nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒05‒04
sixteen papers chosen by
Russell Pittman
US Government

  1. A Theory of Price Adjustment under Loss Aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
  2. Too much or too little? Price-discrimination in a market for credence goods By Uwe Dulleck; Rudolf Kerschbamer; Alexander Konovalov
  3. Product Upgrades and Posted Prices By Mustafa Dogan_
  4. Hotelling Games on Networks: Efficiency of Equilibria. By Gaëtan Fournier; Marco Scarsini
  5. Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers By Rosa-Branca Esteves; Sofia Cerqueira
  6. Behaviour-Based Price Discrimination with Retention Offers By Rosa-Branca Esteves
  7. Technology Transfer and its effect on Innovation By Sen, Neelanjan
  8. Why are product prices in online markets not converging? By Takayuki Mizuno; Tsutomu Watanabe
  9. The Effect of Payment Reversibility on E-commerce and Postal Quality By Christian Jaag; Christian Bach
  10. Postal-Sector Policy: From Monopoly to Regulated Competition and Beyond By Christian Jaag
  11. Regulation and the burden of the net cost resulting from the Universal Service Obligation By Christian Jaag; Urs Trinkner; Topias Uotila
  12. Estimating Dynamic Demand for Airlines By Diego, Escobari
  13. Provider competition and over-utilization in health care By Jan Boone; Rudy Douven
  14. Opening Access to Research By Armstrong, Mark
  15. Comparing Mobile Communication Service Prices Among Providers: A Hedonic Approach By Schöni, Olivier; Seger, Lukas
  16. Competition among non-life insurers under solvency constraints: A game-theoretic approach By Christophe Dutang; Hansjoerg Albrecher; Stéphane Loisel

  1. By: Ahrens, Steffen (Kiel Institute for the World Economy); Pirschel, Inske (Kiel Institute for the World Economy); Snower, Dennis J. (Kiel Institute for the World Economy)
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers' rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers' reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that – in line with the empirical evidence – prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks.
    Keywords: price sluggishness, loss aversion, state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014–04
  2. By: Uwe Dulleck; Rudolf Kerschbamer; Alexander Konovalov
    Abstract: In markets for credence goods sellers are better informed than their customers about the quality that yields the highest surplus from trade. This paper studies second-degree price-discrimination in such markets. It shows that discrimination regards the amount of advice offered to customers and that it leads to a different distortion depending on the main source of heterogeneity among consumers. If the heterogeneity is mainly in the expected cost of efficient service, the distortion involves overprovision of quality. By contrast, if consumers differ mainly in the surplus generated whenever the consumer's needs are met, the inefficiency involves underprovision of quality.
    Keywords: Price Discrimination, Credence Goods, Experts, Discounters, Distribution Channels
    JEL: L15 D82 D40
    Date: 2014–04
  3. By: Mustafa Dogan_ (Department of Economics, University of Pennsylvania)
    Abstract: We consider the dynamic pricing problem of a durable good monopolist with full commitment power, when a new version of the good is expected at some point in the future. The new version of the good is superior to the existing one, bringing a higher ow utility. If the arrival is a stationary stochastic process, then the corresponding optimal price path is shown to be constant for both versions of the good, hence there is no delay on purchases and time is not used to discriminate over buyers, which is in line with the literature. However, if the arrival of the new version occurs at a commonly known deterministic date, then the optimal price path may be decreasing over time, resulting in delayed purchases. For both stochastic and deterministic arrival processes, posted prices is not the optimal mechanism, which on the other hand, involves into bundling of both new and old versions of the good and selling them only together.
    Keywords: durable goods, product upgrades, commitment, posted prices, dynamic mechanism design
    JEL: D42 D82
    Date: 2014–04–28
  4. By: Gaëtan Fournier (Centre d'Economie de la Sorbonne); Marco Scarsini (Dipartimento di Economia e Finanza - LUISS, Roma)
    Abstract: We consider a Hotelling game where a finite number of retailers choose a location, given that their potential customers are distributed on a network. Retailers do not compete on price but only on location, therefore each consumer shops at the closest store. We show that when the number of retailers is large enough, the game admits a pure Nash equilibrium and we construct it. We then compare the equilibrium cost bore by the consumers with the cost that could be achieved if the retailers followed the dictate of a benevolent planner. We perform this comparison in term of the induced price of anarchy, i.e., the ratio of the worst equilibrium cost and the optimal cost, and the induced price of stability, i.e., the ratio of the best equilibrium cost and the optimal cost. We show that, asymptotically in the number of retailers, these ratios are two and one, respectively.
    Keywords: Induced price of anarchy, induced price of stability, location games on networks, pure equilibria, large games.
