Oligopoly under incomplete information: On the welfare effects of price discrimination

We study competition by firms that simultaneously post (potentially nonlinear) tariffs to consumers who are privately informed about their tastes. Market power stems from informational frictions, in that consumers are heterogeneously informed about firms’ offers. In the absence of regulation, all firms offer quantity discounts. As a result, relative to Bertrand pricing, imperfect competition benefits disproportionately more consumers whose willingness to pay is high, rather than low. Regulation imposing linear pricing hurts the former but benefits the latter consumers. While consumer surplus increases, firms’ profits decrease, enough to drive down utilitarian welfare. By contrast, improvements in market transparency increase utilitarian welfare, and achieve similar gains on consumer surplus as imposing linear pricing, although with limited distributive impact. On normative grounds, our analysis suggests that banning price discrimination is warranted only if its distributive benefits have a weight on the societal objective.     

Market regulation of voluntary add-on contracts

This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products. We develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown. Some consumers do not pay attention to extended warranties before making base product choices, but overestimate the value of such warranties at the point of sale. Under retail competition, the consumers’ option to buy multiple base products can endogenously create a base price floor that may prevent firms from redistributing the full warranty profits via loss-leadership. Inducing competition in the warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators.     

Digital monopolies: Privacy protection or price regulation?

Increasing returns to scale in data gathering and processing give rise to a new form of monopoly, referred to here as digital monopoly. Digital monopolies create new challenges for regulators and antitrust authorities. We address two in this paper: market power arising from improved match values and from reduced privacy. The digital monopoly’s profit and social surplus always increase as privacy decreases. However, consumer surplus is non-monotone in privacy. Without privacy, the match value is perfect but completely extracted by the digital monopoly. In contrast, as privacy goes to infinity, match values and social surplus go to zero. With regulated prices, consumer surplus is maximized without privacy protection. As with natural monopolies, price regulation thus remains an appropriate tool in the digital age to capture the social benefits from increasing returns to scale without harming consumers.     

Price competition when three are few and four are many

I examine price competition in a market for a homogeneous good when consumers observe prices subject to a random shock (perception error). When firms have symmetric costs, there exists a unique equilibrium in pure strategies, which is symmetric. When there are up to three sellers in the market, the sellers extract the entire consumer surplus. However, with at least four firms, assuming that the marginal cost is sufficiently low relative to consumers’ valuation, both consumers and producers may enjoy a positive surplus. The marginal-cost pricing is never observed in an equilibrium with finitely many firms. Potential policy implications are discussed.     

Estimating consumer surplus in the mobile telecommunications market: The case of Korea

This paper estimates consumer surplus in the Korean mobile telephone services (MTS) market. The Korean mobile telecommunications market has grown rapidly since 1997 when competition was introduced and Code Division Multiple Access (CDMA) technology was commercialized. Because consumer surplus is relevant to the controversy over establishing an appropriate price level between consumers and service providers, the need for a robust measurement of benefit from MTS is increasing. The measured net consumer surplus estimated by means of elasticities of demand reached about US$48.8 billion in the period 1996–2004 and the changes amounted to about US$8.8 billion during the same period. In particular, after competition was introduced into the market with an accompanying price decrease and increase in the number of subscribers, consumers have benefited greatly. Therefore, it can be inferred that a facility-based competition policy and the reduction in price of access such as handset subsidies all played a positive role in the early diffusion of MTS in Korea. The estimated consumer surplus in this paper does not include network externality (option externality); if this were considered, the total social welfare of the consumer would be larger.     

All-pay competition with captive consumers

We study a game in which two firms compete in quality to serve a market consisting of consumers with different initial consideration sets. If both firms invest below a certain threshold, they only compete for those consumers already aware of their existence. Above this threshold, a firm is visible to all and the highest investment attracts all consumers. On the one hand, the existence of initially captive consumers introduces an anti-competitive element: holding fixed the behavior of its rival, a firm with a larger captive segment enjoys a higher payoff from not investing at all. On the other hand, the fact that a firm’s initially captive consumers can still be attracted by very high quality introduces a pro-competitive element: a high investment becomes more profitable for the underdog when the captive segment of the dominant firm increases. The share of initially captive consumers therefore has a non-monotonic effect on the investment levels of both firms and on consumer surplus. We relate our findings to competition cases in digital markets.     

