Monopoly Level Research Articles

Revenue Management Games: Horizontal and Vertical Competition

A well-studied problem in the literature on airline revenue (or yield) management is the optimal allocation of seat inventory among fare classes, given a demand distribution for each class. In practice, the seat allocation decisions of one airline affect the passenger demands for seats on other airlines. In this paper, we examine the seat inventory control problem under both horizontal competition (two airlines compete for passengers on the same flight leg) and vertical competition (different airlines fly different legs on a multileg itinerary). Such vertical competition can be the outcome of a code-sharing agreement between airlines, because each airline sells seats on the partner airlines’ flights but the airlines are unwilling, or unable, to coordinate yield management decisions. We provide a general sufficient condition under which a pure-strategy Nash equilibrium exists in these revenue management games, and we also compare the total number of seats available in each fare class with, and without, competition. Analytical results as well as numerical examples demonstrate that more seats are protected for higher-fare passengers under horizontal competition than when a single airline acts as a monopoly. Under vertical competition the booking limit may be higher or lower, however, than the monopoly level, depending on the demand for connecting flights in each fare class. Finally, we discuss revenue-sharing contracts that coordinate the actions of both airlines.

Countercyclical Pricing in Customer Markets

I present a dynamic model of price determination in customer markets that are subject to exogenous business cycle fluctuations. The business cycle is described in terms of a Markov process, in which market demand alternates stochastically between fast growth (boom) and slow growth (recession) phases. In the consumers' preferred equilibrium outcome, (1) prices are below the monopoly level, and (2) prices are countercyclical when demand growth rates are positively correlated through time. A firm faces a dynamic trade‐off when making its current price selection. While a higher price may raise a firm's profit in the short term, it also may diminish the firm's reputation for low prices, leading to lower profits in the future.

Market Structure and Schumpeterian Growth

We present a discrete-time version of an otherwise standard Schumpeterian growth model. Discrete time exhibits two important differences from continuous time. First, the probability of successful innovation cannot be homogeneous of degree one in inputs. A natural R&D analogue to constant returns to scale implies a Poisson production function with diminishing marginal product of inputs. Second, R&D firms sometimes innovate simultaneously. The resulting market conduct is critical. We consider both Bertrand competition and collusion among successful innovators. Surprisingly, the industry demand for R&D inputs does not depend on the number of firms in the R&D sector if Bertrand competition ensues following ties. In contrast, demand for R&D inputs is higher if ties are expected to result in collusion. In general equilibrium, Bertrand competition leads to random switching between monopoly and competitive production. Under collusion, production is always at the monopoly level, but there is faster growth. Numerical simulations suggest that this also leads to higher welfare.

Price-Matching Guarantees, Retail Competition, and Product-Line Assortment

Price-matching guarantees (PMGs) are offers to match or beat a competitor's price on a specific item. Such guarantees are extremely common in U.S. retail practice, and appear on their face to be very beneficial to consumers because they make an implicit promise to the consumer that she won't pay by shopping at the PMG-offering retailer. However, the evidence about why PMGs are used, and their effect on prices, consumer welfare, and retail profitability is mixed. Some authors have found that PMGs can actually facilitate tacit collusion between competing retailers, not competition. Others find that mitigating factors such as hassle costs limit the collusive impact of PMGs. The limited empirical evidence in the area provides some support for the collusive view but overall it is inconclusive. The existing analytic literature makes the assumption that each retailer sells a single product that is identical with (or completely substitutable for) the product of any competing firm. But, in reality, competing retailers often sell multiple products, and these products do not always overlap. This poses a conundrum for theory. Since PMG's only apply when consumers find a lower price on the same item at a competing store, why would retailers ever offer PMGs and not have identical product lines? In this paper, we start with the real-world observation that some retailers may be more space-constrained (have less shelf space) than others, and we seek to address the conundrum by examining firms' competitive incentives to offer PMGs, and the implications of doing so, in a world where retailers may vary in their ability to carry a broad (versus a narrow) product line. These issues are particularly relevant, given that, in practice, most if not all retailers face some limitations on their shelf space. Our results show that with unlimited shelf space, competing retailers both offer PMGs and both stock the entire available product line. Monopoly pricing prevails, consistent with the earlier literature. But in a market with asymmetric shelf-space availability, either product variety will be severely limited or retailers will offer different arrays of products. Weak substitution between products leads to the latter, with pricing between the differentiated-products Bertrand and monopoly levels; strong substitution leads to the former, with pricing at the monopoly level. In a market where both retailers are shelf-space-constrained, the equilibrium strategies also depend on the degree of substitutability of products in the market. If products are weak substitutes, the retailers carry non-overlapping product lines, differentiated-products Bertrand pricing prevails, and PMGs are not offered. In contrast, if products are not very differentiated, the retailers carry the same product, offer PMGs, and set monopoly prices. In short, our results demonstrate that the nature of product variety, and the availability of retail shelf space, are key market characteristics that jointly and strongly affect the optimality of PMGs and the resulting pricing, profitability, and consumer welfare characteristics of the market. product-line assortment

