Soften Price Competition Research Articles

To Partner or Not to Partner? The Partnership Between Platforms and Data Brokers in Two-Sided Markets

Data have become a vital competitive asset for online advertising platforms, such as Facebook and Snapchat. These platforms often partner with data brokers to enhance targeting capabilities, which raises important consumer privacy concerns. This study develops a game-theoretic model to analyze the economic dynamics of partnerships between competing platforms and a data broker in a two-sided market. Our findings reveal that heightened consumer privacy concerns can encourage platforms to collaborate with data brokers rather than discourage them, as these concerns may strategically soften price competition on the advertiser side. However, when both platforms partner with a data broker, a prisoner’s dilemma may arise, even if the broker significantly improves targeting capabilities. From a policy perspective, such partnerships can harm consumer surplus in a purely ad-sponsored model, where users are not charged. Conversely, they may enhance consumer surplus in a mixed revenue model that combines advertising with subscriptions. These insights suggest that policymakers should consider regulations on platform-data broker partnerships to protect consumer interests, particularly regarding privacy protections that platforms may not prioritize under competitive pressures.

Peer-to-Peer Markets with Bilateral Ratings

Bilateral ratings on online marketplaces may soften price competition and sellers of higher quality may charge lower prices.

Competitive Bundling and Offer Design in a Symmetric Bertrand Duopoly

How should digital service firms design and bundle their offering to capture a large market while seeking differentiation from competition? To answer this question, we consider the most generic model of competition, namely, two symmetric firms competing on price with regard to two (independent or complementary) components with an arbitrary distribution of valuations, without restrictions on their product offering. We show that three outcomes emerge in equilibrium, namely, a full-mixed bundling monopoly, a full-mixed bundling competitive duopoly leading to a price war, and a pure or partial-mixed bundling differentiated duopoly yielding positive profits for both firms. The latter equilibrium is the most plausible because it is the only one that is both trembling-hand perfect and not payoff dominated. We demonstrate the benefits of bundling under competition, thereby explaining the online platforms’ motivation for and success in expanding their offering horizontally. Yet not all products may be offered in equilibrium to avoid direct or indirect competition; hence, competition may lead to a narrower range of products available than a monopoly. Is bundling anticompetitive? It is a double-edged sword. On the one hand, it softens price competition by allowing firms to differentiate their offering. On the other hand, it stimulates competition by creating some product overlap.

Environmental Preferences and Technological Choices: Is Market Competition Clean or Dirty?

We investigate the effects of consumers’ environmental concerns and market competition on firms’ decisions to innovate in “clean” technologies. Agents care about their consumption and environmental footprint; firms pursue greener products to soften price competition. Acting as complements, these forces determine R&D, pollution, and welfare. We test the theory using panel data on patents by 7,060 automobile sector firms in 25 countries, environmental willingness to pay, and competition. As predicted, exposure to prosocial attitudes fosters clean innovation, all the more so where competition is strong. Plausible increases in both together can spur it as much as a large fuel price increase. (JEL D22, L62, O31, O34, Q52, Q53, Q54)

Softening Competition Through Unilateral Sharing of Customer Data

We study how a data-rich firm can benefit by unilaterally sharing its customer data with a data-poor competitor when the data can be used for price discrimination. By sharing data on the segment of market that is more loyal to the competitor and keeping the data on the competitor’s most loyal segment to itself, the firm can induce the competitor to raise its price for consumers on which it does not have data. Such data sharing is an example of a fat-cat strategy as it softens price competition that follows data sharing. Although consumer surplus decreases as a result of data sharing, total surplus can increase when the sharing firm concedes its market share to the competitor, which improves the quality of consumer–firm matching. This paper was accepted by Joshua Gans, business strategy. Funding: C. Choe and C. Wang gratefully acknowledge financial support from the Australian Research Council [Grant DP210102015]. J. Cong would like to acknowledge the financial support from the National Natural Science Foundation of China [Grants 72003035, 72192845] and Shanghai Pujiang Program [Grant 2019PJC007]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4689 .

