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.     

Raising rivals’ cost in multi-unit auctions

The objective many telecom regulators want to achieve when they decide to auction spectrum is that acquiring firms pay a market price (based on the opportunity cost principle). The simultaneous ascending auction may fail in this respect, as it provides bidders with an opportunity to engage in strategic demand reduction. This paper asks whether the combinatorial clock auction (CCA) fares better in this respect. We show that the answer to this question depends on the objectives bidders have. If bidders have only the slightest preference to raise rivals’ cost, they will use the opportunities the CCA provides them to engage in strategic demand expansion. This is even the case when the clock phase ends with excess demand.     

Strategies for online communities

This study examines the participation of firms in online communities as a means to enhance demand for their products. We begin with theoretical arguments and then develop a simulation model to illustrate how demand evolves as a function of interpersonal communication and a firm's chosen strategy. In this model, the firm's strategy involves allocating advocates who promote its product in online communities. Our model results point to some key parameters informing firms' strategies when social learning processes shape demand. Copyright © 2008 John Wiley & Sons, Ltd.     

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.     

Anticompetitive Vertical Merger Waves

We develop a model of vertical merger waves and use it to study the optimal merger policy. As a merger wave can result in partial foreclosure, it can be optimal to ban a vertical merger that eliminates the last unintegrated upstream firm. Such a merger is more likely to worsen market performance when the number of downstream firms is large relative to the number of upstream firms, and when upstream contracts are non‐discriminatory, linear and public. On the other hand, the optimal merger policy can be non‐monotonic in the strength of synergies or in the degree of downstream product differentiation.     

Why Do Suppliers Charge Larger Buyers Lower Prices?

The phenomenon of input suppliers charging larger buyer firms, relative to smaller buyer firms, lower prices is commonly explained in terms of supplier economies of scale, supplier competition for larger buyers, and the larger bargaining power of larger buyers. This paper provides an alternative explanation, and shows that the observed direction of differential pricing can benefit the supplier by lowering the level of tacit collusion its buyers can sustain in their output market. This result also provides a new mechanism through which a ban on price discrimination by input suppliers may lower consumer welfare.     

Pricing in revenue management for multiple firms competing for customers

We consider the pricing strategies of multiple firms providing the same service in competition for a common pool of customers in a revenue management context. The firms have finite capacity and the demand at each firm depends on the selling prices charged by all firms, each of which satisfies demand up to a given capacity limit. We use game theory to analyze the systems when firms face either a deterministic demand or a general stochastic demand. The existence and uniqueness conditions of a Nash equilibrium are derived, and we calculate the explicit Nash equilibrium point when the demand at each firm is a linear function of price. We also conduct sensitivity analysis of the equilibrium prices with respect to cost and capacity parameters.     

Preemptive investments under uncertainty,credibility and first mover advantages

We present a continuous-time game in which two firms must decide at each instant of time whether to be in or out of a market that expands up to a random maturity date and declines thereafter. Firms are initially inactive, and they differ only in the opportunity costs of using their assets (e.g., owing to different redeployment or resale values). After characterizing the unique Markov perfect equilibrium of the entry and exit game under demand uncertainty, we challenge the result that the threat of preemption can partially or even totally dissipate a first mover advantage. When post-entry profits can be negative, the preemption threat of a firm may become weaker because its rival may force it out of the market after entering. As a result, there may be little or no dissipation of the first mover advantage when post-investment profits are not assumed to be always positive.     

INPUT PRICE DISCRIMINATION WHEN BUYERS OPERATE IN MULTIPLE MARKETS*

This paper revisits third‐degree price discrimination when input buyers serve multiple product markets. Such circumstances are prevalent since buyers often use the same input to produce different outputs, and even homogenous outputs are routinely sold through different locations. The typical view is that price discrimination stifles efficiency (and welfare) by resulting in price concessions to less efficient firms. When buyers serve multiple markets, price discrimination leads to price breaks for firms in markets with lower demand. When lower demand markets also have less competition, price discrimination can provide welfare gains by shifting output to less competitive markets.     

COLLUSION AND FIGHTS IN AN EXPERIMENT WITH PRICE‐SETTING FIRMS AND ADVANCE PRODUCTION*

We present results from 50‐round duopoly and triopoly experiments. Firms decide repeatedly both on price and quantity of a perishable good. Each firm has capacity to serve the whole market. The stage game does not have an equilibrium in pure strategies. Most markets evolve either to monopolies as a consequence of bankruptcies or to collusion at the monopolistic price. Evolution is faster in markets with two than in those with three firms. Therefore, over time average price is lower with three than with two. Consumer surplus is higher with three firms, but efficiency is lower in markets with three firms.     

Is a Big Entrant a Threat to Incumbents? The Role of Demand Substitutability in Competition Among the Big and the Small

We establish a model of market competition between large and small firms and investigate the way in which demand substitutability affects how the entry of big firms impacts incumbents. We focus on the relative strength of two opposing effects of entry on large incumbent firms’ demand: the direct substitution effect among large firms (negative) and the indirect feedback effect through the change in small firms’ aggregated behavior (positive). If the substitutability between large and small firms is sufficiently high, the indirect effect dominates the direct effect and large incumbents’ equilibrium prices and profits increase. We show that welfare effects are ambiguous, which calls for careful assessment when regulating large firms’ entry.     

