A Model of Direct and Intermediated Sales

We examine a model in which an upstream firm can sell directly online and through heterogeneous intermediaries to heterogeneous consumers engaging in time-consuming search. Direct online sales may be more or less convenient and involve costly returns if the good fits consumers poorly. Direct selling appeals to higher-value consumers and increases the upstream firm's profits by allowing price discrimination. Competition and segmentation due to direct sales results in lower intermediary prices, making all consumers better off. Thus, entry by an upstream firm increases consumer surplus at the expense of intermediaries with the net result being an increase in social welfare.     

Behavior‐ and characteristic‐based price discrimination

We develop a model of behavior‐ and characteristic‐based discriminatory pricing where consumers are heterogeneous both in tastes and in price sensitivity. Each firm is able to distinguish between the consumers that have bought from it and those that have bought from the rival. Furthermore, each firm learns the price sensitivity of their own consumers. We show that using this additional information may yield higher profits than uniform pricing provided that consumers are heterogeneous enough with respect to price sensitivity. We also discuss consumer surplus implications of such behavior‐ and characteristic‐based price discrimination, and we show that the impact of price discrimination depends on both the consumer type and the level of consumers’ heterogeneity.     

Welfare impacts of a non-profit firm in mixed commercial markets

Utilizing a model that allows for the welfare of the commercial NPO’s stakeholders directly in terms of their consumer surplus, and indirectly in terms of NPO profits, we explore the impact of changes in the NPO’s “social concern” for consumers on market efficiency. Three separate Cournot mixed market scenarios are analyzed: competition between the NPO and a private for-profit firm, competition between the NPO and a public firm, and a market scenario that includes all three firms. We find that the technical efficiency of the NPO vis-à-vis the profit maximizer is crucial in determining whether social welfare rises or falls as the NPO places more weight on their stakeholders’ surplus. In particular, if the NPO is less technically efficient than the profit maximizer or public firm, somewhat paradoxically social welfare may fall as the NPO shows a greater social concern for consumers. In other words, a movement away from pure profit maximizing behavior by a NPO may well be detrimental in these mixed commercial markets. We also show the additional sources of revenue available to a NPO may decrease the overall welfare in these mixed market situations.     

Production quality and pricing strategy for substitutable products under comparison effects

Comparison effects have been studied extensively in many fields. In particular, existing operations management articles have discussed the impact of comparison effects on enterprises' production and pricing decisions. Research has also shown that consumers' purchasing decisions are primarily determined by three factors: product quality, selling price, and comparison effects. The current study introduces the concepts of social and temporal comparison effects to examine how comparison effects influence a monopolist’s production quality and pricing strategy for substitutable products. Results reveal the following: (1) Setting different prices for even two types of substitutable products with negligible quality differences can divide customers into three groups under the influence of social comparison effects in a single-stage model. (2) The monopolist should avoid using a price discrimination strategy in which products with a short market life cycle have the same quality but different prices. (3) When the market life cycle of products is sufficiently long in the single-product market and the market with two substitutable products, the monopolist’s optimal choice in the second stage is to keep production quality constant and increase the selling price. Consequently, the number of buyers does not decrease because of temporal comparison effects. Therefore, the firm increases its revenue. (4) For the market with two substitutable products with quality differences, one approximate optimal strategy for the enterprise in the second stage is to keep the selling price constant with the assumption that product quality cannot be adjusted after the first period. At this point, the consumption situation in the market is the same as that in the first stage. Therefore, when no external constraints exist, the monopolist firm can obtain more benefits in the second stage than in the first stage by exploiting the temporal comparison effects of consumers in the second stage. (5) When consumer identity information can be confirmed in the market, social comparison effects, similar to temporal comparison effects, could help the enterprise increase its price and profit while maintaining product quality. These social and temporal comparison effects constrain consumers. Thus, the number of people who continue to buy products does not decrease.     

