Hotelling Duopoly Research Articles

Personalized pricing with heterogeneous mismatch costs

AbstractPersonalized pricing has become a reality through digitization. We examine firms' incentives to adopt one of the three pricing schemes: uniform, personalized, or group pricing in a Hotelling duopoly model. There are two types of consumer groups that are heterogeneous in their mismatch costs. We show that both firms employ personalized pricing in equilibrium regardless of the heterogeneity of consumer groups. If the consumer groups' heterogeneity is significant, the profits are higher when both firms use personalized pricing than when they employ uniform pricing; otherwise, the latter profits are higher than the former. Profits are highest when firms employ group pricing among the three cases. The ranking of consumer welfare among the three cases is opposite to that of profits.

Co-operative investment by downstream rivals: network sharing in telecom markets

Ever-increasing data consumption and evolving technologies make cooperation on investments and network sharing crucial issues in mobile telecommunications markets. In this paper, we analyze incentives for cooperation and investment in product quality. Generalizing quality investment in a Hotelling duopoly model, we allow investment to have heterogeneous effects on consumers’ changing demand responsiveness to prices. If the effect of investment on demand elasticity is weak, consumer surplus and total welfare are higher when firms are prevented from cooperating on quality investment. Otherwise, firms should be allowed to jointly decide on quality improvements and share these improvements as long as they compete in the downstream markets.

Value-added service investment and pricing decisions in two-sided platform: the role of user expectations

PurposeThis paper aims to investigate how user expectations affect value-added service (VAS) investment and pricing decisions of two-sided platforms. It draws on the information asymmetry theory and offers suggestions on how platform operators can manage user expectations.Design/methodology/approachAccording to the game theory, this study considers three user expectations (responsive, passive and wary). By framing the Hotelling duopoly model and comparing the VAS investment, price and platform profits, the optimal platform decision is analyzed and discussed.FindingsThe conclusions demonstrate that the monopolistic two-sided platform obtains more profits from the informed users with responsive expectations than uninformed users with passive or wary expectations. The marginal investment cost and cross-network externalities are two key factors that determine the platform's VAS investment and pricing strategies of passive or wary users. Furthermore, considering the expectation preferences, i.e. the uniformed users hold wary expectations with more information and hold passive expectations with less or no information, the results suggest that the proportion of wary users to all uninformed users increases the platform's VAS investment, profits and the price of informed users, and increase (decrease) the price of uninformed users when the cross-network externalities of informed users are relatively small (larger).Practical implicationsThese results can provide insightful enlightenment into how platform operators utilize bilateral users' expectations and information level to guide their VAS investment and pricing decisions.Originality/valueThis paper is one of the first to explore the impact of three user expectations and the heterogeneity of preferences in informing users' passive or wary expectations, based on different levels of information on the decision-making of two-sided platforms regarding VAS.

“Green” innovation, privacy regulation and environmental policy

We present a Hotelling duopoly and study the relationship between privacy regulation and environmental policy in an industry in which firms invest in “green” innovation (E-R&D) to reduce emissions in production. This research concludes that governments need to set emission taxes consistent with privacy regulations. With strong privacy protections, emission taxes should be higher than the case with no privacy protections. In the asymmetric case with poor privacy regulation, the optimal emission tax is highest to achieve emissions reductions. In addition, an economic trade-off can arise from the industry profits and E-R&D investment. With weak privacy regulation, the effort of E-R&D is highest, and corporatedo the least harm to the environment, while the industrial profits are lowest due to the massive tax burden. Finally, we suggest that policymakers should (i) combine reasonable emission tax policies and green finance for renewable energy projects, (ii) conduct weak privacy regulations on green finance and renewable energy projects, and (iii) encourage uniform pricing for renewable energy products from a competition policy perspective.

