Endogenous Market Structures in the Presence of a Socially Responsible Firm

We consider the endogenous selection of strategic contracts in an asymmetric duopoly with substitutable goods. the duopoly comprises a typical managerial firm with a sales delegation and a socially responsible firm (CSR firm) with a linear combination of social welfare and quantity as its managerial delegation contract. In particular, we examine how the equilibrium market structure changes from the case wthere both firms adopt sales delegation contracts to the case wthere one of the firms becomes a CSR firm, after the owners of the firms select their strategic contracts. We show that two market structures that are asymmetric with respect to their strategic contracts can become equilibrium market structures under the pure strategic contract class. Furthermore, we consider a unique mixed strategy equilibrium to examine how the risk domination between the two asymmetric equilibrium market structures affects equilibrium selection. there, we find that the competition wthere the firm with the sales delegation and the CSR firm have a price contract and a quantity contract, respectively, risk-dominates the competition wthere the firms have a quantity contract and a price contract, respectively. Finally, by deriving the order of social welfare among the four subgames, we show that the social incentive does not coincide with the private incentive in the robust equilibrium with respect to risk domination in the endogenous selection game of the strategic contracts of the asymmetric duopoly with the firm with a sales delegation and the CSR firm.     

Tie-in contracts with downstream competition

A tie-in contract has frequently come under scrutiny for its role as an exclusionary device. A firm that is a monopolist in a primary market can utilize such contracts to exclude a more efficient rival in a secondary market. When the firms sell through competing retailers, the leveraging firm may offer tie-in contracts to the retailers inducing them to purchase both primary and secondary products entirely from it such that the rival is excluded. We examine whether such tie-in contracts are profitable for an incumbent firm under different conditions of (i) the ability to commit to prices by the upstream firms and (ii) downstream competition among the retailers. We show that when retailers compete in prices, then regardless of whether the entrant is able to commit to its own prices, an exclusionary tie-in strategy is profitable (not profitable) for the incumbent when it is able (unable) to commit to prices. However, when retailers compete in quantities, the entrant’s commitment ability does matter. Specifically, an exclusionary tie-in strategy (i) may be unprofitable for an incumbent when both upstream firms are able to commit to their prices, depending on the degree of cost advantage of the entrant; (ii) is always profitable when it alone can commit to its price; and (iii) is unprofitable when both upstream firms cannot commit to their prices. Our results extend to situations where the products are complementary or substitutes and where the retailers may be asymmetric in nature.     

Sequential Product Design

I consider a model of duopoly where firms make sequential product design changes prior to price competition. I show that a socially desirable outcome is possible in this model. In equilibrium, the leader's product is less specific, implying a customer attraction strategy, and the follower's product is more specific, implying a customer retention strategy. This outcome is in contrast with the equilibrium outcome of a similar model, where simultaneous design competition takes place prior to price competition. In this latter model, the product designs are more specific and the prices are higher in equilibrium, leading to a reduction in welfare. I compare the design incentives under price competition with those in models where price collusion or merger is expected and with multi-product monopoly. In models with no price competition, less specific designs may serve to attract more customers, to improve current or future pie of monopoly profits, or to improve the outside option in bargaining game, depending on the model.     

Managing Channel Profits: The Role of Managerial Incentives

The existing literature has examined how manufacturers can enhance profits by employing specific channel structures and channel coordination mechanisms. In this paper, we examine the implications of strategically designed managerial incentives for channel performance in a duopoly. We first analyze how equilibrium outcomes (especially manufacturer profits) are altered when the manufacturers provide their channel managers with strategically designed incentives. Following that, we examine how optimal channel structure decisions are altered when manufacturers provide their managers with strategic incentives, i.e., we examine how strategic incentives moderate optimal channel structure decisions. In contrast with the existing literature, we find that an asymmetric channel structure with one manufacturer employing a profit-maximizing retailer and the other integrated manufacturer providing strategic incentives for the channel manager in charge of pricing, is an equilibrium outcome under certain conditions. We then compare how the implications of strategic incentives differ from those of channel structure decisions and channel coordination initiatives, and discuss when and why strategic incentives yield superior outcomes from the manufacturer’s perspective. Our results shed light on the sparsely researched role of managerial incentives in the channel context.     

The shipping strategies of internet retailers: Evidence from internet book retailing

Managing the shipment of goods to consumers is one of the central aspects of retail competition on the internet. In this article, we analyze internet retailers’ shipping strategies using data from the internet book retailing industry. We find that, controlling for a variety of observable firm characteristics, firms with lower product prices offer lower shipping fees and higher quality shipping in terms of average delivery time, compared to firms with higher product prices. These patterns cannot be readily reconciled with a large class of models of competition under perfect consumer information. Theories based on imperfect consumer information can explain the findings better.

