Duopoly Pricing Under ‘Private Knowledge’ of Product Differentiation

This note studies price decisions in a duopoly industry where firms have private information over the degree of product differentiation (product-type). A Bayesian-Nash price solution is derived assuming firms maximize their ??certainty-equivalent?? profit levels. The comparative-statics indicate that increased risk aversion over the rival??s product triggers price competition. Consequently, the results of the study suggest revealing information is a higher reward strategy than concealing information in situations where rivals have asymmetric information over product type. These findings contribute to the industrial economic literature by generalizing the Bertrand equilibrium in an asymmetric information game model.     

Erratum to: Competitive price-matching guarantees under imperfect store availability

This paper analyzes the role of verification of product availability in the context of competitive price-matching guarantees (PMGs). PMGs involve a retailer matching any lower price offered by competition for an identical item. Until now, researchers focused on the scenario where customers can receive the lower price with a simple proof (e.g., weekly flyers). However, in reality, retailers reserve the right to verify the availability at the competitor location; if the product is not available there, then the price-match request might be declined. We develop a price competition model to investigate the effects of verification of availability on price decisions and profit levels of competing retailers. In our model, demand is driven by the availability levels of retailers as well as the price-search cost and store-switching cost incurred by customers. Price-search cost leads to two customer segments: uninformed ones who have no knowledge about prices, and informed ones who are knowledgeable about prices. On the other hand, store-switching cost determines how many customers search for the product at an alternative location because of high price or unavailability at their preferred retailers. Our analysis reveals, among others, that the outcome of availability verification is linked to three factors: price-search cost, store-switching cost, and the reservation prices of customer segments. Verification of availability allows retailers to price discriminate customers who could not be discriminated otherwise, specifically those belonging to the informed customer segment. Furthermore, it is a significant profit-enhancing mechanism only if there are switching customers in the market. Interestingly, even though customers view the verification of availability as a hassle, it can actually result in them paying lower retail prices by increasing the level of retail price competition.     

Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees

Retailers use both pricing and service strategies to respond to intensified competition. Here we develop a duopoly model to investigate the impact of the increasingly popular personalized pricing strategy (PPS) and the widely used Money Back Guarantee (MBG) customer returns policy. We consider two retailers who differ in customer satisfaction rates. Each retailer chooses a pricing strategy, PPS or uniform pricing, and a product return strategy, MBG or ‘no returns.’ We show that both PPS and MBG are dominant strategies, but their impact on retailers’ prices and profits are different; while PPS intensifies price competition and may lead to a prisoner’s dilemma in which both retailers may lose profit, MBG mitigates price competition and may result in a Pareto improvement in both retailers’ profits. Both PPS and MBG increase the size of the overall market, but not the total duopoly profit. The total customer surplus and social welfare may increase under either strategy. In addition, we obtain some interesting observations as to how our results may change if the product quality/customer satisfaction rate is endogenously chosen in the duopoly. Some of our findings are in contrast to related results reported in the literature.     

Competitive price-matching guarantees under imperfect store availability

This paper analyzes the role of verification of product availability in the context of competitive price-matching guarantees (PMGs). PMGs involve a retailer matching any lower price offered by competition for an identical item. Until now, researchers focused on the scenario where customers can receive the lower price with a simple proof (e.g., weekly flyers). However, in reality, retailers reserve the right to verify the availability at the competitor location; if the product is not available there, then the price-match request might be declined. We develop a price competition model to investigate the effects of verification of availability on price decisions and profit levels of competing retailers. In our model, demand is driven by the availability levels of retailers as well as the price-search cost and store-switching cost incurred by customers. Price-search cost leads to two customer segments: uninformed ones who have no knowledge about prices, and informed ones who are knowledgeable about prices. On the other hand, store-switching cost determines how many customers search for the product at an alternative location because of high price or unavailability at their preferred retailers. Our analysis reveals, among others, that the outcome of availability verification is linked to three factors: price-search cost, store-switching cost, and the reservation prices of customer segments. Verification of availability allows retailers to price discriminate customers who could not be discriminated otherwise, specifically those belonging to the informed customer segment. Furthermore, it is a significant profit-enhancing mechanism only if there are switching customers in the market. Interestingly, even though customers view the verification of availability as a hassle, it can actually result in them paying lower retail prices by increasing the level of retail price competition.     

