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on Game Theory |
| By: | Berliant, Marcus |
| Abstract: | Workers generally commute on a daily basis, so we model commuting as a repeated game. The folk theorem implies that for sufficiently large discount factors, the repeated commuting game has as a Nash equilibrium any feasible strategy that is uniformly better than the minimax strategy payoff for a commuter in the one shot game, repeated over the infinite horizon. This includes the efficient equilibria. An example where the efficient payoffs strictly dominate the one shot Nash equilibrium payoffs is provided. Our conclusions pose a challenge to congestion pricing in that equilibrium selection could be at least as effective in improving welfare. We examine evidence from St. Louis to determine what equilibrium strategies are actually played in the repeated commuting game. |
| Keywords: | Repeated game; Nash equilibrium; Commuting; Folk theorem |
| JEL: | R41 |
| Date: | 2023–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119442&r=gth |
| By: | Tiziano De Angelis; Fabien Gensbittel; St\'ephane Villeneuve |
| Abstract: | We construct a Nash equilibrium in feedback form for a class of two-person stochastic games with absorption arising from corporate finance. More precisely, the paper focusses on a strategic dynamic game in which two financially-constrained firms operate in the same market. The firms distribute dividends and are faced with default risk. The strategic interaction arises from the fact that if one firm defaults, the other one becomes a monopolist and increases its profitability. To determine a Nash equilibrium in feedback form, we develop two different concepts depending on the initial endowment of each firm. If one firm is richer than the other one, then we use a notion of control vs.\ strategy equilibrium. If the two firms have the same initial endowment (hence they are symmetric in our setup) then we need mixed strategies in order to construct a symmetric equilibrium. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.07703&r=gth |
| By: | Hanyu Li; Wenhan Huang; Zhijian Duan; David Henry Mguni; Kun Shao; Jun Wang; Xiaotie Deng |
| Abstract: | Nash equilibrium is one of the most influential solution concepts in game theory. With the development of computer science and artificial intelligence, there is an increasing demand on Nash equilibrium computation, especially for Internet economics and multi-agent learning. This paper reviews various algorithms computing the Nash equilibrium and its approximation solutions in finite normal-form games from both theoretical and empirical perspectives. For the theoretical part, we classify algorithms in the literature and present basic ideas on algorithm design and analysis. For the empirical part, we present a comprehensive comparison on the algorithms in the literature over different kinds of games. Based on these results, we provide practical suggestions on implementations and uses of these algorithms. Finally, we present a series of open problems from both theoretical and practical considerations. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.11063&r=gth |
| By: | Ivan Conjeaud |
| Abstract: | Most contributions in the algorithmic collusion literature only consider symmetric algorithms interacting with each other. We study a simple model of algorithmic collusion in which Q-learning algorithms repeatedly play a prisoner's dilemma and allow players to choose different exploration policies. We characterize behavior of such algorithms with asymmetric policies for extreme values and prove that any Nash equilibrium features some cooperative behavior. We further investigate the dynamics for general profiles of exploration policy by running extensive numerical simulations which indicate symmetry of equilibria, and give insight for their distribution. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.02644&r=gth |
| By: | Masaki Miyashita; Takashi Ui |
| Abstract: | A linear-quadratic-Gaussian (LQG) game is an incomplete information game with quadratic payoff functions and Gaussian payoff states. This study addresses an information design problem to identify an information structure that maximizes a quadratic objective function. Gaussian information structures are found to be optimal among all information structures. Furthermore, the optimal Gaussian information structure can be determined by semidefinite programming, which is a natural extension of linear programming. This paper provides sufficient conditions for the optimality and suboptimality of both no and full information disclosure. In addition, we characterize optimal information structures in symmetric LQG games and optimal public information structures in asymmetric LQG games, with each structure presented in a closed-form expression. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.09479&r=gth |
| By: | David Gill; Zachary Knepper; Victoria Prowse; Junya Zhou |
