Intense Price Competition Research Articles

Revenue efficiency across airline business models: A bootstrap non-convex meta-frontier approach

The intense price competition has hurt the revenue performance of the U.S. airline industry. In this context, network-legacy carriers (NLCs), low-cost carriers (LCCs), and ultra-low-cost carriers (ULCCs) in the U.S rely on different competitive advantages to create and promote their revenue efficiency. This study investigates the revenue efficiency differentials of the three airline business models in the U.S – NLC, LCC, and ULCC, using a two-stage data envelopment analysis (DEA) approach. In the first stage, a bootstrap non-convex meta-frontier framework is developed to estimate the DEA-based revenue efficiency of the airlines adopting different business models. In the second stage, a bootstrap truncated regression is employed to explain the differences in the airlines' revenue efficiency. Based on a data sample of the major airlines in the U.S. from 2015 to 2019, the study reveals the following findings: (1) The revenue efficiency varied significantly across the three airline business models. In which, ULCC type exhibited the lowest revenue efficiency; (2) Due to technological constraints, ULCCs averagely collected less than 17.6% of their potential revenue during the study period. Both LCC and NLC types demonstrated the most advanced technologies in generating revenue; however, NLCs generally outperformed LCCs; (3) Service quality, operational size, and airfare significantly impacted the airlines’ revenue performance.

Consumer informedness: A key driver of differentiation

AbstractMinimum Differentiation is the equilibrium in spatial models with fixed prices, while firms move apart to reduce the intensity of competition when firms set prices. Nevertheless, firms collocate in many industries where marketing‐active firms compete on price. This puzzle is called the Hotelling paradox. We offer a resolution of this puzzle by noting that imperfect information about the availability of all products can soften competition, allowing firms to produce similar products without engaging in intense price competition. Specifically, we construct a model that predicts minimum differentiation when consumers have low awareness about products and maximum differentiation when they are well informed.

Analisis Pengaruh Harga dan Promosi Terhadap Tingkat Penjualan Pizza Hut di era Covid-19

Abstract- This study aims to analyze the effect of price and promotion on the sales level of Pizza Hut in the Covid-19 era. This research is a basic research to fill the research gap in sales level studies. two hypotheses and tested using data collected from 150 respondents of pizza hut customers. This research is driven by the Covid-19 pandemic which has brought a downturn for companies in marketing products produced by these companies, especially companies in the field of food and beverage. Researchers use quantitative research with multiple linear regression analysis techniques to analyze how much influence the independent variables interact with. dependent variable. Researchers found that the variable that had the most significant influence on Pizza Hut sales in the Covid-19 era was promotion. The decline in Pizza Hut prices did have an effect on the increase in Pizza Hut sales but the effect was not too significant. This is due to the intense price competition to attract consumers' attention in this pandemic. Thus, it is evident that the Pizza Hut promotion strategy by attracting public sympathy can increase sales in the Covid-19 era.Keywords: price, promotion, sales level, covid-19

Competing tourism service provider introduction strategy for an online travel platform with demand information sharing

This paper considers a tourism supply chain (TSC) where an online travel platform (OTP) that holds private demand information cooperates with an incumbent tourism service provider (TSP) through the agency model. To expand the online travel markets and improve profitability, the OTP can further introduce the competing TSP using the agency model or the wholesale model. Based on a game model, we explore the OTP’s introduction and demand information sharing strategies, and then study the Pareto improvement of the OTP’s strategy choices. We find that both the price competition intensity and the commission rate influence the OTP’s introduction choice, while the demand fluctuation and demand forecast accuracy also critically affect selection under certain conditions. In particular, the OTP may introduce the competing TSP even if the price competition is fierce. Moreover, the agency introduction strategy may hurt the OTP even though the commission rate is high under the agency model. The results also show that regardless of the chosen introduction strategy, the OTP always shares demand information with the agency cooperating TSP, and also may share it with the wholesale cooperating TSP. In addition, the OTP’s strategy choices may lend to the inefficiency of the TSC, and the Pareto improvement in introduction strategy or (and) demand information sharing strategy can be realized by implementing three types of transfer payment contracts.

