Price‐matching policy with imperfect information

The model of price‐matching policy emphasizes on the importance of information imperfection. The demand is derived based on the assumptions that consumers have different reservation prices and different preferences over location. When a firm undercuts its competitor's price, it changes the demand structure of the market. The result shows that price‐matching policies are anticompetitive, but they do not facilitate monopoly price. Copyright © 2005 John Wiley & Sons, Ltd.     

Price Discrimination in Two‐Sided Markets

We examine the profitability and welfare implications of targeted price discrimination (PD) in two‐sided markets. First, we show that equilibrium discriminatory prices exhibit novel features relative to discriminatory prices in one‐sided models and uniform prices in two‐sided models. Second, we compare the profitability of perfect PD, relative to uniform prices in a two‐sided market. The conventional wisdom from one‐sided horizontally differentiated markets is that PD hurts the firms and benefits consumers, prisoners' dilemma. We show that PD, in a two‐sided market, may actually soften the competition. Our results suggest that the conventional advice that PD is good for competition based on one‐sided markets may not carry over to two‐sided markets.     

Voluntary Quality Disclosure under Price‐Signaling Competition

We analyze an oligopolistic competition with differentiated products and qualities. The quality of a product is not known to consumers. Each firm can make an imperfect disclosure of its product quality before engaging in price‐signaling competition. There are two regimes for separating equilibrium in our model depending on the parameters. Our analysis reveals that, in one of the separating regimes, price signaling leads to intense price competition between the firms under which not only the high‐quality firm but also the low‐quality firm chooses to disclose its product quality to soften the price competition. Copyright © 2011 John Wiley & Sons, Ltd.     

Upstream conduct and price authority with competing organizations

We characterize the degree of price authority that competing upstream principals award their downstream agents in a setting where these agents own private information about demand and incur nonverifiable distribution costs. Principals cannot internalize these costs through monetary incentives and design “permission sets” from which agents choose prices. The objective is to understand the forces shaping delegation and the constraints imposed on equilibrium prices. When principals behave noncooperatively, agents are biased toward excessively high prices because they pass on distribution costs to consumers. Hence, the permission set only features a price cap that is more likely to bind as products become closer substitutes, in sectors where distribution is sufficiently costly, and when demand is not too volatile. By contrast, when principals behave cooperatively, the optimal delegation scheme is richer and more complex. Because principals want to charge the monopoly price, the optimal permission set features a price floor when the distribution cost is sufficiently low, it features instead full discretion for moderate values of this cost, and only when it is high enough, a price cap is optimal. Surprisingly, while competition (as captured by stronger product substitutability) hinders delegation in the noncooperative regime, the opposite occurs when principals maximize industry profit.     

Random encounters and information diffusion about product quality

This paper explores how social interactions among consumers shape markets. In a two-country model, consumers meet and exchange information about the quality of the goods. As information spreads, demand evolves, affecting the prices and quantities manufactured by profit-maximizing firms. We show that market prices with informational frictions reach the duopoly price with full information at the limit. However, this convergence can take different paths depending on the size asymmetry between countries. In particular, when the country producing the low-quality good is relatively large, the single market does not immediately turn into a duopoly and can be temporarily trapped in a situation of price instability where no Nash equilibrium in pure (but only in mixed) strategies exists and prices can fluctuate between their monopoly and duopoly levels. It follows that the classical price-reducing effects of international trade may take longer to appear. In view of an intense globalization process, understanding how social meetings affect market outcomes is critical for understanding the performance of international economic integration.     

Price and quality decisions under network effects

I analyse monopoly pricing and quality decisions under network effects. High quality premium and low quality punishment are found to depend on how the impact of marginal costs on quality relates to the intensity of the network effect and the optimism of the producer about final demand. More precisely, marginal costs have to be low enough (but not too low) with respect to the intensity of the network effects and/or the optimism about final demand so that higher prices reflect higher quality. A similar conclusion can be drawn about incentives for quality provision, whenever quality is considered endogenous together with price.     

Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive

In markets where consumers have switching costs and firms cannot price‐discriminate, firms have two conflicting strategies. A firm can either offer a low price to attract new consumers and build future market share or a firm can offer a high price to exploit the partial lock‐in of their existing consumers. This paper develops a theory of competition when overlapping generations of consumers have switching costs and firms produce differentiated products. Competition takes place over an infinite horizon with any number of firms. This paper shows that the relationship between the level of switching costs, firms' discount rate, and the number of firms determines whether firms offer low or high prices. Similar to previous duopoly studies, switching costs are likely to facilitate lower (higher) equilibrium prices when switching costs are small (large) or when a firm's discount rate is large (small). Unlike previous studies, this paper demonstrates that the number of firms also determines whether switching costs are pro‐ or anticompetitive, and with a sufficiently large (small) number of firms switching costs are pro‐ (anti‐) competitive.     

Falsified or Substandard? Assessing Price and Non‐price Signals of Drug Quality

Pharmaceutical products can be of poor quality either because they contain zero correct active ingredient (referred to as “falsified”) or because they contain a nonzero but incorrect amount of the right active ingredient (referred to as “substandard”). Although both types of poor‐quality drugs can be dangerous, they differ in health consequence, price, and potential policy remedies. Assessing basic quality of 1437 samples of Ciprofloxacin from 18 low‐to‐middle‐ income countries, we aim to understand how price and nonprice signals can help distinguish between falsified, substandard, and passing drugs. Following the Global Pharma Health Fund e.V. Minilab® protocol, we find 9.88% of samples have less than 80% of the correct active ingredient and 41.5% of these failures are falsified. Falsified and substandard drugs tend to differ in two observable attributes: first, falsified drugs are more likely to mimic drugs registered with local drug safety regulators. Second, after controlling for other factors, substandard drugs are on average cheaper than passing generics in the same city but the price of falsified drugs is not significantly different from that of passing drugs on average. These data patterns suggest that careful consumers may have information to suspect a drug is substandard before purchase but substandard drugs can still exist to cater to poor and less‐educated population. In contrast, falsified drugs will be more difficult for consumers to identify ex ante because they appear similar to high‐quality, locally registered products in both price and packaging.     

Leveraging of Reputation through Umbrella Branding: The Implications for Market Structure

The Klein–Leffler model explains how fear of reputation loss can induce firms to produce high‐quality experience goods. This paper shows that reputation can be leveraged across products via umbrella branding, but only by a firm with a monopoly on at least one product. Such a firm may be able to capture a market by using umbrella branding to make high quality credible at a lower price than the incumbent competitive firms. If monopolists compete for this capture, consumers are left better off than if the market remained competitive, in some cases even though the price increases.     

Unbeatable Value Low‐Price Guarantee: Collusive Mechanism or Advertising Strategy?

This paper investigates the effects of a low-price guarantee (price-beating guarantee) on the patterns of price setting of three supermarkets using micro-level price data. Following recent theoretical developments, the paper analyzes the ability of low-price guarantees to sustain anticompetitive prices. My empirical analysis suggests instead that this low-price guarantee may serve as an advertising device to signal low prices. The supermarket offering the low-price guarantee, aware of its price advantage in a subset of products, uses it to signal low prices to induce consumers to switch supermarkets.     

Multi‐unit pricing

A price takes the form of a cost for either one unit (single‐unit pricing) or multiple units (multi‐unit pricing). I consider a monopolist selling units of a good to a population of homogeneous consumers to explain why one is preferred to the other. A mental cost arises if the division problem a multi‐unit price causes is done. If marginal utility remains high multiple units are desired. Multi‐unit pricing is preferred since it creates a cost if fewer units are purchased. If utility exhibits strong diminishing returns single‐unit pricing is used to avoid the calculation. Copyright © 2008 John Wiley & Sons, Ltd.     

Regulating a Manager‐controlled Natural Monopoly with Unknown Costs

We study the regulation of a manager‐controlled natural monopoly with unknown costs, borrowing from Baron and Myerson (BM) (1982), where the monopoly is controlled by the owner. We consider the case where the regulator can tax the owner as well as the case where she cannot. We find that the optimal price schedule generally lies below the one in the BM model and that it can be as low as the marginal cost if the compensation parameter is sufficiently small and the regulator cannot tax the monopoly owner. We also identify the cases where the monopoly owner prefers to delegate the control to a manager. Copyright © 2016 John Wiley & Sons, Ltd.     