    JEL: C72 R30 R39
    Date: 2014–04
  5. By: Rosa-Branca Esteves (Universidade do Minho - NIPE); Sofia Cerqueira (Universidade do Minho)
    Abstract: This paper is a first look at the dynamic effects of BBPD in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. In comparison to no discrimination, it is shown that firms reduce their advertising efforts, charge higher first period prices and lower second period prices. In comparison to no discrimination, in contrast to the profit and consumer welfare results obtained under full informed consumers, it is shown that BBPD boosts industry profits and harms consumers.
    Date: 2014
  6. By: Rosa-Branca Esteves (Universidade do Minho - NIPE)
    Abstract: This paper is a first step in investigating the competitive and welfare effects of behavior-based price discrimination (BBPD) in markets where firms have information to employ retention strategies as an attempt to avoid the switching of their clientele to a competitor. We focus on retention activity in the form of a discount offered to a consumer expressing an intention to switch. When retention strategies are allowed, forward looking firms anticipate the effect of first period market share on second period profits and price more aggressively in the first-period. Thus,first period equilibrium price under BBPD with retention strategies is below its non-discrimination counterpart. This contrasts with first period price above the non-discrimination level if BBPD is used and retention activity is forbidden. Regarding second period prices, the use of retention offers increase the price offered to those consumers who do not signal am intention to switch; the reverse happens to those consumers who decide to switch after being exposed to retention offers. As in other models where consumers have stable exogenous brand preferences, the instrument of BBPD is bad for profits and welfare but good for consumers. BBPD with the additional tool of retention activity boosts consumer surplus and overall welfare but decreases industry profit.
    Date: 2014
  7. By: Sen, Neelanjan
    Abstract: This paper analyses technology transfer and innovation activities by the high cost firm in a Cournot duopoly framework, where technology transfer between the firms may occur after the innovation decision. The two effects of innovation are to access the superior technology of the low cost firm if higher cost prohibits technology transfer and to affect the pricing rule of technology transfer via higher bargaining power. The incentive for innovation is more in fixed-fee licensing than in two-part tariff (royalty) licensing if cost difference between firms is low. The possibility of licensing, irrespective of the licensing scheme, encourages innovation if the cost difference between the firms is high.
    Keywords: Technology licensing; Innovation; Welfare
    JEL: D45 L24
    Date: 2014–04–26
  8. By: Takayuki Mizuno; Tsutomu Watanabe
    Abstract: Why are product prices in online markets dispersed in spite of very small search costs? To address this question, we construct a unique dataset from a Japanese price comparison site, which records price quotes offered by e-retailers as well as customers' clicks on products, which occur when they proceed to purchase the product. We find that the distribution of prices retailers quote for a particular product at a particular point in time (divided by the lowest price) follows an exponential distribution, showing the presence of substantial price dispersion. For example, 20 percent of all retailers quote prices that are more than 50 percent higher than the lowest price. Next, comparing the probability that customers click on a retailer with a particular rank and the probability that retailers post prices at a particular rank, we show that both decline exponentially with price rank and that the exponents associated with the probabilities are quite close. This suggests that the reason why some retailers set prices at a level substantially higher than the lowest price is that they know that some customers will choose them even at that high price. Based on these findings, we hypothesize that price dispersion in online markets stems from heterogeneity in customers' preferences over retailers; that is, customers choose a set of candidate retailers based on their preferences, which are heterogeneous across customers, and then pick a particular retailer among the candidates based on the price ranking.
    Date: 2013–05
  9. By: Christian Jaag; Christian Bach
    Abstract: In this paper we develop a stylized model of competition between brick-and-mortar merchants and online retailers. An offline transaction, matching payment with delivery, is without risk for both the seller and the buyer. In an online transaction the seller faces the potential risk of non-payment while the buyer risks failed delivery. The effects of these two risks depend on the reversibility of payment. While traditional payment systems for e-commerce are reversible, virtual currencies like Bitcoin offer irreversible transactions. This shifts the risk from the receiver of the payment to its sender. The paper explores the effect of payment reversibility on competition between offline and online merchants and on the importance of postal quality for e-commerce. It finds that payment irreversibility may strengthen e-commerce due to reduced overall risk. Moreover, under reasonable conditions, postal operators have stronger incentives for quality since it affects volumes more strongly if payment is irreversible.
    Keywords: Virtual Currencies, Bitcoin, E-Commerce
    JEL: L81
    Date: 2014–04
  10. By: Christian Jaag
    Abstract: This paper discusses the main aspects of the competitive and regulatory state of the postal sector. It presents the different models for postal competition and regulation in the EU and the US and their history, together with their implications on regulation, with a focus on universal services and network access. While postal monopolies used to be the main source of funding for universal service obligations, the need for alternative funding sources after full liberalization has increased the interest of regulators and the public in knowing the cost of these obligations. In parallel, new means of electronic communication and consumer needs call the traditional scope of universal services into question. This paper outlines the economic rationale of current policies and directions for future postal regulation to strengthen the postal services’ commercial viability in a competitive age, while safeguarding their relevant characteristics for the economy.
