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Abstract:
This paper introduces a second-degree oligopolistic price discrimination model with consumer heterogeneity both on a horizontal and a vertical dimension. We find a non-monotonic relationship between market power and price dispersion. Using data from the U.S. airline industry, we find supportive empirical evidence for the theoretical prediction. To the extent that price dispersion is correlated with the degree of price discrimination, our exercise indicates that the relationship between market power and price discrimination can be nonmonotonic.

Price dispersion, Second-Degree Price Discrimination, Non-Linear Pricing, Airline Industry

Abstract:
We employ a vertical differentiation model to examine the potential bias in pricing-to-market results when using export unit values aggregating differentiated products. Our results show that: (i) false evidence of pricing-to-market is always found when using unit values, whether the law of one price holds or not; and (ii) the size of the bias increases with the level of product differentiation. Our simulation results support those conceptual findings. Thus, some of the positive pricing-to-market results in the literature could be an artifact of the product heterogeneity embodied in unit values rather than evidence of imperfect competition.

Abstract:
We employ a vertical differentiation model to examine the potential bias in pricing-to-market (PTM) results when using unit values aggregating differentiated products. Our results show that: i) false evidence of PTM ("pseudo PTM") is always found when using unit values, whether the law of one price holds or not; and ii) the extent to which results are biased due to pseudo PTM increases with the level of product differentiation. Correspondingly, our simulation results suggest that: i) it is possible to get a statistically significant estimate of the exchange rate coefficient, even when there is no real PTM; ii) the probability of a false PTM finding increases with product differentiation. Pseudo PTM is the result of a change in the mix of qualities imported when the exchange rate changes.

Pricing-to-market, Vertical differentiation, Unit values, Price discrimination, Quality upgrading

Abstract:
We examine the profitability and the welfare implications of price discrimination in two-sided markets. Platforms have information about the preferences of the agents that allows them to price discriminate within each group. The conventional wisdom from one-sided horizontally differentiated markets is that price discrimination hurts the firms and benefits consumers, prisoners' dilemma. Moreover, it is well-known that the presence of indirect externalities in two-sided markets can intensify the competition. Despite all these, we show that the possibility of price discrimination, in a two-sided market, may actually soften the competition. Therefore, the implications of price discrimination from one-sided markets may not carry over to two-sided markets. This is the case regardless of whether prices are public or private, although private prices boost profits. Our analysis also sheds light on the welfare properties of price discrimination in intermediate goods markets, such as Business-to-Business (B2B) markets.

Price discrimination, Two-sided markets, Indirect network externalities, Market segmentation

Abstract:
The recent rapid growth of the Internet as a medium of communication and commerce, combined with the development of sophisticated software tools, are to a large extent responsible for producing a new kind of information: databases with detailed records about consumers' preferences. These databases have become part of a firm's assets, and as such they can be sold to third parties. This possibility has raised numerous concerns from consumer privacy advocates and regulators, who have entered into a heated debate with business groups and industry associations about whether the practice of customer information sharing should be banned, regulated, or left unchecked. This paper investigates the incentives of rival firms to share their customer-specific information and evaluates the welfare implications if such exchanges are banned, in the context of a perfect price discrimination model.

Customer information sharing, horizontal and vertical differentiation, perfect price discrimination

Abstract:
The recent literature on oligopolistic third-degree price discrimination has been primarily concerned with rival firms' incentives to acquire customer-specific information and the consequences of such information on firm profitability and welfare. This literature has taken mostly a static view of the interaction between competing firms. In contrast, in this paper, we investigate the impact of customer-specific information on the likelihood of tacit collusion in a dynamic game of repeated interaction. This issue is very important because competitive price discrimination usually leads to a cutthroat price competition (prisoners' dilemma) among firms. Firms, therefore, may seek ways to soften competition and sustain higher prices. Our main result is that collusion becomes more difficult as the firms' ability to segment consumers improves.

Market segmentation, Tacit collusion, Third-degree price

Abstract:
The advent of the Internet has revolutionized the way companies advertise, develop and distribute products. Firms can now customize their advertising messages and products to the particular characteristics and needs of customers. Customers themselves can create their own products. We investigate investments by firms in product customization capabilities within a duopoly model of horizontal product differentiation. We find that i) if brand name effects are not too strong, one firm emerges as a leader in product customization - firms make asymmetric investments in product customization technologies in order to reduce price competition, ii) if brand name effects are strong, both firms make extensive investments in product customization, and iii) the possibility of product customization can raise industry profits if brand names are weak, but not when they are strong.

