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Author: Sungbok Lee
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This dissertation investigates the relationship of competition and firms' price responses, by analyzing: i) whether new entry reduces price discrimination, ii) when incumbents reduce price discrimination preemptively in response to the threat of entry, and iii) how competition increases prices. The dissertation consists of three independent essays addressing each of the above questions. The first two essays present an empirical analysis of the airline industry and the third essay presents a theoretical analysis of the credit card industry. In the empirical study of the relationship between competition and firms' pricing in the airline industry, I emphasize the importance of distinguishing the equilibrium behaviors with respect to different market characteristics. Major airlines can price discriminate differently in a market where they compete with low-cost carriers comparing to in another market where they don't, and also they can respond dfferently to the threat of entry depending on whether they are certain about the rival's future entry. The study reveals that competition has a positive effect on price discrimination in the routes where major airlines compete against one anther. In these routes, competition reduces lower-end prices to a greater extent than upper-end prices. In contrast, an entry by low-cost carriers results in a significant negative relationship between competition and price discrimination. Thus, the opposite results in the literature are both evident in the airline industry, and it is very important to identify the different forces of competition on price discrimination. Firms can respond to potential competition as well as actual competition. So, I extend the study to the relationship of potential competition and price discrimination, specially in cases where major airlines compete against one another while facing Southwest's threat of entry. I also attempt to suggest major airlines' motives of reducing price discrimination preemptively. The results of the study suggest that incumbents reduce price dispersion when it is possible to deter the rival's entry and that the potential rival discourages incumbents from deterring entry by announcing before its beginning service. Finally, I examine when competition can increase prices in a market, by analyzing the issuing side of the credit card industry. This industry is characterized by a two-sided market with a platform. Under the no-surcharge rule that restricts merchants to set the same price for cash and card purchases, the equilibrium interchange fee increases with competition. This occurs because issuers can compensate losses from competing on the issuing side by collectively increasing the interchange fee. As a result, limiting competition may improve social welfare when the interchange fee is higher than the social optimal level. In contrast, in the absence of the no-surcharge rule, the analysis shows that competition always improves social welfare by lowering the price of the market.
Author: Sungbok Lee
Publisher:
ISBN:
Category :
Languages : en
Pages :
Get Book Here
Book Description
This dissertation investigates the relationship of competition and firms' price responses, by analyzing: i) whether new entry reduces price discrimination, ii) when incumbents reduce price discrimination preemptively in response to the threat of entry, and iii) how competition increases prices. The dissertation consists of three independent essays addressing each of the above questions. The first two essays present an empirical analysis of the airline industry and the third essay presents a theoretical analysis of the credit card industry. In the empirical study of the relationship between competition and firms' pricing in the airline industry, I emphasize the importance of distinguishing the equilibrium behaviors with respect to different market characteristics. Major airlines can price discriminate differently in a market where they compete with low-cost carriers comparing to in another market where they don't, and also they can respond dfferently to the threat of entry depending on whether they are certain about the rival's future entry. The study reveals that competition has a positive effect on price discrimination in the routes where major airlines compete against one anther. In these routes, competition reduces lower-end prices to a greater extent than upper-end prices. In contrast, an entry by low-cost carriers results in a significant negative relationship between competition and price discrimination. Thus, the opposite results in the literature are both evident in the airline industry, and it is very important to identify the different forces of competition on price discrimination. Firms can respond to potential competition as well as actual competition. So, I extend the study to the relationship of potential competition and price discrimination, specially in cases where major airlines compete against one another while facing Southwest's threat of entry. I also attempt to suggest major airlines' motives of reducing price discrimination preemptively. The results of the study suggest that incumbents reduce price dispersion when it is possible to deter the rival's entry and that the potential rival discourages incumbents from deterring entry by announcing before its beginning service. Finally, I examine when competition can increase prices in a market, by analyzing the issuing side of the credit card industry. This industry is characterized by a two-sided market with a platform. Under the no-surcharge rule that restricts merchants to set the same price for cash and card purchases, the equilibrium interchange fee increases with competition. This occurs because issuers can compensate losses from competing on the issuing side by collectively increasing the interchange fee. As a result, limiting competition may improve social welfare when the interchange fee is higher than the social optimal level. In contrast, in the absence of the no-surcharge rule, the analysis shows that competition always improves social welfare by lowering the price of the market.
