Model Of Price Discrimination Research Articles

Public firms on an international border: A model of spatial price discrimination

This paper uniquely examines an international mixed oligopoly in a model of spatial price discrimination. It isolates the importance of the location of the border showing a variety of equilibria depending on the nationality and placement of the private rivals. While the presence of a public firm often improves domestic welfare, it need not. Moreover, a prisoner's dilemma can exist in which each country would benefit from the privatization of both public firms but neither country has a unilateral incentive to privatize. The implications are discussed.

Endogenous price discrimination with asymmetric firms

We explore a third-degree spatial price discrimination model within the context of asymmetric duopolies. We find that if the degree of asymmetry is small, both firms charge uniform price is the unique sub-game perfect Nash equilibrium. As the degree of asymmetry reaches intermediate, there exists no pure strategy sub-game perfect Nash equilibrium. In the mixed strategy equilibrium, both firms price discriminate with certain probability. When the degree of asymmetry is large, there exists one or two asymmetric equilibria: the advantaged firm price discriminating and the disadvantaged firm uniformly pricing IN and vice versa in the other NI. In both equilibria, the price-discriminating firm consistently benefits, and the uniform-pricing firm also experiences higher profits when the degree of asymmetry is large, despite being driven out of the smaller market. Moreover, when the asymmetry is large enough, social welfare can also be higher.

Individualization in Online Markets: A Generalized Model of Price Discrimination through Learning

This paper builds a theoretical framework to model individualization in online markets. In a market with consumers of varying levels of demand, a seller offers multiple product bundles and prices. Relative to brick-and-mortar stores, an online seller can use pricing algorithms that can observe a buyer’s online behavior and infer a buyer’s type. I build a generalized model of price discrimination with Bayesian learning where a seller offers different bundles of the product that are sized and priced contingent on the posterior probability that the consumer is of a given type. Bayesian learning allows the seller to individualize product menus over time as new information becomes available. I explain how this strategy differs from first- or second-degree price discrimination models and how Bayesian learning over time affects equilibrium values and welfare.

Ripping off regular consumers? The antecedents and consequences of consumers’ perceptions of e-commerce platforms’ digital power abuse

Leveraging a large consumer base and algorithmic technology, e-commerce platforms exercise digital power, notably via algorithmic price discrimination. Consumers acutely perceive this power inequality and platforms’ digital power abuse. Meanwhile, platforms that practice algorithmic price discrimination are generally in a fiercely competitive oligopolistic market and are concerned about consumer loyalty. This study investigates the internal mechanism through which algorithmic price discrimination affects consumer loyalty. Based on consumer ethical perception theory, we develop a model of algorithmic price discrimination’s influence on consumer loyalty and examined the moderating effect of consumer types. Analyzing 597 consumer responses, findings suggest price discrimination negatively influences perceived platform ethics and corporate social responsibility, thus reducing loyalty. This effect is more pronounced for consumers with high price sensitivity and initial trust. This study sheds light on algorithmic price discrimination’s influence from a novel digital power-abuse perspective, reveals the underlying mechanisms, and provides specific suggestions for platform management.

Price Discrimination in International Airline Markets

Abstract We develop a model of inter-temporal and intra-temporal price discrimination by monopoly airlines to study the ability of different discriminatory pricing mechanisms to increase efficiency and the associated distributional implications. To estimate the model, we use unique data from international airline markets with flight-level variation in prices across time, cabins, and markets and information on passengers’ reasons for travel and time of purchase. The current pricing practice yields approximately 77% of the first-best welfare. The source of this inefficiency arises primarily from private information about passenger valuations, not dynamic uncertainty about demand. We also find that if airlines could discriminate between business and leisure passengers, total welfare would improve at the expense of business passenger surplus. Also, replacing the current pricing that involves screening passengers across cabin classes with offering a single cabin class has minimal effect on total welfare.

Nash versus consistent equilibrium: A comparative perspective on a mixed duopoly location model of spatial price discrimination with delegation

We argue that under the presence of a public firm, discriminatory pricing according to location leads to an efficient consistent equilibrium. We consider a mixed ownership duopoly delegation model with spatial price discrimination and constant, albeit different, marginal production costs. In contrast to what holds true for a private duopoly, we prove that the Nash equilibrium, absent delegation, is both consistent and socially optimal. The consistent equilibrium remains socially optimal regardless of the order in the delegation process. Under Nash conjectures, in most cases, firm owners have a strong incentive to delegate location decisions to managers. In such cases, duopolists locate closer to each other. Nash, compared to consistency of conjectures, leads to lower prices, lower profits, for both firms, and increased surplus for the consumer. The result surprises as it contrasts with respective findings regarding a private duopoly.

