POSTING MULTIPLE PRICES TO REDUCE THE EFFECTIVENESS OF CONSUMER PRICE SEARCH*

In a model of competition with imperfect consumer price information and incomplete price search, some consumers may end up comparing prices originating from the same supplier: either because one firm sets multiple prices or because a group of firms colludes. This leads to added monopoly power for these firms, and average prices in the mixed strategy equilibrium become higher. There is a shift in welfare from consumers to producers, both with exogenous and endogenous consumer search behaviour. However consumers might search more or less with multiple prices. The implications for the price‐setting equilibrium, competition policy and recent judgements are considered.     

A more general model of price complexity

This paper analyses a model of competition where the firms set not only prices but also the complexity levels of their prices (which determine how difficult it is for consumers to assess the price offers). Unlike previous work, in this model, the firms’ confusion technology may be non-linear in the aggregate complexity level. The equilibrium probability of using high complexity increases in the number of firms but decreases in the convexity of the confusion technology. In large markets, the firms use high complexity almost surely. However, the industry profit converges to the highest level with concave technologies and to the lowest level with convex technologies. An increase in consumer sophistication, which benefits the consumers, may not reduce market complexity.     

Curbing obfuscation: Empower consumers or regulate firms?

This paper develops a market model where consumers refrain from buying products that they are unable to understand and a firm can influence the probability of a consumer understanding its offer. In equilibrium, firms artificially increase product complexity, and firms that offer more transparent products choose on average higher prices. We study two sets of public policies. We show that consumer side policies may have the unintended consequence of encouraging obfuscation while firm side policies are always effective in curbing obfuscation. Interestingly, a consumer side policy can even harm consumers when it protects consumers so much that it greatly increases the marginal effectiveness of obfuscation. Policies on both sides can either increase or decrease social welfare depending on the marginal effectiveness and the marginal cost of obfuscation. Our main insights hold in both asymmetric and symmetric obfuscation equilibria.     

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.     

Waterfall Versus Sprinkler Product Launch Strategy: Influencing the Herd

A seller decides the price and sequence in which a product of unknown value is introduced to consumers. Consumers inspect the product before consumption and observe past prices and sales. Consumption at a high price is informative for later consumers as it indicates that the product is likely to be of high value. I show that on an average prices decrease over time. However, expected revenue on an average rises over time. For a high enough discount factor, I find that for extreme beliefs the firm introduces the product to all consumers but for intermediate values the product is introduced only to one consumer.     

Collusion Under Imperfect Monitoring with Asymmetric Firms

We explore the effects of asymmetries in capacity constraints on collusion where market demand is uncertain and where firms’ sales and prices are private information. We show that all firms can infer when at least one firm's sales are below some firm‐specific ‘trigger level.’ When firms use this public information to monitor the collusive agreement, price wars may occur on the equilibrium path. Symmetry facilitates collusion but, if price wars are sufficiently long, then the optimal collusive prices of symmetric capacity distributions are lower on average than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.     

Non-linear pricing and conscious consumption

We consider a duopolistic market in which a green firm competes with a brown rival and each firm sells two quality-differentiated products. We study optimal non-linear contracts offered by the two firms when consumers: (i) Are privately informed about their willingness to pay for quality, and (ii) differ in their environmental consciousness. We characterize how consumers with different valuations for quality self-select into firms and show that the ranking of qualities, relative prices and profits all depend on the interplay between consumers’ valuations and firms’ cost heterogeneity. Interestingly, when consumers’ valuations for quality are relatively low, the brown firm does not offer a low-quality variety. This contrasts with the situation of full information, in which both firms commercialize a high- and a low-quality variety. Hence, the lack of information about consumers’ valuations may not only favor the green firm in terms of higher prices and profits, but also reduce the product range offered by the brown rival.     