Food Donations, Retail Operations, and Retail Pricing

Problem definition: For grocery retailers, managing perishable food that is nearing expiry is a major challenge. Donating food to food banks is socially responsible, as it improves local communities and reduces waste generation. It also diverts food to a secondary, quality-differentiated market. Academic/practical relevance: In this paper, we quantify the economic impacts of this secondary market for food by examining donation and pricing behaviors for competing retailers. Methodology: We use a structural model of price-discriminating oligopoly retailers to study the effect of food donations on store and category-level demand and equilibrium prices. Empirically, we estimate the food donation effect using a unique data set of food donations and sales for several categories of perishable foods across two major retail chains that compete in the same market. Results: The competitive effects of food donations follow from the price-discrimination logic. First, food donations create a direct demand effect. Donations raise the average quality of products on display, shifting demand curves inward and rotating them clockwise (e.g., more inelastic). Second, food donations create a market enhancement effect, softening price competition and raising equilibrium prices among competing retailers. Managerial implications: Food donations increase food prices and store profits, tying the socially responsible option to an economic benefit. This study contributes a new type of reuse operation to the literature on closed-loop supply chains.Funding: Funding from the Agriculture and Food Research Initiative (National Institute for Food and Agriculture, U.S. Department of Agriculture) [Grant 2020-67021-31377] is acknowledged.Supplemental Material: The online supplement is available at https://doi.org/10.1287/msom.2022.1185 .

Salience and horizontal differentiation

AbstractI study a horizontal differentiation model in which one of two attributes of a product, product fit and price, is more salient for a consumer than the other and different consumers can find a different attribute salient. The attribute that is more salient is determined by relative differences between the two products and is determined endogenously as a result of firms' pricing strategies. High (low) marginal costs soften (toughen) price competition between firms. Pass‐through rates are greater than 1 for some parameter values. Both industry‐ and firm‐level cost increases may be beneficial for firms.

When and How Should Firms Differentiate? Quality and Advertising Decisions in a Duopoly

A prominent hallmark of competitive interaction is the desire to differentiate from rivals. In this article, the authors examine under what conditions firms will differentiate through product quality versus advertising intensity. Firms select quality in a first stage, advertising in a second stage, and price in the last stage. The probability that a consumer is informed of a firm’s offering depends on its advertising expenditure. The authors find that when advertising is not cost effective, both firms choose a light ad spending. This allows them to minimally differentiate in quality without concern of intense price competition, as each firm has a segment of “captive” consumers. When advertising is moderately cost effective, one firm spends heavily on advertising. The rival advertises lightly, while choosing the same maximal quality level. This strategy softens price competition by inducing the heavy advertiser to price high more often to capitalize on its large captive segment. When advertising is very cost effective, both firms advertise heavily and differentiate in quality. Three extensions are examined: upfront fixed quality costs, continuous advertising levels, and simultaneous advertising and pricing decisions. This research reveals that letting market awareness be determined endogenously suggests less product differentiation than previously suspected and regions of advertising differentiation.

Escaping search when buying

This paper studies a duopoly with horizontally differentiated products and costly sequential consumer search. Prices are posted and search costs must be paid to observe the match values of goods. Consumers choose both in what order to inspect the products and whether to inspect the goods before purchasing. When the expected match value is relatively high, consumers always consider the cheaper product first. However if the expected match value is low, then consumers may check the more expensive product first. The fact that a consumer may buy a product without inspection softens price competition. As a result, the comparative statics of prices and surplus division with respect to search costs is different from that of a sequential search model with observable prices.

Competition between proprietary and open source vendors with security concerns

ABSTRACT There exists fierce competition in both low-end and high-end markets between open source and proprietary vendors. This paper constructs a game-theoretic model based on Hotelling competition to examine such two types of vendors’ market strategies with security threats. Each vendor can choose to enter high-end market by making the quality effort meet the quality requirement. Security threats are caused by software vulnerability and characterised by negative externalities. Technology similarity is an important element that improves the efficiency of quality effort by facilitating technology spillover but worsens security threats by sharing more vulnerability. Through solving equilibrium solutions by backward induction, I find that under different market strategies: (i) user innovation that contributes to the quality of software product and service of the open source vendor does not always increase its profit because price competition that is intensified by such innovation may offset the contribution; (ii) the risk of security threats benefits both vendors at the cost of user interest since it can soften price competition, while technology similarity that acts as another source of security threats decreases both vendors’ profits. I finally indicate that thanks to user innovation, the open source vendor is relatively more likely to enter the high-end market.

