Strategic Buyers Research Articles

Contextual Dynamic Pricing with Strategic Buyers

Personalized pricing, which involves tailoring prices based on individual characteristics, is commonly used by firms to implement a consumer-specific pricing policy. In this process, buyers can also strategically manipulate their feature data to obtain a lower price, incurring certain manipulation costs. Such strategic behavior can hinder firms from maximizing their profits. In this article, we study the contextual dynamic pricing problem with strategic buyers. The seller does not observe the buyer’s true feature, but a manipulated feature according to buyers’ strategic behavior. In addition, the seller does not observe the buyers’ valuation of the product, but only a binary response indicating whether a sale happens or not. Recognizing these challenges, we propose a strategic dynamic pricing policy that incorporates the buyers’ strategic behavior into the online learning to maximize the seller’s cumulative revenue. We first prove that existing nonstrategic pricing policies that neglect the buyers’ strategic behavior result in a linear Ω ( T ) regret with T the total time horizon, indicating that these policies are not better than a random pricing policy. We then establish an O ( T ) regret upper bound of our proposed policy and an Ω ( T ) regret lower bound for any pricing policy within our problem setting. This underscores the rate optimality of our policy. Importantly, our policy is not a mere amalgamation of existing dynamic pricing policies and strategic behavior handling algorithms. Our policy can also accommodate the scenario when the marginal cost of manipulation is unknown in advance. To account for it, we simultaneously estimate the valuation parameter and the cost parameter in the online pricing policy, which is shown to also achieve an O ( T ) regret bound. Extensive experiments support our theoretical developments and demonstrate the superior performance of our policy compared to other pricing policies that are unaware of the strategic behaviors. Supplementary materials for this article are available online, including a standardized description of the materials available for reproducing the work.

Balancing medical innovation and affordability in the new healthcare ecosystem in China: Review of pharmaceutical pricing and reimbursement policies

AbstractThe China Basic Medical Insurance Program was created in 1999 with three objectives: equal accessibility, affordability, and quality. Today, it has become the biggest medical insurance program in the world, covering 95% of China's population. Since 2015, China's healthcare ecosystem has been reshaped by increasing innovation, which has in turn been driven by regulatory reform, enhancement of research and development capability, and capital market development. There has also been improved regulatory efficiency to reduce lags in launching drugs. In 2022, nearly 20% of novel active substances launched globally were from China. China has also risen to become the second biggest contributor to innovation in terms of pipelines. Using a “fast‐follow” strategy, many locally developed innovative drugs can compete with products from multinational companies in their quality and pricing. However, China's pharmaceutical and biotechnology industry will continue to face challenges in pricing and reimbursement, as well as a shortened product lifecycle with rapid price erosion. The government has already accelerated the timeline for updating the drug reimbursement list and is willing to create a high‐quality medical insurance program. However, some obstacles are hard to overcome, including reimbursement for advanced therapies, limited funding and an increasing burden of disease due to an aging population. This article reviews the trajectory of medical innovation in China, including the challenges. Looking forward, balancing affordability and innovation will be critical for China to continue the trajectory of growth. The article also offers some suggestions for future policy reform, including optimizing reimbursement efficiency with a focus on high‐quality solutions, enhancing the value assessment framework, payer repositioning from “value buyer” to “strategic buyer”, and developing alternative market access pathways for innovative drugs.

The Role of Private Equity in Health Care for Older Adults

With demographic shifts in longevity, healthcare has struggled to adequately meet the needs of older adults who are living longer and with more complex illness than ever. These demographic trends pose a substantial opportunity for emerging business ventures focused on health care for older adults. The operational inefficiencies, inequities in access, and increasing consumer demands for quality care also make health care ripe for innovation and disruption. Thus, it is no surprise that private equity (PE) firms are playing an increasing role in the business of the US health care system. PE investment in health care has grown dramatically over the last decade; estimated annual deal values have gone from $41.5 billion in 2010 to $119.9 billion in 2019, totaling approximately $750 billion (Scheffler et al., 2021). PE firms raise capital from investors or acquire private operating companies, improve their financial condition and business prospects with an expectation to have 20%–30% returns, and sell companies to the public through an initial public offering or to a strategic buyer at a profit within a truncated frame (3–7 years; Gondi & Song, 2019). The PE model puts enormous financial pressure on the delivery of health care to produce short-term profits, which is often achieved through operational and management changes, staffing restructuring, standardization, and cost containment. PE investment in health care is increasing because health care is an essential industry that functions on a reimbursement structure and is largely insulated from recession. The growing demand in health care services for the aging and chronic disease population is also contributing to the increased investment in health care from PE.

