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Author: Eduardo Brou
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
According to received Economic Theory, the implementation of price discrimination by a firm requires market power, at least in the short term. However, mere observation of reality, confirmed by empirical studies, shows that in extremely competitive industries, with approximately zero economic profit, the practice of price discrimination is verified, especially its second degree variant (Nonlinear Pricing), this phenomenon being more the rule than the exception.This paper explains theoretically the sustainability of second degree price discrimination in perfectly contestable markets (a generalisation of the notion of perfectly competitive markets i.e. those without any market power), thus explaining an empirical phenomenon not authorised by received Economic Theory. Nonlinear Pricing systems emerge as mechanisms that, in competitive environments, and with minimal central planning (centralisation of information), will allow greater social efficiency, constituting a "second-best invisible hand."
Author: Eduardo Brou
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
According to received Economic Theory, the implementation of price discrimination by a firm requires market power, at least in the short term. However, mere observation of reality, confirmed by empirical studies, shows that in extremely competitive industries, with approximately zero economic profit, the practice of price discrimination is verified, especially its second degree variant (Nonlinear Pricing), this phenomenon being more the rule than the exception.This paper explains theoretically the sustainability of second degree price discrimination in perfectly contestable markets (a generalisation of the notion of perfectly competitive markets i.e. those without any market power), thus explaining an empirical phenomenon not authorised by received Economic Theory. Nonlinear Pricing systems emerge as mechanisms that, in competitive environments, and with minimal central planning (centralisation of information), will allow greater social efficiency, constituting a "second-best invisible hand."
Author: Robert B. Wilson
Publisher: Oxford University Press, USA
ISBN: 9780195115826
Category : Business & Economics
Languages : en
Pages : 446
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Book Description
What do phone rates, frequent flyer programs, and railroad tariffs all have in common? They are all examples of nonlinear pricing. Pricing is nonlinear when it is not strictly proportional to the quantity purchased. The Electric Power Research Institute has commissioned Robert Wilson to review the various facets of nonlinear pricing. The work starts with a general non-mathematical discussion, followed by a more technical presentation intended for readers with a fairly advanced background. Thorough and detailed, this study has ample examples of case studies from a variety of industries.
Author: Orazio P. Attanasio
Publisher:
ISBN:
Category : Food prices
Languages : en
Pages : 76
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Book Description
We propose a model of price discrimination to account for the nonlinearity of unit prices of basic food items in developing countries. We allow consumers to differ in their marginal willingness and absolute ability to pay for a good, incorporate consumers' subsistence constraints, and model consumers' outside options from purchasing a good, such as self-production or access to other markets, which depend on consumers' preferences and income. We obtain a simple characterization of equilibrium non-linear pricing and show that nonlinear pricing leads to higher levels of consumption and lower marginal prices than those implied by the standard nonlinear pricing model. The model is nonparametrically and semiparametrically identified under common assumptions. We derive nonparametric and semiparametric estimators of the model's primitives, which can easily be implemented using individual-level data commonly available for beneficiaries of conditional cash transfer programs in developing countries. The model well accounts for our data on rural Mexican villages. Importantly, the standard nonlinear pricing model, a special case of our model, is almost always rejected. We find that sellers have large degrees of market power and exert it by price discriminating across consumers through distortionary quantity discounts. Contrary to the prediction of the standard model, consumption distortions are less pronounced for individuals purchasing small quantities, despite the steep decline of observed unit prices with quantity. Overall, most consumers tend to benefit from nonlinear pricing relative to linear pricing. A novel result is that when sellers have market power, policies such as cash transfers that affect households' ability to pay can effectively strengthen sellers' incentive to price discriminate and thereby give rise to asymmetric price changes for low and high quantities, which exacerbate the consumption distortions associated with nonlinear pricing. We find evidence of these patterns in response to transfers in our data. These results confirm the importance of our proposed extension of the standard nonlinear pricing model in evaluating the distributional effects of nonlinear pricing.
Author: Michael E. Levine
Publisher:
ISBN:
Category : Market segmentation
Languages : en
Pages : 34
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Book Description
Author: Marco Alderighi
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We characterise, for both separate and interdependent markets, the local pure-strategies Nash equilibrium of a spatial duopoly game, where consumers are horizontally and vertically heterogeneous, and firms have different cost structures and ranges of product lines. We show that standard results which emerged in the monopoly context can not be generalised to strategic contexts where firms retain market power and there is sufficient competitive pressure. We prove that in the asymmetric duopoly case, when markets are interdependent, the incentive compatibility constraints are slack, and there is no quality distortion.
