Firms Charge Research Articles

The Potential of Servicizing as a Green Business Model

It has been argued that servicizing business models, under which a firm sells the use of a product rather than the product itself, are environmentally beneficial. The main arguments are as follow. First, under servicizing the firm charges customers based on the product usage. Second, the quantity of products required to meet customer needs may be smaller because the firm may be able to pool customer needs. Third, the firm may have an incentive to offer products with higher efficiency. Motivated by these arguments, we investigate the economic and environmental potential of servicizing business models. We endogenize the firm’s choice between a pure sales model, a pure servicizing model, and a hybrid model with both sales and servicizing options; the pricing decisions; and the resulting customer usage. We consider two extremes of pooling efficacy, i.e., no pooling versus strong pooling. We find that under no pooling servicizing leads to higher environmental impact due to production but lower environmental impact due to use. In contrast, under strong pooling, when a hybrid business model is more profitable, it is also environmentally superior. However, a pure servicizing model is environmentally inferior for high production costs because it leads to a larger production quantity even under strong pooling. We also examine the product efficiency choice and find that the firm offers higher efficiency products only under servicizing models with strong pooling. This paper was accepted by Serguei Netessine, operations management.

Mixed pricing in monopoly and oligopoly: theory and implications for merger analysis

ABSTRACTMixed pricing is when firms supplying an input to other firms charge some customers a fixed, take-it-or-leave-it (ToL) price, whilst other customers are allowed to bargain for a special (lower) price. The practice appears to be almost ubiquitous in business-to-business markets. The paper analyses how monopoly or non-cooperative oligopoly sellers will optimally choose which customers to bargain with, and will choose the ToL price to be paid by other customers. In the model, average revenues and thus profits increase as the number of competitors gets smaller, but this is achieved without the restriction of output predicted by standard price theory. Implications for merger analysis and policy are drawn out.

Fee or Free: When Should Firms Charge for Online Content?

Many online content providers aim to compensate for a loss in advertising revenues by charging consumers for access to content. However, such a choice is not straightforward because subscription fees typically deter customers, and a resulting decline in viewership further reduces advertising revenues. This research examines whether firms that offer both free and paid content can benefit from adjusting the amount of content offered for free. We find that firms should offer more free—and not paid—content in periods of high demand. We motivate theoretically that this policy, which we term “countercyclical offering,” may be optimal for firms when consumers are heterogeneous in their valuation of online content and this heterogeneity varies over time. Using unique data from an online content provider, we then provide empirical evidence that firms indeed engage in countercyclical offering and increase the share of free content in periods of high demand. This paper was accepted by Matthew Shum, marketing.

Evolution of a Collusive Price in a Networked Market

This paper studies evolution of firms’ behavior in a networked Bertrand oligopoly market, in which firms who are located on vertices of a network compete in price with their neighbors. This network model is also applied to a market with multi-dimensionally differentiated products. In a non-networked market, it is known that the Bertrand-Nash equilibrium pricing is evolutionarily stable. We show, however, that in our large networked market, the Bertrand-Nash equilibrium price is not stable but a collusive price is evolutionarily stable under weak selection. As the magnitude of transportation cost increases, firms charge a more collusive price in the long run. The results suggest that collusive pricing prevails in a large market if and only if it is networked.

Et dansk-norsk provinstrykkeri. Nye perspektiver på opprettelsen av det første boktrykkeri i Norge