Dynamic Price Competition, Learning-by-Doing, and Strategic Buyers

We examine how strategic buyer behavior affects equilibrium outcomes in a model of dynamic price competition where sellers benefit from learning-by-doing by allowing each buyer to expect to capture a share of future buyer surplus. Many equilibria that exist when buyers consider only their immediate payoffs are eliminated when buyers expect to capture even a modest share of future surplus, and the equilibria that survive are those where long-run market competition is more likely to be preserved. Our results are relevant for antitrust policy and our approach may be useful for future analyses of dynamic competition. (JEL C73, D21, D43, D83, K21, L13, L40)

Rethinking the M&A process: Learning private equity’s secret to outperforming corporate strategic acquirers

PurposeAlthough M&A transactions often destroy shareholder value for corporate strategic buyers, PE firms, whose business model is predicated upon repeating M&A, have a better record of creating value for their investors.Design/methodology/approachThe critical aspects that comprise the PE playbook are organized around the three main deal phases Pre-deal, Deal and Post-deal.FindingsResearch has found that 60 percent of surveyed strategic buyer executives indicated their companies do not have a comprehensive end-to-end M&A approach using a playbook.Practical/implicationsAmple evidence exists demonstrating that corporate strategic buyers experience significant difficulty in creating value from their transactions.Originality/valueThough many view PE firms as value-destroyers, various peer-reviewed studies have found that PE-backed firms have a surprisingly favorable record.

Demand Estimation Using Managerial Responses to Automated Price Recommendations

We provide a new framework to identify demand elasticities in markets where managers rely on algorithmic recommendations for price setting and apply it to a data set containing bookings for a sample of midsized hotels in Europe. Using nonbinding algorithmic price recommendations and observed delay in price adjustments by decision makers, we demonstrate that a control-function approach, combined with state-of-the-art model-selection techniques, can be used to isolate exogenous price variation and identify demand elasticities across hotel room types and over time. We confirm these elasticity estimates with a difference-in-differences approach that leverages the same delays in price adjustments by decision makers. However, the difference-in-differences estimates are more noisy and only yield consistent estimates if data are pooled across hotels. We then apply our control-function approach to two classic questions in the dynamic pricing literature: the evolution of price elasticity of demand over and the effects of a transitory price change on future demand due to the presence of strategic buyers. Finally, we discuss how our empirical framework can be applied directly to other decision-making situations in which recommendation systems are used. This paper was accepted by Omar Besbes, revenue management and market analytics. Funding: D. Garcia acknowledges financial support from the Austrian Science Fund [Single Project “Understanding Consumer Search” FWF-P 30922]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.4261 .

Private Equity Funds and Strategic Buyers -- Effort, Debt Overhang, and Cross-Subsidization

Private Equity Funds and Strategic Buyers -- Effort, Debt Overhang, and Cross-Subsidization

Asia’s Chemical Distribution Market: The final Frontier for Mergers and Acquisitions!

The chemical distribution business had undergone huge transformational changes globally, through mergers and acquisitions, by both strategic buyers and private equity firms. The industry consolidation process in Europe and North America which started many years ago is now being shifted to Asia. There is very little research being done on Asia’s chemical distribution market size and the major chemical distributors. Asia’s chemical industry enjoyed tremendously high growth in the past years, and coupled with the highly fragmented chemical marketplace, it offers huge scope for consolidation. The lack of information and clarity in Asia’s chemical distribution sector has somewhat impeded the pace of the consolidation process. A clearer knowledge of the chemical distribution market size, and the key players in the market, itself would help potential investors enormously in their decision making to expedite the mergers and acquisitions process.
 The research findings can serve as a compass for potential investors to navigate through Asia when searching out for potential targets and would offer investors a much-needed informational tool to know where to look to invest in. Literature review on existing publications, chemical industry trade publications, and chemical distribution associations will provide the background information for this research.

Influence of factors on the activity of financial and strategic buyers in leveraged buyouts

Subject. This article examines the influence of factors on the activity of financial investors and strategic buyers in leveraged buyout transactions. Objectives. The article aims to clarify the dependence of the behavior of financial investors and strategic buyers on changes in various market conditions. Methods. For the study, I used a correlation analysis, logistic regression, comparison, and the abstract-logical and monographic methods. Results. The article identifies and describes differences in the behavior of the main types of buyers of debt financing transactions. Based on an analysis of leveraged buyout transactions in the euro area between 2002 and 2020, the article assesses the dependence of the relative contribution of financial investors and strategic buyers to the overall flow of transactions on the terms of debt and equity markets. Transaction-level analysis shows that differences in the behavior of financial investors and strategic buyers are due to differences in their propensity to make transactions in different market conditions and differences in adjustments to the volume of transactions they make, but are independent of the takeover premium they pay. Relevance. The results of the study contribute to a better understanding of the behavior of each type of buyout buyer, depending on changing market conditions.