Quantitative restrictions in international trade under monopoly

This paper discusses the implications of quantitative restrictions in international trade for the terms of trade, domestic price ratio and outputs in the presence of monopoly in the domestic import-competing industry in a general equilibrium model. It is shown that a change in quotas has the same effects on the terms of trade and domestic price ratio under monopoly as under competition. Furthermore, the price-output relationship associated with a change in quota under monopoly may become perverse even though the production possibilities frontier is assumed to be strictly concave to the origin. The paper also derives the optimal and revenue maximizing quotas. It is demostrated that under monopoly, unlike under competition, the optimal and revenue maximizing quotas cannot be ranked uniquely.     

空间竞争、房价收入比与房价

本文通过构建一个房地产市场空间竞争模型,分别就Cournot竞争和价格合谋情形,探讨了开发商的位置及其密度如何影响均衡开发量、房价和社会福利.本文的基本结论是:空间竞争决定了房价,而非房价收入比;市场决定的价格不一定为合理性价格;房价与市中心距离和开发商密度成反比;空间垄断是房价刚性的根本原因.因此,要将刚性房价降下来,政府一方面应将大项目拆分为小项目,促进竞争,另一方面应对空间垄断进行管制.     

The influence of demand factors on dynamic competitive pricing strategy: An empirical study

This empirical paper investigates the relationship between the dynamic strategic interactions among competitors in a component market and demand factors in the market for the end product. The structure of competition in the US microprocessor (MPU) industry is analyzed using data on prices and sales in both the MPU market as well as the market for personal computers. The pattern of dynamic strategic interaction between competing firms in this market on a key decision variable, price is studied. Non-nested model comparison tests based on equilibrium solutions derived for specific differential games are applied to identify the mode of competitive strategy between pairs of competing brands. The empirical fit to the longitudinal and cross-sectional data, of alternative models of competition, independent (Bertrand?CNash), Stackelberg leader?Cfollower, and Collusion, is used to determine which dynamic model best describes actual competitive behavior over the life of each MPU. Demand for the product market which is downstream from microprocessors, that for personal computers, is estimated using a generalized diffusion model with price effects. Data from the markets for desktop and laptop computers are analyzed at the level of computer vendor and internal microprocessor. Patterns are uncovered, linking downstream demand parameters with upstream competitive strategy. There is evidence to suggest that when there are strong diffusion effects driving sales of both the competing computer brands, there is a higher likelihood of Bertrand?CNash competition among MPU firms. However, when there are higher cross-price effects (substitutability) among personal computer brands there is a greater chance of Stackelberg leader?Cfollower price competition. When self-price effects are relatively high, the likelihood of Bertrand?CNash competition among MPU firms increases. Furthermore, when the potential demand for the computer product category is high, there is a higher likelihood of Bertrand?CNash pricing in the MPU market.     

基于损失函数的物流服务价格竞争模型

对完全信息静态博弈价格竞争模型和损失函数进行相关分析 ,得到两个第三方物流企业在不同的服务承诺下的价格竞争模型 ,为物流企业进行定价决策提供了依据。国内物流企业需要采取差异化的竞争战略 ,针对客户的不同需求 ,制定与竞争者不同的服务策略和价格策略     

Who should practice price discrimination using rebates in an asymmetric duopoly?

Price discrimination is generally thought to improve firm profits by allowing firms to extract more consumer surplus. In competition, however, price discrimination may also be costly to the firm because restrictive incentive compatibility conditions may allow the competing firm to gain market share at the discriminating firm’s expense. Therefore, with asymmetric competition, it may be the case that one firm would let the other firm assume the burden of price discrimination. We investigate optimal segmentation in a market with two asymmetric firms and two heterogeneous consumer segments that differ in the importance of price and product attributes. In particular, we investigate second-degree price discrimination under competition with explicit incentive compatibility constraints thus extending prior work in marketing and economics. Focusing on the managerial implications, we explore whether it would be profitable for either or both firms to pursue a segmentation strategy using rebates as a mechanism. We identify conditions under which one or both firms would want to pursue such segmentation. We find that segmentation lessens competition for the less price-sensitive consumer segment and that this results in higher profits to both firms. A key to understanding this result is that segmentation leads to consumer remixing. We establish the key result that if firms are asymmetric in their attractiveness to consumers, the disadvantaged firm in our model is more likely to pursue a segmentation strategy than its rival in equilibrium. We then ask whether this result prevails in practice. To this end, we explore competitive segmentation empirically and are able to verify that disadvantaged firms indeed pursue segmentation through rebates with greater likelihood.     