| Abstract: | We explore the influence of cognitive ability and judgment on strategic behavior in the beauty contest game. Using the level-k model of bounded rationality, cognitive ability and judgment both predict higher level strategic thinking. However, individuals with better judgment choose the Nash equilibrium action less frequently, and we uncover a novel dynamic mechanism that sheds light on this pattern. Taken together, our results indicate that fluid (i.e., analytical) intelligence is a primary driver of strategic level-k thinking, while facets of judgment that are distinct from fluid intelligence drive the lower inclination of high judgment individuals to choose the equilibrium action. |
| Keywords: | cognitive ability; judgment; fluid intelligence; matrix reasoning; beauty contest; strategic sophistication; level-k; experiment; game theory |
| JEL: | C92 C72 D91 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1337&r=gth |
| By: | Pierfrancesco Guarino |
| Abstract: | Given a dynamic ordinal game, we deem a strategy sequentially rational if there exist a Bernoulli utility function and a conditional probability system with respect to which the strategy is a maximizer. We establish a complete class theorem by characterizing sequential rationality via the new Conditional B-Dominance. Building on this notion, we introduce Iterative Conditional B-Dominance, which is an iterative elimination procedure that characterizes the implications of forward induction in the class of games under scrutiny and selects the unique backward induction outcome in dynamic ordinal games with perfect information satisfying a genericity condition. Additionally, we show that Iterative Conditional B-Dominance, as a `forward induction reasoning' solution concept, captures: $(i)$ the unique backward induction outcome obtained via sophisticated voting in binary agendas with sequential majority voting; $(ii)$ farsightedness in dynamic ordinal games derived from social environments; $(iii)$ a unique outcome in ordinal Money-Burning Games. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.03536&r=gth |
| By: | Hanshu Zhang; Frederic Moisan (EM - emlyon business school); Palvi Aggarwal; Cleotilde Gonzalez |
| Abstract: | Previous research has discussed the effects of monetary incentives and prosociality on deceptive behavior. However, research has not comprehensively investigated the relationship between these two factors. In the current research, we introduce a repeated two-player sender–receiver binary choice task, where players in the role of senders or receivers receive asymmetric information regarding payoffs, offering the opportunity to explore the effects of economic incentives to lie according to the players' prosociality. In Experiment 1, players are paired to play the game as a sender or receiver online. We find that economic incentives determine the likelihood of deception from senders and the likelihood that receivers will deviate from the received suggestions. Moreover, prosociality is related to players' behavior: Prosocial senders send less deceptive messages and prosocial receivers choose options that benefit senders more. Furthermore, senders display consistent behavior when interacting with receivers, and they do not change their deceptive behavior even if detected by receivers. Experiment 2 further investigates how the players' behavior corresponds to their understanding and interpretation of the other players' actions, by pairing players with computer algorithms that display consistent probabilistic behaviors. We observe that senders deceive receiver algorithms by sending truthful messages when they expect the message not to be followed, and receivers follow the received messages by choosing the option that benefits "honest" sender algorithms. While we find a consistent result that prosocial senders send fewer deceptive messages than they should when telling the truth is costly, prosocial receivers are less considerate of sender payoffs in algorithms' interaction. |
| Keywords: | Deception, Sender-receiver game, Social preferences, Social value orientation, Human machine interaction |
| Date: | 2022–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04325602&r=gth |
| By: | Iuliia Grabova (HU Berlin, DIW Berlin); Hedda Nielsen (HU Berlin); Georg Weizsäcker (HU Berlin) |
| Abstract: | Game-theoretic analyses of communication rely on beliefs – especially, the receiver’s belief about the truth status of an utterance and the sender’s belief about the reaction to the utterance – but research that provides measurements of such beliefs is still in its infancy. Our experiment examines the use of second-order beliefs, measuring belief hierarchies regarding a message that may be a lie. In a two-player communication game between a sender and a receiver, the sender knows the state of the world and has a transparent incentive to deceive the receiver. The receiver chooses a binary reaction. For a wide set of non-equilibrium beliefs, the reaction and the receiver’s second-order belief should dissonate: she should follow the sender’s statement if and only if she believes that the sender believes that she does not follow the statement. The opposite is true empirically, constituting a new pattern of inconsistency between actions and beliefs. |
| Keywords: | strategic information transmission; lying; higher-order beliefs; |
| JEL: | D01 D83 |
| Date: | 2023–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:477&r=gth |
| By: | Ratul Lahkar (Ashoka University); Saptarshi Mukherjee (Indian Institute of Technology Delhi) |