A GENERAL EQUILIBRIUM MODEL OF A MULTIFIRM MORAL‐HAZARD ECONOMY WITH FINANCIAL MARKETS

We present a general equilibrium model of a moral‐hazard economy with many firms and financial markets, where stocks and bonds are traded. Contrary to the principal‐agent literature, we argue that optimal contracting in an infinite economy is not about a tradeoff between risk sharing and incentives, but it is all about incentives. Even when the economy is finite, optimal contracts do not depend on principals’ risk aversion, but on market prices of risks. We also show that optimal contracting does not require relative performance evaluation, that the second best risk‐free interest rate is lower than that of the first best, and that the second‐best equity premium can be higher or lower than that of the first best. Moral hazard can contribute to the resolution of the risk‐free rate puzzle. Its potential to explain the equity premium puzzle is examined.     

Pricing the Quality Option In Treasury Bond Futures1

This article develops a model for pricing the quality option embedded in the Treasury bond futures contract. Since the option value is set relative to a large family of deliverable bond prices, it is important for the theoretical bond prices to match up to the observed prices. Hence an arbitrage-based model is used where the forward rate process is initialized at its current observable value. A model for valuing the quality option in an otherwise identical forward contract is also established. This permits the quality option and marking to market costs to be separately quantified. Support is provided for the common practice of pricing Treasury bond futures contracts as forward contracts with an embedded forward quality option.     

Renegotiation, collective action clauses and sovereign debt markets

Collective action clauses (CACs) are provisions specifying that a supermajority of bondholders can change the terms of a bond. We study how CACs determine governments' fiscal incentives, sovereign bond prices, and default probabilities in environments with and without contingent debt and IMF presence. We claim that CACs are likely to be an irrelevant dimension of debt contracts in current sovereign debt markets because of the variety of instruments utilized by sovereigns and the implicit IMF guarantee. Nonetheless, under a new international bankruptcy regime like that recently proposed by the IMF, CACs can increase significantly the cost of borrowing for sovereigns, contrary to what is suggested in previous empirical literature.     

Price as an Indicator of Quality: Implications for Utility and Demand Functions

Consumers often infer quality information from prices and rely on their reference prices. This paper incorporates both behavioral regularities into the classic utility function. The analytical investigation reveals five qualitatively different types of consumers, three of which are relatively new to modeling literature. The authors test the model's theoretical insights using a new experimental method, random allocation of scarce inventories (RASI), which is designed to align people's incentives, such that they state their true rank order preferences. The results support the existence of five different types of consumers; the authors discuss the managerial implications for pricing strategies.     

Virtual operators in the mobile industry: a techno-economic analysis

For a company planning to become a mobile operator, two alternative ways to enter the market exist. In addition to the traditional way of acquiring a spectrum license and building a mobile network, market entrance is also possible by becoming a virtual operator and utilizing the existing networks of incumbent operators. Potentially, virtual operators will have an important role in shaping the mobile market structure and competition. In this paper, techno-economic modeling methods are used to analyze the position of virtual operators in the mobile communications industry. Four alternative virtual operator scenarios are constructed and analyzed using a linear, deterministic, and quantitative techno-economic model. The results highlight the importance of wholesale contracts with incumbent mobile network operators in determining the virtual operators’ business profitability. Unbalance in termination prices between fixed and mobile networks is shown to give incentives for virtual operators to invest in their own network infrastructure.     

Technological tying and the intensity of price competition: An empirical analysis of the video game industry

Using data from the 128-bit video game industry I evaluate the impact technologically tying has on the intensity of console price competition and the incentives for hardware firms to tie their produced software to their hardware. Tying occurs when a console hardware manufacturer produces software that is incompatible with rival hardware. There are two important trade-offs an integrated firm faces when implementing a technological tie. The first is an effect that increases console market power and forces hardware prices higher. The second, an effect due to the integration of the firm, drives prices lower. A counterfactual exercise determines technological tying of hardware and software increases console price competition; console makers subsidize consumer hardware purchases in order to increase video games sales, in particular their tied games, where the greatest proportion of industry profits are made. I also determine technological tying to be a dominant strategy for hardware manufacturers when software development costs are low.     

