Fixed vs. Flexible Pricing in a Competitive Market

We study the selection and dynamics of two popular pricing policies—fixed price and flexible price—in competitive markets. Our paper extends previous work in marketing, for example, Desai and Purohit (2004) by focusing on decentralized markets with a dynamic and fully competitive framework while also considering possible noneconomic aspects of bargaining. We construct and analyze a competitive search model, which allows us to endogenize the expected demand depending on pricing rules and posted prices. Our analysis reveals that fixed and flexible pricing policies generally coexist in the same marketplace, and each policy comes with its own list price and customer demographics. More specifically, if customers dislike haggling, then fixed pricing emerges as the unique equilibrium, but if customers get some additional satisfaction from the bargaining process, then both policies are offered, and the unique equilibrium exhibits full segmentation: haggler customers avoid fixed-price firms and exclusively shop at flexible firms, whereas nonhaggler customers do the opposite. We also find that prices increase in customer satisfaction, implying that sellers take advantage of the positive utility enjoyed by hagglers in the form of higher prices. Finally, considering the presence of seasonal cycles in most markets, we analyze a scenario in which market demand goes through periodic ups and downs and find that equilibrium prices remain mostly stable despite significant fluctuations in demand. This finding suggests a plausible competition-based explanation for the stability of prices

Why Fixed-Price Policy Prevails: The Effect of Trade Frictions and Competition

Fixed-price selling is common in today's markets. While previous research in marketing and economics literatures provide several intuitive reasons for the emergence of fixed-price selling (e.g. clarity and simplicity of managing the fixed-price process, reduced coordination and information costs) our study offers an entirely different rationale---based on market competition and trade frictions---that explains the prevalence of fixed-price selling. Using a market equilibrium approach, and employing a novel competitive search framework to account for a fully competitive and dynamic market, we offer a new and micro-founded account for the widespread use of fixed pricing policy. Considering three important market characteristics---customer risk aversion, the degree of trade frictions and the level of market competition---we explore the strategic choice between the fixed-price, best-offer, and over-the-sticker pricing policies. Unlike the standard models in the literature, which are based Hotelling, Cournot, Bertrand frameworks, the competitive search framework enables us to model competition with a large number of buyers and sellers, and to vary the degree of competition accordingly. We find that fixed pricing emerges as the unique or the de-facto selling rule in most parameter regions. Indeed, the only region where haggling matters is the case in which customers are risk neutral and trade frictions are significant and market competition is moderate