| Abstract: | We consider large population Tullock contests in which agents are divided into different types according to their strategy cost function. A planner assigns type specific bias parameters to affect the likelihood of success with the objective of maximizing the Nash equilibrium level of aggregate strategy. We characterize such optimal bias parameters and identify conditions under which those parameters are increasing or decreasing according to the cost parameters. The parameters are biased in favor of high cost agents if the cost functions are strictly convex and the likelihood of success is sufficiently responsive to strategy. We also identify conditions under which a planner can truthfully implement the optimal parameters under incomplete information. In fact, under such conditions, dominant strategy implementation is equivalent to Nash implementation in our model. Hence, our mechanism double implements the optimal bias parameters. |
| Date: | 2022–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:ash:wpaper:82&r=gth |
| By: | Jan Christoph Schlegel |
| Abstract: | We study equilibrium investment into bidding and latency reduction for different sequencing policies. For a batch auction design, we observe that bidders shade bids according to the likelihood that competing bidders land in the current batch. Moreover, in equilibrium, in the ex-ante investment stage before the auction, bidders invest into latency until they make zero profit in expectation. We compare the batch auction design to continuous time bidding policies (time boost) and observe that (depending on the choice of parameters) they obtain similar revenue and welfare guarantees. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.02055&r=gth |
| By: | Lea Heursen (HU Berlin); Eva Ranehill (University of Gothenburg, Lund University); Roberto Weber (University of Zurich) |
| Abstract: | We study whether one reason behind female underrepresentation in leadership is that female leaders are less effective at coordinating followers’ actions. Two experiments using coordination games investigate whether female leaders are less successful than males in persuading followers to coordinate on efficient equilibria. In these settings, successful coordination hinges on higher-order beliefs about the leader’s capacity to convince followers to pursue desired actions, making beliefs that women are less effective leaders potentially self-confirming. We find no evidence that such bias impacts actual leadership performance, precisely estimating the absence of a gender leadership gap. We further show that this result is surprising given experts’ priors. |
| Keywords: | gender; coordination games; leadership; experiment; |
| JEL: | D23 C72 C92 J1 |
| Date: | 2023–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:472&r=gth |
| By: | Zongxia Liang; Keyu Zhang |
| Abstract: | In this paper we study a time-inconsistent portfolio optimization problem for competitive agents with CARA utilities and non-exponential discounting. The utility of each agent depends on her own wealth and consumption as well as the relative wealth and consumption to her competitors. Due to the presence of a non-exponential discount factor, each agent's optimal strategy becomes time-inconsistent. In order to resolve time-inconsistency, each agent makes a decision in a sophisticated way, choosing open-loop equilibrium strategy in response to the strategies of all the other agents. We construct explicit solutions for the $n$-agent games and the corresponding mean field games (MFGs) where the limit of former yields the latter. This solution is unique in a special class of equilibria. As a by-product, we find that competition in the time-inconsistency scenario modifies the agent's risk tolerance as it does in the time-consistent scenario. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.14437&r=gth |
| By: | Anton Kolotilin (School of Economics, UNSW); Roberto Corrao (Department of Economics, MIT); Alexander Wolitzky (Department of Economics, MIT) |
| Abstract: | We consider general Bayesian persuasion problems where the receiver’s utility is single-peaked in a one-dimensional action. We show that a signal that pools at most two states in each realization is always optimal, and that such pairwise signals are the only solutions under a non-singularity condition (the twist condition). Our core results provide conditions under which riskier prospects induce higher or lower actions, so that the induced action is single-dipped or single-peaked on each set of nested prospects. We also provide conditions for the optimality of either full disclosure or negative assortative disclosure, where all prospects are nested. Methodologically, our results rely on novel duality and complementary slackness theorems. Our analysis extends to a general problem of assigning one-dimensional inputs to productive units, which we call optimal productive transport. This problem covers additional applications including club economies (assigning workers to firms, or students to schools), robust option pricing (assigning future asset prices to price distributions), and partisan gerrymandering (assigning voters to districts). |
| Keywords: | Bayesian persuasion, information design, first-order approach, optimal transport, duality, complementary slackness, pairwise signal, single-dipped signal, negative assortative disclosure, club economies, option pricing, gerrymandering |