Ernst Bjerke: A Danish-Norwegian provincial press. New perspectives on the establishment of the first printing press in Norway
 It is often stated as a matter of fact that Norway, independent only since 1814, was one of the last European countries to have its own printing press. That a press was finally set up in Christiania in 1643 is usually ascribed to the private initiative of the prolific theologian Christen Bang. However, Norway was at the time a province of Denmark, whose centralized government did not allow the establishment of provincial presses until the early 17th century. The first press in Norway must be viewed as one of a number of permanent presses set up in the provinces at this time. Furthermore, the decision to allow a press in Christiania is clearly connected with the foundation, a few years earlier, of a gymnasium, an academy of sorts, in connection with the old cathedral school. There are several examples of presses connected with institutions of learning in Denmark, and Christiania, with its gymnasium, conforms to this model. While Bang may have invited the first printer to establish his press in Christiania, he could not have done so without the express permission of central government, and were it not for the gymnasium, the printer would not have found work. Christiania’s first printer became entangled in a lawsuit against his patron and left town after only one year. When it came to appointing a successor, the sources reveal that government, both locally in Christiania and centrally in Copenhagen, took firm charge, in order to provide the press with tenable conditions. The printer was provided with a fixed wage, and there is even reason to believe that the Christiania press was exempted from centralized censorship in Copenhagen. The Christiania press ought not to be considered as one of the last national presses to be established in Europe (its influence, anyway, never reached far past Christiania’s walls), and not as the accomplishment of one private individual. It was in fact one of the earliest provincial presses in the Danish state, established as part of a general expansion of institutions of learning undertaken by the state at that time.

Trade liberalization and markups: Micro evidence from China

This paper presents evidence from highly disaggregated Chinese firm-product data that, given productivity, input tariff reductions induce an incumbent importer/exporter to increase product markups. We further investigate empirically the mechanisms underlying this trade liberalization effect, and find that input tariff reductions decrease marginal costs, and their effects on markup adjustments are more profound among firms with higher import dependence. Moreover, we exploit unique features of Chinese data by comparing results for two trade regimes: ordinary trade (wherein firms pay import tariffs to import) and processing trade (wherein firms are not subject to import tariffs). While the aforementioned trade liberalization effects and mechanisms only apply to ordinary trade, processing trade samples are used in a placebo test. The paper also shows that more productive firms charge higher markups for products. All these findings are robust to alternative markup measures including one estimate using physical-quantity output data, different production function specifications, a subsample consisting only of pure exporters, and estimations based on our theoretical derivations.

Cournot, Bertrand or Chamberlin: Toward a reconciliation

AbstractThis paper compares the market equilibria in a differentiated industry under Cournot, Bertrand, and monopolistic competition. This is accomplished in a one‐sector economy where consumers are endowed with separable preferences. When firms are free to enter the market, monopolistically competitive firms charge lower prices than oligopolistic firms, while the mass of varieties provided by the market is smaller under the former than the latter. If the economy is sufficiently large, Cournot, Bertrand and Chamberlin solutions converge toward the same market outcome, which may be a competitive or a monopolistically competitive equilibrium, depending on the nature of preferences.

Competition with Variety Seeking and Habitual Consumption: Price Commitment or Quality Commitment?

This paper investigates price and quality competition in a market where consumers seek variety and habit formation. Variety seeking is modeled as a decrease in the willingness to pay for product purchased on the previous occasion while habitual consumption may increase future marginal utility. We compare two competing strategies: price commitment and quality commitment. With a three-stage Hotelling-type model, we show that variety seeking intensifies while habitual consumption softens the competition. With price commitment, firms supply lower quality levels in period 1 and higher quality levels in period 2, while, with quality commitment, firms charge higher prices in period 1 and lower prices in period 2. However, the habitual consumption brings the opposite effect. In addition, with quality commitment variety seeking leads to a lower profit and a higher consumer surplus, while habitual consumption leads to the opposite results. On the other side, with price commitment these behaviors have no effect on the consumer surplus, although they still lower down the firm profits. Finally, we also identify conditions under which one strategy outperforms the other.

I Will Survive. Pricing Strategies of Financially Distressed Firms

We consider a standard result of customer market theory: if firms have stable customer relations and face financial frictions, they may keep prices relatively high in times of low demand and vice versa. Indeed, during recessions, when firms have low cash flow and greater difficulty in raising external funds, they may set higher prices on their locked-in shoppers to maintain short-term profits at the expense of future market shares. We extend this theoretical framework so that the countercyclical behaviour of price margins is strengthened by the expected persistence of the downturn and the procyclicality of competitive pressures. We test these predictions for Italian firms participating in the 2014 Wage Dynamics Network Survey. All things being equal, financially constrained firms charge higher markups when faced with low demand; this behaviour is more evident when demand is perceived as being persistent. Our findings suggest that the severity of financial constraints in Italy was one of the causes of the sustained growth of prices in 2010-2013, notwithstanding the considerable slack in the economy.

