Market regulation of voluntary add-on contracts

This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products. We develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown. Some consumers do not pay attention to extended warranties before making base product choices, but overestimate the value of such warranties at the point of sale. Under retail competition, the consumers’ option to buy multiple base products can endogenously create a base price floor that may prevent firms from redistributing the full warranty profits via loss-leadership. Inducing competition in the warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators.     

Anti‐Competitive Interconnection: the effects of the elasticity of consumers' expectations and the shape of the network effects function

I find that interconnection might cause the market to be less competitive, and might lead to an increase in the price firms charge for their product. Absent interconnection, firms compete for a consumer for two reasons. The first reason is to obtain revenue from selling the product to a consumer (as in the case without network effects). The second reason is that by expanding the network by one more consumer, the product becomes more attractive to all other consumers. Interconnection eliminates the second reason—when firms interconnect, they are no longer concerned with consumers' following the crowd. I show that consumers and society might be worse off from interconnection. I focus on two factors that make the (post‐interconnection) price increase larger: consumer expectations that are highly sensitive to prices and consumers putting a high value on small increases in network size at the equilibrium market shares. Both of these factors make firms highly competitive, but only if the firms' products' networks are not interconnected.     

Price promotions in emerging markets

How should price promotion strategies be modified in an emerging market (e.g., India, China) compared to those employed in developed markets (e.g., USA, Canada)? Specifically, how should the presence of middle-class consumers with limited ability to pay, prevalent in an emerging market, influence the depth and frequency of price promotions offered by competing firms? Lay intuition suggests that firms should promote more frequently and offer deeper discounts in emerging markets, in order to effectively sell to limited income, middle-class consumers. We construct a theoretical model that investigates the effect of the middle-class segment on firms' price promotion strategies. Contrary to lay intuition, our analysis reveals precisely the opposite results. First, price promotions offered in an emerging market (with middle-class consumers) are shallower than those offered in a developed market (without middle-class consumers). Second, relatively deep price promotions occur less frequently in an emerging market, compared to a developed market. These theoretical findings are consistent with the empirical evidence we gathered from the supermarkets in India and in Canada.     

DYNAMIC PRICE DISCRIMINATION WITH ASYMMETRIC FIRMS*

This paper considers variants of a dynamic duopoly model where one firm has a stronger market position than its competitor. Consumers' past purchases may reveal their different valuations for the two firms' products. Price discrimination based on purchase histories tends to benefit consumers if it does not cause the weaker firm to exit; otherwise it can harm consumers. The effect of price discrimination also depends on firms' cost differences, market competitiveness, and consumers' time horizon. The stronger firm may price below cost in the presence of consumer switching costs, with the purpose and effect of eliminating competition.     

Risk Sharing,the Cost of Equity and the Optimal Capital Structure of the Regulated Firm

This paper considers the relationship between the regulator’s pricing decision and the allocation of risk between consumers and shareholders. Consumers are willing to trade-off price variations against a lower expected price. Prices are higher in adverse economic conditions, but shareholder returns are not necessarily lower. It might be optimal to insure shareholders against market risk, so that consumers could thereby achieve a lower expected price. The allocation of risk between consumers and shareholders depends on the capital structure of the regulated firm, and a very special set of conditions must apply for the social optimum to be 100% debt finance with the firm operating on a ‘not-for-profit’ basis.      

Asymmetric Price Effects of Competition

When price dispersion is prevalent, a relevant question is what happens to the whole distribution of equilibrium prices when the number of firms changes. Using data from the gasoline market in the Netherlands, we find, first, that markets with N competitors have price distributions that first‐order stochastically dominate the price distributions in markets with N+1 firms. Second, the effect of competition is stronger for the medium to upper percentiles of the price distribution. Finally, consumer gains from competition are larger for relatively well‐informed consumers. To account for these empirical patterns, we extend Varian's [1980] model by allowing for richer heterogeneity in consumer price information.     

Price effects of search advertising restrictions

Some suppliers prohibit their distributors from advertising on search engines if the consumer searches for the supplier's brand name. Such restrictions are referred to as “non-brand bidding agreements” (NBBAs). This paper investigates the effect of NBBAs on retail prices in the Dutch hotel sector, where some hotels impose NBBAs on online hotel booking platforms. An NBBA may protect the hotel's own website against competition from hotels on booking platforms because booking platforms cannot target consumers searching for the hotel with a search ad. This may lead to higher prices on the hotel website. However, an NBBA may also generate ad savings, which may lead to lower prices. We use hotel prices from a meta-search site and data on NBBAs from two hotel booking platforms. To correct for unobserved heterogeneity between hotels with and without NBBA, we apply a trajectory balancing approach within a synthetic difference-in-differences framework. Compared to non-NBBA-hotels, NBBA-hotels charge higher prices on their website relative to the price on booking platforms, suggesting a price increase. We identify cases where it is unlikely that consumers benefit from passed-on ad savings.     

