Consumer Surplus Research Articles

Reselling or agency selling? The impact of live-streaming on selling formats

PurposeChoosing the proper selling format for online retail has long been a critical issue for many platforms to consider, whereas the emergence and popularity of live-streaming have had a massive impact on the platform's business. As a result, selecting the suitable operating strategy for the live channel has become another critical issue for platforms. In such a context, what will be the impact of live-streaming on selling formats?Design/methodology/approachIn order to explore these issues, we identified two selling formats (wholesale reselling or agency selling) as well as two operating strategies (introduce or discard). Thereby, four channel-structures are constructed, namely the reselling-discard model (WN), the reselling-introduce model (WL), the agency-discard model (AN), and the agency-introduce model (AL). We comprehensively compare how different structures affect stakeholders' interests, consumer surplus, and social welfare through equilibrium analyses.FindingsThese results help clarify the impact of critical factors (e.g. self-effort attribute, cross-effort attribute, and commission ratio) on the choice of models. We find that regardless of the selling agreement between the manufacturer and the platform, the introduction of a live store is necessary; specifically, when the commission ratio is high, the platform's optimal decision is first to sign an agency agreement and then apply live selling (AL); conversely, when the commission ratio is low, the platform's optimal strategy is first to enable the live channel and then to select the reselling format (WL), together, this also reveals, from a theoretical perspective.Originality/valueOur study includes the dual analysis of selling formats and channel operations, considering the inherent dual attributes of service efforts and the external competitive environment.

Estimating the value of self‐drive recreation in the remote Kimberley: Sensitivity to multi‐destination trips

AbstractThe remote and iconic Kimberley region, in northern Western Australia, is a contested landscape with growing pressure for different types of land use and development. The region has high biodiversity values and impressive scenery that provide attractive recreation experiences for visitors. We estimate the value of domestic recreation to the region using a travel cost model. Analysis includes two approaches for accounting for multi‐destination trips (MDTs) given travel to remote sites are more likely to include these than shorter trips, and four specifications for the value of travel time. We estimate a total consumer surplus of A$110.34 million annually and find that adjusting travel costs for MDTs using stated survey information produces a better fitting model than using revealed travel information. These findings highlight both the importance of estimating recreation values for use in land use planning in the Kimberley and for improving the travel cost method for remote sites where per‐trip travel costs are high.

Who should pay for the return freight in e-commerce? Platforms, retailers or consumers

In the realm of e-commerce, various return freight modes are available, such as platform-bearing return freight (PP strategy), retailer-bearing return freight (RP strategy), and consumer-bearing return freight (CP strategy). The return freight strategy adopted by platforms plays a crucial role in responding to consumer behaviors. To analyze how platforms determine the optimal return freight strategies, we examine a supply chain comprising a platform, a retailer, and heterogeneous consumers, employing a Stackelberg game model to capture their decision dynamics. Our findings suggest that the platform should opt for the PP strategy only when the product profit margin is relatively low. If the platform refuses to adopt the PP strategy, then the RP strategy is preferable when consumers face extremely high consumer return freight costs; otherwise, the CP strategy is the equilibrium result. We also prove that the selection of the return freight strategies leads to changes in the property of the equilibrium. Under the CP strategy, how the product fit probability affects the optimal price depends on the procurement cost; while under the RP and PP strategies, the optimal price decreases with the fit probability. Moreover, under the PP strategy, an increase in the product fit probability does not always benefit the platform. Further, our analysis reveals that, while the PP strategy can reduce the retailer’s risk, it might negatively impact supply chain performance, which implies that cost sharing in the supply chain does not necessarily lead to a higher channel profit. We also investigate how the platform’s return freight strategies affect consumer surplus and identify regions for Pareto improvement where all parties benefit from the PP strategy. Finally, by exploring extensions like positive salvage values, partial refunds, platform competition, and differentiated return freight costs, we confirm the robustness of our findings and unveil new insights.