Impact of Social Interactions on Duopoly Competition with Quality Considerations

We study the impacts of social interactions on competing firms’ quality differentiation, pricing decisions, and profit performance. Two forms of social interactions are identified and analyzed: (1) market-expansion effect (MEE)—the total market expands as a result of both firms’ sales—and (2) value-enhancement effect (VEE)—a consumer gains additional utility of purchasing from one firm based on this firm’s previous and/or current sales volume. We consider a two-stage duopoly competition framework, in which both firms select quality levels in the first stage simultaneously and engage in a two-period price competition in the second stage. In the main model, we assume that each firm sets a single price and commits to it across two selling periods. We find that both forms of social interactions tend to lower prices and intensify price competition for given quality levels. However, MEE weakens the product-quality differentiation and is benign to both high-quality and low-quality firms. It also benefits consumers and improves social welfare. By contrast, VEE enlarges the quality differentiation and only benefits the high-quality firm, but is particularly malignant to the low-quality firm. It further reduces the consumers’ monetary surplus. Such impact is consistent, regardless of whether the VEE interactions involve previous or current consumers. We further discuss several model extensions, including dynamic pricing, combined social effects, and various cost structures, and verify that the aforementioned impacts of MEE and VEE are qualitatively robust to those extensions. Our results provide important managerial insights for firms in competitive markets and suggest that they need to not only be aware of the consumers’ social interactions, but also, more importantly, distinguish the predominant form of the interactions so as to apply proper marketing strategies. This paper was accepted by Matthew Shum, marketing.

Multi-period price competition of blockchain-technology-supported and traditional platforms under network effect

ABSTRACT We build a multi-period pricing model between a blockchain-technology-supported platform and a traditional platform, where the blockchain-technology-supported platform provides a higher value for customers. Customers are influenced by network effect, that is, they value a platform more if the platform has more users. As either platform can adopt static pricing or dynamic pricing, four scenarios may occur. By deriving the equilibrium of each scenario, we reveal the 'Matthew effect' caused by network effect, that platform advantage (from adopting blockchain technology) or disadvantage (from not adopting blockchain technology) accumulates as time goes by. Thus, platforms are advised to adopt the blockchain technology antecedent to the competitors. Network effect, which amplifies the benefit of initial users, may intensify price competition and harm both platforms. By comparing the four scenarios, we derive the equilibrium pricing strategies: when network effect is weak, one platform adopts static pricing and the other adopts dynamic pricing; when network effect is medium, the blockchain-technology-supported platform adopts static pricing and the traditional platform adopts dynamic pricing; and when network effect is strong, both platforms adopt dynamic pricing. Dynamic pricing is more desirable for the traditional platform relative to the blockchain-technology-supported platform.

Flagship Entry in Online Marketplaces

In the world of omnichannel retail, some brands open a flagship store at online marketplaces, while others avert it. Focusing on a large e-commerce platform, we empirically study how flagship entry affects consumers, the platform, and various sellers on the platform. We find flagship entry may benefit consumers by expanding the choice set, by intensifying price competition within the entry brand, and by improving consumer perception for parts of the platform. In the meantime, flagship entry cannibalizes the sales of same-brand sellers, while other brands may gain as the buyer base expands on the platform. Counterfactual simulation suggests that flagship entry improves the gross merchandise value (GMV) of the platform but hurts existing sellers of the entry brand. On average, the effect on consumer welfare is more positive if the flagship entry is from a non-prominent brand than from a prominent brand, because consumers tend to lower their willingness to pay for individual sellers upon a prominent flagship entry. In hypothetical scenarios where flagship entry were accompanied by constraints on other same-brand sellers, the reduced competition would benefit the flagship store but hurt consumers. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Flagship Entry in Online Marketplaces

In the world of omnichannel retail, some brands open a flagship store at online marketplaces, while others avert it. Focusing on a large e-commerce platform, we empirically study how flagship entry affects consumers, the platform, and various sellers on the platform. We find flagship entry may benefit consumers by expanding the choice set, by intensifying price competition within the entry brand, and by improving consumer perception for parts of the platform. In the meantime, flagship entry cannibalizes the sales of same-brand sellers, while other brands may gain as the buyer base expands on the platform. Counterfactual simulation suggests that flagship entry improves the gross merchandise value (GMV) of the platform but hurts existing sellers of the entry brand. On average, the effect on consumer welfare is more positive if the flagship entry is from a non-prominent brand than from a prominent brand, because consumers tend to lower their willingness to pay for individual sellers upon a prominent flagship entry. In hypothetical scenarios where flagship entry were accompanied by constraints on other same-brand sellers, the reduced competition would benefit the flagship store but hurt consumers.

