Opportunistic Termination

If a seller delivers a good non-conforming to contract, European and US warranty law allows consumers to choose between some money transfer and termination. Termination rights are, however, widely criticized, mainly for fear that the buyer may use non-conformity as a pretext for getting rid of a contract he no longer wants. We show that this possibility of 'opportunistic termination' might actually have positive effects. Under some circumstances, it will lead to redistribution in favour of the buyer without any loss of efficiency. Moreover, by curbing the monopoly power of the seller, a regime involving termination might increase welfare by enabling a more efficient output level in a setting with multiple buyers

Why markdown as a pricing modality?

Markdown as a pricing modality is ubiquitous in retail whereas everyday low price (EDLP) remains relatively rare (despite its several advantages, such as simplicity). This paper explores whether and why retailers can use either of these pricing modalities as an effective defense against a competitor entering the market with the alternative pricing modality. Various studies have shown that consumers are strategic and heterogeneous in their valuation of a product. Consumers are also shown to be regret-prone, and anticipation of regret affects their purchase decisions. Consumers experience availability regret when they are unable to purchase products due to stockouts and high-price regret when they miss an opportunity to purchase products at low prices. Considering such factors, consumers decide whether, when, and from which retailer to purchase the product. In such a market environment, we find that the possible entry of a competitor should deter retailers from using the EDLP pricing modality but not markdown. We also identify a new reason for the markdown retailer to ration stock (in addition to the reason for discouraging consumers to wait for the markdown). In particular, we show that the markdown retailer can use inventory rationing to preclude a cutthroat competition and bankruptcy after the entry of an EDLP retailer. We also quantify how consumer regret affects both retailers' decisions and resulting profits. In particular, in a competitive market, the EDLP retailer cannot simply disregard consumers' availability and high-price regret (even when it stocks ample inventory and does not discount prices). We show that high-price regret and availability regret have complementary effects on the markdown retailer's rationing strategy and the EDLP retailer's price decision. Finally, using a proprietary price data set from a large department store, we show that ignoring regret factors causes the markdown retailer to leave up to 20% of its profits on the table. In addition, in a competitive market, the markdown retailer rations too aggressively when regret is ignored and, as a result, leaves some of the forgone profit to its competitor-the EDLP retailer. The retail industry is often characterized by its slim profit margins. In such an environment, the aforementioned results also suggest that retailers should seriously consider investing in developing the capacity to estimate and quantify the role of regret in consumers' purchase decisions

CAN INCOME EQUALITY INCREASE COMPETITIVENESS?

This paper explores the relationship between income distribution, prices, production efficiency and aggregate output in a decentralized search economy. We show that income distribution determines how competitive the market is, and thereby affects production efficiency and aggregate output. It is shown that it is generally possible to engineer a judicious transfer of income from high to low income individuals which simultaneously increases income equality, competitiveness, and aggregate output.Search, Price Dispersion, Income Inequality, Consumer/Household Economics, D83,

Health Insurance as a Two-Part Pricing Contract

Monopolies appear throughout health care markets, as a result of patents, limits to the extent of the market, or the presence of unique inputs and skills. In the health care industry, however, the deadweight costs of monopoly may be small or even absent. Health insurance, frequently implemented as an ex ante premium coupled with an ex post co-payment per unit consumed, effectively operates as a two-part pricing contract. This allows monopolists to extract consumer surplus without inefficiently constraining quantity. This view of health insurance contracts has several implications: (1) Low ex post copayments to insured consumers substantially reduce deadweight losses from medical care monopolies -- we calculate, for instance, that the presence of health insurance lowers monopoly loss in the US pharmaceutical market by 82 percent; (2) Price regulation or break-up of health care monopolies may be inferior to laissez-faire or simple redistribution of monopoly profits; and (3) Promoting efficiency in the health insurance market can reduce static losses in the goods market while improving the dynamic efficiency of innovation.

