Search, common knowledge, and competition

This paper analyzes the effects of buyer search costs and seller private and common knowledge on seller competition. It shows that lack of common knowledge results in the equilibrium price continuously decreasing to the perfectly competitive one as buyer search costs for price decrease from positive for all buyers to zero for all buyers, even if each market agent's uncertainty (in the private knowledge) is small. At the same time, if the uncertainty of each seller about buyer valuations is small, the effects of a small change in the search costs or of information structure on pricing may be large (but continuous).     

Communication strategy in partnership selection

This paper explores the communication and choice strategies of economic agents deciding on a partnership, where agents are uncertain about their payoffs, and payoffs of each agent depend on and are partly known to the potential partner. Business examples of such decisions include mergers, acquisitions, distribution channel partners, as well as manufacturing and brand alliances. Dating and marriage partner selection are also natural examples of this game. The paper shows that (a) when communication is informative, the communication strategy as a function of the expected payoff of the partnership involves pretending fit when expected payoff is high, pretending misfit when expected payoff is low, and telling the truth in the intermediate range, and (b) the condition for informativeness of communication is that the distribution of payoffs has thin tails. Furthermore, the paper shows that the possibility of communication, even when this communication is not restricted to be truthful, can decrease the expected payoff for both the sender and the receiver; in particular, it can decrease the expected social welfare.

Free in-network pricing as an entry-deterrence strategy

This paper analyzes the entry-deterring power of free in-network pricing with multiple incumbents. Free in-network pricing may deter entry since it creates network externality that intensifies competition. One may expect that a particular entry-deterrent strategy adopted by all incumbents would have more entry-deterring power than when it is adopted by some incumbents only. However, we show that when free-in network plan has entry-deterrence power with two incumbent firms, sometimes one incumbent offering free in-network plan may have more entry deterrence power than both firms offering free in-network plans. In other words, we find that an asymmetric adoption of entry-deterrence strategies by the incumbent firms may be the best for entry deterrence. This result highlights the importance of the strategic choice of the pricing plan as a function of not only the likelihood/cost of entry but also of the plan choices of other firms, and may partially explain the asymmetric strategies used by competing firms.     

Consumer Feelings and Equilibrium Product Quality

This paper considers the possibility that a firm can invest not only in the true product quality, but also in activities such as merchandizing and store atmospherics that influence consumer perception of the product quality. Consumers make their purchase decisions based on the signal (perception) of quality they experience, where the signal is influenced by both the true product quality valued by the consumer and the affect of the consumer at the time of the signal formation. In this situation, a firm finds it optimal to invest in both product quality and in variables inducing affect, even though rational consumers, in equilibrium, correctly solve back for the true product quality. We uncover an asymmetry in the effects of the cost of producing quality and the cost of inducing affect. As a firm's cost of quality decreases, the firm will find it optimal to invest more both in the true quality and in the affect inducement, even if it does not have a lower cost of inducing affect. Conversely, if a firm finds it easier to induce affect, then the product quality decreases but affect-inducing activities increase.
Under competition, we find that the firm investing more in quality also invests more in affect creation. An implication of this is that in a competitive environment, consumers can rationally associate an up-lifting store atmosphere, affect inducing merchandizing, or mood-creating communication with high quality products even when the firm has no need to signal their private cost of quality information, and when there is no consumption externality of the affect. We also analyze the case in which firms might have different costs and consumers are uncertain about the costs incurred by a given firm. Here again we show that the perceived quality production is positively correlated with both the true quality and the affect inducing activities.     

Incorporating Behavioral Anomalies in Strategic Models

Behavioral decision researchers have documented a number of anomalies that seem to run counter to established theories of consumer behavior from microeconomics that are often at the core of analytical models in marketing. A natural question therefore is how equilibrium behavior and strategies would change if models were to incorporate these anomalies in a consistent way. In this paper we identify several important and generalizable anomalies that modelers may want to incorporate in their models. We briefly discuss each phenomenon, identify a key unresolved issue and outline a research agenda to be pursued.