Customization with Vertically Differentiated Products

We consider a duopoly market with heterogeneous consumers. The firms initially produce vertically differentiated standard products located at the end points of the variety interval. Customization provides ideal varieties for consumers but has no effect on quality. The firms first choose whether to customize their products, then engage in price competition. We show that the low‐quality firm never customizes alone; customization becomes more likely as the difference between the firms’ qualities increases; and less likely as the fixed cost of customization increases. We extend the base model by relaxing two important assumptions—uniform pricing and exogenous quality. The main conclusions with uniform pricing continue to hold when price customization is allowed. In the second extension the firms’ qualities are endogenously determined. We show that the firms choose to be either substantially differentiated in quality or nondifferentiated.     

Optimal Two‐Part Pricing under Demand Uncertainty

This paper examines the pricing behavior of a risk‐averse monopolistic firm under demand uncertainty. The firm produces a single good at a constant marginal cost. To facilitate sales, the firm uses a two‐part pricing contract that includes a membership fee and a selling price per unit. The good is sold to a continuum of heterogeneous consumers who are subject to a common demand shock. We show that the global and marginal effects of risk aversion are to push the unit price closer to the constant marginal cost and to shrink the market coverage so as to limit the firm’s risk exposure to the demand uncertainty. The more risk‐averse firm as such charges a higher membership fee to consumers. We further show that an increase in the fixed cost of production induces the firm to lower (raise) the unit price, to raise (lower) the membership fee, and to shrink (enlarge) the market coverage under decreasing (increasing) absolute risk aversion. The firm’s optimal two‐part pricing contract, however, is unaffected by changes in the fixed cost under constant absolute risk aversion. Finally, we show that a mean‐preserving‐spread increase in the demand uncertainty induces the firm to lower the unit price, to raise the membership fee, and to shrink the market coverage under either decreasing or constant absolute risk aversion. The firm’s risk preferences as such play a pivotal role in determining the optimal two‐part pricing under demand uncertainty. Copyright © 2013 John Wiley & Sons, Ltd.     

How does competition among lodging sharing platforms affect welfare and profits?

We investigate the likely effect on prices, consumer surplus, and profits of intensified competition among peer‐to‐peer lodging platforms. We find that intensified competition in the sharing economy may give rise to some surprising results. For instance, intensified competition may allow platforms to charge higher fees from peer suppliers and lead, therefore, to a decline in consumer surplus. Only if the market of professional hoteliers is highly competitive, intensified competition among platforms leads to the traditional outcome that the entry of more platforms leads to lower fees charged from consumers and to enhanced consumer surplus. We also find that platforms may actually earn higher profits when there is intensified competition among professional hoteliers. In addition, while intensified competition among professional hoteliers leads to a decline in the fees that platforms can charge customers, it may actually result in higher lodging prices. We explain these counterintuitive results by the dual role that the lodging price plays in affecting the welfare of individuals active in the sharing economy. While a higher price has an adverse effect on the welfare of demanders of lodging it benefits peer suppliers of lodging because a higher lodging price raises the compensation they receive when offering lodging capacity to a platform.     

Reference Dependence and Market Competition

This paper examines the implications of consumer reference dependence for market competition. If consumers take some product (e.g., the first product they consider) as the reference point when evaluating others and they exhibit loss aversion, then the more “prominent” firm whose product is taken as the reference point by more consumers will randomize between a high and a low price. We also find that consumer loss aversion in the price dimension intensifies competition while that in the product dimension softens competition. With consumer reference dependence, asymmetric prominence can arise as an equilibrium outcome when firms advertise before engaging in price competition.     

Endogenous mergers under multi-market competition

This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play out. The first is the selection effect, which acts to increase welfare, as shutting down the relatively more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works to increase prices and, therefore, decrease consumer surplus (but increase producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.     

Strategic Quality Decisions under Heterogeneous Resource Endowments

The literature on product competition advocates a differentiation strategy assuming firm homogeneity in resources. However, firm heterogeneity in resource endowments has long been recognized in economics. Merging these two perspectives, we show that the increase in consumer preference for quality leads to firms' aggressive price competition instead of quality differentiation. As consumers look for higher quality, the cost advantage arising from superior resources increases and makes head-to-head competition more profitable than accommodating a less efficient rival. When consumers are highly concerned about quality, even a small resource difference leads a more efficient firm to initiate cutthroat price competition for market dominance.     