On Holders, Blades and Other Tie-In Sales

Tie-in sales have a bad image because of anti-competitive effects. Notably, tying contracts allow monopolists to carry over monopoly power into markets where they meet competition. Most of the literature assumes a firm being monopolist in one market and facing competition in another. In contrast, we analyze two firms which both are monopolists in one market and competitors in the other. Under such a symmetric structure tying has competitive effects. Tie-in sales may increase the consumers' expected utility. By tying their products, the firms insure consumers against uncertain future demandTie-in sales; leverage theory of tying; competition; expected utility

Nonlinear Pricing and Multimarket Duopolists

This paper studies competition in price-quality menus within the context of a horizontally differentiated duopoly, where each firm also operates in a local, monopolistic market. It is assumed that the consumer's unobservable valuation for quality is determined by the nature of his preferences over brand product characteristics. I show that if competition between the two firms is sufficiently fierce, the equilibrium contract features overprovision of quality for sufficiently low types. Thus, with respect to the monopoly setting, competition may introduce new types of distortions, namely upward distortions. This suggests that the relationship between 'toughness of competition' and welfare may not necessarily be monotonic.oligopoly, other forms of market imperfection

Opportunistic Termination

If a seller delivers a good non-conforming to contract, European and US warranty law allows consumers to choose between some money transfer and termination. Termination rights are, however, widely criticized, mainly for fear that the buyer may use non-conformity as a pretext for getting rid of a contract he no longer wants. We show that this possibility of 'opportunistic termination' might actually have positive effects. Under some circumstances, it will lead to redistribution in favour of the buyer without any loss of efficiency. Moreover, by curbing the monopoly power of the seller, a regime involving termination might increase welfare by enabling a more efficient output level in a setting with multiple buyers.contract law; warranties; breach remedies; termination; harmonization

Accessible Pareto-Improvements: Using Market Information to Reform Inefficiencies

We study Pareto improvements whose implementation requires knowledge of only market prices and traded quantities, not utility and demand functions. Quantity stabilizations (for example, the Lau, Qian, and Roland model of dual-track reform) give agents the right to repeat their earlier trades and hence require policymakers to know the quantities agents previously exchanged. While reasonable in some partial equilibrium contexts, such knowledge is implausible in general equilibrium. To diminish informational requirements further, we also consider price stabilizations, which hold constant the relative prices that consumers face. Although price stabilizations do not achieve first-best efficiency, they lead to Pareto-improvements and production efficiency. Moreover, the production efficiency advantage persists under price stabilization but not under quantity stabilization when some firms are not profit-maximizes; this difference can be critical in transition policies for planned economies. In addition to planning, we consider several other applications of quantity and price stabilization, both partial equilibrium and general equilibrium: removal of rent controls, deregulation of a cross-subsidizing public utility, and the entry of an autarkic economy into world trade. Not surprisingly, the most plausible candidates for quantity or price stabilization occur in partial equilibrium settings. Finally, we discuss some difficulties specific to general equilibrium models of transition economies. When the state completely rations trades under planning, it will usually need to operate at a deficit. Under reform, the state must raise revenue to close this deficit, and that will frequently prevent quantity stabilizations from achieving a Pareto improvement. But ex ante deficits do no pose a problem for price stabilization reform strategies.http://deepblue.lib.umich.edu/bitstream/2027.42/39782/3/wp398.pd

Strategic aspects of bundling

The increase of bundle supply has become widespread in several sectors (for instance in telecommunications and energy fields). This paper review relates strategic aspects of bundling. The main purpose of this paper is to analyze profitability of bundling strategies according to the degree of competition and the characteristics of goods. Moreover, bundling can be used as price discrimination tool, screening device or entry barriers. In monopoly case bundling strategy is efficient to sort consumers in different categories in order to capture a maximum of surplus. However, when competition increases, the profitability on bundling strategies depends on correlation of consumers reservations values.Product bundling, foreclosure, price discrimination

A Rationale for Repealing the 1987 Groceries Order

A ban on pricing below cost was implemented under the 1987 Groceries Order based on the premise that loss leading used in multi-product retail pricing distorts competition and exploits consumers in the short run, while driving a more concentrated structure and reducing welfare in the long run. Loss leading is examined for multi-product retailers selling in imperfectly competitive market niches with imperfect consumer information. We develop a theoretical argument in a simple two-stage framework that illustrates how loss leading on a subset of products is an equilibrium outcome of price competition that leaves overall welfare equal to that observed under laissez faire.