Entry deterrence and experimentation under demand uncertainty

We examine the effect of a threat of entry on experimentation about demand by an incumbent monopolist when there is a fixed cost of entry. We show that experimentation may itself be used as a tool for entry deterrence and derive conditions under which experimentation reduces the probability of entry. These conditions depend on the entry rule which in turn depends on entry costs. We show that if experimentation does not deter entry, the monopolist incumbent experiments less. We also characterize experimentation and entry in the linear-uniform example, and show that cost of entry and experimentation do not have a monotonic relationship.     

Optimal reciprocal access pricing and collusion

This work extends the network competition model of Armstrong [(1998). Network interconnection in telecommunications. Economic Journal, 108, 545–564] and Laffont, Rey, and Tirole (1998). Network competition: I. Overview and nondiscriminatory pricing. RAND Journal of Economics, 29, 1–37] by assuming that operators can maintain a certain level of collusion in the unregulated retail market, and access prices may be regulated through non-linear tariffs. It emerges that, in the case of partially collusive environments, the regulator can design cost-based non-linear access charges such that the result is socially optimal.     

Search engines: Left side quality versus right side profits

Search engines face an interesting tradeoff in choosing the way to display their results. While providing high quality unpaid, or “left side” results attracts users, doing so can also cannibalize the revenue that comes from paid ads on the “right side”. This paper examines this tradeoff, focusing, in particular, on the role of users' post-search interaction with the websites whose links are displayed. In the model, high quality left side results boost demand from users, causing them to tolerate a search engine on which advertisers do not offer the lowest possible prices for the goods that they sell. However, because websites appearing on the left side still have an incentive to compete in the same market as advertisers, an increase in quality on the left side may reduce advertisers' equilibrium prices. I analyze the circumstances under which this will occur and discuss the model's potential implications for antitrust policy.     

Endogenous capacities and price competition: The role of demand uncertainty

We analyze the role of demand uncertainty in markets of fixed size, in which firms take long-run capacity decisions prior to competing in prices. We characterize the set of subgame perfect Nash equilibria under various assumptions regarding the nature and timing of demand uncertainty. In order to prove equilibrium existence, we identify a sufficient condition for the capacity choice game to be submodular. This condition resembles the standard downward-sloping marginal revenue condition used in Cournot games. A robust conclusion of the analysis is that equilibrium capacity choices are asymmetric, even when firms are ex-ante identical. Concerning the equivalence between the capacity-price game and the Cournot game, we find that with inelastic demands, the equilibria of the former belong to the equilibrium set of the latter. However, as compared to the Cournot game, the capacity-price game leads to lower prices and generates price dispersion.     

Competition and the signaling role of prices

In a market where sellers are heterogeneous with respect to the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price-setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.     

Buyer confusion and market prices

We employ a price setting duopoly experiment to examine whether buyer confusion increases market prices. Each seller offers a good to buyers who have homogeneous preferences. Sellers decide on the number of attributes of their good and set prices. The number of attributes bears no cost to the sellers and does not affect the value of the good to the buyers but adds complexity to buyers’ evaluation of the goods. The experimental results indicate that the buyers make more suboptimal choices and that prices are higher when the number of attributes of the goods is higher. Moreover, prices and profits are higher than those in a benchmark treatment with perfectly rational (robot) buyers.     

Optimal exploration investments under price and geological‐technical uncertainty: a real options model

This article develops a real options model for valuing natural resource exploration investments (e.g. oil or copper) when there is joint price and geological‐technical uncertainty. After a successful several‐stage exploration phase, there is a development investment and an extraction phase. All phases are optimized contingent on price and geological‐technical uncertainty.
Several real options are considered. There are flexible investment schedules for all exploration stages and a timing option for the development investment. Once the mine is developed, there are closure, opening and abandonment options for the extraction phase. Our model maintains a relatively simple valuation structure by collapsing price and geological‐technical uncertainty into a one‐factor model.
We apply the model to a copper exploration prospect and find that a significant fraction of total project value is due to the operational, development and exploration options available to project managers.     

A choice experiment model for beef: What US consumer responses tell us about relative preferences for food safety,country-of-origin labeling and traceability

Several food safety issues have prompted questions regarding the role of country-of-origin labeling, traceability, and food safety inspections in consumers’ perceptions of food safety and quality. The importance of origin-labeling and traceability have been discussed in the EU for some time. North American cases of mad cow disease have led to increased discussions of these topics in the US, however, relatively little research has been conducted to examine the value US consumers place on these attributes. Choice experiments were used to analyze US consumers’ relative preferences and willingness-to-pay for these meat attributes in labeled ribeye beef steaks. Relatively speaking, consumers value certification of USDA food safety inspection more than any of the other choice set attributes, including country-of-origin labeling, traceability and tenderness. As a result, indication of origin may only become a signal of enhanced quality if the source-of-origin is associated with higher food safety or quality.     

Cartel formation and pricing: The effect of managerial decision-making rules

We experimentally investigate how the managerial decision-making process affects choices in a Bertrand pricing game with an opportunity to form non-binding cartels. To do so we compare the effects of three decision-making rules for the firm (decisions by CEOs, majority rule and consensus) to each other and to decisions in a benchmark consisting of single-individual firms. It has been argued elsewhere that groups behave more competitively than individuals. In this setting this predicts that for all three decision-making rules we should observe fewer cartels and lower prices. This is not what we find. For the formation of cartels, there are no differences across treatments. For prices asked, we find that first, cartels lead to higher prices in all treatments, despite the fact that they are non-binding. Second, the decision-making rules strongly affect the prices asked. One thing that stands out is that firms run by CEOs ask higher prices (i.e., defect less often from the cartel) than observed in the other treatments.     

