Segmentation of consumer markets in the US: What do intercity price differences tell us?

We quantify the magnitude of market segmentation in US consumer market and explore the underlying factors behind this segmentation, using a quarterly panel of retail prices for 45 products in 48 US cities from 1985 to 2009. The extent of market segmentation is estimated using city‐pair price differences within the framework of both linear autoregressive (AR) and nonlinear threshold autoregressive (TAR) models. We find that the magnitude of market segmentation varies from one product to another, but even more across city pairs in each product. Contrary to a widespread perception, market segmentation within the US is not necessarily larger for non‐tradable services compared to tradable goods. We identify potential drivers of market segmentation by relating the cross‐city and cross‐product variations of market segmentation to location‐specific and product‐specific characteristics—distance, relative city sizes, differences in wage and rent, type of product and proximity to marketplace. Distance, which captures more than transport costs, turns out to be the most salient factor even after controlling for a range of other potential factors. The effect of distance, however, varies substantially across products, with perishable products and locally produced products showing larger distance effect on market segmentation. We find that the magnitude of market segmentation has been somewhat stable during the sample period, but intercity price differences have become more sensitive to distance over time in many products under study.     

ASYMMETRIC INFORMATION AND EXCHANGE OF INFORMATION ABOUT PRODUCT DIFFERENTIATION

We introduce asymmetric information about consumers’ transportation costs (i.e., the degree of product differentiation) in the model of Hotelling. When transportation costs are high, both firms have lower profits with asymmetric information than with perfect information. Contrarily, if transportation costs are low, both firms may prefer the asymmetric information scenario (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information exchange is ex‐ante advantageous for both firms, but ex‐post damaging if transportation costs turn out to be low. If the information is unverifiable, the informed firm does not represent a reliable source of information, since it always prefers to announce that transportation costs are high and there is no contract that induces truthful revelation.     

Uniform Versus Discriminatory Tariffs

We analyze the non‐cooperative interaction between two exporting countries producing differentiated products and one importing country when governments use optimal policies to maximize welfare. The analysis includes product differentiation, asymmetric costs, and Bertrand competition. For identical exporting countries we demonstrate that the importing country always prefers a uniform tariff regime while both exporting countries prefer a discriminatory tariff regime for any degree of product differentiation. If countries are asymmetric in terms of production cost then the higher‐cost exporter always prefers the discriminatory regime but the lower‐cost exporter prefers the uniform regime if there is a significant cost differential. With cost asymmetry the announcement of a uniform tariff regime by the importer is not a credible strategy since there is an incentive to deviate to discrimination. This implies an international body can play a role in ensuring that tariff agreements are respected.     

网购市场鱼龙混杂现象的经济学解释：基于二维不对称信息的视角

网络购物市场存在商品鱼龙混杂的典型现象：高价格的商品不一定高质量，低价格的商品也不一定低质量，表现出明显的信息不对称特征。文章基于网络购物市场所存在的两个维度不对称信息的特征事实，即厂商在产品质量与产品生产成本两个方面拥有私有信息，通过构建二维不对称信息的分析框架，从市场均衡的视角首次解释了上述现象的经济机理。分析表明，由于二维不对称信息的存在，消费者和厂商决策的互动过程使得市场上产品价格与质量不再具有单调递增关系，从而网络购物市场可能出现鱼龙混杂的市场均衡，文章证明了这一均衡在合理的条件下是存在的。文章通过比较静态分析考察了市场环境的变化如何影响商品质量的价格信号显示效率以及消费者购买行为，并考察了网络购物行业商家披露信息、消费者对于商家的反馈评分机制和保证退货等手段对于消除商品鱼龙混杂现象的有效性，为进一步规范发展我国网络购物行业提供了参考。     

Simple Reputation Systems*

We develop a model of simple “reputation systems” that monitor and publish information about the behavior of sellers in a search market with asymmetric information. The reputations created influence the equilibrium search patterns of buyers and thus provide for market‐based “punishment” of bad behavior. We show that a reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, the same system can be prone to strategic manipulation by sellers who always have low‐quality products. In that case, we show that an alternative system which assigns reputations based on product quality rather than honesty can be superior.     