Personalized Pricing and Quality Customization

We embed the principal–agent model in a model of spatial differentiation with correlated consumer preferences to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby duopoly firms charge different prices and offer different qualities to different consumers, based on their willingness to pay. Our model sheds light on the equilibrium product-line pricing and quality schedules offered by firms, given that none, one, or both firms implement PPQ. The adoption of PPQ has three effects in our model: it enables firms to extract higher rents from loyal customers, intensifies price competition for nonloyal customers, and eliminates cannibalization from customer self-selection. Contrary to prior literature on one-to-one marketing and price discrimination, we show that even symmetric firms can avoid the well-known Prisoner's Dilemma problem when they engage in personalized pricing and quality customization. When both firms have PPQ, consumer surplus is nonmonotonic in valuations such that some low-valuation consumers get higher surplus than high-valuation consumers. The adoption of PPQ can reduce information asymmetry, and therefore sellers offer higher-quality products after the adoption of PPQ. Overall, we find that while the simultaneous adoption of PPQ generally improves total social welfare and firm profits, it decreases total consumer surplus.     

Consumer Search with Limited Product Evaluation

Consumers need not evaluate all available product information before making a purchase. This may arise because shopping environments prevent a full evaluation (e.g., online). We develop a model of simultaneous search in which consumers have limited ability in product evaluation in order to study the impact of search cost on prices, consumer surplus, and social welfare. If consumers are endowed with the ability to choose how much information to acquire from a searched product, they may choose limited product evaluation. We find that consumers may evaluate more firms, enjoy lower prices, and higher surplus despite this limited ability. This implies that prices can decrease and consumer surplus can increase in search costs. We then extend our setting to the case of multiproduct firms and find similar effects due to changes in within‐firm search costs.     

Bundling and joint marketing by rival firms

We study joint marketing by firms who price discriminate between consumers who patronize only one firm (single purchasers) and those who purchase from both (bundle purchasers). Firms either set the price of the bundle and then compete along side the bundle; or they determine a rebate that is applied to joint purchasers and then set prices. Even though the pricing structure in the joint marketing scheme is determined noncooperatively, the commitment to the joint marketing agreement allows firms to leverage their stand‐alone prices—leading to higher profits and lower consumer surplus in either case, compared to both uniform pricing and independent price discrimination without a joint marketing agreement. Nevertheless the two schemes differ dramatically, in that rebates increase joint purchasing, whereas bundle pricing diminishes bundle purchases.     

Advertising a product to face a competitor entry: a differential game approach

We analyze a market in which advertising is the dominant marketing tool to create market share. We assume that an incumbent firm dominates the market during an initial stage, and that a new competitor is going to enter the market. In particular, we analyze the different advertising policies that the incumbent firm can adopt, before and after the entry of the rival. We explore three possible behaviours. In the first scenario the firm knows that the competitor will arrive at a given instant. In the second one we assume the original firm to be surprised, in the sense that it does not anticipate the entry of the opponent either because it does not expect the competitor to arrive, or it is not prepared to react before the entry takes place. Finally, in the third scenario, the original firm knows that the competitor will enter at a constant rate. We characterize a differential game model and compare the firms’ behaviours in a strategic perspective.     

Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs

I investigate the reasons why market expansion attempts by vertically integrated health insurers have largely failed. I use an econometric model of consumer demand for hospitals and insurers to simulate entry of an integrated plan into 28 new markets. The results indicate that entry would increase social surplus by over $34 billion per year. I then investigate several potential barriers to entry. Three are particularly important. Integrated plans cannot attract enough enrollees to support their provider networks unless they exceed competitor quality levels and convince consumers of this benefit. Regulatory restrictions on plans building new facilities may also be important.     