| JEL: | C78 D82 D83 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2023-12&r=gth |
| By: | Anton Kolotilin (School of Economics, UNSW); Roberto Corrao (Department of Economics, MIT); Alexander Wolitzky (Department of Economics, MIT) |
| Abstract: | In persuasion problems where the receiver’s utility is single-peaked in a one-dimensional action, optimal signals are characterized by duality, based on a first-order approach to the receiver’s problem. A signal that pools at most two states in each realization is always optimal, and such pairwise signals are the only solutions under a non-singularity condition on utilities (the twist condition). Our core results provide conditions under which higher actions are induced at more or less extreme pairs of states, so that the induced action is single-dipped or single-peaked on each set of nested pairs of states. We also provide conditions for the optimality of either full disclosure or negative assortative disclosure, where signal realizations can be ordered from least to most extreme. Methodologically, our proofs rely on a novel complementary slackness theorem for persuasion problems. |
| Keywords: | persuasion, information design, duality, optimal transport, first-order approach, pairwise signals, twist condition, single-dipped disclosure, negative assortative disclosure, complementary slackness |
| JEL: | C78 D82 D83 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2023-07&r=gth |
| By: | Martín Iñaki Loriente (Department of Economics, Universidad de San Andrés); Juan Cruz Diez (Department of Economics, Universidad de San Andrés) |
| Abstract: | In 1950, Harold W. Kuhn introduced a simplified version of poker referred to as Kuhn Poker and solved it using the notion of Nash Equilibrium. His pioneering work inspired subsequent scholars who applied similar methodologies to other poker versions. In contrast we adopt a different procedure by employing Harsanyi’s approach to reach a Perfect Bayesian Equilibrium (PBE), a concept that emerged two decades after Kuhn’s original solutions. While computational techniques have greatly advanced the analysis of various poker variations, achieving a PBE remains elusive. Some studies suffer from methodological flaws, as they overlook the importance of incorporating beliefs into their analysis. In our research, we also conducted a rationality study and found that relaxing the sophistication of a player leads to a shift in optimal strategies towards more exploitative ones. |
| Keywords: | Bayesian, Exploitative, GTO, KuhnPoker, PBE, Poker, Rationality |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:sad:ypaper:10&r=gth |
| By: | Emanuel Vespa (UC San Diego); Georg Weizsäcker (HU Berlin) |
| Abstract: | We consider the trade-off between talking and listening in a laboratory experiment where two team members need to coordinate on the use of an information channel. Each team member indicates their preference to “talk” and share her own information with her teammate, or to “listen” and obtain knowledge of the teammate’s information. The nature of the information varies across treatments. For stylized urns-and-balls treatments, we formalize a version of the “hard-easy effect” of over- and under-confidence: players talk more in situations where information is relatively precise – not only for the talker but also for the listener. Indeed we find that a more precise information structure induces a higher talking frequency, with a difference of 5 percentage points, relative to a baseline of 48 percent. The game-theoretic equilibrium, with rational expectations, predicts no such treatment effect. In treatments where information arises from real-world contexts, the hard-easy effect on the talking frequency is even stronger, at about 13 percentage points, relative to a baseline of about 38 percent. |
| Date: | 2023–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:479&r=gth |
| By: | Mehmet S. Ismail; Ronald Peeters |
| Abstract: | It is well known that ex ante social preferences and expected utility are not always compatible. In this note, we introduce a novel framework that naturally separates social preferences from selfish preferences to answer the following question: What specific forms of social preferences can be accommodated within the expected utility paradigm? In a departure from existing frameworks, our framework reveals that ex ante social preferences are not inherently in conflict with expected utility in games, provided a decision-maker's aversion to randomization in selfish utility "counterbalances" her social preference for randomization. We also show that when a player's preferences in both the game (against another player) and the associated decision problem (against Nature) conform to expected utility axioms, the permissible range of social preferences becomes notably restricted. Only under this condition do we reaffirm the existing literature's key insight regarding the incompatibility of ex ante inequality aversion with expected utility. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.06048&r=gth |
| By: | Anesti, Vincent (Department of Economics and Management, University of Luxembourg); Buisseret, Peter (Department of Government, Harvard University,) |
