Product Differentiation by Competing Vertical Hierarchies

We revisit the choice of product differentiation in the Hotelling model, by assuming that competing firms are vertically separated, and that retailers choose products' characteristics. The “principle of differentiation” does not hold because retailers with private information about their marginal costs produce less differentiated products in order to increase their information rents. Hence, information asymmetry within vertical hierarchies may increase social welfare by inducing them to sell products that appeal to a larger number of consumers. We show that the socially optimal level of transparency between manufacturers and retailers depends on the weight assigned to consumers' surplus and trades off two effects: higher transparency reduces price distortion but induces retailers to produce excessively similar products.     

Data-driven manufacturer-retailer collaboration under competition

This research employs game theoretic models to investigate how and when data-driven collaborations between manufacturers and retailers are beneficial. In the models, two symmetric retailers each offer two products from two different manufacturers. Each manufacturer may choose to collaborate with one or both retailers through data-driven initiatives in providing retail value to the consumers. The results show that the main incentive behind these collaborations arise from the efficient allocation of resources. Surprisingly, greater brand differentiation reduces profit margins and the incentive to collaborate. We also find that market leaders can endogenously arise through data-driven collaborations.     

Bait and ditch: Consumer naïveté and salesforce incentives

We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naïve. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The two retailers sell an identical base product, but the deceptive one also offers an add‐on. Rational consumers never consider buying the add‐on while naïve ones can be “talked” into buying it. By offering the manager a contract that pushes him to never sell the base good without the add‐on, the chain can induce an equilibrium in which both retailers obtain more‐than‐competitive profits. The equilibrium features price dispersion and market segmentation, with the deceptive retailer targeting only naïve consumers whereas the transparent retailer serves only rational ones.     

Advance selling of new products to strategic consumers on flash sale platforms*

Flash sale (FS) is a new business model that offers discounted products in limited numbers over a short period. In this paper we discuss the impact of strategic consumers on advance selling (AS) of new products on FS platforms. We first study the impact of strategic consumers on competing retailers adopting AS to sell a homogeneous new product. And find that the retailers’ AS profits and inventory quantities decrease with the strategic customers’ valuation and valuation decreasing rate. Then we analyse whether FS can mitigate the impact of strategic customers on retailers adopting AS for new products. We consider a newsvendor model involving only one retailer adopting AS to sell a new product. We derive the results by comparing this model with two counterpart models, namely the classical newsvendor model with no strategic customers and a newsvendor model with strategic customers where the retailer does not use FS under AS.     

“When Should Manufacturers Want Fair Trade?”: New Insights from Asymmetric Information when Supply Chains Compete

We study a model of competing manufacturer/retailer pairs where adverse selection and moral hazard are coupled with promotional externalities at the downstream level. In contrast to earlier models mainly focusing on a bilateral monopoly setting, we show that with competing brands a ‘laissez‐faire’ approach towards vertical price control might not always promote productive efficiency. Giving manufacturers freedom to control retail prices is more likely to harm consumers when retailers impose positive promotional externalities on each other, and the converse is true otherwise. Our simple model also suggests that, with competing supply chains, consumers and manufacturers might prefer different contractual modes if promotional externalities have substantial effects on demands.     

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.     

Options as a Marketing Tool: Pricing a Promotional Scheme for a Product with a Secondary Market

Adding options to durable products allows new opportunities for manufacturers and retailers in markets with a secondary market to create better segmentation schemes, provide creative means to differentiate their products and services, and increase the value they offer consumers. This raises the need for sellers to properly price such options. This work presents a few examples of incentive programs for the car industry, develops models and calculates their cost to the seller, demonstrating the applicability of the proposed methodology. Our numerical results indicate that such options are surprisingly inexpensive for car manufacturers and dealers. Copyright © 2015 John Wiley & Sons, Ltd.     

Spoils from the Spoiled: Strategies for Entering Stigmatized Markets

Stigmatized markets are those where either the products/services, or the consumers, or both, have been collectively, negatively stereotyped and devalued by one or more stakeholder audiences in ways that discredit the overall market. Many stigmatized markets exist, and many flourish, yet little systematic attention has focused on entry into such markets. Our article addresses this gap by conceptualizing various strategies for entering stigmatized markets. We further present propositions regarding the market‐level factors that can influence which of these strategies firms will choose to employ. The contributions include: conceptually clarifying the nature of stigmatized markets; identifying additional types of entry strategies relevant for entering stigmatized markets; theorizing the conditions under which firms would choose one entry strategy over another; and opening up for consideration the effects that market entry may have on stigmatized actors in targeted markets.     