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.     

The role of online platforms for media markets — Two-dimensional spatial competition in a two-sided market

We analyze the market for online and offline media in a model of two-dimensional spatial competition where media outlets sell content and advertising space. Consumer preferences are distributed along the style and type of news coverage where the distance costs may vary across dimensions. For integrated provision of online and offline platforms we show that entering the online market reduces average profits and may even constitute a prisoner's dilemma. Specialized provision may yield polarization in the style and type dimensions. This is in contrast to the maximum–minimum differentiation result previously established in the literature on multidimensional horizontal competition. We show that maximal differentiation in both dimensions occurs due to the discrete nature of the type dimension and asymmetric advertising markets.     

Legal unbundling can be a golden mean between vertical integration and ownership separation

We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means in our model that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling never yields lower quantities in the downstream market than ownership separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.     

Production planning of a hybrid manufacturing-remanufacturing system under uncertainty within a closed-loop supply chain

This paper deals with the production planning and control of a single product involving combined manufacturing and remanufacturing operations within a closed-loop reverse logistics network with machines subject to random failures and repairs. While consumers traditionally dispose of products at the end of their life cycle, recovery of the used products may be economically more attractive than disposal, while remanufacturing of the products also pursues sustainable development goals. Three types of inventories are involved in this network. The manufactured and remanufactured items are stored in the first and second inventories. The returned products are collected in the third inventory and then remanufactured or disposed of. The objective of this research is to propose a manufacturing/remanufacturing policy that would minimize the sum of the holding and backlog costs for manufacturing and remanufacturing products. The decision variables are the production rates of the manufacturing and the remanufacturing machines. The optimality conditions are developed using the optimal control theory based on stochastic dynamic programming. A computational algorithm, based on numerical methods, is used for solving the optimal control problem. Finally, a numerical example and a sensitivity analysis are presented to illustrate the usefulness of the proposed approach. The structure of the optimal control policy is discussed depending on the value of costs and parameters and extensions to more complex reverse logistics networks are discussed.     

Duration and relational choices: Time based effects of customer performance and environmental uncertainty on relational choice

This paper investigates the influences of customer performance and environmental uncertainty on the customer's choice of relational exchange strategies over the duration of their relationship. Relational exchanges of short, intermediate, and long term duration are investigated with the results showing different performance outcomes and environmental factors impacting relational choice at different times in the relationship. The results help explain conflicts reported in prior relational exchange research and provide valuable insights for practitioners responsible for managing relational exchanges.     

Cost Reduction,Competitive Pressure and Firms' Optimal R&D Strategies in a Duopolistic Industry

This paper deals with a duopolistic industry where firms are engaged in cost-reducing R&D activity in order to maximize their market shares. Firms' R&D competition is characterized as a dynamic noncooperative feedback game where the optimal strategies are affected by the extra-industry R&D activity and the degree of intra-industry spillovers. Numerical simulations highlight the importance of the assumptions on the firms' absorptive capacity (to exploit external knowledge) in determining the optimal levels of firms R&D investrnents.     

Exporter-importer relationship quality: The inhibiting role of uncertainty, distance, and conflict

The article examines the impact of uncertainty, distance, and conflict on key elements comprising the quality of the relationship between U.S. industrial exporters and their overseas customers. Information received from 151 manufacturers revealed that these three parameters play a significant negative role in building sound relationship quality, in terms of adaptation, commitment, communication, cooperation, satisfaction, trust, and understanding — which, in turn, may inhibit the firm's progression along the internationalization path. Specifically, an inverse association was found between uncertainty, distance, and conflict, on one hand, and commitment, cooperation, and satisfaction, on the other. In addition, in relationships characterized by high uncertainty, adaptation, communication, trust, and understanding were low. In high distance relationships, communication was insufficient, and in high conflict situations, trust and understanding were low. Several managerial implications are extracted from the study, as well as directions for future research.     

Coordination and the provision of incentives to a common regulated firm

This paper considers the problem faced by two regulators in providing incentives to a common (privately informed) regulated firm under various degrees of coordination. In the model, the firm exerts effort toward cost reduction and self-dealing, and incentives can be input-based (monitoring) and output-based (demanded cost targets). Full coordination between the regulators leads to the second best allocation. A setting in which the regulators do not fully coordinate leads to (i) higher overall monitoring (more aggressive input-based incentives) and (ii) higher demanded cost targets (i.e., more lenience in terms of output-based incentives). As a consequence of (i), in all possible equilibria, the effort toward cost reduction will be smaller when the agent reports to two regulators who do not coordinate. (i) and (ii) imply that the impact on the effort toward self-dealing activities is ambiguous. In our leading example, self-dealing will be larger if the regulators coordinate on monitoring levels but smaller if they choose monitoring levels independently.     

Valuation of digital goods during the coronavirus outbreak in the United States

We examine how the Coronavirus pandemic affected consumer valuation of digital services. Governments responded to the pandemic with various forms of lockdowns and social distancing, leading to increased dependence on digital services for work, social engagement, and leisure activities. We identify consumer valuations through surveys where respondents express their reservation prices for digital services such as email, search, and social media. We compare our results to surveys done in 2016 and 2017 and find an about five-fold increase in valuations.