Third-degree price discrimination,quality choice,and welfare

Employing an endogenous quality choice model, we reconsider the effect on welfare of monopolistic third-degree price discrimination. We prove that price discrimination always enhances welfare, mainly because the quality improvement owing to price discrimination increases consumer surplus. Moreover, we show that third-degree price discrimination benefits all parties, including consumers in the higher priced market if the preference differences between markets are sufficiently large.     

Third-Degree Price Discrimination in the Presence of Subsidies

Abstract. According to a classical result, a move from uniform pricing to third-degree price discrimination only improves welfare if total output increases. In this paper I show that the classical result fails in the presence of subsidies. This finding appears to be relevant for the pharmaceutical sector where a consumer pays a fraction of the actual drug price due to health insurance coverage.     

Complementing Cournot’s analysis of complements: unidirectional complementarity and mergers

We study the price and welfare effects of a merger of firms producing unidirectional complements: a firm is producing a product (called an optional good) that is valuable only if it is consumed with the other product (called a base good) produced by another firm. Under the assumption that there are two types of consumers: (i) those who consume one unit of the base good only or nothing (having zero valuation of the optional good), and (ii) those who consume one unit of the composite good or nothing, we show that a merger of the two firms raises the price of the base good, resulting in lower consumer surplus for the former consumer group, if and only if the average willingness to pay in the latter consumer group is sufficiently low. This result is in sharp contrast to Cournot’s (Researches into the mathematical principles of the theory of wealth, 1838) classical implication that a merger of firms producing strict complements makes all consumers strictly better off.     

Monopolistic third-degree price discrimination under vertical product differentiation

This paper shows in a vertical product differentiation model with variable costs of quality that monopolistic third-degree price discrimination always reduces welfare regardless of whether the quality is fixed or is endogenous. The results provide rich implications for antitrust policy.     

Corporate Social Responsibility Spillover and Competition Effects on the Food Industry

This paper examines the spillover and competition effects of corporate social responsibility (CSR) with duopoly competition. In employing the assumption that firm CSR increases consumer willingness to pay for the firm's products while consumer willingness to pay decreases for non‐CSR firm products, some interesting conclusions are achieved. First, CSR spillover effects increase CSR firm outputs and prices, while CSR spillover has the opposite effect on competitors. Second, CSR spillover decreases total outputs and total social welfare levels. Third, competition effects increase CSR expenditures, and CSR firms' CSR policies are the most robust when non‐CSR firms assume a leading position. It is found that total outputs and consumer utilities are highest when CSR firm acts as leader, while the relationships of social welfare among different cases are ambiguous depending on product substitution and spillover effects.     

Switching costs, consumer heterogeneity and price discrimination

In a duopoly with price discrimination and switching costs, we analyse the evolution of market structure, when an incumbent and a new entrant compete, and a new class of users with lower willingness to pay appears in the market. We find that the market share of the new entrant depends on the degree of heterogeneity and the level of switching costs. In particular, if the degree of heterogeneity is intermediate, the evolution of market structure is similar for high and null switching costs. Since consumer surplus and social welfare are unambiguously lower under high switching costs, this result points at the risk of inferring the degree of market competitiveness from the convergence in market shares.     

Product line pricing in a vertically differentiated oligopoly

Abstract This paper examines the joint pricing decision of products in a firm’s product line. When products are distinguished by a vertical characteristic, those with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is an additional price premium for products on the industry and/or the firm frontier, that is, for the products with the highest value of the characteristic in the market or in a firm’s product line. We also investigate the existence of price premia for lower‐ranked products and other product line pricing questions. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers, even after holding absolute quality constant. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). There is also evidence that a product’s price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm’s offerings constant), possibly as an attempt to reduce cannibalization. Finally, a product’s price declines with the time it is offered by a firm, suggesting intertemporal price discrimination.     