Pricing Internet access in the presence of user loyalty

Socio-economic aspects of future communication networks such as pricing models for network providers, network neutrality, and Quality of Experience (QoE) are becoming more and more important as the convergence of networks is in progress. All the above areas share a common interest: the deeper understanding of user behavior. In this paper, as a first step towards a more realistic user model, we investigate customer loyalty and its impact on the pricing competition of Internet Service Providers (ISPs) who sell Internet access to end-users. The main contribution of this paper is twofold. First, we analyze the impact of user loyalty with game-theoretical means motivated by the Bertrand game. We show how loyalty introduces a new equilibrium in a repeated game setting resulting in the cooperation of ISPs. Furthermore, we investigate the case of a differentiated customer population by introducing dual reservation values, and show how it leads to new, pure strategy Nash equilibria indicating that ISPs should make the most out of their respective loyal user base. Second, we construct two novel models for customer loyalty incorporating two important aspects of the users’ purchasing decisions: price sensitivity and inherent uncertainty. We evaluate the impact of user loyalty through these models by extensive simulations in a number of relevant scenarios. In particular, we show how the higher level of loyalty in the user population leads to larger profits for ISPs. We argue that our findings can motivate network researchers to incorporate a finer-grained user behavior model in their investigations on pricing models of network services and other socio-economic issues.     

Price-Increasing Competition on Two-Sided Markets with Homogeneous Platforms

We make a case for price-increasing competition on “competitive bottleneck” two-sided markets. We argue that demand interrelation might be sufficient to cause either no observable price effect of competition or price-increasing competition. Under price equality, total demand on both market sides in the duopoly market exceeds total demand in the monopoly market. Furthermore, even though there is no observable price effect, there is still a competitive effect that becomes manifest in total duopoly equilibrium profits being strictly smaller than monopoly profits. The relationship of total welfare is ambiguous in subsidization cases, while without subsidization, welfare is strictly greater in duopoly.     

Optimal retail sales strategies for old and new products in monopoly and horizontal competition scenarios

Advances in technology have made product updates more frequent and allowed consumers to choose different versions of the same product based on their preferences. It is crucial for retailers to understand how to formulate optimal sales strategies based on those different consumer preferences. To this end, we develop game models that consider the heterogeneity of consumer preferences under both monopoly and horizontal competition scenarios and perform the sensitivity analysis to examine the impact of consumer proportions and consumer preferences on retailers’ sales strategies. The results show that (i) regardless of competition or monopoly status, the original retailer can always maximize profit by setting prices based on the market share of traditional consumers, as long as the retailer sells both new and old versions of the product; (ii) the greater the competitive advantage of the competitor, the more advantageous the hybrid sales mode; (iii) if the price of the old product is below a certain threshold, there will be a positive profit for the original retailer when selling both the old and new products; and (iv) when consumer acceptance of competing retailers is lower, entering the retail market is not a good choice for competing retailers.     

Challenges of Existing in a Market as a Small,Low-quality Producer

This paper explores the strategy of a small firm entering a monopolist's market thereby creating a duopoly market. The small firm avoids competing with the larger, incumbent firm by producing a lower-quality product at a lower price. The model here establishes an equilibrium under a specific set of assumptions and examines how exogenous factors affect prices, qualities and profits. Although the strategy might allow the firm to enter and earn a profit, the market conditions may make this position much less desirable to that of the large firm for several reasons. In the case explored here where tastes for the product are uniformly distributed, the small firm's profit is about six percent of that of the larger firm. The smaller firm is more severely threatened by the entrance of a third firm. Furthermore, even if the smaller firm can cut costs, its position is not well suited for exploiting such increases in efficiencies.     

垄断对顾客购买行为的影响分析

顾客购买行为指顾客满意和顾客忠诚。在静态古诺模型中加入顾客忠诚度这个变量,分析了垄断对顾客忠诚度的影响,从数学的角度证明了垄断与顾客忠诚度负相关;同时提出了垄断系数,以刻画不同竞争环境,并构造了顾客忠诚度关于顾客满意度的函数,以此针对不同产品分析顾客忠诚度和顾客满意度之间的关系。     

Customer relationship management in competitive environments: The positive implications of a short-term focus

