Price Discrimination under Customer Recognition and Mergers

This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in behavior‐based price discrimination (BBPD). From a merger policy perspective, this paper's main contribution is twofold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price discriminate), but has no ex‐post effect on the outsider firm's profitability, thereby eliminating the so‐called (static) “free‐riding problem.” Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected. This then suggests that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.     

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.     

Nonlinear Pricing and Oligopoly

We consider the general problem of price discrimination with nonlinear pricing in an oligopoly setting where firms are spatially differentiated. We characterize the nature of optimal pricing schedules, which in turn depends importantly upon the type of private information the customer possesses–either horizontal uncertainty regarding brand preference or vertical uncertainty regarding quality preference. We show that as competition increases, the resulting quality distortions decrease, as well as price and quality dispersions. Additionally, we indicate conditions under which price discrimination may raise social welfare by increasing consumer surplus through encouraging greater entry.     

Coupons and price discrimination in vertically‐correlated markets

This research analyzes the non‐cooperative and cooperative strategies with respect to manufacturer and retailer coupons. In a model with one manufacturer selling its product to one retailer, it is found that the retailer can achieve third‐degree price discrimination equilibrium in retail markets by issuing coupons to demanders with higher elasticity. Although facing only one retailer, the manufacturer can also achieve the same third‐degree price discrimination equilibrium by issuing coupons directly to demanders of higher elasticity. However, when only one firm issues the coupon, both manufacturer and retailer coupons can help alleviate the channel profit loss due to double marginalization. If the manufacturer and the retailer non‐cooperatively issue coupons, then the subgame‐perfect Nash equilibrium outcomes are equivalent to those under the successive third‐degree price discrimination. Moreover, cooperative strategies between the manufacturer and the retailer can eliminate double marginalization, achieve the vertical integration effect, and lead to higher profits, consumer surpluses, and social surpluses than non‐cooperative coupon strategies. Copyright © 2004 John Wiley & Sons, Ltd.     

Apple's disaster: Linking two‐sided markets and strategic delegation

Asymmetric pricing structure and different intergroup network externalities are characteristics of two‐sided markets not captured in the analysis of one‐sided markets. Focusing on Cournot duopoly where membership decision may be delegated to a manager, several equilibrium regimes are sustained depending on the fixed cost of managerial hiring and strength of the network externality exerted by the side whose demand is more price sensitive. The change from null to full delegation sharpens the asymmetric pricing structure and reduces the price level in two‐sided markets. Contrary to one‐sided markets with direct network effects, the prisoner's dilemma holds for sufficiently strong indirect network externalities. Imperfect interside discrimination of managerial incentives ensures profit maximization and efficient consumers' allocation. Private hiring should occur when the two‐sided market exhibits symmetric pricing structure. An explanation for Apple's unprecedented event is provided. The reduction of revenue and managerial bonus in 2016 may be justified by the dissemination of full delegation in the Chinese information technology industry. Apple's upcoming strategy may consist on reducing both access prices, although the side whose demand is more price sensitive should have a greater price reduction. Alternatively, improving the content quality may constitute Apple's corporate strategy, thereby inducing a skimming pricing strategy on Chinese rivals.     

Behavior‐ and characteristic‐based price discrimination

We develop a model of behavior‐ and characteristic‐based discriminatory pricing where consumers are heterogeneous both in tastes and in price sensitivity. Each firm is able to distinguish between the consumers that have bought from it and those that have bought from the rival. Furthermore, each firm learns the price sensitivity of their own consumers. We show that using this additional information may yield higher profits than uniform pricing provided that consumers are heterogeneous enough with respect to price sensitivity. We also discuss consumer surplus implications of such behavior‐ and characteristic‐based price discrimination, and we show that the impact of price discrimination depends on both the consumer type and the level of consumers’ heterogeneity.     

Learning quality through prices and word‐of‐mouth communication

This paper studies the effect of word‐of‐mouth communication on the optimal pricing strategy for new experience goods. I consider a dynamic monopoly model with asymmetric information about product quality, in which consumers learn in equilibrium from both prices and other consumers. The main result is that word‐of‐mouth communication is essential for the existence of separating equilibria, wherein the high‐quality monopolist signals high quality through a low introductory price (lower than the monopoly price), and the low‐quality one charges the monopoly price. The intuition is simple: low prices are costly, and will only be used by firms confident enough that increased experimentation (and therefore communication among consumers) will yield good news about quality and increased future profits. Additional results are the following: for the high‐quality seller, the expected price (quantity) is increasing (decreasing) over time; whereas for the low‐quality one, the opposite is true. Moreover, signaling becomes more difficult when consumers pay less attention to their peers' reports and more attention to past prices. Finally, word‐of‐mouth communication improves consumer welfare.     

