Consumer Surplus Research Articles

On excessive entry in Bayes‐Cournot oligopoly

AbstractIn a Cournot industry where firms are privately informed about their marginal costs, raising entry barriers (i.e., imposing strictly positive, but not too large, entry costs) increases expected output, entrants' profits, total welfare, and might benefit consumers. Under Bayes‐Cournot competition, firms react to the expectation (conditional on entry) of rivals' costs rather than to their actual costs. This creates scope for entry by relatively inefficient types. Entry costs that prevent these high‐cost types from entering increase inframarginal (lower‐cost) types' and rivals' expected output. As a result, they increase profits and, unless they reduce output variability too much, also consumer surplus.

To Share or Not? Hybrid e‐Commerce Platform's Provision and Sharing Strategies of Consumer Credit Service

ABSTRACTAs a new financial innovation, consumer credit services are increasingly embraced by e‐commerce platforms. This paper presents a stylized model to determine when an e‐commerce platform should launch credit services and whether to share them with third‐party sellers. Our findings indicate that the platform benefits from launching credit services only when consumer preference outweighs the delinquency rate. Furthermore, service sharing can create a win‐win scenario with moderate fees and high consumer preference. Contrary to common belief, sharing services with sellers can reduce consumer surplus, suggesting that widespread use of consumer credit services is not necessarily beneficial for consumers.

Differential Game Analysis of Carbon Emission Reduction Effect and Price Strategy Considering Government Intervention and Manufacturer Competition

ABSTRACTGovernments and enterprises are paying more and more attention to carbon emissions. Considering the dynamic of carbon emissions reduction (CER) and the government intervention, this study discusses the optimal CER effort level, price, and government intervention intensity in a two‐echelon supply chain consisting of a government and two manufacturers. The two manufacturers have two competitive behaviors: Cournot and Stackelberg. Two differential game models are constructed for the two different behaviors, and the optimal decisions under the two models are obtained. The comparisons of these optimal solutions are analyzed, and the influence of some parameters on the optimal solution in the two models is investigated under two scenarios. Furthermore, the optimal government intervention intensity is obtained with the goal of maximizing government utility. The results show that the Stackelberg game allows manufacturers to achieve higher profits and CER but is disadvantageous to consumers, and the manufacturer as the leader has a first‐mover advantage. Fierce market competition leads to greater CER and profits, but higher prices reduce consumer surplus. Larger penalties can promote enterprises to reduce carbon emissions when carbon emissions are large. Compared with the Cournot behavior game, the Stackelberg allows manufacturers to obtain higher profits and CER, but the prices are higher that are detrimental for consumers. The fierce market competition is good for manufacturers, the environment, and the society, but it reduces the consumer surplus. The low CER efficiency causes high costs and reduces the manufacturer's motivation to CER, which harm the environment and reduce profits. The government intervention is negatively correlated with the intensity of market competition and the sensitivity of manufacturers to policies.

Cross Ownership Under Strategic Tax Policy

Abstract We provide a new reason for the consumer surplus and welfare raising cross ownership. We show that cross ownership reduces the tax rate, and increases consumer surplus and welfare under Cournot and Bertrand competition when the marginal social cost/benefit of public funds is less than unity. We further show that Cournot competition creates higher consumer surplus and welfare compared to Bertrand competition if the marginal social cost/benefit of public funds is less than unity, thus providing a new reason for the Cournot-Bertrand welfare reversal.

Mergers and Licensing With Horizontal Differentiation

ABSTRACTWe consider a research laboratory that owns a patented process innovation and two firms producing differentiating goods in a Bertrand setting. The laboratory considers the possibility to license the innovation as an outsider patentee or to merge with one of the firms in the industry, becoming an incumbent patentee. Licensing takes place through observable two‐part tariff contracts. We show that the merger is profitable only for small innovations and increases social welfare for both small and large innovations. Even though we allow the royalty to be higher than the size of the innovation, and opposite to the result in a Cournot setting, we find a region where the merger is both profitable and welfare improving. This occurs only for small innovations and sufficiently differentiated goods. The same result arises for consumer surplus which allows us to derive the optimal merger policy: compared with Cournot competition, a Bertrand setting calls for a more lenient merger policy.

