Corporate social responsibility,durable‐goods and firm profitability

Utilizing a two‐period durable‐goods framework, we show that in uncommitted sales markets a firm may earn higher profits as it increases its level of corporate social responsibility (CSR). We find that this occurs even though CSR has no direct impact other than increasing the durable‐goods firm's manufacturing costs. We show that in sales markets, CSR may allow the firm to credibly commit itself to lower production in the future. This, in turn, can enhance their profits even though the CSR activities are costly and provide no direct demand or marketing benefit in our model. This is important because it provides another, hereto unexplored, strategic rationale for the willingness of profit‐maximizing firms to undertake costly CSR activities. Copyright © 2010 John Wiley & Sons, Ltd.     

Exporting firms and retail internationalization: Evidence from France

This paper questions the impact of the globalization of the retail sector on the export activity of origin country agri‐food firms. We use an original firm‐level database of French agri‐food exports that identifies the domestic suppliers of French retailers through certification with the private International Featured Standard (IFS). The results show that IFS certified French firms are more likely to export and export larger volumes than noncertified firms to markets where French retailers have established outlets. We also show that when French retailers stop their activities in a market, certified firms reduce their exports to this market in the following years. The results are robust to the use of different sets of firm‐year‐ and country‐year‐specific controls and fixed effects, and are not affected by possible selection and endogeneity biases. The difference in the behavior of certified and noncertified exporting firms on markets where French retailers operate confirms the network effect that benefits retailers’ suppliers, which is lost when French retailers exit from the destination country.     

Customer‐oriented employees: Blessing or curse for firms?

I investigate whether the presence of customer‐oriented employees benefits firms in a competitive environment. Employees are defined as customer‐oriented if they are interested not only in their wage but also in the well‐being of their customers. I find that firms may obtain higher profits by hiring self‐interested rather than customer‐oriented employees. This is because the employees' customer orientation has opposing effects on the profits obtained by the firms. On the one hand, customer‐oriented employees provide a given level of quality for a lower wage. On the other hand, the employees' customer orientation increases competition reducing prices. If the second effect dominates, firms find themselves trapped in a prisoners' dilemma as the strategy of hiring self‐interested employees is strictly dominated by that of hiring customer‐oriented employees. Hence, the very presence of customer‐oriented employees may hurt firms. If motivated employees are merely interested in the quality of the good provided, the effect on the price outlined before disappears.     

Price Dispersion and Consumer Reservation Prices

We describe firm pricing when consumers follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields price dispersion in pure strategies even when firms have the same marginal costs. At the equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly price, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. The equilibrium pricing pattern is the same when prices are chosen sequentially.     

Firms,shareholders, and financial markets

We study the influence of the financial market on the decisions of firms in the real market. To that end, we present a model in which the shareholders’ portfolio selection of assets and the decisions of the publicly traded firms are integrated through the market process. Financial access alters the objective function of the firms, and the market interaction of shareholders substantially influences firms’ behavior in the real sector. After characterizing the unique equilibrium, we show that the financial sector integrates the preferences of all shareholders into the decisions for production and ownership structure. The participation from investors in the financial market also limits the firms’ ability to manipulate real prices, i.e., there is a loss of market power in the real sector. Note that, while the loss of market power changes expected profits, it is not detrimental to shareholders since the expected return of equity share depends on the variance (and not the mean) of profits. Indeed, any change in expected profits is absorbed by the financial price. We also show that financial access increases production, thereby altering the distribution of profits. In particular, financial access induces firms to take on more risk. Finally, financial access makes the relationship between risk-aversion and risk-taking ambiguous. For example, it is possible that an increase in risk-aversion leads to more risk-taking, i.e., the variance of real profits increases.     

Noncompete agreements,training, and wage competition

We study the effects of noncompete agreements in an environment where firms invest in training junior workers. After obtaining employer-provided training, trained workers can choose whether to remain loyal to their initial employer or switch to the competing employer. We evaluate the effects of noncompete agreements on wages, employment, investment in training, production, profits, and total welfare. Firms earn higher profits and pay lower average wage when they require workers to sign noncompete agreements.     

Loyalty Rewards Facilitate Tacit Collusion

Using a dynamic overlapping‐generations model, we show that loyalty rewards robustly facilitate tacit collusion. We compare the sustainability of tacit collusion when uniform prices are used, when loyal customers are rewarded without using commitment, and when loyalty rewards are implemented by committing to offering customers either lower fixed repeat‐purchase prices or fixed repeat‐purchase discounts. We find that, relative to uniform prices, rewarding loyalty without using commitment on the equilibrium path makes tacit collusion easier to sustain, because a deviating firm is unable to steal one period of industry profit before losing all future profits. When loyalty rewards are offered by firms committing to repeat‐purchase prices, collusion is even easier to sustain, because a deviating firm cannot renege on its discounted price for repeat‐purchase customers. When firms commit to repeat‐purchase discounts, they also commit to lowering the price for their repeat‐purchase customers if they undercut the regular price, rendering tacit collusion to be even more readily sustainable. Our results hold whether products are homogeneous or horizontally differentiated as in a Hotelling model.     

