A laboratory study of advertising and price competition

We use a laboratory experiment to study advertising and pricing behavior in a market where consumers differ in price sensitivity. Equilibrium in this market entails variation in the number of firms advertising and price dispersion in advertised prices. We vary the cost to advertise as well as varying the number of competing firms. Theory predicts that advertising costs act as a facilitating device: higher costs increase firm profits at the expense of consumers. We find that higher advertising costs decrease demand for advertising and raise advertised prices, as predicted. Further, this comes at the expense of consumers. However, advertising strategies are more aggressive than theory predicts with the result that firm profits do not increase.     

Endogenous price leadership

We consider a linear price setting duopoly game with differentiated products and determine endogenously which of the players will lead and which one will follow. While the follower role is most attractive for each firm, we show that waiting is more risky for the low cost firm so that, consequently, risk dominance considerations, as in Harsanyi and Selten (A General Theory of Equilibrium Selection in Games, MIT Press, Cambridge, MA, 1988), allow the conclusion that only the high cost firm will choose to wait. Hence, the low cost firm will emerge as the endogenous price leader.     

Exposure order effects and advertising competition

This paper applies the theories of exposure order effects, developed in the psychology literature, to an industrial organization model to explore their role in advertising competition. There are two firms and infinitely many identical consumers. The firms produce a homogeneous product and distribute their brands through a common retailer. Consumers randomly arrive at the retailer and buy their most preferred brands. The order in which a consumer sees the advertising messages affects his brand preferences. Under the primacy effect the consumer prefers the brand he first saw advertised, under the recency—the last encountered brand. The equilibrium of the advertising game is characterized separately under the primacy and the recency effects. In the first setting all consumers are initially unaware of the product existence. The equilibrium advertising intensities, remarkably, do not depend on the type of exposure order effect. In the other two settings some consumers have already formed their brand preferences. The primacy and the recency effects give rise to different equilibrium outcomes.     

Winner-take-all price competition

Summary. We analyze an oligopoly model of homogeneous product price competition that allows for discontinuities in demand and/or costs. Conditions under which only zero profit equilibrium outcomes obtain in such settings are provided. We then illustrate through a series of examples that the conditions provided are “tight” in the sense that their relaxation leads to positive profit outcomes. Received: April 7, 2000; revised version: September 14, 2000     

Dynamic price competition

We consider the model of price competition for a single buyer among many sellers in a dynamic environment. The surplus from each trade is allowed to depend on the path of previous purchases, and as a result, the model captures phenomena such as learning by doing and habit formation in consumption.We characterize Markovian equilibria for finite and infinite horizon versions of the model and show that the stationary infinite horizon version of the model possesses an efficient equilibrium where all the sellers receive an equilibrium payoff equal to their marginal contribution to the social welfare.     

Endogenous expropriation and political competition

We develop a game-theoretical model in which the politicians can be influenced by means of campaign contributions of special interest groups. If there is no legally binding contract, politicians have a proclivity to divert some contributions for private use. In doing so, they maximize their own utility which depends on expected election-winning premium and amount of funds misappropriated. We study the utility maximizing fraction of expropriation emerging from the equilibrium policy platform and the associated contribution level. We then compare results under alternative scenarios, namely, one single lobby group versus multiple lobby groups and one-sided lobbying versus two-sided lobbying.     

Shopping hours and price competition

This paper develops an argument why retail prices may rise in response to the deregulation of opening hours. We make this point in a model of imperfect duopolistic competition. In a deregulated market retailers view the choice of opening hours as a means to increase the degree of perceived product differentiation thus relaxing price competition. If the consumers’ preference intensity for time is sufficiently high the equilibrium configuration has asymmetric shopping hours where one retailer stays open for longer than the other. Both retailers charge higher prices than under regulation, and both are strictly better off.     

Endogenous political competition and political accountability

We contribute to the debate over the effectiveness of elections in motivating incumbents to perform well. We show that with endogenous political competition the effectiveness of democracy in disciplining officials can be largely diminished.     

Differentiated credence goods and price competition

This paper analyses price competition between two firms producing horizontally and vertically differentiated goods. These are assumed to be credence goods, as consumers can hardly ascertain the quality of the commodities. To illustrate the model, we adapt it to represent a newspaper industry with two outlets, when the population of readers have preferences both on the political stance of the newspapers and on the accuracy of the news they dispatch.     