The vertical cooperation and pricing strategies of electric vehicle supply chain under brand competition

This paper considers an electric vehicle supply chain composed of a battery supplier, a well-known brand manufacturer (Manufacturer A) and an ordinary brand manufacturer (Manufacturer B). Three strategies are studied, namely, the noncooperative strategy (hereafter “Strategy N”), the cooperation strategy between the battery supplier and Manufacturer A (hereafter “Strategy S-A”), and the cooperation strategy between the battery supplier and Manufacturer B (hereafter “Strategy S-B”). Under these strategies, we investigate the optimal sales prices of the battery and electric vehicles of the two brands. We then analyze the impacts of brand effect on the demands of the two electric vehicles and the profits of all enterprises. The theoretical and numerical analyses present some valuable findings. First, Strategy S-A improves the demand and the profit of Manufacturer A, but reduces the demand and the profit of Manufacturer B; inversely, Strategy S-B increases the demand and profit of Manufacturer B, but decreases the demand and profit of Manufacturer A. Under Strategy S-B, the total demand for the two brands of electric vehicles is the largest. Second, Strategy S-A can intensify price competition, while Strategy S-B can weaken price competition between the two manufacturers. Third, when the degree of brand difference is relatively low, or the ratio of Manufacturer A’s bargaining power to Manufacturer B’s bargaining power is high, the battery supplier’s profit under Strategy S-B is the highest; otherwise, the battery supplier can obtain the highest profit from Strategy S-A. Finally, vertical cooperation strategies do not always improve the overall profitability of the supply chain.

Informative Role of Recommender Systems in Electronic Marketplaces: A Boon or a Bane for Competing Sellers

Recommender systems have become the cornerstone of electronic marketplaces that sell products from competing sellers. Similar to traditional advertising, recommender systems can introduce consumers to new products and increase the market size which benefits sellers. This informative role of recommender systems in electronic marketplaces seems attractive to sellers because sellers do not pay the marketplaces for receiving recommendations. We show that in a marketplace that deploys a recommender system helping consumers discover the product that provides them the highest expected net utility, sellers do not necessarily benefit from the “free” exposure provided by the recommender system. The impacts of the recommender system are the result of a subtle interaction between advertising effect and competition effect. The advertising effect causes sellers to advertise less on their own and the competition effect causes them to decrease prices in the presence of a recommender system. Essentially, sellers “pay” in the form of more intense price competition because of the recommender system. Furthermore, the competition effect is exacerbated by the advertising effect because the recommender system alters a seller’s own strategies related to advertising intensity and price from being strategic substitutes in the absence of the recommender system to being strategic complements in its presence. As a result of these two effects, we find that sellers are more likely to benefit from the recommender system only when it has a high precision. The results do not change qualitatively whether sellers use targeted advertising or uniform advertising. However, we find that a recommender system that benefits sellers when they do not employ targeted advertising may actually hurt them when they adopt targeted advertising with a high precision. On the other hand, in the presence of the recommender system, an increase in sellers’ targeting precision beyond a threshold softens price competition, increases seller profits, and reduces consumer surplus. Finally, we find that when the recommender system assigns a larger weight to product fit than price, the adverse impacts of the recommender system on sellers are mitigated, thereby expanding the region in the parameter space where the recommender system is beneficial to sellers.

Preempting the Entry of Near Perfect Substitutes

Abstract When firms compete on price and quality-enhancing promotion in a market for differentiated products, entry of a nearly perfect substitute to one of such products, for example, a generic version of a pharmaceutical drug, intensifies price competition but softens quality competition. We show that consumers are likely to gain from entry when quality is relatively unimportant for them, when business stealing generated by promotion is substantial, and when products are poor substitutes. We also show that entry may be more attractive for consumers in less concentrated markets, as a smaller number of firms and asymmetric market shares may be associated with higher quality.

Benefits of Customer Loyalty in Markets with Endogenous Search Costs

Managers have long appreciated having loyal customers, and academic research has explored the benefits of loyal consumers as coming from reduced price competition. This paper extends this research by considering how loyalty affects firms’ decisions to facilitate search for nonloyal consumers. We show that in equilibrium, the store with more loyal customers ends up having lower search costs even if facilitating search is costless. The intuition for this result is that nonloyal consumers expect higher prices at a store with a larger loyal segment, and therefore, this store has to set a lower search cost to counteract the negative effect of this expectation. Given this, it is optimal for the other store to set a higher search cost to avoid intensifying price competition. As a consequence, a larger loyal segment may lead to both higher prices and a higher market share among nonloyal customers. In other words, an advantage in customer loyalty leads to the store becoming the search hub of the nonloyal customers. This, in turn, implies that even a small advantage in customer loyalty may lead to a large increase in profits and may help explain why some managers place such a high value on earning customer loyalty. This paper was accepted by David Simchi-Levi, marketing.