VEHICLE CHOICE BEHAVIOR AND THE DECLINING MARKET SHARE OF U.S. AUTOMAKERS*

We develop a consumer‐level model of vehicle choice to shed light on the erosion of the U.S. automobile manufacturers' market share during the past decade. We examine the influence of vehicle attributes, brand loyalty, product line characteristics, and dealerships. We find that nearly all of the loss in market share for U.S. manufacturers can be explained by changes in basic vehicle attributes, namely: price, size, power, operating cost, transmission type, reliability, and body type. U.S. manufacturers have improved their vehicles' attributes but not as much as Japanese and European manufacturers have improved the attributes of their vehicles.     

Minimum Quality Standards and International Trade

This paper investigates the impact of a non‐discriminating minimum quality standard (MQS) on trade and welfare when the market is characterized by imperfect competition and asymmetric information. A simple partial equilibrium model of an international Cournot duopoly is presented in which a domestic and a foreign firm are identical except that the foreign firm faces positive transport costs. Asymmetric information generates a market failure, which the government attempts to alleviate with a MQS. It is found that although firms face the exact same costs of compliance, they will generally prefer different levels of regulation. As a result, international trade disputes are likely to arise even when regulation is non‐discriminating.     

Competition,product line length,and firm survival: evidence from the US printer industry

Adjusting product line length is one major strategy that firms employ to sustain their market position in competitive environments. This study extends extant literature on product line length by adding empirical results on the relationship between competitive intensity and product line length, and by examining the performance of firms that follow the suggested product line strategies. The analysis of data on 1849 printer products introduced by 342 manufacturers from 1983 to 2002 shows an inverted U-shaped relationship between competitive intensity and product line length, and firms following this pattern have a significantly lower hazard ratio of exit. These results confirm those discussed in the previous literature and provide evidence of the positive impacts of following such product strategies on firm survival.     

国内市场分割与中国的出口贸易扩张

本文将国内市场分割和边际成本与固定成本之间的反向关系引入Melitz(2003)的模型,构建了一个开放经济模型。文章证明了国内市场分割导致不同生产技术的企业都首选进入国外市场。这似乎解释了中国出口贸易的强劲增长其实是严重的国内市场分割导致企业无法依托巨大的国内需求、发挥规模经济而被迫出口的扭曲现象。     

Manufacturers and retailers in the global economy

We develop a model with multi‐product retailers acting as intermediaries between manufacturers and consumers. We show that the rise in retailer product assortment, the rise of up‐front payments in many retail markets and the observed shift in employment from manufacturing to retailing may be the consequence of the global integration of product markets. We also identify a novel benefit from market integration consisting of efficiency gains in the vertical distribution chain.     

Interconnection and competition among asymmetric networks in the Internet backbone market

We examine the interrelation between interconnection and competition in the Internet backbone market. Networks that are asymmetric in size choose among different interconnection regimes and compete for end-users. We show that a direct interconnection regime, peering, softens competition as compared to indirect interconnection since asymmetries become less influential when networks peer. If interconnection fees are paid, the smaller network pays the larger one. Sufficiently symmetric networks enter a Peering agreement while others use an intermediary network for exchanging traffic. This is in line with considerations of a non-US policy maker. In contrast, US policy makers prefer that relatively asymmetric networks peer.     

Product line pricing in a vertically differentiated oligopoly

Abstract This paper examines the joint pricing decision of products in a firm’s product line. When products are distinguished by a vertical characteristic, those with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is an additional price premium for products on the industry and/or the firm frontier, that is, for the products with the highest value of the characteristic in the market or in a firm’s product line. We also investigate the existence of price premia for lower‐ranked products and other product line pricing questions. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers, even after holding absolute quality constant. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). There is also evidence that a product’s price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm’s offerings constant), possibly as an attempt to reduce cannibalization. Finally, a product’s price declines with the time it is offered by a firm, suggesting intertemporal price discrimination.     

