Uniform Pricing Policy Research Articles

Aggregating Distributed Energy Resources: Efficiency and Market Power

Problem definition: The rapid expansion of distributed energy resources (DERs) is one of the most significant changes to electricity systems around the world. Examples of DERs include solar panels, electric storage, thermal storage, and combined heat and power plants. Because of the small supply capacities of these DERs, it is impractical for them to participate directly in the wholesale electricity market. We study in this paper the question of how to integrate these DER supplies into the electricity market, with the objective of achieving full market efficiency. Methodology/results: We study four aggregation models, where there is an aggregator who, with the knowledge of DERs’ utility functions and generations, procures electricity from DERs, and sells them in the wholesale market. In the first aggregation model, a profit-maximizing aggregator announces a differential two-part pricing policy to the DER owners. We show that this model preserves full market efficiency, that is, the social welfare achieved by this model is the same as that when DERs participate directly in the wholesale market. In the second aggregation model, the profit-seeking aggregator is forced to impose a uniform two-part pricing policy to prosumers from the same location, and we numerically show that there can be large efficiency loss. In the third (fourth) aggregation model, a uniform (semiuniform) two-part pricing policy is applied to DER owners, whereas the aggregator becomes fully regulated but is guaranteed nonnegative (positive) profit. It is shown that these models again achieve full market efficiency. Furthermore, we show that DER aggregation also leads to a reduction in the market power of conventional generators. Managerial implications: DER aggregation via profit-seeking and/or regulated aggregators has been investigated by California Independent System Operator and New York Independent System Operator, among others, and the recent Federal Energy Regulatory Commission Order No. 2222 paved the way for aggregators to bid in the wholesale market. Our four aggregation models may shed light on how DERs should be included in the wholesale electricity market. Funding: This work was supported by the King Fahd University of Petroleum and Minerals [Grant INML2106] and the National Science Foundation [Grant 1832230]. Supplemental Material: The online appendices are available at https://doi.org/10.1287/msom.2021.0539 .

Information Sharing and Personalized Pricing in Online Platforms

With the rise of big data technology, an online platform can easily gather customer information to engage in price discrimination and obtain additional profits. Sharing customer information with a third-party seller increases the platform’s commission and information revenue, but the seller’s personalized pricing using customer information intensifies the price competition, which may damage the profitability of the platform’s own product. Whether to share information remains an unsolved strategy decision for the platform. We employ a game-theoretic model to characterize the interplay of information sharing by the platform and the pricing strategies of two firms. We consequently study four basic scenarios where the two firms adopt either uniform or personalized pricing policies. In equilibrium, the seller does not always have incentives to acquire information, and the platform is not always willing to share information. Intriguingly, with different combinations of the commission rate and the new consumer ratio, the equilibrium of the overall system has four possible results where the information may not be used for price discrimination. With a relatively high commission rate and a low new consumer ratio, the platform no longer pursues a demand for its own product and lets the seller occupy the whole market, which leads to the lowest consumer surplus and social welfare. We finally show that in the event of a relatively high commission rate, prohibiting information sharing increases consumer surplus and social welfare, verifying the necessity of regulations. These results could provide useful guidelines for platform managers and regulators to better design information sharing and price discrimination policies.