Aftermarket power and foremarket competition

I revisit the issue of aftermarkets by developing an infinite period model with overlapping consumers. If the aftermarket is characterized by constant returns to scale, then social surplus and consumer surplus are invariant with respect to aftermarket power. Under increasing returns to scale, however, greater aftermarket power leads to: greater concentration in the foremarket; higher barriers to entry; higher social surplus; and possibly higher consumer surplus.     

Cursed Consumers and the Effectiveness of Consumer Protection Policies*

We model firms' quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, that is, mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve welfare, they often lead to a reduction in consumer surplus. Our conclusions hold in extensions with endogenous quality and horizontal differentiation.     

PRICE DISCRIMINATION IN STACKELBERG COMPETITION*

We examine the effects of price discrimination in the Stackelberg competition model for the linear demand case. We show that the leader does not use any price discrimination at all. Rather, the follower does all price discrimination. The leader directs all of its first mover preemptive advantage to attract the highest value consumers who pay a uniformly high price. We observe that profits and total welfare are larger and consumer surplus is smaller than those of the standard Stackelberg competition model.     

Long‐Lived Consumers,Intertemporal Bundling and Collusion

In a repeated price game with long but finitely‐lived consumers, long‐term contracts facilitate collusion. Intertemporal bundling reduces the gains from business stealing but has little effect on the cost of the resulting price war. When consumers anticipate future price wars, the maximum deviation profit is a single period of consumer surplus per consumer. Hence long‐term contracts do not increase the incentive to deviate per consumer, but do reduce the the number of consumers currently in the market by locking them into past contracts, so tacit collusion is sustainable for a wider range of discount factors and market structures.     

企业家代言人的慈善行为对消费者的作用机制研究

本文从信源的角度对企业家代言人的慈善行为如何影响消费者对其代言产品的购买意向进行了实证研究。研究发现,企业家代言人的慈善行为显著影响消费者的购买意向。即:道德身份自我重要性高的消费者更倾向购买捐时间的企业家所代言的产品,因为捐时间的慈善行为让消费者感知其更有亲和力;道德身份自我重要性低的消费者更倾向购买捐钱的企业家所代言的产品,因为捐钱的慈善行为让消费者感知其有能力。本研究是对营销沟通理论的有益补充,我们探究了企业家代言人的不同类型慈善行为(捐时间和捐钱)产生作用的具体情景。该研究结论为营销实践提供了直接的指导,企业家代言人通过其慈善行为提升消费者信任度时需根据消费者的特点来选择其慈善的类型。     

Minimum Quality Standards and Collusion

We model the introduction of a minimum quality standard in a vertically differentiated duopoly. We extend the literature by determining the standard endogenously, showing that the maximisation of social welfare entails an increase in the surplus accruing to consumers served by the low quality firm and a decrease in the surplus of the remaining consumers. Then, we consider the effects of the standard on the stability of price collusion, proving that the standard makes it more difficult for firms to collude if consumers are sufficiently rich.     

A New Perspective on Entry in Horizontal Merger Analysis

I analyze horizontal mergers in procurement settings in which sellers incur costs to participate. Considering existing sellers’ contest-level entry differs from antitrust authorities’ typical emphasis on new sellers’ market-level entry to counteract a merger’s anticompetitive harm. I show that profitable mergers can increase consumer and total surplus by inducing more and stronger contest-level entry by the merged seller, which echoes common claims from merging parties that their merger is beneficial because it creates a stronger competitor. This finding suggests caution by antitrust authorities: when contest-level entry costs matter, standard models that ignore those costs prescribe blocking procompetitive mergers.

     

Platform competition with free entry of sellers

We study platforms setting access prices and commissions on revenues of sellers engaged in monopolistic competition with free entry, such as the app providers on the app stores of Apple and Android devices. The link between prices on different sides induces the platforms to redistribute all the commission revenues through lower access prices and to set the optimal commission rates from the point of view of consumers, taking into account the pass-through on the prices of sellers, the elasticities of demand and surplus for their services and the elasticity of entry with respect to profitability. We discuss the role of heterogeneous sellers, substitutability between sellers’s products and limitations of the basic alignment of interest due to direct channels for sellers and consumer myopia.     

