nep-ind New Economics Papers
on Industrial Organization
Issue of 2009‒12‒11
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price Controls and Consumer Surplus By Jeremy Bulow; Paul Klemperer
  2. Is cross-category brand loyalty determined by risk aversion? By Nadja Silberhorn; Lutz Hildebrandt
  3. Dynamics of Entry and Exit of Product Varieties – what evolution dynamics can account for the empirical regularities? By Andersson, Martin; Johansson, Börje; Månsson, Kristofer
  4. Leadership Games with Convex Strategy Sets By Bernhard von Stengel; Shmuel Zamir
  5. Testing Theories of Scarcity Pricing in the Airline Industry By Steven L. Puller; Anirban Sengupta; Steven N. Wiggins

  1. By: Jeremy Bulow (Graduate School of Business, Stanford University, Stanford, USA); Paul Klemperer (Nuffield College, University of Oxford, Oxford, UK)
    Abstract: The condition for when a price control increases consumer welfare in perfect competition is tighter than often realised. When demand is linear, a small restriction on price only increases consumer surplus if the elasticity of demand exceeds the elasticity of supply; with log-linear or constant-elasticity, demand consumers are always hurt by price controls. The results are best understood - and can be related to monopoly-theory results - using the fact that consumer surplus equals the area between the demand curve and the industry marginal-revenue curve.
    Keywords: Rationing, Allocative Efficiency, Microeconomic Theory, Marginal Revenue, Minimum Wage, Rent Control, Consumer Welfare
    JEL: D45 D61 D6
    Date: 2009–07–01
  2. By: Nadja Silberhorn; Lutz Hildebrandt
    Abstract: The need to understand and leverage consumer-brand bonds has become critical in a marketplace characterized by increasing unpredictability, diminishing product differentiation, and heightened competitive pressure. This is especially true for fast moving consumer goods (FMCG) manufacturers and retailers. Knowing why a customer stays loyal to a brand in multiple product categories is necessary for deriving suitable marketing strategies in the context of a brand extension, yet research on the motives, characteristics, life styles and attitudes of cross-category brand loyal customers has been investigated only in a limited number of studies. We will fill a gap in the literature on cross-category brand choice behavior by analyzing revealed preference data with respect to brand loyalty in several categories in which a brand competes. Provided with purchase and corresponding survey data we investigate the product portfolio of a leading nonfood FMCG brand. We segment consumers on the basis of their revealed brand preferences and, focusing on consumers’ risk aversion, identify cross-category brand loyal customers’ personality traits as determinants of their brand loyal purchase behavior.
    Keywords: cross-category brand loyalty, risk aversion, share of category requirements, customer segmentation
    JEL: M31 C51
    Date: 2009–12
  3. By: Andersson, Martin (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Johansson, Börje (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Månsson, Kristofer (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: Firm-level heterogeneity is substantial even in narrowly defined industries. This paper focuses on formulating evolution dynamics which can account for the observed heterogeneity and its maintenance. Based on examination of data on Swedish firm’ supply pattern to different markets over time, we present a parsimonious model that has the ambition to capture the picture of heterogeneous firms, while accommodating the simultaneous exit and entry of destination varieties in firms’ supply pattern. The model assumes both scale economies of firms and path-dependence, where the latter is manifested in such a way that the arrival rate of innovation ideas to an individual firm is a function of each firm’s stock of varieties at every given point in time. The path-dependence phenomenon is an “explosive” non-linearity, whereas conservation mechanisms include development of demand and exit of established varieties. The described path dependence explains the skewed distribution of varieties across firms, but the question of what keeps the “equilibrium” away from competitive exclusion where only few large firms remain. We make use of simulations to depict and assess the innovation dynamics of the proposed model.
    Keywords: innovation; path-dependence; firm-level; heterogeneity; evolution dynamics
    JEL: C16 F14 L25 O33
    Date: 2009–11–23
  4. By: Bernhard von Stengel; Shmuel Zamir
    Abstract: A basic model of commitment is to convert a two-player game in strategic form to a “leadership game†with the same payoffs, where one player, the leader, commits to a strategy, to which the second player always chooses a best reply. This paper studies such leadership games for games with convex strategy sets. We apply them to mixed extensions of finite games, which we analyze completely, including nongeneric games. The main result is that leadership is advantageous in the sense that, as a set, the leader’s payoffs in equilibrium are at least as high as his Nash and correlated equilibrium payoffs in the simultaneous game. We also consider leadership games with three or more players, where most conclusions no longer hold.
    Date: 2009–11
  5. By: Steven L. Puller; Anirban Sengupta; Steven N. Wiggins
    Abstract: This paper investigates why passengers pay substantially different fares for travel on the same airline between the same two airports. We investigate questions that are fundamentally different from those in the existing literature on airline price dispersion. We use a unique new dataset to test between two broad classes of theories regarding airline pricing. The first group of theories, as advanced by Dana (1999b) and Gale and Holmes (1993), postulates that airlines practice scarcity based pricing and predicts that variation in ticket prices is driven by differences between high demand and low demand periods. The second group of theories is that airlines practice price discrimination by using ticketing restrictions to segment customers by willingness to pay. We use a unique dataset, a census of ticket transactions from one of the major computer reservation systems, to study the relationships between fares, ticket characteristics, and flight load factors. The central advantage of our dataset is that it contains variables not previously available that permit a test of these theories. We find only mixed support for the scarcity pricing theories. Flights during high demand periods have slightly higher fares but exhibit no more fare dispersion than flights where demand is low. Moreover, the fraction of discounted advance purchase seats is only slightly higher on off-peak flights. However, ticket characteristics that are associated with second-degree price discrimination drive much of the variation in ticket pricing.
    JEL: L1 L93
    Date: 2009–12

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