Multiproduct Competition Research Articles

Environmental technology licensing with multi-product competition in a vertically differentiated duopoly

ABSTRACT In many polluting industries, firms with high environmental quality (HEQ) products often license their new environmental technology to firms with low environmental quality (LEQ) products. After accepting the licensing arrangement, firms with LEQ products can produce both the HEQ and LEQ products and compete with the licensor. What type of licensing mode is optimal under such circumstance becomes an interesting question and warrants analysis. To analyze this issue, we construct a vertical product differentiation duopoly model with multi-product competition. The results show that two-part tariff licensing is always the optimal strategy for the licensor, and it is the optimal licensing strategy as well to improve the environment and social welfare only when the degree of product environmental quality differentiation is relatively high.

Multi-Category Innovation and Encroachment Strategy Evolution of Composite E-Commerce Platform Based on Multi-Agent Simulation

An in-depth study of the product encroachment behavior on the composite e-commerce platform is of great significance to standardize the platform economy. This paper studies product encroachment behavior of composite e-commerce platforms with double-differentiated multi-product competition and constructs a game model of product innovation by an independent seller and product encroachment by the platform owner. Using multi-agent simulation, we simulate the bounded rational decision-making and interaction process of multiple agents in multiple periods and analyze the main parameters’ influence. Results indicate the following: (1) In dual-differentiated multi-product competition, the third-party seller is more willing to invest in innovating high-quality category P, and the profit-driven platform owner only encroaches on the new variants of category P. (2) The larger consumers’ platform owner preference can encourage the third-party seller to innovate high-quality new products. The increase in vertical differentiation of categories can enhance the third-party seller’s innovation motivation for the traffic-attracting category. (3) A reasonable commission rate set by the platform owner can ensure the variety of variants of various categories, thereby expanding the sales scope of the composite e-commerce platform. Diseconomies of scale of category diversity management costs hinder the growth of product variety in the online marketplace.

Spatial retail competition reduces the effects of soda taxes on price and quantity: Evidence from the Philadelphia Beverage Tax

We model and measure the economic response to taxes on sugar-sweetened beverages (SSB). We hypothesize that when the tax does not cover the geographic extent of the market, cross-border shopping by consumers reduces the pass-through rate of the tax and the effect of the tax on consumption. We further hypothesize that the multi-product nature of retail groceries compounds this competitive effect. We use retail scanner data and a difference-in-difference estimator to quantify effects of the Philadelphia Beverage Tax (PBT) implemented in 2017. We estimate a pass-through rate of 80 percent and a 32-percent reduction in SSB sales caused by the PBT. We find the tax increased sales and revenue of SSBs and of non-taxed products in stores close to Philadelphia but not subject to the tax. In addition, we find lower pass-through rates in stores offering a wider assortment of products. We take this as evidence that multiproduct competition reduces the effect of Philadelphia’s SSB tax. An important implication is that a tax implemented at the state or national level would be more effective at reducing SSB consumption.

MATHEMATICAL MODELING OF THE SPREADING OF GENERATIONS OF INDUSTRIAL PRODUCTS IN A COMPETITIVE MARKET

This article studies the process of spreading generations of industrial products in the competitive market and assessing the influence of the characteristics of generations of products and destabilizing factors on the volume of their sales. The level of innovation and competitiveness of generations is used as characteristics, their definition and mathematical formalization are given. The study uses the generalized model of F. Bass, the provisions of the concept of “multi-product competition” by R. Peterson and V. Mahajan, and the concept of the va­riability of consumer behavior of different generations by T. Islam and N. Mead. A model of the spreading of generations of industrial products of competing brands in the duopole market is obtained, taking into account destabilizing factors. Based on this model, equations are constructed that establish the relationship between the shares of consumers of competing generations of pro­ducts. The statistical data on the spreading of generations of video game consoles from Sony and Microsoft in the global and regional markets serve as a basis for approbation. To identify the parameters of the model and determine the presence and closeness of the relationship, correlation-regression analysis and the least squares method are used. These results demonstrate a high level of correlation between the sales volume of each console generation and the characteristics of the console generations. It was found that with an increase in the influence exerted by a competitor, the cumulative market share of the considered generation of the product decreases, and with an increase in the level of innovation of the generation of the product, its level of competitiveness increases. The obtained results of processing the predicted and actual data on the spread of generations demonstrate a significant influence of destabilizing factors on the process of spreading generations. The theo­retical significance of the work consists in the development of a model for the distribution of generations of industrial products for a particular case with a duapole market structure. The practical significance lies in obtaining the calculated values of the link between the sales volume of each generation of consoles and their characteristics.

Collusion Along the Learning Curve: Theory and Evidence From the Semiconductor Industry*

I study the effectiveness of collusion during an international cartel in DRAM, a type of semiconductor characterized by learning‐by‐doing and multiproduct competition. First, by exploiting time and firm‐level variation in cartel activity, I estimate that cartel participants cut output more on the oldest product generation than on newer generations. This is consistent with a hypothesis that higher learning rates in newer generations make defection from collusive equilibria more attractive. Second, I formulate a test for defection from collusive equilibria in learning‐by‐doing industries. Third, I formalize these results in a theoretical framework and discuss implications for antitrust policy in high technology markets.

Collusion Along the Learning Curve: Theory and Evidence from the Semiconductor Industry

This paper studies the effectiveness of collusion in the DRAM cartel. Like other high technology products, DRAM is characterized by learning-by-doing and multi-product competition. I hypothesize that collusion is more difficult to sustain on a new generation, where learning is high, than an old generation, where learning is low. A higher learning rate makes defection from a collusive equilibrium more attractive by reducing future cost. Empirical analysis exploits variation between cartelization and competition to estimate the change in firms' output decisions on each generation. Consistent with the hypothesis, cartel participants are estimated to cut output more on the oldest generation than newer generations. Output decisions on the newest generation also show evidence consistent with defection from collusive equilibria. Lastly, the paper presents a theoretical framework to analyze collusive equilibria with learning-by-doing and multi-product competition. The model motivates various pieces of evidence that competition authorities can compile to guide antitrust investigations in high technology markets.

An efficient hybrid genetic algorithm for multi-product competitive supply chain network design with price-dependent demand

According to the recent studies, competition between supply chains (SCs) will play a noticeable part of competition in the future’s market. This study considers a SC vs. SC multi-product competition in the duopolistic markets. Pricing, location, transportation and production decisions are taken in a Stackelbrg game formulated as bi-level model. These supply chains (called leader and follower) are three-stage, multi-product, multi-source, and single-period SCs. Karush-Kuhn-Tucker (KKT) conditions are applied in order to transform the presented bi-level model into a single-level mixed integer nonlinear programming (MINLP). Due to computational complexity of the problem, an efficient Hybrid Genetic Algorithm (HGA) is proposed to solve the large size problems. In order to obtain more robust solutions, Taguchi method is applied to calibrate hybrid meta-heuristic parameters. The efficiency of the proposed HGA is investigated through the comparisons with optimal solutions and also with GA. Managerial insights are proposed alongside with the Sensitivity Analysis for important parameters.

Sales and Perishable Products

This paper examines the role of sales (temporary price reductions) in the pricing of perishable products. When products can be stored, periodic sales are commonly explained using inventories: the ability to store lets consumers wait for better prices, and so they have a more elastic demand. When consumers differ in their ability to wait, firms periodically reduce prices to keep the price regularly high, thereby targeting the low prices to just the most elastic (patient) consumers. However, this explanation is not reasonable for perishable goods, since they cannot be stored. Using a large retail dataset, I show that a cyclic pattern of sales is a major feature of how perishable products are priced, which cannot be explained by product expiration. To explain this, I develop a dynamic model of loss leadership. In my model, consumers purchase baskets of goods which contain different mixtures of perishable and storable products. Shopping costs induce consumers to buy their entire basket at a single store. Because these baskets differ, firms can use them to discriminate between different groups of consumers. Specifically, firms want to attract perishable-buying consumers when they are also purchasing relatively many storable goods. In order to do this, they offer these consumers a better total price for their whole basket. It is optimal to do this by lowering just the price of the perishable good, since this targets the price reduction to the group the firm wishes to attract, keeping the total basket price high for other consumers. Firms time these price reductions to allow the target group of consumers to run down their inventory, which entails trading off present and future profit in an inter-temporal optimization problem. The link between storable good inventories and perishable products creates, in equilibrium, periodic sales on the perishable good. I test my model by linking the retail data to consumer choice data, a process which requires the development of a data-driven method of classifying prices into sales. The results validate the central prediction of the loss leadership model: when consumers buy perishables on sale they also buy more of other products, particularly storable ones, relative to their purchasing in non-sale periods. These findings highlight the role multi-product competition has on pricing dynamics, and rationalize an empirical finding which is difficult to explain with most models of sales.

Multiproduct competition in a North-South model with technological differences

This paper examines multiproduct competition in a simple North-South model with technological differences. I mainly focus on strategic decisions on the product scope in the global economy. I find that there are several different types of equilibria depending on technological differences and relative cost advantage of the Northern and Southern firms. When each firm has local cost advantage and technological difference between firms is sufficiently large, firms reallocate resources toward their more profitable products. By contrast, when there exists a small technological difference or global cost advantage, the more productive firm may expand the product line.

Access regulation and the entrant's mode of entry under multi-product competition in telecoms

We study the optimal access regulation during the transition from copper to fiber access networks in telecoms when each competitor provides broadband services that are both horizontally and vertically differentiated. We consider a setting in which there is a vertically integrated incumbent that controls a network required for the supply of the final services and an entrant that undertakes a “build-or-buy” decision. In this multi-product framework, where the quality of the services is endogenously determined, we show that the entrant always prefers service-based to facilities-based entry, provided that this option is available. Hence, the regulator sets the welfare-maximizing access charges whenever this socially optimal access pricing policy leads to higher welfare than facilities-based entry. Otherwise, a sufficient access policy that ensures facilities-based competition is to ban access to the incumbent's upstream facilities. We present the conditions under which each of these instruments should be implemented and conclude that the optimal access rules depend on the characterization of consumers according to their tendency to be “firm-oriented” or “technology-oriented” since this discrimination determines whether intra-firm or, respectively, inter-firm competition prevails in the market.

On the Impact of Input Prices on an Entrant’s Profit Under Multi-Product Competition

We study the impact of input prices on an entrant’s profit when firms are engaged in multi-product competition. We consider a setting with both horizontal and vertical differentiation, in which a vertically integrated firm controls the input that is required for the supply of the high-quality product. We establish the conditions under which the entrant is better off from an increase in the wholesale price of this critical input. This possibility contrasts with the existing literature that, under linear demands, finds a non-positive relationship between the input price and the single-product entrant’s profit.

Can more consumers lead to lower profits? A model of multi-product competition

The article analyzes the optimal pricing strategy of duopoly retailers who sell two goods to three consumer segments: two segments that are interested in one good, and one that wants to buy both goods. The analysis suggests that the markup on one of the goods might be negative and that the existence of consumers who buy both goods can either increase or decrease markups. Surprisingly, the addition of the consumers who buy both goods (unchanging the number of the other consumers) might decrease profits, and increasing the number of consumers who buy one good might also reduce profits. This suggests that firms should consider carefully how additional customers might affect the competitive environment and the equilibrium before attempting to attract them to the market.

Heterogeneous multi-product competition in Taiwan's newspaper industry

Taiwan's daily newspaper industry is characterized by multiple products and heterogeneous competition. This article develops a game-theoretic model to analyze the strategic and competitive reaction of the incumbent in the newspaper market to a recent tabloid-like entertainment newspaper entrant and its impact on the industrial structure through a modification of Judd's multi-product competition model (1985), considering the property of heterogeneous competition in the Taiwan newspaper market. The leading incumbent operated newspapers in the general news and entertainment-oriented news segments of the market and our equilibrium analysis shows that closing its entertainment-oriented paper was the optimal response to the competitive entry in the short run. However, when the possibility that the entrant might invest in disruptive innovations in other product segments after entry is considered, the model shows that the incumbent's withdrawal from the entertainment market could induce more severe competition in the general news market and thus hurt its long-term profits. Managerial insights and implications of the analysis are discussed.

The forecasting of the mobile Internet in Taiwan by diffusion model

From the government's perspective, it is very important to estimate the growing path of the mobile Internet market and then to forecast the trend. The purpose of this paper is to propose a diffusion model that reveals the growth pattern of the mobile Internet subscriber in Taiwan utilizing the concepts of the “technical substitution” and the “multi-product competition”, which suits the characteristics in the mobile Internet market in Taiwan. From the regression results, the estimated ultimate market potential of GPRS is 6.4 million, which is going to saturate in about 2008Q1. On the other hand, the estimated range of the market potential of PHS/3G is about 7.2 to 8.0 million. That is, the total mobile Internet market in Taiwan is forecasted to be around 13.6 to 14.4 million subscribers.

Multiproduct Competition between Congestible Networks

This paper analyses competition between firms who sell multiple products in the presence of negative externalities. The model involves two networks who each may offer several service classes. Service classes are generated by forming sub-networks differentiated by their congestion levels. The level of congestion on a sub-network is determined by its capacity and the number of users, i.e., quality of demand-dependent. This paper shows that networks will choose to offer only one service class, and thus not to form distinct sub-networks, in equilibrium. In addition to contributing to the theory of multiproduct competition, the paper addresses applied problems. For example, the results suggest that current proposals to implement pricing on the Internet will not be viable under competition.

Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade

We survey recent work on competition in markets in which consumers have costs of switching between competing firms' products, even when all firms' products are functionally identical. We address issues in macroeconomics and international trade, as well as industrial organization: In a market with switching costs (or 'brand loyalty'), a firm's current market share is an important determinant of its future profitability. We examine how the firm's choice between setting a low price to capture market share, and setting a high price to Harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry interest rates, exchange rate expectations, the state of the business cycle, etc. We also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition.

Internal Pricing and Cost Allocation in a Model of Multiproduct Competition with Finite Capacity Increments

Internal prices are used in practice to allocate central resources to a firms' profit centers. The fixed costs of capacity acquisitions are often included in these prices. We examine the interaction between capacity acquisition and competition when capacity is available in fixed increments. We find predictably that if the increments are small, unit capacity cost is a good approximation for the internal price, and if the increments are large, the internal price is zero. However, the relationship between the internal price and the capacity increment for intermediate cases is quite irregular, to the extent that it is not possible to approximate the internal price with accounting data. The analysis also suggests that full cost allocation overcharges for the opportunity cost of capacity. Furthermore, the right internal price does not act either as a way of recovering fixed costs or as a proxy for externalities such as congestion costs. The conclusions are not materially altered in the case where variable costs increase at the margin, and where these costs rather than hard capacity constraints are the reason to restrict output.

Price and Productivity Change Following Deregulation: The US Experience

No real world market is likely to be perfectly contestable, anymore than it is to be perfectly competitive. Yet, like its predecessor, the contestability benchmark proves highly useful as a framework for evaluating policies and outcomes. Under the contestability framework, entry and price regulation is deemed inappropriate in industries which do not have system-wide natural monopoly characteristics. On this criterion, brokerage, airline, trucking, long-distance telephone and terminal equipment should not be regulated. True, these industries may be characterised by some elements of scale economy, such as economies of vehicle size, so that at some level (city-pair routes) only a few firms may serve. But industry performance need not suffer in such an unregulated environment. Impediments to entry and exit, not concentration or scale of operations, may be the primary source of prices that are not welfare optimal. Even in the presence of natural monopoly characteristics, it is important to isolate those markets which are not yet structurally competitive, as in the case of coal shipments over which the railroads are judged to possess 'market dominance' or in local telephone service. It can be argued that the latter should continue to be overseen by regulators while markets which are controlled by competitive forces, deriving from actual or potential competition or taking other indirect but effective forms, should be free from traditional regulation. Thus, unlike privatisation policy in the United Kingdom, described in the companion article by Kay and Thompson (I985), US deregulatory policy can be construed as having a coherent rationale. The nature and extent of deregulation match remarkably well with the policy prescription of the theory. This paper analyses the consequences that have emerged under deregulation in terms of the following behavioural properties predicted by multi-product competition and contestability theory: a variety of products will emerge, each of which will yield zero economic profit; the revenues from any subset of the products must exceed the incremental costs of those products, so that no cross-subsidy can exist; prices for each product will equal or exceed marginal costs; and an equilibrium market structure will minimise costs for the industry (see Baumol