Downstream labeling and upstream price competition

This paper analyses the economic consequences of labeling in a setting with two vertically related markets. Labeling on the downstream market affects upstream price competition through two effects: a differentiation effect and a ranking effect. The magnitude of these two effects determines who in the supply chain will receive the benefits and who will bear the burden of labeling. For instance, whenever the ranking effect dominates the differentiation effect, the low-quality upstream firm loses from labeling while all downstream actors are individually better off. By decreasing the low-quality input price, the label acts as a subsidy and leads to an increase of the downstream market welfare. This analysis furthers our understanding of the economic consequences of labeling in cases like those of GMOs or restaurants.     

Collusive outcomes in price competition

In this paper we provide a sufficient condition for collusive outcomes in a single-shot game of simultaneous price choice in a homogeneous product market with symmetric firms and strictly convex costs. We also prove the counterintuitive result: if the second derivative of the cost function is nonincreasing in output, it is easier to sustain collusion when the number of firms increases.     

Pricing and price competition in consumer markets

This paper offers a simple model of the price mechanism in markets where buyers take prices as given and prices are set by sellers, as in most consumer markets. It explains price competition by arguing that a market price goes down if—and only if—a price cut appears profitable to a firm even if its competitors follow suit. It also explains why markets do not always clear, that is, why production can be restricted by sales and not capacity at prices set by firms.     

Bertrand price competition with differentiated commodities

This develops a general equilibrium, differentiated commodity version of Bertrand price competition. We study two, related market games in which buyers as well as sellers announce both quantities and prices. In the first game, buyers' strategies are artificially restricted. The Nash allocations of this game will be nearly competitive, provided that the commodities supplied by sellers are sufficiently similar. In the second game, the restriction on buyers' strategies is relaxed and a stronger solution criterion, called local perfection, is invoked. The locally perfect equilibria of the unrestricted game coincide the Nash equilibria of the restricted game.     

On price competition with complementary goods

We consider a duopoly industry with two separate firms each selling an indivisible product. The joint consumption of these goods has a specific value for the consumers which exceeds the mere addition of utilities when products are consumed in isolation: the higher this excess, the larger the complementarity between the goods. We analyse price equilibria in this market as related to the degree of complementarity existing between the two products.     

政治竞争与相互直接投资

This paper investigates a basic question about the international political economy—why is international trade not free? To answer this question, we modified Grossman and Helpman (1994) by considering that interest lobbies make political contributions to both the incumbent government and the political challenger in order to influence the incumbent government’s choice of trade policy. By examining the contribution schedules under a framework of bilateral direct investments, we find that the modified Ramsey rule still holds under our setting.     

Capacity precommitment,price competition and forward markets

The Cournot model can be seen as a reduced form of a more realistic model of capacity choice followed by price competition. We show that this is not the case if forward markets are added as their pro-competitive effects no longer hold.     

Repeated price competition between individuals and between teams

We conducted an experimental study of price competition in a duopolistic market. The market was operationalized as a repeated game between two “teams” with one, two, or three players in each team. We found that asking (and winning) prices were significantly higher in competition between individuals than in competition between two- or three-person teams. There were no general effects of team size, but prices increased with time when each team member was paid his or her own asking price and decreased when the team's profits were divided equally. This result is consistent with a simple model of individual learning.     

Domestic and international mixed models with price competition

This article examines domestic (respectively, international) mixed competition in which a state-owned welfare-maximizing public firm competes on price with a domestic (respectively, foreign) profit-maximizing private firm. The article presents and compares the equilibrium outcomes of the two mixed models.     

Relaxing competition through quality differentiation and price discrimination

In this paper, I compare two-part tariff competition to linear pricing in a vertically differentiated duopoly. Consumers have identical tastes for quality but differ in their preferences for quantity. The main finding is that quality differentiation occurs in equilibrium if and only if two-part tariffs are feasible. Furthermore, two-part tariff competition encourages entry, which in turn increases welfare. Nevertheless, two-part tariff competition decreases consumer surplus compared to linear pricing.