Special offers and clustering under symmetric monopoly

A monopolist offerings variants on a Salop circle is analyzed with respect to his choice of product variants and prices. Although we assume a uniform distribution of tastes, the profit-maximizing pattern is not equidistant in variants and prices are not the same for all variants.Instead, under fairly general circumstances, there exists at least one cheap variant (special offer) around which the more expensive ones are clustered. This result depends on the assumption that the market size is not fixed as in most other models of this sort, but depends on prices in a straightforward manner.     

Monopoly Price Dispersion Under Demand Uncertainty

When a monopolist sets its price before its demand is known, then it may set more than one price and limit the availability of its output at lower prices. This article adds demand uncertainty and price rigidities to the standard model of monopoly pricing. When there are two states of demand and the ex post monopoly price is greater when demand is high then the monopolist's optimal ex ante pricing strategy is to set two prices and limit purchases at the lower price.     

Rational rationing and increasing returns an example

The paper gives an example of an economy where it is rational for a monopolist to control a competitive agent by setting both prices and quantities supplied. There are increasing returns in production, and the competitive agent has a discontinuous offer curve. The monopolist reaches points in the discontinuity by rationing.     

Commitment for storable goods under vertical integration

The role of commitment under monopoly for storable goods has been fully considered in many papers. In general, if the monopolist with storable goods cannot commit, the prices are higher than in the case in which the monopolist launches commitment. According to the discrete-time dynamic model, commitment for storable goods under vertically integrated structures is considered in this paper. The similar results to the monopoly are correspondingly obtained. Namely, the prices without commitment are also higher than that with commitment under vertical integration.     

RETAIL PRICE REGULATION AND THE OPTION TO DELAY

ABSTRACT ** :  This paper examines a two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we consider a monopolist who faces no downstream (final good) competition but is subject to retail price regulation. We identify the welfare-maximizing regulated prices when the unregulated market outcome is set as the benchmark. We show that if the regulator can commit to ex post regulation – that is, regulated prices that are contingent to future demand realization – then regulated prices that allow the firm to recover its total costs of production are welfare-maximizing. Thus, under ex post price regulation there is no need to compensate the regulated firm for the option to delay that it foregoes when investing today. We argue, however, that regulators cannot make this type of commitment and, therefore, price regulation is often ex ante – that is, regulated prices are not contingent to future demand. We show that the optimal ex ante regulation, and the extent to which regulated prices need to incorporate an option to delay, depend on the nature of demand uncertainty.     

From Segmented Markets to Integrated Markets: an Analysis of Economic Integration and Antidumping Legislation

The paper examines how a movement from segmented markets to integrated markets affects the volume of trade, consumer prices, profits and welfare in a monopoly model. The monopolist can initially discriminate consumer prices among markets with trade costs but has to take arbitrage into account as economic integration proceeds. The analysis provides interesting insights into economic integration and antidumping law. It is shown that the extent of arbitrage and the shape of the marginal cost curve play crucial roles. Surprisingly, it is possible that neither consumers nor the monopolist gains from economic integration, and that antidumping legislation benefits consumers at the expense of producers.     

Random Price Discrimination

When a monopolist randomly sorts customers, price discrimination “concavifies” the revenue function of the firm, so that it may be optimal for a monopolist to divide customers into groups that have the same demand function and charge them different prices. It is impossible to rule out this type of result whenever the revenue function is somewhere convex in the “economically relevant” set of quantities, because there always exists a non-decreasing cost function that leads to that conclusion. It is also impossible to rule out the case where, with respect to monopoly, the firm raises or lowers price to all classes and, accordingly, the case where the social welfare decreases or increases. Received December 13, 2001; revised version received June 3, 2002 Published online: February 17, 2003 I am indebted to Carlo Beretta, Giuseppe Colangelo, Umberto Galmarini, Guido Merzoni, Gerd Weinrich and especially to Carla Peri for helpful discussions and comments. I have also benefited from insightful suggestions of three anonymous referees. Finally, I wish to thank participants to seminars at the Catholic University of Milan and University of Bologna. The usual disclaimer applies. Funds from MIUR are gratefully acknowledged.     