The sentiment pricing dynamics with short-term and long-term learning

Combining the behavioral characteristics of rational uninformed investors with learning information behavior of sentiment investors, this paper establishes a mathematical model about the impact of learning information behavior on the investor's transaction and asset equilibrium price under asymmetric information. Research shows that when rational uninformed investors learn information in the short term, on the one hand, they choose to bet against sentiment investors, thus reducing the influence of sentiment; on the other hand, they occasionally mistake sentiment for information to chase sentiment investors, then amplifying sentiment shocks. Furthermore, sentiment investors can also gain valuable information indirectly by observing the price in the long term. When sentiment investors learn information in the long term, the price fluctuations caused by sentiment and information, informativeness of the price system and market efficiency are no longer dependent on the quality of information.     

Locally stable price mechanisms

This paper develops necessary conditions for a price adjustment mechanism to achieve local stability at regular competitive equilibria. Two principal questions are: how closely must a locally stable mechanism be tailored to particular excess demand functions, and can any such mechanism be interpreted as a market adjustment process. In response to the first question, a variant of the (local) Newton method, termed the ‘orthogonal Newton method’ is shown to require, in a dimensional sense, the minimal information about excess demand functions. The second question is answered in the negative by proving the non-existence of any locally stable mechanism with the property that the price of any given commodity is not changed when its own market is in equilibrium. These and other results are obtained by using convergent price paths to generate a homotopy between the adjustment dictated by the mechanism and the actual direction of the equilibrium.     

基于信息不对称房价博弈模型的优化均衡研究

目前我国住宅市场存在严重的信息不对称,如何进行规制引起多方关注。首先利用房价博弈模型研究我国住宅市场信息不对称下的非理性均衡和精炼优化的序贯均衡,进而探求政府对市场房价经济优化规制后的理性序贯均衡,以此提出政府对住宅产业的规制方式和对策建议。     

Competitive market equilibrium under asymmetric information

This paper studies the existence of a competitive market equilibrium under asymmetric information. There are two agents involved in the trading of the risky assets: an “informed” trader and an “ordinary” trader. The market is competitive and the ordinary agent can infer the insider information from the price dynamics of the risky assets. The insider information is considered to be the total supply of the risky assets. The definition of market equilibrium is based on the law of supply-demand as described by a rational expectations equilibrium of the Grossman and Stiglitz (Am Econ Rev 70:393–408, 1980) model. We show that equilibrium can be attained by linear dynamics of an admissible price process of the risky assets for a given linear supply dynamics.      

Convergence to Walrasian equilibrium with minimal information

We consider convergence to Walrasian equilibrium in a situation where firms know only market price and their own cost function. We term this a situation of minimal information. We model the problem as a large population game of Cournot competition. The Nash equilibrium of this model is identical to the Walrasian equilibrium. We apply the best response (BR) dynamic as our main evolutionary model. This dynamic can be applied under minimal information as firms need to know only the market price and the their own cost to compute payoffs. We show that the BR dynamic converges globally to Nash equilibrium in an aggregative game like the Cournot model. Hence, it converges globally to the Walrasian equilibrium under minimal information. We extend the result to some other evolutionary dynamics using the method of potential games.

     

Equilibrium pricing and advertising strategies for nondurable experience products in a dynamic duopoly

The quality of many consumer nondurable goods or services is sufficiently complex or obscure that consumers cannot completely verify the true quality in a single usage. For such ‘experience’ products or services, the accumulated consumer consumption experience of a brand is an important determinant of its sales or market share. The market share of a brand is in turn directly influenced by its own and the competitive price and advertising strategies, given the different levels of quality (among other factors). In this paper, we investigate the impact of the aggregate consumption experience on the firm's dynamic pricing and advertising strategies by developing a formal game-theoretic model of a dynamic duopoly. The model of competition does not yield explicit closed-form expressions for the dynamic price and advertising paths of the two firms. Hence, we simulate the equilibrium paths using a discrete-time algorithm. Our simulation results provide interesting insights into the dynamic equilibrium price and advertising paths, under a variety of realistic competitive scenarios.     

An equilibrium model of insider trading in continuous time

We study a Bayesian–Nash equilibrium model of insider trading in continuous time. The supply of the risky asset is assumed to be stochastic. This supply can be interpreted as noise from nonrational traders (noise traders). A rational informed investor (the insider) has private information on the growth rate of the dividend flow rewarded by the risky asset. She is risk averse and maximizes her inter-temporal utility rate over an infinite time-horizon. The market is cleared by a risk neutral market maker who sets the price of the risky asset competitively as the conditional present value of future dividends, given the information supplied by the dividend history and the cumulative order flow. Due to the presence of noise traders, the market demand does not fully reveal the insider’s private information, which slowly becomes incorporated in prices. An interesting result of the paper is that a nonstandard linear filtering procedure gives an a priori form for the equilibrium strategy to be postulated. We show the existence of a stationary linear equilibrium where the insider acts strategically by taking advantage of the camouflage provided by the noise which affects the market maker’s estimates on private information. In this equilibrium, we find that the insider’s returns on the stock are uncorrelated over long periods of time. Finally, we show that the instantaneous variance of the price under asymmetric information lies between the instantaneous variance of the price under complete and incomplete information. The converse inequalities hold true for the unconditional variance of the price.     