How does competition among lodging sharing platforms affect welfare and profits?

We investigate the likely effect on prices, consumer surplus, and profits of intensified competition among peer‐to‐peer lodging platforms. We find that intensified competition in the sharing economy may give rise to some surprising results. For instance, intensified competition may allow platforms to charge higher fees from peer suppliers and lead, therefore, to a decline in consumer surplus. Only if the market of professional hoteliers is highly competitive, intensified competition among platforms leads to the traditional outcome that the entry of more platforms leads to lower fees charged from consumers and to enhanced consumer surplus. We also find that platforms may actually earn higher profits when there is intensified competition among professional hoteliers. In addition, while intensified competition among professional hoteliers leads to a decline in the fees that platforms can charge customers, it may actually result in higher lodging prices. We explain these counterintuitive results by the dual role that the lodging price plays in affecting the welfare of individuals active in the sharing economy. While a higher price has an adverse effect on the welfare of demanders of lodging it benefits peer suppliers of lodging because a higher lodging price raises the compensation they receive when offering lodging capacity to a platform.     

External spillovers, internal spillovers and the geography of production and innovation

We consider a three-location duopoly model such that (i) firms choose production and innovation locations before (Bertrand) competition takes place and (ii) there are internal and external knowledge spillovers. We show: (1) agglomerations where firms earn negative profits may exist when there are both external and internal knowledge spillovers; (2) greater external spillovers do not necessarily favor agglomeration; (3) decreasing communication costs tend to favor agglomeration; (4) there are exactly two types of agglomeration equilibria: either both firms innovate in the agglomeration, or there is an innovator and an imitator; and (5) if there is a location where both firms produce, then innovation must take place in this location.     

Customer Privacy and Competition

We analyze how different degrees of privacy protection affect industry profits, consumer welfare, and total welfare in a model with switching costs. Firms earn higher profits under weak privacy protection compared with strong or no privacy protection. The relationship between the degree of privacy protection and equilibrium profits is not monotonic. Consumer surplus and total welfare increase with the degree of privacy protection unless firms recognize consumer‐specific switching costs. In that case, pricing conditional on switching costs has favorable implications for consumer surplus and total welfare.     

A Strategic Approach to Software Protection*

This paper demonstrates that there is a strategic reason why software firms have followed consumers' desire to drop software protection. We analyze software protection policies in a price-setting duopoly software industry selling differentiated software packages, where consumers' preference for particular software is affected by the number of other consumers who (legally or illegally) use the same software. Increasing network effects make software more attractive to consumers, thereby enabling firms to raise prices. However, it also generates a competitive effect resulting from feircer competition for market shares. We show that when network effects are strong, unprotecting is an equilibrium for a noncooperative industry.     

Consumer Cognition and Pricing in the Nines in Oligopolistic Markets

The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e., the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that are likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices. It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (nonstrict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the nines.     

Attention to Fairness versus Profits: The Determinants of Satisficing Pricing

We investigate determinants of the competitive behaviour of satisficing, non‐profit‐maximizing pricing. Taking a behavioural approach, we argue that pricing decisions are motivated by fairness objectives as well as the desire to achieve economic objectives. We draw from the attention‐based view to build our theoretical model explaining the contextual conditions that are most likely to be associated with attention to fairness relative to attention to achieving maximum profits when setting prices. Our hypothesized predictors of satisficing pricing decisions encompass the institutional context in which the firm is embedded, the exchange context with customers and suppliers, and the context internal to the firm. Hypotheses are tested with survey data of over 3000 firms from 15 countries. We find that the decision to set prices at a satisficing level is remarkably common, and its prevalence is associated with contextual factors that are consistent with greater attention to fairness concerns.     

Economics of total quality management

This paper presents two models of the economics of total quality management. In the first, the concept of quality management is viewed as a technological innovation that requires investment. To reduce cost and improve quality, firms must make investments that are largely sunk. The effect of market competition on quality related technology investments is studied. Several results follow. With new quality technologies, price falls, quality rises and average cost declines. Firms must anticipate rivals' technology choices and the market prices when justifying quality technology investments. When all firms quickly adopt quality technology, returns of such investments are normal, that is, have a zero net present value. However, firms that do not invest in quality related technology are forced from the market. A firm that is faced by competitors that are slow to adopt quality related technology, can earn positive returns by early adoption. The firm invests more in quality related technology, and produces higher quality products, charges a higher price and earns higher profits than competitors. The firm's quality, price and profit advantages persist over time. In the second model, we show that firm value increases when customer satisfaction is used as an objective by aligning incentives. This explains the common use of customer satisfaction measures in TQM programs.     