To Partner or Not to Partner? The Partnership Between Platforms and Data Brokers in Two-Sided Markets

Data have become a vital competitive asset for online advertising platforms, such as Facebook and Snapchat. These platforms often partner with data brokers to enhance targeting capabilities, which raises important consumer privacy concerns. This study develops a game-theoretic model to analyze the economic dynamics of partnerships between competing platforms and a data broker in a two-sided market. Our findings reveal that heightened consumer privacy concerns can encourage platforms to collaborate with data brokers rather than discourage them, as these concerns may strategically soften price competition on the advertiser side. However, when both platforms partner with a data broker, a prisoner’s dilemma may arise, even if the broker significantly improves targeting capabilities. From a policy perspective, such partnerships can harm consumer surplus in a purely ad-sponsored model, where users are not charged. Conversely, they may enhance consumer surplus in a mixed revenue model that combines advertising with subscriptions. These insights suggest that policymakers should consider regulations on platform-data broker partnerships to protect consumer interests, particularly regarding privacy protections that platforms may not prioritize under competitive pressures.

Retailer involvement in eco-conscious consumer-oriented carbon footprint reduction

Retailer involvement and consumer eco-consciousness are two critical considerations for firms when designing comprehensive carbon footprint reduction (CFR) plans. This paper constructs a supply chain (SC) where one manufacturer and one retailer make CFR and pricing strategies in response to eco-conscious consumers. Eco-conscious consumers form a reference carbon footprint to assess the product's green level. To achieve SC coordination, a cost-sharing contract is introduced. Our results suggest that retailer involvement in CFR always benefits the environment, SC performance, consumer surplus, and social welfare. During CFR cooperation, the manufacturer strategically affects the retailer's CFR decision by adjusting the CFR level, impacting environmental and economic outcomes. Although higher CFR efficiency by the manufacturer can benefit the environment, SC performance, consumer surplus, and social welfare, a similar emphasis by the retailer may have adverse effects. Surprisingly, a lower reference carbon footprint for eco-conscious consumers may be worse for the environment, depending on the retailer's CFR efficiency. Furthermore, implementing a cost-sharing contract under the retailer's different CFR efficiency yields two distinct impacts: a multi-win situation or an incentive conflict. Extended studies are further examined to validate the robustness of these main results.

Consumer private data collection strategies for AI-enabled products

The increasing use of artificial intelligence (AI) to enhance products and services has enabled personalized offerings and smarter functionalities through the analysis of consumer data. However, privacy concerns present significant challenges to the effective utilization and commercialization of AI-enabled products. To address these concerns, firms must carefully navigate consumer data privacy and develop appropriate data collection strategies to support future product intelligence, particularly with AI technologies like ChatGPT. This study examines two primary data collection approaches: the uniform policy strategy and the option menu strategy. A mathematical model is constructed to assess these strategies, considering factors such as information externalities and heterogeneous consumer privacy concerns. By comparing firm profits, consumer surplus, and social welfare under both strategies, the study finds that the option menu strategy becomes optimal when there are considerable differences in privacy concerns across consumer groups or when even smaller differences exist, but consumers place a high value on personalized services. These insights offer guidance to firms and policymakers in formulating appropriate data collection strategies for AI-enabled products.

Regulated Pricing Decisions and Diagnostic Test Choices in Personalized Medicine: Navigating the Implications Within Legal Frameworks.

The emerging risk of personalized medicine is driving drug manufacturers to seek collaborations with advanced diagnostic firms, aiming to improve detection and treatment outcomes. However, the government's regulated pricing in personalized medicine affects manufacturers' strategic decisions, particularly regarding the selection of diagnostic partners. In this context, this study investigates whether the government should regulate the price of personalized medicine and how the government's regulated pricing decisions affect drug manufacturers' diagnostic test choices. A stylized analytical model was developed, employing game-theoretic analysis. Numerical studies are also conducted to validate our results. The study reveals that in the absence of the government's regulated pricing, drug manufacturers benefit from partnering with high-level diagnostic firms, enhancing consumer surplus and social welfare. However, when the government regulates pricing, the choice of partnering with a high-level diagnostic firm depends on specific conditions, such as low patient sensitivity to treatment failure and a low unit cost coefficient of diagnostic effort. The government's decision to regulate prices is influenced by three key parameters: patients' sensitivity to treatment failure, the unit cost coefficient of the diagnostic test effort, and the proportion of the price of specialized drugs in the regulated pricing. The findings underscore the importance of legal frameworks in the personalized medicine industry. The absence of the government's regulated pricing incentivizes collaborations with high-level diagnostic firms, enhancing consumer surplus and social welfare. However, government intervention in pricing makes such decisions contingent on specific conditions, requiring nuanced regulatory policies that balance the interests of patients, manufacturers, and diagnostic firms.

