Mitigate Price Competition Research Articles

Co-opetition or decentralization? A study of manufacturers’ sourcing and distribution strategies

This study aims to explore the impacts of manufacturers’ downstream distribution channels on upstream sourcing strategy and of the business relationship between manufacturers resulting from upstream sourcing transactions on downstream distribution strategy, through investigating the interplay of co-opetition and decentralization. We consider a framework with two manufacturers producing substitutable products. In the upstream component market, one manufacturer needs to source a key component from either a third-party supplier or its competing manufacturer. In the downstream consumer market, each manufacturer sells the end product through either an integrated or a decentralized distribution channel. The two channels engage in a price competition. For a given downstream distribution strategy, we find that even at a higher component price, the manufacturer who purchases the component may have incentive to source from its competitor that has an integrated channel, while having no incentive to choose a decentralized competitor. A key driver behind this contrast is that co-opetition can be substituted by a decentralized channel used by the competitor, which enables the manufacturer who purchases the component to mitigate price competition more efficiently. For a given upstream sourcing strategy, in contrast to the literature which shows that manufacturers generally prefer downstream decentralization at high competition intensity, we find that integration is always preferred by manufacturers who engage in supplier–buyer cooperation. A key underlying driver is that co-opetition helps the manufacturer who sells the component mitigate price competition more efficiently than decentralization. We also extend our analysis by investigating manufacturers’ decisions on both sourcing and distribution strategies.

Competitive targeted online advertising

This paper examines how an online publisher utilizes its information about consumer preference to target advertising. In our model, two firms first bid for a prominent ad position in a publisher-organized position auction, and then compete on price in the subsequent product marketplace. We consider two dimensions of consumer heterogeneity. First, consumers are heterogeneous in product preference. Based on their tastes, some consumers prefer one product over the other, whereas other consumers may rank the products in an opposite order. Second, consumers differ in search preference, i.e., “nonshoppers” only consider the advertised product, while “shoppers” always search both firms’ products before buying. We show that targeted advertising based on product preference will mitigate price competition in product markets as well as competition in position auctions, the latter to the detriment of the publisher. In contrast, targeted advertising based on search preference always benefits the publisher, as the winning firm can charge monopoly prices to nonshoppers. We show that the publisher’s optimal choice is to utilize only the information about consumer search preference. We also explore the welfare implications of targeted advertising based on different types of consumer preference.

Pricing and content development for online media platforms regarding consumer homing choices

With the rise of online media platforms, intensified competition has forced platforms to develop their content and even to cooperate with rival platforms. It is worth exploring the effects of multihoming, a key feature in platform businesses, on platform strategies and decision-making. In this paper, we establish a game-theoretic model in which two competing platforms generate profits from consumer subscriptions, and consumers decide to subscribe to one (singlehoming) or both (multihoming) platforms. In addition, we examine whether multihoming leads to negative synergy because of the content overlap between the platforms but mitigates price competition, where a platform that can create new content itself decides whether to distribute the content exclusively or to cooperate with the rival by licensing the newly developed content. We derive the equilibrium price and content decisions of the platforms and further elaborate their optimal strategic choices regarding content development and distribution. We find that in the absence of multihoming, developing exclusive content is an efficient competitive strategy for platforms but may cause worse social welfare than would be the case without the development of new content. However, in the presence of multihoming, developing exclusive content is a dominant strategy that benefits platforms, consumers, and society. Managerial insights are provided for platform managers in terms of the rival reactions and changes in content-and market-related factors.

Pricing, Quality, and Stocking Decisions in a Manufacturer-Centric Dual Channel

Problem description. We consider a dual channel in which a focal manufacturer (he) sells his output through his online store and an independent brick-and-mortar retailer (she). In this manufacturer-centric dual channel, we study product line, stocking, and pricing decisions in the presence of stochastic demand and inventory constraints. The pricing decisions include choosing whether to give price match guarantees (PMGs), standard in the U.S. retail practice. Methodology/Results. We analyze a game-theoretic model in which a focal manufacturer designs a product line, sets wholesale prices, and decides what products to sell in the dual channel. An independent brick-and-mortar retailer responds to the product line design and the wholesale prices by making stocking decisions in her store. Then, both stores observe demand and independently set retail prices subject to any PMGs that the stores gave to consumers. The brick-and-mortar store (online store) fulfills demand in a make-to-stock (make-to-order) fashion. We find that whenever one of the stores holds a competitive advantage, the manufacturer sells the same product line in both stores. If the brick-and-mortar store holds an advantage, it matches the online store’s retail price to obtain favorable wholesale pricing from the manufacturer. We find no equilibria where the online store price matches the brick-and-mortar store or the stores’ prices match each other. Finally, when neither store has a clear advantage, the manufacturer mitigates price competition by designing a different product for each store. Managerial implications. Our model helps identify optimal stocking and pricing strategies that depend on e-fulfillment cost and demand uncertainty and offers a novel reason for offering PMGs in a supply chain.