分散决策下的双渠道供应链补偿策略——基于消费者渠道选择行为

为了有效解决由于对消费者的争夺从而引发的渠道之间关于定价、服务水平、利润等方面的冲突,基于消费者渠道选择行为,构建了网络直销市场与传统零售市场需求模型和双渠道供应链利润模型,运用Stackelberg模型,在制造商与零售商实施分决策时,通过制造商对零售商实施补偿激励前后的对比,分析了消费者渠道选择行为对网络直销渠道和传统零售渠道定价、制造商与零售商利润以及供应链总利润的影响,并求得最优定价及制造商的最优补偿额度和零售商的最优销售努力水平,进行了不同情况下的双渠道供应链利润的比较分析。结果表明,无论制造商是否实施补偿激励,都应随着网络消费者比例的增加而增加其网络直销价格;零售商的零售渠道价格应根据网络消费者比例的增加先降低到一定水平后再提升。当更多的消费者选择网络直销渠道时,制造商的补偿激励水平和零售商的销售努力程度均会下降。制造商应提高其补偿水平,进而激发零售商提高销售的努力水平,并使双方利润及供应链总利润最大化。研究结果为基于消费者选择行为的供应链补偿研究提供了新方法,对双渠道的供应链补偿研究有借鉴意义。     

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.     

Shopping for Information: Implications of Consumer Learning for Optimal Pricing and Product Design*

I study a seller's pricing problem where consumers perform costly product research about value before purchase. They buy the product when sufficiently optimistic about value and cease research when sufficiently pessimistic. I find that the seller encourages product research when prior belief about value is high, even though he could sell immediately for a high price. The prior affects both expected value and how additional information changes consumers' beliefs. I show that an increase in research cost affects equilibrium price nonmonotonically. Finally, when the seller chooses price and product value dispersion, the optimal level of dispersion need not be extremal.     

Identifying customer behavioral factors and price premiums of green building purchasing

In recent years, global urbanization and overdevelopment have resulted in environmental degradation and an energy crisis. Promoting green buildings is among the most effective methods for achieving environmental sustainability. Although the initial costs of green buildings are higher than those of ordinary buildings, people perceive that the environmental benefits of green buildings justify their higher price premiums. From a developer's perspective, devising optimal pricing strategies according to customer-perceived prices and developers' expected profit is complex and difficult. Hence, in this study, we developed a framework based on the Howard–Sheth model of consumer behavior to identify behavioral factors that may affect consumer purchases of green buildings. An artificial neural network (ANN) was then used to develop a pricing model for predicting the price premiums of green buildings. The results revealed that the ANN model's overall prediction capability was 94%; the model's robustness was demonstrated by comparing the results produced using the model with those produced using a multiple regression analysis. In addition, the characteristics of consumers who were willing to accept higher price premiums for green buildings were identified and discussed. The proposed model can be applied as an effective decision-support tool for green building pricing and formulating marketing strategies.     

Does Energy Consumption Respond to Price Shocks? Evidence from a Regression‐Discontinuity Design

We exploit unique features of a recently introduced tariff schedule for natural gas in Buenos Aires to estimate the short‐run impact of price shocks on residential energy utilization. The schedule induces a non‐linear and non‐monotonic relationship between households' accumulated consumption and unit prices, thus generating exogenous price variation, which we exploit in a regression‐discontinuity design. We find that a price increase causes a prompt and significant decline in gas consumption. The results also indicate that consumers respond more to recent past bills than to expected prices, which argues against an assumption of perfect awareness of complex price schedules by consumers.     

A Search Model Where Consumers Choose Quantity Based on Expected Price

I describe a price game in which consumers face search costs and base their quantity decision on the expected price. Because of search costs, the choice of the firm they will buy from is described by a random process. I show that the expected equilibrium price is above the monopoly price. This result does not change if demand comes from a small share of perfectly informed consumers with zero search costs.     

Mobile-only consumers arise from heterogeneous valuation of fixed services

Mobile-only users are usually perceived as a consequence of fixed-mobile substitution. This study uses a unique dataset based on a survey in France, combined with interviewee's telecommunications billing data, to reveal heterogeneous consumer preferences for fixed services. With the same mixed logit model we estimate the willingness to pay (WTP) for fixed communications services and fixed-mobile relationship. Results show a very large heterogeneity of WTP for fixed services among consumers. In addition, we show that fixed and mobile data are complement for all consumers. Mobile-only consumers have a much lower but non-zero WTP, and higher price sensitivity compared to fixed-mobile consumers. Consequently, an increase in the fixed offer price would reduce the demand for fixed service. Heterogeneous preferences for fixed services constitute an alternative explanation for the existence of mobile-only users, despite the complementary nature of fixed and mobile broadband. Counter-factual simulations show that the share of mobile-only could also be driven by the way to subsidize mobile handset. For instance, making the handset subsidy only available to fixed-mobile quadruple play subscribers could reduce the share of mobile-only by half.     