Investigating the market share convergence and welfare potentials of asymmetric train access charges for the commercial passenger rail services

A recent market liberalisation of commercial passenger rail services since 2020 has brought a new era for long-distance transport in the EU. However, drawing from the experiences of countries with unsuccessful entry attempts, we investigate the effects of asymmetric train access charges (TAC). Asymmetric access regulation is based on lower access charges for entrants than for incumbents for a limited period in order to induce convergence of railway undertakings' (RU) market shares. Intending to compare the effects of symmetric and asymmetric TAC, we model oligopoly competition in the number of offered seats between the incumbent (Inoui) and entrant (Trenitalia) on the Paris–Lyon line, the first case of asymmetric TAC regulation on railways. In the first year of competition, consumer surplus, entrant's profit, and total welfare without infrastructure manager's profit increased with asymmetric TAC compared to symmetric TAC without discounts. As the discount for entrant diminishes over time, all previous welfare elements monotonically decline. By introducing new departures and running double trainsets, the entrant can reverse this monotonically declining trend. This implies that asymmetric TAC should provide additional incentives for entrants to increase their frequency and number of offered seats.

Technology Transfer and Imitation in a Cournot Oligopoly

AbstractI examine and compare patent licensing by fixed fee and unit royalty under Cournot competition. I consider licensing by an incumbent patent holder to one or two other competing firms that can obtain a patented technological improvement through technology transfer or imitation. Assuming that imitation is perfect, certain, instantaneous, and non-infringing, I analyze the effects of licensing on market structure, firms’ individual profits, and consumer surplus. This provides a theoretical framework that explains when technology licensing is superior to imitation for both firms and consumers, what is the optimal licensing choice for firms, and how imitation affects firms’ licensing behavior and competition in a highly concentrated industry. In particular, I show that licensing through a unit royalty is preferable to licensing through a fixed fee for a patent holder, while licensing through a fixed fee is at least as beneficial as licensing through a unit royalty for consumers. Moreover, the patent holder can use licensing to prevent imitation, but cannot use it selectively to affect competition, at least before the patent expires and when one of the competing firms can imitate. I contribute to the literature that considers the patent holder as a producer by showing how technology licensing can affect competition and improve consumer surplus in oligopolistic industries. This is important for policy makers to identify when technology licensing is used strategically to transfer surplus from consumers to producers.

Common ownership and information exchange in a duopoly

I analyze effects of common ownership or cross-ownership on the incentives of Cournot competitors with close substitutes to exchange perfectly correlated information. Consistent with empirical findings, firms have stronger incentives to exchange information for greater degrees of common ownership. There is a trade-off for consumers. On the one hand, more common ownership relaxes competition, which hurts consumers. On the other hand, more common ownership may yield more information exchange, which benefits consumers. Consequently, positive degrees of common ownership may maximize the expected consumer (and total) surplus.

How Do Digital Advertising Auctions Impact Product Prices?

Abstract We present a model of digital advertising with three key features: (1) advertisers can reach consumers on and off a platform, (2) additional data enhances the value of advertiser–consumer matches, and (3) the allocation of advertisements follows an auction-like mechanism. We contrast data-augmented auctions, which leverage the platform’s data advantage to improve match quality, with managed-campaign mechanisms that automate match formation and price-setting. The platform-optimal mechanism is a managed campaign that conditions the on-platform prices for sponsored products on the off-platform prices set by all advertisers. This mechanism yields the efficient on-platform allocation but inefficiently high off-platform product prices. It attains the vertical integration profit for the platform and the advertisers, and it increases off-platform product prices while decreasing consumer surplus, relative to data-augmented auctions.

Impact of carbon quota policy on clean energy investment strategies with financial constraints

The actions of electricity enterprises investing in clean energy are mainly affected by national policies and financial constraints. However, their joint impact on corporate decision-making for clean energy investment (CEI) is unclear. This study develops a game model to study the impact of carbon quota policies on corporate decision-making under financial constraints, including the grandfathering quota policy and benchmarking quota policy. A series of interesting conclusions were obtained. (1) With the goal of CEI, irrespective of financial constraints, the benchmarking quota policy is the best option. (2) With total carbon emissions (TCEs), consumer surplus, or enterprise profit as the goal, financial constraints will have an impact on optimal carbon quota policies. (3) In addition to TCEs, an increase in the financial constraints cap will enhance CEI, consumer surplus, and enterprise profit. These conclusions provide new insights for government policy-making and business decision-making, requiring comprehensive consideration of financial constraints.

