Consumer Surplus Research Articles

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.

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.

Robust lower bounds on monopoly profit with [formula omitted]-concave demand

I extend Condorelli’s lower bound on monopoly profit from log-concave demand to a broader class of α-concave demand, with α=0 corresponding to log-concavity and α=1 to concavity. The monopoly profit is at least 1(1+α)1/α of the area under the demand curve. I further derive upper bounds for consumer surplus and deadweight loss relative to monopoly profit and show all three bounds are sharp.

Consumer Data Collection Strategies in Two-Sided Platforms: The Role of Data Ownership Assignment and Privacy Concerns

Recognizing data as the new oil of the digital economy, two-sided platforms have invested heavily in collecting consumer data. However, issues surround privacy concerns and conflicts over data ownership. More importantly, should consumers retain ownership of their personal data? This paper models a two-sided platform under different data ownership structures and explores the effect of data ownership assignment, consumer privacy concerns, and network externalities on Consumer Data Collection (CDC) strategies. Game theoretic results suggest that, with a low data collection compensation, leaving data ownership with consumers increases the platform's inclination toward investing in CDC strategies when the cost of personal data protection is low and the loss of consumer data ownership is high. However, in cases with high data collection compensation, this inclination diminishes, indicating a decreased desire for CDC investment. Interestingly, when data ownership is assigned to consumers, heightened consumer privacy concerns lead to consumers providing less personal data, but the platform may be more incentivized to invest in CDC. Further, allowing consumers to hold on to data does not always increase consumer surplus, as the latter depends on the trade-off between the costs of data ownership shift (i.e., both personal data protection costs and data collection compensation) and the benefits attached to the data. When data collection compensation is relatively low, conflicting views on data ownership may arise between the platform and consumers.

Bilateral Trade Welfare Impacts of India’s Export Ban of Non-Basmati Rice Using the Global Partial Equilibrium Simulation Model (GSIM)

India, the world’s leading rice exporter, banned the export of non-Basmati white rice, accounting for 25% of its total exports (or 10% of the global rice trade). The ban aims to ensure availability to domestic Indian consumers and reduce domestic market prices, impacting global rice market accessibility, consumers, and producers across twelve regions. The study utilized the global simulation model (GSIM) to analyze the effects of trade restrictions on industries. The model uses national product differentiation to assess trade policy changes at global, regional, or national scales. It examined importer and exporter effects on trade values, tariff revenues, exporter surplus, and importer surplus. It found that India’s Voluntary Export Restraint (VER) ban on non-Basmati rice resulted in a higher local price and a negative global net welfare impact of USD 1.7 billion. The losses decreased to USD 1.4 billion when importing countries responded by reducing rice import tariffs by 25% and USD 1.1 billion when importing countries reduced tariffs by 75%. Sub-Saharan Africa, the Middle East, North Africa, and the Gulf Cooperation Council regions were most affected. The study also found minimal impact on consumer surplus in India due to inelastic rice demand.

Brand loyalty, managerial delegation and position choices: Bertrand versus Cournot competition

In a mature product market, brands compete aggressively with each other using a marketing mix that includes position, pricing, and managerial delegation to win loyal customers and gain a larger market share. We examine the effects of brand loyalty on the endogenous choices of managerial compensation contracts and optimal brand positions in an uncovered market model. We analytically compare 18 symmetric and asymmetric mutual delegation cases associated with three delegation schemes—no delegation, sales delegation and relative performance (RP) delegation—in the Bertrand and Cournot competition modes. In the case of symmetric mutual contracts, under Bertrand competition, a price commitment effect resulting from the delegation decision weakens the competition, inducing higher prices and profits for both brands regardless of the type of delegation scheme. Under Cournot competition, delegation decisions can be viewed as signals to promote competition, intensifying the degree of competition. To acquire more loyal customers and higher profits, mutual RP delegation is the dominant choice under Bertrand competition, whereas mutual profit maximization is the dominant choice under Cournot competition. Furthermore, the social welfare is the highest when both brands optimally choose the RP delegation under Bertrand or optimally choose no delegation under Cournot; however, consumer surpluses are the lowest in both optimal cases.

