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.
Bundling can signal high quality Dana, James D.
International journal of industrial organization,
March 2020, 2020-03-00, Letnik:
69
Journal Article
Recenzirano
•Product bundling signals high-quality by restricting demand when consumers are partially informed, which is less costly for high quality firms.•Product bundling can restrict demand when consumers ...are different, but in this case raising price restricts demand more effectively.•.The simple signaling model here obtains results previously derived in more complex and more dynamic models.
When consumers have noisy information, bundling experience goods can signal high quality in a simple static model. When consumers are partially informed, bundling has a bigger negative impact on the sales of a low-quality firm than on the sales of a firm with two high-quality products. Bundling can also signal high quality by restricting total sales even when consumers are uninformed. However, I argue this is not a likely explanation for bundling because raising prices is always a more profitable way to restrict total sales than bundling.
Buyer cooperatives, buyer alliances, and horizontal mergers are often perceived as attempts to increase buyer power. In contrast to prior research emphasizing group size, I show that even small buyer ...groups composed of buyers with heterogeneous preferences can increase price competition among rival sellers by committing to purchase exclusively from one seller. Without transfer payments, at least one buyer group exists for each pair of sellers and buyer groups membership is chosen to achieve indifference between the two sellers. With transfer payments, and just two sellers, the grand coalition is a coalition-proof subgame perfect equilibrium (CP-SPNE), though equilibria with arbitrarily many buyer groups also exist. With three sellers (and with more sellers when the distribution of buyers is symmetric), a CP-SPNE always exists, all coalition-proof equilibria are payoff equivalent and have at least one buyer group for each pair of firms, so the grand coalition is not an equilibrium.
► Buyer groups composed of heterogeneous buyers can increase competition among sellers. ► With multiple sellers, buyer group composition, not just size, drives group formation. ► With many sellers, at least one buyer group forms for each pair of sellers.
Using a mechanism design approach, we consider a firm's optimal pricing policy when consumers are heterogeneous and learn their valuations at different times. We show that by offering a menu of ...advance-purchase contracts that differ in when, and for how much, the product can be returned, a firm can more easily price discriminate between privately-informed consumers. In particular, we show that screening on when the return option can be exercised increases firm profits, relative to screening on the size of the refund alone, only if the expected gains from trade are higher for consumers who learn later. We show that in some settings (mean-preserving spread) the firm can achieve the complete-information profits and analyze the optimal contract in other settings (first-order stochastic dominance) in which the first-best allocation is not always feasible.
Price discrimination on booking time Ata, Barış; Dana, James D.
International journal of industrial organization,
11/2015, Letnik:
43
Journal Article
Recenzirano
Even if consumers are forward looking and free to choose when to purchase, a firm can price discriminate on booking time if consumers learn their valuations at different times and consumers who learn ...later have higher valuations. The model is related to our work on optimal screening with returns contracts Akan, Ata, and Dana 1, but here we consider a simpler binary-valuation distribution and consider more realistic consumer learning assumptions. The main contribution is to show that the profitability of screening on time is robust to relaxing the assumption that consumers learn instantaneously. In addition to analyzing a bad-news model in which information arrives gradually, we characterize a general bound on consumer optimism that guarantees that the instantaneous learning results are robust.
•A firm can exploit differences in when consumers learn their valuations.•Screening is profitable when consumers who learn later have higher valuations.•For a simple, binary distribution, spot prices can sometimes extract all the surplus.•Screening may be profitable even when consumers learn their valuations gradually.
When both individual and aggregate consumer demand is uncertain and firms set prices before demand is known, price‐taking firms may offer advance‐purchase discounts. Consumers with relatively more ...certain demands and with relatively lower valuations have an incentive to buy in advance the presence of other consumers with higher valuations and more uncertain aggregate demand increases the price they expect to pay in the spot market. Advance‐purchase sales are made to low‐valuation customers, as predicted by traditional models of second‐degree price discrimination, without assuming that firms have market power.
This paper considers a firm's price and inventory policy when it faces uncertain demand that depends on both price and inventory level. The authors extend the classic newsvendor model by assuming ...that expected utility maximizing consumers choose between visiting the firm and consuming an exogenous outside option. The outside option represents the utility the consumer forgoes when she chooses to visit the firm before knowing whether or not the product will be available. The authors investigate both the case in which the firm's price is exogenous and the case in which price is chosen optimally. The paper makes two contributions. First, the authors show that the firm holds more inventories, provides a higher fill rate, attracts more customers, and earns higher profits when it internalizes the effect of its inventory on demand. Second, the authors show that in the endogenous price case the firm's two-dimensional decision problem can be reduced to two, sequential, single-variable optimizations. As a result, the endogenous-price case is as easy to solve as the exogenous-price case.
Tying, bundling, minimum purchase requirements, loyalty discounts, exclusive dealing, and other purchase restraints can create stronger incentives for firms to invest in product quality. In our first ...example, the firm sells a durable experience good and a complementary non-durable good to a representative consumer. Tying shifts profits from the durable to the non-durable good, making profits more sensitive to the consumer's experience. In our second example, the firm sells a single experience good to consumers with heterogeneous demands. Minimum purchase requirements screen out the low-volume consumers who would otherwise free ride on the superior monitoring of the high-volume consumers. The examples illustrate that purchase restraints can increase both firm profits and consumer surplus by making firm profits more sensitive to consumer experience, either directly by giving the consumer more control over the stream of profits or indirectly by constraining consumers to monitor more intensively.
•Purchase restraints enable higher quality provision of experience goods.•Tying durables to non-durables makes profits sensitive to customer satisfaction.•Bundling and minimum purchase rules induce consumers to monitor firms better.•Consumers monitor and control the flow of profits, so firms’ incentives are stronger.
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