Informative Role of Recommender Systems in Electronic Marketplaces: A Boon or a Bane for Competing Sellers

Recommender systems have become the cornerstone of electronic marketplaces that sell products from competing sellers. Similar to traditional advertising, recommender systems can introduce consumers to new products and increase the market size which benefits sellers. This informative role of recommender systems in electronic marketplaces seems attractive to sellers because sellers do not pay the marketplaces for receiving recommendations. We show that in a marketplace that deploys a recommender system helping consumers discover the product that provides them the highest expected net utility, sellers do not necessarily benefit from the “free” exposure provided by the recommender system. The impacts of the recommender system are the result of a subtle interaction between advertising effect and competition effect. The advertising effect causes sellers to advertise less on their own and the competition effect causes them to decrease prices in the presence of a recommender system. Essentially, sellers “pay” in the form of more intense price competition because of the recommender system. Furthermore, the competition effect is exacerbated by the advertising effect because the recommender system alters a seller’s own strategies related to advertising intensity and price from being strategic substitutes in the absence of the recommender system to being strategic complements in its presence. As a result of these two effects, we find that sellers are more likely to benefit from the recommender system only when it has a high precision. The results do not change qualitatively whether sellers use targeted advertising or uniform advertising. However, we find that a recommender system that benefits sellers when they do not employ targeted advertising may actually hurt them when they adopt targeted advertising with a high precision. On the other hand, in the presence of the recommender system, an increase in sellers’ targeting precision beyond a threshold softens price competition, increases seller profits, and reduces consumer surplus. Finally, we find that when the recommender system assigns a larger weight to product fit than price, the adverse impacts of the recommender system on sellers are mitigated, thereby expanding the region in the parameter space where the recommender system is beneficial to sellers.

The Effects of a Day off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing

First, we analyze how regular days off from competition and a time-dependent price pattern affect firm performance. Second, we examine the effects on firms' profitability from consumers’ changing search- and timing behavior. We use microdata from gasoline retailing in Norway. From 2004 to 2017, firms practiced an industry-wide day off from competition, starting on Mondays at noon, by increasing prices to a common level given by the recommended prices (decided and published in advance). In turn, a foreseeable low-price window is open before every restoration. During the data period, we observe an additional weekly restoration on Thursdays at noon. The additional day off from competition increases firm performance. As expected, a conventional price search of where to buy reduces firms’ profitability. In contrast, consumers who are aware of the cycle and spend effort on when to buy have a positive impact on firms’ profitability. If consumers spend effort on when to buy, they attempt to tank during low price windows. By its very nature, this shrink consumers’ ability to compare prices at several outlets. Consequently, more attention to when to buy may soften price competition.

Competition in Markets with Quality Uncertainty and Network Effects

AbstractWe study how quality uncertainty among consumers affects price competition in the presence of network effects. Our main result is that quality uncertainty has non-monotonic effects on firms’ price setting behavior. Prices and industry profit is first falling, then increasing, in quality uncertainty. In addition we show that quality uncertainty can force a high quality provider to be aggressive to the point where its price in the first period is below that of a low quality provider. We also analyse the incentives for compatibility under quality uncertainty, and find that when quality uncertainty is sufficiently high, compatibility may be used as a means of softening price competition.

Joint Oligopsony‐Oligopoly Power in Food Processing Industries: Application to the us Broiler Industry

Food manufacturers and retailers mediate transactions between farm product markets and finished product markets for a large number of agricultural products. In such settings, producers at the intermediary stages of the supply chain have the potential to exercise market power jointly over agricultural producers in the upstream farm product market and over consumers in the downstream market for finished goods. In this paper, we examine settings in which food processors jointly exercise oligopsony power over farmers in the upstream market and oligopoly power over consumers in the downstream market. We demonstrate how forward contracts in the procurement market affect equilibrium prices in the downstream consumer market, allowing food processors to raise margins by leveraging oligopsony power. We apply our model to the US broiler industry and show that tournament contracts for live chicken procurement can be employed as an instrument to extend spatial oligopsony power in the upstream procurement market to soften price competition in the downstream processed goods market.

Pricing and Distribution Strategies in a Dual-Channel Supply Chain

Internet has revolutionized distribution channels. Online orders are forwarded to the brick-and-mortar store to make the fulfillment, which is a new distribution strategy in a dual-channel supply chain. However, there is little research on the value of using such distribution strategy in dual-channel setting. To fill this gap, this article considers a manufacturer marketing a product through a dual-channel supply chain, comprised of an online channel and an offline retail channel. We develop a game theory model to investigate the pricing decisions and the distribution strategies, as well as to examine the impacts of the new distribution strategy on price competition and the dual-channel supply chain member's profits. By comparing the results of the traditional distribution strategy and the new distribution strategy, we find that the new distribution strategy can soften price competition when the proportion of the revenue generated by the direct channel is high enough, while if the proportion is low enough, it may intensify price competition. We also find that the supply chain members can achieve a win-win situation when the wholesale price is higher, and the proportion is greater under the new distribution strategy.