Catalog competition: Theory and experimental evidence

AbstractThis paper compares the standard location‐then‐pricing Hotelling duopoly with a catalog competition game in which firms simultaneously decide locations and prices. We consider a three‐location space and continuous pricing and fully characterize the unique symmetric equilibrium. In both games, firms employ mixed strategies, producing a mainstream product more often than a specialized one. In the catalog game, prices are always above the marginal cost of production, whereas in the sequential model, prices converge to the marginal cost when firms produce the same variety. We experimentally test our theoretical predictions in the laboratory, finding strong evidence in favor of most of them.

Competitive Price-Quality Strategy of Platforms under User Privacy Concerns

The behavior-based discrimination price model (BBPD) needs to collect a large amount of user information, which would spark user privacy concerns. However, the literature on BBPD typically overlooks consumer privacy concerns. Additionally, most of the existing research provides some insights from the perspective of traditional privacy protection measures, but seldom discusses the role of quality discrimination in alleviating users’ privacy concerns. By establishing a Hotelling duopoly model of two-period price-quality competition, this paper explores the impact of quality discrimination on industry profits, user surplus, and social welfare under user privacy concerns. The results show that, with the increase of user privacy cost, given weak market competition intensity, quality discrimination can increase users’ surplus and social welfare, thereby alleviating users’ privacy concerns. We then discuss the managerial implications for alleviating consumer privacy concerns. In addition, we take Airbnb as an example to provide practical implications.

Duopolistic Competition and Monetary Policy

A standard macroeconomic model based on monopolistic competition (Dixit-Stiglitz) does not account for the strategic behaviors of oligopolistic firms. In this study, we construct a tractable Hotelling duopoly model with price stickiness to consider the implications for monetary policy. The key feature is that an increase in a firm’s reset price increases the optimal price set by the rival firm in the following periods, which, in turn, influences its own optimal price in the current period. This dynamic strategic complementarity leads to the following results. (1) The steady-state price level depends on price stickiness. (2) The real effect of monetary policy under duopolistic competition is larger than that in a Dixit-Stiglitz model, but the difference is not large. (3) A duopoly model with heterogeneous transport costs can explain the existence of temporary sales, which decreases the real effect of monetary policy considerably. These results show the importance of understanding the competitive environment when considering the effects of monetary policy.

Investigating the article processing charge of journals in the gold open access market: A game theory approach

AbstractAs a promising solution for enhancing knowledge communication as well as alleviating financial pressure of institutional libraries, gold open access (gold OA) has attracted wide attention all over the world. But it is a hard work to fully disclose how the equilibrium article processing charge is established in the gold OA market. To deal with this challenge, this paper firstly formulates the competition among journals in this market as a three‐stage Hotelling duopoly game, which is able to reveal its dynamic and competitive features affected by academic reputation, publication delays and article processing charges of journals. Then backward induction is applied to derive the market equilibria. Finally, an empirical study with 1,346 journals is conducted to verify the credibility of the theoretical solutions. The results show that gold OA journal with relatively higher academic reputation and shorter publication delay could charge higher article processing charge. And the publication delays of gold OA journals tend to cluster together in a limited time interval.

Strategic take-back programs when consumers have heterogeneous environmental preferences

We look at the strategic introduction of take-back programs (TBPs) which offer consumers a discount on their next purchase (reward) when they drop off previous purchases. In a Hotelling duopoly, consumers are heterogeneous not only in terms of their location on the Hotelling line but also in terms of their recycling preferences. Firms introduce TBPs to obtain a market share advantage (reward effect) and/or to recover the intrinsic value of the recycled units (recycling effect); their choice of the optimal reward balances these two effects: for instance, a firm might be willing to introduce a TBP, even if this means losing money on each recycled unit, in order to prevent the competitor from gaining a too large market share advantage. Comparing the level of TBP uptake at the market equilibrium to the one that maximizes social welfare, we show that a lower or higher TBP uptake can be socially desirable, depending, among other, on the weight that is given to the environmental benefits of TBPs. Several extended producer responsibility policies are discussed in terms of their potential to encourage TBP uptake and their overall impact on social welfare.

