Behavior based price personalization under vertical product differentiation

We study price personalization in a two period duopoly with vertically differentiated products. In the second period, a firm not only knows the purchase history of all customers, as in standard Behavior Based Price Discrimination models, but it also collects detailed information on its old customers, using it to engage in price personalization. The analysis reveals that there exists a natural market for each firm, defined as the set of customers that cannot be poached by the rival in the second period. The equilibrium is unique, except when firms are ex-ante almost identical. In equilibrium, only the firm with the largest natural market poaches customers from the rival. This firm has highest profits but not necessarily the largest market share. Aggregate profits are lower than under uniform pricing. All consumers gain, total welfare is higher herein than under uniform pricing if firms’ natural markets are sufficiently asymmetric. The low quality firm chooses the minimal quality level and a quality differential arises, though the exact choice for the high quality depends upon the cost specification.     

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.     

Prominence,complexity, and pricing

This paper analyzes prominence in a homogeneous product market where two firms simultaneously choose both prices and price complexity levels. Market-wide complexity results in consumer confusion. Confused consumers are more likely to buy from the prominent firm. In equilibrium, there is dispersion in both prices and price complexity. The nature of equilibrium depends on prominence. Compared to its rival, the prominent firm makes higher profit, associates a smaller price range with lowest complexity, puts lower probability on lowest complexity, and sets a higher average price. However, higher prominence may benefit consumers and, conditional on choosing lowest complexity, the prominent firm’s average price is lower, which is consistent with confused consumers’ bias.     

Bundling can signal high quality

When consumers have noisy information, bundling experience goods can signal high quality in a simple static model. When consumers are partially informed, bundling has a bigger negative impact on the sales of a low-quality firm than on the sales of a firm with two high-quality products. Bundling can also signal high quality by restricting total sales even when consumers are uninformed. However, I argue this is not a likely explanation for bundling because raising prices is always a more profitable way to restrict total sales than bundling.     

On two-part tariff competition in a homogeneous product duopoly

We explore aspects of two-part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage levels. Competition in only one price component (the fee or the rate) may allow both firms to enjoy positive profits if the other price component has been set at levels different enough between firms. Fixing one price component alters the nature of competition, indirectly introducing an element of product differentiation. Endogenous market segmentation emerges, with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm. When no price component can be negative, competition becomes softer, profits tend to be higher but there is also a disadvantage for the firm that starts with a higher fee than that of its rival.     

Personalized pricing and advertising: Who are the winners?

This paper investigates who wins and who loses when firms depart from a mass advertising/uniform pricing strategy (benchmark model) to a targeted advertising/price discrimination one. Considering a duopoly market in which firms simultaneously compete in prices and advertising decisions, we examine the competitive and welfare effects of personalized pricing with targeted advertising by comparing equilibrium outcomes under customized advertising/ pricing decisions to the results arising under mass advertising and uniform pricing. We show that, when both firms compete in both market segments, all segment consumers are expected to pay higher average prices under the personalized advertising/pricing strategy. We also show that, in the context of our simultaneous game, targeted advertising with price discrimination might boost firms’ profits in comparison to the case of mass advertising and uniform prices. The overall welfare effects of the personalized strategy are ambiguous. However, even when the personalized strategy boosts overall welfare, consumers might all be worse-off. Thus the paper gives support to concerns that have been raised regarding the firms’ ability to adopt personalized strategies to boost profits at the expense of consumers.     

Why (don’t) firms free ride on an intermediary’s advice?

When consumers rely on an intermediary’s advice about which firm to buy from but can switch to buying directly after receiving advice, one might expect firms to discount their direct prices to encourage consumers to purchase directly after obtaining advice, thereby avoiding paying commissions. We provide a theory which can explain why firms often do not free ride in this way, as well as when they do. The theory can explain why online marketplaces and hotel booking platforms impose price-parity clauses to prevent such free riding, while insurance and financial advisors do not.     

MARKET PERFORMANCE WITH MULTIPRODUCT FIRMS*

We revisit the fundamental issue of market provision of variety associated with Chamberlin, Spence, and Dixit‐Stiglitz when firms sell multiple products. Both products and firms are (horizontally) differentiated. We propose a general nested demand framework where consumers first decide upon a firm then which variant to buy and how much (the nested CES is a special case). We use it to determine the market's biases when firms compete in product ranges and prices. The market system attracts too many firms with too few products per firm: firms restrain product ranges to relax price competition, but this exacerbates over‐entry.     

Referrals in search markets

This paper compares the equilibrium outcomes in search markets with and without referrals. Although it seems clear that consumers would benefit from referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage consumers to purchase the product elsewhere. In a model of a horizontally differentiated product market with sequential consumer search, we show that valuable referrals can arise in the equilibrium: a firm will give referrals to consumers whose ideal product is sufficiently far away from the firm's offering. We allow firms to price-discriminate among consumers, and consumers to misrepresent their tastes. We found that the equilibrium profits tend to be higher in markets with referrals than in markets without. Consumers tend to be better off in the presence of referrals when search costs are not too low, and under a certain parameter range, referrals lead to a Pareto improvement.     

Tying in evolving industries,when future entry cannot be deterred

We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when tying cannot be used as a defensive strategy to protect the incumbent’s dominant position in the primary market. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival’s efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home.     