Randal Heeb Innovation and Vertical Integration in Complementary Markets

This paper studies vertical integration by an essential-good monopolist into complementary markets. Unlike previous studies of complementary products, consumers are allowed to purchase some components of a complementary basket, but not others. Two different pricing strategies by the integrated firm may emerge. In mass-market equilibria, the price of the complement under integration is zero and it is given away with the essential good. Niche-market equilibria have more conventional pricing. This dichotomy is consistent with consumer software pricing. Integration enhances consumer and total surplus, unless it leads to exit by the higher-quality rival, in which case welfare is reduced. Exit is most likely when it is least damaging to consumer welfare. Integration reduces innovation by the rival firm. The effect on innovation by the integrated firm is ambiguous, but numerical computation of an extended model indicates that integration increases the innovation of the integrated firm and enhances welfare.     

Optimal pricing strategy for foreign market entry: a game theoretic approach

Given that pricing plays an important role in a company's international competitive strategy, researchers have long argued the need for theory building in the area of international pricing. This study develops an optimal pricing strategy for foreign market entry using a game theoretic framework. The proposed model assumes two firms, a local incumbent and a foreign entrant, competing in a market. Consumers know the quality of the incumbent's offering, but do not know how it compares to that of the foreign entrant's. Based on these assumptions, and using the theory of inference making, we propose an upward price distortion by the entrant firm as an optimal entry strategy under incomplete information. The paper presents a game theoretic derivation to establish that the game has a unique intuitive separating equilibrium where the entrant firm stands to gain by engaging in upward price distortion to signal high quality to consumers. Copyright © 2006 John Wiley & Sons, Ltd.     

Equilibrium pricing and advertising strategies for nondurable experience products in a dynamic duopoly

The quality of many consumer nondurable goods or services is sufficiently complex or obscure that consumers cannot completely verify the true quality in a single usage. For such ‘experience’ products or services, the accumulated consumer consumption experience of a brand is an important determinant of its sales or market share. The market share of a brand is in turn directly influenced by its own and the competitive price and advertising strategies, given the different levels of quality (among other factors). In this paper, we investigate the impact of the aggregate consumption experience on the firm's dynamic pricing and advertising strategies by developing a formal game-theoretic model of a dynamic duopoly. The model of competition does not yield explicit closed-form expressions for the dynamic price and advertising paths of the two firms. Hence, we simulate the equilibrium paths using a discrete-time algorithm. Our simulation results provide interesting insights into the dynamic equilibrium price and advertising paths, under a variety of realistic competitive scenarios.     

Collusive equilibria with switching costs: The effect of consumer concentration

I study the ability of two competing firms to set collusive prices in markets where consumers have switching costs. In consumer markets (with a small number of consumers), I find an antifolk result in which collusion, in the presence of switching costs, does not arise with patient firms. Patient firms compete aggressively and consumers expect a large utility. A collusive equilibrium is unstable because a deviating firm incorporates the future consumer utility in its deviating price. Also, consumers have a strategic impact so, with the prospects of large utility, they decide to switch to destabilize the firms' collusive agreement. These results do not eventuate in markets with a large number of consumers. In mass markets (a continuum of consumers), a single consumer lacks a strategic impact to destabilize a collusive agreement and a deviating firm cannot appropriate the consumer utility when deviating from collusion. Collusion, then, becomes straightforward to achieve. We show that for any number of consumers, switching costs make collusion easy to sustain.     

Pricing Experience Goods: The Effects of Customer Recognition and Commitment

In a two‐period model of nondurable experience goods, we compare the profit and social welfare effects of behavior‐based price discrimination (BBPD) and price commitment (PC) (relative to time‐consistent pricing) in a monopoly. We find that when the static, full‐information monopoly price is higher (lower) than the mean consumer valuation, PC yields higher (lower) profits and social welfare than BBPD. We also identify the market conditions under which BBPD does not increase firm profits and provide an explanation as to when the firm should discriminate against its first‐time and repeat customers, respectively.