Option Package Bundling

This paper analyzes the optimality of package bundling by focusing on the ?main and accessory?relationship between two goods. In particular, we consider option package bundling in which an optional good is valuable only if it is consumed together with a certain (nonoptional) base good. We develop a model of option package bundling for a monopolist in which buyers?valuations are independently and uniformly distributed. We also allow inter-relationship between valuations by assuming that the reservation value of the bundle can be greater or less than the sum of the innate value of both goods. Our analysis observes that mixed bundling, in which the base good is sold with or without the optional good, yields a higher pro?t than pure bundling if and only if the range of the optional good valuation exceeds a threshold value. We then conduct a welfare analysis of the bundling choice. The result is surprising: pure bundling is always desirable from the social welfare viewpoint when a monopolist chooses mixed bundling.Multiproduct monopoly; Bundling; Optional goods; Interdepen-dent valuations.

Essays in industrial organization

This dissertation contains two essays on how contracting affects behavior and welfare of firms when information about some key variables is imperfect. The first essay deals with contractual solutions to the holdup problem when a party\u27s relationship-specific investment can be subsidized by the other party. The second essay considers relational contracts and pricing patterns in a Bertrand game in which each firm has private information about the demand state. Holdup with subsidized investment. In this essay a holdup model is analyzed in which one party, the seller, has an investment project that the other party, the buyer, can subsidize: The investment project remains the seller\u27s; she cannot transfer her entire control rights to it. In particular, she can always refuse to allow the buyer to subsidize her investment if the subsidy would put the buyer in too strong a bargaining position ex post. Even with the subsidization opportunity, the holdup inefficiency is still present, except in the special cases in which one party has all the bargaining power. The adoption of a contract, however, allows full efficiency to be achieved more generally. In particular, if the seller\u27s investment project imposes a positive externality on the buyer but does not reduce her own production costs, a buyer\u27s option contract exists that achieves full efficiency. This is in contrast to the result of Che and Hausch (1999) that without a subsidization opportunity, contracting has no value in this “purely cooperative” case. If the investment lowers the seller\u27s costs as well as raises the buyer\u27s value, whether full efficiency can be achieved depends on how cooperative the investment is. Full efficiency can be achieved if the cooperativeness of the investment is either sufficiently high or sufficiently low. Collusion, fluctuating demand, and price rigidity (with Huanxing Yang). In this essay we study an infinitely repeated Bertrand game in which an i.i.d. demand shock occurs in each period. Each firm receives a private signal about the demand shock at the beginning of each period. At the end of each period, information about the underlying demand shock and the rivals\u27 prices becomes public. A firm\u27s pricing schedule can be either a sorting scheme, in which its price depends on its private signal, or a price-rigidity scheme in which the firm charges the same price regardless of its private signal. We consider the optimal strong symmetric perfect public equilibrium (SPPE). The optimal SPPE consists of a profile of price-rigidity schemes if the accuracy of the private signals is low. Moreover, the lower the variance of the demand shock, the more likely that a price-rigidity scheme is optimal. These results contribute to our understanding of which industries, and under what conditions, should exhibit rigid prices