Product Design Competition Under Different Degrees of Demand Ambiguity

Product differentiation decisions are frequently made under imperfect probabilistic information about consumer tastes (demand ambiguity). We investigate a Hotelling duopoly game of product-design-then-price choices that incorporates demand ambiguity. Our model allows for different levels of demand ambiguity. We find that the impact of ambiguity on product differentiation depends on firms’ ambiguity attitudes. Furthermore, our model generalizes the probabilistic model of Meagher and Zauner (J Econ Theory 117:201–216, 2004) and the non-probabilistic model of Krol (Int J Ind Org 30:593–604, 2012).

Product Differentiation and Firm Profits in a Hotelling Model with Endogenous Timing

This paper revisits the relationship between product differentiation and firm profits. We analyze a Hotelling duopoly with endogenous timing choice. There exists an equilibrium where an efficient firm becomes leader whereas an inefficient firm does follower. We show that when cost difference is sufficiently large, the less the degree of product differentiation becomes, the more profit the efficient leader gets. Moreover, the joint profit of those firms may increase with product substitutability.

A spatial equilibrium model of local nonmarket production with capacity constraints

This paper studies the autonomous formation of regions with local nonmarket production in the presence of profit-maximizing producers. The approach is based on a spatial equilibrium model with a linear transport cost. A Hotelling duopoly model is extended by allowing the households, uniformly distributed on a line, to become local producers. Due to capacity restrictions, local production covers at most a given percentage of a fixed household demand, whereas the remaining portion is bought from one of the profit-maximizing suppliers. Local production is pro-competitive, implying a lower equilibrium price than the standard Hotelling model, in spite of capacity restrictions. A price equilibrium where the firms are located symmetrically within the quartiles may exist, assuming a sufficient degree of self-sufficiency of local production. A higher level of capacity restrictions implies a higher equilibrium price. Local production may emerge as an equilibrium outcome, assuming the production does not require strong economies of scale and assuming the households are willing to invest in local production. Due to imperfect competition, the equilibrium number of local producers is positive whenever local production is optimal.

Trade, Externalities, and the Impact of Asymmetric Information on Trade Policy

This paper investigates the relationship between trade liberalisation, consumers' environmental awareness and a negative environmental externality in consumption. We adopt an international Hotelling duopoly setup, where firms are located in two asymmetric countries. We find that, if the intensity of environmental externality is common knowledge for country governments, this setup delivers no need of accompanying trade policies in order to enforce trade liberalisation. In the opposite case, in which information is asymmetric, i.e., the small country's Government cannot observe the positive enviromental effects of its firm's exports to foreign consumers, we find that: (i) the Pareto optimum is always enforced, since the brown country always relaxes the distortionary trade policy, and (ii) cheating on the environmental externality allows the brown country's government to extract extra surplus from the green country. Allowing for trade in green technology delivers opposite conclusions: the externality is minimised and welfare is maximised in equilibrium if information is symmetric while trade liberalisation with asymmetric information always entails a second best outcome.

A Hotelling model of spatial competition with local production

Local production is a central theme in sustainable development and is of increasing current interest in e.g. food and energy production. This paper extends the classical Hotelling duopoly model of spatial competition to allowing for local production at the household level. The model is applied to study the existence and efficiency of a price equilibrium in the presence of local production. The optimal solution to the corresponding planning problem minimizing the sum of the resource costs is derived. Assuming the duopolists are symmetrically located on a line, the equilibrium number of local producers (“ecological entrepreneurs”) exceeds the optimal number. However, local production implies a lower equilibrium price than the standard Hotelling model and may extend the range of the symmetric locations of the duopolists for which a price equilibrium exists.

Trade liberalisation between asymmetric countries with environmentally concerned consumers

This paper investigates the impact of free trade on welfare in a two-country world modelled as an international Hotelling duopoly with quadratic transport costs and asymmetric countries, where a negative environmental externality is associated with the consumption of the good produced in the smaller country. The countries' relative sizes as well as the intensity of negative environmental externality affect potential welfare gains of trade liberalisation. In line with Lambertini (1997a) we show that, as long as no trade policy is undertaken by the government of the larger country, trade liberalisation is not feasible since the latter always loses from opening to trade. A subsidy policy in favour of the firm producing the clean good is, on the contrary, shown to give both countries the right incentives to liberalise trade. Allowing for redistributive transfers between countries further extends the parametric range for which trade liberalisation is feasible under the subsidy scheme.