Quality upgrading in Ethiopian dairy value chains: dovetailing upstream and downstream perspectives

Abstract

In this article, we analyze opportunities and constraints for upgrading product quality in the dairy value chain in Ethiopia. Our analysis is based on an integrated understanding of supply chain performance both from producer and from consumer perspectives. We outline as main drivers for quality upgrading: (a) factors that influence producers’ willingness to invest toward intensification by smallholder dairy farmers and cooperatives and (b) factors that induce consumer’s willingness to pay for healthy and nutritious dairy products delivered at specific retail outlets. Since there are large gaps between upstream producers incentives and downstream consumers motives, possibilities for dairy quality upgrading remain fairly limited. Given this market structure, decisive policy support is required for better tailoring producer’s investments with consumer preferences.     

Third-degree price discrimination in a short-stay accommodation industry

This article analyses the pricing in the short-stay accommodation industry in Tasmania. It utilizes a novel 2008 survey of Tasmanian short-stay accommodation firms in which business managers were asked about their perception of the elasticity of their firm’s demand in each of the market segments that their firm supplied. This direct observation of elasticity allows us to demonstrate that firms’ price across market segments act in a manner consistent with the Lerner index and the theory of third-degree price discrimination. Further we show, in line with expectations based on the literature, that increased quality of the accommodation lowers the elasticity of demand, while the elasticity of demand is higher in winter. Surprisingly, Internet sales channels do not exhibit a different elasticity of demand to other sales channels.     

Segmenting the market: The monopolist's optimal product mix

In an industry producing products which differ in quality, to consumers who vary in their willingness to pay, it may happen that only a bounded number of producers can coexist at (noncooperative price) equilibrium; in other words, the industry is a natural oligopoly. We are here concerned with a special example, in which only one producer can survive. Our focus of interest in the present paper is to examine this monopolist's optimal product range. Depending on the dispersion of consumers' willingness to pay (income), either (i) the monopolist will find it optimal to segment the market completely, offering the maximum number of products permitted or (ii) the monopolist will offer only a single product. The precise nature of this switch of policy, which occurs at a certain critical distribution of consumer incomes (willingness to pay), is explored fully.     

Consumer attitudes toward low stake risk in food markets

Consistency of quality is viewed as important for producers of consumer goods. However, there is no literature testing the importance of quality consistency on consumers’ willingness to pay for consumer goods. We use an experimental auction market to investigate how inconsistency in tenderness affects consumers’ willingness to pay for beef. We find that most consumers are risk averse with respect to sensory quality. Both the average tenderness and the variance of tenderness affected the consumers’ willingness to pay for beef. Reducing the uncertainty of the sensory quality by categorizing the beef into three tenderness classes increased the total value of the beef by 8%.     

Behaviour-based price discrimination with cross-group externalities

Two platforms compete for heterogeneous firms and consumers. Platforms are allowed to discriminate prices on the consumers’ side according to their past purchase behaviour. The findings of the paper depend on two dimensions: the relative cross-side externalities and the consumer discounting relative to platform discounting. Price competition is strengthened in the poaching phase compared to the case where a uniform price is charged in both sides, whereas the early price competition is relaxed if firms exhibit weaker externalities than consumers and if the latter discount sufficiently the future. The overall effect on inter-temporal profits of platforms is negative, but consumers might be harmed by BBPD when they discount sufficiently the future. Finally, depending on consumers’ discounting, total welfare may increase or decrease going from the uniform pricing to the discriminatory pricing.     

Should Mobile Marketers Collect Data Other Than Geo‐Location?*

We take today's mobile marketing data landscape as a starting point and consider a duopoly model of third‐degree price discrimination in which firms can complement geo‐location information with data on consumer flexibility of varying quality. We show that, depending on consumer heterogeneity, higher‐quality flexibility data affect profits according to three different patterns. In equilibrium, both firms tend to acquire data if the data are of high quality, while only one acquires data if the data quality is low. Firms are likely to gain from additional data if consumers have similar preferences and/or when data are precise. Although social welfare (weakly) improves, consumers can be harmed.     