Essays in industrial organization

This dissertation contains two essays on how contracting affects behavior and welfare of firms when information about some key variables is imperfect. The first essay deals with contractual solutions to the holdup problem when a party\u27s relationship-specific investment can be subsidized by the other party. The second essay considers relational contracts and pricing patterns in a Bertrand game in which each firm has private information about the demand state. Holdup with subsidized investment. In this essay a holdup model is analyzed in which one party, the seller, has an investment project that the other party, the buyer, can subsidize: The investment project remains the seller\u27s; she cannot transfer her entire control rights to it. In particular, she can always refuse to allow the buyer to subsidize her investment if the subsidy would put the buyer in too strong a bargaining position ex post. Even with the subsidization opportunity, the holdup inefficiency is still present, except in the special cases in which one party has all the bargaining power. The adoption of a contract, however, allows full efficiency to be achieved more generally. In particular, if the seller\u27s investment project imposes a positive externality on the buyer but does not reduce her own production costs, a buyer\u27s option contract exists that achieves full efficiency. This is in contrast to the result of Che and Hausch (1999) that without a subsidization opportunity, contracting has no value in this “purely cooperative” case. If the investment lowers the seller\u27s costs as well as raises the buyer\u27s value, whether full efficiency can be achieved depends on how cooperative the investment is. Full efficiency can be achieved if the cooperativeness of the investment is either sufficiently high or sufficiently low. Collusion, fluctuating demand, and price rigidity (with Huanxing Yang). In this essay we study an infinitely repeated Bertrand game in which an i.i.d. demand shock occurs in each period. Each firm receives a private signal about the demand shock at the beginning of each period. At the end of each period, information about the underlying demand shock and the rivals\u27 prices becomes public. A firm\u27s pricing schedule can be either a sorting scheme, in which its price depends on its private signal, or a price-rigidity scheme in which the firm charges the same price regardless of its private signal. We consider the optimal strong symmetric perfect public equilibrium (SPPE). The optimal SPPE consists of a profile of price-rigidity schemes if the accuracy of the private signals is low. Moreover, the lower the variance of the demand shock, the more likely that a price-rigidity scheme is optimal. These results contribute to our understanding of which industries, and under what conditions, should exhibit rigid prices

Holdup with Subsidized Investment

A holdup model is analyzed in which one party, the seller, has an investment project that the other party, the buyer, can subsidize. The investment project remains the seller's; she cannot transfer her entire control rights to it. In particular, she can always refuse to allow the buyer to subsidize her investment if the subsidy would put the buyer in too strong a bargaining position ex post. Even with the subsidization opportunity, the holdup inefficiency is still present, except in the special cases in which one party has all the bargaining power. The adoption of a contract, however, allows full efficiency to be achieved more generally. In particular, if the seller's investment project imposes a positive externality on the buyer but does not reduce her own production costs, a buyer's option contract exists that achieves full efficiency. This is in contrast to the result of Che and Hausch (1999) that without a subsidization opportunity, contracting has no value in this "purely cooperative" case. If the investment lowers the seller's costs as well as raises the buyer's value, whether full efficiency can be achieved depends on how cooperative the investment is. Full efficiency can be achieved if the cooperativeness of the investment is either sufficiently high or sufficiently lowHoldup, renegotiation, contractual remedies, subsidized investment

Dynamic entry and exit with uncertain cost positions

We study the dynamics of entry and exit based on firms' learning about their relative cost positions. Each firm's marginal cost of production is its own private information, thereby facing ex ante uncertainty about its cost position. The (inelastic) market demand can accommodate only a fraction of firms to operate, and thus only firms with relatively lower costs are viable in the long run. Some firms in the market will exit if excessive entry (or overshooting) occurs. We derive the unique symmetric sequential equilibrium. The equilibrium properties are consistent with empirical observations: (i) entry occurs gradually over time with lower cost firms entering earlier than higher cost firms, (ii) exiting firms are among the ones that entered later (indeed in the last period). Moreover, equilibrium overshooting probability is shown to always be positive and decreasing over time.Entry Shakeout Learning Cost positions

Option Package Bundling

This paper analyzes the optimality of package bundling by focusing on the "main and accessory" relationship between two goods. In particular, we consider option package bundling in which an optional good is valuable only if it is consumed together with a certain (nonoptional) base good. We develop a model of option package bundling for a monopolist in which buyers' valuations are independently and uniformly distributed. We also allow inter-relationship between valuations by assuming that the reservation value of the bundle can be greater or less than the sum of the innate value of both goods. Our analysis observes that mixed bundling, in which the base good is sold with or without the optional good, yields a higher profit than pure bundling if and only if the range of the optional good valuation exceeds a threshold value. We then conduct a welfare analysis of the bundling choice. The result is surprising: pure bundling is always desirable from the social welfare viewpoint when a monopolist chooses mixed bundling