Optimal Service Strategies of Online Platform Based on Purchase Behavior

In the rapidly evolving platform economy, online platforms have emerged as pivotal providers of digital services to sellers. The paper investigates how online platforms optimize service strategies based on consumers’ purchase behavior, influencing sellers’ pricing and social welfare. Using a two-period Hotelling model and a cooperative game framework, we discover that the optimal service strategies of a platform with data collecting capabilities are collaborating with two sellers to offer to extend services to new consumers in the second period, maximizing profits for all sellers and platform. Applying Shapley value analysis, we determine the platform’s equitable service charge strategies. When sellers adopt behavior-based pricing (BBP), the pricing escalates in the first period, and the platform’s optimal service strategies also enhance the pricing of sellers. However, in the second period, BBP intensifies competition, leading to generally lower pricing. Our findings suggest that optimal pricing in the second period for new consumers should increase with enhanced quality perception, which is provided by the platform’s digital services and heightened by consumers’ privacy concerns, while decreasing for regular consumers. Lastly, we offer policy recommendations, exploring optimal regulatory scenarios—limiting or not limiting data collection—to maximize social welfare or consumer surplus, and the Mathematica software is used to identify distinct optimal policy intervals.

Determining the Economic Benefit of Watershed Conservation for Urban Water Supply Based on Scarcity rent for Water and Consumer Surplus

Determining the Economic Benefit of Watershed Conservation for Urban Water Supply Based on Scarcity rent for Water and Consumer Surplus

Carbon footprint reduction in an e-commerce market: impacts of logistics service sharing

In the e-commerce market, green technology investment and carbon offset purchase are two widely-used approaches for reducing the carbon footprint of logistics services. However, implementing carbon footprint reduction in logistics services generally incurs heavy costs. To distribute heavy costs and improve resource utilization, a novel strategy of logistics service sharing has played an important role. Nevertheless, it is still unclear, in a co-opetitive e-commerce market, how to make use of different approaches and what the impacts of logistics service sharing are. To answer these questions, we develop an analytical model where an e-commerce platform and a third-party seller compete for consumers who care about both the selling price and the logistics service carbon footprint. We assume that the platform builds his own logistics service system and can adopt two different approaches to cut carbon footprint, while the seller needs to outsource logistics services to the TPL service provider or the platform. The analysis shows that without logistics service sharing, the platform may be more willing to purchase carbon offset as the offset cost increases, and the availability of carbon offset can prompt the platform to increase his investment in green technology. By contrast, with logistics service sharing, the platform will be less willing to purchase carbon offset as the offset cost increases, and the usage of carbon offset will induce him to invest less in green technology. These findings highlight that logistics service sharing can change the platform's preference toward the two approaches and modify the relationship between them. Furthermore, we find that logistic service sharing can provide a win-win outcome for the platform and the seller, but is not necessarily helpful for reducing the total carbon footprint in the e-commerce supply chain as well as increasing consumer surplus and social welfare.

Rare earth recycling and remanufacturing: Impacts on oligopoly markets and industry development from a closed-loop supply chain perspective

The recycling of rare earth elements (REEs) yielded a dual benefit by alleviating supply constraints and contributing to environmental preservation. Independent recyclers (IRs), upon extracting REEs from waste materials, not only supplied the recovered REEs to the REE conglomerates but also engaged in competitive relationships by remanufacturing REE products. This study established a closed-loop supply framework, allowing the IR flexibly to choose between remanufacturing or direct sales strategies. Using the Cournot model under inequation constraints and real market data, to explores the impact of REE acquisition prices and recycling technologies on the closed-loop supply chain (CLSC) and society. The results indicated that: (1) The recycling mode and technology do not affect market share. Compared to the IR, REE conglomerate exhibit significant monopolistic advantages, occupying at least 85.1% of the market share, which can increase to a maximum of 98% as acquisition prices rise. (2) The acquisition price of recycled REE has an “inverse U-shaped” relationship with the profits of REE conglomerate and a positive relationship with the profits of IR. (3) The recovery rate is negatively related to the profits of REE conglomerate and positively related to the profits of IR. Increasing the REE recovery rate will enhance the profitability of the IR. (4) In terms of social effects, higher acquisition price of recycled REE continuously reduce consumer surplus and social welfare. Although the REE recovery rate does not affect consumer surplus, it has a significant positive impact on social welfare.

Blockchain-enabled downward traceability to combat gray market

Cross-market brand owners have long been troubled by the gray market issues. This study examines a dual distribution channel model involving one brand owner, two retailers, and two independent markets. In this model, low-end retailers privately transfer products from the low-end to high-end markets, creating a gray market. The brand addresses this behavior by adopting blockchain. We examine the impact of blockchain on gray market invasion, firm decisions, consumer surplus, and social welfare through downward traceability. The results show that gray market invasion consistently benefits low-end market retailers while disadvantaging high-end market retailers. It is profitable for the brand to allow gray market invasion when the willingness to pay in the low-end market is substantial. Blockchain adoption can effectively inhibit gray market invasion, benefiting high-end market retailers while harming low-end market retailers and the brand, depending on the cost and penalty fee involved with blockchain implementation. When the cost of blockchain adoption is relatively low, brand adopting blockchain may achieve a win-win-win market situation. However, although consumer surplus and social welfare can benefit from a gray market invasion, adopting blockchain reduces this impact, especially when cost of blockchain adoption and penalty fee are both relatively high.

