Complementarity of willingness to pay and cost heterogeneity under vertical product differentiation: A welfare analysis

Due to the fact that a consumer’s willingness to pay differs between segments, many unregulated industries are price constrained, although the specific costs of market segments also differ. If the product quality is endogenously chosen, we find that third-degree price discrimination increases welfare if a sufficiently pronounced complementarity between the willingness to pay and variable cost heterogeneity is given. This is due to the fact that the monopolist’s incentive for employing a pronounced price dispersion strategy is directly influenced by the consumers’ willingness to pay for the quality of a product. With endogenous product quality, the paper shows that the standard welfare result of third-degree price discrimination compared to uniform monopoly pricing (e.g. that total welfare and consumer surplus both fall if total output does not rise) can be only reversed given the complementarity is sufficiently pronounced.     

Innovation,complementarity, and exporting. Evidence from German manufacturing firms

This paper assesses whether there might be complementarities between different types of innovation activities (product, process and organizational) and how these effects may be linked to the likelihood that a firm will export. Complementarity is addressed through the properties of supermodular functions, and firm heterogeneity by export destination is explored. A new econometric strategy to test for pairwise complementarity in a function with three independent variables and a binary dependent variable is proposed. Exogenous and endogenous innovation variables are considered by using bootstrapping for hypothesis testing, propensity score matching and treatment effects models. The empirical analysis shows that complementarity relationships between innovation strategies are more likely to exist when firms export to multiple foreign markets.     

Inside innovation persistence: New evidence from Italian micro-data

This paper contributes the analysis of the persistence of innovation activities, as measured by different innovation indicators and explores its past and path dependent characteristics. The study provides new insights on the role of R&D investments in innovation persistence and analyses differentiated patterns of persistence across product and process innovation, by accounting for complementarity effects between the two types of innovative behaviour. The empirical analysis is based on a sample of 451 Italian manufacturing companies observed during the years 1998–2006. Results highlight the relevance of innovation persistence. The highest level of persistence is found for R&D-based innovation activities, witnessing the actual presence of significant entry and exit barriers. Moreover, we obtain more robust evidence of persistence for product innovation than for process innovation when complementarity effects between the two types of innovation are accounted for.     

HOTELLING'S BEACH WITH LINEAR AND QUADRATIC TRANSPORTATION COSTS: EXISTENCE OF PURE STRATEGY EQUILIBRIA*

In Hotelling type models consumers have the same transportation cost function. We deviate from this assumption and introduce two consumer types. Some consumers have linear transportation costs, while the others have quadratic transportation costs. If at most half the consumers have linear transportation costs, a subgame perfect equilibrium in pure strategies exists for all symmetric locations. Furthermore, no general principle of differentiation holds. With two consumer types, the equilibrium pattern ranges from maximum to intermediate differentiation. The degree of product differentiation depends on the fraction of consumer types.     

When Competition is Not Enough: Consumer Protection

Rather than market structure, it is the nature of the goods and services and the cost of obtaining and processing information that may place consumers in a poor bargaining position. The article outlines the key provisions for consumer protection in Australia, Part V of the Trade Practices Act. It discusses search costs, and the factors that limit search, and explains how the conduct of suppliers (or others) may reduce search costs. Asymmetry of information is identified as a necessary (but not sufficient) condition for misleading consumers. When products are sub standard or are used incorrectly, they may harm consumers or cause property damage and in some circumstances this may be best addressed via product liability laws. The article concludes by considering how firms or industries can be more pro-active in relation to consumer protection.     

Regulation and the provision of quality to heterogenous consumers: The case of prospective pricing of medical services

This paper analyzes the welfare implications of fixed-price regulation of services in a model in which consumers are heterogenous and a firm can endogenously quality discriminate. We consider two different scenarios: The first scenario is when the consumer is also the payer. The second scenario is when the payer (usually the government) is not the consumer. Our major result is that fixed-price regulation causes a distributional welfare loss. We show that it is not possible for fixed-price regulation to induce providers to supply all consumer types with the first-best quality even under perfect information, under either pricing scenario. We show that high and low demand types may receive more than their respective first-best qualities, less than their first-best qualities, or one type may receive more and the other type less depending on the level of the regulated price. It is always true that when consumers are payers, quality is higher for both types than when consumers are not the payers. In this paper, we motivate and discuss the results in terms of price regulation of hospitals where consumers are patients and patient types vary by severity of illness.     

DOUBLE‐SIDED ADVERSE SELECTION IN THE PRODUCT MARKET AND THE ROLE OF THE INSURANCE MARKET*

I investigate the interrelation between a product market and an insurance market when adverse‐selection problems exist both in consumers and in firms. Firms offer warranties for product failures. Consumers may further purchase first‐party insurance for the residual risks of product failures. Given that the insurance market exists, two types of equilibria are possible: (a) Different firm types offer different pooling warranties attracting both good and bad consumer types or (b) good firms attract only bad consumers and bad firms attract both types of consumers. I discuss the existence and the efficiency implication of the insurance market.     