Price authority and information sharing with competing supply chains

We characterize the degree of price discretion that two competing manufacturers grant their retailers in a framework where demand is uncertain and privately observed by the retailers, while manufacturers only learn it probabilistically. In contrast with the consolidated vertical contracting literature, we assume that manufacturers cannot use monetary incentives to align the retailers’ incentives to pass on their unverifiable distribution costs to consumers. Our objective is to study how, in this context, an information-sharing agreement according to which manufacturers share their demand information affects prices, profits and consumer surplus. While equilibria with full price delegation never exist, regardless of whether manufacturers share information, partial delegation equilibria may exist with and without the exchange of information. These equilibria feature binding price caps (list prices) that prevent retailers from passing on their distribution costs to consumers, and are more likely to occur when manufacturers exchange demand information than when they do not share this information. Manufacturers profit from exchanging demand information when products are sufficiently differentiated, and retailers’ distribution costs are high enough. Yet, expected prices are unambiguously lower when manufacturers exchange demand information than when they don’t, making the information exchange beneficial to consumers.     

Austrian-style gasoline price regulation: How it may backfire

In January 2011, a price regulation was established in the Austrian gasoline market which prohibits firms from raising their prices more than once per day. Similar restrictions have been discussed in New York State and Germany. Despite their intuitive appeal, this article argues that Austrian-type policies may actually harm consumers. In a two-period duopoly model with consumer search, I show that under the regulation, firms will distort their prices intertemporally in such a way that their aggregate expected profit remains unchanged. This implies that, as some consumers find it optimal to delay their purchase due to expected price savings, but find it inconvenient to do so, a friction is introduced that decreases net consumer surplus in the market.     

Too Much Information Sharing? Welfare Effects of Sharing Acquired Cost Information in Oligopoly

By using general information structures and precision criteria based on the dispersion of conditional expectations, we study how oligopolists’ information acquisition decisions may change the effects of information sharing on the consumer surplus. Sharing information about individual cost parameters gives the following trade-off in Cournot oligopoly. On the one hand, it decreases the expected consumer surplus for a given information precision, as the literature shows. On the other hand, information sharing increases the firms’ incentives to acquire information, and the consumer surplus increases in the precision of the firms’ information. Interestingly, the latter effect may dominate the former effect.     

Competitive targeted online advertising

This paper examines how an online publisher utilizes its information about consumer preference to target advertising. In our model, two firms first bid for a prominent ad position in a publisher-organized position auction, and then compete on price in the subsequent product marketplace. We consider two dimensions of consumer heterogeneity. First, consumers are heterogeneous in product preference. Based on their tastes, some consumers prefer one product over the other, whereas other consumers may rank the products in an opposite order. Second, consumers differ in search preference, i.e., “nonshoppers” only consider the advertised product, while “shoppers” always search both firms’ products before buying. We show that targeted advertising based on product preference will mitigate price competition in product markets as well as competition in position auctions, the latter to the detriment of the publisher. In contrast, targeted advertising based on search preference always benefits the publisher, as the winning firm can charge monopoly prices to nonshoppers. We show that the publisher’s optimal choice is to utilize only the information about consumer search preference. We also explore the welfare implications of targeted advertising based on different types of consumer preference.     

Regulatory bias in the price structure of local telephone service

This article combines a discrete choice model of demand for residential local telephone access and an optimal price regulation model to estimate the welfare weights that state regulators implicitly place on consumers with different incomes and locations. I find no evidence of a bias towards rural consumers on average, but the relative weight on low income consumers in a geographic area can vary as a function of the proportions of rural and poor population and the political characteristics of the regulator. I also measure the welfare consequences of deviating from total consumer surplus maximization and disconnecting prices from costs.     

Consumer surplus vs. welfare standard in a political economy model of merger control

This paper considers the political economy environment that an antitrust agency is operating in and asks under what circumstances a consumer surplus standard yields higher welfare than a welfare standard. In particular, we address how institutional settings—such as transparency and accountability—interact with the choice of an appropriate standard. We consider a framework in which the antitrust agency can be influenced by third parties (at a cost in terms of real resources) and in which the agency is imperfectly monitored. A welfare comparison between the two standards reveals that neither standard dominates. The consumer surplus standard is attractive relative to a welfare standard, when lobbying is efficient, when accountability is low, where mergers are large and when a marginal increase in merger size is highly profitable.