Endogenous Merger Decisions Among Competitors: Impact of Limited Capacity and Loyal Segments

We study endogenous merger decisions among three competing firms with asymmetric capacity: one large firm has ample capacity, and two small firms have limited capacity. Each firm can either operate independently or merge with another firm. Because of antitrust laws, all three firms merging is not permitted. When two firms merge, the merged entity and the remaining independent firm use the resulting capacity to capture their own “loyal buyers” and compete in price for price-sensitive “disloyal switchers.” We first consider a base model in which the size of loyal buyers for different firms is symmetric. We find that, in equilibrium, either there is no merger or the large firm will merge with a small firm as a “mixed merger.” We explain how this equilibrium structure is driven by the mergers’ impacts on market competition and firms’ pricing aggressiveness. Specifically, the mixed merger that can most effectively reduce price competition is the equilibrium under relatively competitive market conditions (i.e., the size of loyal buyers is small and capacity is large but limited). We also extend to the case with asymmetric size of loyal segments and show that two small firms merging (“small merger” structure) can be the equilibrium structure when the large firm has a much larger loyal segment than the small firms and the small firms’ capacity is sufficiently large. The impacts of mergers on social welfare and consumer surplus provide practical implications from the antitrust perspective. The antitrust agencies can approve a mixed merger to improve social welfare under certain conditions, but if the agencies pay more attention to consumer surplus, then mixed mergers should not be permitted. Small mergers, though sometimes not the equilibrium structures, can improve social welfare and consumer surplus. In such cases, the government can appropriately promote mergers that are beneficial for society and/or consumers by adopting some restrictive measures or offering incentives. This paper was accepted by Jeannette Song, operations management. Funding: The work of D. Wang was supported by the National Natural Science Foundation of China [Grant 72401275]; the work of X. Wu was supported by the National Natural Science Foundation of China [Grants 72025102, 72293560/72293565]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.01943 .

Dynamic game research of food agricultural products supply chain based on blockchain traceability technology

PurposeFood quality and safety issues have always been imperative topics discussed by people. The anti-tampering of blockchain technology and the transparency of information make it possible to improve food traceability and safety quality. How to effectively apply blockchain traceability technology to food safety has great research significance for improving food safety and consumer quality trust.Design/methodology/approachThe paper aims to analyze the differences in product quality levels and market participants’ profits before and after the use of blockchain-driven traceability technology in the food agricultural product supply chain (SC) in the dynamic game frameworks of supplier-led and retailer-led modes, respectively, and explores the willingness, social welfare and consumer surplus of each member of the agricultural product SC to participate in the blockchain. Besides, We investigate the SC performance improvement with the mechanism of central centralized decision-making and revenue-sharing contract, compared to the SC performance in dynamic games.FindingsThe results are obtained as follow: The adoption of blockchain traceability technology can help improve the quality of food agricultural products, consumer surplus and social welfare, but the application and popularization of technology is hindered by traceability technology installment costs. Compared with the supplier leadership model, retailer-led food quality level, customer surplus and social welfare are higher.Research limitations/implicationsHow to effectively apply blockchain traceability technology to food safety has great research significance for improving food safety and consumer quality trust.Practical implicationsFood quality and safety issues have always been hot topics discussed by people. The anti-tampering of blockchain technology and the transparency of information make it possible to improve food traceability and safety quality.Social implicationsThe research results enrich the theories related to food safety and quality, and provide a valuable reference for food enterprises involved in the decision-making exploration of blockchain technology.Originality/valueBased on the characteristics of blockchain technology, the demand function is adjusted and the product loss risk of channel members is transferred through a Stackelberg game SC composed of agricultural products suppliers and retailers.Highlights:•We introduce two features of blockchain: quality trust and product information tracking.•The willingness of each member of the supply chain to use blockchain for product traceability was explored.•The overall traceability effect of the retailer-led blockchain is better than that of the manufacturer-led blockchain.•The cost of blockchain technology is a barrier to its adoption.•Blockchain brings higher consumer surplus and social welfare.

Real Life Application of Consumer and Producer Surplus

In this assignment, we addressed the usage of consumer and producer surplus in various sectors as business sector, medical sector, engineering sector, non profit sector and educational sector. Businesses employ consumer excess to draw in new clients, boost client satisfaction, expand their product offerings, and maintain their position as leaders in their sector. The idea is to determine what advantages consumers can have from purchasing a product and then reduce the price of that product to provide those advantages to them in excess.