Researchers and business thought leaders have emphasized that firms must think and act with a long-term horizon when managing customer relationships. We demonstrate that, in contrast to this widely held view, profits in competitive environments may be maximized when firms ignore the future and instead maximize period-by-period profits from customers. Intuitively, while a long-term focus yields more loyal customers, it greatly increases short-term price competition to gain and keep customers. Consequently, overall firm profits and customer lifetime value may be lower when firms directly maximize multi-period profits from customers. Specifically, we analyze a model with segment-level pricing where firms in a duopoly can choose between period-by-period and multi-period profit maximization and demonstrate that, in many cases, a symmetric focus on period-by-period profit maximization emerges as the Pareto-dominant Nash equilibrium. We extend the model in two directions. First, we demonstrate that this superiority of the short-term focus endures even when a revenue expansion effect applies—that is, when customer loyalty leads to enhanced revenues. Second, we examine the case where customers are strategic and incorporate the long-term implications of their choices into their decision-making. Here we demonstrate that it may pay for firms to be myopic even when customers are strategic. The focus on multi-period surplus makes customers less price sensitive to price variations at the early stage of the game. Consequently, the focus on maximizing period-by-period profits enables the firms to charge higher upfront prices and leverage this lower price sensitivity into higher profits. Overall, our results highlight the paradox that, when it comes to managing customer relationships in competitive environments, a short-term focus may constitute the optimal long-term strategy.

Price Strategies and Compatibility in Digital Networks

We analyze competition between two horizontally differentiated network providers. New technologies help the providers to collect consumer‐specific information, and such technologies increase the providers’ ability to use price discrimination. One example is the mobile providers’ choice of investing into third generation mobile systems (3G). Compared to the current 2G systems (GSM), 3G gives the providers more accurate customer specific information (e.g. with respect to customers’ location at any time). Since new technologies give the opportunity to implement price discrimination, an interesting question is how the price strategies (price discrimination or not) affect the incentives to unilaterally establish a walled garden where the rival’s customers have imperfect access. The main message of the paper is that walled garden strategies are more likely when firms use price discrimination than when they all use linear pricing.     

Exchange‐rate Misalignments in Duopoly: The Case of Airbus and Boeing

We examine the effect of exchange‐rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar‐denominated prices while one of them, Airbus, incurs a large fraction of its costs in euro. We estimate price elasticities for big aircraft, and construct a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment and how this affects profit margins and volumes. We conclude that, due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange‐rate fluctuations on to customers. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning‐by‐doing, even a temporary departure of the exchange rate from its long‐run equilibrium level may have permanent effects on the industry.     

双寡头企业产量竞争的均衡质量安全水平研究——以受规制的食品企业为例

在双寡头企业产量竞争的基本模型基础上,考虑了政府规制水平的影响,分析了生产高、低质量安全水平的两个食品企业分别在古诺和斯塔克尔伯格博弈模型中的均衡质量水平及其相互关系,结果揭示了不同模型中两个企业的最优质量安全水平之间的关系及其均衡点。在斯塔克尔伯格模型中,以生产高质量安全水平产品的企业为产量领导者时,其产品质量安全水平、价格、产量和利润远高于追随企业;两个企业的均衡质量安全水平、价格和产量都随着政府相关部门规制水平的提高而上升。     

Retail Market Power in a Shopping Basket Model of Supermarket Competition

Supermarket retailers typically operate with relatively low margins, suggesting a highly competitive retail environment. However, despite the fact that consumers purchase an entire shopping basket at a time from supermarkets, this evidence is largely based on models of retail competition with single-category purchases. In this paper, we develop and test an empirical model of retail price competition that explicitly accounts for the effect of demand complementarity among items in consumer shopping baskets. Relative to the case where consumers purchase products with independent demands, we demonstrate that equilibrium prices are higher for all items when retailers take demand-complementarity into account. Our findings indicate that non-price strategies intended to encourage complementarity, such as co-merchandising, strategic shelf-positioning, or featuring complementary goods tend to soften price competition, and lead to higher equilibrium prices.     

食品安全问题：揭发或模仿的影响因素研究

食品质量难以被检测导致了食品安全问题频繁出现。为了解决这一问题,需要设计一种市场竞争环境,激励厂商揭发制造有毒食品的行为。通过数字例子对古诺竞争、斯坦克博格竞争、价格领导者竞争及差异化竞争等,厂商模仿或揭发激励相容条件的对比分析,得出产量竞争相对于价格竞争,在提高市场集中度时更能有效的提高食品安全。产品差异化水平较高时,价格竞争更有利于提高食品安全。需求弹性只有在价格竞争时才发挥作用。