nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒10‒27
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price Competition in a Duopoly Characterized by Positional Effects By Evdokia Dritsa; Eleftherios Zacharias
  2. Price as a signal of product quality: some experimental evidence By Giovanni Mastrobuoni; Franco Peracchi; Aleksey Tetenov
  3. Price Discrimination of Congestible Network Goods By Maxime Agbo; Marc Santugini; Jonathan W. Williams
  4. Do Online Marketplaces Become More Efficient Over Time? By Andrey Fradkin

  1. By: Evdokia Dritsa (Department of Economics, Athens University of Economics and Business); Eleftherios Zacharias (Department of Economics, Athens University of Economics and Business)
    Abstract: We examine the price decisions in a vertically differentiated duopoly where the decision to buy a good depends not only upon the intrinsic utility from consuming it but also upon the social attributes (prestige, uniqueness etc.) associated with its consumption. These social attributes are especially important in vertically differentiated markets. We show that when these attributes are not very strong, if their intensity increases, the profits of both firms increase. However, when these attributes are very important, if their intensity increases, the profits of the firm that offers a lower quality variant increase whereas the profits of the firm that offers the higher quality variant decrease. Our results have implications on the amount of persuasive advertising firms should conduct in such markets.
    Keywords: Vertical differentiation; positional externalities, snob effect; bandwagon effect.
    JEL: L11 D11 D43
    Date: 2012–10
  2. By: Giovanni Mastrobuoni; Franco Peracchi; Aleksey Tetenov
    Abstract: We study the determinants of the choice between wines in wine tasting experiments where about 200 nonprofessional tasters were asked to indicate which one of the tasted wines they preferred and which one they would buy. In addition to actually tasting several wines, which differ in terms of their intrinsic quality, tasters were randomly given fictitious information about their price and the environment where the grapes were grown and the wines produced. We exploit the randomness of these signals to weigh their importance relative to the intrinsic quality of the wine using a random utility model. The model combines separate information on which wine the tasters prefer and which one they would buy to identify the signaling value of price. We are able to separate the positive signaling effect of price from its negative effect through the budget constraint. Consistent with Wolinsky (1983) and Milgrom and Roberts (1986), we find that tasters use price as a signal about the quality of the product. The signaling effect is strongly non-linear and depends on the tasters' experience.
    Keywords: Pricing; signalling; product quality; wine ratings
    JEL: D11 D12 D82
    Date: 2012
  3. By: Maxime Agbo; Marc Santugini; Jonathan W. Williams
    Abstract: We study second-degree price discrimination for a congestible network good. We show that the seller does not always provide distinct contracts (i.e., it is not always optimal to price discriminate) and that it is more likely for the low-valuation buyer to be excluded. Because of the network externality through congestion, no buyer receives an efficient allocation. In particular, the high-valuation buyer might be offered a higher or a lower quality (relative to the first-degree price discrimination offer). Moreover, with congestion and for values of the parameters for which all types are serviced, consumer surplus under second-degree price discrimination may be greater than consumer surplus under no price discrimination.
    Keywords: Congestion, Network, Price Discrimination
    JEL: D40 D62 D86 L14
    Date: 2012
  4. By: Andrey Fradkin (Department of Economics, Stanford University)
    Abstract: An increasing proportion of transactions in two-sided markets are being mediated by online platforms. Presumably, agents choose to use online platforms because they have a lower transaction cost technology compared to alternatives. I use data from a growing online platform that matches travelers and hosts to study matching and transaction costs on online platforms. I show that the matching probability for guests has increased by 18% over a span of two years on the platform. I then show that the increase in efficiency holds even when controlling for the search intensity of guests, the change in the composition of transactions and aggregate market conditions at the time of search I demonstrate that guests are elastic with respect to the time it takes to make a transaction. I then investigate one potential reason for why guests are more successful over time: a decrease in the transaction costs required to book. I show that the time to book and the amount of communication required to book on the platform are falling over time. I then consider three possible explanation hypotheses for the reduction in required transaction costs: learning, reputation building and platform policy. I show that all three are likely important for explain the increased efficiency over time.
    Keywords: Two-Sided Platforms, Matching, Search, Marketplaces, Frictions, Transaction Costs, Learning, Reputation, Internet Economics
    JEL: L1 L2 J6 D82 D83 D23 O31 O33
    Date: 2012–10

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