Impact of personalization and privacy concerns on information disclosure and pricing

Advances in IT have enabled some firms to offer personalized products according to the private information disclosed by consumers, while others are still offering standardized products, which brings about asymmetric competition. For consumers, disclosing private information for personalized products leads to reduced misfit cost as well as privacy loss. To illuminate the impact of consumers' trade-off between the benefit of information disclosure and the associated privacy concerns on firms' asymmetric price competition, we consider a setting where only one firm is capable of product personalization based on consumers' personal information. The capable firm makes a profit from selling the product and monetizing consumers' information. We demonstrate that as the capable firm becomes more adept at personalization, he may raise or lower the price depending on his profit foci, and an improvement in his capability does not always guarantee a higher profit. Counterintuitively, an increase in the unit misfit cost (i.e., greater product differentiation) can, under certain circumstances, intensity price competition, making both firms worse off and leading to higher consumer surplus. We also show that when consumers are more privacy-concerned, there exists an indirect effect that weakens the impact of an increase in price on the monetization of consumers’ information, and hence price competition can be mitigated and both firms can be better off. Furthermore, we demonstrate that product personalization with misfit-reducing effect always increases consumer surplus under the asymmetric competition. Our findings provide firms and policy-makers with great managerial insights.     

The effects of detailing on prescribing decisions under quality uncertainty

Motivated by recent empirical findings on the relationship between new clinical evidence and the effectiveness of detailing, this paper develops a new structural model of detailing and prescribing decisions under the environment where both manufacturers and physicians are uncertain about drug qualities. Our model assumes (1) a representative opinion leader is responsible for updating the prior belief about the quality of drugs via consumption experiences and clinical trial outcomes, and (2) manufacturers use detailing as a means to build/maintain the measure of physicians who are informed of the current information sets. Unlike previous learning models with informative detailing, our model directly links the effectiveness of detailing to the current information sets and the measures of well-informed physicians. To illustrate the empirical implications of the new model, we estimate our model using a product level panel data on sales volume, prices, detailing minutes, and clinical trial outcomes for ACE-inhibitors with diuretics in Canada. Using our estimates, we demonstrate how the effectiveness of detailing depends on the information sets and the measures of well-informed physicians. Furthermore, we conduct a policy experiment to examine how a public awareness campaign, which encourages physicians/patients to report their drug experiences, would affect managerial incentives to detail. The results demonstrate that the empirical and managerial implications of our model can be very different from those of previous models. We argue that our results point out the importance of developing a structural model that captures the mechanism of how detailing/advertising conveys information in the market under study.     

Who should practice price discrimination using rebates in an asymmetric duopoly?

Price discrimination is generally thought to improve firm profits by allowing firms to extract more consumer surplus. In competition, however, price discrimination may also be costly to the firm because restrictive incentive compatibility conditions may allow the competing firm to gain market share at the discriminating firm’s expense. Therefore, with asymmetric competition, it may be the case that one firm would let the other firm assume the burden of price discrimination. We investigate optimal segmentation in a market with two asymmetric firms and two heterogeneous consumer segments that differ in the importance of price and product attributes. In particular, we investigate second-degree price discrimination under competition with explicit incentive compatibility constraints thus extending prior work in marketing and economics. Focusing on the managerial implications, we explore whether it would be profitable for either or both firms to pursue a segmentation strategy using rebates as a mechanism. We identify conditions under which one or both firms would want to pursue such segmentation. We find that segmentation lessens competition for the less price-sensitive consumer segment and that this results in higher profits to both firms. A key to understanding this result is that segmentation leads to consumer remixing. We establish the key result that if firms are asymmetric in their attractiveness to consumers, the disadvantaged firm in our model is more likely to pursue a segmentation strategy than its rival in equilibrium. We then ask whether this result prevails in practice. To this end, we explore competitive segmentation empirically and are able to verify that disadvantaged firms indeed pursue segmentation through rebates with greater likelihood.     

Free samples, profits, and welfare: The effect of market structures and behavioral modes

This paper addresses an important and underresearched issue in the economics and marketing literatures: what are the managerial and social consequences when firms use business models that are based on the dissemination of free samples? We develop an analytical model of free samples for both digital and physical goods that addresses three fundamental managerial and social questions. First, what is the effect of different market structures (i.e., monopoly and oligopoly) and cost structures on optimal marketing policy and prices? Second, what is the effect of different behavioral modes on prices and free samples? Third, how do different market structures and behavioral modes affect social welfare?The main conclusion is that a number of standard results do not hold when firms have the option of selling products and of distributing free samples. For example, the optimal strategy for oligopolists who produce homogeneous goods and coordinate their marketing policies is to increase - not decrease - the quantity of sold output. Similarly, under well-defined cost and demand conditions, monopoly can lead to a socially inferior outcome to competition. From a policy viewpoint, the managerial and social welfare implications of free samples depend on the type of market structure (monopoly or oligopoly) and the behavioral modes chosen by the firms in an industry (e.g., whether to coordinate their free sample policies or to behave non-cooperatively).     