Analysis of Asymmetric Quantity Commitment in Decentralized Supply Chains

Quantity commitment chosen by firms in competition has been demonstrated by previous studies to mitigate price competition. This study demonstrates that asymmetric quantity commitment can always arise when one firm (e-tailer) shortens lead times or adopts just-in-time systems to circumvent quantity commitment while another firm (retailer) does not. To study the asymmetric quantity commitment in decentralization, a multi-stage game is analyzed, and backward induction is adopted. The authors find that the retailer always adopts the quantity commitment in the decentralization to achieve a higher profit.

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.

Pricing strategy and moral hazard: Copay coupons in pharmaceuticals

Branded drug manufacturers issue copay coupons to compete with generics as their brands are coming off patent. To explore the impact of copay coupons on pricing and welfare, I estimate a model of demand and supply using data on sales, advertising, and copayment for cholesterol-lowering drugs and perform a counterfactual analysis to simulate equilibrium pricing with copay coupons used for price discrimination and moral hazard. Copay coupons issued for price discrimination make the drug with coupons affordable for more consumers and increase consumer welfare even when a small fraction of consumers receive a coupon. Coupons used for moral hazard significantly mitigate price competition and improve consumer welfare only when coupon penetration is sufficiently high.

Supply chain coordination with customer returns and retailer's store brand product

We examine a retailer's Stackelberg supply chain, in which the retailer sells a product in the two brands: its own store brand (SB) and a national brand (NB) supplied by a well-established manufacturer. The two brands both face customer returns, and they differ in product quality. We examine the retailer's decision on returns policies for the two brands (either Money Back Guarantee (MBG) or No Refund) and the effects of returns policies on the competition between the two brands. We identify the condition when the retailer should offer MBGs for both brands and we show that MBGs mitigate price competition between the two brands. MBGs are found to enhance the retailer's profit and reduce the NB manufacturer's profit. We examine coordination mechanisms and find that a centralized supply chain intensifies the competition and pushes the NB to reduce its retail price. A simple coordination contract that can achieve supply chain coordination to ensure a win-win for both the retailer and the NB manufacturer is proposed.

The Effects of Autoscaling in Cloud Computing

Web-based firms often rely on cloud-based computational resources to serve customers, but the number of customers they will serve is rarely known at the time of product launch. A recent innovation in cloud computing, known as autoscaling, allows companies to automatically scale their computational load up or down to match customer demand. We build a game theory model to examine how autoscaling will affect firms’ decisions to enter a new market and the resulting equilibrium prices, profitability, and consumer surplus. The model produces novel results depending on the likelihood of a firm’s success in the new market, differentiation among potential entrants, and the cost of computational capacity. For instance, in contrast to previous capacity commitment models with demand certainty, we show that autoscaling can mitigate price competition if the likelihood of a firm’s success in the market is moderate and the cost of capacity is sufficiently low. This is because without autoscaling, the firms’ uncertainty about demand would lead to excessive computational capacities and thus aggressive price competition. We also find that when the likelihood of success is sufficiently high, autoscaling facilitates entry for one firm yet deters a second firm from simultaneously entering the market. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2891 . This paper was accepted by Juanjuan Zhang, marketing.

In-Store Advertising by Competitors

Conventional advice to firms in competitive markets is to raise barriers against competitive poaching of their customers. However, we see instances where a firm enables competitor advertising to its customers. For example, Walmart hosts banner ads for TVs from Sears to customers searching for TVs on Walmart.com, risking a loss of customers in exchange for a commission. This paper explores whether and under what conditions allowing competitor advertising in one’s store may be a beneficial strategy. We analyze a duopoly market where customers are heterogeneous in search costs, information, and preferences. We find that hosting a competitor ad for an undifferentiated product can mitigate price competition and boost profits of both firms if the advertising commission is high enough. Otherwise, hosting competitor advertising may decrease the profits of both firms. Thus, there is no conflict of interest between firms in advertising and in setting the ad commission level. Yet the host prefers more efficient ads while the advertiser does not. Furthermore, the equilibrium outcome is asymmetric, with only one store featuring ads of the other. If stores are sufficiently differentiated in marginal costs of the product, the cost disadvantaged store will be the host. We show that the results are robust to displaying price in the ad, to different commission structures, and to customer uncertainty about the commission rate. The online appendix is available at https://doi.org/10.1287/mksc.2016.1015 .