Pricing and Distribution Strategies in a Dual-Channel Supply Chain

Internet has revolutionized distribution channels. Online orders are forwarded to the brick-and-mortar store to make the fulfillment, which is a new distribution strategy in a dual-channel supply chain. However, there is little research on the value of using such distribution strategy in dual-channel setting. To fill this gap, this article considers a manufacturer marketing a product through a dual-channel supply chain, comprised of an online channel and an offline retail channel. We develop a game theory model to investigate the pricing decisions and the distribution strategies, as well as to examine the impacts of the new distribution strategy on price competition and the dual-channel supply chain member's profits. By comparing the results of the traditional distribution strategy and the new distribution strategy, we find that the new distribution strategy can soften price competition when the proportion of the revenue generated by the direct channel is high enough, while if the proportion is low enough, it may intensify price competition. We also find that the supply chain members can achieve a win-win situation when the wholesale price is higher, and the proportion is greater under the new distribution strategy.

Concentration and Competition in the Australian Banking Industry: A Bresnahan–Lau Structure–Conduct–Performance Assessment*

This study assesses the impact on competitiveness of banking takeovers in Australia, to inform regulators and contribute to the mergers and acquisitions body of international evidence. New industrial organisation theories and empirical evidence suggest that more concentration may or may not lead to decreased competition. We assess competitiveness with the Bresnahan–Lau conduct coefficient. We find that the 2008 takeover of St. George had no significant effect, whereas that of BankWest in 2012 attracted a marginally small deadweight efficiency loss. Overall, the sector is found to be fairly competitive, a result that we associate with intense price competition under low switching costs.

Gains from Convenience and the Value of E-commerce

Why do consumers value shopping online? We decompose the value of e-commerce to individual consumers and highlight the role of convenience, i.e., the avoidance of transportation costs. We complement household purchase panel data with precise locations of consumers and stores, and show that travel distance is a strong driver of consumer store choice and the substitution to the online channel. Using a structural model of retailer and channel choice, we report that during 2016-2018 the total value from e-commerce to consumers is equivalent to a 23% discount on all prices. Of this value, a quarter comes from convenience in the form of lower transportation costs, a quarter from intensified price competition, and the remaining half from new online retailers and online channels of existing offline retailers. We further demonstrate that consumer gains are heterogeneous. Consumers far from offline stores or experienced in online shopping will benefit more from e-commerce, whereas consumers who likely do not shop online still benefit indirectly from price competition. Finally, our results show that, as consumers gain more online shopping experience, substantial additional gains from e-commerce are yet to materialize in the future.

Role of Consumer Targeting in E-commerce Marketplaces:Sponsored versus Organic Product Listing

E-commerce marketplaces have been slowly replacing organic product listing with sponsored product listing in prominent positions of consumer search results. Marketplaces receive listing fees in addition to sales commission in sponsored listings, whereas they receive only the latter in organic listings. Moreover, marketplaces have access to vast amounts of consumer data which enables the marketplaces to target consumers profitably. We demonstrate that consumer targeting plays a central role in how the listing type affects various stakeholders. We show that marketplaces indeed have an incentive to switch to sponsored product listing from organic product listing, even though such a switch intensifies the price competition between sellers and reduces the marketplaces’ sales commission. The more intense price competition between sellers benefits consumers, but it, along with the listing fees, hurts sellers. The marketplace’s switch to the sponsored product listing hurts the social welfare by increasing the mismatch between preferred and purchased products for some consumers. The primary driver of these impacts is that the marketplaces’ incentive to precisely target consumers diminishes if they switch to sponsored product listing. An improvement in the targeting precision softens the price competition between sellers as well as the competition between them for the desirable slot in sponsored product listing; while the former effect increases the marketplace’s sales commission,the latter effect decreases listing fees. Therefore, when sales commission is the sole revenue source, as in the case of organic product listing, marketplaces have a higher incentive to improve targeting precision compared to when listing fees is also a revenue source, as in the case of sponsored product listing.

