Competitive product lines with quality constraints

Competing firms often use product lines to screen different types of customers. Examples include, in general markets, product lines that screen the purchasing ability or preference for quality; in credit markets, product lines that screen the risk of the projects with different collateral; in insurance markets, product lines that screen the risk of accident with different coverage; and in labor markets, wage schedules that screen the employees’ abilities with different education levels. In some of these markets there can be some natural quality constraints: a maximum available quality in general markets, no negative collateral in credit markets; coverage not above 100% in insurance markets; minimum education level in labor markets. We present sufficient conditions for the existence of a pure strategies equilibrium (in such markets) under differentiation and a continuous distribution of customer types. We show that the equilibrium exists if there is a sufficiently high degree of differentiation among firms. Furthermore, we show that this equilibrium involves, under certain general conditions, pooling of customer types at the top and at the bottom of the distribution of customer types. The middle types may still be screened by the firms.

Outsourcing and pass-through

A large share of international trade occurs through intra-firm transactions. We show that this common cross-border organization of the firm has implications for the well-documented incomplete transmission of shocks across such borders. We present new evidence of an inverse relationship between a firm's outsourcing of inputs and its rate of exchange-rate pass-through. We then develop a structural econometric model with final assemblers and upstream parts suppliers to quantify how firms' organization of their activities across national borders affects their pass-through behavior.     

Renegotiation and Collusion in Organizations

It has been argued that collusion among the members of an organization may lead to inefficiencies and hence should be prevented in equilibrium. This paper shows that whenever the parties to an organization can renegotiate their incentive scheme after collusion, these inefficiencies can be greatly reduced. Moreover, it might not be possible to prevent collusion and renegotiation in equilibrium. Indeed, if collusion is observable but not verifiable, then the organization's optimal incentive scheme will always be renegotiated. If, instead, collusion is not observable to the principal, both collusion and renegotiation will occur in equilibrium with positive probability. The occurrence of collusion and renegotiation should therefore not be taken as evidence of the inefficiency of an organization.     

A reflection on analytical work in marketing: Three points of consensus

This article presents three points of consensus about game-theoretic work in marketing: First, equilibrium analysis is necessary for studying situations that have strategic interactions. In many cases, empirical examination of these strategic scenarios is difficult or impossible, at least without the guidance of an equilibrium model. Second, more general models are not necessarily ??better,?? because institutional details matter. Thus, the appropriate compromise between generality and specificity depends on the scope of the research question. Finally, there should be a two-way road between theory and empirics??theory is necessary to interpret empirical results, while empirical findings should guide theoretical modeling choices.     

Recent Advances in Structural Econometric Modeling: Dynamics, Product Positioning and Entry

In the empirical analysis of consumer markets, recent literature has begun to explore the dynamics in both consumer decisions as well as in firms' marketing policies. Other research has begun to explore the strategic aspects of product line design in a competitive environment. In both cases, structural models have given us new insights into consumer and firm behavior. For example, incorporating consumer and firm dynamics may help explain patterns in our data that are not well-captured by static models. Similarly, the strategic aspects of firm entry and product-positioning may be intrinsically linked to firm conduct and the intensity of competition in a market. Structural analysis of these consumer and firm decisions raise a number of substantial computational challenges. We discuss the computational challenges as well as specific empirical applications. The discussions are based on the session “Structural Models of Strategic Choice” from the 2004 Choice Symposium.     

Consumer Stockpiling and Price Competition in Differentiated Markets

In many storable-goods markets, firms are often aware that consumers may strategically adjust purchase timing in response to expected price dynamics. For example, in periods when prices are low, consumers stockpile for future consumption. This paper investigates the dynamic impact of consumer stockpiling on competing firms' strategic pricing decisions in differentiated markets. The necessity of equilibrium consumer storage for storable products is re-examined. It is shown that preference heterogeneity generates differential consumer stockpiling propensity, thereby intensifying future price competition. As a result, consumer storage may not necessarily arise as an equilibrium outcome. Economic forces are also investigated that may mitigate the competition-intensifying effect of consumer inventories and that, hence, may lead to equilibrium consumer storage.     

Dynamic Competition with Experience Goods

This paper considers dynamic competition in the case in which consumers are only able to learn about their preferences for a certain product after experiencing it. After trying a product a consumer has more information about that product than about untried products. When competing in such a market firms with more sales in the past have an informational advantage because more consumers know their products. If products provide a better-than-expected fit with greater likelihood, taking advantage of that informational advantage may lead to an informational disadvantage in the future. This paper considers this competition with an infinite horizon model in a duopoly market with overlapping generations of consumers. Two effects are identified: On one hand marginal forward-looking consumers realize that by purchasing a product in the current period will be charged a higher expected price in the future. This effect results in reduced price sensitivity and higher equilibrium prices. On the other hand, forward-looking firms realize that they gain in the future from having a greater market share in the current period and compete more aggressively in prices. For similar discount factors for consumers and firms, the former effect is more important, and prices are higher the greater the informational advantages. The paper also characterizes oscillating market share dynamics, and comparative statics of the equilibrium with respect to consumer and firm patience, and the importance of the experience in the ex post valuation of the product.     

Models of Competitive Price Promotions: Some Empirical Evidence from the Coffee and Saltine Crackers Markets

I present tests of a competitive rationale for price promotions. In a model with a population of informed and uninformed customers, price competition yields a static equilibrium in which each seller draws a price from a specified density function. Price data on coffee and saltine crackers products are used to test whether the sample of prices on each product could have possibly come from the theoretically specified density function. The results suggest that some markets are indeed consistent with the marginal distributions of prices predicted by the model. Furthermore, in the process of testing this rationale for price promotions, estimates are obtained for the marginal cost of each product, the number of competing goods, and the percentage of informed consumers. The resulting excess variability of these estimates across competing brands can also raise questions with respect to the empirical validity of the model.     

Consumer and Market Responses to Mad Cow Disease

We examine how consumers and financial markets in the United States reacted to two health warnings about mad cow disease: the first discovery of an infected cow in December 2003 and an Oprah Winfrey show that aired seven years earlier on the potentially harmful effects of mad cow disease. We find a pronounced and significant reduction in beef sales following the first discovery of an infected cow in a product-level scanner data set of a national grocery chain. Cattle futures show a pattern of abnormal price drops comparable to the scanner data. Contracts with longer maturity show smaller drops, suggesting that the market anticipated the impact to be transitory. Cattle futures show abnormal price drops after the Oprah Winfrey show that are more than 50% of the drop following the 2003 discovery of an infected cow.