A Theory of International Strategic Alliance

AbstractAs an alternative to exporting, a firm can enter a foreign market by forging a strategic alliance with its foreign counterpart. The alliance eliminates transportation costs and duplications in product distribution networks. At the same time, strategic alliance lessens competition between the firms so that it leads to smaller outputs and higher prices. The degree of lessening of competition depends on the firms’ ability to commit to output levels. In the case where the firms can credibly commit to output levels, the alliance effectively becomes a cartel, restoring prices to the monopoly level. On the other hand, if such commitment is not credible or not possible, prices will be lower than the monopoly level but will still be higher than that if firms had exported to each other's market directly. The welfare effects of the strategic alliance are in general ambiguous.

On Measuring Competitive Viability and Monopoly Power in Cable: An Empirical Cost Approach

This study provides empirical evidence concerning the economic feasibility of competition in the local market for video-delivery services. Using responses from the FCC's 1995 cost survey, we jointly estimate a translog cost function with factor share equations. To evaluate subadditivity, the fitted total cost of each firm is compared with the cost of two firms providing the same total output in eleven different market scenarios. Although costs were mildly superadditive, in the vast majority of cases they were lower when one firm provided the output. Average cost savings with respect to a monopoly were fairly small, ranging from 1.37% with a 10% market overlap to 5.05% with a complete overbuild. We also calculated marginal cost from the fitted total cost equation, and a price for cable services derived from the FCC survey data. Using these results and Rubinovitz's price elasticity of −1.46, we estimated that reregulation had a regulatory effectiveness of 0.3251 and held prices to 40.5% of the monopoly level.

Vertical foreclosure versus downstream competition with capital precommitment

The recent literature on vertical foreclosure suggests that vertical integration can have the anticompetitive effect of enabling an upstream firm to commit to restricting output to downstream firms at the monopoly level. We allow the upstream firm to make an ex-ante capital precommitment. We show that, if integration is outlawed, the upstream firm will distort capital downward as an alternative device to restrict output. We show that this alternative may be socially less efficient than vertical integration.

Market Power and Power Markets

Market power is a prominent issue in the current debate about electricity industry restructuring. Market experiments I conducted with industry subjects via the Internet show the impact of seller concentration, demand-side bidding, and transmission constraints on competition in simulated electricity markets. Realistic modeling of the transmission grid revealed opportunities to exercise market power not found in simpler experimental designs. In particular, increasing the number of sellers in a market did not necessarily reduce market power as standard theory suggests. Rather, locational advantages allowed some players to maintain profits near monopoly levels even when seller concentration was at levels generally considered competitive. The implication is that divestiture of existing local monopolies may not be enough to make electricity markets competitive. I confirm the positive impact of demand-side bidding on competition.