| Abstract: | We develop a dynamic model in which a group collectively bargains with an external party. At each date the group makes an offer to the external party (the ‘agent’) in exchange for a concession. Group members hold heterogeneous preferences over agreements and are uncertain about the agent’s resolve. We show that all group members favor more aggressive proposals than they would if they were negotiating alone. By eliciting more information about the agent’s resolve, these offers reduce the group members’ uncertainty about the agent’s preferences and therefore reduce the group’s internal conflicts over its negotiating strategy. To mitigate the consequent risk that negotiations fail, decisive group members successively give up their influence over proposals: starting from any initially democratic decision process, the group eventually consolidates its entire negotiation authority into the hands of a single member. |
| Keywords: | Adverse selection ; collective choice ; political economy ; dictatorship ; bargaining. JEL codes: D02 ; D71 ; D78 ; D82 ; L22 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:81&r=gth |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | Financial integration generates macroeconomic spillovers that may require international monetary policy coordination. We show that individual central banks may set nominal interest rates too low or too high relative to the cooperative outcome. We identify three sufficient statistics that determine whether the Nash equilibrium exhibits under-tightening or over-tightening: the output gap, sectoral differences in labor intensity, and the trade balance response to changes in nominal rates. Independently of the shocks hitting the economy, we find that under-tightening is possible during economic expansions or contractions. For large shocks, the gains from coordination can be substantial. |
| JEL: | E21 E23 E43 E44 E52 E62 F32 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32009&r=gth |
| By: | Japneet Kaur (Indira Gandhi Institute of Development Research) |
| Abstract: | In an economy with club goods, we introduce the concept of von Neumann-Morgensetern stable sets. Our main result provides a correspondence between stable sets of a club economy comprising a continuum of agents and finitely many types with those that form in the related finite economy. Along with the trade in private goods, agents in our economy can belong to multiple clubs. A club is characterised by the undertaking in which it is engaged and the external attributes of its members. Further, inspired by Harsanyi [10], we also bring in the notion of `sophisticated stability' and show an equivalence between `sophisticated stable sets' in the utility space with those that form in the allocation space. |
| Keywords: | Club goods, Stable sets of allocations, Stable sets of payoffs, Core, Sophisticated stability |
| JEL: | D50 D51 D60 D61 D71 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2023-011&r=gth |
| By: | Matteo M. Marini (Department of Public Economics and Masaryk University Experimental Economics Laboratory, Masaryk University, Brno, Czech Republic); Giulia Ulivieri (Department of Economics and Statistics, University of Siena, Siena, Italy) |
| Abstract: | This manuscript is a methodological work on the state of research using meta-analytic procedures in Economic Psychology, with a focus on the investigation of cross-cultural differences. We review published meta-analyses and introduce a new classification thereof by data source, describing how the different categories relate to the study of cross-cultural differences. We also discuss related opportunities and challenges, proposing a sustainable methodological approach that is then implemented in three case studies where we re-analyze data from published meta-analyses. In doing so, the relevance of culture as a determinant is explored by relating country-level cultural indicators to experimental measures of risk aversion, tax compliance, and prosocial behavior, respectively. It turns out that, after we control for country-level cultural heterogeneity and economic development, country-level individualism predicts these economic outcomes. We discuss possible interpretations of our findings. |
| Keywords: | meta-analysis, individualism, fractionalization, Multiple Price List, Tax Evasion Game, Dictator Game |
| JEL: | C90 Z10 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:mub:wpaper:2024-01&r=gth |
| By: | Hunold, Matthias; Werner, Tobias |
| Abstract: | This paper investigates the collusive and competitive effects of algorithmic price recommendations on market outcomes. These recommendations are often non-binding and common in many markets, especially on online platforms. We develop a theoretical framework and derive two algorithms that recommend collusive pricing strategies. Utilizing a laboratory experiment, we find that sellers condition their prices on the recommendation of the algorithms. The algorithm with a soft punishment strategy lowers market prices and has a pro-competitive effect. The algorithm that recommends a subgame perfect equilibrium strategy increases the range of market outcomes, including more collusive ones. Variations in economic preferences lead to heterogeneous treatment effects and explain the results. |
