OBSERVABLE MANAGERIAL INCENTIVES AND SPATIAL COMPETITION

In this paper we investigate the relationship between product market competition and managerial incentives within a circular city model with observable agency contracts. With respect to the case of unobservability studied by Raith (2003 ), we find that optimal managerial contracts provide lower incentives, and that equilibrium expected prices and profits are higher. Changes in competition fundamentals have ambiguous effects, but observable contracts alleviate their impact on incentives. Finally, observability involves three major implications: managerial incentives are higher under price regulation than under competition; prices may increase with the number of firms; consumer welfare may diminish when competition increases.     

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.

     

Retail Market Power in a Shopping Basket Model of Supermarket Competition

Supermarket retailers typically operate with relatively low margins, suggesting a highly competitive retail environment. However, despite the fact that consumers purchase an entire shopping basket at a time from supermarkets, this evidence is largely based on models of retail competition with single-category purchases. In this paper, we develop and test an empirical model of retail price competition that explicitly accounts for the effect of demand complementarity among items in consumer shopping baskets. Relative to the case where consumers purchase products with independent demands, we demonstrate that equilibrium prices are higher for all items when retailers take demand-complementarity into account. Our findings indicate that non-price strategies intended to encourage complementarity, such as co-merchandising, strategic shelf-positioning, or featuring complementary goods tend to soften price competition, and lead to higher equilibrium prices.     

Prices Paid in Grocery Markets: Searching Across Stores and Brands

Using a large sample of prices paid for 21 homogeneous grocery products available in several brands in each of 16 markets, we simulate the search behavior of a consumer following different shopping strategies using as many as four supermarkets. We find that price search can lead to substantial savings. Brand switching can generate savings at least as large as visiting multiple stores to find the lowest price for a single brand. Buying a private label is usually a better way to save than any amount of search for low prices on national brands. A case study in a small metropolitan area grocery market yields results substantially the same as the simulation results.     

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.     

It's Not All Relative: The Effects of Mental and Physical Positioning of Comparative Prices on Absolute versus Relative Discount Assessment

In the context of three experiments, the authors examine the manner in which consumers compare a sale price to an explicit reference value. They find that a comparison of sale price to regular price may be more likely to involve an absolute (dollar amount) assessment, whereas a comparison of sale price to a competitor's price may be more likely to involve a relative (percent) assessment. The authors also find that vertical (i.e., columnar) placement of prices may result in a greater tendency to estimate discounts in relative terms. Conversely, horizontal (i.e., side-by-side) placement may result in a greater tendency to compute absolute numerical difference. The results provide important implications for retail managers in terms of framing and communicating price discounts.     

Consumer heterogeneity and online vs. offline retail spatial competition

This paper develops a game-theoretic spatial model featuring consumer heterogeneity in online vs. offline retailers’ spatial competition. We find that consumers’ browse-and-switch behavior intensifies the competition because both offline and online retailers’ price and profit decline when the behavior occurs, but it is not necessarily a threat to offline retailers especially when the product relates more closely to experience. We consider six equilibrium scenarios for different combinations of consumer behaviors when considering a hybrid retailer. The analysis taking consumer heterogeneity into consideration shows that the hybrid retailer operating both online and offline is not always the winner. Particularly, the business opportunity for the offline retailer lies in consumers’ willingness to pay in store, and whether the retailer launches an online store depends on the type of products and services provided.     

Consumer price awareness in food shopping: the case of quantity surcharges

Quantity surcharges, higher unit prices on larger sizes than smaller sizes, are often found among grocery items. In this study we consider the question of why consumers buy surcharged goods. We hypothesize that it is the consequence of a failure to price search, and that some buyers purchase larger sizes in the belief they are cheaper, thus avoiding the need for price comparisons. In the analysis we examine canned tuna, using 1990 data from 54 grocery regions on sales, prices, and consumer demographics. Results support the hypothesis. We find evidence that buyers of surcharged items are mainly those with high time and information costs.     

