nep-ind New Economics Papers
on Industrial Organization
Issue of 2006‒03‒11
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Supermarket Pricing Strategies By Ellickson, Paul; Misra, Sanjog
  2. Vertical differentiation, network externalities and compatibility decisions : an alternative approach. By Hend Ghazzai; Rim Lahmandi-Ayed
  3. Capacity Choice under Uncertainty: The Impact of Market Structure By Veronika Grimm; Gregor Zoettl
  4. "Repeated Games, Entry in The New Palgrave Dictionary of Economics, 2nd Edition" By Michihiro Kandori

  1. By: Ellickson, Paul; Misra, Sanjog
    Abstract: Most supermarket firms choose to position themselves by offering either "Every Day Low Prices" (EDLP) across several items or offering temporary price reductions (promotions) on a limited range of items. While this choice has been addressed from a theoretical perspective in both the marketing and economic literature, relatively little is known about how these decisions are made in practice, especially within a competitive environment. This paper exploits a unique store level dataset consisting of every supermarket operating in the United States in 1998. For each of these stores, we observe the pricing strategy the firm has chosen to follow, as reported by the firm itself. Using a system of simultaneous discrete choice models, we estimate each store's choice of pricing strategy, conditional on its expectation over the choices of its rivals. We find evidence that firms cluster by strategy, choosing actions that agree with those of its rivals. We also find a significant impact of various demographic and firm characteristics, providing some qualified support for several specific predictions from marketing theory.
    Keywords: EDLP, promotional pricing, positioning strategies, supermarkets, discrete games
    JEL: M31 L11 L81
    Date: 2006
  2. By: Hend Ghazzai (CES-CERMSEM et LEGI-Ecole Polytechnique de Tunisie); Rim Lahmandi-Ayed (LEGI-Ecole Polytecnique de Tunisie)
    Abstract: We characterize the equilibrium of a game in vertically differentiated market which exhibits network externalities. There are two firms, an incumbent and a potential entrant. Compatibility means in our model that the inherent qualities of the goods are close enough. By choosing its quality, the entrant chooses in the same time to be compatible or not. The maximal quality difference that allows compatibility i.e the compatibility interval is chosen by the incumbent which involves costs increasing with the width of that interval. We show that in order to have two active firms at price equilibrium, the sufficient condition on the market size of a standard vertical differentiation model remains valid under compatibility. However, an additional condition on the firms' qualities is needed under incompatibility. For a small quality segment, the incumbent can block entry choosing an empty compatibility interval. At the subgame perfect equilibrium, incompatibility prevails if the quality segment is large and the compatibility costs are high. Compatibility prevails for sufficiently large quality segments and low costs of compatibility. Finally there is no entry if the quality segment is small and the compatibility costs are high.
    Keywords: Vertical differentiation, compatibility, network externalities.
    JEL: L13 L15 D43
    Date: 2006–02
  3. By: Veronika Grimm; Gregor Zoettl
    Abstract: We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and provide an intuitive characterization of equilibrium investment. We show that investment in oligopoly, in the first and second best solution can be unambiguously ranked, in particular investment incentives are highest in the First Best solution and lowest under imperfect competition. We finally demonstrate that intervention of a social planer only at the production stage leads to strategic uncertainty at the investment stage and moreover decreases total investment below the level obtained under imperfect competition.
    Keywords: Investment incentives, demand uncertainty, cost uncertainty, Cournot competition, First Best, Second Best, capacity obligations, spot market regulation
    JEL: D43 L13 D41 D42 D81
    Date: 2006–02–28
  4. By: Michihiro Kandori (Faculty of Economics, University of Tokyo)
    Abstract: This entry shows why self-interested agents manage to cooperate in a long-term relationship. When agents interact only once, they often have an incentive to deviate from cooperation. In a repeated interaction, however, any mutually beneficial outcome can be sustained in an equilibrium. This fact, known as the folk theorem, is explained under various information structures. This entry also compares repeated games with other means to achieve efficiency and briefly discuss the scope for potential applications.
    Date: 2006–01
  5. By: Ramón Faulí-Oller (Universidad de Alicante); Lluís Bru (Universitat de les Illes Balears); Joel Sandonís (Universidad de Alicante)
    Abstract: We analyze third degree price discrimination by an upstream monopolistto a continuum of heterogeneous downstream firms. The novelty of ourapproach is to recognize that customizing prices may be costly, whichintroduces an interesting trade-off. As a consequence, partial pricediscrimination arises in equilibrium. In particular, we show that inefficientdownstream firms receive personalized prices whereas efficient firms arecharged a uniform price. The extreme cases of complete price discriminationand uniform price arise in our setting as particular cases, depending on the costof customizing prices.
    Keywords: Price discrimination, input markets
    JEL: D4 L11 L12
    Date: 2006–02

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