Differentiated Product Market Research Articles

Specialized advertising media and product market competition

This paper studies the strategic relationship between a specialized communication medium and a product market. To that end, we formulate a model of informative advertising and price competition where the advertising fee is endogenously determined by the interaction between two firms producing a horizontally-differentiated good and a communication platform. We find that (i) when the subscription to the medium is free, the platform asks for high prices for its advertising services, which allows firms to raise their prices to the level where the marginal potential consumer achieves zero utility and (ii) a positive subscription fee generates cross-side externalities between the firms and subscribers, which can increase or decrease the equilibrium advertising fee. In particular, under a positive advertising externality, the platform tends to charge low advertising fees, thus triggering strong price competition between firms. We also show that less product differentiation or a lower consumer valuation of the goods can increase firms’ profits, so a strategic connection between the product and the media markets can substantially affect the functioning of a differentiated product market.

Referrals in search markets

This paper compares the equilibrium outcomes in search markets with and without referrals. Although it seems clear that consumers would benefit from referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage consumers to purchase the product elsewhere. In a model of a horizontally differentiated product market with sequential consumer search, we show that valuable referrals can arise in the equilibrium: a firm will give referrals to consumers whose ideal product is sufficiently far away from the firm's offering. We allow firms to price-discriminate among consumers, and consumers to misrepresent their tastes. We found that the equilibrium profits tend to be higher in markets with referrals than in markets without. Consumers tend to be better off in the presence of referrals when search costs are not too low, and under a certain parameter range, referrals lead to a Pareto improvement.

Fixed-Point Approaches to Computing Bertrand-Nash Equilibrium Prices Under Mixed-Logit Demand

This article describes numerical methods that exploit fixed-point equations equivalent to the first-order condition for Bertrand-Nash equilibrium prices in a class of differentiated product market models based on the mixed-logit model of demand. One fixed-point equation is already prevalent in the literature, and one is novel. Equilibrium prices are computed for the calendar year 2005 new-vehicle market under two mixed-logit models using (i) a state-of-the-art variant of Newton's method applied to the first-order conditions as well as the two fixed-point equations and (ii) a fixed-point iteration generated by our novel fixed-point equation. A comparison of the performance of these methods for a simple model with multiple equilibria is also provided. The analysis and trials illustrate the importance of using fixed-point forms of the first-order conditions for efficient and reliable computations of equilibrium prices.

Ownership and Control in a Competitive Industry

We study a differentiated product market in which an investor initially owns a controlling stake in one of two competing firms and may acquire a non-controlling or a controlling stake in a competitor, either directly using her own assets, or indirectly via the controlled firm. While industry profits are maximized within a symmetric two product monopoly, the investor attains this only in exceptional cases. Instead, she sometimes acquires a noncontrolling stake. Or she invests asymmetrically rather than pursuing a full takeover if she acquires a controlling one. Generally, she invests indirectly if she only wants to affect the product market outcome, and directly if acquiring shares is profitable per se. (This abstract was borrowed from another version of this item.)

Patent licensing of Stackelberg manufacturer in a differentiated product market

The present paper analyzes the patent licensing behavior of a Stackelberg leader of manufacturing firms with an in‐house R&D division in a differentiated product market where the firm is able to choose between fixed‐fee licensing and royalty licensing. The findings are compared with the conclusions reached on the Stackelberg competition model in a homogeneous product market, and those under Cournot competition in a differentiated product market. This paper also examines two‐part tariff licensing and its findings are compared with those of previous studies.

Ownership and Control in a Competitive Industry

We study a differentiated product market in which an investor initially owns a controlling stake in one of two competing firms and may acquire a non-controlling or a controlling stake in a competitor, either directly using her own assets, or indirectly via the controlled firm. While industry profits are maximized within a symmetric two product monopoly, the investor attains this only in exceptional cases. Instead, she sometimes acquires a non-controlling stake. Or she invests asymmetrically rather than pursuing a full takeover if she acquires a controlling one. Generally, she invests indirectly if she only wants to affect the product market outcome, and directly if acquiring shares is profitable per se.

Environmental Policy in a Vertically Differentiated Product Market

Using a discrete-continuous model that deals with both consumers' choice and usage of an environmentally differentiated product in a utility-consistent framework, this paper investigates welfare impacts of emission taxes, subsidies and ad valorem taxes/subsidies on a green market where consumers emit a pollutant through their usage of the products offered by duopolists. An emission tax is always welfare dominant over a subsidy on consumers' purchase of the clean product because the emission tax contributes to a reduction in environmental damage by inducing firms to improve environmental qualities of the products and by constraining consumers' usage of the products. An ad valorem subsidy is always dominated by both an emission tax and a subsidy in terms of social welfare.