Salience and horizontal differentiation

I study a horizontal differentiation model in which one of two attributes of a product, product fit and price, is more salient for a consumer than the other and different consumers can find a different attribute salient. The attribute that is more salient is determined by relative differences between the two products and is determined endogenously as a result of firms' pricing strategies. High (low) marginal costs soften (toughen) price competition between firms. Pass-through rates are greater than 1 for some parameter values. Both industry- and firm-level cost increases may be beneficial for firms.     

Niche products, generic products, and consumer search

We endogenize product design in a model of sequential search with random firm-consumer match value à la Wolinsky (Quart J Econ 96:493–511, 1986) and Anderson and Renault (RAND J Econ 30:719–735, 1999). We focus on a product design choice by which a firm can control the dispersion of consumer valuations for its product; we interpret low-dispersion products as “generic” and high-dispersion products as “nichy.” Equilibrium product design depends on a feedback loop: when reservation utility is high (low), the marginal customer’s match improves (worsens) with more nichy products, encouraging high (low) differentiation by firms. In turn, when firms offer more nichy products, this induces more intense search; depending on search costs, this could raise or lower consumers’ reservation utility. Remarkably, when the match distribution satisfies a hazard rate condition, firm and consumer interests align: equilibrium product design always adjusts to the level that maximizes utility. When this condition is not met, either multiple equilibria (one nichy, the other generic) or one asymmetric equilibrium (generic and nichy firms coexist) can arise; we argue that the former is more likely for common specifications of consumer preferences.     

EXCESSIVE COMPETITION ON HEADLINE PRICES

In a variety of purchasing situations, consumers may focus primarily on headline prices, disregarding the full costs associated with acquiring and maintaining a product or service contract. Even when this is the case, the literature has delineated various circumstances where intense competition can protect consumers through the so-called “waterbed effect.” In this article, we however show that when consumers have context-dependent preferences, competition may rather exacerbate their and society's harm by distorting product choice and provision. Then, consumer protection policy must sufficiently constrain hidden fees so that competition, along with high-quality firms' incentives to educate consumers, can restore efficiency.     

Consumer well-being in a future of accelerating novelty

Novel goods and ideas are introduced to today’s consumers with increasing frequency. This phenomenon is perhaps most notable in the apparel industry, which in recent decades has seen the rise of “fast fashion” and an accelerating rate of novel style introductions from semi-annual to semi-weekly. In this paper I study the potential for this type of accelerating novelty to have a negative impact on consumer well-being. I analyze a simple theoretical model of consumer behavior in which consumers with a preference for novelty decide how fast to replace their fashion goods before and after an innovation which accelerates the rate at which new goods become available. In the basic model, where consumers update their goods based on their intrinsic preference for novelty, the novelty-accelerating innovation is not welfare-decreasing. However, when the model is extended in realistic ways, I find that there are at least three conditions under which the innovation may decrease welfare by increasing the extent of sub-optimal replacement: if there are external costs of updating to a newer good; if the consumers are boundedly rational and exhibit present bias; or if consumers’ replacement decisions reflect an arms race for social status. My results in these model extensions provide an economic foundation for rising popular concern about undesirable social effects of “fast fashion.” I also discuss the implications of these results for future patterns of consumption, which are likely to reflect still more accelerated novelty and possibly the expansion of fashion behavior to a broader range of consumption settings.     

Predicting early adoption of successive video player generations

Early adopters play an important role in the innovation diffusion process. Over the past decades, many factors have been identified as predictors for early adoption of innovations. Less attention has been paid to the relationship between the early adoption of one generation of a specific product and the early adoption of successive product generations. This paper analyzes how early adoption of a new product generation depends on ownership, purchase experience and adoption times for previous generations of the same product. The paper develops predictive models of early adoption for four generations of video player products, based on a survey among 815 Australian consumers. The model allows the testing of various hypotheses. It is shown that previous generation variables outperform conventional socio-demographic and psychographic variables in predicting early adoption but also that the two variable types complement each other. The best predicting models include both previous generation and socio/psychographic variables. It is concluded that previous generation models have substantial merits for new product forecasting as they are more parsimonious than conventional models and the data required to estimate them is relatively easy to obtain.     

PRODUCTS LIABILITY WHEN CONSUMERS VARY IN THEIR SUSCEPTIBILITY TO HARM AND MAY MISPERCEIVE RISK

This article examines products liability when consumers have private information about their susceptibilities to product‐related harm. In this case, it is efficient for consumers to self‐select their purchases, with those especially prone to harm refraining from purchase. Achieving this outcome requires consumers to bear their own harm, given that producers cannot observe consumer types. When consumers also misperceive risk, the problem becomes more complicated because accurate signaling of risk requires that firms bear liability. A trade‐off therefore emerges between imposing liability on firms versus consumers. This article characterizes the choice among liability rules in the presence of this trade‐off. (JEL K13, L15)     