Understanding demand and supply paradoxes and their role in business-to-business firms

In this paper, we explore paradoxes firms face when managing demand and supply activities and managers' experience of coping with and transcending these paradoxes. Following an exploratory research approach and based on the analysis of interviews with executive managers, documents from, and observations of 19 business-to-business (B2B) firms, we develop empirically grounded propositions. We first find and explain three major demand and supply paradoxes, namely collaboration-competition, concord-conflict, and integration-differentiation. We then expand on the handling mechanisms B2B firms employ to respond to these paradoxes. We find that B2B firms that understand, balance, and transcend demand and supply paradoxes achieve greater synergy between demand and supply activities and leverage both demand and supply approaches as overarching guiding principles for their strategy. Our study informs B2B marketing and marketing strategy by exploring the nature and role of paradoxes that shape the relationships between demand and supply activities. In doing so, it also offers an empirical account of the discrepancy between the theory and practice of demand and supply integration.     

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.     

Welfare losses under Cournot competition

In a market for a homogeneous good where firms are identical, compete in quantities and produce with constant returns, the percentage of welfare losses (PWL) is small with as few as five competitors for a class of demand functions which includes linear and isoelastic cases. We study markets with positive fixed costs and asymmetric firms. We provide exact formulae of PWL and robust constructions of markets were PWL is close to one in these two cases. We show that the market structure that maximizes PWL is either monopoly or dominant firm, depending on demand. Finally we prove that PWL is minimized when all firms are identical, a clear indication that the assumption of identical firms biases the estimation of PWL downwards.     

Computing welfare losses from data under imperfect competition with heterogeneous goods

We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear, even if prices, outputs, costs and the number of firms can be observed, PWL is arbitrary in both Cournot and Bertrand equilibria. If in addition the elasticity of demand (resp. cross elasticity of demand) is known, we can calculate PWL in a Cournot (resp. Bertrand) equilibrium. When demand is isoelastic and there are many firms, PWL can be computed from prices, outputs, costs and the number of firms. We find that price–marginal cost margins and demand elasticities may influence PWL in a counterintuitive way. We also provide conditions under which PWL increases or decreases with concentration.     

Endogenous capacities and price competition: The role of demand uncertainty

We analyze the role of demand uncertainty in markets of fixed size, in which firms take long-run capacity decisions prior to competing in prices. We characterize the set of subgame perfect Nash equilibria under various assumptions regarding the nature and timing of demand uncertainty. In order to prove equilibrium existence, we identify a sufficient condition for the capacity choice game to be submodular. This condition resembles the standard downward-sloping marginal revenue condition used in Cournot games. A robust conclusion of the analysis is that equilibrium capacity choices are asymmetric, even when firms are ex-ante identical. Concerning the equivalence between the capacity-price game and the Cournot game, we find that with inelastic demands, the equilibria of the former belong to the equilibrium set of the latter. However, as compared to the Cournot game, the capacity-price game leads to lower prices and generates price dispersion.     

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.     

Investment timing and vertical relationships

We show that the standard analysis of vertical relationships transposes directly to investment dynamics. Thus, when a firm undertaking a project requires an outside supplier (e.g., an equipment manufacturer) to provide it with a discrete input to serve a growing but uncertain demand, and if the supplier has market power, investment occurs too late from an industry standpoint. The distortion in firm decisions is characterized by a Lerner-type index. Despite the underlying investment option, greater volatility can result in a lower value for both firms. We examine several contractual alternatives to induce efficient timing, a novel vertical restraint being for the upstream to sell a call option on the input. We also extend the model to allow for downstream duopoly. When downstream firms are engaged in a preemption race, the upstream firm sells the input to the first investor at a discount such that the race to preempt exactly offsets the vertical distortion, and this leader invests at the optimal time. These results are illustrated with a case study drawn from the pharmaceutical industry.     

Cournot Oligopoly Conditions under which Any Horizontal Merger Is Profitable

Findings in economic theory suggest that horizontalmergers involving firms with aggregate market shareless than 50% are unlikely to be motivated by theconsequent reduction in competitivity. The resultsarise because, absent cost efficiencies, quantity-settingfirms in small mergers are impoverished by the merger.We demonstrate that this conclusion is a consequence ofthe strong restrictions imposed on the demand function,and we identify a well-behaved demand function suchthat any set of merging firms benefits from the reductionin competition even when there are no cost efficiencies.     

Franchisor–franchisee supply chain cooperation: Sharing of demand forecast information in high-tech industries

In order to maintain their competitive edges in the market, high-tech firms cannot simply rely on superior technology alone. In addition, due to rapid technological changes, market demands in the high-tech industries have become volatile and difficult to forecast. This study proposes an option (i.e. franchising) that high-tech firms can use in order to expand their markets and improve firm performance. We also utilize a Bayesian forecasting methodology in order to address information sharing between the franchisor and franchisee. Our study demonstrates how high-tech franchising firms can benefit from information sharing of demand forecasts when franchising in order to enhance franchise performance. We also show that a profit sharing mechanism that results in optimal profits for the franchisor and franchisee. The study fills the research gaps that currently exist in the franchising literature and provides important managerial implications for practitioners in B2B markets.