Indication-Based Pricing for Multi-Indication Drugs

Many pharmaceutical drugs have multiple indications, for which they offer a varying degree of benefit for patients. Yet, in the current U.S. pricing system, the price of the drug is the same regardless of the indication for which it is prescribed. This uniform pricing policy can deter the payer from providing coverage for low-value indications, if the price is high relative to the potential benefit for patients, which can reduce patients’ access to the drug. It can also deter the drug manufacturer from investing in obtaining U.S. Food and Drug Administration (FDA) approval for new indications, as the lack of flexibility in pricing can result in too low demand (and thus profits) to recoup fixed investment costs. Indication-based pricing has been proposed as a new pricing mechanism for multi-indication drugs allowing the price to differ according to the indication, to better align the price of the drug to its value. In this paper, we analyze the effect of indication-based pricing in comparison with uniform pricing on the drug manufacturer’s profit and investment incentives, the patient demand and utility, the payer’s coverage incentives, and the payer’s objective. Under uniform pricing, we consider both the cases when the price can versus cannot be adjusted upon introduction of a new indication. We find that the drug manufacturer earns higher profits under indication-based pricing than under uniform pricing. Moreover, indication-based pricing improves incentives for the manufacturer to invest in a new indication and for the payer to cover the drug. If the fixed investment cost is high, indication-based pricing also benefits patients and the payer’s objective. Otherwise, the patient demand, patient utility and payer’s objective may be lower under indication-based pricing. Hence, payers who value the patient utility should carefully consider the tradeoffs involved in implementing this pricing system and where the bottlenecks are under uniform pricing. This paper was accepted by Carri Chan, healthcare management. Supplemental Material: The online appendices are available at https://doi.org/10.1287/mnsc.2022.01721 .

Third-degree price discrimination versus uniform pricing

We compare the profit of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave profit functions (in the price space) and common support, a uniform price is guaranteed to achieve one half of the optimal monopoly profits. This profit bound holds for any number of segments and prices that the seller might use under third-degree price discrimination. We establish that these conditions are tight and that weakening either common support or concavity can lead to arbitrarily poor profit comparisons even for regular or monotone hazard rate distributions.

Configuring and pricing smart coproductive services

Coproductive services involve the active participation of customers by exerting physical/mental effort as a part of the service process to co-create value. While the demand for coproduction models is surging, there are complaints about customer experience and service system design. Owing to these dissatisfaction issues, providers are now shifting away from self-service models, towards the notion of smart service; where service tasks are efficiently divided between the provider and the customer. This study addresses the business problem of the configuration and pricing of such a smart coproduction service channel targeted at a segment within an incumbent provider's captive customer base. We analyze the relative preference of the popular uniform pricing policy against a new proposed policy that accounts for the strategic behaviour of customers. This study uses a suite of analytical modelling tools to address this problem. We analyze the applicability of the alternate pricing regimes when providers are pursuing certain prevalent marketing strategies. We also analyze the influence of relative co-creation productivity between the provider and customer on the choice of pricing regime. We find that the popularity of the uniform pricing model can be explained with its simplicity in configuration and applicability. On the other hand, we find that the proposed strategic pricing regime not only induces customers to adopt coproduction channels but also enables providers to charge a price premium where possible. Furthermore, our analysis explains several observations in practice w.r.t. uptake and proliferation of coproduction channels. We also present useful guidelines to managers for configuring and pricing coproduction service channels.

Aggregating Distributed Energy Resources: Efficiency and Market Power

The rapid expansion of distributed energy resources (DERs) is one of the most significant changes to electricity systems around the world. Examples of DERs include solar panels, small natural gas-fueled generators, combined heat and power plants, etc. Due to the small supply capacities of these DERs, it is impractical for them to participate directly in the wholesale electricity market. We study in this paper two efficient aggregation models. In the first aggregation model, a profit-maximizing aggregator procures electricity from DERs, and sells them in the wholesale market. We show that this model preserves full market efficiency, i.e., the social welfare achieved by the aggregation model is the same as that when DERs participate directly in the wholesale market. In the second aggregation model, a uniform two-part pricing policy is applied to DER owners, while the aggregator becomes fully regulated but is guaranteed positive profit. It is shown that this second model again achieves full market efficiency. Furthermore, we show that DER aggregation can also leads to a reduction on the market power of conventional generators. All arguments are supplemented with illustrative examples.

Uniform Pricing Versus Third-Degree Price Discrimination

We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one half of the optimal monopoly profits. This revenue bound holds for any arbitrary number of segments and prices that the seller would use in case he would engage in third-degree price discrimination. We further establish that these conditions are tight and that weakening either common support or concavity leads to arbitrarily poor revenue comparisons.

