Quantity precommitment and price-matching

We study the effects of price-matching in a capacity-constrained duopoly setting. We show that no firm does worse at any pure equilibrium under price-matching relative to Bertrand, but as capacity increases, one or both firms do better relative to Bertrand. If the firms choose their capacities simultaneously before making pricing decisions, then the effect of price-matching varies with the cost of capacity. Specifically, when the cost is “high” price-matching either (i) has no effect on the market price, i.e., the market price associated with the pure SPEs is the Cournot one, or (ii) weakly decreases the market price relative to Cournot. Furthermore, when the cost is “low” price-matching leads to a set of (pure) SPE prices that includes the Cournot price in the interior. Therefore, price-matching does not necessarily benefit the firms when firms select their capacities before competing in price.     

Pricing strategy in the product and service market

Existing studies have mainly focused on pricing in either primary markets or aftermarkets. However, in practice, prices in primary markets and aftermarkets are closely correlated. This study examines the joint pricing strategy in both primary markets and aftermarkets based on customer utility and establishes a pricing model for profit-maximization firms. Our results show that overpricing in the aftermarket is caused by customer myopia, while the motivation of the firm to avoid customer myopia depends on its pricing strategy. A quantity–price contract in the aftermarket is designed to raise the firm’s profit.     

Personalized Pricing and Quality Customization

We embed the principal–agent model in a model of spatial differentiation with correlated consumer preferences to investigate the competitive implications of personalized pricing and quality allocation (PPQ), whereby duopoly firms charge different prices and offer different qualities to different consumers, based on their willingness to pay. Our model sheds light on the equilibrium product-line pricing and quality schedules offered by firms, given that none, one, or both firms implement PPQ. The adoption of PPQ has three effects in our model: it enables firms to extract higher rents from loyal customers, intensifies price competition for nonloyal customers, and eliminates cannibalization from customer self-selection. Contrary to prior literature on one-to-one marketing and price discrimination, we show that even symmetric firms can avoid the well-known Prisoner's Dilemma problem when they engage in personalized pricing and quality customization. When both firms have PPQ, consumer surplus is nonmonotonic in valuations such that some low-valuation consumers get higher surplus than high-valuation consumers. The adoption of PPQ can reduce information asymmetry, and therefore sellers offer higher-quality products after the adoption of PPQ. Overall, we find that while the simultaneous adoption of PPQ generally improves total social welfare and firm profits, it decreases total consumer surplus.     

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.     

Drivers of optimal prices in two-sided markets: the state of the art

In two-sided markets, a platform has two groups of customers and enables their interactions. Demand on one market side depends on demand on the other; therefore, when platforms set prices, they must consider this interdependency and set prices on both sides simultaneously. By surveying the vast theoretical marketing and economics literature, this article provides a clear and systematic overview of profit-maximizing pricing in two-sided markets. It identifies and structures the various drivers of those optimal prices. Using this framework, it summarizes the findings from prior research and offers an assessment of the state of the art with regard to drivers of optimal prices and their impacts on a platform’s price setting. This improves understanding of both the principles of two-sided markets and their optimal pricing. Finally, this state of the art paper suggests some directions for further research.     

How firms compete when they set identical prices: Nonprice strategies in the Indian biscuit industry

How do firms compete when all firms in an industry set identical prices? Using Nielsen data on India's biscuit manufacturers, we document productivity-based competition on nonprice strategies under industry-wide uniform pricing. Products with one standard deviation higher quantity-based productivity contain, on average, 13% more quantity per pack for the same price. Productivity also positively correlates with promotions on pack size, availability, and variety. A higher price (per pack size) sensitivity in rural markets combined with industry-wide uniform pricing imposes a greater burden on rural consumers. Additional analyses show that firms can reduce this burden by selling different pack sizes in urban and rural areas.     

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.     

Strategic Incentives for Keeping One Set of Books in International Transfer Pricing

We study the equilibrium accounting and transfer pricing policies in a multinational duopoly with price competition in the final product market. We find that the firms in a duopoly can benefit from strategically using the same transfer price for tax and managerial purposes instead of using separate transfer prices for both objectives. According to our results, the practice of one set of books should be the prevalent accounting method in markets with a small number of competitors and similar products.     

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.     

Pricing competition with inventory considerations in a hazard rate-prone market of durables

This paper addresses Bertrand-type pricing competition between two firms producing partially differentiated durables over a finite planning horizon. The demand for durables, characterized by increasing returns of scale to a price reduction, is led by the hazard rate. While the effect of inventories on pricing of non-durables is widely recognized, the management and marketing literature typically overlooks this effect in regard to horizontally competing firms for durables. In this paper we show that the pricing trajectory of durables may significantly alter when inventory dynamics are accounted for. In particular, the price may hike upwards before dropping; gradually grow; or even stay at the same level over the entire product life while it would only decline if inventories and related costs are disregarded. Furthermore, the well-known, optimal pricing strategy of following the pattern of sales does not necessarily confirm even for symmetric equilibria when the competing firms have either an inventory surplus or shortage.     

Choosing the Quality of the Fit between Complementary Products

In this paper, I examine how firms should position their complementary products. I assume that there are two competing firms, each producing two complementary products. Each firm decides whether to employ strategies that enhance the quality of the fit (the degree of complementarity) between its pair of complementary products before competing in prices. The consumers have heterogeneous tastes for the four possible bundles. They are willing to pay a price premium in order to purchase a bundle from the same firm if this firm chose to make such bundle more attractive. I find that increasing the degree of complementarity between a firm's complementary products intensifies price competition and often leads to smaller profits. Only when complementarity‐enhancing strategies significantly increase the demand for a firm's matching bundle, does the firm benefit from employing them. The highest profits for both firms are obtained when both firms do not employ complementarity‐enhancing strategies. Deteriorating the quality of the fit between one's own and a rival's complementary products is never profitable.     