Banking competition and firm-level financial constraints in Latin America

Prior literature argues that, given the existence of information asymmetries and agency costs, higher competition may increase financial constraints by reducing banks' incentives to build lending relationships. Using a sample of listed firms for six Latin American countries, we analyze the relation between banking competition and financial constraints. We find evidence in line with prior research that banking competition increases financial constraints. This result is robust and heterogeneous. We include other country-specific variables and check the robustness of our findings; the main results hold. Our results show that the effect of competition differs across firms and industries. Specifically, consistent with the information hypothesis, the negative impact of competition is higher for small quoted firms and for low-assets tangibility industries. Also, as expected, we find evidence that firms are more affected by financial constraints during the last crisis. This negative effect is larger for firms in more competitive banking industries.     

Managerial power,perquisite consumption and the efficiency of property right system: Evidence from Chinese listed companies

This research uses data of Chinese listed companies during 2001–2004 to test the effects of managerial power on perquisite consumption and firm performance from the perspectives of CEO duality, ownership dispersion and long-term tenure of top executives. Results show that companies with higher managerial power tend to incur higher perquisite consumption, while their performance does not improve accordingly. Moreover, perquisite consumption fails to offer effective incentives to managers, and non-state-controlled listed companies have greater managerial power, higher perquisite consumption, and worse performance than that of their state-controlled peers. Results also show that managerial power is an important factor influencing compensation incentive.     

The effect of exogenous product familiarity on endogenous consumer search

When a consumer is familiar with one product but not its competitor, she is faced with a decision: either buy what she knows, or engage in search to learn more. When search is costly, competing firms may attempt to encourage or discourage search by adjusting prices. In this paper we consider how competitive dynamics between two quality differentiated firms are affected if one product enjoys a familiarity advantage. Familiarity is defined as a consumer’s ex-ante knowledge of fit for a particular product. An increase in the level of familiarity for one product allows a firm to charge higher prices since there are more consumers with information on that product relative to the competition. We call this the direct effect of familiarity. However, an increase in familiarity also has an indirect effect, since it gives the rival firm a stronger incentive to decrease price in order to encourage searching, in turn increasing overall competition. The effect of familiarity on profits depends on the magnitudes of these effects, and it is moderated by the level of quality differentiation between products. For very high or very low levels of differentiation, the results are relatively straightforward. However, when the level of differentiation is moderate, the results are more nuanced, with the higher-quality firm realizing higher profits from more familiarity, even if it must lower prices due to the indirect effect. We also find that, contrary to conventional wisdom, overall competition may be higher when firms are more quality differentiated. This is driven by the fact that higher quality differences bolster the indirect effect, with a lower quality firm providing deeper price cuts to counter increased familiarity of a high quality rival. We conclude by examining how changes in the cost of searching impact equilibrium outcomes.

     

Duopolistic Price Competition with Captives

We extend the Bertrand duopolistic competition to include captives. These are consumers that have no choice between the suppliers. Usual population of shoppers are modeled performing a sequential search in order to decide where to buy a homogenous good. These two simple departures from the original setup have sharp consequences. First, we find that duopolistic price competition is not robust to inclusion of captives. The equilibrium results starkly differ and the only possible equilibrium now includes duopolists charging monopolistic prices. Second, addition of sequential search introduces multiplicity of pure strategy Nash equilibria. In this setup, we observe perverse optimal response to competitor's price changes. Notably, we find that the firm might want to reduce the price in response to the competitor's price increase, which is at odds with the usual undercutting principle. Third, we investigate the behavior of equilibrium prices depending on the heterogeneity in consumer risk attitudes. We find that the higher consumer heterogeneity with respect to acceptance of risky gambles leads to higher prices in equilibrium.     

加入WTO后我国连锁超市发展中的品牌战略

我国加入WTO必将加剧商业企业的竞争,尤其是连锁超市会面临国外名牌连锁集团的挑战。强 化经营管理,提升市场竞争能力是连锁超市的现实选择。其中,实施品牌战略有利于连锁超市提高信誉、 形成经营特色、降低商品价格、提升市场竞争力。针对我国连锁超市的发展状况,需制定相应策略。