Targeted advertising,platform competition,and privacy

Targeted advertising can benefit consumers through lower prices for access to web sites. Yet, if consumers dislike that web sites collect their personal information, their welfare may go down. We study competition for consumers between web sites that can show targeted advertisements. We find that more targeting increases competition and reduces the web sites' profits, but yet in equilibrium web sites choose maximum targeting as they cannot credibly commit to low targeting. A privacy protection policy can be beneficial for both consumers and web sites. If consumers are heterogeneous in their concerns for privacy, a policy that allows choice between two levels of privacy will be better. Optimal privacy protection takes into account that the more intense competition on the high‐targeting market segment also benefits consumers on the less competitive segment. Consumer surplus is maximized by allowing them a choice between a high‐targeting regime and a low‐targeting regime which affords more privacy.     

Price promotions as a threat to brands

Manufacturers frequently resist heavy discounting of their products by retailers. Since low prices should increase demand and manufacturers could simply refuse to fund deep price promotions, such resistance is puzzling at first sight. We develop a model in which price promotions cause shoppers to evaluate the relative importance of quality and price against a market-wide reference point. With deep discounting, consumers perceive quality differences as less pronounced, eroding brand value and the bargaining position of brand manufacturers. This reduces their profits and may even lead to a delisting of their products. By linking price promotions to increased one-stop shopping and more intense retail competition, our theory also offers an explanation for the rise of store brands.     

The impact of corporate social responsibility associations on trust in organic products marketed by mainstream retailers: a study of Italian consumers

This paper investigates the determinants of consumer attitudes toward organic products marketed by mainstream retailers under a private label. Since organic products are credence goods, consumers cannot directly verify whether these products comply with official standards. Organic labels are the primary source of consumer trust in organics, but these labels must be noticed and understood before consumers will actively seek them out. In that some consumers may not prioritize product labels when they shop, it is sometimes up to retailers to strengthen consumer trust. Within the antecedents of this trust, we isolated the contribution of the corporate social responsibility associations held by consumers about retailers. We surveyed Italian customers interested in organics and found that they are more likely to trust the private‐label organic products sold by a retailer when it is considered socially responsible. Our results also show that consumer trust translates into brand loyalty and a willingness to pay a premium price for organic products. Copyright © 2009 John Wiley & Sons, Ltd and ERP Environment.     

Product Line Choice in Retail Duopoly

This paper develops a successive duopoly model to identify conditions under which differentiated retailers that compete in quantities, when deciding on the range of brands to offer, will carry overlapping product lines. They will do so when retail margins on each brand are not too asymmetric. Otherwise, the less profitable brand is foreclosed from the market. It is shown that welfare increases if the upstream industry is perfectly competitive, even though fewer brands may be sold. With price competition though, exclusive dealing arises when retailers are not too differentiated and in‐store competition is sufficiently intense.     

Intermediation Can Replace Certification

We consider a market in which consumers do not have perfect information about product quality. Producers can perfectly reveal that a good is of high quality through certification, which entails socially wasteful costs. Firms can choose whether to sell through an intermediary or to sell independently (vertical integration). We show that multibrand retailing, which leads to a redistribution of profits but not to social costs, can fully or partially replace certification by signaling product quality. Renting the image of a competing high-quality brand is shown to be an outcome that can be sustained through intermediation.     

A model of vertical integration and investment in generation capacity in electricity markets: The case of the bidding game

The aim of this work is to assess the impact of (partial) vertical integration between generators and retailers on generation capacity choice and its subsequent welfare consequences. We present a framework in which final demand is perfectly inelastic and stochastic. Nevertheless, wholesale demand is elastic because of the existence of outside opportunities (mainly international transmission capacity). The model is a three-stage game. Neither transmission nor retail costs are taken into account.

In the first stage of the game, generators choose capacity only knowing distribution of demand and thus maximizing their expected profit. The second stage of the game represents the competition for market share between retailers in a market where consumers have switching costs. The former face unknown demand and maximize their utility based on two factors: the expected profit and a risk element. Finally, generators submit bid functions to the system operator given known demand and maximizing their profit during the last stage of the game. Retailers and generators interact in the wholesale market, which is cleared by the system operator whose function is to match supply (represented by the bids of the generators) and demand through a system of single price auctions. The wholesale market is the only means to buy and sell energy; there are no bilateral contracts between firms, except if they are vertically integrated.