Using Market Structure to Regulate a Vertically Integrated Monopolist

A natural monopolist whose cost is private information produces a good which is combined with another good that can be produced by the monopolist or by other firms. The agency that regulates the monopolist can impose any of several different market structures in the industry: integrated monopoly, vertical separation with free entry downstream, or liberalization downstream (both integrated and independent production). When several firms produce downstream, a Cournot quantity-setting game with free entry determines the market price. We derive the optimal contracts to offer the monopolist under all three market structures and examine the influence of downstream cost differences on access prices.We then study the optimal regulatory policy where the regulator can condition the downstream market structure on the monopolist's cost report to the regulator. The optimal regulatory policy awards a monopoly to a low-cost upstream firm, but requires free entry downstream if the monopolist reports high upstream costs. Thus, the choice of market structure is an additional tool to limit rent extraction by the monopolist. Simulation analysis reveals the possibility of significant welfare gains from this additional regulatory tool.     

Quality uncertainty and time inconsistency in a durable good market

In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, I show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repeat purchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, I characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. I also show that the presence of quality uncertainty can lead to no trading in the primary good market. Further, in contrast to the literature on the Coase conjecture, inability to precommit to future prices can reduce social welfare as a result of the market closure.     

A note on monopolistic quantity rationing

It is shown that under incomplete information it may be optimal for a monopolist to ration a single price taker in addition to setting prices, which is in contrast to the case of complete information. As a byproduct it is shown that the star-shaped hull of the offer curve of a price taker exactly consists of the points that can be supported as Drèze-optima.     

Upstream mergers,downstream mergers,and secret vertical contracts

In an industry characterized by secret vertical contracts, we consider a benchmark case where two vertical chains exist, with two upstream manufacturers selling to two downstream retailers, and show that the equilibrium prices are independent of whether upstream or downstream firms have all the bargaining power. We then analyse two alternative mergers, and show that a downstream merger (which gives the downstream monopolist all the bargaining power) is more welfare detrimental than an upstream merger (which gives the bargaining power to the upstream monopolist). We also show that downstream and upstream mergers have the same effects when contracts are observable.     

The company you keep: Qualitative uncertainty in providing a club good

Clubs are typically experience goods. Potential members cannot ascertain precisely beforehand their quality (dependent endogenously on the club's facility investment and number of users, itself dependent on its prices). Members with unsatisfactory initial experiences discontinue visits. We show that a monopoly profit maximizer never offers a free trial period for such goods. For quality functions homogeneous of degree of at least minus one, a welfare maximizer, motivated by distributional concerns to mitigate disappointed consumers' losses, always does. We demonstrate the robustness of this finding by showing that (i) without qualitative uncertainty (thus, no disappointed customers), neither welfarist nor monopolist offers free trials; and (ii) if the planner pursues an objective mixing welfare maximization with profit maximization, the likelihood of free trials increases with the weight put on welfare maximization. Regarding club quality and usage, the monopolist provides a socially excessive level of quality to repeat buyers when the quality function is homogeneous of degree zero. With nonhomogeneous quality functions, the monopolist permits too little club usage; quality may or may not be socially excessive.     

Capacity Choice Counters the Coase Conjecture

The Coase conjecture (1972) is the proposition that a durable-goods monopolist, who sells over time and can quickly reduce prices as sales are made, will price at marginal cost. We show that an arbitrarily small deviation from Coase's assumptions—a deviation that applies in almost any practical application—results in the failure of that conjecture. In particular, we examine that conjecture in a model where there is a vanishingly small cost for production (or sales) capacity, and the seller may augment capacity in every period. In the "gap case", any positive capacity cost ensures that in the limit, as the size of the gap and the time between sales periods shrink, the monopolist obtains profits identical to those that would prevail when she could commit ex ante to a fixed capacity. Those profits are at least 29·8% of the full static monopoly optimum.     

