An antitrust analysis of bundled loyalty discounts

Consider a monopolist in one market that faces competition in a second market. Bundled loyalty discounts, in which customers receive a price break on the monopoly good in exchange for making all purchases from the monopolist, have ambiguous welfare effects. Such discounts should not always be treated as a form of predatory pricing. In some settings, they act as tie-in sales. Existing tests for whether such discounts violate competition laws do not track changes in consumer surplus or total surplus. We apply a new test to an illustrative example based on SmithKline that assumes the “tied” market has homogeneous goods. If the tied market is characterized by Hotelling competition, bundling by the monopolist causes the rival firm to reduce its price. In numerical examples, we find that this can deter entry or induce exit.     

Auction hosting site pricing and market equilibrium with endogenous bidder and seller participation

This paper characterizes the payoffs and pricing policies of auction hosting sites when both the bidders’ and the sellers’ participation is endogenous. Sellers have heterogeneous opportunity costs and make a listing decision depending on the listing fee and the expected revenue from the sale. On the other side of the market, factors such as facility in navigating an interface layout and prior bidding experience result in bidder heterogeneity with respect to participation costs. Bidders participate if their ex ante expected payoff from searching the site exceeds their participation costs. The auction site earns revenue by setting positive listing fees, trading off the increased revenue per seller resulting from a higher fee with the revenue reduction from the loss of sellers. Though this appears to be a classic monopoly problem, there are important differences. The reduction in the number of sellers participating in a site has feedback effects, as it affects the number of bidders who choose to visit that site, which in turn again affects the attractiveness of the site to sellers, and thus further reduces seller participation. In this environment the monopolist’s ability to extract rents is severely limited, even if one considers rent extraction from the seller side of the market only. It is demonstrated that the inverse demand curve is flatter than the demand curve obtained from the (inverse) distribution of seller costs. Moreover, the inverse demand curve has at least one and possibly multiple flat segments, leading to discontinuities in the profit function. Thus, small changes in the environment can lead to large changes in the optimal fee and market participation.     

Quality infomediation in search markets

We examine the effects of informational intermediation by a third party ‘infomediary’ in a search model with heterogeneous seller qualities and asymmetric information. The infomediary earns revenue by selling a list of accredited sellers (a ‘guidebook’) to buyers and selling accreditations to sellers. We show that such information always improves welfare but can hurt informed buyers (as well as the uninformed) if it is not sufficiently informative about seller qualities. The model also provides a number of insights concerning the private and social incentives to create information, and the determinants and nature of demand for infomediation services by buyers and sellers.     

Penny auctions

This paper studies penny auctions, a novel auction format in which every bid increases the price by a small amount, but placing a bid is costly. Outcomes of real-life penny auctions are often surprising. Even when selling cash, the seller may obtain revenue that is much higher or lower than its nominal value, and losers in an auction sometimes pay much more than the winner. This paper characterizes all symmetric Markov-perfect equilibria of penny auctions and studies penny auctions’ properties. The results show that a high variance of outcomes is a natural property of the penny auction format and high revenues are inconsistent with rational risk-neutral participants.     

Implications of regulation for entry and investment in the local loop

A number of countries around the world are trying to promote competition at the local loop as demand for higher bandwidth to the home increases. Different technologies (xDSL, cable modems, and wireless local loop) offer alternative solutions and the issue for regulators is to design a framework that promotes competition and investment. Regulators can promote competition in a number of ways, but two “pure” strategies are services and infrastructure competition. This paper models the regulator and incumbent–entrant interactions explicitly in order to understand how the structure of the voice services might evolve under different regulatory frameworks. Our analysis suggests that a “mix” of infrastructure and service competition like the one promoted in Netherlands, stimulates investment by incumbents and entrants alike and offers better consumer benefits. The message for policy makers is that the introduction of “sunset clauses” provides new entrants with strong incentives to invest while allowing them to enter in service competition and to acquire important knowledge about their new market.     

THE VALUE OF PRIVATE INFORMATION IN MONOPOLY*

We investigate a basic question about a monopoly with incomplete information: when does the seller have an incentive to allow potential buyers to acquire more private information about their tastes for the seller's product? Under plausible conditions such as log‐concave density of willingness‐to‐pay and convex marginal cost, the seller prefers that the paying customers be well informed as a group but be left in the dark regarding their individual tastes.     

Economic and health effects of fruit and vegetable advertising: Evidence from lab experiments

This study investigates consumer response to various types of advertising for fruits and vegetables—a food category which health officials uniformly agree is significantly under-consumed in the United States. Using an adult, non-student subject pool of 271 participants in an economic experiment, consumers’ response to different types of fruit and vegetable advertising is measured empirically. This study finds that broad-based advertising, which is generic advertising for the entire fruit and vegetable category, increases consumer willingness to pay by an average of 24.6%. The simulation model shows that broad-based advertising for fruits and vegetables, either alone or as a hybrid with individual commodity-specific campaigns (e.g., apple advertising), would reduce average caloric intake per person by approximately 1800 kcal per year. The results of this study may contribute to new public policy initiatives that aim to reduce diet-related illnesses and obesity, which have become increasingly prevalent in the United States.     