The Cost of Apprenticeship: A Theoretical Model

Apprenticeship is a human capital investment that costs something. The firm charges apprentices some apprenticeship fee — no free lunch. We model this fee. Our model extends Frazer’s (2006) by assuming that the productivity of workers that have apprenticed within the firm is different than workers’ that have apprenticed outside the firm which is itself different than workers’ with zero apprenticeship. We determine the fee in the absence and presence of free entry into providing apprenticeship. In either case, higher training costs lead to higher fees. In the absence of free entry, higher productivity of workers who apprenticed outside the firm lead to lower fees; with free entry, higher productivity of workers who apprenticed outside the firm lead to higher fees. Finally, we show that a positive relationship exists between a worker’s probability of quitting and the fees.

Markups and exporting behavior of foreign affiliates

This study investigates the effect of exporting on markups for firms in China with a focus on foreign affiliates. Firm markups are first recovered after correcting for both output and input price biases. The analysis reveals that exporters which are affiliates of foreign firms charge, on average, lower markups in their export pricing. The markups are decomposed into price and marginal cost components to show that although exporting increases both price and marginal cost, the price increases are small relative to the increases in marginal cost. Heterogeneous effects of exporting on markups across firms and location are also examined.

The Strategic Behavior of Firms with Debt

We empirically study the strategic behavior of levered firms in competitive and noncompetitive environments. We find that regulation induces firms to increase leverage, and this reduces their ability to compete when deregulation occurs. Large and small levered firms adopt different strategies upon deregulation. Whereas more levered small firms charge higher prices to increase margins at the expense of market shares, highly levered large firms prey on their rivals by increasing output and reducing prices to increase their market shares. The difference in their behavior is due to differences in their probability of bankruptcy and their financing constraints.

Omnichannel Retail and Inventory Integration with Strategic Consumers

We study the value of channel and inventory integration for a firm selling a seasonal good over two periods: in the first period the firm charges a high price, and in the second period the firm charges a low price to clear remaining inventory. Consumers are strategic in two ways: they decide whether and when to visit the firm based on their cost of visiting the firm, the price of the product, and its anticipated availability. We show that integration — which combines inventory from distinct selling channels, e.g., online and offline, into a single virtual stock from which any consumer demand may be fulfilled — generates value by increasing first period availability and encouraging more consumers to visit the firm, but it may also encourage more consumers to delay a purchase until the second period to obtain a lower price. The latter effect can significantly reduce the value of integration relative to a situation in which consumers are not strategic, and can even make the total value of integration negative. We derive conditions under which this value is largest and smallest, and show that consumer behavior plays a significant role in determining the value of inventory and channel integration.

History-based versus uniform pricing in growing and declining markets

We analyze the Markov Perfect Equilibria of an infinite-horizon overlapping generations model with consumer lock-in to compare the performance of history-based and uniform pricing in growing and declining markets. Under history-based pricing, firms charge higher prices to locked-in customers and lower prices to new customers. We show that a high exit rate of consumers (sufficiently declining market) constitutes a sufficient condition for history-based pricing to generate higher average prices than uniform pricing, thereby harming consumer welfare. In contrast, a high consumer entry rate (sufficiently growing market) ensures that history-based pricing intensifies competition compared with uniform pricing.

