Price Discrimination in Two‐Sided Markets

We examine the profitability and welfare implications of targeted price discrimination (PD) in two‐sided markets. First, we show that equilibrium discriminatory prices exhibit novel features relative to discriminatory prices in one‐sided models and uniform prices in two‐sided models. Second, we compare the profitability of perfect PD, relative to uniform prices in a two‐sided market. The conventional wisdom from one‐sided horizontally differentiated markets is that PD hurts the firms and benefits consumers, prisoners' dilemma. We show that PD, in a two‐sided market, may actually soften the competition. Our results suggest that the conventional advice that PD is good for competition based on one‐sided markets may not carry over to two‐sided markets.     

A Semi‐Parametric Analysis of Two‐Sided Markets: An Application to the Local Daily Newspapers in the USA

This paper considers an empirical semiparametric model for two‐sided markets. Contrary to existing empirical literature on two‐sided markets, we specify network effects and probability distribution functions of net benefits of the two sides nonparametrically. We then estimate the model by nonparametric instrumental variables regression for local daily newspapers from the USA. We show that semiparametric specification is supported by the data and the network effects are neither linear nor monotonic. With a numerical illustration we demonstrate that the mark‐up of the newspaper on each side changes drastically with the nonlinearly specified network effects from the case with linear network effects. Copyright © 2015 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.     

Platform market competition with endogenous side decisions

This paper develops a framework to analyze platform competition in two‐sided markets in which agents endogenously decide on which side of a platform to join. We characterize the equilibrium pricing structure and perform a comparative statics analysis on how the distribution of agents’ preferences affects the platforms’ profits. We also show that the market equilibrium under profit‐maximizing platforms leads to the first best social surplus, which illustrates the importance of the price mechanism to induce more balanced participation across the two sides. This framework can be applied to analyze market competition for “rental” or “sharing” platforms. In addition, we extend our analysis to consider an initial investment stage, which makes participants the owner of some durable goods to rent out.     

Indivisibilities and development timing the shopping-center problem

The subject of this paper is the timing and efficiency of development decisions in urban or regional markets for establishments like shopping centers, hotels, and commercial office buildings where indivisibilities are important. It presents a model of the land development process that incorporates indivisibilities. A non-optimality theorem is proved to confirm that market-controlled development timing is not optimal, and that sometimes the market undersupplies indivisible establishments once a terminal state is reached. Further, during the period of development the market may oversupply establishments for intervals of time. In contrast to static analysis, indivisibilities do not allow developers to earn positive profits. These are competed away by foresighted, sequential development timing.     

The importance of consumer multihoming (joint purchases) for market performance: Mergers and entry in media markets

Consumer “multihoming” (watching two TV channels, or buying two news magazines) has surprisingly important effects on market equilibrium and performance in (two‐sided) media markets. We show this by introducing consumer multihoming and advertising finance into the classic circle model of product differentiation. When consumers multihome (attend more than one platform), media platforms can charge only incremental value prices to advertisers. Entry or merger leaves consumer prices unchanged under consumer multihoming, but leaves advertiser prices unchanged under single‐homing: Multihoming flips the side of the market on which platforms compete. In contrast to standard circle results, equilibrium product variety can be insufficient under multihoming.     

Competition Among Health Plans: A Two‐Sided Market Approach

We set up a two‐sided market framework to model competition between a Prefered Provider Organization (PPO) and a Health Maintenance Organization (HMO). Both health plans compete to attract policyholders on one side and providers on the other. The PPO, which is characterized by a higher diversity of providers, attracts riskier policyholders. Our two‐sided framework allows us to examine the consequences of this risk segmentation on the providers' side, especially in terms of remuneration. The outcome of the competition depends mainly on two effects: a demand effect, influenced by the value put by policyholders on the providers access and an adverse selection effect, captured by the characteristics of the health risk distribution. If the adverse selection effect is too strong, the HMO receives a higher profit in equilibrium. On the contrary, if the demand effect dominates, the PPO profit is higher in spite of the unfavorable risk segmentation. We believe that by highlighting the two‐sided market structure of the health plans' competition, our model provides a new insight to understand the increase in the PPOs' market share as observed in the USA during the last decade.     

