Segmenting the market: The monopolist's optimal product mix

In an industry producing products which differ in quality, to consumers who vary in their willingness to pay, it may happen that only a bounded number of producers can coexist at (noncooperative price) equilibrium; in other words, the industry is a natural oligopoly. We are here concerned with a special example, in which only one producer can survive. Our focus of interest in the present paper is to examine this monopolist's optimal product range. Depending on the dispersion of consumers' willingness to pay (income), either (i) the monopolist will find it optimal to segment the market completely, offering the maximum number of products permitted or (ii) the monopolist will offer only a single product. The precise nature of this switch of policy, which occurs at a certain critical distribution of consumer incomes (willingness to pay), is explored fully.     

WELFARE EFFECTS OF STRATEGIC PRICE SETTING IN ANTICIPATION OF PRICE REGULATION

A single product monopolist with constant unit costs, in a simple two-period model, is aware that price regulation will be imposed in the second period. The form of the regulation is such that price in period 2 may not exceed 100 ; per cent of price in period 1, where 0 < < 1. The period 1 price will be set higher than it would be in the absence of anticipated regulation. However, it is not always the case that pre-regulation price will be raised as falls. The welfare effects are crucially dependent on the form of the demand function. Under constant elasticity of demand a reduction in will reduce both consumers' and the producer's welfare. Under linear demand, consumers benefit and the producer loses as is reduced and the resultant effect on aggregate welfare is ambiguous.     

Competition and confidentiality: Signaling quality in a duopoly when there is universal private information

We model non-cooperative signaling by two firms that compete over a continuum of consumers, assuming each consumer has private information about the intensity of her preferences for the firms' respective products and each firm has private information about its own product's quality. We characterize a symmetric separating equilibrium in which each firm's price reveals its respective product quality. We show that the equilibrium prices, the difference between those prices, the associated outputs, and profits are all increasing functions of the ex ante probability of high safety. If horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known. Thus, while signaling imposes a distortionary loss on a monopolist using price to signal quality, duopolists may benefit from the distortion as it can reduce competition. Finally, average quality is lower since signaling quality redistributes demand towards low-quality firms.     

Intertemporal price discrimination in infinite horizon

In infinite horizon, a credible durable-good monopolist may resort to intertemporal price discrimination. We provide an analytical characterization of his optimal price policy when consumers and the monopolist have different values for the trade because of distinct discount factors.     

网络效应、动态定价与电脑软件的最佳升级时机

电脑软件存在的网络效应使得厂商定价策略发生一定的变化。本文运用动态最优化理论,分析电脑软件厂商的定价策略和最优更版时机。发现厂商通常会以先低于边际成本的价格定价,然后逐渐提高软件的价格,与不具有网络效应的产品的边际成本定价有一定差异;厂商在升级旧版软件时,存在最佳时机,过早或者过迟推出新版软件都将导致利润损失。     

Deregulation,competition, and the network size in the market for telecommunication services

This paper analyzes the networking aspect in telecommunication services and the recent divestiture and increased competitiveness of the industry. The product considered is the right to access the network. The utility of a consumer from having access to a network depends on the network's quality, defined by the number of other local and long-distance consumers which can be reached. Network services are provided in two layers; On the lower layer consumers within a local access and transport area (LATA) are connected to a central office which provides the basic switching facility for local telecommunication. On the upper layer, LATAs are connected together by an interLATA carrier, to enable long distance communication from different localities.It is shown that relative to the choices of an unconstrained monopolist, larger networks at both layers may be obtained by imposing quality controls, while price controls may have the opposite effect. A divestiture policy in which all local carriers are connected to a single long distance carrier is likely to reduce the quality of services at both layers. Introducing competition among long-distance carriers further reduces the quality of long distances services but may improve the local service.     

A note on welfare-improving ignorance about quality

Consider a monopolist that is selling a high quality product when the quality is unknown to a fraction of the consumers. If the quality cannot be signaled and the fraction is sufficiently large, then the monopolist will offer a low price to induce uninformed consumers to buy. If the fraction is sufficiently small, then uninformed consumers are irrelevant to its optimal price. If the uninformed consumers are priced out of the market as a result, then welfare can decrease. I am very grateful for the comments of two anonymous referees that have significantly improved this paper.     