Corruption, Accounting Firm Size and Audit Fee Premium—Evidence from Chinese Listed Companies

China is playing an increasingly important role in the global economy and the economic transformation becomes the most pressing need at this stage. “Corruption governance”, and “anti-corruption” are hot topics which are discussed by people from all works of life. The main purpose of this paper is to examine the relationship between corruption and audit fee premium under the back-ground of China’s special institutional environment. Based on firms listed on the Shanghai and Shenzhen Stock Exchanges from 2007-2012, the paper verifies that compared with the domestic accounting firms, the international big four firms charge higher audit fees. More importantly, the empirical result finds that corruption has a positive effect on the relationship between firm size and audit fee premium. In other words, corruption governance will decrease the audit fee premium. This study contributes to improved understanding of the influence of anti-corruption wave in China.

The Timing of Choice-Enhancing Policies

Recent studies investigate policies motivating consumers to make an active choice as a way to protect unsophisticated consumers. We analyse the optimal timing of such choice-enhancing policies when a firm can strategically react to them. In our model, a firm provides an automatic enrolment or renewal to consumers. We show that a conventional choice-enhancing policy, which decreases consumers’ switching costs when they are initially enroled, can be detrimental to consumer and social welfare. By contrast, an alternative policy that decreases consumers’ switching costs when the firm charges a higher price for the service increases consumer and social welfare more robustly.

How Small Audit Firm Membership in Associations, Networks, and Alliances Can Impact Audit Quality and Audit Fees

SUMMARYThis article summarizes “Small Audit Firm Membership in Associations, Networks, and Alliances: Implications for Audit Quality and Audit Fees” (Bills, Cunningham, Myers 2015), which examines the association between small audit firm membership in an association, network, or alliance (collectively referred to as an “association”), audit quality, and audit fees. We find that small audit firm association members provide higher-quality audits and charge higher fees than small audit firms that are not members of an association. When compared to similarly sized clients audited by the Big 4, we find that member firms provide audit quality similar to the Big 4 firms, but member firms charge lower fees than their Big 4 counterparts. We caution that these results may not be generalizable to the largest Big 4 clients for which there is not a similarly sized client audited by our sample of small audit firms. We infer audit quality from Public Company Accounting Oversight Board inspections, restatement announcements, and discretionary accruals. Our findings should be of interest to audit committees in charge of auditor selection and to small audit firms interested in the benefits of association membership.

History-Based Versus Uniform Pricing in Growing and Declining Markets

We analyze the Markov Perfect Equilibria of an infinite-horizon overlapping generations model with consumer lock-in to compare the performance of history-based and uniform pricing in growing and declining markets. Under history-based pricing, firms charge higher prices to locked-in customers and lower prices to new customers. We show that a high exit rate of consumers (sufficiently declining market) constitutes a sufficient condition for history-based pricing to generate higher average prices than uniform pricing, thereby harming consumer welfare. In contrast, a high consumer entry rate (sufficiently growing market) ensures that history-based pricing intensifies competition compared with uniform pricing.We analyze the Markov Perfect Equilibria of an infinite-horizon overlapping generations model with consumer lock-in to compare the performance of history-based and uniform pricing in growing and declining markets. Under history-based pricing, firms charge higher prices to locked-in customers and lower prices to new customers. We show that a high exit rate of consumers (sufficiently declining market) constitutes a sufficient condition for history-based pricing to generate higher average prices than uniform pricing, thereby harming consumer welfare. In contrast, a high consumer entry rate (sufficiently growing market) ensures that history-based pricing intensifies competition compared with uniform pricing.

Partial shrouding in asymmetric markets

This paper studies shrouding of add-on information in a market where firms differ in add-on production costs. We show that partial shrouding equilibria, characterised by a selection result, exist: Firms with high (low) add-on costs shroud (unshroud). Unshrouding firms charge lower base-good prices than shrouding firms.

The Price Distribution and Technological Shocks in Markets with Endogenous Search Intensity

We provide a simple model that relates the search intensity of households for products to the price distribution and the wage. Households decide how much time to spend on work and on search for finding better deals in a market where firms charge different prices. Thus, the equilibrium price distribution and the wage depend on the endogenous search intensity and labor supply. Moreover, we show that positive technological shocks, which reduce price posting costs for firms, lead to an increase in labor supply, wages and to the average price, while they lead to a decrease in search effort. These results are consistent with recent empirical findings.