Evaluating the effects of quality regulations on the pharmaceutical supply chain

This paper considers a two-echelon pharmaceutical supply chain comprising two pharmaceutical manufacturers and a pharmacy. We derive optimal decisions for three different supply chain power structures considering two scenarios: one scenario featuring quality regulation, and one without. By comparing the equilibriums of the two regulatory scenarios under different power structures, we then evaluate the effects of quality regulation and power structure on pharmaceutical firms' decisions, profits and social welfare. Our results show that the product differentiation between two pharmaceutical manufacturers will be reduced through quality regulation, serving to intensify price competition between them. This has a negative impact on the two pharmaceutical manufacturers but a positive effect on the pharmacy's profit. However, an appropriate level of minimum quality standards can enhance social welfare and the economic performance of the whole pharmaceutical supply chain, resulting in a win-win outcome. In addition, our results demonstrate that the balanced power structure has a positive effect on the pharmaceutical supply chain's economic performance and social welfare.

Competitive Structure of Accommodations in a Traditional Japanese Hot Springs Tourism Area

This paper investigates the competitive structure of prices in a traditional hot springs resort area in Japan from a spatial econometric perspective. This perspective has not been addressed in hot springs—or “onsen” in Japanese—tourism areas, which have been gradually losing momentum due to the ageing of operators and diversification of leisure activities. The study area is one of the three oldest hot springs in Japan, the Dogo Onsen area in Matsuyama, where hotels and ryokans are clustered. First, we present a conceptual framework that characterizes two strategies, namely, differentiation and partnership strategies. Then, spatial error models are employed to test the hypothesis that spatial closeness intensifies price competition, while social closeness mitigates price competition. The estimation results reveal that our hypothesis was verified, in that the social network which has been nurtured for generations in the study hot spring area mitigates price competition, in comparison with the non-hot spring area in Matsuyama. Thus, good partnerships among local operators based on social networks should be more closely scrutinized for the revitalization of traditional hot springs areas.

Does Convergent-IFRS Adoption in China Increase Audit Fees?

The aim of this study is to investigate whether the adoption of convergent-International Financial Reporting Standards (IFRS) in China affects the audit fees of initial public offerings (IPO) firms. An empirical regression analysis using panel data for 1,094 nonfinancial IPOs (excluding season equity offers) of A-shares listed on the Shanghai and Shenzhen Stock Exchanges between 2003 and 2012 is adopted. The results reveal that audit fees increase following convergent-IFRS adoption in China and additionally suggest that convergent-IFRS adoption eases the intense price competition that previously existed in China’s audit market and thus has important policy implications for regulators. To the best of the authors’ knowledge, this study represents the first reported attempt to adopt the IPO setting to examine the effects of convergent-IFRS adoption on audit fees and fills the gap in literature. Using a setting of IPOs enables this paper to further exclude the influence of quasi-rents derived from low-balling after initial audit engagement when testing audit fees.

Supply competition under quality scores: Motivations, information sharing and credibility

Non-price attributes such as product quality, supplier’s reliability, and timely delivery can be more important than simply unit price for the buyers. Therefore, the form of supplier competition in which the buyer adjust the prices from the suppliers with the quality scores (QS) becomes more popular than that under price-only format, where the decision is made solely based on prices. That said, QS alters the competition between the suppliers in two ways. First, it changes the nature of price competition among the suppliers as the winner needs to offer the lowest QS-adjusted price (not necessarily the lowest price). Second, the specific value of QS for each supplier is only known to the buyer, which gives rise to the credibility issues from the buyer’s perspective. Analysing supply competition under QS, in this paper, we characterize the equilibrium prices and evaluate whether or not it is beneficial for the buyer to share QS information with the suppliers in a credible fashion. We identify two factors: (i) degree of homogeneity among the suppliers (as measured by relative QS between the suppliers) and (ii) degree of information asymmetry (as measured by the range of uncertainty for the relative QS). The buyer prefers not to share the relative QS with the suppliers if they are relatively similar to each other in terms of QS. This is because the suppliers engage in a more intensified price competition under information asymmetry compared to when they have access to exact value of the relative QS. However, the opposite holds true if the suppliers become more uncertain about their relative QS. Hence, in this case, the buyer finds sharing QS information with the suppliers beneficial for the sake of lowering equilibrium prices notwithstanding the cost of credible sharing.