Consumer flexibility,data quality and location choice

We analyze firms’ location choices in a Hotelling model with two-dimensional consumer heterogeneity, along addresses and transport cost parameters (flexibility). Firms can price discriminate based on perfect data on consumer addresses and (possibly) imperfect data on consumer flexibility. We show that firms’ location choices depend on how strongly consumers differ in flexibility. Precisely, when consumers are relatively homogeneous, equilibrium locations are socially optimal regardless of the quality of customer flexibility data. However, when consumers are relatively differentiated, firms make socially optimal location choices only when customer flexibility data becomes perfect. These results are driven by the optimal strategy of a firm on its turf, monopolization or market-sharing, which in turn depends on consumer heterogeneity in flexibility. Our analysis is motivated by the availability of customer data, which allows firms to practice third-degree price discrimination based on both consumer characteristics relevant in spatial competition, addresses and transport cost parameters.     

Exporting to bypass weak institutions

Institutions have been shown to be important for trade and growth. In particular, weak institutions may reduce the returns to product quality, harming domestic welfare and making it attractive to export to countries with strong institutions where quality is better rewarded. We model this alternative story as to why the “good apples are shipped out” and explore whether exporting ameliorates the problems created by weak institutions. We find that, instead, because home prices do not reflect the marginal value of quality, access to developed markets can be welfare reducing. Specifically, there are always export prices such that total welfare (and not just consumer welfare) is harmed by exporting. Furthermore, if the domestic price equilibrates to the export price, then the marginal unit exported reduces total welfare. Exporting can even reduce producer surplus, leading to a contraction of the export industry; although, welfare can decrease even if production of the exported good increases. Thus, our results reinforce the importance of strengthening institutions to help the development of economies.     

Location choices and third‐degree spatial price discrimination

This paper studies how firms choose their product differentiation levels when they engage in third‐degree price discrimination in the following product market competition in a location‐price model. We show that firms will not choose to locate at the two endpoints if different consumer groups have similar sizes. Hence, the principle of maximum differentiation does not hold, resulting in a more intense product market price competition. Only if the size of one group of consumers is sufficiently larger than that of the other group, would firms make their products as differentiated as possible by choosing the two endpoints as their locations.     

动物福利认知与居民食品安全

农场动物福利不仅是伦理问题,还关乎食品安全。文章将农场动物福利纳入食品安全议题之内,考察了消费者的农场动物福利认知对其支付意愿及政策诉求的影响。研究表明,尽管当前我国消费者对农场动物福利认知还不充分,但仍有81.42%的消费者对农场动物福利存在一定的支付意愿,平均支付溢价达19.24%,消费者关于农场动物福利的认知对其农场动物福利支付意愿及政策诉求存在显著影响。这一结论表明,我国已存在通过市场激励手段或是政府规制手段改善农场动物福利,进而提升居民食品安全的基础条件。     

Price discrimination in Cournot–Nash oligopoly

The standard Cournot–Nash oligopoly model is extended to encompass price discrimination, where firms charge more than one price for the same product based on willingness to pay. In the linear, symmetric case, the average price is not dependent on the extent of price discrimination.     

A dynamic model of price discrimination and inventory management at the Fulton Fish Market

We estimate a dynamic profit-maximization model of a fish wholesaler who can observe consumer characteristics, set individual prices, and thus engage in third-degree price discrimination. Simulated prices and quantities from the model exhibit the key features observed in a set of high quality transaction-level data on fish sales collected at the Fulton Fish Market. The model's predictions are then compared to the case in which the wholesaler must post a single price to all retailers. We find the added revenue the wholesaler receives from price discriminating to be small.     

Can green consumerism replace environmental regulation?—a differentiated-products example

This paper assumes that consumers are willing to pay an extra premium for a good if it has a low impact on the environment. We examine if a little dose of such idealistic behavior has a large impact on the market equilibrium, and to what extent it can replace the environmental regulation. The analysis is carried out in a model with product differentiation, where consumers differ in their preferences for product quality. Consumers’ willingness to pay the environmental premium may be uniformly or non-uniformly distributed. Green consumerism will only be modestly influential in both cases, despite the fact that product differentiation leads to relaxed competition and increased profits, and thereby creates leverage.