Intense Price Competition Research Articles

Travel agency referral and retailer competition

Tourists are one of the main market segments for service providers such as parks, museums, restaurants, and retailers. Travel agencies expose tourists in their package tours to service providers for a referral fee. This paper studies the competitive effects of travel agency referral in a setting where differentiated products are sold by two competing service providers. Using a simple spatial competition model, a non-cooperative game is analysed with informed tourists where duopolistic service providers compete on price, focusing on equilibrium prices and the profit of each service provider. This paper shows that referral is beneficial except where the cost of referral is too high. Service providers employ travel agency referral in order to mitigate the intensity of price competition by committing to higher prices.

Production Capacity Planning with Market Share Expansion under Different Procurement Strategies

Market share expansion strategy is usually considered by the manufacturers who intend to achieve lower production cost to extend the surviving period in mature markets where intense price competition occurs frequently. This study will discuss one manufacturer who is producing mature stage products and supplying them to product market to serve the end users. In order to produce the products, it is necessary for the manufacturer to procure the key components of the products from the component market which is on its fast-growing stage with high price fluctuation. Spot procurement and SC procurement are to be compared to find out which is a better strategy to support the manufacturer in the decision-making of production capacity. Profit rate, deficit rate and market share rate are considered as the valuation index in this study.

Choosing the Quality of the Fit between Complementary Products

In this paper, I examine how firms should position their complementary products. I assume that there are two competing firms, each producing two complementary products. Each firm decides whether to employ strategies that enhance the quality of the fit (the degree of complementarity) between its pair of complementary products before competing in prices. The consumers have heterogeneous tastes for the four possible bundles. They are willing to pay a price premium in order to purchase a bundle from the same firm if this firm chose to make such bundle more attractive. I find that increasing the degree of complementarity between a firm's complementary products intensifies price competition and often leads to smaller profits. Only when complementarity-enhancing strategies significantly increase the demand for a firm's matching bundle, does the firm benefit from employing them. The highest profits for both firms are obtained when both firms do not employ complementarity-enhancing strategies. Deteriorating the quality of the fit between one's own and a rival's complementary products is never profitable.

Search Costs and Investment in Quality

In this paper we analyze how lower search costs affect firms' incentives to invest in quality. We identify two conflicting effects. On the one hand, lower search costs increase incentives to invest in quality by eroding the market share of low quality firms and increasing the market share of high quality firms. On the other hand, by intensifying price competition, lower search costs adversely affect high quality firms more than low quality firms. The net effect of a change in the search cost on quality is shown to depend on the initial quality distribution. There is a critical value such that, if the proportion of high quality firms is initially below this value, lower search costs increase this proportion, whereas if the initial quality is above this value, lower search cost decreases the proportion of high quality firms. We show that our results are consistent with a ‘superstar effect.’

Cross-border effects of capacity mechanisms: Do uncoordinated market design changes contradict the goals of the European market integration?

This paper analyses cross-border effects of a strategic reserve (SR) and reliability options (ROs) based on a two-country simulation model. Using a game-theoretic approach, the countries' policy options for capacity remuneration mechanisms (CRMs) are analysed with respect to welfare and distribution effects. An SR tends to narrow down the market, while ROs intensify price competition. However, cross-border effects are most likely negative for consumers and producers in total in the case of a unilateral implementation of a CRM, and market design changes should be coordinated.All results are strongly driven by possible changes in competition and market power. In practice, the market design decision should also consider possible regulatory failures that might lead to further market distortions. The risk of market design flaws seems larger for full capacity markets such as ROs than for an SR, which requires only minor adjustments to the market design.

Add-On Policies Under Vertical Differentiation: Why Do Luxury Hotels Charge for Internet Whereas Economy Hotels Do Not?