On Hotelling's ‘stability in competition’ with network externalities and switching costs

AbstractWe revisit the Hotelling duopoly model with linear transportation costs, introducing network effects and brand loyalty. We show that, while network externalities destabilize prices, the lock‐in effect generated by exogenous switching costs, if sufficiently high, eliminates the incentive to undercut, thereby restoring the existence of the pure strategy equilibrium in prices, and the corresponding minimum differentiation principle.

Outsourcing versus technology transfer: Hotelling meets Stackelberg

This paper considers a Hotelling duopoly with two firms A and B in the final good market. BothA andB can produce the required intermediate good, firmB having a lower cost due to a superior technology. We compare two contracts: outsourcing (A orders the intermediate good from B) and technology transfer (B transfers its technology to A). First we show that an outsourcing order acts as a credible commitment on part of A to maintain a certain market share in the final good market. This generates an indirect Stackelberg leadership eect, which is absent in a technology transfer contract. We show that compared to the situation of no contracts, there are always Pareto improving outsourcing contracts but no Pareto improving technology transfer contracts. Finally, it is shown that whenever both firms prefer one of the two contracts, all consumers prefer the other contract.

Trade Liberalisation between Asymmetric Countries with Environmentally Concerned Consumers

This paper investigates the impact of free trade on welfare in a two-country world modelled as an international Hotelling duopoly with quadratic transport costs and asymmetric countries, where a negative environmental externality is associated with the consumption of the good produced in the smaller country. Countries’ relative sizes as well as the intensity of negative environmental externality affect potential welfare gains of trade liberalisation. In line with Lambertini (1997a) we show that, as long as no trade policy is undertaken by the government of the larger country, trade liberalisation is not feasible since the latter always loses from opening to trade. A subsidy policy in favour of the firm producing the clean good is, on the contrary, shown to give both countries the right incentives to liberalize trade. Allowing for redistributive transfers between countries further extends the parametric range for which trade liberalisation is feasible under the subsidy scheme. The alternative situation, in which the green firm is based in the larger country, is also briefly sketched to find that free trade does give rise to a global welfare increment with no need of accompanying trade policies.

Dynamic Hotelling duopoly with linear transportation costs

SUMMARYI investigate a spatial duopoly model with linear transportation costs as a differential game where product differentiation is the result of firms' R&D investments. Two related results obtain, i.e. (i) the steady‐state R&D investment (product differentiation) is negatively (positively) related to the cost of capital and time discounting; and (ii) if time discounting and the cost of capital are sufficiently high, the amount of differentiation observed in steady state is sufficiently large to ensure the existence of a unique pure‐strategy price equilibrium with prices above marginal cost. The range of time discounting wherein the game produces a price equilibrium in pure strategies is wider under the closed loop solution than under the open loop solution. Copyright © 2011 John Wiley & Sons, Ltd.

Controversial Role of GPOs in Healthcare‐Product Supply Chains

This paper examines the controversial role that Group Purchasing Organizations (GPOs) play in the supply chains for healthcare products. Among the controversies, perhaps the most fundamental one is whether or not GPOs reduce purchasing costs for their members. However, the fiercest controversy is around the “contract administration fees (CAFs)” that GPOs charge to manufacturers. We examine these and other controversies using a Hotelling duopoly model. Among our conclusions: GPOs increase competition between manufacturers and lower prices for healthcare providers. However, GPOs reduce manufacturers' incentives to introduce innovations to existing products. We also demonstrate that the existence of lower off‐contract prices is not, per se, evidence of anticompetitive behavior on the part of GPOs. Indeed, we demonstrate that, under certain circumstances, the presence of a GPO lowers off‐contract prices. We also examine the consequences of eliminating the “safe harbor” provisions that permit healthcare GPOs to charge CAFs to manufacturers, and conclude that it would not affect any party's profits or costs.