Input Price Discrimination and Allocation Efficiency

This research examines the effects of input price discrimination on allocation efficiency and social welfare. Instead of assuming constant marginal costs, we allow downstream firms to produce under increasing marginal costs. When downstream firms operate in separate markets, even though total output remains unchanged, consumer surplus and social welfare could be greater under discriminatory pricing than under uniform pricing. Moreover, the social desirability of input price discrimination can still hold true when downstream firms compete either in Cournot or Bertrand fashion.

     

First Degree Price Discrimination Goes to School

Personalized pricing is widely discussed but seldom observed, making studies of its efficacy rare. Yet, first degree price discrimination is common in the pricing of higher education, and I use data on prices and the characteristics of students admitted to a professional graduate program at a public university to estimate a matriculation demand function. I then derive linear pricing functions that maximize revenue for a target number of students. By allowing these functions to depend on progressively richer sets of observables, I explore the effect of personalization of pricing on profit. Tailoring prices to a one‐dimensional measure of student quality would raise revenue by 2.2 per cent above the revenue with uniform pricing. Pricing based on both student quality and state residency raises revenue by 8.4 per cent, and further tailoring based on available observables raises prices 9.0 per cent above the maximum revenue under uniform pricing. Pricing that obeys current statutory tuition limits raises revenue less but still by just over half as much. I also infer the welfare weights that the pricing process implicitly attaches to student characteristics.     

Public pricing under imperfect competition

Existing literature on second-best pricing assumes that regulatory control encompasses all industries subject to distortion. This paper extends the theory in a game-theoretic framework to incorporate market power outside the regulated sector. We find that in this situation, price always exceeds marginal cost in the public firm and that the profit constraint for the public firm need not be binding. In addition, the existence of pricing distortions outside the regulated sector can actually increase welfare.     

The Access Pricing Problem with Deregulation: A Note

This note extends the analysis of Armstrong, Doyle and Vickers [1996] to the case of retail price deregulation. It is shown (i) that the optimal access price may be above, below, or (in the linear case) equal to marginal cost, (ii) that optimal regulation of the margin between the retail price and the access price entails the ECPR, and (iii) that welfare and entrant profit are higher when the level of the access price, rather than the margin, is regulated.     

Fuly Distributed Cost Pricing,Ramsey Pricing,and Shapley Value Pricing: A Simulated Welfare Analysis for the Telephone Exchange

Economic theory has long been concerned with determining the optimal pricing scheme for a multiproduct monopoly, but it has been quite difficult to make use of developments in practice. Using LECOM, the Local Exchange Cost Optimization Model, over three stylized city maps, and assuming price elasticity values taken from the literature for four standard outputs of the local exchange, we demonstrate how fully distributed cost prices, Ramsey-optimal prices, Shapley prices, and standalone prices can be computed for a variety of baseline output levels. Analysis of consumer surplus changes relative to the marginal cost baseline shows that while Ramsey pricing maximizes social welfare over the set of schemes considered, only the Shapley approach results in subsidy-free prices.     

Personalized pricing and advertising: Who are the winners?

This paper investigates who wins and who loses when firms depart from a mass advertising/uniform pricing strategy (benchmark model) to a targeted advertising/price discrimination one. Considering a duopoly market in which firms simultaneously compete in prices and advertising decisions, we examine the competitive and welfare effects of personalized pricing with targeted advertising by comparing equilibrium outcomes under customized advertising/ pricing decisions to the results arising under mass advertising and uniform pricing. We show that, when both firms compete in both market segments, all segment consumers are expected to pay higher average prices under the personalized advertising/pricing strategy. We also show that, in the context of our simultaneous game, targeted advertising with price discrimination might boost firms’ profits in comparison to the case of mass advertising and uniform prices. The overall welfare effects of the personalized strategy are ambiguous. However, even when the personalized strategy boosts overall welfare, consumers might all be worse-off. Thus the paper gives support to concerns that have been raised regarding the firms’ ability to adopt personalized strategies to boost profits at the expense of consumers.     

Termination fees revisited

We reconsider the question of the optimal level of termination fees between communication networks in the context of heterogeneous usage and elastic participation. The interaction between these two features yields new insights; in our model: i) The profit maximizing reciprocal termination fee is above marginal cost; ii) the welfare maximizing termination fee is also above cost; iii) the welfare-maximizing termination fee is below the profit-maximizing one in the absence of termination-based price discrimination, but can be above it otherwise.     