The Impact of Store-Price Signals on Consumer Search and Store Evaluation

Always low price (ALP) and low price guarantee (LPG) are store-price signals that retailers frequently use to induce favorable store-price image and discourage consumers from comparing prices across stores. Although both policies signal low prices, only LPG is an obligatory promise to beat rival stores’ prices. Results of two shopping simulations show that when consumer search costs are relatively low, ALP may effectively discourage consumer search whereas LPG may trigger more search. Paradoxically, consumers tend to evaluate ALP stores less favorably (as having lower integrity and higher self-serving intention) than LPG stores even when both signals appear to be credible. These findings suggest that LPG is a superior tactic for creating a favorable store image while ALP is more effective for discouraging consumer search. The results also indicate that consumers visit fewer stores when the LPG is not a credible signal of lowest market price than when it is credible. This is because consumers are inclined to either claim discounts or refunds at the non-credible LPG store or to purchase at the competing store with a lower price rather than continue searching.     

Market share response and competitive interaction: The impact of temporary, evolving and structural changes in prices

Managing pricing is a challenging task due to the significant impact on shares and the likelihood of strong consumer and competitor reaction. The major contributions of this paper are to assess comprehensive share response to temporary, evolving and structural changes in prices and to determine the level of market share as a function of levels of prices. For the empirical analysis, we examine two consumer product categories and find that it is valuable to distinguish among temporary, evolving and structural changes in prices, as their impact on market shares tends to differ. Further, we find that subsequent competitive reaction will influence predictions of price response. Accordingly, it is important for managers to use conjectures regarding competitive price reactions in assessing the impact of policy changes. We conclude with the strategic implications of the findings and discuss a number of opportunities for future research.     

Setting prices in mixed logit model designs

We investigate different procedures to set prices in designs for choice-based conjoint analysis using the mixed logit model which captures latent consumer heterogeneity. Besides discrete attributes, we include a linear price term in the deterministic utility function thereby treating price as continuous variable. We consider two different price intervals and several price sets which contain either two or three prices. We compare these alternatives to set prices by simulating choices for different constellations on the basis of the mixed logit model. Furthermore, we generate ten designs simultaneously instead of just one. Using these simulated choices, we estimate the parameters of the mixed logit model in the next step. To reduce the needed sample size and computation time caused by accounting for latent consumer heterogeneity, we apply Halton draws and set a minimum potential design for prior draws. ANOVA with root mean squared error between estimated and true price coefficient values of individual consumers as dependent variable shows that using more extreme prices as interval bounds and one intermediate price positioned to the right of the interval performs best.     

Modelling the asymmetric responses of price level to oil price changes in Qatar

This paper inspects the asymmetric effect of oil price on prices level in Qatar. To achieve that, we proceed by employing a nonlinear autoregressive distributed lag (ARDL) approach on data during the period 1990Q1–2014Q4. The estimation results show evidences of an incomplete and asymmetric influence of oil price on price level in the long term. Moreover, we find that price responses to negative changes in oil price is greater than its response to positive changes. Given Qatar’s economic features, a decrease in oil price could cause lower imports and production prices and consequently a substantial influence on domestic prices level. However, the lower effect of positive oil price changes on consumer prices can be explained by the subsidies system, the consumption patterns, and the exchange rate regime.     

Is transparency a good thing? How online price transparency and variability can benefit firms and influence consumer decision making

The internet has empowered consumers and changed the way they search and shop for products and services by increasing the availability and transparency of pricing and other comparative information. However, what is less clear from a managerial perspective is just how transparent pricing information should be. While it might seem that increasing price transparency would reduce consumer search, we find that it may actually increase search and delay. In this article, we review the use of firms’ application of price transparency in practice and propose that specific types of information can influence how transparent prices are to consumers, and how such transparency can influence consumer decisions in a way that is beneficial for the firm. We focus on a specific form of transparency: whether or not the consumer knows the range of pricing. We also discuss whether a high variability pricing approach versus a low variability pricing approach influences consumer decision making—and whether this influence is moderated by transparency.     