Behavior-based personalized pricing: When firms can share customer information

We study a two-period model of behavior-based price discrimination where firms can agree to share customer information before the first-period competition begins, and the information can be used for personalized pricing in the second-period competition. We show that information sharing is individually rational for firms as it softens upfront competition when information is gathered, consumers are worse off as a result, but total surplus can increase thanks to the improved quality of matching between firms and consumers. These findings are robust to firm asymmetries and varying discount factors for consumers and firms.

Product Lines and Price Discrimination in Markets with Information Frictions

A well-known principle in economics is that firms differentiate their product offerings in order to relax competition. However, in this paper we show that information frictions can invalidate this principle. We build a duopolistic competition model of second-degree price discrimination with information frictions in which (i) an equilibrium always exists with overlapping product qualities, whereas (ii) an equilibrium with nonoverlapping product qualities exists only if both information frictions and the cost of providing high quality are sufficiently small. As a consequence, reasons other than an attempt to soften competition should explain why firms in some cases carry nonoverlapping product lines. This paper was accepted by Matthew Shum, marketing.

Tax Deductibility, Market Frictions, and Price Discrimination: Evidence from the Mortgage Market.

This study shows that borrowers who benefit from the mortgage interest deduction pay an interest rate that is on average 11.6 basis points higher than that of otherwise similar borrowers. This result implies that mortgage originators capture between 7 to 15 percent of this government subsidy. Consistent with a model of first-degree price discrimination, this additional markup increases with borrowers’ marginal tax rate and with market frictions such as concentration, search cost, and leverage in bargaining. Thus, the study suggests that interest deductibility functions as price support in credit markets characterized by high market frictions.

Pricing Mechanism of Charging Pile Power Supply Market——Based on RTP Theory and Price Discrimination Model

Based on the data of monopoly enterprises in China’s new energy charging pile power retail market, this paper explores the application of RTP differential pricing in new areas. First of all, from the perspective of business, this paper constructs the incentive cost model of low period which can minimize the supply pressure of power sales enterprises. Then, from the perspective of charging consumers, based on the assumption of user’s conversion cost, an improved demand response model is established according to the price elasticity. The paper is to consider the premise of maximizing social welfare, in the supply and demand of both sides to improve the pressure of electricity measurement, to minimize the operation and maintenance costs in peak and trough period.

Behavior-Based Price Discrimination and Product Choice

We study a two-period model of behavior-based price discrimination, as in Fudenberg and Tirole (RAND J Econ 31(4):634–657, 2000), but we allow firms to make their product choices in the first period. We show that the only possible equilibrium involves maximal differentiation. This is in contrast to Choe et al. (Manag Sci 64(12):5669–5687, 2018), where equilibrium features less-than-maximal differentiation when competition is in personalized pricing. Thus, our result highlights an important interplay between the type of price competition and product choice.

Retail price discrimination and food waste

Abstract We examine a food retailer’s incentive to use a minimum quality standard as part of a quality-based price-discrimination strategy and show how price discrimination can result in a substantial level of retail food waste. Using data from a major US food retailer, we estimate a structural model of retail price discrimination and conduct a series of counter-factual experiments to demonstrate that observed retail prices are consistent with quality-based price discrimination in the retail market. Our findings indicate that quality standards on fresh produce can explain a substantial proportion ($7.5\%$) of food waste by retailers in the US.

Rethinking Profit-Maximization in Second-Degree Price Discriminating Markets

Standard models of indirect price discrimination generate a separating equilibrium in which all consumers choose bundles on their demand curves. Low-demand consumers voluntarily choose to pay a higher unit price for small quantities because the discount is offered by the monopolist at prohibitively high quantity. These models implicitly assume the low-demand consumer would purchase the higher quantity at the discounted price if the quantity requirement were set at a low quantity, but rational monopoly pricing avoids this. We show that it is possible for a monopolist to offer price/quantity bundles that induce each consumer to choose voluntarily the one preferred by the monopolist for her where each bundle is above the respective consumer’s demand curve. The primary theoretical results include greater profits for the firm and greater total efficiency as output more closely approaches the socially optimal level in both market segments. Resolving an ambiguity from earlier research on price discrimination, the model also unequivocally demonstrates that consumer surplus is reduced. An important implication of the monopolist constraining consumption to be above the demand curve for her product is that she has effectively reduced the demand for some subset of other goods and services the consumers purchase.