Role of resource gap and value appropriation: effect of reputation gap on price premium in online auctions

In this study, we draw on the resource‐based view of the firm and on value‐based models of strategy to examine when firms appropriate value from their superior resources. We argue for the need to take into account the role of the resource gap between competitors rather than the absolute resource stock of the focal firm when examining the resource‐performance relationship. In particular, we investigate whether the ability of a reputable seller to command a price premium is influenced by the reputation gap (i.e., the reputation differences between the focal seller and its closest competitor standardized by the reputation stock of both sellers). We test our hypotheses on 72 matched pairs of online transactions screened from more than 2,000 auctions of new mobile phones on the Polish Internet auction site Allegro. We find that the ability of a reputable seller to command a price premium (1) increases with the size of the reputation gap between the focal seller and its matched competitor, and (2) becomes increasingly smaller for each additional unit of the seller reputation gap. Copyright © 2010 John Wiley & Sons, Ltd.     

Variance amplification and the golden ratio in production and inventory control

A discrete linear control theory model of a generic model of a replenishment rule is presented. The replenishment rule, which we term a “Deziel Eilon—automatic pipeline, inventory and order-based production control system”, is guaranteed to be stable. From a z-transform model of the policy, an analytical expression for bullwhip is derived that is directly equivalent to the common statistical measure often used in simulation, statistical and empirical studies to quantify the bullwhip effect. This analytical expression clearly shows that we can reduce bullwhip by taking a fraction of the error between the target and actual inventory and pipeline (or work in progress (WIP) or “orders placed but not yet received”) positions. This is in contrast to the common situation where ordering policies account for all of the error every time an order is placed. Furthermore, increasing the average age of the forecast reduces bullwhip, as does reducing the production/distribution lead-time. We then derive an analytical expression for inventory variance using the same procedure to identify the closed form bullwhip expression.We assume that a suitable objective function is linearly related to the bullwhip and inventory variance amplification ratios and then optimise the PIC system for different weightings of order rate and inventory level variance. We highlight two forms of the objective function, one where “the golden ratio” can be used to determine the optimal gain in the inventory and WIP feedback loop and another that allows the complete range of possible solutions to be visualised. It is interesting that the golden ratio, which commonly describes the optimum behaviour in the natural world, also describes the optimal feedback gain in a production and inventory control system.     

Optimal reserve prices in sealed-bid auctions with reference effects

The reference effect and loss aversion are incorporated into the buyer’s utility in the symmetric independent private value models of sealed-bid auctions. The buyer’s equilibrium bidding strategy and the seller’s optimal reserve price are derived for the first-price and second-price sealed-bid auctions. In both auction mechanisms, the seller’s optimal reserve price and expected revenue are increasing in the reference point. We compare the seller’s expected revenues as well as the optimal reserve prices in the two auctions. The results show that the seller will set a higher optimal reserve price but obtain lower optimal expected revenue in the second-price auction compared to the first-price auction. Further, we extend the model to the gain-seeking case, and endogenize the reference point as the ex-ante expected price of the item in equilibrium. In contrast to the loss-averse case, the seller will set a lower optimal reserve price but obtain higher optimal expected revenue in the second-price auction compared to the first-price auction if the buyers are gain-seeking. With an endogenous reference point, similar results are obtained in terms of revenue comparison between the two auctions.     

Optimal mechanisms for an auction mediator

We consider a dynamic auction environment with a long-lived seller and short-lived buyers mediated by a third party. A mediator has incomplete information about traders’ values and selects an auction mechanism to maximize her expected revenue. We characterize mediator-optimal mechanisms and show that an optimal mechanism has a simple implementation as a Vickrey auction with a reserve price where the seller pays to the mediator only a fixed percentage from the closing price.     

Why Do Vacant Houses Sell for Less: Holding Costs,Bargaining Power or Stigma?

This article introduces Nash bargaining into a search model to identify various channels through which vacancy affects selling price and liquidity in the resale market for houses. The model shows the various vacancy effects in the form of greater seller holding cost, lower seller bargaining power and unobserved negative attributes or stigma. We use a 20‐year data series on house transactions to test for these effects in a simultaneous model of price and liquidity, using the long data series to allow for variation across market phases. The robust vacancy effects on price and liquidity across all market phases primarily reflect greater seller holding cost and diminished bargaining power. Repeatedly, vacant houses also exhibit significant stigma effects in the rising market but not in stable or declining market phases. At the same time, vacant houses enjoy stronger shopping externality effects from surrounding houses for sale than do their occupied counterparts.     

The Role of Undisclosed Reserves in English Open Outcry Auctions

This study considers the role that reserve prices may play in residential property auctions. In comparison to much of the previous empirical work, this study has access to undisclosed reserve prices from English auctions. Consistent with theoretical arguments in the auction literature, the results obtained illustrate that while higher reserve prices increase the revenue obtained for the seller, they also reduce the probability of sale. The findings also highlight the importance of auction participation, with the number of individual bidders and the number of bids significant in most specifications.     