Author: Vera Magin
Publisher: Springer Science & Business Media
ISBN: 3835092774
Category : Business & Economics
Languages : en
Pages : 156
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Book Description
In her first essay Vera Magin uses primary experimental data to explore the effects of information on marketing decisions, performance, and competition. In the second essay she discusses several approaches to measure product differentiation in spatial contexts.
Author: Anna Olga Smolnik
Publisher: Cuvillier Verlag
ISBN: 3736984669
Category : Business & Economics
Languages : en
Pages : 124
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The dissertation consists of three empirical studies and takes a closer look at price fluctuations using German gasoline prices as an example for a homogenous good. It analyzes consumers’ reaction to price fluctuations and respectively the pricing behavior of firms. The first paper, which was developed with co-authorship, explores consumers’ online price search effects on the pricing behavior of firms (gasoline price level and price dispersion). As regulators have recently implemented a mechanism for reporting all price changes to a central data base, the core assumption of this price reporting scheme is that the increase in price transparency will lead to a decline in the price level and a reduction in price dispersion. The second study addresses the question whether German gas stations adjust their retail prices asymmetrically in response to crude oil price changes, i.e., whether gas stations react quicker to crude oil price increases than to crude oil price decreases. The third study aims to analyze whether consumers react more strongly to gasoline price increases or to price decreases when considering buying a new vehicle.
Author: Jonathan Richard Lhost
Publisher:
ISBN:
Category :
Languages : en
Pages : 342
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My dissertation examines competition, cooperation, and efficiency in three market settings in which a population of economic agents interact, either directly with each other in pairwise matches, directly with firms, or with firms via a platform. In one chapter I consider a population of customers who have different valuations for a good sold by competing merchants, as well as varying preferences over the merchant from which to purchase the good and the payment form with which to make the purchase, and examine what the effects might be if a merchant placed an additional surcharge on transactions completed with a payment form that is more costly for the merchant. The cost for the merchant can vary dramatically depending on the payment form used. For example, a credit card transaction is generally more expensive for the merchant than a debit card transaction, even if the transaction is completed using the same technology and is processed over the same network (e.g., a MasterCard signature debit transaction and a MasterCard credit card transaction). Historically, with limited exceptions, merchants have been prohibited, both by law and by the contract permitting the acceptance of that network's cards, from charging customers different prices for transactions completed using different payment cards, despite the different costs these transactions impose on them. Recent concessions made by several major payment networks in response to legal challenges raises the possibility that this paradigm might change in the future. This chapter examines what the effects might be if merchants were permitted to charge customers different prices based on the payment form and whether these effects depend on differences between the merchants, such as differences in the marginal cost of providing the good. In another chapter, I consider a population of individuals made up of more-patient and less-patient types who interact directly with each other in a repeated prisoner's dilemma embedded in a search model. A player is matched anonymously with another player to play a prisoner's dilemma game repeatedly until the match is ended, either exogenously or endogenously by one of the players, at which point each player may receive another random match. I first determine when it is feasible to achieve the best outcome in which all players cooperate. When it is not possible to achieve full cooperation, I examine how welfare can be improved over the outcome in which no players cooperate. When conditions are such that less-patient players choose not to cooperate, I first examine how separation by action within a single market can increase welfare for all players over the uncooperative equilibrium, with more-patient players choosing to cooperate in hopes of forming a cooperative relationship, despite the risk of being matched with a less-patient player who chooses not to cooperate. I then examine how full separation of the more- and less-patient players, made possible by introduction of a second market, can increase the welfare of the more-patient players without harming the less-patient players. In a third chapter, customers choose to purchase a good from one of several competing firms in a setting in which network congestion and firms' investment in capacity plays an important role in firm costs and product quality, e.g., the wireless industry. Wireless carriers (e.g., Verizon) compete not only on the price of their service but also on its quality. The quality of a carrier's service is determined in part by the quantity of customers it serves and by investment in capacity with which to serve them. While the primary effect of a carrier increasing its capacity is an increase in that carrier's service quality, there are also externality effects on other wireless carriers. For example, if carrier A increases its capacity, thereby increasing its service quality, and causes some customers to leave a competing carrier B, the service quality experienced by customers who remain with carrier B will increase as a result of the decreased congestion in carrier B's network. This chapter examines the interplay between these effects alongside traditional price competition in this oligopoly setting.