Price dispersion and optimal price categories with limited memory consumers

In this paper, we study consumers with limited memory and examine the effects of their price categorization on the pricing strategies of competing firms. The valuations of consumers are assumed to be heterogeneous. We find that it is possible to observe price dispersion even when each firm charges a single price if the consumers categorize prices non‐optimally. Moreover, we demonstrate that the likelihood of a price dispersion outcome is reduced when consumers with limited memory set up the price categories optimally. These findings suggest that the consumers' limited memory and their sub‐optimal behavior, that is, their inability to choose price categories optimally can be a reason for observed price dispersion.     

Strategic Transfer Pricing and Social Welfare under Product Differentiation

In this paper, we investigate the social impacts of strategic transfer pricing by oligopoly firms, aiming to derive regulatory implications for transfer prices. A notable finding from our model is that the negative effects on social welfare of transfer prices being set above marginal cost are pronounced when either (1) the number of competing firms is large and the product is relatively highly differentiated or (2) the number of firms is small and the product is not very differentiated. This result indicates that even when the number of firms in the industry is significant and the market is thus apparently competitive, the authorities should not overlook the possibility that setting transfer prices above marginal cost might seriously damage social welfare if the product is highly differentiated.     

Intertemporal pricing and price discrimination: a semiparametric hedonic analysis of the personal computer market

We apply a smooth coefficient semiparametric model to a unique high‐frequency data set to examine the intertemporal pricing of personal computers. Furthermore, we test whether firms charge differential component prices for their top performance personal computers and whether premium firms charge both a premium for all their computers and a premium for their top performance ones. We find nonlinear effects in the pricing of personal computer components. We also find that firms in general do not charge differential prices for the components of their top performance computers. In addition, high‐quality firms charge higher premia only for their most advanced products. Copyright © 2006 John Wiley & Sons, Ltd.     

Customization with Vertically Differentiated Products

We consider a duopoly market with heterogeneous consumers. The firms initially produce vertically differentiated standard products located at the end points of the variety interval. Customization provides ideal varieties for consumers but has no effect on quality. The firms first choose whether to customize their products, then engage in price competition. We show that the low‐quality firm never customizes alone; customization becomes more likely as the difference between the firms’ qualities increases; and less likely as the fixed cost of customization increases. We extend the base model by relaxing two important assumptions—uniform pricing and exogenous quality. The main conclusions with uniform pricing continue to hold when price customization is allowed. In the second extension the firms’ qualities are endogenously determined. We show that the firms choose to be either substantially differentiated in quality or nondifferentiated.     

Pricing To Signal Product Line Quality

This paper offers a general characterization of the optimal product line prices for a monopolist whose quality of products is initially unknown to consumers. In the focal equilibrium, a monopolist signals a high-quality product line by pricing as if quality were known to be high, but costs of production were higher than they truly are. In a rich set of environments, this characterization implies that the prices of all products are initially distorted upward, with the price distortion being largest for products with the most inelastic demands and/or quality-sensitive production costs. These implications yield predictions for the time path of prices flint are broadly consistent with evidence from the marketing literature. The multidimensional signaling problem is made tractable by the satisfaction of a very simple and powerful single crossing property.     

Departures from marginal-cost pricing in the American automobile industry: Estimates for 1977–1978

How are prices set in the American automobile oligopoly? This paper seeks empirical estimates of the extent of departure from marginal-cost pricing and of the effects of foreign competition. The model estimated has product differentiation, multiproduct firms, and heterogeneity in consumer tastes. The estimation presumes that product type (proxied by engineering specifications) is exogenous to the price/quantity market equilibrium. Cross-section results for the 1977 and 1978 model years yield price-cost margins around 10%. Import competition has the effect of lowering equilibrium margins for compact and subcompact models.     

Strategic Invasion in Markets with Switching Costs

We investigate the role of consumer switching costs in a three-stage model in which the entrant and the incumbent firm set prices sequentially and then the consumers decide from which firm to buy. We characterize the unique subgame perfect equilibrium and find that even an entrant with a higher marginal cost may profitably invade part of the market due to the existence of switching costs. Switching costs benefit both firms but harm consumers. This model is used to understand pricing behavior in the US telecommunications industry.     

Collusive equilibria with switching costs: The effect of consumer concentration

I study the ability of two competing firms to set collusive prices in markets where consumers have switching costs. In consumer markets (with a small number of consumers), I find an antifolk result in which collusion, in the presence of switching costs, does not arise with patient firms. Patient firms compete aggressively and consumers expect a large utility. A collusive equilibrium is unstable because a deviating firm incorporates the future consumer utility in its deviating price. Also, consumers have a strategic impact so, with the prospects of large utility, they decide to switch to destabilize the firms' collusive agreement. These results do not eventuate in markets with a large number of consumers. In mass markets (a continuum of consumers), a single consumer lacks a strategic impact to destabilize a collusive agreement and a deviating firm cannot appropriate the consumer utility when deviating from collusion. Collusion, then, becomes straightforward to achieve. We show that for any number of consumers, switching costs make collusion easy to sustain.