不同类型的技术创新对产业国际竞争优势的影响——基于制造业面板数据的分阶段回归分析

构建线性回归模型,利用1996—2010年我国15个制造业行业的面板数据,根据消费者边际效用递减规律是否明显将样本行业分为最终消费品制造业和装备制造业,同时将研究区间划分为1996—2001年和2002—2010年两个阶段,分组、分阶段地对不同类型的技术创新(产品创新和工艺创新)对制造业国际竞争优势的影响进行实证分析。结果表明:产品开发类创新对产业国际竞争优势的巩固与保持具有显著的正向影响;性能改进类创新和工艺创新对产业国际竞争优势的影响取决于消费者边际效用变化的特点。     

Equilibrium Effects of Superstition in the Housing Market

We investigate the interaction of product quality differentiation and consumer preference heterogeneity in durable goods markets, focusing on the effects of secondary market liquidity and consumer heterogeneity on equilibrium prices. We build an infinite‐horizon dynamic model of the apartments housing market that captures the above features. Some apartments are considered lucky, and some consumers are superstitious. Lucky apartments are valued more highly than non‐lucky ones only by superstitious consumers. Results show that the difference between the lucky apartment price and the non‐lucky apartment price becomes smaller when the secondary market becomes less liquid and when consumers’ preference heterogeneity becomes more persistent as opposed to time‐varying.     

Assessing complementarity in organizational innovations for technological innovation: the role of knowledge management practices

We empirically investigate the pattern of complementarity among four organizational practices. Firm-level data were drawn from the Community Innovation Survey, carried out in Luxembourg. Supermodularity tests confirm the crucial role of organizational innovation in raising firms’ technological innovation. The pattern of complementarity across organizational practices differs according to the type of innovation (i.e. product or process), as well as according to whether the firm is in the first stage of its innovation process (i.e. being innovative or not) or in a later stage (i.e. sales of new products).     

Succeeding in innovation: key insights on the role of R&D and technological acquisition drawn from company data

This paper discusses the relationship between a company’s investment in innovation and its success in introducing new product and/or process innovations. In doing so, this analysis departs from the standard approach which puts forward a homogenous R&D-based knowledge production function by introducing different types of innovation investments (R&D and technology acquisition) for different sets of companies. Using the Community Innovation Survey (CIS) dataset comprising more than 3,000 Italian manufacturing companies, the econometric analysis adopts a set of techniques which allows to control for the sample selection, endogeneity and simultaneity problems which arise when dealing with CIS data. The main findings are summarised as follows: (1) beyond the acknowledged effect of R&D in increasing the probability of success of product innovation, a larger-than-expected role is played by technology acquisition in the innovation process; (2) the relative importance of R&D and technology acquisition varies significantly across different types of companies where crucial dimensions of analysis are company size and the technological domain of a sector.     

Credence Goods,Misleading Labels,and Quality Differentiation

Due to differences in information disclosure mechanisms, consumer misinformation about the quality of many credence goods is more endemic at intermediate levels of the quality spectrum rather than at the extremes. Using an oligopoly model of vertical product differentiation, we examine how consumers’ overestimation of the quality of intermediate-quality products affects firms’ incentives to improve product quality. The firms non-cooperatively choose the quality of their product before choosing its price or quantity. Irrespective of the nature of second stage competition, Bertrand or Cournot, we find that quality overestimation by consumers increases profit of the intermediate-quality firm, and motivates it to raise its product’s quality. In response, the high-quality firm improves its product quality even further but ends up with lower profit. Overall, average quality of the vertically differentiated product improves, which raises consumer surplus. Social welfare increases when the firms compete in prices but falls when they compete in quantities.     

Bringing computer power to the consumer market

Firms in m a y industrial sectors are seeking to capitalize on the promise of new information technology to generate new consumer products which can gain substantial markets. Where these are improved versions of familiar products, the marketing task is relatively easy, but many of the new product opportunities involve radically new types of consumer good and/or service. Drawing on studies of efforts to establish such radical innovations, this paper examines the problems that are confornted in attempting to define what sort of product is actually being created and how it may fit into consume life-styles. Though there is considerable discussion of these topics in industrial circles, it appears that until late stages of product development, little serious analysis of social issues is undertaken— if at all. Furthemore, such discussio of the nature and use of products are more intended to mobilize the group of actors who are needed to support the innovation than to feed substantial information about possible user reqquirements into the design process. The design process is much more liable to invorporate ideas derived from analysis of technological trends and the use of products in professional applications, than information derived from social scienc or market research.     

TALKING,SEARCHING, AND PRICING*

I study the implications of interpersonal communication for incentives for consumers to acquire information and firms’ pricing behavior. Firms market a homogeneous product and choose its price; consumers acquire price information at some cost to themselves. Also, each consumer accesses the information acquired by a sample of other consumers—interpersonal communication. An exogenous increase in the level of interpersonal communication decreases the information that consumers acquire, and, when search costs are low, firms price less aggressively. In an extension, consumers may choose to invest in interpersonal communication at some cost. A decrease in the costs of interpersonal communication decreases firms’ competition.