nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒03‒29
five papers chosen by

  1. Bertand Competition and the Existence of Pure Strategy Nash Equilibrium in Markets with Adverse Selection By Anastasios Dosis
  2. Pricing Strategies in Advance Selling: Should a Retailer Offer a Pre-order Price Guarantee? By Oksana Loginova
  3. Relative price dispersion: evidence and theory By Kaplan, Greg; Menzio, Guido; Rudanko, Leena; Trachter, Nicholas
  4. Vertical Differentiation and Collusion: Cannibalization or Proliferation? By Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
  5. Competitive Capacity Investment under Uncertainty By Li, X.; Zuidwijk, R.A.; de Koster, M.B.M.; Dekker, R.

  1. By: Anastasios Dosis (ESSEC - ESSEC Business School - Essec Business School - Economics Department - Essec Business School, THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)
    Abstract: I analyse a market with adverse selection in which companies competè a la Bertrand by offering menus of contracts. Contrary to Rothschild and Stiglitz (1976), I allow for any finite number of types and states and more general utility functions. I define the generalised Rothschild-Stiglitz Profile of Actions (RSPA), and I show that, in every possible market, if the RSPA is efficient, it is also a pure strategy Nash equilibrium profile of actions. On the contrary, I show that in markets in which the RSPA is not efficient, preferences admit an expected utility representation with strictly increasing and strictly concave VNM utilities and a weak sorting condition holds, no pure strategy Nash equilibrium exists.
    Keywords: Nash Equilibrium,Adverse Selection, Bertrand Competition
    Date: 2016–02–17
  2. By: Oksana Loginova (University of Missouri)
    Abstract: I consider a retailer who sells a new product over two periods: advance and regular selling seasons. Experienced consumers learn their valuations for the product in the advancesellingseason,whileinexperiencedconsumerslearnonlywhentheproductbecomes availableintheregularsellingseason. Theretailerisuncertainaboutthenumberofinexperienced consumers. Production takes place between the periods. Unsold units are scrapped at a price that is below the retailer’s marginal cost, which makes it costly to produce and notsell. Ishowthat whenconsumersare lessheterogeneousin theirvaluations, theretailer shouldimplementadvancesellingandofferapre-orderpriceguarantee. Forsomeparameter con?gurations a pre-order price guarantee acts as a commitment device not to decrease thepriceintheregularsellingseason. Inothersituations,itenablesthesellertoreacttothe information that is obtained from pre-orders by increasing or decreasing the price. When consumersaremoreheterogeneousintheirvaluations,themarketsizeuncertaintyissmall, or the scrap value is high, the retailer should not implement advance selling.
    Keywords: advance selling, demand uncertainty, learning, price guarantee, price commitment, the Newsvendor problem.
    JEL: C72 D42 L12 M31
    Date: 2013
  3. By: Kaplan, Greg (Princeton University and NBER); Menzio, Guido (University of Pennsylvania and NBER); Rudanko, Leena (Federal Reserve Bank of Philadelphia); Trachter, Nicholas (Federal Reserve Bank of Philadelphia)
    Abstract: We use a large data set on retail pricing to document that a sizable portion of the cross-sectional variation in the price at which the same good trades in the same period and in the same market is due to the fact that stores that are, on average, equally expensive set persistently different prices for the same good. We refer to this phenomenon as relative price dispersion. We argue that relative price dispersion stems from sellers’ attempts to discriminate between high-valuation buyers who need to make all of their purchases in the same store and low-valuation buyers who are willing to purchase different items from different stores. We calibrate our theory and show that it is not only consistent with the extent and sources of dispersion in the price that different sellers charge for the same good, but also with the extent and sources of dispersion in the prices that different households pay for the same basket of goods and with the relationship between prices paid and the number of stores visited by different households.
    Keywords: Price dispersion; Equilibrium product market search; Retail pricing; Goods;
    JEL: D40 D83 E31 L11
    Date: 2016–02–29
  4. By: Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
    Abstract: In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multiproduct firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market. The same findings do not hold when firms are horizontally differentiated along a circle.
    Keywords: Vertically Differentiated Markets, Cannibalization, Market Pruning, Price Collusion, Public Economics, D42, D43, L1, L12, L13, L41,
    Date: 2016–03–01
  5. By: Li, X.; Zuidwijk, R.A.; de Koster, M.B.M.; Dekker, R.
    Abstract: We consider a long-term capacity investment problem in a competitive market under demand uncertainty. Two firms move sequentially in the competition and a firm’s capacity decision interacts with the other firm’s current and future capacity. Throughout the investment race, a firm can either choose to plan its investments proactively, taking into account possible responses from the other firm, or decide to respond reactively to the competition. In both cases, the optimal decision at each period is determined according to an ISD (Invest, Stayput, Disinvest) policy. We develop two algorithms to efficiently derive proactive ISD policies for the leader and follower firms. Using data from the container shipping market (2000-2015), we show that the optimal capacity determined by our competitive strategy is consistent with the realized investments in practice. By revealing strategical flexibility of proactive strategies, our results demonstrate that firms in the competition can gain more capacity and profit through such a strategy. Using Monte Carlo simulations, we explore the impact of different market conditions and investment irreversibility levels on capacity strategies. In particular, by comparing the results of competitive strategies and strategies that separate firms into different markets, we show that both firms can benefit from the competition and that market downturns likely lead to investment cascades.
    Keywords: capacity, dynamic investment, proactive strategy, Stackelberg competition, feedback policies
    Date: 2016–03–03

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