This paper examines firms' product policies when they sell an add-on (e.g., Internet service) in addition to a base product (e.g., hotel rooms) under vertical differentiation (e.g., four- vs. three-star hotels). I show that the role of an add-on differs; higher-quality firms prefer to sell it as optional to discriminate consumers, and lower-quality firms trade off discrimination and differentiation, trying to lower the add-on price to lure consumers from higher-quality rivals. In equilibrium, lower-quality firms' policies are more sensitive to the cost-to-value ratio of an add-on. If the ratio is sufficiently small, firms sell it to all consumers, potentially explaining why lower-end hotels are more likely than higher-end ones to offer free Internet service. Contrary to consensus in the literature, optional add-ons can intensify price competition over consumers who trade off a higher-quality base product versus a lower-quality base including an add-on. Hence, higher-quality firms are incentivized to commit to bundling, while lower-quality firms prefer to commit to not selling it. Add-ons can further reduce lower-quality firms' profits if consumers do not observe the prices because holding up consumers ex post encourages them to switch to higher-quality rivals, which then become better off. Therefore, lower-quality firms are incentivized to advertise add-on prices, and higher-quality firms are not.

Does competition spur innovation? Evidence from labor productivity data for the banking industry

In this article, I address a research question that bears crucial policy implications and on which economic theory provides controversial conclusions: does innovation emerge from competition? I provide econometric evidence for the EU banking industry, that intensity of price competition does not affect innovation. Results hold across various estimation methods.

The Road to an Open Internet is Paved with Pragmatic Disclosure & Transparency Policies

Ensuring a healthy ecosystem for broadband services is critical to securing the future of a healthy and open Internet. From the perspective of social welfare maximization, this means collective management of the decision-making regarding how we design, operate, provide access to, use, and pay for our broadband access networks. Realizing this collective goal requires balancing the interests of multiple market participants that are often in conflict and evolve in light of changing technical, business, and policy conditions. The efficiency of markets and regulatory interventions depends on whether decision-makers at all market levels are appropriately informed. This requires the selective sharing of information. Consumers need information about their broadband access options in order to make informed decisions about which (if any) broadband services to subscribe to, how to use those services, and what investments to make in complementary assets (devices, content, applications). Providers of content, applications, and other complementary goods and services need to know about broadband access options to appropriately position their offerings in the market. And, regulators need information about broadband access options to design and enforce policies that will promote competition and ensure appropriate market choices exist. All of these stakeholders need information about broadband service availability, pricing, performance, and to the extent discernible, about trends and plans that will shape future options. Furthermore, broadband access service providers either already possess or may more easily obtain a great deal of the information needed by market participants. However, the information sharing challenges are far from simple. Different stakeholders need different information, information is costly to collect and share, and to the extent it impacts market outcomes, has strategic value. For example, better informed consumers might be more inclined to switch providers, thereby intensifying price competition; while better informed regulators may be better able to limit supra-competitive profit opportunities. Additionally, sharing of too much information about the performance of specific broadband connections might threaten subscriber privacy or render broadband networks more vulnerable to attack. Disclosure and Transparency (D&T) policies comprise a toolset of rules, processes, and mechanisms that are used by market participants to help structure and manage the flow of information that is needed for informed decision-making. D&T policies comprise a significant component of the regulatory provisions in the FCC's 2015 OIO, which sets forth the FCC's approach for regulating providers of broadband access services. The focus of this paper is on providing a framework with which to interpret the OIO's D&T provisions within the larger market context. The OIO's specific D&T provisions are just one component of the tools and mechanisms that shape how broadband management relevant information is discovered, shared, and interpreted. Other regulatory provisions in the OIO and other market mechanisms such as performance testing platforms interact with the explicit D&T provisions that mandate specific obligations and responsibilities. As we shall explain, the richness of D&T tools is desirable in order to address the complex and diverse questions that arise in the context of broadband management requiring information sharing. Moreover, understanding how these D&T policy tools interact and complement (or substitute) for each other is helpful if these tools are to be appropriately applied and appreciated. Application of these tools should be nuanced and evolvable to incentivize cooperation and voluntary disclosure by the ISPs while also safeguarding the interests of end users and intermediaries in the broadband Internet ecosystem.In Section 2, we review the specific D&T provisions in the FCC's 2015 OIO and situate these within the larger D&T policy framework. We introduce a meta-tool, the D&T Coordinator, to assist in better understanding the landscape of potential interventions and with which to contrast the relative merits of different interventions in different contexts. In Section 3, we apply our framework to divergent prototypical examples of the sorts of questions that confront the challenge of how to best manage broadband networks. At one end, we have what appears to be the narrow and specific question of crafting an appropriate set of D&T policies to ensure adequate reporting of packet loss by ISPs. At the other extreme, we consider open-ended questions that relate to society's aspirations or goals for what the Internet and broadband services should be. We argue that an assortment of D&T tools are needed for the array of questions confronting broadband stakeholders, but with different emphasis, because the contexts within which they arise engage both specific and general, closed and open-ended details to be addressed appropriately. Section 4 offers our concluding summary and directions for future work.