Tacit Collusion and Non–uniform Prices

This article examines the possibility of building a tacit agreement between price–setters that yields non–uniform pricing. It is shown that firms with market power may restrict competition not only by alternating between periods of high prices and low prices (Green and Porter (1984), Rotemberg and Saloner (1986)), but also by always charging different prices and taking turns in being the monopolist. In contrast with the existing literature, price variability is not due to imperfect monitoring, stochastic demand or short–run pricing rigidity but it is a pure supply side effect. The author provides the necessary conditions to have collusion with non–uniform pricing, and shows that the latter dominates a fixed price solution. In terms of competition policy this result confirms that no price parallelism is not, per se , a signal of no collusion.     

Pricing behavior of the budget-constrained public enterprise

By assuming that a budget-constrained multiproduct public enterprise chooses prices with the goal of maximizing its budget, its revenue or its output, specific pricing rules can be derived. Rather than overstating demand elasticities and then pricing like a monopolist, as a budget-constrained welfare-maximizing firm would do, the enterprise pursuing one of these alternative goals is shown to understate marginal cost and then price like a monopolist. Non-optimal price discrimination and even cross subsidization may result. The outcome tends to be more perverse when statutory entry barriers protect some markets of the enterprise. In its pricing, the U.S. Postal Service has shown some of the signs of such other-than-welfare-maximizing pricing behavior.     

Natural monopoly and differential pricing

Under uniform pricing a monopolist cannot make a positive profit in equilibrium. I analyze how differential pricing can be exploited by a natural monopolist to deter entry when entry is costless. In a two-stage game with price competition before quantity competition I show that the incumbent firm can deter entry and make a positive profit in equilibrium. The incumbent sets two different prices, the low price to deter entry and the high price to generate profit. Entry is not possible because of scale effects. If dumping is allowed for all firms no positive profits are realizable, but welfare is reduced. I show that for some parameter values the incumbent is forced to engage in a stunt (i.e., set a negative low price) to keep entrants out.     

Consumer‐benefiting exclusive territories

Abstract.  I investigate the effect of exclusive territories, which are typical vertical controls imposed by upstream firms. Using shipping spatial models, I consider an industry that consists of many independent local markets. An upstream monopolist restricts competition between downstream firms using exclusive territories. I find that exclusive territories reduce the prices of final products in all local markets in quantity‐setting competition. In price‐setting competition, they raise prices in half the local markets, reduce them in other markets, and also reduce the total consumer surplus. JEL classification: L42, R32     

Front-running dynamics

We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131-152] establish an irrelevance result—expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105-124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.     

Mixed linear-nonlinear pricing with bundling

The practice of setting marginal prices below marginal costs is so common in telecommunications offerings that it can justifiably be labeled a stylized fact. In this paper, we present a stylized model that establishes conditions under which this practice is economically efficient and profit-maximizing. A multiproduct monopolist who sells some of his goods according to a nonlinear price schedule, while selling the remaining goods at linear prices, is said to use a mixed price structure. We develop a simple model to characterize welfare- and profit-maximizing mixed prices. It is shown that standard results obtained separately for linear and nonlinear prices do not hold when mixed prices are used. In particular, the marginal price facing the largest buyer can be above or below marginal cost. The result is shown to depend on whether the goods are substitutes or complements. Implications of these results for telecommunications prices are derived, and the intuition underlying our stylized fact is developed.     

OPEC and the monopoly price of world oil

The paper presents a dynamic model of the behavior of OPEC viewed as a monopolist sharing the oil market with a competitive sector. The main conclusion is that the recent increase in the price of oil was a once and for all phenomenon due to the formation of the cartel and that prices should remain approximately constant during the next twenty years.