| Keywords: | Collusion, Experiment, Human-Machine Interaction, Bertrand Oligopoly |
| JEL: | C92 D43 L13 L41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:280937&r=gth |
| By: | Ayush Pant (Ashoka University); Federico Trombetta (Universita Cattolica del Sacro Cuore) |
| Abstract: | Conventional wisdom suggests that competition in the modern digital environment pushes media outlets toward the early release of less accurate information. We show that this is not necessarily the case. We argue that two opposing forces determine the resolution of the speed-accuracy tradeoff: preemption and reputation. More competitive environments may be more conducive to reputation building, which may lead to better reporting. However, the audience may be worse off due to the outlets' better initial information. Finally, we show how a source may exploit the speed-accuracy tradeoff to quickly get "unverified facts" out to the audience. |
| Keywords: | media competition; preemption; reputation |
| Date: | 2023–01–30 |
| URL: | http://d.repec.org/n?u=RePEc:ash:wpaper:92&r=gth |
| By: | Kai Barron (WZB Berlin); Tilman Fries (LMU Munich) |
| Abstract: | Modern life offers nearly unbridled access to information; it is the harnessing of this information to guide decision-making that presents a challenge. We study how one individual may try to shape the way another person interprets objective information by proposing a causal explanation (or narrative) that makes sense of this objective information. Using an experiment, we examine the use of narratives as a persuasive tool in the context of financial advice where advisors may hold incentives that differ from those of the individuals they are advising. Our results reveal several insights about the underlying mechanisms that govern narrative persuasion. First, we show that advisors construct self-interested narratives and make them persuasive by tailoring them to fit the objective information. Second, we demonstrate that advisors are able to shift investors’ beliefs about the future performance of a company. Third, we identify the types of narratives that investors find convincing, namely those that fit the objective information well. Finally, we evaluate the efficacy of several potential policy interventions aimed at protecting investors. We find that narrative persuasion is difficult to protect against. |
| Keywords: | narratives; beliefs; financial advice; conflicts of interest; behavioral finance; |
| JEL: | D83 G40 G50 C90 |
| Date: | 2023–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:rco:dpaper:469&r=gth |
| By: | Bruno Jullien (TSE-R - TSE-R Toulouse School of Economics – Recherche - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Markus Reisinger (Frankfurt School of Finance and Management); Patrick Rey (TSE-R - TSE-R Toulouse School of Economics – Recherche - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | The availability of consumer data is inducing a growing number of firms to adopt more personalized pricing policies. This affects both the performance of, and the competition between, alternative distribution channels, which in turn has implications for firms' distribution strategies. We develop a formal model to examine a brand manufacturer's choice between mono distribution (selling only through its own direct channel) or dual distribution (selling through an independent retailer as well). We consider different demand patterns, covering both horizontal and vertical differentiation and different pricing regimes, with the manufacturer and retailer each charging personalized prices or a uniform price. We show that dual distribution is optimal for a large number of cases. In particular, this is always the case when the channels are horizontally differentiated, regardless of the pricing regime; moreover, if both firms charge personalized prices, a well-designed wholesale tariff allows them to extract the entire consumer surplus. These insights obtained here for the case of intrabrand competition between vertically related firms are thus in stark contrast to those obtained for interbrand competition, where personalized pricing dissipates industry profit. With vertical differentiation, dual distribution remains optimal if the manufacturer charges a uniform price. By contrast, under personalized pricing, mono distribution can be optimal when the retailer does not expand demand sufficiently. Interestingly, the industry profit may be largest in a hybrid pricing regime, in which the manufacturer forgoes the use of personalized pricing and only the retailer charges personalized prices. This paper was accepted by Joshua Gans, business strategy. Funding: The financial support of the European Research Council under the European Union's Horizon 2020 research and innovation programme [Grant Agreement 670494] and of the Agence nationale de la recherche (ANR) [Grant ANITI (ANR Grant 3IA)] and [Grant CHESS ANR-17-EURE-0010] (Investissements d'Avenir program) is gratefully acknowledged. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4437 . |
| Keywords: | Personalized pricing, Distribution strategies, Vertical contracting, Downstream competition |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04282548&r=gth |