Exclusionary discounts

We consider a two-period model with two sellers and one buyer. Although we assume it is efficient for the buyer to purchase from both sellers in each period, we show that when the buyer's valuations are inter-temporally linked and at least one seller is financially constrained, exclusion can sometimes arise in equilibrium (i.e., the buyer purchases all of its requirements from the same seller in each period). The exclusionary equilibria are supported by contract offers in which the excluding seller's incremental price to supply the contestable part of demand is below its marginal cost and sometimes negative. Our findings contribute to the literatures on market-share contracts, bundling, all-units discounts, and loyalty discounts.     

Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity

This paper introduces and tests Bid Function Equilibria (BFE) in the British spot market for electricity. BFE extend von der Fehr and Harbord's (1993) multi-unit auction model of wholesale electricity markets by allowing firms to have heterogeneous costs for different generating units. Pure-strategy equilibria in BFE predict asymmetric bidding by producers: a single firm (the “price-setter") bids strategically while other firms (“non-price-setters") bid their costs. We test for asymmetries in firms' bid functions in the British spot market between 1993 and 1995 and find strong empirical support for the theory. We conclude that BFE have important implications for the design and governance of electricity markets.     

Viewpoint: “Customized competitiveness” strategies for horticultural exporters – Central America focus with lessons from and for other regions

This paper presents the idea of “customized competitiveness” as a strategy necessary for overall competitiveness in particular in globalized horticulture markets and in the “second round” of globalization that started in the mid/late 1990s. Customized competitiveness is additional and complementary to basic “structural competitiveness” that is the focus of competitiveness debates today and for the past decade. The paper illustrates the need for this new strategy, using the example of Central America, highlighting the severe challenges (similar to those facing other developing regions) it faces in the second round of globalization of horticulture markets, magnified by market liberalization culminating recently in implementation of CAFTA. The paper then illustrates “solutions” by providing examples of cutting-edge programs in various developing countries of de facto “customized competitiveness” in the form of public–private partnerships and the provision of public and semi-public goods, to help their exporters access and succeed in the new markets. We conclude with policy implications for Central America and other developing regions.     

Effects of seller’s information disclosure in equity auctions requiring post-auction investment

We consider a moral hazard issue inherent in the equity auctions of assets such as oil and gas leases and corporate takeovers. After the auction, the winning bidder decides whether to make follow-up investments in the acquired asset and makes the equity payment out of the revenue from it according to the auction outcome. Before the auction, the seller holds private information about the possible returns on that investment and must decide whether to disclose it. Larger equity payments undermine incentives to invest, reducing the impact of information revealed by the seller on expected values of the asset to a winning bidder. Thus, information disclosure makes bids less aggressive in expectation. Expected seller revenues may be higher when she does not disclose her private information than when she commits to publicly announcing it regardless of whether it is good or bad.     

Is allowing trading enough? Making secondary markets in spectrum work

The debate on spectrum reforms has mostly focused on the choice between a property rights and a commons regime. This article argues that moving to a property right system requires careful attention to details in order to avoid that “micro” rather than “macro” factors may prevent efficient trades from taking place. It provides a framework to conduct this assessment, identifies a number of possible concerns and puts forward some solutions.     

Quantized Hopfield networks and tabu search for manufacturing cell formation problems

The use of neural networks in the design of cellular manufacturing system is not new. This paper presents an application of modified Hopfield neural networks in order to solve cell formation problems: the quantized and fluctuated Hopfield neural networks (QFHN). This kind of Hopfield network combined with the “tabu search” approach were primarily used in a hybrid procedure in order to solve the cell formation for big sizes industrial data set. The problem is formulated as a 0/1 linear and integer programming model in order to minimize the dissimilarities between machines and/or parts. Our hybrid approach allows us to obtain optimal or nearly optimal solutions very frequently and much more quickly than traditional Hopfield networks. It is also illustrated that the fluctuation associated with this quantization may enable the network to escape from local minima, to converge to global minima, and consequently to obtain optimal solutions very frequently and much more quickly than pure quantized Hopfield networks (QHN). The effectiveness of the proposed approach is flexibility it gives us, for example, in time problem-solving for large-scale and speed of execution when we apply it.     

Accounting for ARPU: New evidence from international panel data

Average revenue per user (ARPU) is commonly used by regulators and industry observers to compare the performance of mobile telephony markets. Under the new EU electronic communications regulatory framework, some national regulatory authorities (NRAs) have linked higher ARPU with ‘significant market power’. This paper empirically examines the determinants of ARPU in a systematic way, taking account of service quality, market environment, regulation and quantity of service. The robust results suggest that concentration may not be a reliable indicator of competition in mobile markets; there are economies of density in mobile markets; and higher GDP per capita increases ARPU.