Multimarket contact, differentiation, and prices of chain hotels

This study seeks to analyze the joint effect of multimarket contact and product differentiation on the intensity of price competition between chain hotels. The theory predicts that both variables reduce price rivalry, but little is known about their interaction effect. Multimarket literature establishes that when two firms meet one another in more than one market, the mutual recognition of their interdependencies will reduce the intensity of competition, leading to mutual forbearance. This article argues that differentiation moderates negatively the effect of multimarket contact on price because differentiation decreases the recognition of interdependence and thus, it makes difficult mutual forbearance. Using data from 1147 Spanish hotels that belong to a chain, this study shows that chain hotels with higher multimarket contact and higher differentiation (i.e. more stars, the Q certificate, common umbrella brand and a unique combination of services) charge higher prices. The evidence confirms the negative interaction but only for horizontal differentiation (i.e. different services and common brand).

Trade Costs, FDI Incentives, and the Intensity of Price Competition

Empirical evidence shows that an increase in trade liberalization causes an increase in foreign direct investments (FDIs). Here we propose an explanation to this apparent puzzle by exploiting the intensity of competition in a Bertrand duopoly with convex costs where the two firms enter in a new market. We adopt Dastidar's (1995) approach, delivering a continuum of Bertrand-Nash equilibria ranging above marginal cost pricing, to show that softening competition may indeed more than offset the standard effect generated by trade costs, thereby leading to a positive relationship between trade liberalization and FDIs.

Trade costs, FDI incentives, and the intensity of price competition

AbstractContrary to theoretical predictions, empirical evidence shows that an increase in trade liberalization causes an increase in foreign direct investment. We propose an explanation for this apparent puzzle by exploiting Dastidar's approach, which delivers a continuum of Bertrand–Nash equilibria ranging above marginal cost pricing. We show that allowing for softer price competition may indeed more than offset the standard effect generated by a decrease in trade costs, thereby restoring foreign direct investment incentives.

Committed Versus Contingent Pricing Under Competition

Should capacitated firms set prices responsively to uncertain market conditions in a competitive environment? We study a duopoly selling differentiated substitutable products with fixed capacities under demand uncertainty, where firms can either commit to a fixed price ex ante, or elect to price contingently ex post, e.g., to charge high prices in booming markets, and low prices in slack markets. Interestingly, we analytically show that even for completely symmetric model primitives, asymmetric equilibria of strategic pricing decisions may arise, in which one firm commits statically and the other firm prices contingently; in this case, there also exists a unique mixed strategy equilibrium. Such equilibrium behavior tends to emerge, when capacity is ampler, and products are less differentiated or demand uncertainty is lower. With asymmetric fixed capacities, if demand uncertainty is low, a unique asymmetric equilibrium emerges, in which the firm with more capacity chooses committed pricing and the firm with less capacity chooses contingent pricing. We identify two countervailing profit effects of contingent pricing under competition: gains from responsively charging high price under high demand, and losses from intensified price competition under low demand. It is the latter detrimental effect that may prevent both firms from choosing a contingent pricing strategy in equilibrium. We show that the insights remain valid when capacity decisions are endogenized. We caution that responsive price changes under aggressive competition of less differentiated products can result in profit‐killing discounting.