Author: Lawrence Abbott
Publisher: Westport, Conn : Greenwood Press
ISBN:
Category : Business & Economics
Languages : en
Pages : 256
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Author: Jakob Arne Robert Jeanrond
Publisher:
ISBN:
Category : Competition, International
Languages : en
Pages : 95
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This thesis focuses on how specific aspects of product differentiation affect economic outcomes through their impact on competition between firms. The first paper presents an analysis of firms' incentives to share information about the perceived profitability of different technologies prior to making an investment decision. The model is one of vertical product differentiation in which firms face uncertainty over consumers' preferred product. The main result is that firms reveal information only when they are sufficiently uncertain about which investment strategy to pursue. Information can be revealed in order to facilitate either coordination on a particular technology or anti-coordination on different technologies. In the second paper a seller can choose to sell one or several horizontally differentiated products from competing developers. Developers can charge the seller different wholesale prices for their products where prices are dependent on whether the seller will also carry a competing product. A higher consumer valuation of products raises the potential market share from a single product and thereby increases competition between developers. This implies developer profits can decrease in product quality. The model is compared to a situation in which developers compete for consumers without an intermediary seller. This comparison illustrates how developers sometimes can make higher profits by using a downstream seller since the seller's pricing response acts as a competition softener between developers. In paper three the focus is on product allocation through a single developer of several products who can decide how to allocate them among sellers. This model also features horizontally differentiated products but introduces multidimensional consumer preferences over products and sellers. The developer's product allocation decision is shown to be a key profit determinant for the supply chain. By distributing different products to each seller, the developer can focus inter-seller competition on the product dimension of consumer preferences. Distributing the same products to both sellers allows the developer to force sellers to compete in the dimension of consumers' seller preferences. The relative intensity of consumer preferences over products and sellers thereby determines a profit maximizing allocation for the developer.
Author: Zhuang Miao
Publisher:
ISBN:
Category :
Languages : en
Pages :
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"This thesis studies how firms in an imperfectly competitive industry adjust their market strategies (such as prices, product quality, and exporting decisions) in response to varying market conditions. The first chapter develops a theoretical model on how firms decide on their product scope (the number of product varieties offered by the firms) in response to varying trade costs (such as transportation distances, exchange rate volatility, and tariff rates). The model predicts that firms export fewer varieties to destinations that are farther away from the home country, or that are subject to higher tariff rate or greater exchange rate volatility. The predictions of the model are tested by employing the Chinese firm-level data from the years 2001 and 2006. The second chapter is a theoretical model of an oligopoly producing vertically differentiated goods, where firms compete in quantities. I consider several alternative specifications of how set-up costs as well as variable costs differ across the chosen quality levels. The chapter focuses on the long run equilibrium, where the long run equilibrium number of firms is determined by the zero-profit condition implied by free entry and exit. The model determines conditions under which all firms produce both high-quality and low-quality variety and studies the effect of an expansion of market size on the quality levels and prices, and on the average price and average quality. An empirical test of a version of the model is carried out, using Chinese firm-level data. The third chapter studies a short-run duopoly model where firms may choose to specialize in different quality levels while competing in quantities rather than in prices. In stage one, firms choose their quality levels, and in stage two, they compete in quantities. The equilibrium prices of high-quality and low-quality goods emerge as outcome of the competition in quantities. This is in contrast to the mainstream literature on duopolies with vertical quality differentiation, which assume that firms set prices. The model is used to study how changes in income inequality affects the equilibrium qualities and prices." --