Product mix,transactions and cost behaviour: a study of South African bank branches

This paper utilizes microeconomic theory and a panel data set to assess the impact of product mix and transactions on cost behaviour of bank branches in South Africa over the short and long‐term. Estimates of properties of concavity and monotonocity indicate that the cost functions of typical bank branches in South Africa are neither consistent with short‐term nor long‐term cost‐minimizing behaviour. This corroborates earlier findings which indicate that South African banks have low production efficiency and high market power. In addition the cost functions and two production‐output type indices indicate that overall, the intermediation‐output type mix (foreign exchange and custodial services) has a more significant effect on cost behaviour than the production‐output type mix (cheque and deposit accounts). The variety of production‐output type services provided by a branch appears to have limited effect on costs. However the financial value of production‐output type transactions has an impact on costs while the financial value of intermediation type products does not. Branches that provide intermediation‐output type products tend to have higher variable costs – the key determinant of costs is the number of transactions.     

Inventories and Risk in African Manufacturing

Using a panel data set for Zimbabwe which includes firm-specific measures of contractual risk, we show that contractual risk has a major effect on the holding input stocks and, to a lesser extent, the constitution of cash reserves. This is consistent with inventories being a hedge against stockout risk. By contrast, firms facing more inter-annual market risk hold less inventories. This suggests that African manufacturers prefer adapting to long-term market fluctuations as they materialise rather than building up inventories. This interpretation is consistent with the finding that high market risk firms also have a low capacity utilisation rate.     

Search costs and the severity of adverse selection

In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.     

The Effects of Trade Liberalization between Heterogeneous Countries on Endogenous Mergers

This paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non‐cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro‐competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff‐jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade‐liberalizing reductions in trade costs, a high‐cost country's optimal policy may be to ban international mergers.     

Market size and entry in international trade: Product versus firm fixed costs

This paper develops a theoretical framework to infer the nature of fixed costs from the relationship between entry patterns in international markets and destination market size. If fixed costs are at the firm level, firms take advantage of an intrafirm spillover by expanding firm‐level product range (scope). Few firms enter with many products and dominate international trade. If fixed costs are at the product level, an interfirm spillover reduces the fixed costs to export for all firms producing the product. The resulting entry pattern consists of many firms exporting different varieties of the same product. Using cross‐country data on firm and product entry, I find empirical evidence consistent with product‐level costs. More firms than products enter in larger markets offering their consumers lower prices and a greater variety of goods within the product category.     

Quality Competition and Social Welfare in Markets with Partial Coverage: New Results*

We use a vertical product differentiation model under partial market coverage to study the social welfare optimum and duopoly equilibrium when convex costs of quality provision are either fixed or variable in terms of production. We show the following new results. First, under fixed costs, the social planner charges a uniform price for the single variant that just covers costs of quality provision. Like the duopoly equilibrium, this socially optimal pricing entails a partially uncovered market, but a smaller share of the market is served compared with the duopoly equilibrium. Second, for the variable cost case, it is socially optimal to provide both high‐ and low‐quality variants, but market shares need not be equal. This differs from the result in fully covered markets. Third, in the duopoly equilibrium, the quality spread is too wide under variable costs relative to the social optimum. Under fixed costs, the duopoly produces two variants, but quality is too low relative to the social optimum, which has only one variant.     

Honesty,Diligence and Skill: Risk Sharing and Specialization in the Kiryu Silk Weaving Cluster,Japan

Many economies have seen growth in industrial clusters during their industrialization, and the relational contracts between manufacturers and subcontractors are often the organizational basis of clusters. We predict that, if manufacturers form relational contracts with subcontractors, if manufacturers closely collude with each other when trading with subcontractors, if information about subcontractors’ past actions is only imperfectly shared by manufacturers as hearsay, and if demand shock is considerable, then premium subcontractors suffer more from market volatility than ordinary subcontractors would and hence, it is optimal for manufacturers to shield premium subcontractors against the risk. We then study Kiryu, a kimono weaving cluster that expanded from the late nineteenth century with the development of new synthetic dyeing techniques. We show that premium subcontracting weavers were allowed long‐term relational contracts and specialization, which shielded already honest weavers against market volatility and induced them to be diligent and to acquire skills.     

Asymmetric Demand Information and Foreign Direct Investment*

We examine the FDI versus exports decision of firms competing in an oligopolistic (quantity‐setting) market under demand uncertainty and asymmetric information. Compared to a firm that chooses to export, a firm that chooses to set up a plant in the host market has superior information about local market demand. In addition to the well‐known tension between the fixed set‐up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if trade costs are zero. The analysis is robust to price competition and to the possibility that a foreign firm can engage in both FDI and exports.