Competitive targeted online advertising

This paper examines how an online publisher utilizes its information about consumer preference to target advertising. In our model, two firms first bid for a prominent ad position in a publisher-organized position auction, and then compete on price in the subsequent product marketplace. We consider two dimensions of consumer heterogeneity. First, consumers are heterogeneous in product preference. Based on their tastes, some consumers prefer one product over the other, whereas other consumers may rank the products in an opposite order. Second, consumers differ in search preference, i.e., “nonshoppers” only consider the advertised product, while “shoppers” always search both firms’ products before buying. We show that targeted advertising based on product preference will mitigate price competition in product markets as well as competition in position auctions, the latter to the detriment of the publisher. In contrast, targeted advertising based on search preference always benefits the publisher, as the winning firm can charge monopoly prices to nonshoppers. We show that the publisher’s optimal choice is to utilize only the information about consumer search preference. We also explore the welfare implications of targeted advertising based on different types of consumer preference.     

Obfuscation and Rational Inattention*

We study the behavior of duopolistic firms that can obfuscate their prices before competing on price. Obfuscation affects the rational inattentive consumers' optimal information strategy, which determines the probabilistic demand. Our model advances related models by allowing consumers to update their unrestricted prior beliefs with an informative signal of any form. We show that the game may result in an obfuscation equilibrium with high prices or a transparency equilibrium with low prices and no obfuscation, providing an argument for market regulation. Obfuscation equilibria cease to exist for low information costs and if one firm seems a priori considerably more attractive.     

Equilibrium price dispersion with heterogeneous searchers

Firms simultaneously set prices in a homogeneous-product market where uninformed consumers search for price information. Some uninformed consumers are “local” searchers who visit only one seller, whereas others search sequentially with an optimal reservation price. Equilibrium prices may follow a mixture distribution, with clusters of high and low prices separated by a zero-density gap. When the (exogenous) reservation price of local searchers depart from that of the optimizing sequential searchers by a relatively small amount, the presence of local searchers either has no effect on market outcomes or benefits all consumers. A reduction in search cost sometimes leads to higher equilibrium prices.     

Optimal strategy of multi-product retailers with relative thinking and reference prices

Experimental evidence suggests that consumers are affected by reference prices and by relative price differences (“relative thinking”). A linear-city model of two retailers that sell two goods suggests how this consumer behavior affects firm strategy and market outcomes. A simple model analyzes the case in which all consumers want to buy both goods. An extended version adds consumers who want only one good. Relative thinking leads firms to increase the markup on the good with the higher reference price and decrease the markup on the other good, possibly to a negative markup. Stronger relative thinking increases the firms' profits.     

Ordered search in differentiated markets

This paper presents an ordered search model in which consumers search both for price and product fitness. I construct an equilibrium in which there is price dispersion and prices rise in the order of search. The top firms in consumer search process, though charge lower prices, earn higher profits due to their larger market shares. Compared to random search, ordered search can induce all firms to charge higher prices and harm market efficiency.     

Vertical product differentiation,network externalities,and compatibility decisions

We analyse the subgame perfect equilibrium of a four-stage game in a model of vertical product differentiation, where the consumer’s evaluation of a product depends on its inherent quality and on its network’s size. First, two firms choose their product’s inherent quality. Then they may mutually agree on providing an adapter before competing in prices. Finally, consumers buy. We find that, despite the high quality firm’s preference for incompatibility, an adapter is always provided in equilibrium. Social welfare is greater than without an adapter and can be improved by regulating compatibility only in those cases where qualities are differentiated too much.     

ASYMMETRIC MARKET SHARES,ADVERTISING AND PRICING: EQUILIBRIUM WITH AN INFORMATION GATEKEEPER*

We analyze how asymmetric market shares impact advertising and pricing decisions by firms that have loyal, non‐shopping customers and can advertise to shoppers through a ‘gatekeeper.’ In equilibrium, the firm with the smaller loyal market advertises more aggressively but prices less competitively than the firm with the larger loyal market. Our results differ significantly from earlier literature which assumes that shoppers observe all prices and finds that the firm with the smaller loyal market adopts a more competitive pricing strategy. The predictions of the model are consistent with advertising and pricing behavior observed on price comparison websites such as http://Shopper.com .     