Telecommunications pricing and consumer expectations : The case of alternate operator services

Traditional discussions of telecommunications pricing utilize microeconomic models that are often timeless. In reality, static models of price-based decision making in telecommunications do not capture an important reality: that the price feedback is substantially delayed. Since consumers have no immediate feedback on which to base rational decisions, they must utilize their expectations of price. This article analyses the implications of this, using the alternate operator services as a discussion case. This analysis shows that few alternatives beyond price regulation exist to resolve the rampant complaints in this industry.     

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.     

Effects of antitrust prosecution on retail fuel prices

In February 2015, Spain’s Competition Authority imposed € 32.4 million in fines on five of the country’s largest oil operators as sanctions for price collusion. This paper examines the effect of that antitrust action on retail fuel prices. Our analysis uses a novel data set with detailed information on more than 8000 gas stations throughout Spain. Prices were collected every day from 18 August 2014 to 15 June 2015 (almost 2 million price observations). First we estimate a reduced-form fuel price equation that accounts for wholesale costs and brand affiliation. Then we use a model of gas stations and time fixed effects while adopting a difference-in-differences approach to assessing the fines’ effect on retail fuel prices. Our results indicate that, after publication of the fine, sanctioned firms raise prices slightly, and the additional revenues far exceeded the amount of the fine. We also find substantial heterogeneity, depending on the size of the fine, in the magnitude of this price response. Hence the fine’s burden might well have been borne mainly by consumers, whose welfare was thereby reduced. Our study should be of interest to antitrust authorities as we show that sanctions may not be effective enough in deter price fixing practices, especially when sanctions are weak and the profits from colluding are sufficiently high.     

Price Discrimination with Demarketing

We study how demarketing interacts with pricing decisions to explain why and when it can be employed as the seller's optimal strategy. In our model, a monopolistic seller offers different price‐quality bundles of the product. A consumer's preference is private information. With demarketing, consumers must make a costly effort to purchase and/or utilize the product, whereas with marketing, the seller instead makes the effort so that the consumer's purchasing decision is independent of the cost of effort. Our result suggests that, for small or large effort costs, it is optimal for the seller to engage in marketing. For intermediate effort costs, however, demarketing can be optimal. With demarketing, the seller induces only the consumers with high valuation to make transaction effort. By doing so, the seller can price discriminate more effectively, thus extracting more surplus. We extend our analysis to the case where the seller can offer special deals through exclusive sales channels along with demarketing. Then, demarketing can be optimal even for large costs of effort.     

CONSUMPTION UNDER NOISY PRICE SIGNALS: A STUDY OF ELECTRICITY RETAIL RATE DEREGULATION IN SAN DIEGO*

Utility services employ nonlinear tariffs that attempt to convey information on cost convexities. This paper examines how customers respond to noisy and volatile tariffs by measuring deregulated retail rates' impact on electricity consumption in San Diego. When rates doubled in 2000, consumers appear to have reacted more to recent past bills than to current price information. By summer's end, we find consumption fell 6% while lagging price increases. Even months after the utility restored low historic rates customers continued curtailing demand. We conclude that rate structures relying upon lagged wholesale price averages produce delayed responses to scarcities or high costs.     

Network effects and preference heterogeneity in the case of mobile telecommunications markets

This paper demonstrates how revealed- and stated-preference analyses can be used for modeling network effects in the field of mobile telecommunications. The aim of this study was to verify if network effects may still play a role in the Polish mobile telecommunications market, measure their strength, identify their sources and variability across consumers by accounting for consumers' observable and unobservable preference heterogeneity, evaluate their monetary value to consumers, and finally, to verify if the marginal utility associated with network effects is constant. The analysis of consumers' revealed choices (currently used mobile telephone operator) allowed the identification of major differences between customer bases of incumbent and new entrant operators, and insight into the business strategies adopted in the presence of asymmetric regulation of mobile termination rates. The second part of the study—the analysis of the consumers' stated choices (made in carefully prepared and designed hypothetical choice situations, known as the choice experiments) made it possible to directly model consumers' utility functions and, in this way, investigate the nature of network effects in mobile telecommunications markets. From the results, the presence of strong network effects, which are related to the ratio of consumers' social network group using the same operator, and to the magnitude of on-net price discounts, is confirmed. These network effects can be disaggregated to pecuniary and non-pecuniary effects. Through the utilization of the random parameters multinomial logit model, consumers' observable and unobservable preference heterogeneity can be accounted for, which proved a scientifically revealing and potentially policy-relevant approach. The results might be of a particular interest to other researchers aiming at modeling consumers' preferences as well as to mobile telephone operators and regulatory authorities—it is shown that capacity for vigorous price competition between mobile operators is limited by non-price factors, which affect subscriber's choices, especially in the presence of asymmetric mobile termination rates.