Elasticity of demand and behaviour-based price discrimination

Behaviour-based price discrimination (BBPD) is typically analysed in a framework characterised by perfectly inelastic demand. This paper provides a first assessment of the role of demand elasticity on the profit, consumer and welfare effects of BBPD. We show that the demand expansion effect, that is obviously overlooked by the standard framework with unit demand, plays a relevant role. In comparison to uniform pricing, we show that firms are worse off under BBPD, however, as demand elasticity increases the negative impact of BBPD on profits gets smaller. Despite a possible slight increase in the average prices charged over the two periods in comparison to uniform pricing, we show that BBPD boosts consumer surplus and that this benefit is independent of elasticity. In contrast to the welfare results derived under the unit demand assumption, where BBPD is always bad for welfare, the paper shows that BBPD can be welfare enhancing if demand elasticity is sufficiently high.     

渐逝资产定价问题探析

针对需求有时大于、有时又小于生产能力的一类渐逝资产,从控制资产流逝价值的目标出发,以列车卧铺为例,提出使需求接近生产能力的基本原则,引入二级差别定价方法。将该定价措施的实施效果与常规的固定价格法进行比较,分析运营收益、消费者剩余、社会福利、资产流逝价值的变化,证明新方法能够将渐逝资产的价值转换为企业收益和消费者剩余,提高了资产利用率,优于常规的固定价格法。     

Endogenous Average Cost Based Access Pricing

We analyze an endogenous average cost based access pricing rule, where both the regulated firm and its rivals realize the interdependence among their outputs and the regulated access price. In contrast, the existing literature on access pricing has always assumed that the access price is exogenously fixed ex-ante. We show that endogenous access pricing neutralizes the artificial cost advantage that is enjoyed by the incumbent firm. Further, endogenous access pricing results in a consumer surplus that is equal to or higher than that under exogenous access pricing. If the entrant is more efficient than the incumbent, then the welfare under endogenous access pricing is higher than that under exogenous access pricing.     

Optimal pricing and advertising strategy for introducing a new business product with threat of competitive entry

The problem of optimal joint pricing and advertising decision making for a new product facing potential competitive entry has received inadequate attention. We propose a model that attempts to find the optimal price-advertising frontier in the face of potential competitive entry that maximizes total discounted profits for pre- and post-entry periods. We find that a firm would charge the price that equates price elasticity to marginal revenue product of advertising (as predicted by [Dorfman, R. and Steiner, P.O. (1954), Optimal Advertising and Optimal Quality, American Economic Review, 44(5), 826-836.]) only when the potential effects of pricing and advertising on its market share are not considered. Under optimal conditions, aware that market share is subject to erosion, the firm charges a somewhat lower price than the profit maximizing price, and sets an advertisement expense that is somewhat higher than the profit-maximizing advertising level as predicted by Cournot's monopolistic setting. We illustrate the applicability of our model using business product examples taken from several industries including operating systems, software, pharmaceutical, and telephone switching. Directions for future research with implications for B2B managers (for example, the possible effects of preannouncement to forestall competitive entry) are discussed.     

Predatory intent under uncertainty

Current analyses of predatory behavior neglect uncertainty. Its presence complicates a firm's evaluation of profits and risks associated with various pricing strategies. Using a price leadership model (with the supply of the competitive fringe not known in advance), we show that a risk averse dominant firm will price lower than the price which maximizes expected profits. Such behavior could be misconstrued as being predatory if marginal and average variable cost rules are used for establishing the proof of predation.     

Beyond the flat rate bias: The flexibility effect in tariff choice

Flat rates are a prominent pricing scheme for telecommunications services and are often preferred by consumers although average costs would be lower in an alternative usage-based tariff. Reasons are that flat rates protect against unexpectedly high costs (insurance effect), are more likely to be chosen if actual usage is overestimated (overestimation effect), and prevent any disutility that is associated with the immediate perception of marginal costs (taximeter effect). This study complements the literature on tariff biases by highlighting that a lack of tariff flexibility is a major impediment to choosing a flat rate: empirical support for this flexibility effect is found, while, at the same time, the insurance and overestimation effect that run in favor of flat rates are confirmed. Finally, the managerial implications of the findings for the introduction of the new cost cap tariff are discussed. The hybrid cost cap tariff can combine the flexibility and the insurance property, and may, therefore, exert a cost cap bias on consumers.     

Third-Degree Price Discrimination in Oligopoly when Markets are Covered*

We analyze oligopolistic third-degree price discrimination relative to uniform pricing when markets are covered. Pricing equilibria are critically determined by supply-side features such as the number of firms and their marginal cost differences. It follows that each firm's Lerner index under uniform pricing is equal to the weighted harmonic mean of the firm's relative margins under discriminatory pricing. Uniform pricing then lowers average prices and raises consumer surplus. We can calculate the gain in consumer surplus and loss in firms' profits from uniform pricing based only on the market data of the discriminatory equilibrium (i.e., prices and quantities).     