Movie Variety and the City

Abstract In this article, I study the effect of entry and ownership structure on product variety within a city. Using longitudinal data on theaters in Korea, I find that the positive effect of entry on city-wide movie variety is limited only to the first few entrants. This finding, together with the observation that movie variety in a theater does not respond to entry, suggests that a theater's incentive to soften price competition by screening less popular movies not otherwise available in the city decreases as more theaters enter. I also find evidence that movie variety is greater in more concentrated cities, implying that a chain that owns multiple theaters in a city may differentiate the movie lineup offered in each theater more than when the theaters are individually owned in order to avoid cannibalization or to preempt entry.

Price and non-price competition in an oligopoly: an analysis of relative payoff maximizers

Do firms that engage in relative payoff maximizing (RPM) behavior always choose a strategy profile that results in tougher competition compared to firms that engage in absolute payoff maximizing (APM) behavior? We address this question by way of a simple model of symmetric oligopoly where firms simultaneously select a two-dimensional strategy set consisting of a price variable and a non-price (i.e., quality) variable. Our results show that equilibrium solutions of RPM and APM are distinct. It is further shown that the standard result of Nash equilibrium in oligopoly, namely, that the non-price variable is used to soften price competition, survives also when firms are concerned with relative payoff considerations.

Sourcing Strategy of Original Equipment Manufacturer with Quality Competition

ABSTRACTWe develop game‐theoretic models to study the sourcing strategy of an original equipment manufacturer (OEM) in the presence of a competing contract manufacturer (CCM). The OEM sells the product in a high‐quality brand and has three strategy options: producing the product in house or outsourcing production to either a CCM or a noncompeting contract manufacturer (NCM). At the same time, the CCM provides its own product in a low‐quality brand. We show that when the product qualities are exogenous, the OEM's sourcing strategy decision depends on the OEM brand's efficiency in producing and selling the product (the difference between quality and production cost), relative to that of the CCM brand. Interestingly, the OEM may prefer outsourcing to a CCM to soften price competition, even though this will mean a higher wholesale price; the CCM also prefers to produce for the OEM, even though its total demand may decrease. When the product qualities are endogenous, however, with quality competition, the OEM prefers either insourcing or outsourcing to an NCM to increase quality differentiation, depending on its cost disadvantage in producing the high‐quality product.

When and How Should Firms Differentiate? Quality, Advertising and Pricing Decisions in a Duopoly

One of the hallmarks of competitive interaction is each firm’s desire to differentiate from rivals. Although differentiation may be achieved through product related choices, advertising levels may constitute another key mechanism. In this paper, we examine under what conditions firms will elect to differentiate through product quality vs. advertising intensity and characterize the set of equilibria that emerge. Consumers can only purchase from the set of products they are informed about through advertising, and choose the alternative that maximizes their utility. Firms select product quality in a first stage, advertising levels in a second stage, and prices in the last stage. We study two forms of advertising–blanket and targeted. Under blanket advertising, firms communicate indiscriminately and a consumer’s probability of seeing an ad depends on the level of ad expenditure. We find that when advertising is ineffective, i.e., the additional awareness generated by a heavy level is modest relative to the cost, both firms choose a light ad spending. This allows them to minimally differentiate in qualities without concern of intense price competition, as each firm expects to have a segment of ‘captive’ consumers that are only aware of its product. When advertising is moderately effective, one firm shifts to expending heavily on advertising, hence all consumers are aware of its product. However, the rival prefers to differentiate by advertising lightly, while choosing the same maximal quality level. This strategy softens price competition by inducing the heavy-advertiser to price highly more often in order to capitalize on its captive segment and allows the light-advertiser to increase its average price. Interestingly, we show that even if advertising heavily entails no extra cost, one firm will choose to advertise lightly in equilibrium for strategic reasons. When advertising is very effective, both firms advertise heavily. In this scenario, firms must differentiate in qualities in order to achieve positive profits. Under targeted advertising, we let firms choose the segment(s) they wish to inform. We identify conditions such that both firms choose equally high quality products, but advertise to distinct segments; thereby achieving differentiation through ad targeting. We further show that this can result in a pocket of unserved consumers, even though consumers with lower willingness to pay purchase. Generally speaking, we show that allowing market awareness to be determined endogenously suggests far less product differentiation than previously suspected and reveals regions where advertising creates viable differentiation.

Strengthening a weak rival for a fight

We provide a new model wherein firms of different productivities survive in an industry despite the threat of entry by high productivity firms. We demonstrate that an efficient incumbent has a unilateral incentive to establish a relational contract, softening price competition to strengthen its inefficient rival in a war of attrition that emerges post-entry, and raising the price of the inefficient firm in the acquisition market. We show that this equilibrium gives rise to persistent performance differences, market compression, and stability in the identity of firms in the market. Moreover, the relational contracting equilibrium is facilitated by strong anti-trust laws.