Third-degree Price Discrimination Versus Uniform Pricing

We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one half of the optimal monopoly profits. This revenue bound holds for any arbitrary number of segments and prices that the seller would use with third-degree price discrimination. We further establish that these conditions are tight and that weakening either common support or concavity leads to arbitrarily poor revenue comparisons.

Buyer-specific versus uniform pricing in a closed-loop supply chain with third-party remanufacturing

Managers broadly agree that the entry of third-party remanufacturers (TPRs) is detrimental to original equipment manufacturers (OEMs), and social planners broadly agree that a nondiscriminatory uniform pricing policy is more desirable than a buyer-specific pricing policy. In this study, we develop a game theoretical model to revisit the effects of these policies in a closed-loop supply chain in which one supplier sells a component that cannot be remanufactured to one OEM and one TPR. The supplier must charge the same wholesale price in the uniform pricing model. Our analysis shows that regardless of the pricing policy, third-party remanufacturing could lead to a triple win to the supplier, the OEM, and the TPR. When compared with a buyer-specific pricing policy, a uniform pricing policy may result in a fourfold loss to the supplier, the OEM, the TPR, and the consumers, and hence an absolute reduction in social welfare. The key intuition driving the findings is that under certain conditions, the buyer-specific pricing policy facilitates third-party remanufacturing, which may increase the total profit of the supply chain and improve social welfare. Therefore, the OEM should not always attempt to deter the entry of TPRs. In addition, the government should allow the supplier to charge buyer-specific wholesale prices to foster the remanufacturing sector, particularly in its infancy.

Intermediaries, transport costs and interlinked transactions

AbstractFarmers in developing countries often encounter difficulties selling their products on local markets. Inadequate transport infrastructure in rural areas and large distances between areas of production and consumption mean that farmers find it costly to bring their produce to the market and this very often results in small net margins and poverty among farmers who are geographically isolated. Agriculture in developing countries is characterized by the presence of intermediaries that have a cost advantage over farmers. Because of their market power, these intermediaries are able to impose interlinked contracts and are free to choose the spatial pricing policy they use. In this paper, we develop a model of input–output interlinked contracts between an intermediary and geographically dispersed farmers. We establish when the intermediary uses either uniform or mill pricing policies, as opposed to spatial discriminatory pricing. For each pricing policy, we analyze what the welfare implications are in terms of an increase in farmers' income and a reduction in poverty in rural areas. We also establish how the choice of a spatial pricing policy impacts geographically isolated farmers and how it influences the participation by farmers.

Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics

Gray markets, also known as parallel imports, have created fierce competition for manufacturers in many industries. We analyze the impact of parallel importation on a price‐setting manufacturer that serves two markets with uncertain demand, and characterize her policy against parallel importation. We show that ignoring demand uncertainty can take a significant toll on the manufacturer's profit, highlighting the value of making price and quantity decisions jointly. We find that adjusting prices is more effective in controlling gray market activity than reducing product availability, and that parallel importation forces the manufacturer to reduce her price gap while demand uncertainty forces her to lower prices. Furthermore, we explore the impact of market conditions (such as market base, price sensitivity, and demand uncertainty) and product characteristics (“fashion” vs. “commodity”) on the manufacturer's policy towards parallel importation. We also provide managerial insights about the value of strategic decision‐making by comparing the optimal policy to the uniform pricing policy that has been adopted by some companies to eliminate gray markets entirely. The comparison indicates that the value of making price and quantity decisions strategically is highest for moderately different market conditions and non‐commodity products.

Maritime port pricing and governance in South Africa: trends and stakeholder comments

This study assesses trends and stakeholder comments on maritime port pricing and governance in South Africa. Content analysis is used to analyse Transnet National Ports Authority (TNPA) tariff applications, Ports Regulator records of decision and stakeholder comments for 2010 to 2012. The study gathers data on port pricing from 1999-2012 and uses descriptive statistics to analyse the trends in port pricing. The findings show the distinctiveness of South Africa’s complementary system of ports and its uniform pricing policy. The ports are financed and managed using a mix of elements from the European and Asian port doctrines, whereas the pricing methodology appears to follow the Anglo-Saxon doctrine. A port doctrine should be developed that would be consistent with the country’s vision and policies.