Demand Estimation Using Managerial Responses to Automated Price Recommendations

We provide a new framework to identify demand elasticities in markets where managers rely on algorithmic recommendations for price setting, and apply it to a dataset containing bookings for a sample of mid-sized hotels in Europe. Using non-binding algorithmic price recommendations and observed delay in price adjustments by decision makers, we demonstrate that a control-function approach, combined with state-of-the-art model selection techniques, can be used to isolate exogenous price variation and identify demand elasticities across hotel room types and over time. We confirm these elasticity estimates with a difference-in-differences approach that leverages the same delays in price adjustments by decision makers. However, the difference-in-differences estimates are more noisy and only yield consistent estimates if data is pooled across hotels. We then apply our control-function approach to two classic questions in the dynamic pricing literature: the evolution of price elasticity of demand over time as well as the effects of a transitory price change on future demand due to the presence of strategic buyers. Finally, we discuss how our empirical framework can be applied directly to other decision-making situations in which recommendation systems are used.

Control-Stopping Games for Market Microstructure and Beyond

In this paper, we present a family of control-stopping games that arise naturally in equilibrium-based models of market microstructure as well as in other models with strategic buyers and sellers. A distinctive feature of this family of games is the fact that the agents do not have any exogenously given fundamental value for the asset, and they deduce the value of their position from the bid and ask prices posted by other agents (i.e., they are pure speculators). As a result, in such a game, the reward function of each agent at the time of stopping depends directly on the controls of other players. The equilibrium problem leads naturally to a system of coupled control-stopping problems (or, equivalently, reflected-backward stochastic differential equations), in which the individual reward functions (or reflecting barriers) depend on the value functions (or solution components) of other agents. The resulting system, in general, presents multiple mathematical challenges because of the nonstandard form of coupling (or reflection). In the present case, this system is also complicated by the fact that the continuous controls of the agents, describing their posted bid and ask prices, are constrained to take values in a discrete grid. The latter feature reflects the presence of a positive tick size in the market, and it creates additional discontinuities in the agents’ reward functions (or reflecting barriers). Herein we prove the existence of a solution to the associated system in a special Markovian framework, provide numerical examples, and discuss the potential applications.

Providing Data Samples for Free

We consider the problem of a data provider (Seller of information) who sells information to a firm (Buyer of information) regarding an unknown (to both parties) state of the world. Traditionally, the literature explores one-round strategies for selling information due to the Seller’s hold-up problem: once a portion of the dataset is released, the Buyer’s estimate improves and as a result the value of the remaining dataset drops. In this paper we show that this intuition is true when the Buyer’s objective is to improve the precision of her estimate. On the other hand, we establish that when the Buyer’s objective is to improve operational decisions (e.g. better pricing decisions on a market with unknown elasticity) and when the Buyer’s initial estimate is misspecified, one-round strategies are outperformed by free-sample selling strategies and dynamic pricing. In particular, we provide conditions under which free sample strategies generate strictly higher revenues than static strategies (with and without strategic Buyers) and provide examples that illustrate the benefit of providing data samples for free.

Platform Pricing with Strategic Buyers: The Impact of Future Production Cost

Two‐sided platforms are often coupled with exclusive hardware products that connect two sides of users, the consumers of the hardware product (i.e., buyers) and the application developers (i.e., sellers). The hardware product in the platform business model introduces three important issues that are not yet well understood in the literature of platform pricing: potentially downward‐trending production cost, product quality improvements, and consumers’ strategic behaviors. Using analytical modeling, our study explicitly factors in these issues in analyzing a monopoly platform owner’s two‐sided pricing problem. The platform sequentially introduces and prices quality‐improving hardware products, for which the costliness of quality may decrease. Strategic buyers make purchasing and upgrading decisions, which dynamically determine the buyer‐side network size. Meanwhile, the seller‐side network size is determined endogenously. We find that, an increase in the likelihood or magnitude of the future costliness reduction raises the initial buyer‐side price of the low‐quality product and lowers the seller‐side fee. This strategy, in turn, creates an indirect intertemporal effect that allows the platform to also raise the buyer‐side price(s) of the product(s) sold later. These findings contrast with conventional wisdom and provide an economic explanation for premium introductory pricing of many platform products. Moreover, we find that strengthening the network effect can result in more pronounced increases in the buyer‐side prices.

Financial or strategic buyers: Who is at the gate?