Manufacturer encroachment in a vertically differentiated market with competing retailers and counterfeiter

AbstractThis study investigates the encroachment strategy of a manufacturer with multiple competing retailers in the presence of a counterfeiter who produces an imitated product in a vertically differentiated market wherein the counterfeits and authentic products differ in quality. We derive some intriguing results that uncover the strategic effects among manufacturer encroachment, counterfeiting, and retailer competition. First, having the option to encroach may hurt the manufacturer himself but benefit the counterfeiter in the presence of competing retailers. Second, increased counterfeit similarity shrinks the beneficial encroachment region for the manufacturer but may widen the beneficial region for the retailer. However, the intensified retailer competition always shrinks the beneficial region for them. Third, the individual retailer's (manufacturer's) profit increases (decreases) with counterfeit similarity when the manufacturer chooses encroachment. Conversely, consumer surplus (social welfare) exhibits an inverted U‐shaped (U‐shaped) pattern with counterfeit similarity under encroachment threat. Moreover, the profits and welfare may jump with counterfeit similarity because of the change in the encroachment strategy wherein retailer competition alters the jump points.

Game-theoretic analysis of Net Neutrality effects

Net Neutrality imposes restrictions on the work of Internet Service Providers (ISPs), which can significantly affect social welfare. This article analyzes the following rules established by the Net Neutrality: zero price rule and the prohibition of exclusive deals between ISPs and Content Providers (CPs). The aim of the study is to determine the impact of Net Neutrality on the welfare of various groups of economic agents. To study these implications, the authors create a game-theoretic model of the ISPs market, the unique feature of which is the following heterogeneity of CPs: one large CP creates a large cross-side network effect for consumers and is able to strike exclusive deals with ISPs without Net Neutrality; many small CPs create a small network effect and are unable to influence prices. The following conclusions were obtained: there are ranges of model parameters in which Net Neutrality increases profits of ISPs and reduces profits of a large CP; increases total social welfare if a large CP joins both ISPs without Net Neutrality. The impact of Net Neutrality on consumer surplus and profits of small CPs at these parameter ranges depends on the exclusivity of a large CP in absence of Net Neutrality. Consequently, certain effects of Net Neutrality may differ dramatically depending on how widespread the exclusivity of CPs will be in its absence. These findings may help regulators better assess the implications of Net Neutrality and make a justified decision on its implementation.

Customer and provider bounded rationality in on-demand service platforms

The growing literature on operations management in the context of the sharing economy typically assumes that both customers and providers are fully rational. In contrast, we consider an on-demand service platform (e.g., Didi and Uber) with boundedly rational customers and providers that sets a price charged to customers and a wage paid to providers. Both customers and providers are sensitive to the payment terms set by the platform and also to congestion in the system (given by the relative numbers of available customers and providers in the market). We capture bounded rationality using a model in which customers and providers are incapable of accurately estimating the congestion level. We examine the impact of bounded rationality on the platform profit, consumer surplus, and labor welfare. We find that both customers’ and providers’ bounded rationalities may benefit the platform. Specifically, when customers’ or providers’ bounded rationality level and service valuation are relatively large or the valuation is relatively small, more irrational customers or providers increases the platform’s profit. Moreover, we find that the platform can exploit the bounded rationality differences between customers and providers to gain profit. Counterintuitively, we also demonstrate that the high bounded rationality of customers or providers may increase consumer surplus and/or labor welfare. Finally, bounded rationality on one side (e.g., customer side) can make bounded rationality on the other side (e.g., provider side) more likely to increase the platform’s profit, consumer surplus, or labor welfare under certain conditions.

