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on Industrial Organization |
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Issue of 2021‒04‒05
eight papers chosen by |
| By: | Andrew Sweeting; Xuezhen Tao; Xinlu Yao |
| Abstract: | We model differentiated product pricing by firms that possess private information about serially-correlated state variables, such as their marginal costs, and can use prices to signal information to rivals. In a dynamic game, signaling can raise prices significantly above static complete information Nash levels even when the privately observed state variables are restricted to lie in narrow ranges. We calibrate our model using data from the beer industry, and we show that our model can explain changes in price levels and price dynamics after the 2008 MillerCoors joint venture. |
| JEL: | D43 D82 L13 L41 L90 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28589&r=all |
| By: | Bos, Iwan; Marini, Marco A.; Saulle, Riccardo D. |
| Abstract: | This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set stability concept and establish the existence of a unique pure-strategy price solution for any given level of capacity. This solution is shown to coincide with the set of pure-strategy Nash equilibria when capacities are large or small. For an intermediate range of capacities, it predicts a price interval that includes the mixed-strategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. In particular, it provides a behavioral rationale for different types of pricing dynamics, including real-world economic phenomena such as Edgeworth-like price cycles, price dispersion and supply shortages. |
| Keywords: | Demand and Price Analysis |
| Date: | 2021–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ags:feemwp:310282&r=all |
| By: | Jeffrey D. Michler; Benjamin M. Gramig |
| Abstract: | Previous research on two-dimensional extensions of Hotelling's location game has argued that spatial competition leads to maximum differentiation in one dimensions and minimum differentiation in the other dimension. We expand on existing models to allow for endogenous entry into the market. We find that competition may lead to the min/max finding of previous work but also may lead to maximum differentiation in both dimensions. The critical issue in determining the degree of differentiation is if existing firms are seeking to deter entry of a new firm or to maximizing profits within an existing, stable market. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2103.11051&r=all |
| By: | Carl-Christian Groh |
| Abstract: | Price discrimination in real-world settings is likely based on imperfect information. I analyse a homogenous goods framework where firms receive binary and noisy signals about consumer valuations and consumers engage in sequential search. Firms have no information about consumers' search histories. In this framework, the existence of on-path search can be understood as an imperfect screening device that firms employ to the detriment of consumers. Firm profits and equilibrium prices are highest in the unique symmetric pure-strategy equilibrium with search on the equilibrium path, as compared to any other symmetric pure-strategy equilibrium. The equilibrium with on-path search can only be sustained when search costs are at an intermediate level. At low search costs, an equilibrium is played in which there is no on-path search, but consumers use the threat of searching to ensure low prices. High levels of signal precision are detrimental to consumers by facilitating existence of the equilibrium with on-path search. |
| Keywords: | search, competitive price discrimination, imperfect customer recognition |
| JEL: | D43 D83 L13 L15 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_280&r=all |
| By: | Tina Oreski (Swiss Finance Institute) |
| Abstract: | Using textual analysis and the firm life-cycle theory to proxy for a company's competitive strategy, this paper empirically examines the strategic similarity hypothesis. The findings show that merger and acquisition transactions are more likely between firms with the same strategy. Moreover, when the acquirer and the target firm compete based on one strategy, the deal yields higher stock returns and stronger future asset growth. The effect is more pronounced in a highly competitive environment, consistent with the strategic misalignment acting as a constraint to the merged company's optimal response. Overall, the results reveal that synergies obtained from the overlapping strategies constitute an important determinant of public merger and acquisition deals. |
| Keywords: | mergers and acquisitions, competitive strategy, synergies, firm life-cycle, textual analysis |
| JEL: | L21 G34 M21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2129&r=all |
| By: | Volker Nocke; Roland Strausz |
| Abstract: | We develop a theory of collective brand reputation for markets in which product quality is jointly determined by local and global players. In a repeated game of imperfect public monitoring, we model collective branding as a pooling of quality signals generated in different markets. Such pooling yields a beneficial informativeness effect for the actions of a global player present in all markets, but also harmful free-riding by local, market-specific players. The resulting tradeoff yields a theory of optimal brand size and revenue sharing, applying to platform markets, franchising, licensing, umbrella branding, and firms with team production. |
| Keywords: | Collective branding, reputation, free riding, repeated games, imperfect monitoring |
| JEL: | L14 L15 D20 D82 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_281&r=all |
| By: | Zhuoqiong Charlie Chen; Christopher T. Stanton; Catherine Thomas |
| Abstract: | When experience goods compete, consuming one product can be informative about value for similar untried products. We study a two-period model of duopoly competition in markets that have this feature and where firms can price discriminate between consumers based on purchasing history. Price dynamics, firm profits, and consumer surplus depend on how information spillovers shape demand from the consumers who have trialed the rival product| the potential switchers. In the first period, rather than competing intensely for all future profits, firms compete only for the difference in future profits between repeat and switching consumers. Demand-side information spillovers offer an explanation of how competing firms in new product markets can be profitable in all periods even when selling products that are indistinguishable ex ante. |
| JEL: | D11 L1 L13 L15 L26 M21 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28584&r=all |
| By: | Crampes, Claude; Renault, Jérôme |
| Abstract: | The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of demand and intermittent renewables. We analyse flexibility in a two-stage decision process where production decided at the last moment is more costly than if it is planned in advance. We first determine the first best outputs, prices and gains. We then consider a model where two partially flexible firms compete in quantities to supply a random residual demand. We determine the subgame perfect equilibria corresponding to two market designs: one where all trade occurs in a spot market with known demand, the other where a day-ahead market with random demand is added to the ex-post market, first in a general setting, then using a quadratic specification. We show that when all trade occurs ex post, the least flexible firm is not necessarily disadvantaged. We also show that adding a day-ahead market makes consumers better off and firms worse off by increasing total output. It increases welfare but it also transfers risks from firms to consumers. |
| Keywords: | Flexibility; electricity; market design; production costs; risk transfer |
| JEL: | C72 D24 D47 L23 L94 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:125447&r=all |