Repair Market Structure, Product Durability, and Monopoly

This paper shows that a durable goods monopolist makes consumers choose a level of repairs which is below the socially optimal level if it monopolises the repair market as well. This distortion occurs due to the possibility of substituting new and used goods and a time inconsistency problem concerning repair decisions. However, if the monopolist is unable to commit the repair price, it may prefer to invite competitors into the repair market. If the repair market is competitive, even when the product market is monopolistic, the socially optimal level of repairs, and thus also the socially optimal durability level is chosen.     

DURABLE GOODS MONOPOLISTS AND BACKWARD COMPATIBILITY*

This paper provides an economic analysis on the choice of backward compatibility by a durable goods monopolist in the presence of network effects. We examine the time inconsistency problem faced by a monopolist in its dynamic provision of two compatible products. We suggest an economic reason why, and when it will be strategically optimal, for the monopolist to choose backward compatibility even though it is socially undesirable, and not to choose forward compatibility even though it is technologically possible. We also investigate the compatibility choices with and without price discrimination, and compare market outcomes with the social optimum. Two different social inefficiencies (planned obsolescence) which arise from the viewpoints of optimal consumption and optimal compatibility are discussed.     

Monopolists and viscous demand

We characterize the optimal dynamic price policy of a monopolist who faces “viscous” demand for its services. Demand is viscous if it adjusts relatively slowly to price changes. We show that with the optimal policy the monopolist stops short of achieving 100% market penetration, even when all of the consumers have the same long-run willingness to pay for the service. Furthermore, for certain parameter values in the model, the price policy requires rapid oscillations of the price path.     

PLATFORM PRICING IN MIXED TWO‐SIDED MARKETS

When a consumer can appear on both sides of a two‐sided market, such as a user who both buys and sells on eBay, the platform may want to bundle the services it provides to two sides. I develop a general model for such “mixed” two‐sided markets and show that a monopolist platform's incentive to bundle and its optimal pricing strategy are determined by simple formulas using familiar price elasticities of demand, which embody the bundling effect, and price‐cost margins adjusted for network externalities, which incorporate “two‐sidedness.” The optimal pricing rule in such markets generalizes the familiar Lerner formula.     

The monopolist is not the best environmentalist’s best friend: An example

This letter addresses the second-degree price discrimination issue when a monopolized product is tied with environmental quality. The monopolist may degrade environmental quality too much when marginal valuations of environmental quality and the good itself are positively related across consumers.     

Advance-purchase discounts as a price discrimination device

In an intertemporal setting in which individual uncertainty is resolved over time, advance-purchase discounts can serve to price discriminate between consumers with different expected valuations for the product. Consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance-purchase discount; consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high. We characterize the profit-maximizing pricing strategy of the monopolist. Furthermore, adopting a mechanism design perspective, we provide a necessary and sufficient condition under which advance-purchase discounts implement the monopolist's optimal mechanism.     

Dynamic control of a monopolist’s product and process innovation with reference quality

ABSTRACT

Our main purpose is to investigate the dynamic control problem of a monopolist’s product and process innovation under reference quality. The main features of this article are: (i) a monopolist dealing with customer behaviour in the spirit of the principle of behaviour economics determines the product price, and carries out the activities of product and process innovation; (ii) the consumers’ demand depends on price, product quality and reference quality, and adopts an additive separable demand function form. Our main results show that under the cases of the monopolist optimum and the social planner optimum, (i) there exists an unique stable, which is a saddle-point steady-state equilibrium; (ii) the change rates of the monopolist’s investments in product and process innovation are increasing with the reference quality, while the monopolist’s steady-state investments in product and process innovation are decreasing with the reference quality; (iii) as the memory parameter increases with other parameters kept constant, it is very likely that the monopolist’s investment in process innovation be greater than the investment in product innovation; and (iv) the social incentive towards both investments in product and process innovation is always larger than the private incentive characterizing the profit-seeking monopolist.     