Production line location strategy for foreign manufacturer when selling in a market lag behind in manufacturing

It is a prevalent practice for foreign manufacturers to market their products in regions with lower manufacturing capabilities. However, the manufacturer’s choice of production line location strategy is significantly influenced by tariffs and negative brand effects caused by localized production. In this paper, we build a game-theoretical model considering a supply chain composed of a foreign manufacturer and a local retailer. The foreign manufacturer initially produces both high-end and low-end products at the oversea (with higher manufacturing capabilities), selling them in the local market through a local retailer. We explore various production line location strategies for the foreign manufacturer, including both location at the oversea, both location at the local market (with lower manufacturing capabilities), and separate location, and analyze the impacts of tariffs and negative brand effects. By comparing equilibrium results in different strategies, we discover that as tariffs rise, both location at the oversea may be the best choice for the foreign manufacturer instead of separate location strategy, which challenges the prevalent practice where many foreign manufacturers opt to produce high-end products overseas to uphold brand influence while localizing low-end products to minimize tariff costs. Overall, there is no singularly dominant production line location strategy for the foreign manufacturer, and each strategy holds the potential to yield the highest overall supply chain profit. In addition, as tariffs rise, customer surplus will increase under separate location, and only the separate location strategy or both location at the local market strategy is likely to yield the highest consumer surplus.

The Bitter Taste of Brazil's Temporary Import Ban on Robusta Coffee

ABSTRACTBrazil, a leading Robusta coffee producer and exporter, faced a significant drought in 2016–2017, which drastically reduced production and depleted stocks. Consequently, Brazil temporarily permitted the import of one million 60‐kg bags of Robusta coffee in the spring 2017. An import ban was imposed shortly afterward due to lobbying by domestic Robusta farmers. We examine the welfare and trade impacts of the drought and subsequent import ban on stakeholders in the Robusta bean and soluble coffee markets. The import ban improved the welfare of Brazilian Robusta producers by $174.85–$280.26 million, nearly offsetting the drought's effects. However, it increased unit cost for Brazilian soluble processors by 10% and reduced consumer surplus in Brazil by $108.35–$174.44 million. Deadweight losses remained minimal due to the markets' price inelasticity. Major Robusta exporters faced reduced exports to Brazil and up to 9% lower prices, losing 0.3363–0.7564 million 60‐kg bags. Additionally, foreign consumers of Brazilian soluble coffee lost $62–$107 million in welfare from higher prices. without the import ban, global stakeholders would have seen a $12.61/bag higher world bean price. The drought benefitted Robusta sellers outside Brazil but harmed net importers, even with the ban in place.

Behavior-based pricing and wholesale contracting in competing supply chains with informative advertising

The development of e-commerce has enhanced the ability of firms to identify existing and potential customers and set targeted prices accordingly, which is known as behavior-based pricing (BBP). This study investigates the effect of manufacturers’ informative advertising on the strategic interaction between wholesale price contracts (long-term or short-term) and downstream pricing mechanisms (BBP or not). We consider two horizontal differentiated supply chains in which firms not only compete in prices but also in informative advertising which is used to generate awareness of products. We find that the impact of BBP on channel members’ advertising, pricing and profits is the tradeoff of multiple effects. With BBP, manufacturers will advertise less and both retailers and manufacturers prefer short-term wholesale contracts. Moreover, BBP eases the price competition in the first period but intensifies it in the second period, especially for short-term wholesale contracts. In equilibrium, BBP is adopted by retailers only when the advertising cost is low, and manufacturers choose short-term wholesale contracts. Furthermore, BBP always hurts the consumer surplus and social welfare which means that targeted measures are needed to regulate firms’ price discrimination.

Impacts of a sustainable aviation fuel mandate on airline competition — Full-service carrier vs. low-cost carrier

The aviation industry has proposed the collective goal of achieving net-zero carbon emissions by 2050. In addition to the existing market-based methods (MBMs), the use of renewable energies, in particular, sustainable aviation fuel (SAF), could be one of the most promising means for achieving this long-term target. This paper investigates how an SAF mandate from the government can lead to heterogeneous impacts on two types of airlines, namely, full-service carriers (FSCs) and low-cost carriers (LCCs), that compete in the same markets. A game-theoretic economic model is constructed that accounts for the different service quality levels and cost structures (i.e., fuel efficiency) between FSCs and LCCs. Our analytical results suggest that the SAF mandate favors LCCs over FSCs. The share of SAF blended into fuel raises the airfares of both types of airlines while reducing the traffic and profit of FSCs. The impacts on the LCC traffic and profit depend on its fuel efficiency relative to that of FSC. When LCCs are sufficiently fuel efficient, the SAF mandate can increase their traffic and profit. The government subsidy on airline's SAF use is also analyzed, deriving the optimal subsidy levels for FSC and LCC respectively to achieve pareto-improvement in social welfare and consumer surplus. We also examine how air passengers’ environmental awareness affects the outcomes of SAF mandate implementation. Our economic model also accounts for passengers’ heterogeneous preferences in terms of service quality and price sensitivity.