EQUIVALENCE OF COMPETITION MODE IN A VERTICALLY DIFFERENTIATED DUOPOLY WITH DELEGATION

AbstractThis paper aims to examine the equivalence of competition mode in a vertically differentiated product market with the relative performance delegation. It demonstrates the equivalence of product quality and social welfare in this delegation game, irrespective of modes of product competition. In addition, in a three‐stage game of quality‐delegation‐quantity (or price), it shows that the delegation coefficient is different between high‐quality and low‐quality firms in an asymmetric vertical differentiated model, and a high‐quality firm makes better use of the delegation than a low‐quality firm.

The Effects of Inter-Firm Cost Correlation, IT Investment, and Product Cost Accuracy on Production Decisions and Firm Profitability

ABSTRACT: Using analytical and simulation techniques, we investigate the effect of inter-firm cost correlation, IT investment, and product cost accuracy on production decisions, and ultimately firm profitability in an imperfectly competitive market. Along with an unprecedented growth in investments in information technology (IT) over the last two decades, firms have made significant investments in IT to increase product cost accuracy. Yet, a variety of studies present mixed evidence as to the linkage between IT investment, product cost accuracy, and organizational performance. Further, while previous research has shown that IT may contribute to the improvement of organizational performance, contextual factors are important. We reexamine this issue in an imperfectly competitive market and product cost setting. We assert that knowledge of inter-firm cost correlation may be used to reduce the IT investment needed to achieve product cost accuracy and thereby optimize production and ultimately firm profit. To motivate our hypotheses, we develop and analyze an analytical model which incorporates IT investment, a costly, endogenous, imprecise product cost report, and inter-firm cost correlation. Using simulation techniques, we illustrate that production decisions informed by inter-firm cost correlation require less IT investment and result in higher firm profitability. Our emphasis on the initial design of product costing systems and the related IT requirements definition phase suggest that our result could be helpful to firm managers in establishing the optimal levels of IT investment and product cost accuracy in their specific product market setting.

Beyond plain vanilla: Modeling joint product assortment and pricing decisions

This paper investigates empirically the product assortment strategies of oligopolistic firms. We develop a framework that integrates product choice and price competition in a differentiated product market. The present model significantly improves upon the reduced-form profit functions typically used in the entry and location choice literature, because the variable profits that enter the product-choice decision are derived from a structural model of demand and price competition. Given the heterogeneity in consumers’ product valuations and responses to price changes, this is a critical element in the analysis of product assortment decisions. Relative to the literature on structural demand models, our results show that incorporating endogenous product choice is essential for policy simulations and may entail very different conclusions from settings where product assortment choices are held fixed.

On the effects of emission standards as a non-tariff barrier to trade in the case of a foreign Bertrand duopoly: A note

Employing a model of an environmentally differentiated product market, we analyze how an emission regulation as non-tariff barriers to trade affects imports, the environment, and welfare in the case of a foreign Bertrand duopoly. Related to this issue, we reconsider the result of Moraga-González and Padrón-Fumero [Moraga-González, J.L., Padrón-Fumero, N., 2002. Environmental policy in a green market. Environmental and Resource Economics 22, 419–447] that a strict emission standard on a dirtier product degrades the environment and reduces the net social surplus associated with the valuation of environmental damage, if the marginal social valuation of environmental damage is larger. On the other hand, we show that a strict emission standard on a cleaner product always improves the environment and the net social surplus associated with the valuation of environmental damage.

Intertemporal price competition with exogenous demand shocks

In this paper we show that in a differentiated product market, the presence of exogenous demand shocks leads to countercyclical price behavior when firms are committed to prices in the short run.

QUALITY DIFFERENTIATION, WELFARE, AND THE MODE OF COMPETITION IN A VERTICALLY DIFFERENTIATED PRODUCT MARKET: A NOTE

We analyse the implications of quality differences in a vertically differentiated product market for social welfare by employing an endogenous quality choice model. We find that in of Bertrand and Cournot duopolies, the degree of quality differentiation at equilibrium in an unregulated market is larger or smaller, respectively, than that of the socially second-best optimum. This implies that a reduction in quality difference, respectively, increases or decreases social welfare in the case of Bertrand or Cournot duopolies.

Information or Opinion? Media Bias as Product Differentiation

Two aspects of media bias are important empirically. First, bias is persistent: it does not seem to disappear even when the media is under scrutiny. Second, bias is conflicting: different people often perceive bias in the same media outlet to be of opposite signs. We build a model in which both empirical characteristics of bias are observed in equilibrium. The key assumptions are that the information contained in the facts about a news event may not always be fully verifiable, and consumers have heterogeneous prior views (“ideologies”) about the news event. Based on these ingredients of the model, we build a location model with entry to characterize firms' reports in equilibrium, and the nature of bias. When a news item comprises only fully verifiable facts, firms report these as such, so that there is no bias and the market looks like any market for information. When a news item comprises information that is mostly nonverifiable, however, then consumers may care both about opinion and editorials, and a firm's report will contain both these aspects—in which case the market resembles any differentiated product market. Thus, the appearance of bias is a result of equilibrium product differentiation when some facts are nonverifiable. We use the model to address several questions, including the impact of competition on bias, the incentives to report unpopular news, and the impact of owner ideology on bias. In general, competition does not lead to a reduction in bias unless this is accompanied by an increase in verifiability or a smaller dispersion of prior beliefs.