Price Differentiation and Discrimination in Transport Networks

This paper analyzes the effects of price differentiation and discrimination by a monopolistic transport operator, which sets fares in a congestible network. Using three models, with different spatial structures, we describe the operator’s optimal strategies in an unregulated market, a market where price differentiation is not allowed (i.e., ticket prices must be the same for all users), and a market where price discrimination is illegal (i.e., ticket prices must only differ with the marginal external costs of users), and analyze the welfare effects of uniform and non-discriminatory pricing policies. The three models allow us to consider three different forms of price differentiation and discrimination in networks: by user class, by origin-destination pair, and by route.We generalize the existing literature, in which groups usually only differ in their value of time, and hence, there is no distinction between differentiation and discrimination. In our models, users may also have different marginal external costs; we show how these two differences interact. We also show how non-differentiated and non-discriminatory policies may increase or decrease welfare, and that non-discrimination can be worse than non-differentiation. The network models show that results obtained for a single-link network can be generalized to a situation where operators price-discriminate or differentiate based on users’ origins and destinations, but not directly to a situation in which differentiation is based on route choices.

Domestic water pricing in Greece: a spatial differentiation

This study investigates the differentiation of the water pricing policies applied by the Greek Municipal Water Utilities (GMWU) in several regions. GMWU are being characterized by individual management framework with a lack of a uniform pricing policy and a significant diversification of the payable amount by region. The export of comparative conclusions regarding the overall pricing policy in Greece, both at GMWU level (a sample of 84 GMWU) and at regional level, is the basic objective of this study. The comparison analysis was performed on a monthly consumption basis of 5–150 m3, for the year 2007, per water utility population served (five groups) and per administrative region (13 regions). The mean net consumption cost and the mean payable amount are calculated for a monthly consumption, because water utilities do not use the same billing period. Fee for construction and sewer user fees are excluded. Maintenance water meter cost and maintenance projects (fixed charges) charges are also partly included. The study revealed that there is a large spatial differentiation of water prices on regional level.

An Empirical Analysis of Digital Music Bundling Strategies

We use panel data on digital song and album sales coupled with a quasi-random price experiment to determine own- and cross-price elasticities for songs and albums. We then develop a structural model of consumer demand to estimate welfare under various policy relevant counterfactual scenarios. This approach represents an early application of the “big data” management paradigm within the media industries and provides managers with detailed guidance on optimal pricing and marketing strategies for digital music. Our results show that tiered pricing coupled with reduced album pricing increases revenue to the labels by 18% relative to uniform pricing policies traditionally preferred by digital marketplaces while also increasing consumer surplus by 23%. Thus, optimal tiered pricing can yield a Pareto improvement over the prior status quo. Additionally, our results indicate that even without tiered pricing, unbundling albums outperforms “album-only” pricing policies that dominated the era of physical CD/cassette sales. This paper was accepted by Alok Gupta, special issue on business analytics.

An Empirical Analysis of Digital Music Bundling Strategies

We use panel data on digital song and album sales coupled with a quasi-random price experiment to determine own- and cross-price elasticities for songs and albums. We then develop a structural model of consumer demand to estimate welfare under various policy relevant counterfactual scenarios. This approach represents an early application of the “big data” management paradigm within the media industries, and provides managers with detailed guidance on optimal pricing and marketing strategies for digital music.Our results show that tiered pricing coupled with reduced album pricing increases revenue to the labels by 18% relative to uniform pricing policies traditionally preferred by digital marketplaces while also increasing consumer surplus by 23%. Thus, optimal tiered pricing can yield a Pareto-improvement over the prior status quo. Additionally, our results indicate that in the digital world, unbundling albums outperforms “album only” pricing policies that dominated the era of physical CD/cassette sales.