Quality differentiation and firms’ choices between online and physical markets

We study firms’ choices between online and physical markets with respect to product quality and competition, and examine consequences of transparency policies on price competition and market structure. We investigate two contrasting forces. First, since consumers cannot fully inspect an online product’s quality prior to purchase, conventional wisdom and some of the literature suggest that this attracts low-quality products to the online market (a pooling effect). On the other hand, the literature on vertical product differentiation indicates that a firm with a lower-quality product may prefer to reveal its product quality in the physical market because quality differentiation helps alleviate price competition (a differentiation effect). We show that an entrant firm with product quality lower than that of the offline incumbent may choose the physical market, whereas the entrant with a quality higher than the incumbent’s may sell online. More generally the two contrasting forces can give rise to a wide range of product quality—from low-end to high-end—in both markets.     

Refunds and returns in a vertically differentiated industry

Firms frequently offer refunds, both when physical products are returned and when service contracts are terminated prematurely. We show how refunds act as a “metering device” when consumers learn about their personal valuation while experimenting with the product or service. Our theory predicts that low-quality firms offer inefficiently strict terms for refunds, while high-quality firms offer inefficiently generous terms. This may help to explain the observed variety in contractual terms.     

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.     

THE FAILING FIRM DEFENSE*

This paper evaluates the welfare consequences of the failing firm defense (FFD) in the EU and U.S. merger laws. To this end, I combine an oligopoly model with an ‘endogenous valuations’ auction model. The FFD is shown to work reasonably well for consumers unless small firms are too small. The FFD may, however, lead to total surplus losses, due to a ‘least danger to competition’ (LDC) condition which favors small, and thus possibly inefficient, firms. It is also shown that, in a multi‐firm setting, the FFD increases the incentive for predation only when the assets are industry‐specific.     

Experimenting to Learn about Demand in Duopoly with Forward‐Looking Consumers

Using a two‐period model, I show that competition between two symmetric duopolists trying to learn about unknown features of demand results in an informationally suboptimal process. Because a firm’s marginal return to price experimentation equals zero if the rival’s price is matched in the first period, myopic symmetric pricing arises in equilibrium even though a firm’s expected second‐period profit attains a local minimum. Furthermore, forward‐looking consumers suffer from ratcheting because their first‐period purchase decisions partly reveal their preferences, which exacerbates the informational suboptimality of the firms’ experimentation process without affecting their pricing. The role of firm asymmetries is also analyzed.     

Switching costs in the US seed industry: Technology adoption and welfare impacts

We evaluate the role of brand and technology switching costs in the US soybean seed industry using a unique dataset of actual seed purchases by about 28,000 farmers from 1996 to 2016. Using a random coefficients logit model of demand, we estimate brand and technology switching costs, characterize the distributions of buyers’ willingness to pay for seed brands and the glyphosate tolerance (GT) trait, and assess the implications of brand and technology switching costs for farmers’ welfare, technology adoption, firm profits, and firm market shares. We find that farmers are willing to pay large premiums for brand labels, and even larger premiums for the GT trait, although there is considerable heterogeneity in these values. Switching costs play an important role in the soybean seed industry. Eliminating these costs would significantly increase buyers’ welfare, reduce seed prices and firm profits, decrease adoption of the GT trait, and impact industry consolidation by expanding smaller firms’ market shares.     

Collusion Under Imperfect Monitoring with Asymmetric Firms

We explore the effects of asymmetries in capacity constraints on collusion where market demand is uncertain and where firms’ sales and prices are private information. We show that all firms can infer when at least one firm's sales are below some firm‐specific ‘trigger level.’ When firms use this public information to monitor the collusive agreement, price wars may occur on the equilibrium path. Symmetry facilitates collusion but, if price wars are sufficiently long, then the optimal collusive prices of symmetric capacity distributions are lower on average than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.     

Oligopoly intermediation,relative rivalry and market conduct

We consider two firms that compete against each other jointly in upstream and downstream markets under two pricing games: Purchasing to stock (PTS), in which firms select input prices prior to setting consumer prices; and purchasing to order (PTO), in which firms sell forward contracts to consumers prior to selecting input prices. The antitrust implications of the model depend on the relative degree of oligopoly rivalry in the upstream and downstream markets. Firms strategically precommit to setting prices in the less rivalrous market, which serves to soften competition in the more rivalrous market, resulting in anticompetitive effects. Bertrand prices emerge in equilibrium when the markets are equally rivalrous, while Cournot outcomes arise with upstream monopsony or downstream monopoly markets. The slope of firm reaction functions depends on relative rivalry, a feature we use to derive testable hypotheses for antitrust analysis of a wide variety of industry practices.     

The dynamic provision of product diversity under duopoly

This paper builds a dynamic duopoly model to examine the provision of new varieties over time. Consumers experience temporary satiation, and hence higher consumption of the current variety lowers demand for future varieties. The equilibrium can be characterized by a combination of monopolistic pricing and nearly zero profits (competitive timing). In particular, if the cost of producing a new variety is not too low then firms tend to avoid head-to-head competition and set the short-run profit maximizing price. However, firms tend to introduce new varieties as soon as demand has grown sufficiently to cover costs. From a second best perspective, the equilibrium may exhibit excessive product diversity. However, if firms coordinate their frequency of new product introductions, then consumers are likely to be harmed. It is also shown that equilibrium prices are moderated by two factors. First, consumers’ option value of waiting reduces their willingness to pay. Second, competition reduces firms’ incentives to engage in intertemporal price discrimination.     

Vertical product differentiation,network externalities,and compatibility decisions

We analyse the subgame perfect equilibrium of a four-stage game in a model of vertical product differentiation, where the consumer’s evaluation of a product depends on its inherent quality and on its network’s size. First, two firms choose their product’s inherent quality. Then they may mutually agree on providing an adapter before competing in prices. Finally, consumers buy. We find that, despite the high quality firm’s preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can be improved by regulating compatibility only in those cases where qualities are differentiated too much.