Author: Jens-Uwe Franck
Publisher: Centre on Regulation in Europe asbl (CERRE)
ISBN:
Category : Law
Languages : en
Pages : 96
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Book Description
With the rise of digital platforms and the natural tendency of markets involving platforms to become concentrated, competition authorities and courts are more frequently in a position to investigate and decide merger and abuse cases that involve platforms. This report provides guidance on how to define markets and on how to assess market power when dealing with two-sided platforms. DEFINITION Competition authorities and courts are well advised to uniformly use a multi-markets approach when defining markets in the context of two-sided platforms. The multi-markets approach is the more flexible instrument compared to the competing single-market approach that defines a single market for both sides of a platform, as the former naturally accounts for different substitution possibilities by the user groups on the two sides of the platform. While one might think of conditions under which a single-market approach could be feasible, the necessary conditions are so severe that it would only be applicable under rare circumstances. To fully appreciate business activities in platform markets from a competition law point of view, and to do justice to competition law’s purpose, which is to protect consumer welfare, the legal concept of a “market” should not be interpreted as requiring a price to be paid by one party to the other. It is not sufficient to consider the activities on the “unpaid side” of the platform only indirectly by way of including them in the competition law analysis of the “paid side” of the platform. Such an approach would exclude certain activities and ensuing positive or negative effects on consumer welfare altogether from the radar of competition law. Instead, competition practice should recognize straightforwardly that there can be “markets” for products offered free of charge, i.e. without monetary consideration by those who receive the product. ASSESSMENT The application of competition law often requires an assessment of market power. Using market shares as indicators of market power, in addition to all the difficulties in standard markets, raises further issues for two-sided platforms. When calculating revenue shares, the only reasonable option is to use the sum of revenues on all sides of the platform. Then, such shares should not be interpreted as market shares as they are aggregated over two interdependent markets. Large revenue shares appear to be a meaningful indicator of market power if all undertakings under consideration serve the same sides. However, they are often not meaningful if undertakings active in the relevant markets follow different business models. Given potentially strong cross-group external effects, market shares are less apt in the context of two-sided platforms to indicate market power (or the lack of it). Barriers to entry are at the core of persistent market power and, thus, the entrenchment of incumbent platforms. They deserve careful examination by competition authorities. Barriers to entry may arise due to users’ coordination failure in the presence of network effect. On two-sided platforms, users on both sides of the market have to coordinate their expectations. Barriers to entry are more likely to be present if an industry does not attract new users and if it does not undergo major technological change. Switching costs and network effects may go hand in hand: consumer switching costs sometimes depend on the number of platform users and, in this case, barriers to entry from consumer switching costs increase with platform size. Since market power is related to barriers to entry, the absence of entry attempts may be seen as an indication of market power. However, entry threats may arise from firms offering quite different services, as long as they provide a new home for users’ attention and needs.
Author: Patrick M. Emerson
Publisher:
ISBN:
Category : Economics
Languages : en
Pages :
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Author: Manuel A. Hernandez
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper empirically examines the effect of competitive conditions on nonlinear pricing strategies in the airline industry. We use a unique data set to analyze the impact of concentration and the competitive pressures generated by Southwest and other low cost carriers on the relative prices within a menu of fares. The menu orders tickets by quality based upon cabin and ticket restrictions. We analyze the ratio of fares charged for various qualities within the menu to the fares charged for the lowest quality nonrefundable, restricted tickets. We observe a fare compression for only the highest fares on only the most concentrated (i.e., monopoly) routes. This result is something of a puzzle given a monopolist's market power. We find, however, that actual and potential competition from Southwest reduces low end fares and generally leads to substantial fare compression throughout the fare menu.
Author: S. W. Davies
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Liberalisation of the British electricity market, in which previously monopolised regional markets were exposed to large-scale entry, is used to test the propositions of several recent theoretical papers on oligopolistic nonlinear pricing. Consistent with those theories, each oligopolist offered a single two-part electricity tariff, and a lump sum discount to consumers who purchased both electricity and gas. However, inconsistent with those theories, firms' two-part tariffs are heterogeneous in ways that cannot be attributed to cost. We establish a series of stylised facts about the nature of these asymmetries between firms and use them to confront established theory.
Author: Garrett Patrick Hagemann
Publisher:
ISBN:
Category :
Languages : en
Pages : 222
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Book Description
This dissertation addresses several open issues in the economics surrounding the use of nonlinear pricing. The first chapter empirically examines the impact of the use of nonlinear pricing by wholesalers. The second chapter evaluates how firm profit depends on the number of prices offered in a nonlinear price schedule. Finally, the third chapter investigates the use of all-unit discounts as a price discrimination instrument. The first chapter exploits a unique data set of price schedules to provide the first empirical estimate of the welfare impact of second degree price discrimination in a market with double marginalization. Theoretical predictions in such a context are ambiguous. Quantity discounts at the wholesale level reduce costs for larger retailers, increasing efficiency. However, quantity discounts raise input costs for smaller retailers, increasing prices consumers may pay. The combined welfare effects on consumers umers depends on how much of input cost discounts are passed through to consumers and the distribution of retailer size. I develop and estimate a model of the New York State retail liquor market where wholesalers offer a multi-part nonlinear tariff for each product. The structural model is then used to estimate the welfare impact of restricting wholesale pricing to be linear. I find that banning quantity discounts reduces total welfare by approximately 14% on average. Consumer surplus and wholesaler profit decline by approximately 26% on average. Average retailer profit increases by a similar magnitude, though effects for a particular retailer are heterogeneous across retailer size. The second chapter examines the shape of observed price schedules more directly. Sellers often offer price schedules with relatively few segments rather than completely nonlinear price schedules which offer a unique price for each unit sold. By not offering a completely nonlinear, sellers are foregoing some additional profit in favor of a simpler pricing strategy. I find that the scale of these foregone profits is relatively small and only loosely related to product characteristics. When considered in percentage terms, foregone profits are very similar across a large number of products. This suggests that simple pricing strategies obtain almost all the profits available and this is a common property of nonlinear pricing strategies. The final chapter compares price discrimination through two different quantity discount mechanisms: all-unit discounts and incremental discounts. All-unit-discounts give consumers a lower marginal price on all units purchased once total purchase size crosses a threshold. Incremental discounts only provide discounts on units above the threshold. Relative to incremental discounts, all-unit-discounts imply higher marginal prices and bunching of purchase sizes in equilibrium. The equilibrium bunching may present a challenge for estimating the model empirically.