Author: Shyh-Fang Ueng
Publisher:
ISBN:
Category : Competition
Languages : en
Pages : 118
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This research investigates three issues related to the economic performance of oligopolistic markets where firms produce differentiated products and compete in prices. First of all, this dissertation uses a Markov Perfect Equilibrium approach with fixed periods of commitment of actions to answer the question of what prices a duopolists will charge in equilibrium if they produce horizontally differentiated products, move alternatingly, and compete in prices forever. It is found that firms charge prices which are higher than Nash equilibrium prices but lower than the fully collusive equilibrium prices. Also, contrasted with the Nash equilibrium of the one-shot constituent game, the firm having the significantly higher demand responsiveness to its own price always charges a lower price than the other firm does although it has higher marginal cost. The dissertation then proceeds to study whether a firm can overcome its cost disadvantage by upgrading its product over the rival's, and if so, whether there exists a profit-division which will induce the low cost firm and the high cost firm to collude and no one has an incentive to cheat. The results show that (1) the ability of upgrading the product over the rival's can allow a high cost firm to earn higher profit than a cost advantaged low cost firm; (2) there exists at least one profit-division which can sustain full collusion; and (3) in the collusive equilibrium firms enlarge their quality differences to alleviate the price tension between their products. Finally, this work investigates the welfare effect of mergers which occur in an oligopolistic industry where firms produce differentiated products. It is shown that for the merger to be socially beneficial, the number of the merging firms must be less than the total number of firms in the industry minus the ratio of the products' own elasticity to cross elasticity. The analysis indicates that the welfare effect of a merger of a specific size depends on the substitutability among products of the industry.
Author: Brady Thomas Vaughan
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 113
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In the first chapter of my dissertation, Aleksandr Yankelevich and I examine the effects of price matching guarantees on duopoly markets. We find that a commitment to price-match raises prices by altering consumer search behavior in three ways. First, price-matching diminishes firms' incentives to lower prices to attract consumers who have no search costs. Second, for consumers with positive search costs, price-matching lowers the marginal benefit of search, inducing them to accept higher prices. Finally, price-matching can lead to asymmetric equilibria where one firm runs fewer sales and both firms tend to offer smaller discounts than in a symmetric equilibrium. These price increases grow with the proportion of consumers who invoke price-matching guarantees and also in the level of equilibrium asymmetry. The second chapter studies the effect of the complexity of consumers' preferences over a product on that product's market structure. I relate complexity of preferences to the number of dimensions of a Lancasterian characteristic space. Using a novel higher dimensional Hotelling model, I find that a fixed number of firms are likely to be better off competing over products with more complex preferences. Although firms face more intense competition in higher dimensional markets, the greater product differentiation afforded to them allows them to charge higher prices and earn higher profits. This result provides a clear theoretical foundation for the observation that goods associated with more complex preferences typically display a greater variety of products sold. Additionally, I show that the behavior of more than two firms competing in more than one dimension differs wildly from that of firms typically studied in models of spatial competition. The final chapter will examine firms' motives for implementing grandfather clauses that allow certain consumers to continue to access a service at a favorable, but no longer available price. Grandfather clauses permit firms to price discriminate between early adopters and new consumers in exchange for forfeiting the right to optimally set prices for early adopters. They may be used to thwart competition following a structural change, to respond to cost shocks, or to retain customers who consume another good from a multiproduct firm. We analyze under what conditions firms might choose to offer grandfather clauses and what effects they have on welfare.