Market Power and Power Markets

AboutSectionsView PDF ToolsAdd to favoritesDownload CitationsTrack CitationsPermissionsReprints ShareShare onFacebookTwitterLinked InEmail Go to Section HomeInterfacesVol. 32, No. 5 Market Power and Power MarketsJürgen WeissJürgen WeissPublished Online:1 Oct 2002https://doi.org/10.1287/inte.32.5.37.74AbstractMarket power is a prominent issue in the current debate about electricity industry restructuring. Market experiments I conducted with industry subjects via the Internet show the impact of seller concentration, demand-side bidding, and transmission constraints on competition in simulated electricity markets. Realistic modeling of the transmission grid revealed opportunities to exercise market power not found in simpler experimental designs. In particular, increasing the number of sellers in a market did not necessarily reduce market power as standard theory suggests. Rather, locational advantages allowed some players to maintain profits near monopoly levels even when seller concentration was at levels generally considered competitive. The implication is that divestiture of existing local monopolies may not be enough to make electricity markets competitive. I confirm the positive impact of demand-side bidding on competition. Previous Back to Top Next FiguresReferencesRelatedInformationCited byNon-Smooth Dynamics in Energy Market Models: A Complex Approximation From System Dynamics and Dynamical Systems ApproachIEEE Access, Vol. 8Transmission Rights to the Electrical Transmission Grid in the Post Liberalization Era30 November 2012 | Journal of the Knowledge Economy, Vol. 5, No. 4Does NTPC Have a Dominant Position? A Critical Analysis23 March 2015 | Journal of Infrastructure Development, Vol. 6, No. 2GenCos' strategic behavior monitoring on auction bidding based on state variables formulationA survey of critical research areas in the energy segment of restructured electric power marketsInternational Journal of Electrical Power & Energy Systems, Vol. 31, No. 5Competition with Forward Contracts: A Laboratory Analysis Motivated By Electricity Market Design20 December 2007 | The Economic Journal, Vol. 118, No. 525Introduction to the Special Issue on Experimental Economics in PracticeGary E. Bolton, Anthony M. Kwasnica, 1 October 2002 | Interfaces, Vol. 32, No. 5 Volume 32, Issue 5September-October 2002Pages 1-105 Article Information Metrics Information Published Online:October 01, 2002 © 2002 INFORMSCite asJürgen Weiss, (2002) Market Power and Power Markets. Interfaces 32(5):37-46. https://doi.org/10.1287/inte.32.5.37.74 KeywordsGovernment: energy policiesGames/group decisions: bidding/auctionsPDF download

Access Pricing under Competition: An Application to Cellular Networks

A new class of access pricing problems is analyzed in which upstream firms compete for customers and access to these customers is required by downstream markets. Using fixed–to–cellular calls as an example, a model is presented which shows that the determination of cellular termination charges is quite different to standard access pricing problems. Competition between cellular firms leads to access prices being set either at, or above, the monopoly level. Applications are given for other market settings, including the termination of long–distance calls on competing local exchange networks and the setting of interchange fees in payment systems.

Duopoly quotas and relative import quality

The present paper develops a two-stage game of quality and quantity competition for an international duopoly in the home market with linear demand and cost functions. While a quota increases domestic output, domestic quality falls to the monopoly level. Import quality may rise or fall with the quota, and the upgrading noted in the empirical literature may occur only relative to home quality.

Revenue Management Games

A well-studied problem in the literature on airline revenue (or yield) management is the optimal allocation of seat inventory among fare classes given a demand distribution for each class. In practice, the seat allocation decisions of one airline affect the passenger demands for seats on other airlines. In this paper we examine the seat inventory control problem under both horizontal competition (two airlines compete for passengers on the same flight leg) and vertical competition (different airlines fly different legs on a multi-leg itinerary). Such vertical competition can be the outcome of a code sharing agreement between airlines, for each airline sells seats on the partner airlines’ flights but the airlines are unwilling, or unable, to coordinate yield management decisions. We provide a quite general sufficient condition under which a pure-strategy Nash equilibrium exists in these 'revenue management games', and we also compare the total number of seats available in each fare class with, and without, competition. Analytical results as well as numerical examples demonstrate that under horizontal competition more seats are protected for higher-fare passengers than when a single airline acts as a monopoly, while under vertical competition the booking limit may be higher, or lower, than the monopoly level, depending upon the demand for connecting flights in each fare class. Finally, we discuss revenue-sharing contracts that coordinate the actions of both airlines.

Vertical Foreclosure in Experimental Markets

We report the results of experiments designed to test recent theories of vertical foreclosure. Consistent with the theory, vertical integration improves the upstream firm's ability to commit to restricting output to the monopoly level, as does the use of public contracts. Public contracts are not a perfect substitute for vertical integration, however: integration allows more surplus to be extracted from the unintegrated downstream firm, a bargaining effect that has been underemphasized in the recent foreclosure literature. Motivated by some observations that are difficult to reconcile with existing theory, we extend the theory to allow downstream firms to have heterogeneous (rather than purely passive or symmetric) out-of-equilibrium beliefs. Copyright 2001 by the RAND Corporation.

Durable goods oligopoly

This paper models a durable-goods oligopoly as a differential game. Two cases are treated: sales, where firms cannot lease but must sell the good in question, and leasing, where firms do not sell but only rent. In the sales case, firms face increasing marginal cost of production and the good in question depreciates. For this case, a rational expectations feedback Nash equilibrium is constructed for which monopoly or oligopoly output is less than the efficient level. This gap between oligopoly and competitive output diminishes as the number of firms increases. When firms can only lease the good, the good is assumed not to depreciate and the monopoly level of steady state output is compared with the level of steady state output for a feedback equilibrium duopoly. For this case, the duopoly equilibrium has steady-state output that is less than the corresponding efficient level, but greater than the monopoly level. The leasing model is shown to be isomorphic to the adjustment-cost duopoly model of Driskill and McCafferty (Journal of Economic Theory, 49 (1989) 324–338).

Using Tort Settlement to Cartelize

The cigarette manufacturer settlements with four individual states (Florida, Minnesota, Mississippi and Texas) and the subsequent multi-state agreement of November 1998 represent a legal innovation in cartelization technology. These new settlements allow state and local government to act as cartel ringmasters?writing enforceable contracts which will predictably (i) raise the market price toward the monopoly level, (ii) split the supra-competitive profits with the government, and (iii) deter new entry. It has been understood that anticompetitive settlements can be produced when competitors sue each other in intellectual property or merger contexts. And it has been understood that captured state agencies may cartelize in-state producers of a particular product. But the individual state settlements suggest that a state may profitably cartelize out-of-state producers. If such settlements are enforceable, states that have virtually no nexus with a set of industry producers - and in fact have not been injured by the industry - may nonetheless race to the bottom by suing and settling with an industry in order enjoy a share of the cartel profits. Unfortunately, it is far from clear that such settlements currently run afoul of the law. The imprimatur of the state shields the settlements from antitrust liability. And while one might object that the settlements usurp the legislative taxing function, the fact that the companies consented to the state settlements may be considered by the courts as a substitute for the legislative-political check. The strongest legal argument against the settlements is that they constitute extraterritorial taxation, but this argument faces grave procedural barriers. Accordingly, I recommend that federal legislation prohibit the types of settlement structures that are most likely to produce cartel-like results.

Virtual Patent Extension by Cannibalization

We propose a model to explain the recent practice of pharmaceutical firms of introducing generic substitutes for their own branded products before their patents expire. By this early introduction, a branded product’s provider seeks to establish a Stackelberg leadership role in the forthcoming generic substitute market. Along with the early introduction of the generic substitute for its branded product, the firm optimally raises the price of its branded product above its prior monopoly level. However, despite its Stackelberg leadership position in the subsequent generic substitute market, the firm’s branded product’s price declines for a sufficiently large number of entrants into that market. Consumers, who are assumed to be composed of a brand-loyal segment and a price-sensitive segment, are better off both before and after the branded product’s patent expires as a result of the branded products’ suppliers early introduction of generic substitutes. The branded products’ suppliers are also better off but the generics’ suppliers are not as a result of this practice. However, total producer profits are higher than they would be if the branded products’ suppliers were not involved in supplying their own generic substitute.

Virtual Patent Extension by Cannibalization

We propose a model to explain the recent practice of pharmaceutical firms of introducing generic substitutes for their own branded products before their patents expire. By this early introduction, a branded product's provider seeks to establish a Stackelberg leadership role in the forthcoming generic substitute market. Along with the early introduction of the generic substitute for its branded product, the firm optimally raises the price of its branded product above its prior monopoly level. However, despite its Stackelberg leadership position in the subsequent generic substitute market, the firm's branded product's price declines for a sufficiently large number of entrants into that market. Consumers, who are assumed to be composed of a brand‐loyal segment and a price‐sensitive segment, are better off both before and after the branded product's patent expires as a result of the branded products' suppliers early introduction of generic substitutes. The branded products' suppliers are also better off but the generics' suppliers are not as a result of this practice. However, total producer profits are higher than they would be if the branded products' suppliers were not involved in supplying their own generic substitute.

Job security, wage bargaining and duopoly outcomes

This paper develops a model where labour supply is constrained because training new workers is costly and redundant workers cannot be fired. An entrant draws labour from an incumbent firm through a wage contest while wages in the latter are bargained with its unionized workers. In a Cournot equilibrium, the union's bargaining power has a positive effect on the incumbent's output, but a negative effect on the industry output. Social welfare under duopoly may fall short of the monopoly level. The distribution of bargaining gains within the incumbent firm is sensitive to whether wage and output choices are made sequentially or simultaneously.

Durable Goods Monopoly with Limited Choice of Commitment Strategy: When Should the Monopolist Precommit?

Consider a firm (a monopolist) offering a unique product to a fixed number of potential customers. Suppose that no consumer desires more than one unit of the good, within a given period or across periods; that is, there is no value to repeat purchases. In addition, suppose that customers vary with respect to their initial reservation prices, which decline over time. A natural interpretation is that the monopolist is selling a good that is durable. Alternatively, the firm is providing an entertainment or fashion good. Consumers may place a premium on obtaining the product quickly, before it becomes less useful, less stylish, or less novel. Coase [7] conjectured that this firm's ability to extract surplus is limited because the firm has to compete with itself across time periods. High-valuation customers would be unwilling to pay a high initial price because they would anticipate that over time, the firm will be reducing the price in order to sell to lower-valuation customers. Subsequent literature formalizes this as a time inconsistency problem faced by a monopolist unable to make intertemporal commitments.' A separate strand of the literature proceeds from the polar assumption that the monopolist can precommit to any multiperiod pricing strategy. Comparison to Coase's monopolist is simple: higher profits are obtainable under precommitment because more surplus is extracted from high valuation customers. An important proposition due to Stokey [22] is that it will be optimal for the monopolist to precommit to a declining intertemporal price schedule if consumers with higher initial valuations have a higher rate of time preference.2 Otherwise, the optimal strategy is to hold price constant at the static monopoly level and to sell no more than the static monopoly quantity.3

CONSUMER SEARCH COSTS AND MARKET PERFORMANCE

We conduct laboratory markets to evaluate the effects of consumer search costs on market performance. The primary research goal is to assess the behavioral relevance of Diamond's [1971] paradoxical conclusion that the injection of a small consumer search cost alters the equilibrium price prediction from competitive to monopoly levels. Although monopoly prices are not consistently observed, we find that search costs do tend to raise prices. Additional experimentation indicates that below‐monopoly prices are not explained by buyer avoidance of high‐pricing sellers, but that prices increase as search costs are raised.