Differentiated‐product distribution in a dual‐channel supply chain

This study presents a theoretical framework to explore the mechanism of firms' preference for different distribution strategies. The results indicate that the manufacturer, retailer, and e‐tailer would prefer the distribution strategy of selling low‐end and high‐end products through offline and online channels, respectively, when consumers are minimally sensitive to the product‐quality differentiation. By contrast, supply‐chain firms would prefer the distribution strategy of selling high‐end and low‐end products through offline and online channels when consumers are significantly sensitive to the product‐quality differentiation. Firms demonstrate different preferences for distribution strategy when consumers are moderately sensitive to product‐quality differentiation.     

Hassle Costs: The Achilles' Heel of Price-Matching Guarantees*

We show that price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs), we find that any increase in equilibrium prices due to firms' price-matching policies will be small; often, no price increase can be supported. In symmetric markets price-matching guarantees cannot support any rise in prices, even if hassle costs are arbitrarily small In asymmetric markets, higher prices can be supported, but the prices fall well short of maximizing joint profits. Our model can explain why some firms adopt price-matching guarantees while others do not.     

Increased word‐of‐mouth via strategic cause‐related marketing

• This research examines word‐of‐mouth (WOM) promotions as an additional consequence of a successful cause‐related marketing (CRM) partnership. Firms properly aligned in CRM partnerships should increase positive feelings that can translate into positive WOM from the public. WOM efforts should be considered in marketing campaigns to develop successful long‐term CRM strategies. Additionally, carefully planned CRM campaigns with positive WOM give firms a competitive advantage without the backlash of consumer skepticism often reported when firms attempt to manipulate WOM campaigns. This study is grounded in associative learning theory which provides support for the strengthened associative links between firm and charity when the relationship is properly aligned. This empirical study suggests that strategically aligned CRM relationships can improve positive WOM recommendations. Results of ANOVA and factor analysis indicate that consumers are more receptive to CRM partnerships that consist of compatibility between firm and charity that persist over time. Results suggest that consumers are more likely to recommend the more properly aligned partnerships to others.

Copyright © 2010 John Wiley & Sons, Ltd.     

IMPACTS OF FOOD PRICES ON THE ECONOMY: SOCIAL ACCOUNTING MATRIX AND MICROSIMULATION APPROACH IN INDONESIA

This study investigated the impacts of increasing the prices of heavily protected food commodities in Indonesia on producer and consumer prices. It also evaluated the changes in household living expenses and poverty. The Indonesian Food Social Accounting Matrix was developed along with a price multiplier matrix–microsimulation approach that was used to analyze problems. Poor rural households were the most negatively affected by the increments in food prices. This result contrasted with the standard political argument stating that high rice prices will decrease poverty, particularly in rural areas where the poor live or work as farmers. Of all the food commodities observed, the changes in the rice prices had the most substantial impact on both producer and consumers price, as well as the households’ living cost, particularly low‐income households. Therefore, an increase of 25% in rice price will raise urban, rural, and national poverty levels by 0.13%, 0.10%, and 0.11%, respectively.     

A note on the low‐quality advantage in vertical product differentiation

In this paper, we modify the analysis of Schubert (2017), who found low‐quality advantage arising from vertical differentiation. Here, we relax the assumption of a sufficiently high reservation utility (so that consumers will always buy the good) to include the case in which they can refrain from buying the good. We find an explicit solution to profit functions, with the result that low‐quality advantage disappears.     

National pricing with local quality competition

We study the incentives of national retail chains to adopt national (uniform) prices across local markets that differ in size and competition intensity. In addition to price, the chains may also compete along a quality dimension, and quality is always set locally. We show that absent quality competition, the chains will never use national pricing. However, if quality competition is sufficiently strong there exist equilibria where at least one of the chains adopts national pricing. We also identify cases in which national pricing benefits (harms) all consumers, even in markets where such a pricing strategy leads to higher (lower) prices.     

Behavior‐ and characteristic‐based price discrimination

We develop a model of behavior‐ and characteristic‐based discriminatory pricing where consumers are heterogeneous both in tastes and in price sensitivity. Each firm is able to distinguish between the consumers that have bought from it and those that have bought from the rival. Furthermore, each firm learns the price sensitivity of their own consumers. We show that using this additional information may yield higher profits than uniform pricing provided that consumers are heterogeneous enough with respect to price sensitivity. We also discuss consumer surplus implications of such behavior‐ and characteristic‐based price discrimination, and we show that the impact of price discrimination depends on both the consumer type and the level of consumers’ heterogeneity.     

Firm entry,product repositioning and welfare

We show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer’s surplus possibly decrease. We first derive the price and the consumer’s surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer’s surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.