Global optimisation for a developed price discrimination model: A signomial geometric programming-based approach

This paper presents a price discrimination model for a manufacturer who acts in two different markets. In order to have a fair price discrimination model and compare monopoly and competitive markets, it is assumed that there is no competitor in the first market (monopoly market) and there is a strong competitor in the other market (competitive market). The manufacturer’s objective is to maximise the total benefit in both markets. The decision variables are selling price, lot size, marketing expenditure, customer service cost, flexibility and reliability of production process, set-up costs, and quality of products. The proposed model in this paper is a signomial geometric programming problem which is difficult to solve and find the globally optimal solution. So, this signomial model is converted to a posynomial geometric type and using an iterative method, the globally optimal solution is found. To illustrate the capability of the proposed model, a numerical example is solved and the sensitivity analysis is implemented under different conditions.

Food Banks and Retail Markups

Food banks play a critical part in the food distribution system. In this paper, we examine the impact of food bank donations on retailer markups using a unique store-level data set on donations, labor employment, sales, and capital employment. We frame our empirical model of food bank donations and store-level markups in terms of a theoretical model of quality-based price discrimination and retail sales. We find that stores that donate more food to the local food bank are able to charge higher markups - 33% higher - after controlling for the well-known endogeneity problems that bedevil production analysis. Our findings suggest that donations are not necessarily only altruistic gestures on the part of retailers, but rather part of a symbiotic relationship between food banks and food retailers.

Behavior-Based Personalized Pricing: When Firms Can Share Customer Information

We study a model of behavior-based price discrimination where firms can agree to share customer information that can be used for personalized pricing. We show that firms are better off sharing customer information as it softens up-front competition when they gather information, consumers are worse off as a result, but total surplus can increase thanks to the improved quality of matching between firms and consumers.

Behavior-Based Price Discrimination and Product Choice

We study a two-period model of behavior-based price discrimination in Fudenberg and Tirole (2000) but allow firms to make product choice in the first period. We show that the only possible equilibrium involves maximal differentiation. This is in contrast to Choe et al. (2018) where equilibrium features less than maximal differentiation when competition is in personalized pricing. Thus, our result highlights an important interplay between the type of price competition and product choice.

Nonlinear Pricing in Village Economies

This paper examines the prices of basic staples in rural Mexico. We document that nonlinear pricing in the form of quantity discounts is common, that quantity discounts are sizable for basic staples, and that the well‐known conditional cash transfer program Progresa has significantly increased quantity discounts, although the program, as documented in previous studies, has not affected unit prices on average. To account for these patterns, we propose a model of price discrimination that nests those of Maskin and Riley (1984) and Jullien (2000), in which consumers differ in their tastes and, because of subsistence constraints, in their ability to pay for a good. We show that under mild conditions, a model in which consumers face heterogeneous subsistence or budget constraints is equivalent to one in which consumers have access to heterogeneous outside options. We rely on known results to characterize the equilibrium price schedule, which is nonlinear in quantity. We analyze the effect of nonlinear pricing on market participation as well as the impact of a market‐wide transfer, analogous to the Progresa one, when consumers are differentially constrained. We show that the model is structurally identified from data on prices and quantities from a single market under common assumptions. We estimate the model using data on three commonly consumed commodities from municipalities and localities in Mexico. Interestingly, we find that relative to linear pricing, nonlinear pricing is beneficial to a large number of households, including those consuming small quantities, mostly because of the higher degree of market participation that nonlinear pricing induces. We also show that the Progresa transfer has affected the slopes of the price schedules of the three commodities we study, which have become steeper as consistent with our model, leading to an increase in the intensity of price discrimination. Finally, we find that a reduced form of our model, in which the size of quantity discounts depends on the hazard rate of the distribution of quantities purchased in a village, accounts for the shift in price schedules induced by the program.

An Empirical Analysis of Minimum Advertised Price Restrictions

Recent theory has examined the competitive effects of minimum advertised price (MAP) restrictions: manufacturer policies that can limit the ability of consumers to search for product prices. In this paper, we empirically study the effect of a major electronics manufacturer’s MAP policy on the e-retail prices for its hardware products. Our approach leverages three types of data: contractual MAP values by product from 2011-2013; daily prices across its largest e-retailers; and the frequency of visits to each e-retailer from a representative household panel. We use a model of search with advertised prices to guide two types of findings. First, descriptive patterns of retailer prices are consistent with the market exhibiting consumer search costs, whereby it is costlier to search when price is below MAP than above MAP. Second, reduced form models imply that MAP diminishes the effect of increased retailer competition on decreased price dispersion, whereby prices are up to 6% more dispersed with MAP than without MAP. This is consistent with a model of inter-retailer price discrimination.

A paradigm shift in revenue management? The new landscape of hotel cancellation policies

This study provides empirical evidence on how hotel cancellation policies are changing in recent years. The findings demonstrate that while hotels are experimenting with stricter cancellation windows, their cancellation penalties do not appear to become stricter. We discuss this counterintuitive discrepancy, explaining the rational with theoretical models of price discrimination and empirical observations of consumer behaviour, both within the framework of hotel revenue management practices.