With or Without Forecast Sharing: Competition and Credibility under Information Asymmetry

Forecast sharing among trading partners lies at the heart of many collaborative and contractual supply chain management efforts. Even though it has been praised in both academic and practitioner circles for its critical role in increasing demand visibility, some concerns remain: The first one is related to the credibility of forecast sharing, and the second is the fear that it may turn into a competitive disadvantage and induce suppliers to increase their price offerings. In this study, we explore the validity of these concerns under a supply chain with a competitive upstream structure, focusing specifically on (i) when and how a credible forecast sharing can be sustainable, and (ii) how it impacts on the intensity of price competition. To address these issues, we develop a supply chain model with a buyer facing a demand risk and two heterogeneous suppliers competing for order allocation from the buyer. The extent of demand is known only to the buyer. The buyer submits a buying request to the suppliers via a commonly used procurement mechanism called request for quotation (RFQ). We consider two variants of RFQ. In the first type, the buyer simply shares the estimated order quantity with no further specifications. In the second one, in addition to this, the buyer also specifies minimum and/or maximum order quantities. We fully characterize equilibrium decisions and profits associated with them under symmetric and asymmetric information scenarios. Our main findings are that the buyer can use a RFQ with quantity restrictions as a credible signal for forecast sharing as long as the degree of demand information asymmetry is not too high, and that, contrary to above concerns, the equilibrium prices that emerge between competing suppliers under asymmetric information may indeed increase if the buyer can not share forecast information credibly with its upstream partners.

TRANSPARENCY IN MARKETS FOR EXPERIENCE GOODS: EXPERIMENTAL EVIDENCE

We propose an experimental design to investigate the role of information disclosure in the market for an experience good. The market is served by a duopoly of firms that choose both the quality and the price of their product. Consumers differ in their taste for quality and choose from which firm to buy. We compare four different treatments in which we vary the degree to which consumers are informed about quality. Contrary to theoretical predictions, firms do not differentiate quality under full information. Rather, both tend to offer products of similar, high quality, entailing more intense price competition than predicted by theory. Under no information, we observe a “lemons” outcome where quality is low. At the same time, firms manage to maintain prices substantially above marginal cost. In two intermediate treatments, quality is significantly higher than the no‐information level, and there is evidence that prices become better predictors of quality. Taken together these findings suggest that information disclosure is a more effective tool to raise welfare and consumer surplus than theory would lead one to expect.(JELL15,C91,D82)

What Types of Switching Costs to Create Under Behavior-Based Price Discrimination?

One of the perennial questions in the switching cost literature is whether switching costs enhance or harm firms’ profits. In this paper, we ask what types of switching costs, among those that are commonly observed, enhance firm’s profits provided that firms can i) endogenously influence the magnitude of switching costs and ii) price-discriminate based on the consumers’ past purchase behavior. Acknowledging that many real/social switching costs need to be created before price competition begins, we show that firms minimize this type of switching costs because these intensify intertemporal price competition. On the other hand, firms create maximal contractual/pecuniary switching costs as these are usually set up in between pricecompeting stages. We show additionally that firms prefer not to create real/social switching costs even when they do not have opportunities to create contractual/pecuniary switching costs later in competition. The results highlight the importance of timing of creation that is embedded in different types of switching costs.

Price competition for retailers with profit and revenue targets

Price competition for retailers has been extensively studied in the literature assuming the objective of (expected) profit maximization. In this paper, we make a major contribution by studying price competition for retailers with both profit and revenue targets. Consequently, each retailer maximizes her profit and revenue probability, namely, the probability of achieving the profit and revenue targets simultaneously. More specifically, we analyze a scenario where two competing retailers purchase a perishable product from a common supplier and sell to a common market. Employing the isoelastic demand model, we derive the closed-form solutions of the optimal order quantity, the optimal selling price, and the maximal profit and revenue probability for each retailer. It is shown that when revenue is a relevant performance measure, positive and non-positive salvage values lead to different optima for competing retailers. Moreover, as price elasticity and/or price competition intensity becomes higher, the optimal retail price decreases and the optimal order quantity increases for each retailer.