Pricing and Capacity Rationing with Customer Disappointment Aversion

Customers are averse to disappointment that arises when economic outcomes fall short of expectations. In this study, we study a two‐period model in which the firm may create rationing in either period. In the anticipation of possible disappointment due to stock‐outs, strategic customers decide when to purchase and the firm determines the prices and rationing levels in each period. We explore the impact of disappointment aversion on customers' strategic purchasing behavior and the firm's pricing and rationing decisions. Without disappointment aversion, it is optimal for the firm to adopt a uniform pricing policy without rationing. However, when strategic customers are averse to disappointment, a firm may be able to increase profits with an appropriate level of rationing. We analyze both the mark‐up and mark‐down policies. We show that, in a mark‐down scenario, the firm always benefits from disappointment aversion behavior by using an appropriate level of rationing in a low‐price period. However, in a mark‐up scenario, whether it is beneficial for the firm to induce disappointment aversion behavior depends on how customers frame payoffs in different periods when forming utilities. Particularly, when customers compartmentalize payoffs in different periods to form utilities, the firm should not induce disappointment aversion behavior.

Coping with Gray Markets: The Impact of Market Conditions and Product Characteristics

Gray markets, also known as parallel imports, are marketplaces for trading genuine products that are diverted from authorized distribution channels. They have created fierce competition for manufacturers in many industries and each year billions of dollars worth of products are traded in these markets. Using a game-theoretic model, we analyze the impact of parallel importation on a price-setting manufacturer that serves two markets with uncertain demand. We characterize the optimal joint price and quantity decisions of the manufacturer which determine whether the manufacturer should ignore, block, or allow parallel importation. We also show that parallel importation forces the manufacturer to reduce her price gap while demand uncertainty forces her to lower prices in both markets. Moreover, we observe that parallel importation may force the manufacturer to exit the low-profit market. Through extensive numerical experiments, we explore the impact of market conditions (size and price elasticity) and product characteristics (a fashion item or a commodity) on the manufacturer's reaction to parallel importation. In addition, we provide interesting insights about the value of strategic pricing for coping with gray markets versus the uniform pricing policy that has been adopted by some companies to eliminate gray markets.

Product Patent, the Problem of Availability of Patented Drugs and Parallel Trade: A Theoretical Approach

This article theoretically examines the potential effect of product patent on the availability of an essential drug in developing countries like India. Previous studies have indicated the possibility of a product patent making a drug unavailable in a developing nation. This has been shown under the uniform pricing policy adopted by the multinational company (MNC) that produces the drug. Allowing for price discrimination and comparing it with the above situation, we have argued that the problem of non-availability of a patented drug is, indeed, much less serious. However, successful price discrimination is not possible when markets are not perfectly segmented and “parallel trade” (a form of arbitrage) by the distributors exists. Our model incorporates such a possibility and establishes that even in the presence of parallel trade, the MNC can earn higher profits by supplying the drug to both the developed and the developing nations than by confining itself to the markets of developed countries.

Wholesale Price Discrimination: Inference and Simulation

This paper makes inferences about wholesale price discrimination and uniform wholesale pricing policy in a national grocery retail market where wholesale price discrimination occurs. I estimate demand and a supply model of multiple retailers’ and manufacturers’ oligopoly-pricing behavior where manufacturers may engage in wholesale price discrimination, which allows me to recover brand level marginal costs in this market. Then I simulate the welfare effects of no wholesale price discrimination via uniform price regulation given observed data on retail and input prices and retail quantities sold and not available data on wholesale prices. This approach uses retail level scanner data on coffee produced by multiple manufacturers sold at the largest retail outlets in Germany. The estimates of uniform wholesale pricing in this market suggest there to be positive welfare effects from preventing wholesale price discrimination, originating from positive effects on consumer surplus of the same magnitude as on joint vertical producer surplus. I show through simulations that estimated welfare decreases, due to higher retail prices under no wholesale price discrimination, for more collusive retail and manufacturer counterfactual scenarios. Finally, and in terms of counterfactual demand simulations, I find that banning wholesale price discrimination may be actually welfare improving the less heterogeneous and the more elastic demand is.