Signaling in Takeover Auctions with Flexible Reserve Price

This paper develops a model of takeover auctions with a two‐step information acquisition process. It shows that the threat of extra information acquisition allows the existence of the signaling jump‐bidding equilibrium even when the seller is able to change its reserve price on the basis of the bidding history. The paper shows that although a higher cost of the secondary information leads to a higher expected price, the precision of the preliminary information has an ambiguous effect on the target's expected profit and that such an effect depends on the number of potential acquirers. Copyright © 2014 John Wiley & Sons, Ltd.     

Production quality and pricing strategy for substitutable products under comparison effects

Comparison effects have been studied extensively in many fields. In particular, existing operations management articles have discussed the impact of comparison effects on enterprises' production and pricing decisions. Research has also shown that consumers' purchasing decisions are primarily determined by three factors: product quality, selling price, and comparison effects. The current study introduces the concepts of social and temporal comparison effects to examine how comparison effects influence a monopolist’s production quality and pricing strategy for substitutable products. Results reveal the following: (1) Setting different prices for even two types of substitutable products with negligible quality differences can divide customers into three groups under the influence of social comparison effects in a single-stage model. (2) The monopolist should avoid using a price discrimination strategy in which products with a short market life cycle have the same quality but different prices. (3) When the market life cycle of products is sufficiently long in the single-product market and the market with two substitutable products, the monopolist’s optimal choice in the second stage is to keep production quality constant and increase the selling price. Consequently, the number of buyers does not decrease because of temporal comparison effects. Therefore, the firm increases its revenue. (4) For the market with two substitutable products with quality differences, one approximate optimal strategy for the enterprise in the second stage is to keep the selling price constant with the assumption that product quality cannot be adjusted after the first period. At this point, the consumption situation in the market is the same as that in the first stage. Therefore, when no external constraints exist, the monopolist firm can obtain more benefits in the second stage than in the first stage by exploiting the temporal comparison effects of consumers in the second stage. (5) When consumer identity information can be confirmed in the market, social comparison effects, similar to temporal comparison effects, could help the enterprise increase its price and profit while maintaining product quality. These social and temporal comparison effects constrain consumers. Thus, the number of people who continue to buy products does not decrease.     

A Study on the Indian Information Sector: An Experiment with Input-Output Techniques

It is widely recognized that rapid changes in information technology (IT) are bringing about major structural changes in the economies of the world. Information flexibility, product quality and fast response are the key factors for global competition and IT plays a critical role in these areas. Policy-makers in industrialized and developing countries view IT as a critical infrastructure to enhance their access to global knowledge, markets and capital. These views--of IT as infrastructure and as core capability for development--resonate with India's aspirations to modernize its infrastructure, transform its industry and join the global economy. Realizing the huge potential of the Indian IT industry, we make an attempt in this paper to study the extent of informatization in the Indian economy during the period 1983-84 to 1989-90 and try to identify the information intensive sectors. This paper also studies the sources of growth of the information sectors of India during 1983-84 to 1989-90 with the help of a structural decomposition analysis (SDA).     

Pricing Experience Goods: The Effects of Customer Recognition and Commitment

In a two‐period model of nondurable experience goods, we compare the profit and social welfare effects of behavior‐based price discrimination (BBPD) and price commitment (PC) (relative to time‐consistent pricing) in a monopoly. We find that when the static, full‐information monopoly price is higher (lower) than the mean consumer valuation, PC yields higher (lower) profits and social welfare than BBPD. We also identify the market conditions under which BBPD does not increase firm profits and provide an explanation as to when the firm should discriminate against its first‐time and repeat customers, respectively.     

IT project portfolio governance: The emerging operation manager

Today's information technology (IT) organizations are under pressure to meet or improve IT service levels for critical business functions. Various industry standards, such as the IT Infrastructure Library (ITIL) and the Control Objectives for Information and Related Technology (COBIT) standard, have gained wide acceptance as comprehensive methodologies for improving the effectiveness of IT management. The role of IT operations management is subsequently changing from a component orientation (such as networks, systems, storage, database, and applications) to managing business‐oriented, end‐to‐end IT services. This article presents a detailed analysis of available literature in order to identify the most appropriate competencies and necessary skill sets that will be needed by an operation manager for strategic business alignment.     

Coupon Advertising Under Imperfect Price Information*

This paper studies sales promotions through coupons in an oligopoly under imperfect price information. Sellers can distribute either ordinary coupons, or coupon (price) advertising, or both types of coupons, at distant locations to attract consumers from their rivals' markets. A unique symmetric pure-strategy equilibrium exists where rebates and couponing intensity are always positive. In the ordinary-coupon equilibrium, prices, promotional efforts, and sellers' profits are higher than in the coupon-advertising equilibrium. However, if sellers are allowed to distribute both types of coupons, only coupon advertising is sent out in equilibrium.