The impact of education expansion on wage inequality

The findings on education expansion and income inequality have important implications for policymakers to implement effective policies to reduce income inequality. This study attempts to explain how education expansion affects income inequality by education distribution and the rate of return to education. We decompose the effect of education expansion on wage gaps into price effect and structure effect. We compare the income inequality from 2002 to 2013 using the Chinese Household Income Project (CHIP) 2002 and CHIP2013 survey data and employ FFL decomposition method. Our findings suggest that income inequality increased in 2013 and that income inequality among the high-income groups increased even more significantly. The structure effect of education expansion on income inequality is negative, when average education increases one year, the income gap between 80th and 20th will decrease 1.2%, in other words, education expansion decreases income inequality by allowing a wide range of individuals to attend college. However, this effect is offset by the price effect, which is positive and much more significant in magnitude. One extra year of average education will increase income gap by 29% which means that the demand for high-skilled labour is increasing faster than the supply and thus lead to the increasing premium for higher education return.     

Raising rivals' costs: The entry of an upstream monopolist into downstream markets

A regulated upstream monopolist provides an input to firms in a downstream market. If the monopolist enters the downstream market, a natural concern is that it will act so as to raise its downstream rivals' costs. An offsetting incentive is that a higher downstream price will reduce demand for the input, which reduces the monopolist's profit. Conditions under which one incentive dominates the other are derived. The monopolist may desire to lower its downstream rivals' costs rather than raise them. These findings suggest that regulatory policy towards such downstream entry should not focus exclusively on the ability to discriminate.     

Avoiding commercial piracy

In this paper we analyse the roles of the government and an incumbent in preventing the entry of a pirate, who tries to avoid being caught. The framework of analysis used is a sequential duopoly model of vertical product differentiation with price competition. We find that both the government and the incumbent have key roles in preventing the entry of pirates. We show that the government will not help the incumbent to become a pure monopolist, even if it installs an antipiracy system. It will let the pirate enter either as a follower or a leader, or encourage the incumbent to set a low enough price to successfully deter the pirate from entering the market, depending on its technology for monitoring commercial piracy. Finally, we find that the pirate decides to become a leader to avoid being caught by the incumbent and the government.     

Income inequality and income bias in voter turnout

In the era of growing income inequality around the world, it remains inconclusive how higher income inequality affects income bias in turnout (i.e., high-income citizens vote more likely than low-income citizens). Using large-scale cross-national survey data, we show that (1) strong income bias in turnout exists in many parts of the world, (2) higher income inequality is related to lower income bias in turnout by demobilizing high-income citizens and mobilizing low-income citizens, and (3) this relationship is partly explained by the pattern that vote buying is more common in societies with higher income inequality and thus mobilizes low-income citizens but decreases political efficacy among high-income citizens. Ultimately, this study suggests that growing income inequality may not exaggerate political inequality, but may challenge the legitimacy of democratic elections.     

收入差距、挤出效应与高房价

本文考察了收入差距的扩大对城市房价的影响。研究表明,收入差距的扩大在微观上通过挤出效应、在宏观上通过储蓄率的上升引发过度住房投资,助长了房价。无论是用基尼系数表征的收入差距,还是用高收入阶层所占总收入的比例表征的收入差距,在经验分析上都与高房价高度正相关。这意味着改善收入分配或通过各种手段限制高收入者的住房投资需求应成为房地产调控的政策选择。     

Welfare and product testing by a regulated monopolist

This paper studies a monopoly firm with the ability to conduct costly pre-market testing of its product in order to predict how safe this product is to consume. While there are private incentives to test, the amount of testing effort supplied by a monopolist need not be optimal. In a model which allows for an imperfect system of liability, we characterize and compare the allocations of testing effort and output at the full social optimum, the pure monopoly solution, and the second-best regulated optimum wherein the regulator chooses testing effort and the monopolist chooses output and price.