Three Essays in Economics of Ageing

This thesis is a collection of three essays in economics of ageing. The research question of the first two chapters was motivated by the willingness to investigate about the effects of the recent financial crisis on saving behavior and the possible effects of pension reforms applied in several European countries on informal care provision. Instead the third chapter employs a statistical approach to treat the problem of non-classical measurement error with recall data affected by heaping and rounding. While this chapter is not strictly related to economics of ageing, applications of this method can be useful to treat problems of non-classical measurement error also with health variables such as the recall number of hospital days or the expenditures for health care which can be affected by this type of rounding mechanism. The first chapter is titled “How the Experience in Financial Stock Markets Affect Stockholding and Portfolio Choice” and investigates about the long-lasting effects of the financial crisis on stock market participation. In the last decade financial stock markets have been affected by several downturns, but in the long run it is supposed that equities give a premium with respect to other less risky financial assets. An analysis on the past performance of the German stock market (DAX) confirms this idea. Investing in stocks markets could have been a great opportunity but many Europeans have not participated. Moreover if the experience of negative returns has long-lasting effects, we may expect even lower participation in the market than we saw before the crisis. Within a behavioral finance approach I allow for the presence of some impressionable financial years and I consider two types of experience in financial stock markets: a potential and actual experience. The potential experience is the observed performance of the stock market when individuals start saving for retirement as predicted by the standard life-cycle model (after age 40), the actual experience is the observed performance of the stock market after the first investment in stocks or shares. Using European data from SHARE and SHARELIFE, I find evidence for the presence of financial impressionable years. Myopic loss aversion and disappointment aversion are found when potential experience is considered: individuals who experienced periods of downturn in the market when they are expected to start saving for retirement are more willing to stay out of the market. Myopic behavior is also found for actual experience: investors who had a good (bad) actual experience with stocks within three years after their first investment are more (less) willing to participate in the financial stock market later in life. Findings also suggest that many Europeans may have invested in stocks to hedge against inflation. The second chapter titled “Occupational Choices and Informal Caregiving Among Young Old Europeans” wants to analyze the effect of occupational choices on informal caregiving. In the recent years many European countries have adopted pension reforms to postpone retirement age. This could lower the informal long-term caregiving potential provided by young old. Using European data from SHARE I investigate about the effect of occupational choices on informal caregiving, both in probability and time, taking into account household formation between a care giver and a care recipient. Four different types of care recipients are considered: parents, grandchildren, adult children and other people who live outside the family. The occupational choices are considered as binary: participating or not in the labour market. Women who never participated in the labour market are distinguished from those who worked in the past, because the choice of never entering in the labour market was made in a distant past and it is more related to family preferences. Endogeneity of the occupational choices are also checked using the potential eligibility to pension benefits based on pension reforms. Results show that there is a positive effect of being not employed on coresiding with a parent or an adult child and on the informal care provision, especially for women and for care given to look after grandchildren. The endogeneity problem is relevant for women as it is considering coresiding as an alternative choice of providing informal care outside the household. Households with a woman who never worked provide more care inside the family and the woman is usually the one who specializes on care provision. A simulation of a pension reform with an increase of one year in the eligibility age to receive a public pension benefit, based on the estimated parameters, suggests that demand for formal care may increase a lot, but less for countries which adopt flexible time working arrangements policies for young old. The third chapter is titled “Estimating the Intertemporal Elasticity of Substitution on error-ridden micro data” and it is based on a joint work with Gugliemo Weber. We estimate the Intertemporal Elasticity of Substitution (IES) using Italian data from SHIW (Bank of Italy). The consumption data from SHIW are based on recall questions and are affected by severe heaping and rounding. The measurement is non-classical. To treat the heaping and rounding we apply a multiple imputation technique proposed by Heitjan and Rubin (1990), following Battistin et al. (2003), to model the coarsening process and to impute true consumption expenditures. We also propose an extension to consider the panel feature of the data. We estimate the Euler equation using four different estimators: the log-linearized version, the standard GMM estimator (EGMM), and two GMM estimators proposed by Alan et al. (2009) which both assume a classical measurement error, the first one is more efficient (GMM-K) and the second one is more robust (GMM-D). We show that EGMM and GMM-K estimators produce implausible estimates of the IES when recall data are used. Instead when multiple imputations of non-durable consumption are used the GMM-K estimator produces plausible estimates in line with the recent micro-based literature (in the 0.5-0.8 range), and the overidentifying restrictions are not rejected at least if I focus on a sample of couples. Parameter estimates using the log-linearized version and GMM-D estimator turn out to be similar to the ones based on the previous method, but less precise and do not change much when we use reported or imputed consumption

Multilateral Bargaining and Downstream Competition

We examine multilateral bargaining in vertical supply relationships which involve an upstream manufacturer who sells through two competing retailers to end consumers. In these relationships the negotiations are inter-dependent and a bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. The manufacturer may negotiate simultaneously with the retailers or sequentially with one retailer at a time. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. This observability of the existence of a prior agreement in the case of sequential negotiations can endogenously affect the bargaining externality. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices (and profitability) are similar, while sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price, and exclusively supply only the retailer who charged a relatively hig

Multilateral bargaining and downstream competition. Working paper

W e examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers. In these relationships the negotiations are interdependent, and bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices (and profitability) are similar, and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition