Oligopoly Pricing Research Articles

Collusion and Price Behavior in the U.S. Pork Industry

Abstract This research analyzes the U.S. pork industry dynamics in light of the alleged output price-fixing cartel of the largest pork processors revealed in the antitrust lawsuits filed by pork buyers beginning in 2018. The empirical evidence may suggest that pork production, the farm, wholesale, and retail values of pork, and marketing margins increased, but the farm sector share decreased in the cartel period (2009–2019), as compared with the pre-cartel period (1998–2008). The wholesale pork pricing by pork processors is consistent with oligopoly pricing in both the pre-cartel and cartel periods. While the estimated decrease in cost pass-through between these two periods may reflect an increase in the seller (oligopoly) market power of pork processors in the cartel period, this cost pass-through decrease is not statistically significant from zero. The retail pork pricing by food retailers is consistent with perfectly competitive pricing in both the pre-cartel and cartel periods.

Myopic oligopoly pricing

This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set solution concept and establish the existence of a unique pure-strategy price solution for any given level of capacity. This solution is shown to coincide with the set of pure-strategy Nash equilibria when capacities are large or small. For an intermediate range of capacities, it predicts a price interval that includes the mixed-strategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. It particularly provides a behavioral rationale for different pricing patterns, including Edgeworth price cycles and states of hyper-competition with supply shortages. We also analyze the impact of a change in firm size distribution. A merger among the biggest firms may lead to more price dispersion as it increases the maximum and decreases the minimum myopically stable price.

Pigouvian algorithmic platform design

There are rising concerns that reinforcement algorithms might learn tacit collusion in oligopolistic pricing, and moreover that the resulting ‘black box’ strategies would be difficult to regulate. Here, I exploit a strong connection between evolutionary game theory and reinforcement learning to show when the latter’s rest points are Bayes–Nash equilibria, but also to derive a system of Pigouvian taxes guaranteed to implement an (unknown) socially optimal outcome of an oligopoly pricing game. Finally, I illustrate reinforcement learning of equilibrium play via simulation, which provides evidence of the capacity of reinforcement algorithms to collude in a very simple setting, but the introduction of the optimal tax scheme induces a competitive outcome.

Precommitments in Two-Sided Market Competition

Problem definition: We consider a two-sided market competition problem where two platforms, such as Uber and Lyft, compete on both supply and demand sides and study the impact of precommitments in a variety of practically motivated instruments on the equilibrium outcomes. Academic/practical relevance: We extend a set of classic oligopoly pricing results to account for two-sided competition under demand uncertainty. Methodology: We investigate multi-stage competition games. Results: We start with a sufficiently low demand uncertainty. First, we show that a precommitment made on the less competitive (demand or supply) side (on price or wage) has a less intense outcome than no commitment (i.e., spot-market price and wage competition). Then we show that, somewhat surprisingly, if the competition intensities of both sides are sufficiently close, the commission precommitment, where the platforms first compete in setting their commission rates and then their prices, is less profitable than no precommitment at all, and vice versa. Furthermore, we show that the capacity precommitment, in which the platforms first commit to a matching capacity and then set price and wage simultaneously subject to the precommitted capacity, leads to the most profitable outcome of all competition modes and extends the celebrated Kreps-Scheinkman equivalency to the two-sided market (without demand uncertainty). Then we extend the comparisons of various competition modes to account for a relatively high demand uncertainty. We show that the comparison between the spot-market price and wage competition and the commission precommitment stays the same as that with a sufficiently low demand uncertainty. In addition, the more flexible competition modes, such as no commitment and commission precommitment, benefit from higher demand uncertainty (with a fixed mean demand) because of their operational flexibility in response to the market changes. Further, a relatively high demand uncertainty may undermine or enhance the value of the wage precommitment, as opposed to no commitment. Finally, we also account for platforms with asymmetric parameters and matching friction and find that our main insights tend to be robust. Managerial implications: Our results caution platforms that a precommitment to the wrong instrument can be worse than no commitment at all. Moreover, the regulation of classifying gig workers as employees, despite many of its benefits to workers, may lead to a less competitive market outcome and, surprisingly, hurt gig workers by paying them lower wages. Funding: M. Hu was supported by the Natural Sciences and Engineering Research Council of Canada [Grants RGPIN-2015-06757, RGPIN-2021-04295]. Y. Liu was supported by the Hong Kong Research Grants Council, Direct Allocation Grant [Project ID P0036818]. Supplemental Material: The online appendices are available at https://doi.org/10.1287/msom.2022.1173 .

Essays in Oligopoly Pricing Behavior

Essays in Oligopoly Pricing Behavior

Oligopoly Pricing: The Role of Firm Size and Number

This paper examines a homogeneous-good Bertrand–Edgeworth oligopoly model to explore the role of firm size and number in pricing. We consider the price impact of merger, break up, investment, divestment, entry and exit. A merger leads to higher prices only when it increases the size of the largest seller and industry capacity is neither too big nor too small post-merger. Similarly, breaking up a firm only leads to lower prices when it concerns the biggest producer and aggregate capacity is within an intermediate range. Investment and entry (weakly) reduce prices, whereas divestment and exit yield (weakly) higher prices. Taken together, these findings suggest that size matters more than number in the determination of oligopoly prices.

Price Wars and Sales Performance at Century Bottling Company Ltd, Mbarara, Uganda

Purpose: Even when price war has seen massive interest among scholars, it is still unclear how it affects sales performance. This study examined the relationship between price war and sales performance among carbonated drink manufacturers in Uganda: a case of Century Bottling Company Limited.
 Methodology: Mixed methods design was used in this study. The population comprised of 210 employee managers and outlet managers. With the aid of Krejie and Morgan (1970)’s table, a sample size of 169 respondents was selected. Questionnaire was used to collect primary data in line with the positivism design and obtained a response rate of 55.0%. Pilot testing however preceded the final survey and we were able to check the relevancy of the instruments which was confirmed through the validity and reliability statistics that we achieved. Zero-order Pearson correlation was used to test the hypotheses.
 Findings: The study results showed a strong positive and significant relationship between promotional pricing and sales performance (r = .522, p= 0.000). Also Penetration pricing was found to have a moderate positive and significant association with sales performance(r = .369, p= 0.000). Last but not least, the study confirmed existence of a strong positive and significant relationship between Oligopoly pricing and sales performance at Century Bottling Company Limited (r = .573, p= 0.000).
 Recommendations: The study recommends that century bottling company limited consider the actual situations of different manufacturers when implementing its promotional strategies in order not to suffocate them, increase the number of sales outlets to ensure increased trades and selling, since it enables the company to access many customers and also to revisit its pricing strategy where customers like low-priced commodities and offer customer discount features according to different selling contexts.

Myopic Oligopoly Pricing

Myopic Oligopoly Pricing

Myopic Oligopoly Pricing

Myopic Oligopoly Pricing

Competition issues in the U.S. beef industry

AbstractThis article analyzes the dynamics of the U.S. beef industry in light of the alleged input and output price‐fixing cartel of the four largest beef packers revealed in the antitrust lawsuits filed by fed cattle producers and beef buyers in 2019. Empirical evidence suggests that beef production, the farm, wholesale, and retail values of beef, and marketing margins increased, but farm sector share decreased in the cartel period (2015–2019), as compared with a prior period (2010–2014). The wholesale beef pricing by beef packers shifted from being consistent with a perfectly competitive industry pricing in the pre‐cartel period to being consistent with the oligopoly and monopoly pricing in the cartel period. The retail beef pricing by food retailers was consistent with an oligopoly pricing in both periods. Beef packers and food retailers shifted to an output (beef) price stabilization practice in the cartel period.

Myopic Oligopoly Pricing

This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set stability concept and establish the existence of a unique pure-strategy price solution for any given level of capacity. This solution is shown to coincide with the set of pure-strategy Nash equilibria when capacities are large or small. For an intermediate range of capacities, it predicts a price interval that includes the mixed-strategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. In particular, it provides a behavioral rationale for different types of pricing dynamics, including real-world economic phenomena such as Edgeworth-like price cycles, price dispersion and supply shortages.

Dynamic Oligopoly Pricing with Asymmetric Information: Implications for Horizontal Mergers

We model differentiated product pricing by firms that possess private information about serially-correlated state variables, such as their marginal costs, and can use prices to signal information to rivals. In a dynamic game, signaling can raise prices significantly above static complete information Nash levels even when the privately observed state variables are restricted to lie in narrow ranges. We calibrate our model using data from the beer industry, and we show that our model can explain changes in price levels and price dynamics after the 2008 MillerCoors joint venture. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Myopic Oligopoly Pricing

Myopic Oligopoly Pricing

Price competition and private labels in the U.S. packaged salad market

ABSTRACT We study the price competition in the U.S. packaged salads market by testing two price competition hypotheses: Bertrand competition versus sequential pricing model. The former is standard for oligopoly pricing in the IO literature. The latter provides a formal mechanism for second-mover, price-undercutting behaviour by private-label brands, owned by mainstream supermarkets, that grew their market share dramatically in the second half of the 2000s. Applying Vuong and Gasmi (1991)’s test, we show that observed market prices and market shares fit best to Bertrand competition.

A note on oligopoly exploitation of common-pool renewable resources

This note derives the linear Feedback Nash equilibrium of a differential oligopoly game of exploitation of a common-pool renewable resource, and compares and contrasts it with social optimum. The case of regulated entry by means of a license fee is also considered. Two main results are derived. First, the steady-state oligopoly price can be increasing in the (exogenously given) number of firms. Second, an optimal license fee exists that induces the (endogenously given) number of firms to behave efficiently.

Dynamic oligopoly pricing with reference-price effects

We analyze the strategic implications of consumers’ reference-price effects, either symmetric (for loss-neutral consumers) or asymmetric (for loss-averse consumers), in a differentiated oligopoly model where firms compete either in prices (à la Bertrand) or in quantities (à la Cournot) over an infinite time horizon. The dynamic game is specified in continuous time. The solution concept is Markov Perfect Equilibrium. We show how price dynamics in the presence of reference-price effects crucially depends on the nature of market competition. One of the main results of our analysis is that, with loss-averse consumers, there exists an interval of initial reference prices such that firms adopt the same constant-pricing strategy in both the Bertrand and the Cournot games, implying that the distinction between price and quantity competition has no impact on market conduct and performance.

Dynamic oligopoly pricing: Evidence from the airline industry

We explore how pricing dynamics in the European airline industry vary with the competitive environment and with customer heterogeneity. We document three main findings. First, the rate at which prices increase towards the scheduled departure date is significantly reduced in more competitive markets. Second, the sensitivity of the intertemporal slope to competition increases in the heterogeneity of the customer base. Third, ex-ante predictable advance purchase discounts account for 83 percent of within-flight dispersion in prices and for 17 percent of cross-market variation in pricing dynamics.

Oligopoly price discrimination, competitive pressure and total output

Abstract This paper extends the traditional analysis of the output effect under monopoly (third-degree) price discrimination to a multimarket oligopoly. The author shows that under oligopoly price discrimination, differences in competitive pressure, measured by the number of firms, across markets are more important than the relative demand curvature when determining the effect on total output.

Heteroscedastic Exponomial Choice

We investigate analytical and empirical properties of the Heteroscedastic Exponomial Choice (HEC) model to lay the groundwork for its use in theoretical and empirical research that build demand models on a discrete choice foundation. The HEC model generalizes the Exponomial Choice (EC) model by including choice-specific variances for the random components of utility (the error terms). We show that the HEC model inherits some of the properties found in the EC model: closed-form choice probabilities, demand elasticities and consumer surplus; optimal monopoly prices that are increasing with ideal utilities in a hockey-stick pattern; and unique equilibrium oligopoly prices that are easily computed using a series of single-variable equations. However, the HEC model has several key differences with the EC model that show variances matter: the choice probabilities (market shares) as well as equilibrium oligopoly prices are not necessarily increasing with ideal utilities; and the new model can include choices with deterministic utility or choices with zero probability. However, because the HEC model uses more parameters, it is harder to estimate. To justify its use, we apply HEC to grocery purchase data for thirty product categories and find that it significantly improves model fit and generally improves out-of-sample prediction compared to EC. We go on to investigate the more nuanced impact of the variance parameters on oligopoly pricing. We find that the individual and collective incentives differ in equilibrium: Firms individually want lower error variability for their own product, but collectively prefer higher error variability for all products – including their own – because higher error variability softens the price competition.

Oligopoly Price Discrimination: The Role of Inventory Controls

Inventory controls, used most notably by airlines, are sales limits assigned to individual prices. While typically viewed as a tool to manage demand uncertainty, we argue that inventory controls can also facilitate intertemporal price discrimination in oligopoly. In our model, competing firms first choose quantity and then choose prices in a series of advance-purchase markets. When demand becomes less elastic over time, as is the case in airline markets, a monopolist can easily price discriminate; however, we show that oligopoly firms generally cannot. We also show that using inventory controls allows oligopoly firms to set increasing prices, regardless of whether or not demand is uncertain.