Product customization, Information acquisition, Brand name effects, Horizontal differentiation

Abstract:
We introduce a flexible framework by modeling the information firms possess about consumers' locations (preferences) on the Salop circle as a partition. Higher information quality is translated into a partition refinement. In the limit, we obtain the perfect price discrimination paradigm. We show that the free-entry equilibrium number of firms exhibits a U-shape as a function of the quality of information. This implies that some (but not too much) price discrimination yields the most efficient non-cooperative outcome.

Free-entry, Price discrimination, Market structure, Efficiency

Abstract:
In many markets, firms have the option of advertising at price comparison sites to broaden their market reach. Such sites are often controlled by profit-maximizing "information gatekeepers" charging advertising fees. This paper considers vertical merger between such a monopoly information gatekeeper and a firm in the product market. We find that the merger is unprofitable, and divestiture is optimal if the firm has already created the gatekeeper.

Information Gatekeeper, Vertical Merger

Abstract:
We study the effects of a Most-Favored Customer (MFC) clause on price competition among major consumer electronics retailers. Our data span the periods before and after Best Buy introduced an MFC clause between April 1, 2003 and March 31, 2004. After controlling for a number of factors (including product life-cycle effects), we find that on average Best Buy lowered its prices by 1.1% post-change. Its competitors (except for Sears) responded by cutting prices further, Buy.com by 2.6%, Circuit City by 1.9%, and CompUSA by 2.2%. Our empirical results are robust to a variety of measures and estimation methods. We conclude that Best Buy's MFC adoption is pro-competitive.

Most-favored customer clause; Low-price guarantee; Pro-competitive

Abstract:
Unrestricted flows of information usually improve efficiency. The recent growth of the Internet as a medium of communication and commerce, combined with the development of sophisticated software tools have paved the road for the collection and analysis of a vast amount of data about consumers. Firms who possess such information can target individual consumers (or certain groups of consumers) more effectively. We investigate whether consumers can claim some of the value of their own private information, while at the same time efficient flows of information are guaranteed. We address this question in a principal-agent adverse selection model. Prior to the contracting stage, the agent (consumer) chooses how much (precision) of his private information to sell to the principal. This gives rise to a signaling game that precedes the adverse selection stage. We show that there exists a pooling efficient equilibrium, where both agent types sell all their information to the principal.

Information sharing, Asymmetric information, Coase theorem, Signaling game

Abstract:
Recent developments in information technology (IT) have resulted in the collection of a vast amount of customer-specific data. As IT advances, the quality of such information improves. We analyze a unifying spatial price discrimination model that encompasses the two most studied paradigms of two-group and perfect discrimination as special cases. Firms use the available information to classify the consumers into different groups. The number of identifiable consumer segments increases with the information quality. Among our findings (1) when the information quality is low, unilateral commitments not to price discriminate arise in equilibrium; (2) after a unique threshold of information precision such a commitment is a dominated strategy, and the game becomes a prisoners' dilemma; and (3) equilibrium profits exhibit a U-shaped relationship with the information quality.

Abstract:
We introduce a flexible third-degree price discrimination framework by modeling the information firms possess about consumers' locations (preferences) on the Salop circle as a partition. Higher information quality is translated into a partition refinement. In the limit, we obtain the perfect price discrimination paradigm. We show that the free-entry equilibrium number of firms exhibits a U-shape as a function of the quality of information. This implies that price discrimination generates the most efficient free-entry outcome.

Abstract:
The price discrimination literature typically assumes no consumer arbitrage. This assumption is increasingly violated in the digital economy. Besides the fact that consumers trade goods online, firms offer coupons to attract customers and coupons are auctioned off with increased frequency. We study the impact of coupon trading on equilibrium prices, promotion intensity (frequency and depth) and profits. Our results show that: (i) Firms have no incentive to distribute defensive coupons. (ii) When both firms offer transferrable coupons, an increase in the fraction of coupon traders and an increase in coupon distribution costs both reduce the attractiveness of offensive couponing. Firms respond by promoting less aggressively, which leads to higher equilibrium prices and profits. (iii) When only one firm's coupons are transferrable, an increase in the fraction of coupon traders benefits the firm with non-transferrable coupons at a cost to the other firm. (iv) Firms prefer to mimic each other's decision on coupon type. The choice of transferable coupons, however, leads to higher profits.

Customer Poaching, Coupon Trading, Consumer Arbitrage, Defensive coupon