Provision and price of child care services: For-profits and nonprofits

We study the market for child care services, with a special focus on examining competition between for- and nonprofits. We estimate a two-stage oligopoly model of product differentiation. The first stage estimates a model of endogenous market structure and the second stage corrects for market structure to examine the prices charged and capacity choices for child care centers. We find that the actions of “same-type” providers have a statistically significant impact on a provider’s entry and pricing decisions but we fail to find evidence that the actions of “other types” have a significant impact. Nonprofit child care providers and Head Start centers do not appear to crowd out for-profit providers. Further, we find that for-profits and nonprofits respond differently to market characteristics generating spatial differences in the types of center available in a market. Our data suggest that for-profits are more likely to enter markets with higher percentages of economically disadvantaged students, but they primarily serve those who work, rather than live, in the market. The prevalence of disadvantaged students does not impact the entry decision of nonprofits leaving disadvantaged areas with relatively fewer non-profit options to serve residents. Policies to encourage for-profit daycare would likely lead centers to locate in markets where they can provide service for workers, whereas a policy to encourage nonprofit entry might be more effective in providing low cost care for nearby residents.     

A Respecified Fama French Three‐Factor Model for the New European Union Member States

This study uses factor models to explain stock market returns in the Eastern European (EE) countries that joined the European Union (EU) in 2004. In line with other studies, we find that the market value of equity component in the Fama French (1993) three‐factor model performs poorly when applied to our emerging markets dataset. We propose a significant amendment to the standard three‐factor model by replacing the market value of equity factor with a term that proxies for accounting manipulation. We show that our three‐factor model is able to explain returns in the EE EU nations significantly better than the Fama French (1993) three‐factor model, hereby offering an alternative model for use in the numerous markets in which previous studies have found little correlation between market value of equity and equity returns.     

The Foundations of International Business: Cross‐Border Investment Activity and the Balance between Market‐Power and Efficiency Effects

The foundational international business (IB) scholarship grappled with whether multinational enterprises (MNEs) are largely efficiency‐enhancing or market‐power inducing institutions. Contemporary scholarship, however, often associates foreign direct investment (FDI) with efficiency‐enhancing properties and thus neglects the market‐power interpretation of the MNE. Such an imbalance is problematic given that the theoretical and empirical justifications behind the field's embrace of the efficiency interpretation are not fully evident. Instead, both efficiency and market‐power effects are seemingly present in cross‐border investment activity. Based on a comprehensive sample of up to 4,361 cross‐border investments materializing between 1986 and 2010, we present theoretically‐grounded hypotheses with regard to when market‐power effects will tend to dominate efficiency effects. We find that cross‐border investments undertaken by emerging‐market MNEs in both developed and emerging markets tend to involve substantial efficiency effects and minimal market‐power effects when compared with the cross‐border investments undertaken by developed‐country MNEs in both developed and emerging markets.     

Great Places to Work®: Resilience in Times of Crisis

We study the resilience of the “100 Best Companies to Work for in America” in times of financial crisis by analyzing their long‐term financial performance. Apart from implementing methods that tackle the statistical problems of stock returns, we use a conditional model to measure financial performance in periods of market growth (bull markets) and market downturn (bear markets). We find that best places to work are indeed resilient in times of crisis since neither their financial performance nor their systematic risk are affected during bear markets: top companies continue to outperform the market during periods of crisis, and the performance of lower‐ranked great workplaces does not deteriorate. Moreover, we find that previous studies were overestimating performance, and only great workplaces on the top half of the rankings exhibit positive excessive returns. © 2015 Wiley Periodicals, Inc.     

Spatial competition between shopping centers

We study competition between two shopping centers that sell the same set of goods and are located at the extremes of a linear city, without restricting consumers to make all their purchases at a single place. In the case of competition between a shopping mall (set of independent single-product shops) and a department store (single multiproduct shop), we find that: if the number of goods is low, all consumers shop at a single place; if it is moderately high, some consumers travel to both shopping centers to buy each good where it is cheaper (a single good is cheaper at the shopping mall). The shops at the mall, taken together, obtain a lower profit than the department store. Nevertheless, two shopping malls should be expected to appear endogenously.     