Information and two-sided platform profits

We study the effect of different levels of information on two-sided platform profits—under monopoly and competition. One side (developers) is always informed about all prices and therefore forms responsive expectations. In contrast, we allow the other side (users) to be uninformed about prices charged to developers and to hold passive expectations. We show that platforms with more market power (monopoly) prefer facing more informed users. In contrast, platforms with less market power (i.e., facing more intense competition) have the opposite preference: they derive higher profits when users are less informed. The main reason is that price information leads user expectations to be more responsive and therefore amplifies the effect of price reductions. Platforms with more market power benefit because higher responsiveness leads to demand increases, which they are able to capture fully. Competing platforms are affected negatively because more information intensifies price competition.

Technological tying and the intensity of price competition: An empirical analysis of the video game industry

Using data from the 128-bit video game industry I evaluate the impact technologically tying has on the intensity of console price competition and the incentives for hardware firms to tie their produced software to their hardware. Tying occurs when a console hardware manufacturer produces software that is incompatible with rival hardware. There are two important trade-offs an integrated firm faces when implementing a technological tie. The first is an effect that increases console market power and forces hardware prices higher. The second, an effect due to the integration of the firm, drives prices lower. A counterfactual exercise determines technological tying of hardware and software increases console price competition; console makers subsidize consumer hardware purchases in order to increase video games sales, in particular their tied games, where the greatest proportion of industry profits are made. I also determine technological tying to be a dominant strategy for hardware manufacturers when software development costs are low.

Complementary Online Services in Competitive Markets: Maintaining Profitability in the Presence of Network Effects

A growing number of firms are strategically utilizing information technology and the Internet to provide online services to consumers who buy their products. Online services differ from traditional services because they often promote interactivity among users and exhibit positive network effects. While the service increases the value obtained by consumers, network effects are known to intensify price competition and thus may reduce firms' profits. In this paper, we model the competition between two firms that sell a differentiated product when each firm can offer a complementary online service to its customers. We derive the market equilibrium and determine how firms should adjust their strategies to account for network effects. We find that when the service exhibits network effects, a firm's decision whether or not to offer the service depends on both the competitor's decision and the competitor's service quality. When the service does not exhibit network effects, this is not the case. In addition, we show that a firm can benefit from the technological ability to offer the service, and from an increase in the strength of network effects or in the market size of the service, only when the value customers derive from the direct functionalities (those that do not rely on the network) of the service are sufficiently high. As a result, a firm's investment in the direct functionalities of its service increases with the strength of network effects of the service as long as the marginal development cost is not too high. Finally, we show that inefficiencies in terms of the number of firms offering the service as well as the total number of service users may prevail.

To Commit or Not to Commit: Revisiting Quantity vs. Price Competition in a Differentiated Industry

Previous studies have shown that quantity commitment by all firms in an industry mitigates price competition. This paper shows that when firms have a choice, asymmetric outcomes can arise, with some firms choosing to commit to a quantity and other firms choosing not to. To study the commitment decision, we analyze a multistage game within a duopoly of differentiated firms à la Hotelling. In the first stage of the game, firms choose whether or not to commit to a quantity. In the second stage, each firm that chose to commit sets a quantity, which represents an upper bound on how much it can sell to consumers. In the third stage, both firms set prices strategically, regardless of whether or not they committed. In the final stage, demand is allocated as consumers maximize their utilities. Firm(s) that chose not to commit to a quantity in the first stage can fulfill any quantity that consumers demand at the equilibrium prices. We find that if product differentiation is sufficiently low, both firms choose to commit to a quantity in equilibrium. This symmetric equilibrium allows both firms to avoid the intense price competition associated with low product differentiation. If the level of differentiation is sufficiently high, the equilibrium in quantity commitment is asymmetric such that one firm chooses to commit and its competitor chooses not to commit. Under this equilibrium, a pricing equilibrium in pure strategies does not exist, only a pricing equilibrium in mixed strategies does, and the equilibrium prices can result in a committed firm not clearing the entire quantity it chose earlier. This paper was accepted by J. Miguel Villas-Boas, marketing.