nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒05‒04
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Hotelling Games on Networks: Efficiency of Equilibria. By Gaëtan Fournier; Marco Scarsini
  2. Product Upgrades and Posted Prices By Mustafa Dogan_
  3. Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers By Rosa-Branca Esteves; Sofia Cerqueira
  4. Behaviour-Based Price Discrimination with Retention Offers By Rosa-Branca Esteves
  5. Estimating Dynamic Demand for Airlines By Diego, Escobari
  6. Postal-Sector Policy: From Monopoly to Regulated Competition and Beyond By Christian Jaag
  7. The Effect of Payment Reversibility on E-commerce and Postal Quality By Christian Jaag; Christian Bach

  1. By: Gaëtan Fournier (Centre d'Economie de la Sorbonne); Marco Scarsini (Dipartimento di Economia e Finanza - LUISS, Roma)
    Abstract: We consider a Hotelling game where a finite number of retailers choose a location, given that their potential customers are distributed on a network. Retailers do not compete on price but only on location, therefore each consumer shops at the closest store. We show that when the number of retailers is large enough, the game admits a pure Nash equilibrium and we construct it. We then compare the equilibrium cost bore by the consumers with the cost that could be achieved if the retailers followed the dictate of a benevolent planner. We perform this comparison in term of the induced price of anarchy, i.e., the ratio of the worst equilibrium cost and the optimal cost, and the induced price of stability, i.e., the ratio of the best equilibrium cost and the optimal cost. We show that, asymptotically in the number of retailers, these ratios are two and one, respectively.
    Keywords: Induced price of anarchy, induced price of stability, location games on networks, pure equilibria, large games.
    JEL: C72 R30 R39
    Date: 2014–04
  2. By: Mustafa Dogan_ (Department of Economics, University of Pennsylvania)
    Abstract: We consider the dynamic pricing problem of a durable good monopolist with full commitment power, when a new version of the good is expected at some point in the future. The new version of the good is superior to the existing one, bringing a higher ow utility. If the arrival is a stationary stochastic process, then the corresponding optimal price path is shown to be constant for both versions of the good, hence there is no delay on purchases and time is not used to discriminate over buyers, which is in line with the literature. However, if the arrival of the new version occurs at a commonly known deterministic date, then the optimal price path may be decreasing over time, resulting in delayed purchases. For both stochastic and deterministic arrival processes, posted prices is not the optimal mechanism, which on the other hand, involves into bundling of both new and old versions of the good and selling them only together.
    Keywords: durable goods, product upgrades, commitment, posted prices, dynamic mechanism design
    JEL: D42 D82
    Date: 2014–04–28
  3. By: Rosa-Branca Esteves (Universidade do Minho - NIPE); Sofia Cerqueira (Universidade do Minho)
    Abstract: This paper is a first look at the dynamic effects of BBPD in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. In comparison to no discrimination, it is shown that firms reduce their advertising efforts, charge higher first period prices and lower second period prices. In comparison to no discrimination, in contrast to the profit and consumer welfare results obtained under full informed consumers, it is shown that BBPD boosts industry profits and harms consumers.
    Date: 2014
  4. By: Rosa-Branca Esteves (Universidade do Minho - NIPE)
    Abstract: This paper is a first step in investigating the competitive and welfare effects of behavior-based price discrimination (BBPD) in markets where firms have information to employ retention strategies as an attempt to avoid the switching of their clientele to a competitor. We focus on retention activity in the form of a discount offered to a consumer expressing an intention to switch. When retention strategies are allowed, forward looking firms anticipate the effect of first period market share on second period profits and price more aggressively in the first-period. Thus,first period equilibrium price under BBPD with retention strategies is below its non-discrimination counterpart. This contrasts with first period price above the non-discrimination level if BBPD is used and retention activity is forbidden. Regarding second period prices, the use of retention offers increase the price offered to those consumers who do not signal am intention to switch; the reverse happens to those consumers who decide to switch after being exposed to retention offers. As in other models where consumers have stable exogenous brand preferences, the instrument of BBPD is bad for profits and welfare but good for consumers. BBPD with the additional tool of retention activity boosts consumer surplus and overall welfare but decreases industry profit.
    Date: 2014
  5. By: Diego, Escobari
    Abstract: This paper uses an original panel dataset with posted prices and sales to estimate a dynamic demand. We find that consumers become more price sensitive as time to departure nears which is consistent with having lower valuations. This result provides empirical support to a key theoretical implication in Deneckere and Peck [Deneckere, R., Peck, J., 2012. Dynamic competition with random demand and costless search: A theory of price posting. Econometrica 80, 1185-1247] --- high-valuation consumers purchase earlier. We also find that the number of active consumers increases closer to departure.
    Keywords: Dynamic demand; Consumers' valuations; Advance purchases; Airlines
    JEL: C23 D12 L93 R41
    Date: 2014–04–18
  6. By: Christian Jaag
    Abstract: This paper discusses the main aspects of the competitive and regulatory state of the postal sector. It presents the different models for postal competition and regulation in the EU and the US and their history, together with their implications on regulation, with a focus on universal services and network access. While postal monopolies used to be the main source of funding for universal service obligations, the need for alternative funding sources after full liberalization has increased the interest of regulators and the public in knowing the cost of these obligations. In parallel, new means of electronic communication and consumer needs call the traditional scope of universal services into question. This paper outlines the economic rationale of current policies and directions for future postal regulation to strengthen the postal services’ commercial viability in a competitive age, while safeguarding their relevant characteristics for the economy.
    Keywords: Postal Sector, Regulation, Liberalization
    JEL: L52 L87
    Date: 2014–04
  7. By: Christian Jaag; Christian Bach
    Abstract: In this paper we develop a stylized model of competition between brick-and-mortar merchants and online retailers. An offline transaction, matching payment with delivery, is without risk for both the seller and the buyer. In an online transaction the seller faces the potential risk of non-payment while the buyer risks failed delivery. The effects of these two risks depend on the reversibility of payment. While traditional payment systems for e-commerce are reversible, virtual currencies like Bitcoin offer irreversible transactions. This shifts the risk from the receiver of the payment to its sender. The paper explores the effect of payment reversibility on competition between offline and online merchants and on the importance of postal quality for e-commerce. It finds that payment irreversibility may strengthen e-commerce due to reduced overall risk. Moreover, under reasonable conditions, postal operators have stronger incentives for quality since it affects volumes more strongly if payment is irreversible.
    Keywords: Virtual Currencies, Bitcoin, E-Commerce
    JEL: L81
    Date: 2014–04

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