Chain-Store Pricing Across Local Markets

Chain‐stores now dominate most areas of retailing. While retailers may operate nationally or even internationally, the markets they compete in are largely local. How should they best operate pricing policy in respect of the different markets served—price uniformly across the local markets or on a local basis according to market conditions? We model this by allowing local market differences, with retail markets differing by their size and the number of players present. We show that practising price discrimination is not always best for a chain‐store. Competitive conditions exist under which uniform pricing can raise profits.     

Structural Analysis of Electricity Demand and Supply Interactions*

We specify a structural asymmetric vector error‐correction model to identify and estimate the demand and supply functions in hourly day‐ahead wholesale electricity markets. In doing so, we provide, inter alia, new insights into a well‐established but unresolved issue concerning the extent of the demand elasticity to price in these markets. We show that whilst demand appears to be inelastic in the short‐run, the quantity traded on the market is significantly influenced by the price level and responds to previous disequilibria in the supply curve through an asymmetric error‐correction mechanism, reacting to a positive disequilibrium but not to a negative one.     

Squeezing the Last Drop Out of Your Suppliers: An Empirical Study of Market‐Based Purchasing Policies for Generic Pharmaceuticals

We study the effect of the degree of exclusivity for the lowest bidder on the average price of generic pharmaceuticals in the short and long terms. Our results indicate that a 1‐percentage‐point gain in market share of the lowest bidder reduces average costs by 0.2% in the short term and 0.8% in the long term, but also reduces the number of firms by 1%. We find that reducing the number of firms has a strong positive (and hence counteracting) effect on average prices, a 1% reduction raising prices by approximately 1%.     

On moral hazard and nonexclusive contracts

We study an economy where intermediaries compete over contracts in a nonexclusive insurance market affected by moral hazard. In this context, we show that, contrarily to what is commonly believed, market equilibria may fail to be efficient even if the planner is not allowed to enforce exclusivity of trades (third best inefficiency). Our setting is the same as that of Bisin and Guaitoli [Bisin, A., Guaitoli, D., 2004. Moral hazard with nonexclusive contracts. Rand Journal of Economics 2, 306–328]. We hence argue that some of the equilibrium conditions they imposed are not necessary, and we exhibit a set of equilibrium allocations which fail to satisfy them.     

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.     

Rivalry information acquisition and disclosure

In the recent past, there have been numerous scandals around poor product qualities in various industries. Although it can be easily rationalized why bad practices have not been reported by the inflictors themselves, it is more difficult to understand why the non‐inflicting competitors did not report their rivals' acts. In this paper, we study these competitors' incentives to acquire and to disclose information on the quality of their rivals' products and question when we can leave the information disclosure process to the competitive pressure of markets and when there is a need for governmental intervention. We find that low quality levels can be disclosed in markets that exhibit negative spill‐over effects, but should not be expected to be disclosed in markets that exhibit a positive spill‐over effect. A regulatory policy on quality testing and disclosure may be more effective in the latter type of market.     

Earnings Management and the Accrual Anomaly: Evidence from China

Using the unique Chinese setting in which the “delisting regulation” is based on accounting numbers, we separate earnings management into (1) earnings management responding to regulation and (2) earnings management prompted by market pressures and further document that earnings management responding to market pressures produces the accrual anomaly (Sloan, 1996) and earnings management responding to regulation does not. Initially unable to detect the accrual anomaly in China's stock market, we were reluctant to conclude that China's market is more efficient than that in the United States. After observing a disproportionate number of “big‐bath” loss firm‐years in the lowest decile of accruals for our sample, we estimated the apparent earnings distortion induced by the delisting regulation. When we excluded this distortion from our analysis, we documented the presence of the accrual anomaly in China's stock market. We conclude that the delisting regulation creates an artificial distribution of firm earnings in China that affects the market pricing of accruals and masks the accrual anomaly. The results have implications for policy makers and regulators in general, and those in emerging markets in particular.