Compete in Price or Service?—A Study of Personalized Pricing and Money Back Guarantees

Retailers use both pricing and service strategies to respond to intensified competition. Here we develop a duopoly model to investigate the impact of the increasingly popular personalized pricing strategy (PPS) and the widely used Money Back Guarantee (MBG) customer returns policy. We consider two retailers who differ in customer satisfaction rates. Each retailer chooses a pricing strategy, PPS or uniform pricing, and a product return strategy, MBG or ‘no returns.’ We show that both PPS and MBG are dominant strategies, but their impact on retailers’ prices and profits are different; while PPS intensifies price competition and may lead to a prisoner’s dilemma in which both retailers may lose profit, MBG mitigates price competition and may result in a Pareto improvement in both retailers’ profits. Both PPS and MBG increase the size of the overall market, but not the total duopoly profit. The total customer surplus and social welfare may increase under either strategy. In addition, we obtain some interesting observations as to how our results may change if the product quality/customer satisfaction rate is endogenously chosen in the duopoly. Some of our findings are in contrast to related results reported in the literature.

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.

The Benefit of Uniform Price for Branded Variants

The extensive adoption of uniform pricing for branded variants is a puzzling phenomenon, considering that firms may improve profitability through price discrimination. In this paper, we incorporate consumers' concerns of peer-induced price fairness into a model of price competition and show that a uniform price for branded variants may emerge in equilibrium. Interestingly, we find that uniform pricing induced by consumers' concerns of fairness can actually help mitigate price competition and hence increase firms' profits if the demand of the product category is expandable. Furthermore, an individual firm may not have an incentive to unilaterally mitigate consumers' concerns of price fairness to its own branded variants, which suggests the long-run sustainability of the uniform pricing strategy. As a result, fairness concerns from consumers provide a natural mechanism for firms to commit to uniform pricing and enhance their profits.

MIXED DUOPOLY, PRODUCT DIFFERENTIATION AND COMPETITION*

We examine the relationship between the equilibrium price and the degree of product differentiation in a mixed duopoly in which a welfare‐maximizing public enterprise competes against a profit‐maximizing private firm. Existing works on private economy show that increased product differentiation mitigates price competition. We find that, in a mixed economy, increased product differentiation can accelerate competition when the demand is elastic. The private firm chooses to locate itself too close to the public firm (and thus makes the resulting degree of product differentiation too low) for social welfare, which never appears in the private economy.

The value of losing control: Competition in markets for complements

AbstractWhen selling complementary products, manufacturers can often benefit from considering the resulting cross‐market interdependencies. Although using independent retailers makes it difficult to internalize these positive externalities, the ensuing double marginalization can mitigate within‐market competition. We use standard game theoretic analysis to determine optimal distribution channel strategies (through independent retailers or integrated) for competing manufacturers who participate in markets for complements. Our results suggest that a firm's optimal channel choice is highly dependent on its competitive positioning. A firm with a competitive advantage in terms of product characteristics (customer preferences) or production capabilities (cost) might benefit from selling through company‐controlled stores, allowing coordinated pricing across the two markets, whereas a less competitive firm might be better off using independent channel intermediaries to mitigate price competition. We consider two scenarios depending on whether the two firms make their distribution channel decisions sequentially or simultaneously. Although firms are unlikely to make such decisions at exactly the same instant, the simultaneous model also serves as a proxy for the scenario where firms decide sequentially, but where they cannot observe each other's strategic channel choices. For the sequential case, we find that the sequence of entry can have tremendous impact on the two firms'profits; whereas in some cases, the first mover can achieve substantially higher profits, we find that when the two markets are of sufficiently different size and only loosely related, a firm with a competitive advantage might be better off as a follower. Interestingly, our results suggest that, when the markets are of rather similar size, both firms are better off if they enter the industry sequentially. In those cases, the first entrant has incentive to reveal its planned channel strategies, and the follower has incentive to seek out and consider this information. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010

The Benefit of Uniform Price for Branded Variants

The extensive adoption of uniform pricing for branded variants is a puzzling phenomenon, considering that firms may improve profitability through price discrimination. In the paper, we incorporate consumers' concerns of peer-induced price fairness into a model of price competition and show that uniform price for branded variants may emerge in equilibrium. Interestingly, we find that uniform pricing induced by consumers’ concerns of fairness can actually help mitigate price competition and hence increase firms’ profits if the demand of the product category is expandable. Furthermore, an individual firm may not have incentive to unilaterally mitigate consumers’ concerns of price fairness to its own branded variants, which suggests the long-run sustainability of the uniform pricing strategy. As a result, fairness concerns from consumers provide a natural mechanism for firms to commit to uniform pricing which enhances their profits.