    Keywords: Postal Sector, Regulation, Liberalization
    JEL: L52 L87
    Date: 2014–04
  11. By: Christian Jaag; Urs Trinkner; Topias Uotila
    Abstract: The financing of the Universal Service Obligation (USO) in network industries has traditionally relied on granting the provider exclusive rights. Full liberalization has created the need for alternative funding mechanisms. This has increased the interest of regulators and the public in estimating the (net) cost of the USO as the universal service provider (USP) should be correctly compensated for its burden. While there is quite a comprehensive literature on the cost of the USO in light of a different business strategy in the hypothetical scenario without USO, there has been little discussion so far on the assumptions to be made about the regulatory environment in this hypothetical scenario. That is the focus of this chapter. In addition, the chapter argues that a careful assessment of the regulatory environment may be useful in assessing the burden resulting from the USO. In Europe, the costing and financing of the postal USO is laid out in the Third Postal Directive 2008/6/EG. Article 7 states that only the net cost of the USO that constitutes an unfair financial burden should be subject to compensation. It does not further define what is regarded as unfair, but imposes criteria on compensation such as objectivity, transparency, non-discrimination, proportionality, least distortion, or neutrality.
    Keywords: Universal service obligation, burden of the net cost, regulatory delta approach
    JEL: L51
    Date: 2013–11
  12. By: Diego, Escobari
    Abstract: This paper uses an original panel dataset with posted prices and sales to estimate a dynamic demand. We find that consumers become more price sensitive as time to departure nears which is consistent with having lower valuations. This result provides empirical support to a key theoretical implication in Deneckere and Peck [Deneckere, R., Peck, J., 2012. Dynamic competition with random demand and costless search: A theory of price posting. Econometrica 80, 1185-1247] --- high-valuation consumers purchase earlier. We also find that the number of active consumers increases closer to departure.
    Keywords: Dynamic demand; Consumers' valuations; Advance purchases; Airlines
    JEL: C23 D12 L93 R41
    Date: 2014–04–18
  13. By: Jan Boone; Rudy Douven
    Abstract: This paper compares the welfare effects of three ways in which health care can be organized: no competition (NC), competition for the market (CfM) and competition on the market (CoM) where the payer offers the optimal contract to providers in each case. We show that CfM is optimal if the payer either has contractible information on provider quality or can enforce cost efficient protocols. If such contractible information is not available NC or CoM can be optimal depending on whether patients react to decentralized information on quality differences between providers and whether payer’s and patients’ preferences are aligned.
    JEL: D82 L5 I11
    Date: 2014–04
  14. By: Armstrong, Mark
    Abstract: Traditionally, the scholarly journal market operates so that research institutions are charged high prices and the wider public is often excluded altogether, while authors can usually publish for free and commercial publishers enjoy high profits. Two forms of open access regulation can mitigate these problems: (i) direct price regulation of the form whereby a journal must charge a price of zero to all readers, or (ii) mandating authors or publishers to make freely available an inferior substitute to the published paper. The former policy is likely to result in authors paying to publish, which may lead to a reduction in the quantity of published papers and may make authors less willing to publish in selective journals. Recent UK policy towards open access is discussed.
    Keywords: Publishing, journals, open access, two-sided markets, regulation
    JEL: D83 I23 L17 L51 L86
    Date: 2014–04
  15. By: Schöni, Olivier; Seger, Lukas
    Abstract: The present article proposes a new approach to compare mobile communication service prices among different communications service providers. To this end, a hedonic model based on monthly phone bills is employed that relates billed amounts and the quantities of consumed mobile communication services. A linear hedonic regression model is separately estimated for each provider and then used to estimate prices. Laspeyres, Paasche, and Fisher double-imputed price indices are then used to compare prices across communications service providers on an aggregate level. The sensitivity of these indices in relation to the estimated hedonic functions is investigated using a generalized additive model.
    Keywords: mobile communication; price indices; prediction; hedonic regression
    JEL: C43 C52 C53 P42
    Date: 2014–04–30
  16. By: Christophe Dutang (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429, IRMA - Institut de Recherche Mathématique Avancée - CNRS : UMR7501 - Université de Strasbourg); Hansjoerg Albrecher (UNIL - Université de Lausanne - Université de Lausanne); Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: In this paper, we formulate a noncooperative game to model a non-life insurance market. The aim is to analyze the e ects of competition between insurers through di erent indicators: the market premium, the solvency level, the market share and the underwriting results. Resulting premium Nash equilibria are discussed and numerically illustrated.
    Date: 2013

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