Author: Eray Cumbul
Publisher:
ISBN:
Category : Competition
Languages : en
Pages : 194
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"Cournot (1838), Bertrand (1883), and Stackelberg (1934)'s models of strategic interaction between competing firms have become the primary workhorses for the analysis of imperfect competition, being employed in a variety of fields, notably industrial organization and international trade. Among others, Anderson and Engers (1992) have argued that the simultaneous-move Cournot model is applicable to characterize an industry where lags in the observation of output decisions are long, whereas the sequential-move Stackelberg model applies when the reverse holds. While many industries fit the Cournot framework better, Shinkai (2000) has argued that the DRAM market (i.e., the market for the main memory component of most computers and many electronic systems) is better described by the Stackelberg model because firms make sequential capacity choices in an irreversible manner. It is important to understand how the implications of the these models differ with respect to total output, welfare and producer surplus for at least two reasons. First, such an understanding provides insights into the mechanics of these important theoretical models. Relatedly, it also helps us in deciding which framework (if either) is more appropriate for studying a given industry given the observed price and output levels. Second, once it has been decided which model better captures the characteristics of a given industry, a policy maker can better assess whether mergers or other industry developments may help or hurt consumers. The answer may very well depend on which model one thinks is more appropriate to describe an industry. In Chapter 1 of my thesis, I compare an n-firm Cournot game with a Stackelberg model, where n firms choose outputs sequentially, in a stochastic demand environment with private information. The Stackelberg perfect revealing equilibrium expected price is higher, therefore expected output and total surplus are lower; total expected profits are higher than in Cournot equilibrium irrespective of how noisy both the demand shocks and private demand signals of firms are. These rankings are the opposite to the rankings of prices, total- output, surplus, and profits between Cournot and Stackelberg models under perfect information. In the second part of Chapter 1, I also extend the analyses of Gal-Or (1987) and Shinkai (2000) on last-mover advantage to the above n-firm Stackelberg oligopoly set-up. I show that at the perfect revealing equilibrium, the first n - 1 firms' expected profits form a decreasing sequence from the first to the (n - 1)st. If, in addition, there are no more than four firms, then the last mover earns the highest expected profit. We explain these results by discussing strategic substitutability and complementarity relationships among the quantity decisions of firms. We use the fact that there is a discontinuity between the Stackelberg equilibrium of the perfect information game and the limit of Stackelberg perfect revealing equilibria of the incomplete information games as the noise of the demand information vanishes to zero. It is in Chapter 2 that I study the applications of Cournot and Bertrand models to mergers. I investigate the welfare effects of mergers on merging firms (insiders), non-merging firms (outsiders), and consumers in a differentiated product market. I extend many results in this literature by both considering imperfect substitution (and complementarity) among goods and varying the number of firms merged. If mergers do not generate any cost efficiencies, then any size of horizontal mergers among firms producing substitutable goods decreases both consumer and total welfare under both quantity and price setting games. Moreover, horizontal mergers with full cost efficiency gains are still mostly welfare reducing especially when the cost-demand ratio is sufficiently low. However, any size of conglomerate merger among suppliers of complementary products are both consumer and welfare enhancing under both game settings. I also introduce a price approach for calculating total welfare to identify the effects causing these results. In both Chapters 1 and 2, the common assumption was that all firms actively produce. However, in several markets some firms are not able to actively participate, and many decide to shut down. A cost reducing innovation by competitors, the inability to adapt changing market conditions, a cost-efficient merger among rival firms, or an increase in fixed costs may increase the incentives of a firm to exit from the market. In line with these concerns, we relax the assumption of positive production by all firms and allow firms to not produce. It is well known that the theorems that state the existence and uniqueness of Cournot equilibrium would straightforwardly extend to environments where firms prefer to be not active. However, in Chapter 3, we argue that when firms are allowed to charge their marginal costs, Bertrand models lead to very unexpected results. We show that differentiated linear Bertrand oligopolies with constant unit costs and continuous best replies do not need to satisfy supermodularity (Topkis (1979)) or the single crossing property (Milgrom and Shannon (1994)). In particular, Bertrand best replies might be negatively sloped and there are (infinite) multiple undominated Bertrand-Nash equilibria on a wide range of parameter values when the number of firms is more than two. These results are very different from the existing literature on Bertrand models, where uniqueness, supermodularity, and single crossing usually hold under a linear market demand assumption and best reply functions slope upwards. We further provide an iteration algorithm to find the set of players that are active in any equilibrium. This set is uniquely defined. We also characterize the whole set of undominated equilibria"--Pages v-viii.