Competing Research Joint Ventures

Research and development (R&D) competition among firms has recently been extended to R&D competition involving research joint ventures. It was previously shown that in an industry conducting cost-reducing R&D followed by competition in the product market, if all firms both fully share R&D information and coordinate investments to maximize pint profits, final products prices are lower, and firms' profits are higher than with information shriving alone, joint profit maximization alone, or no cooperation. In this paper we question whether a single research joint venture (RJV) cartel is the best form of industry R&D coordination. We show that there are circumstances in which splitting a single RJV cartel into several competing ones yields lower product prices. Moreover, we show that in these circumstances, splitting the industry into exactly two competing RJV cartels would be best.     

Competition with Aftermarket Power When Consumers Are Heterogeneous

We study a model of competitive foremarkets and partly monopolized aftermarkets. We show that high aftermarket power prompts firms to engage in inefficiently aggressive below‐cost pricing in the foremarket. This inefficiency is driven by the presence of consumers with valuations below marginal cost. While for intermediate aftermarket power their presence leads to a competition‐softening effect, for high aftermarket power firms attract increasing numbers of unprofitable consumers by aggressively pricing below cost. For high aftermarket power, firms' equilibrium profits can therefore be decreasing in aftermarket power but are always higher than for low aftermarket power. If firms engage in price discrimination by bundling the foremarket and aftermarket goods or by reducing their aftermarket power, they avoid selling to unprofitable consumers but also reduce the competition‐softening effect. This decreases firms' equilibrium profits but increases consumer and social welfare.     

Price and quality competition with quality positions

In this study, we investigate price and quality decisions in a duopoly in the presence of firms’ quality positions , which are determined by the quality levels of their existing core products. Into a standard model of vertical differentiation, we incorporate a “repositioning cost” that is proportional to the quality differences between firms’ current and new products. By varying the levels of quality positions, we analyze the impact of this cost on the equilibrium outcomes. Our results show that the presence of repositioning costs restricts firms’ abilities to improve profitability and differentiate themselves vertically. As a result, a high‐positioned firm does not necessarily have a competitive advantage over a low‐positioned firm, even if the former offers a superior new product in equilibrium. In addition, if a low‐positioned firm is significantly cost‐efficient compared with its rival with regard to repositioning, then that firm can earn higher profits than those of a high‐positioned firm by strategically offering its low‐end product. These results contrast sharply with those based on the standard vertical differentiation model.     

Hassle Costs: The Achilles' Heel of Price-Matching Guarantees*

We show that price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs), we find that any increase in equilibrium prices due to firms' price-matching policies will be small; often, no price increase can be supported. In symmetric markets price-matching guarantees cannot support any rise in prices, even if hassle costs are arbitrarily small In asymmetric markets, higher prices can be supported, but the prices fall well short of maximizing joint profits. Our model can explain why some firms adopt price-matching guarantees while others do not.     

Herding versus Hotelling: Market Entry with Costly Information

Why do businesses such as fast‐food restaurants, coffee shops, and hotels cluster? In the classic analysis of Hotelling, firms cluster to attract consumers who have travel costs. We present an alternative model where firms cluster because one firm is free riding on another firm's information about market demand. One consequence of this free riding is that an informed firm might forego a market that it knows to be profitable. Furthermore, an uninformed firm might earn higher profits when research costs are high, because it can credibly commit to ignorance.     

The foreclosure discount: Myth or reality?

Foreclosed properties sell at lower prices than do nearby non-distressed properties. Of particular concern, is whether there is a “stigma” foreclosure discount whereby REO properties sell at lower prices simply because they have been involved in foreclosure proceedings. To the extent that such a discount exists, arbitrage opportunities exist and the associated market failure has significant policy implications. We examine the foreclosure discount from a different perspective than prior researchers by comparing holding period returns earned by purchasers of REOs with those earned by purchasers of similar non-distressed properties. Our results show that the majority of REO purchasers do not earn economically significant excess returns. On average, the implied market discount is less than typical transaction costs. We also find evidence that REO properties and buyers vary systematically from their counterparts in the non-distressed market segment and that REO attribute prices differ from those of non-distressed properties. Overall, our evidence suggests that the market for REOs operates efficiently: lenders are not irrationally dumping REO properties and REO investors are not reaping extraordinary profits.