Durable‐goods oligopoly with secondary markets: the case of automobiles

We study the effects of durability and secondary markets on equilibrium firm behavior in the car market. We construct a dynamic oligopoly model of a differentiated product market to incorporate the equilibrium production dynamics that arise from the durability of the goods and their active trade in secondary markets. We derive an econometric model and estimate its parameters using data from the automobile industry over a 20‐year period. Our estimates are used to provide a measure of the competitive importance of the secondary market.

A Gibbs sampler for mixed logit analysis of differentiated product markets using aggregate data

In this paper, we offer the Gibbs sampler as an alternative to the GMM estimator developed by Berry, Levinsohn, and Pakes (Econometrica 63(4), 841---890, 1995) in their equilibrium differentiated product market analysis of the automobile industry. We use the GMM objective as the basis for forming a posterior distribution, thereby making use of certain attributes of the GMM approach that reduce the computational cost of conducting posterior inference. The advantages provided by the our Bayesian GMM approach are that it enables us to conduct inference under the exact posterior distribution for the parameters, to estimate moments of functions of interest that are not readily available using GMM, and to capture non-normalities in the parameter distributions. The cost of posterior inference takes the form of additional distributional assumptions and longer computational time. In an illustration within, we find the random coefficients to be only weakly identified by the data. This results in highly non-normal distributions. The GMM estimates hint at this problem, but it can only be fully characterized by the Gibbs sampler.

Bundling may blockade entry

I consider bundling of two products as a strategy to avoid entry in a differentiated product market. I construct a simple model in which the potential entrant can offer a differentiated product to one of the incumbent's products. I show that the incumbent optimally bundles irrespective of entry. For a given entry decision, the incumbentís gains are small compared to the entrant's loss; its gains are substantial when the bundling induces the potential entrant not to enter the market. In this case bundling blockades entry and reduces welfare.

Bundling May Blockade Entry

I consider bundling of two products as a strategy to avoid entry in a differentiated product market. I construct a simple model in which the potential entrant can offer a differentiated product to one of the incumbent's products. I show that the incumbent optimally bundles irrespective of entry. For a given entry decision, the incumbent's gains are small compared to the entrant's loss; its gains are substantial when the bundling induces the potential entrant not to enter the market. In this case, bundling blockades entry and reduces welfare.

Strategic pricing in a differentiated product oligopoly model: fluid milk in Boston

AbstractIn an imperfectly competitive industry, differentiated products compete with each other with price rather than quantity as the strategic variable. Several previous studies have employed a generalized Nash–Bertrand model: Liang (1989), Cotterill (1994), Cotterill et al. (2000), and Kinoshita et al. (2002); however, only Liang has explored the theoretical foundations of that model. This article generalizes the Liang two‐good model to three goods. A surprising and important result follows. Price‐conjectural variations do not exist in models with three or more goods. Price‐reaction functions, however, exist in multiple‐good models. We estimate them jointly with a brand‐level demand system to evaluate the total impact of a brand manager's price change on own quantity. In a differentiated product market, this is a useful addition to a partial demand elasticity approach, because a change in one brand's price typically engenders a price reaction by other brands that affects own quantity via substantial cross‐price elasticities among substitutes. Strategic pricing in the Boston fluid milk market was also influenced by the existence of a raw milk price support program, the Northeast Dairy Compact. We find that the advent of the Compact was a focal point event that crystallized a shift away from Nash–Bertrand to more cooperative pricing. If the downstream market is not competitive, one needs to consider strategic price reactions when designing and evaluating agricultural price programs.

Product Differentiation and MultiProduct Strategies

This paper analyzes the price-setting behavior of multiproduct firms in a differentiated product market. The structure considered is one where large companies offer either a set of close substitutes (market segmentation) or a set of distant substitutes (market interlacing). The modelling strategy of the paper is to allow for two different elasticities of substitution: the intra-company elasticity of substitution and the inter-company elasticity of substitution. The key feature of the model is the possibility for multiproduct companies to choose their optimal internal organizational structure, according to the relative size of these two parameters. In order to maximize profits, each company may either set prices centrally, or alternatively it may assign an independent product manager to run each division. In other words, product managers of the same company may behave either independently or cooperatively. While the model does not consider either the proliferation or the product-line selection decisions, it deals with multiproduct frms price decisions under oligopolistic competition making use of conjectural variations. Its main purpose has been to provide a micro-founded answer about the question of whether and when a system of independent product managers (decentralized decisions) is better than a mechanism with a centralized general direction. Coordination is always profitable under market segmentation; while under market interlacing, the strategy of relying on independent product managers is profitable when the standard monopolistic competition arises; it may also be profitable with oligopolistic (Bertrand) competition under some assumptions.