Target companies are differently affected when acquired by a financial sponsor as opposed to a strategic buyer. In this paper we analyze M&A activity by financial sponsors and strategic buyers in the euro area between 2002 and 2018, linking their relative contributions to deal flow to the conditions in capital markets. Does the composition of the M&A deal flow change over time? How do different types of acquirers respond to varying conditions in debt and equity markets? We find that M&A activity by financial sponsors and strategic buyers are not synchronous and that capital market conditions affect the composition of the M&A deal flow through multiple channels. In particular, the relative contribution of financial sponsors to overall deal flow grows when the risk-free rate increases, while the opposite occurs when the difference between the credit risk premium of high-yield and investment-grade issuers widens and when stock market valuations rise.

Can Private Equity Funds Act as Strategic Buyers? Evidence from Buy-and-Build Strategies

By holding assets longer and increasingly focusing on growth strategies private equity firms enter the territory of strategic buyers. In one such strategy, a private equity firm buys a company and then builds on that platform through add-on acquisitions. We ask whether such serial (buy-and-build) acquisition strategies deliver operating synergies, as expected from strategic buyers, or rather are a form of window-dressing. We collect a sample of buy-and-build strategies from seven major European markets and find that the profitability of these strategies improves more than that of the comparable strategies, constructed by us from stand-alone companies. We analyze a number of operating outcomes across various strategy sub-types and confirm that these operational improvements are consistent with the synergy interpretation.

Can Private Equity Funds Act as Strategic Buyers? Evidence from Buy-and-Build Strategies

By holding assets longer and increasingly focusing on growth strategies private equity firms enter the territory of strategic buyers. In one such strategy, a private equity firm buys a company and then builds on that “platform†through add-on acquisitions. We ask whether such serial (buy-and-build) acquisition strategies deliver operating synergies, as expected from strategic buyers, or rather are a form of “window-dressing.†We collect a sample of buy-and-build strategies from seven major European markets and find that the profitability of these strategies improves more than that of the comparable strategies, constructed by us from stand-alone companies. We analyze a number of operating outcomes across various strategy sub-types and confirm that these operational improvements are consistent with the synergy interpretation.

Dynamic Price Competition, Learning-by-Doing and Strategic Buyers

We generalize recent models of dynamic price competition where sellers benefit from learning-by-doing by allowing for long-lived strategic buyers, with a single parameter capturing the extent to which each buyer internalizes future buyer surplus. Many of the equilibria that exist when buyers are atomistic or myopic are eliminated when buyers internalize even a modest share of their effects on future surplus. The equilibria that survive tend to be those where long-run market competition is preserved. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Price Staggering in Cartels

In this paper we investigate the optimal organization of staggered price increases in cartels. Staggered price increases impose a cost during cartel formation as the price leader initially loses sales. We show that for intermediate discount factors, staggered price increases can only be sustained when the increase is neither too low nor too high. When a cartel executes two consecutive price increases, the choice between using the same leader or alternating leadership depends on the initial price level in the industry. We also discuss the allocation of price leadership in the presence of cost asymmetry, product differentiation and consider the effect of strategic buyers on price staggering.

How ‘the new customer buyer’s journey’ is reshaping the way you strategically manage your brand

This paper analyses the changing buyer behavior and its impact on how companies consider their funnel including their marketing, sales and customer service execution. The outcome of these changes to buyer behavior is brands are missing their revenue goals and with no real strategy in place to change this they execute “random acts of marketing” or hire more salespeople to fix the problem. Neither of those actions is going to create sustainable, predictable and repeatable revenue generation machine they are looking for. Instead they need to consider a new metaphor instead of the funnel and in this paper, we suggest that the Cyclone and the Cyclonic Buyer Journey provides marketers and sales leaders an opportunity to redesign their marketing and sales execution to match the way people buy products and services today. Marketing and sales leaders must improve their ability to create an experience for their prospects by providing a more designed and strategic buyer’s journey with the tools, techniques and technology at their disposal. The Cyclonic Buyer Journey provides a methodology creating a strategy for each of the eight stages of the new prospect’s buyer’s journey and gives leaders a map showing how to apply that strategy, what tactics to deploy, what metrics to track and what technology to leverage to get prospects through their buyer’s journeys in more efficiently and effectively. The result of using this approach is more leads, better quality leads, more sales opportunities, a higher close rate on those opportunities, a shorter sales cycle, and more consistent revenue goal attainment.

Financial versus Strategic Buyers

This article introduces the impact of debt misvaluation on merger and acquisition activity. We show the potential for debt misvaluation to help explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). Fundamental differences in governance and project coinsurance between the two types of acquirer would interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.