New Economics Papers
on Industrial Organization
Issue of 2013‒02‒08
four papers chosen by

  1. Product development capability and marketing strategy for new durable products By Sumitro Banerjee; David A. Soberman
  2. Product Market Predatory Threats and the Use of Performance-sensitive Debt By Kjenstad, Einar; Su, Xunhua
  3. Intertemporal Pricing with Unobserved Consumer Arrival Times By Philippe Choné; Romain De Nijs; Lionel Wilner
  4. The History of an Inferior Good: Beer Consumption in Germany By Benjamin Volland

  1. By: Sumitro Banerjee (ESMT European School of Management and Technology); David A. Soberman (Rotman School of Management, University of Toronto)
    Abstract: Our objective is to understand how a firm’s product development capability (PDC) affects the launch strategy for a durable product that is sequentially improved over time in a market where consumers have heterogeneous valuations for quality. We show that the launch strategy of firms is affected by the degree to which consumers think ahead. However, only the strategy of firms with high PDC is affected by the observability of quality. When consumers are myopic and quality is observable, both high and low PDC firms use price skimming and restrict sales of the first generation to consumers with high willingness to pay (WTP). A high PDC firm, however, sells the second generation broadly while a low PDC firm only sells the second generation to consumers with low WTP. When consumers are myopic and quality is unobservable, a firm with high PDC signals its quality by offering a low price for the first generation, which results in broad selling. The price of the second generation is set such that only high WTP consumers buy. A firm with low PDC will not mimic this strategy. If a low PDC firm sells the first generation broadly, it cannot discriminate between the high and low WTP consumers. When consumers are forward looking, a firm with high PDC sells the first generation broadly. This mitigates the “Coase problem” created by consumers thinking ahead. It then sells the second generation product only to the high WTP consumers. In contrast, a firm with low PDC does the opposite. It only sells the first generation to high WTP consumers and the second generation broadly.
    Keywords: product development, marketing strategy, durable goods, quality, signaling game
    Date: 2013–01–28
  2. By: Kjenstad, Einar; Su, Xunhua
    Abstract: We use a variant of the Hotelling (1929) model to illustrate that, when a firm faces hard payment constraint(s), financially strong rivals may adopt predatory strategies to drive the firm out of the product market and hence to obtain extra profit from enhanced market power later on. Predation is more likely to occur if the payment constraint is contingent on the firm’s performance. The model predicts that higher predatory threats in the product market reduce firm’s use of performance-sensitive debt and this effect should be more pronounced for small firms with large growth opportunities. Through a sample of over 16,000 bank loans to U.S. borrowers in 1997-2008, we find empirical evidence to support these model predictions.
    Keywords: Financial constraints; PSD; Competition; Hotelling model; HHI
    JEL: L10 D20 G30 G20
    Date: 2012–10
  3. By: Philippe Choné (CREST); Romain De Nijs (CREST & UC Berkeley); Lionel Wilner (CREST-INSEE 104 rue de la Convention 75015 Paris Tél : 06 22 82 56 26)
    Abstract: We examine optimal selling mechanisms with ex-ante commitment for a nondurable good when the seller does not observe the times at which strategic consumers arrive on the market and how much they are willing to pay for the good. Assuming consumer risk neutrality, we demonstrate in this two-dimensional screening problem that stochastic mechanisms are suboptimal. In practice, this means that quantity rationing and behavior-based price discrimination do not improve the profit compared to a simple time-dependent price schedule. We explain how the optimal profit may be achieved with a first-come first-served policy
    Keywords: Intertemporal pricing, Strategic consumers, Arrival dates, Heterogeneous cohorts, two-dimensional screening
    JEL: D11 D42 D82
    Date: 2012–10
  4. By: Benjamin Volland
    Abstract: The question whether alcohol in general, and different types of alcoholic beverages in particular (e.g., beer) are normal or inferior goods is a heavily disputed issue within economics and health research. Based on recently developed theories of preference adjustment this paper argues that the answer to this question may not be independent of the level of income itself. It therefore applies a gradual switching regression approach to aggregate beer consumption data in Germany from 1957 to 2007. This method allows elasticities to change over time, without prior specifications of the time and speed of adjustments. Results suggest that an important behavioral change is present in the data, as elasticities of beer demand shifted considerably between 1965 and 2004. In particular, they demonstrate that over this period beer shifted from being a normal to being an inferior good.
    Keywords: Beer demand, Inferior goods, Gradual switching regression
    JEL: D10 C22
    Date: 2013–01–31

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