Too Far? Autonomous vehicles, travel demand, and carbon dioxide emissions in Sweden

This article envisions that by the middle of this century fully self-driving Autonomous Vehicles (AVs) are available for private use. By considering how AVs can affect the utility of being in the vehicle, and accounting for the utility of being able to transport oneself to and from various locations, we derive the consumer surplus of having an AV and evaluate that against the cost of adopting the technology. This break-even calculation is used to evaluate AV purchase and consequent impacts on increase in travel demand and lifecycle CO2 emissions for different income groups for different assumptions concerning the Value of Travel Time, transport demand elasticity, AV technology costs, interest rates, and the possibility to work in the car or not. The modelled results show that all income groups purchase AV given low technology cost, and the highest income groups purchase AV under most conditions. Changes in demand elasticity and the value of travel time have the largest effect on vehicle miles traveled, which could be as much as 50 additional kilometers daily per driver. Even in a scenario consistent with the Paris Agreement, this implies an annual carbon footprint of 0.42 – 0.86 metric tons of CO2 per driver from personal car travel in Sweden.

Using contingent behaviour analysis to estimate benefits from coral reefs in Kume Island, Japan: A Poisson‐inverse Gaussian approach with on‐site correction

AbstractCoral reefs face a critical crisis worldwide because of rising ocean temperature, excessive use of resources and soil erosion. As reefs have great recreational and tourism value, the degradation of their quality may have a significant effect on tourism. This study employs a contingent behaviour approach to estimate the effect of reef extinction on the recreational demand for Kume Island, Okinawa, Japan. We propose a Poisson‐inverse Gaussian (PIG) model with correction for on‐site sampling issues to derive a more accurate estimate of consumer surplus (CS). The results show that the annual CS per‐person trip is 5898 yen (US$ 49.15 in 2015 currency) according to the random‐effects PIG model.

Investment and remanufacturing strategies considering the application of intelligent manufacturing in hybrid manufacturing–remanufacturing systems

The development of data science and sensing technologies provides opportunities to mitigate uncertainty in hybrid manufacturing–remanufacturing systems, and drives manufacturers to invest in intelligent manufacturing (IM). This paper considers the adoption of IM to mitigate classification errors in the end-of-use (EoU) products’ acquisition while improving the operational efficiency of manufacturing–remanufacturing systems. By constructing game models, we jointly investigate the investment, pricing, production and order quantities, and collection decisions in a closed-loop supply chain. Interestingly, we find that IM does not always increase manufacturers’ enthusiasm to engage in remanufacturing, firms’ profits or consumer surplus. It does not always reduce environmental impact either. Analytical results show that IM reduces manufacturers’ enthusiasm to engage in remanufacturing if the initial core misclassification rate is low. Furthermore, we identify key factors that impact the firms’ profits, consumer surplus, and carbon emissions. For a manufacturer producing high-cost new products, investing in IM hurts its profits when the remanufacturing cost savings due to intelligent manufacturing is small and the manufacturing benefit due to IM is not significant. Moreover, investing in IM reduces consumer surplus if the cost of new products is high, and the IM does not lead to significant remanufacturing cost saving and manufacturing benefit increase. The results reveal that investing in IM is preferred from the environmental point of view if the IM-induced manufacturing cost saving is small. Our research provides management insights into the intelligent transformation of manufacturers with hybrid manufacturing–remanufacturing systems, as well as policymakers concerned with value creation for customers and environmental impacts.

Foreign Direct Investment and Technology Licensing in a Polluting Industry

We consider a firm’s incentive for foreign direct investment (FDI) and international technology licensing in a polluting industry. We explain the rationale and the welfare implications of complementarity between FDI and licensing, i.e., the firm’s strategy of “FDI and licensing” (FL), which is empirically relevant but ignored in the literature. When the environmental tax cannot be committed, the firm adopts the licensing strategy if the pollution intensity is not high, and the licensing strategy may create lower consumer surplus and welfare compared to both FDI and FL. However, if the pollution intensity is high, the firm undertakes FL, which provide higher consumer surplus and welfare compared to both licensing and FDI. When the government can commit to the environmental tax, the firm always prefers FL. The host-country welfare is higher but the consumer surplus and world welfare may be lower under the committed tax policy compared to the non-committed tax policy. These results hold under Cournot competition and Stackelberg competition. We further show that FL can be the equilibrium strategy of the foreign firm if there is fixed-fee licensing instead of a two-part tariff licensing, which is considered in the main analysis.