We compare fully disintegrated and partially vertically integrated structures using a comparative statics approach. In this paper, the analysis will focus on the last stage of the game: the bidding game. We find that partial vertical integration between generators and retailers tends to lower wholesale prices but not unambiguously. Depending on which firm (vertically integrated or disintegrated generator) has installed the higher capacity and depending on level of demand, prices can stay unchanged or even rise.     

The strategic effect of retailers' in‐store advertising services under product variety competition

We study a retailer service model of in‐store advertising, in which a neutral retailer provides product information to consumers for free but charges manufacturers. Our results show that the retailer's optimal pricing induces the manufacturers to decrease the number of items they offer. Nevertheless, this relaxes the competition between the manufacturers so that they benefit from using the in‐store service, unless the cost of communicating with consumers about the between‐firm products is lower. Furthermore, the service can be made socially beneficial by reducing the inefficiency resulting from an excessive number of items when manufacturers are not well differentiated.     

Who Appoints Them,What Do They Do? Evidence on Outside Directors from Japan

Although reformers often claim Japanese firms appoint inefficiently few outside directors, the logic of market competition suggests otherwise. Given the competitive product, service, and capital markets in Japan, the firms that survive should disproportionately be firms that tend to appoint boards approaching their firm‐specifically optimal structure. The resulting debate thus suggests a test: do firms with more outsiders do better? If Japanese firms do maintain suboptimal numbers of outsiders, then those with more outsiders should outperform those with fewer; if market constraints instead drive them toward their firm‐specific optimum, then firm characteristics may determine board structure, but firm performance should show no observable relation to that structure. We explore the issue with data on the 1000 largest exchange‐listed Japanese firms from 1986 to 1994. We first ask which firms tend to appoint which outsiders to their boards. We find the appointments decidedly nonrandom. Firms appoint directors from the banking industry when they borrow heavily, when they have fewer mortgageable assets, or when they are themselves in the service and finance industry. They appoint retired government bureaucrats when they are in construction and sell a large fraction of their output to government agencies, and they appoint other retired business executives when they have a dominant parent corporation or when they are in the construction industry and sell heavily to the private sector. Coupling OLS regressions with two‐stage estimates on a subset of the data, we then ask whether the firms with more outside directors outperform those with fewer, and find that they do not. Instead, the regressions suggest—exactly as the logic of market competition predicts—that firms choose boards appropriate to them.     

Option Contracts and Vertical Foreclosure

A model of vertical integration is studied. Upstream firms sell differentiated inputs; downstream firms bundle them to make final products. Downstream products are sold as option contracts, which allow consumers to choose from a set of commodities at predetermined prices. The model is illustrated by examples in telecommunication and health markets. Equilibria of the integration game must result in upstream input foreclosure and downstream monopolization. Consumers may or may not benefit from integration.     

Resale price maintenance in a model of consumer search

A retail search model of Salop and Stiglitz (1977) is adapted to analyze manufacturer incentives for resale price maintenance. For some retailer cost functions and distributions of consumer search costs, imposition of a minimum price for retailers causes a price distribution to collapse to an intermediate price. Manufacturers may benefit from price floors when sales to high-search-cost consumers that have obtained lower prices increase sufficiently so as to offset decreased sales to other consumers facing higher prices. In contrast to previous work, no free-riding problem with respect to dealer services is necessary for manufacturers to prefer banning discounting of their products.     

Bailing on the Car That Was Not Bailed Out: Bounding Consumer Reactions to Financial Distress

We examine how consumers react to the financial distress of durable goods manufacturers by studying the Swedish new car market. We employ a difference‐in‐differences matching methodology whereby we compare sales of carmaker Saab with those of a control group of substitute products. To account for possible substitution between products in the treatment and control groups, we propose and apply bounds to our difference‐in‐differences matching estimator. We then refine the bounds and provide conditions under which they depend only on product elasticities. We find that there was a significant decrease in the sales of Saab following its filing for administration.     

A Study of Vertical Integration and Vertical Divestiture: The Case of Store Brand Milk Sourcing in Boston

This article investigates whether a retailer’s store brand supply source impacts vertical pricing and supply channel profitability. Using chain‐level retail scanner data, a random coefficients logit demand model is estimated employing a Bayesian estimation approach. Supply models are specified conditional on demand parameter estimates. Bayesian decision theory is applied to select the best fitting pricing model. Results indicate that a vertically integrated retailer engages in linear pricing for brand manufacturers’ products while competing retailers make nonlinear pricing contracts with brand manufacturers for branded products and store brands. A simulated vertical divestiture based on real world events provides evidence for improved channel efficiency.