Regulation of price increases

U.S. federal and state governments rarely regulate healthcare price levels, but do regulate price changes for pharmaceuticals, hospitals, and health insurance. Previous research showed that limiting price increases can raise launch prices and reduce both profit and social welfare, assuming consumers are myopic. We show that with forward-looking consumers, limiting price increases can have the opposite effect, that is, launch prices fall while profit and social welfare rise. Ironically, inflation regulation can cause inflation to rise, but only because firms are reducing launch prices to make the regulation bind and credibly commit to future prices.     

Pricing strategy, quality signaling, and entry deterrence

I investigate a pricing strategy that is aimed at deterring entry by applying a two-period model of a durable-goods monopolist. There exists an incumbent that is of two types, that is, high and low quality types. They differ in terms of their R&D capabilities, and the incumbent's type is assumed to be unknown to an entrant. If the entrant decided to enter the market, Nash–Bertrand price competition ensues between the incumbent and the entrant. I show that not only limit pricing but also prestige pricing signals the incumbent's quality type, which serves to discourage entry. In the prestige pricing, the high-quality type sells the products at an intentionally higher price. I also show that although limit pricing is more desirable than prestige pricing from a social welfare viewpoint, the incumbent can still choose prestige pricing.     

Pricing strategy and moral hazard: Copay coupons in pharmaceuticals

Branded drug manufacturers issue copay coupons to compete with generics as their brands are coming off patent. To explore the impact of copay coupons on pricing and welfare, I estimate a model of demand and supply using data on sales, advertising, and copayment for cholesterol-lowering drugs and perform a counterfactual analysis to simulate equilibrium pricing with copay coupons used for price discrimination and moral hazard. Copay coupons issued for price discrimination make the drug with coupons affordable for more consumers and increase consumer welfare even when a small fraction of consumers receive a coupon. Coupons used for moral hazard significantly mitigate price competition and improve consumer welfare only when coupon penetration is sufficiently high.     

Metaheuristic-based simulation optimization approach to network revenue management with an improved self-adjusting bid price function

Making accurate accept/reject decisions on dynamically arriving customer requests for different combinations of resources is a challenging task under uncertainty of competitors' pricing strategies. Because customer demand may be affected by a competitor's pricing action, changes in customer interarrival times should also be considered in capacity control procedures. In this article, a simulation model is developed for a bid price–based capacity control problem of an airline network revenue management system by considering the uncertain nature of booking cancellations and competitors' pricing strategy. An improved bid price function is proposed by considering competitors' different pricing scenarios that occur with different probabilities and their effects on the customers' demands. The classical deterministic linear program (DLP) is reformulated to determine the initial base bid prices that are utilized as control parameters in the proposed self-adjusting bid price function. Furthermore, a simulation optimization approach is applied in order to determine the appropriate values of the coefficients in the bid price function. Different evolutionary computation techniques such as differential evolution (DE), particle swarm optimization (PSO), and seeker optimization algorithm (SOA), are utilized to determine these coefficients along with comparisons. The computational experiments show that promising results can be obtained by making use of the proposed metaheuristic-based simulation optimization approach.     

FOB or Uniform Delivered Prices: Strategic Choice and Welfare Effects

In spatial markets firms typically use either FOB (mill) or uniform delivered (UD) pricing. What competitive factors motivate this choice and what are the welfare implications of the choice? We study these questions in a duopsony market, where farmers with unit elastic supply curves sell to processing firms. In results that differ considerably from prior work, we show that the equilibrium price policy depends upon the extent of competition in the market, with FOB pricing emerging under very competitive structures and UD pricing emerging under less competition. Mixed FOB‐UD pricing may also emerge in equilibrium. In most cases welfare is higher under UD than FOB pricing.     

如何破解中国天然气价格改革困局——天然气价格改革思考之二

在天然气产业格局深刻变化和社会主义市场经济深入发展的背景下,天然气价格改革的指导思想不能偏离经济体制改革的总方向,不能背离天然气产业的基本属性,不能脱离天然气价格的历史现实。必须坚持市场化的改革目标,强化管输和城市燃气环节的管制,逐步到位分步实施。由价格调节供需变化、保证市场配置资源的基础性作用,尊重市场主体利益、保证市场机制有效,同时同地同质同价、保证市场竞争秩序,运费差决定异地价差、保证市场物流秩序,这四项基本原则是市场经济秩序的保障,也决定了在市场条件下天然气市场价格的功能定位、水平确定、价格关系（不同用户之间和不同地区之间）。对现行天然气价格体制的技术性完善无法解决根本问题,必须构建新的天然气价格机制,即天然气市场回价机制,彻底改变现行天然气价格的顺价机制。为此,提出天然气价格改革方案,包括回价建秩序、管制门站价、权衡定水平、逐步市场化、政策调利益。