nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒08‒07
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pricing as a risky choice: Uncertainty and survival in a monopoly market By Andersen, Per; Vetter, Henrik
  2. Nonlinear Pricing By Armstrong, Mark
  3. Competitive Package Size Decisions By Yonezawa, Koichi; Richards, Timothy J.

  1. By: Andersen, Per; Vetter, Henrik
    Abstract: Roy (Safety First and the Holding of Assets, 1952) argues that decisions under uncertainty motivate firms to avoid bankruptcy. In this paper the authors ask about the behaviour of a monopolist who pre-commits to price when she has only probabilistic knowledge about demand. They argue that pricing in order to maximise the likelihood of survival explains anomalies such as inelastic pricing, why the firm takes on more risk as gains become less likely, and asymmetric responses to demand and cost changes. When demand is a linear demand, the monopolist's response to an increase in the marginal cost is similar to the response when mark-up pricing is used. That is, there is a one-to-one relationship between an increase of the marginal cost and an increase in price.
    Keywords: monopoly,uncertainty,safety-first principle
    JEL: D42 L12 L21
    Date: 2015
  2. By: Armstrong, Mark
    Abstract: I survey the use of nonlinear pricing as a method of price discrimination, both with monopoly and oligopoly supply. Topics covered include an analysis of when it is profitable to offer quantity discounts and bundle discounts, connections between second- and third-degree price discrimination, the use of market demand functions to calculate nonlinear tariffs, the impact of consumers with bounded rationality, bundling arrangements between separate sellers, and the choice of prices for upgrades and add-on products.
    Keywords: Nonlinear pricing; price discrimination; bundling; multidimensional screening; oligopoly
    JEL: D21 D42 L13 L15 M31
    Date: 2015–07
  3. By: Yonezawa, Koichi; Richards, Timothy J.
    Abstract: In the consumer packaged goods (CPGs) industry, consumers base their purchase decisions in part on package size because different package sizes offer different levels of convenience. The heterogeneous preference for package size allows manufacturers to use package size as a competitive tool in order to raise margins in the face of higher production costs. By competing in package sizes, manufacturers may be able to soften the degree of price competition in the downstream market, and raise margins accordingly. In order to test this hypothesis, we develop a structural model of consumer demand, and manufacturers' joint decisions regarding package size and price applied to store-level scanner data for the ready-to-eat breakfast cereal category. While others have argued that manufacturers reduce package sizes as a means of raising unit-prices in a hidden way, we show that package size and price are strategic complements – downsizing causes competitors to lower their prices, which leads to further downsizing, and more price competition until a particularly undesirable equilibrium (from the manufacturers perspective) is reached. Our results suggest that package downsizing is not necessarily the best way to extract surplus from consumers as the existing literature would lead us to believe.
    Keywords: Differentiated products, discrete choice, package size, pricing, product design, Agribusiness, Demand and Price Analysis, Industrial Organization, Marketing, C35, L13, L66, M31,
    Date: 2015–05–26

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