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Abstract:
We consider a general model of monopoly price discrimination and characterize the conditions under which price discrimination is and is not profitable. We show that an important condition for profitable price discrimination is that the percentage change in surplus (i.e., consumers' total willingness to pay less the firm's costs) associated with a product upgrade is increasing in consumers' willingness to pay. We refer to this as an increasing percentage differences condition and relate it to many known results in the marketing, economics, and operations management literatures.

Abstract:
Airline capacity utilization, or load factors, increased dramatically between 1993 and 2007, after staying fairly level for the first 15 years following deregulation. We argue that consumers’ adoption of the Internet, and their use of the Internet to investigate and purchase airline tickets, explains this increase. We find that differences in the rate of change of metropolitan area Internet penetration explain differences in the rate of change of airline-airport-pair load factors. Consistent with our explanation, we also find that, all else equal, changes in Internet penetration have a bigger impact on load factors on flights in more competitive markets and on flights with fewer total passengers. We argue that a significant part of the associated $2.7 billion reduction in airlines’ annual capacity costs, represents a previously unmeasured social welfare benefit of the Internet.

Internet, Airline Industry, Industrial Organization, Revenue Management, Peak Load Pricing

Abstract:
By bundling experience goods, a manufacturer can more easily maintain a reputation for high quality over time. Formally, we extend Klein and Lefler's (1981) repeated moral hazard model of product quality to consider multi-product firms and imperfect private learning by consumers. When consumers are small, receive imperfect private signals of product quality, and have heterogeneous preferences over available products, then purchasing multiple products from the same firm makes consumers more effective monitors of the firm's behavior. These consumers observe more signals of firm behavior and detect shirking with a higher probability, which creates stronger incentives for the firm to produce high quality products. By constraining all of the firm's consumers to use more effective monitoring and punishment strategies, bundling creates an even stronger incentive for a multi-product firm to produce high quality products. The impact of bundling on incentives is even greater when consumers cannot identify which of the goods is responsible for poor overall product performance.

experience goods, product quality, reputation

Abstract:
In a repeated price game with long but finitely-lived consumers, the use of staggered long-term contracts enables firms to earn positive profits for a wider range of discount factors and market structures. Intertemporal bundling reduces the gains from business- stealing while leaving the cost of the resulting price war unchanged. Though less empirically relevant, we also show that in a repeated price game with infinitely-lived, and arbitrarily-small, consumers, firms can use menus of single-period and infinite- length contracts to earn strictly positive profits for any discount factor and any market structure.

Intertemporal Bundling, Tacit Collusion

Abstract:
We show that demand uncertainty leads to vertical product differentiation even when consumers are homogeneous. When a firm anticipates that its inventory or capacity may not be fully utilized, product variety can reduce its expected costs of excess capacity. When the firm offers a continuum of product varieties, the highest quality product has the highest profit margins but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. We derive these results in both a monopoly model and a variety of different competitive models. We conclude with a discussion of empirical predictions together with a brief discussion of supporting evidence available from marketing studies.

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Abstract:
When players who choose a common strategy face a common shock, while players who choose different strategies face independent or imperfectly correlated shocks, equilibrium choices exhibit differentiation (respectively emulation) when the sign of the cross-partial derivative of the firms' profit functions with respect to the realizations of the uncertain variables is negative (respectively positive). I consider a variety of applications, including technology choice, brand investments, and R&D races, many of which can be characterized as two-stage games. In such games I demonstrate that differentiation is more likely to occur when the second stage game is a game of strategic substitutes.

Abstract:
Buyer cooperatives, buyer alliances, and horizontal mergers are often perceived as attempts to increase buyer power. Most theoretical and empirical work on buyer groups has emphasized that buyer size can increase buyer surplus. In contrast, I argue that even an arbitrarily small buyer group that is composed of buyers with heterogeneous preferences can increase price competition among rival sellers by committing to purchase exclusively from a single seller. When there are two sellers, the grand coalition is a coalition-proof subgame perfect equilibrium, though many other equilibria exist including equilibria with arbi- trarily many buyer groups. When there are three or more sellers, a coalition proof subgame perfect equilibrium always exists, but the grand coalition is not an equilibrium. When there are three sellers and buyers have symmetric preferences, then all coalition-proof equilibria have a minimum of three buyer groups, one group for each pair of sellers.

Buyer Groups, Buyer Power, Coalition Proof Equilibrium, Product Differentiation, Oligopoly

Abstract:
We demonstrate that demand uncertainty can explain equilibrium product variety in the presence of sunk costs. Product variety is an efficient response to uncertainty because it reduces the expected costs associated with excess capacity. We find that within the firm's product line, the highest quality product has the highest profit margin but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. Both of these relationships are consistent with evidence available from marketing studies.

Abstract:
I present a strategic model of competition in price and availability in which demand is uncertain and consumers choose where to shop given firms' observable prices and their expectations of firms' unobservable inventories. In both a single-period Cournot model (inventories are chosen first) and a single-period Bertrand model (prices are chosen first), I show that firms use higher prices to "signal" higher availability. This creates a floor on equilibrium prices and industry profits regardless of the number of firms. The model is useful in understanding the relationship between price and availability in the video rental industry.

Abstract:
When capacity is costly and prices are set in advance, firms facing uncertain demand will sell output at multiple prices and limit the quantity available at each price. I show that the optimal price strategy of a monopolist and the unique pure-strategy Nash equilibria of oligopolists both exhibit intrafirm price dispersion. Moreover, as the market becomes more competitive, prices become more dispersed, a pattern documented in the airline industry. While generating similar predictions, the model differs from the revenue management literature because it disregards market segmentation and fare restrictions that screen customers.

Abstract:
Traditional peak-load and stochastic peak-load models assume firms have prior information about when peak demand occurs. However, price dispersion, such as is typically used by firms practicing yield management, can achieve some of the same efficient demand shifting even when the peak time is unknown. Equilibrium price dispersion arises because of stochastic demand and price rigidities, but a previously unexplored benefit of price dispersion is its ability to reduce equilibrium capacity costs through demand shifting. The model also suggests how yield management (now more commonly called revenue management) might actually benefit business travellers, contrary to the popular prejudice.