Exchange‐rate Misalignments in Duopoly: The Case of Airbus and Boeing

We examine the effect of exchange‐rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar‐denominated prices while one of them, Airbus, incurs a large fraction of its costs in euro. We estimate price elasticities for big aircraft, and construct a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment and how this affects profit margins and volumes. We conclude that, due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange‐rate fluctuations on to customers. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning‐by‐doing, even a temporary departure of the exchange rate from its long‐run equilibrium level may have permanent effects on the industry.     

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.     

Consumer responses to characteristics of price-matching guarantees: The moderating role of price consciousness

The present study develops and tests a conceptual model of consumer response to different types of price-matching characteristics (i.e., refund depth, length, and scope) across consumer segments with varying levels of price consciousness. A computer shopping simulation results show that a deep refund is interpreted as a signal of low prices by nonprice conscious consumers. However, price conscious consumers are found to associate deep refunds with increased prices, an unintended outcome for the retailer. The effects of price-matching characteristics on search and purchase behavior were also found to vary across more and less price conscious consumer segments.     

The Consumer Costs of Food Certification: A Pilot Study and Research Opportunities

Certification labels have become a ubiquitous feature on food products across grocery store shelves. Although it is widely acknowledged that certified products often garner higher prices than their noncertified competition, less is known regarding what those price differences are based on, and what the personal, political, or ethical implications are for consumers. This research note argues for greater attention to the implications of certified food prices—which we conceptualize as the “consumer costs” of food certification. The paper discusses the theoretical linkages between food certifications and prices, and outlines the resulting consumer costs of which we are concerned. Through a pilot study in Salt Lake City, Utah, we investigate prices found on certified grocery store rice, and consider the causes and implications of the consumer costs of food certification.     

Information and channel profits

New marketing information technologies, associated with point-of-purchase scanner systems, have increased the potential information available to manufacturers and retailers. In this paper, we explore the pricing and profit implications of this technology within a channel setting. We find that improved information about demand always results in greater absolute profits, as well as a claim on greater division of channel profits for the informed channel member. The greater profitability is due to the informed channel member's ability to “fine tune” prices in response to changes in demand conditions. However, total channel profits are highest when only one channel member acquires information. We also show that fine-tuning of price has the effect of smoothing sales, as informed firms charge higher prices during high demand periods and charge lower prices during low demand periods. Lastly, we show that an equilibrium where both channel members acquire information does not lead to a prisoners' dilemma.     

Pricing Policy and Partial Collusion

We study the pricing policy equilibria emerging in a partial collusion duopolistic framework where firms in the first stage of the game choose non-cooperatively the pricing strategy (perfect price discrimination or uniform pricing), and from the second stage onward collude on prices. We show that for intermediate discount factors and high firms’ asymmetry, the unique equilibrium is characterized by only the smaller firm choosing price discrimination. In the case of intermediate discount factors and low firms’ asymmetry, there are two possible equilibria: both firms price discriminate or no firm price discriminates. When the discount factor is particularly high or particularly low both firms price discriminate in equilibrium.     

Consumer deliberation and quality signaling

Consumers are often uncertain about their product valuation before purchase. They may bear the uncertainty and purchase the product without deliberation. Alternatively, consumers can incur a deliberation cost to find out their true valuation and then make their purchase decision. This paper proposes that consumer deliberation about product valuation can be an endogenous mechanism to enable credible quality signaling. We demonstrate this point in a simple setup in which product quality influences the probability that the product has high valuation. We show that with endogenous deliberation there may exist a unique separating equilibrium in which the high-quality firm induces consumer deliberation by setting a high price whereas the low-quality firm prevents deliberation by charging a low price. Compared to the case of complete information, the price of the high-quality firm can be distorted upward to facilitate consumer deliberation, or distorted downward to avoid the low-quality firm’s imitation. In an extension we show that dissipative advertising can facilitate quality signaling. The high-quality firm can utilize advertising spending to avert imitation from the low-quality firm without distorting price downward, earning a higher profit than that without advertising. However, advertising mitigates the distortion at the expense of consumer surplus and social welfare.