R&D capitalization vs. R&D expensing: A theoretical model with policy implications

The aim of this study is to establish a theoretical model to investigate the incentives of firms for choosing R&D capitalization. We focus on a monopoly firm managed by a typically myopic manager. In a two-stage setting, the manager determines the level of R&D prior to its output decision. Our model indicates that capitalizing some R&D costs yields higher profitability than fully expensing such investments. Moreover, we show that a longer useful life of capitalized assets is favorable for both consumer surplus and social welfare; thus, policy-makers should encourage policies that support extended lifespans of these assets.

Life can’t be too sweet: the effects of sugar-sweetened beverage labelling on the government’s health battle

Singapore’s recent mandatory labelling regulations for sugar-sweetened beverages (SSBs) aim to guide consumer choices towards healthier options, which mandates labels on SSBs regarded as less healthy and encourages voluntary labelling for healthier SSBs. We focus on market competition between two SSB firms under different labelling schemes. Surprisingly, we find that mandatory labelling increases the consumption of less-healthy SSBs while reducing healthier SSBs consumption when the health risk is low. This counterintuitive result is attributed to the revelation of the lower-than-expected health risk, triggering a heterogeneity-reducing effect that heightens competition and price sensitivity. The lower retail price of less-healthy SSBs increases the demand. The heterogeneity-reducing effect also enables voluntary labelling of healthier SSBs to alleviate the adverse impact of mandatory labelling on consumer surplus and social welfare. Additionally, the imposition of SSB taxes effectively reduces consumption but challenges consumer surplus and compromises the efficacy of mandatory labelling.

Indirect Effects of Access to Finance

We created experimental variation across markets in China in the share of firms having access to a new loan product. Access to finance had a large positive direct effect on the performance of treated firms but a similar-sized negative indirect effect on that of firms with treated competitors, leading to nondetectable gains in producer surplus. Access to finance had a positive direct effect on business quality and consumer satisfaction and a negative effect on price, which were not offset by indirect effects, implying net gains in consumer surplus. We document other indirect effects and combine effects in a welfare evaluation. (JEL D22, G21, G32, L81, O16, P31, P34)

Double marginalization in the pricing of complements: The case of US freight railroads

AbstractMonopolists selling complementary products charge a higher price in a static equilibrium than a single (multiproduct) monopolist would, reducing both the industry profits and consumer surplus. Firms could instead reach a Pareto improvement by lowering prices to the single‐monopolist level. We analyze pricing data of railroad coal shipping in the United States. We compare a coal producer that needs to ship from A to C, with the route passing through B, in two cases: (1) the same railroad owning AB and BC and (2) different railroads owning AB and BC. We do not find that the price in case (2) is higher than the price in case (1), suggesting that the complementary monopolist pricing inefficiency is absent in this market. Our findings are robust to propensity score blocking, causal machine learning algorithms, and difference‐in‐differences analysis. Our results have implications for vertical mergers, tragedy of the anticommons, mergers of firms selling complements, elimination of double marginalization, and royalty stacking and patent thickets.

Blockchain adoption for product freshness traceability under platform competition

ABSTRACT With the rapid development of e-commerce, a large number of online platforms specialising in fresh product have entered the market. Previous studies have rarely considered how to efficiently deliver the product’s freshness status to customers. In this paper, we establish a game model that consists of two competitive online platforms, which operate vertically differentiated fresh product on the same market. The product freshness is uncertain due to the opaque delivery process and consumers may have the risk-averse attitude, while platforms could opt to deploy blockchain to trace the product’s logistic information in real time and eliminate the consumer’s risk-averse attitude. Our finding shows that when the platform competition and the consumer’s risk-averse attitude are high, both platforms would like to adopt blockchain technology; With the moderate platform competition and the consumer’s risk-averse attitude, neither platform wants to adopt blockchain technology. Otherwise, only one platform would like to adopt blockchain technology. Moreover, when one platform deploys blockchain, the other one can free ride and become better off. Finally, we analyse consumer surplus and social welfare under different scenarios. A win-win-win situation can be achieved among platforms, consumer surplus, and social welfare when both platforms deploy blockchain technology.