Economic Benefits and Uses of Indigenous Seasonal Weather Forecasts in Zimbabwe

This study presents a seminal contribution regarding the economic value of indigenous seasonal weather forecasts in Zimbabwe. Many farmers (58%) use indigenous seasonal weather forecasts to make maize farming decisions such as selecting suitable varieties. The main indicators used for indigenous seasonal weather forecasts are flowering and fruition of specific trees. Based on travel cost analysis, which incorporates a multi-purpose visit scenario, the study establishes the economic importance of indigenous seasonal weather forecasts with a consumer surplus of US$1,044 per year among the 290 farmers using the forecasts. There is therefore a need to integrate indigenous weather forecasts into national seasonal weather forecasting and disaster risk reduction systems to complement modern seasonal weather forecasts. Co-production of seasonal weather forecasts with farmers is proposed in this regard. This further calls for the need to digitally document, visualize, and disseminate indigenous seasonal weather forecast indicators to a wider audience to increase their use.

Brand extension strategy in the presence of carbon tax regulation policy and social influence

Brand extension is a common marketing strategy used to capture a competitive advantage in the fashion industry and often causes social influence between the parent and sub-brands. On the one hand, sub-brand consumers are more willing to buy products when the parent brand sells well. On the other hand, the parent brand consumers’ purchase intention decreases when the sub-brand product sells too much. The fashion industry also contributes considerably to global carbon emissions. To reach sustainable development goals, governments impose carbon taxes. This paper analyzes how social influence and carbon tax regulations can affect a monopolistic firm’s brand extension strategy. The analytical results show that the firm extends from the parent brand to the sub-brand when the magnitude of social influence is not strong in the absence of a carbon tax, as the market expansion effect dominates the cannibalization effect. When the regulator imposes a carbon emissions tax, the range is further narrowed of the social influence that allows the firm to benefit from brand extension strategy because of the cost effect. Counterintuitively, the brand extension strategy can force the regulator to lower the tax price. Moreover, our findings reveal that social influence exerts an inverse impact on the regulator’s tax pricing decisions, contingent upon the extent of the parent brand’s brand power advantage. Carbon tax regulation hurts the firm and consumer surplus, but benefits the environment and social welfare. Additionally, we reaffirm the robustness of our findings under conditions of asymmetry in the intensity of social influence and different pollution damage functions. Intriguingly, we find that the firm can mitigate the negative cannibalization effect by selling its sub-brand products through a downstream retailer.

Assessment of recreational value of national Chambal sanctuary: application of individual travel cost model

Purpose This study aims to assess the recreational value of the National Chambal Sanctuary highlighting the potential benefits of conservation and the need for sustainable practices. Design/methodology/approach This study uses the Individual Travel Cost Method to evaluate the expenses of individuals visiting the National Chambal Sanctuary. Findings The study reveals that the National Chambal Sanctuary has a significant recreational value, with an average visitor value of INR 35,335.69 or USD 434 and an annual value of INR 132,473,501.81 or approximately USD 1.62m, indicating substantial economic contribution. Research limitations/implications The study's limitations may stem from data collection constraints, visitor reporting biases or other factors affecting estimates' accuracy. Future research could explore socio-economic factors or factors affecting low tourist inflow in India's protected areas (PAs). Practical implications This study suggests raising entrance fees for the National Chambal Sanctuary to ensure financial sustainability, based on its high recreational value and average consumer surplus. This has practical implications for policymakers, conservationists and the tourism industry. Social implications The study underscores the significance of protecting PAs like the National Chambal Sanctuary, suggesting that public attitudes towards biodiversity conservation can be influenced by highlighting its economic and recreational value and promoting awareness of its significance. Originality/value The study evaluates the recreational value of a wildlife sanctuary in India, offering insights into conservation's economic benefits and sustainable practices and promoting further research.

Game theoretic operation optimization of photovoltaic storage charging station considering uncertainty and carbon trading

With the advancement of energy conservation and emission reduction efforts, the orderly charging of electric vehicles and the operation of photovoltaic-storage-charging stations associated with electric vehicles have become increasingly important topics. This study constructs an optimization model for the operation of stations under the synergy of electricity and carbon markets from a game theory perspective. Firstly, Latin hypercube sampling and Monte Carlo sampling are employed to handle the uncertainties in photovoltaic output and the stochastic nature of electric vehicles charging. Secondly, a ladder-type carbon trading mechanism is introduced, and a charging optimization model based on Stackelberg game theory is developed to describe the benefit interaction between charging stations and electric vehicles users. In this model, the upper level represents the charging station operator aiming to maximize joint electricity and carbon revenue while minimizing load fluctuations, whereas the lower level represents electric vehicles users aiming to maximize consumer surplus. Finally, a genetic algorithm nested with mixed-integer linear programming is used to solve the optimization model. The simulation results validate the model's effectiveness and superiority. The results indicate that, compared to centralized optimization methods, the Stackelberg game mechanism can increase consumer surplus by 119.40 %, reduce carbon emissions by 217.92 %, and achieve a win-win situation for both parties. Compared to a fixed carbon trading value, the ladder-type carbon trading mechanism can reduce carbon emissions by 23.84 % and smooth load fluctuations.

Switching Costs and Market Power in Auditing: Evidence from a Structural Approach

ABSTRACT This study provides novel evidence on the magnitude of switching costs in auditing. Using a discrete choice approach, we infer switching costs from clients’ audit firm choices. The demand estimation reveals that switching costs are significant and vary by direction, with the highest costs associated with switching from non-Big 4 to Big 4 audit firms. Counterfactual analyses of forced switches suggest that switching costs are substantial, ranging from 0.7 billion U.S. dollars (14.2 percent of audit fees) to 1.2 billion U.S. dollars (24.0 percent of audit fees) when aggregated across all clients. Counterfactual analyses of voluntary switching show that the audit market would become highly dynamic and more concentrated if switching costs were removed. Additionally, clients would gain consumer surplus of up to 306 million U.S. dollars (5.4 percent of audit fees) in such a scenario. Overall, our study documents the importance of switching costs for understanding audit market dynamics. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M42; M48; L11; L84.

Evaluating the impact of price caps - Evidence from the European roam-like-at-home regulation

The roam-like-at-home regulation (RLAH) eliminated all mobile roaming surcharges to European consumers traveling within Europe. We measure the causal impact of the regulation on European roaming traffic, using the Rest of the World as a control group. We find large and heterogeneous effects on retail and wholesale traffic volumes and revenues. To evaluate the welfare effects of the regulation, we develop a framework that includes consumer surplus, retail and wholesale profits. The gains in consumer surplus are large, and mainly stem from data services. The consumer gains are proportionately larger in small, open economies and in countries with previously high roaming prices. Finally, total welfare increases considerably, because the consumer surplus gains outweigh profit losses. As such, the removal of market power more than compensates for a distortion from a possible overconsumption at zero surcharges.

Biomass supply chain coordination considering government subsidies and corporate social responsibility

PurposeThe purpose of this paper is to investigate the impact of various decision-making approaches and government subsidies on supply chain performance, aiming to enhance the profits of disposal firms and retailers as well as to improve social welfare.Design/methodology/approachIn this paper, a two-echelon biomass supply chain composed of a disposal firm and a retailer is developed. Firstly, considering the effects of government subsidies, we analyze biofuels prices, corporate social responsibility levels, social welfare and supply chain profitability under centralized and decentralized decision-making scenarios, respectively. Furthermore, we assess how subsidies influence pricing, market participation, profitability and social welfare. Secondly, we propose a revenue sharing–cost sharing contract to enhance the profits of the disposal firm and retailer. Thirdly, we extend the supply chain to a disposal firm and two retailers and explore the impact of competition intensity on corporate decision-making behavior. Finally, numerical analysis is conducted by taking one biomass energy firm as an example to support the results.FindingsOur research finds that (1) Equilibrium strategies under the centralized decision-making scenario are greater than those under the decentralized decision-making scenario. Centralized decision-making can increase market demand and consumer surplus. (2) Government subsidies can promote corporate social responsibility levels, despite causing a slight increase in retail price for biofuels. When market competition intensifies, companies usually reduce their investment in CSR, and this trend is particularly pronounced in the absence of subsidies. (3) In both the decentralized and the centralized decision-making scenarios, increasing conversion rates and the CSR coefficient can significantly increase the overall profitability and social welfare.Research limitations/implicationsA three-echelon biomass supply chain involving collection station, disposal firm and retailer can be studied in the future.Originality/valueBy examining the effects of subsidies on CSR engagement and market outcomes, our study contributes valuable insights into policy design for promoting sustainable practices in biomass industries.