Price competition when three are few and four are many

I examine price competition in a market for a homogeneous good when consumers observe prices subject to a random shock (perception error). When firms have symmetric costs, there exists a unique equilibrium in pure strategies, which is symmetric. When there are up to three sellers in the market, the sellers extract the entire consumer surplus. However, with at least four firms, assuming that the marginal cost is sufficiently low relative to consumers’ valuation, both consumers and producers may enjoy a positive surplus. The marginal-cost pricing is never observed in an equilibrium with finitely many firms. Potential policy implications are discussed.     

Manipulation Through Biased Product Reviews*

We study a signal-jamming model of product review manipulation in which rational consumers consult product reviews and price to better estimate a product's quality, and a firm, whose quality is either high or low, chooses its price and how much bias to insert into product reviews. We show that both firm types always exert positive effort to manipulate product reviews, and, depending on the equilibrium price level, one or both of them can increase its sales. When the high-type firm exerts more effort than the low-type, review manipulation benefits consumers by raising [lowering] their demand for the high-quality [low-quality] product.     

质量规制有效性和消费者信任的市场均衡效应

产品质量规制有效性和消费者信任对市场均衡具有重要影响,引入预期产品质量水平和能够检测出假冒高质量产品概率两个变量,分别表示消费者对产品质量信任状况和产品质量规制有效性,研究产品质量规制有效性和消费者对产品质量信任对产品均衡价格和数量的影响.结果表明无论是国内市场还是出口市场,消费者对产品质量信任状况对高质量产品市场均衡价格和均衡数量都有正向影响;而质量规制有效性对高质量产品市场均衡价格有正向影响,对均衡数量有负向影响.     

Experimenting to Learn about Demand in Duopoly with Forward‐Looking Consumers

Using a two‐period model, I show that competition between two symmetric duopolists trying to learn about unknown features of demand results in an informationally suboptimal process. Because a firm’s marginal return to price experimentation equals zero if the rival’s price is matched in the first period, myopic symmetric pricing arises in equilibrium even though a firm’s expected second‐period profit attains a local minimum. Furthermore, forward‐looking consumers suffer from ratcheting because their first‐period purchase decisions partly reveal their preferences, which exacerbates the informational suboptimality of the firms’ experimentation process without affecting their pricing. The role of firm asymmetries is also analyzed.     

Barriers to Entry and Competitive Behavior: Evidence from Reforms of Cable Franchising Regulations

Between 2005 and 2008, nineteen of the fifty states of the U.S. reformed the franchising process for cable television, significantly easing entry into local markets. Using a difference‐in‐differences approach that exploits the staggered introduction of reforms, we find that prices for ‘Basic’ service declined systematically by about 5.5 to 6.8 per cent following the reforms, but we find no statistically significant effect on average price for the more popular ‘Expanded Basic’ service. We also find that the reforms led to increased actual entry in reformed states, by about 11.6% relative to non‐reformed states. Our analysis shows that the decline in price for ‘Basic’ service holds for markets that did not experience actual entry, consistent with limit pricing by incumbents. To control for potential state‐level shocks correlated with the reforms, we undertake a sample‐split test that finds larger declines in prices for both ‘Basic’ and ‘Expanded Basic’ services in local markets which faced a greater threat of entry (because they were close to a prominent second entrant). Our results are consistent with limit pricing models that predict incumbents respond to increased threat of entry, and suggest that the reforms facilitated entry and modestly benefited consumers in reformed states.     

Behavior based price personalization under vertical product differentiation

We study price personalization in a two period duopoly with vertically differentiated products. In the second period, a firm not only knows the purchase history of all customers, as in standard Behavior Based Price Discrimination models, but it also collects detailed information on its old customers, using it to engage in price personalization. The analysis reveals that there exists a natural market for each firm, defined as the set of customers that cannot be poached by the rival in the second period. The equilibrium is unique, except when firms are ex-ante almost identical. In equilibrium, only the firm with the largest natural market poaches customers from the rival. This firm has highest profits but not necessarily the largest market share. Aggregate profits are lower than under uniform pricing. All consumers gain, total welfare is higher herein than under uniform pricing if firms’ natural markets are sufficiently asymmetric. The low quality firm chooses the minimal quality level and a quality differential arises, though the exact choice for the high quality depends upon the cost specification.