Competitive Price Discrimination Research Articles

Market Effects of Loyalty and Cost Factors in a Price Discrimination Environment

Product cost heterogeneity across firms and loyalty models of customers are two topics that have garnered limited attention in prior studies on competitive price discrimination. Costs are generally assumed negligible or equal for all firms, and loyalty is modeled as an additive bias in customer valuations. We extend these previous treatments by considering cost asymmetry and a richer class of loyalty models in a game-theoretic model involving two asymmetric firms. Here firms may incur different non-negligible product costs, and customers can have firm-specific loyalty levels. We characterize the effects of loyalty levels and product cost difference on market outcomes such as prices, market share and profits. Our analysis and numerical simulations shed new light on market equilibrium structures arising from the interplay between product cost difference and loyalty levels.

Competitive price discrimination, imperfect information, and consumer search

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.

Multi-Sided Market

We study the equilibrium for symmetric competition between multi-sided platforms under utility competition and make equilibrium comparison for asymmetric platform competition. We consider the small-ticket effect where the price cap regulation of the large-ticket item leads to a rise of the price for the small-ticket item. We show that competitive price discrimination could lead to higher profits for firms. We build a model with general externality and demand function. We consider a partially covered market and show that the externality could be a bless for firms. Moreover, we conduct a merger analysis for the general demand and externality model.

Price and Output Effects of Oligopoly Price Discrimination Under Best-Response Asymmetry

When firms competitively price discriminate, best-response functions may exhibit either best-response symmetry (firms’ ranking of strong and weak markets coincide) or best-response asymmetry (one firm’s strong market is another firm’s weak market). It has been shown in Corts (1998) and many models of behavior-based price discrimination that prices of all firms may decrease in all markets with best-response asymmetry. While one may presume that total consumption will increase upon low prices by all firms in all markets, such output effect has not been explicitly shown. We provide conditions on demands that are necessary for an output to increase as a result of competitive price discrimination. In particular, we link the condition to cross-price elasticity between the firms and the industry-level elasticity to average market price.

An Empirical Study of National vs. Local Pricing by Chain Stores Under Competition

Geographic price discrimination is generally considered beneficial to firm profitability. However, theoretical results point to conditions under which firms might prefer to price across markets uniformly in oligopolistic settings. This paper provides an empirical analysis of competitive price discrimination and quantitatively assesses the profitability of national pricing relative to store-level pricing policies under different market conditions. Specifically, we construct and estimate a model of retail competition using extensive data from the digital camera market. A series of counterfactuals show that, under reasonable commitment mechanisms, two leading chains would benefit from employing national pricing policies, whereas a discount retailer should target prices in each local market. Additional results explore the boundary conditions of these findings and evaluate hybrid pricing policies. The online appendices are available at https://doi.org/10.1287/mksc.2018.1100 .

An Empirical Study of National vs. Local Pricing under Multimarket Competition

Geographic price discrimination is generally considered beneficial to firm profitability. However, theoretical results point to conditions under which firms might prefer to price uniformly across markets in oligopolistic settings. This paper provides an empirical analysis of competitive price discrimination and quantitatively assesses the profitability of national pricing relative to store-level pricing policies under different market conditions. Specifically, we construct and estimate a model of retail competition using extensive data from the digital camera market. A series of counterfactuals show that, under reasonable commitment mechanisms, two leading chains would benefit from employing national pricing policies, whereas the discount retailer should target prices in each local market. Additional results explore the boundary conditions of these findings and evaluate hybrid pricing policies.

Theories of Broadband Competition

Like the other information technology (IT) markets that comprise the Internet ecosystem, markets for broadband communications services are characterized by rapid innovation, declining costs, product differentiation and the potential for competitive price discrimination, network effects, and “multi-sidedness.” Broadband ISPs make large, sunk cost investments and seek to differentiate their products in order to be able to earn economic returns on those investments. They seek to assemble and/or participate in systems that create new value for consumers, and do so by picking and choosing both the platforms in which they participate and the products with which they interconnect. They experience both supply-side economies of scale and scope and demand-side externalities that create powerful incentives to increase volumes by maximizing system openness, but, as with other IT firms, these incentives do not always outweigh the costs of interoperability. This paper examines the competitive dynamics of broadband through the lens of the economic literature on competition in IT markets. It concludes that broadband markets are shaped by three sets of characteristics that distinguish competition in IT markets from competition in more traditional ones. Like other IT markets, broadband: (1) is characterized by high sunk costs, declining costs, and rapid innovation (dynamism); (2) functions as a complementary component in modular platforms (modularity); (3) is subject to demand-side economies of scope and scale (network effects). It is generally agreed that these characteristics have important implications for competition analysis, including increased focus on market dynamics and on “vertical” relationships among market participants, reduced emphasis on traditional structural presumptions, and the need to assess efficiency and competitive effects of various forms of conduct on a case-by-case basis. One implication of this analysis is that the central metaphor used in the analysis of communications markets today – the notion that broadband networks are uniquely at the “core” of the Internet while content, applications and devices are at the “edge” – is at best misleading, and in any case does not justify differential policy treatment. To the contrary, for purposes of competition analysis, it is no longer possible to distinguish meaningfully between the competitive characteristics of broadband markets and other IT markets. Accordingly, there is no basis for asymmetric regulatory treatment – for ex ante regulation of broadband services and ex post antitrust scrutiny of other IT markets. The unavoidable conclusion is that competition oversight of broadband markets should be conformed to modern antitrust principles.

Firm Discrimination Pricing Strategies with Network Effect

We explore the price and welfare effect of price discrimination in a differentiated-goods oligopoly market with network effect and the effect of network effect on the equilibrium price, profit and output. We show that competitive price discrimination and network effect may intensify competition and the price discrimination increases the social welfare under oligopoly market with network effect. If firms differ in which markets they target for aggressive pricing strategy and competitive firm’s reaction is strong, prices in all markets may fall. So both firms agree on the strategies of setting the uniform pricing.

Market segmentation and collusive behavior

The recent literature on oligopolistic third-degree price discrimination has been primarily concerned with rival firms' incentives to acquire customer-specific information and the consequences of such information on firm profitability and welfare. This literature has taken mostly a static view of the interaction between competing firms. In contrast, in this paper we investigate the impact of customer-specific information on the likelihood of tacit collusion in a dynamic game of repeated interaction. This issue is very important because competitive price discrimination usually leads to a cutthroat price competition (prisoners' dilemma) among firms. Firms, therefore, may seek ways to soften competition and sustain higher prices. Our main result is that collusion becomes more difficult as the firms' ability to segment consumers improves.

Market Segmentation and Collusive Behavior

The recent literature on oligopolistic third-degree price discrimination has been primarily concerned with rival firms' incentives to acquire customer-specific information and the consequences of such information on firm profitability and welfare. This literature has taken mostly a static view of the interaction between competing firms. In contrast, in this paper, we investigate the impact of customer-specific information on the likelihood of tacit collusion in a dynamic game of repeated interaction. This issue is very important because competitive price discrimination usually leads to a cutthroat price competition (prisoners' dilemma) among firms. Firms, therefore, may seek ways to soften competition and sustain higher prices. Our main result is that collusion becomes more difficult as the firms' ability to segment consumers improves.

Competitive Price Discrimination: The Exercise of Market Power Without Anticompetitive Effects (Comment on Klein and Wiley)

A firm that discriminates in prices faces a downward sloping demand curve, and thus could potentially raise price by reducing output. For this reason, evidence of price discrimination is relevant to assessing the possibility of market power, as antitrust law has long recognized. But price discrimination can be beneficial as well as harmful, and can reasonably be termed competitive if entry is easy. Hence a demonstration that entry is easy rebuts the inference of anticompetitive effect when price discrimination is the basis for proof of market power, breaking the link between market power and anticompetitive effect. Klein and Wiley's proposal that courts should never infer market power from price discrimination is unnecessary to insulate competitive price discrimination from antitrust scrutiny, introduces a confusing distinction between market-power-in-economics and market-power-in-antitrust, and risks insulating from liability firms engaged in price discrimination when discrimination or the practices that facilitate it would harm competition.

Competitive Price Discrimination Strategies in a Vertical Channel Using Aggregate Retail Data

We explore opportunities for targeted pricing for a retailer that only tracks weekly store-level aggregate sales and marketing-mix information. We show that it is possible, using these data, to recover essential features of the underlying distribution of consumer willingness to pay. Knowledge of this distribution may enable the retailer to generate additional profits from targeting by using choice information at the checkout counter. In estimating demand we incorporate a supply-side model of the distribution channel that captures important features of competitive price-setting behavior of firms. This latter aspect helps us control for the potential endogeneity generated by unmeasured product characteristics in aggregate data. The channel controls for competitive aspects both between manufacturers and between manufacturers and a retailer. Despite this competition, we find that targeted pricing need not generate the prisoner's dilemma in our data. This contrasts with the findings of theoretical models due to the flexibility of the empirical model of demand. The demand system we estimate captures richer forms of product differentiation, both vertical and horizontal, as well as a more flexible distribution of consumer heterogeneity.

A Model of Add-On Pricing

This paper examines competitive price discrimination with horizontal and vertical taste differences. Consumers with higher valuations for quality are assumed to have stronger brand preferences. Two models are considered: a standard competitive price discrimination model in which consumers observe all prices; and an game in which add-on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add-ons at high unadvertised prices. In the standard game price discrimination is self-reinforcing: the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not. The analysis of the add-on pricing game focuses on the Chicago-school argument that profits earned on add-ons will be competed away via lower prices for advertised goods. A conclusion is that add-on practices can raise equilibrium profits by creating an adverse selection problem that makes price-cutting unappealing. Although profitable when jointly adopted, using add-on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising. Several models that could account for add-on pricing are discussed.

Competitive Price Discrimination

We model firms as supplying utility directly to consumers. The equilibrium outcome of competition in utility space depends on the relationship π (u) between profit and average utility per consumer. Public policy constraints on the “deals” firms may offer affect equilibrium outcomes via their effect on π(u) .F rom this perspective we examine the profit, utility, and welfare implications of price discrimination policies in an oligopolistic framework. We also show that an equilibrium outcome of competitive nonlinear pricing when consumers have private information about their tastes is for firms to offer efficient two-part tariffs.