Price discrimination

This paper surveys recent economic research on price discrimination, both in monopoly and oligopoly markets. Topics include static and dynamic forms of price discrimination, and both final and input markets are considered. Potential antitrust aspects of price discrimination are highlighted throughout the paper. The paper argues that the informational requirements to make accurate policy are very great, and with most forms of price discrimination a laissez-faire policy may be the best available in practical terms. However, careful case-by-case analysis of situations involving selective price cuts and margin squeeze seems worthwhile.Price discrimination; bundling; entry deterrence; competition policy

Economic models of consumer protection policies

This paper summarizes some of my recent work on consumer protection. I present three theoretical models which illustrate the merits and drawbacks of a number of common consumer protection policies, namely: policies which prevent firms from setting unduly high prices; policies which prevent firms requiring on-the-spot decision making by prospective customers, and policies which prevent suppliers from paying commission payments to sales intermediaries.Consumer protection, consumer search, marketing, commission sales

Interactions between competition and consumer policy

This paper discusses complementarities and tensions between competition policies and consumer protection policies. The paper argues that markets will often supply adequate customer protection without the need for extra public intervention. Special areas where intervention might be needed are discussed, including the need to combat deceptive marketing and the need to provide additional market transparency (about both headline prices and shrouded product attributes). A few instances are presented of how more intense competition can worsen the outcomes for (some) consumers. Situations in which poorly designed consumer policies can harm consumers are discussed, including how they can be used to protect incumbent suppliers, how they can relax competition between oligopolists, how they can reduce consumer choice, how they can focus on one aspect of market performance at the expense of others, and how they can lead consumers to take insufficient care in the market.Competition policy; consumer protection; fraud; market transparency; add-on pricing

Exploding Offers and Buy-Now Discounts

A common sales tactic is for a seller to encourage a potential customer to make her purchase decision quickly. We consider a market with sequential consumer search in which firms often encourage first-time visitors to buy immediately, either by making an “exploding offer” (which permits no return once the consumer leaves) or by offering a “buy-now discount” (which makes the price paid for immediate purchase lower than the regular price). Prices often increase when these policies are used. If firms cannot commit to their sales policy, the outcome depends on whether consumer incur an intrinsic cost of returning to a firm: if there is no such return cost, it is often an equilibrium for firms to offer a uniform price to both first-time and returning visitors; if the return cost is positive, however, firms are forced to make exploding offers.Consumer search, oligopoly, price discrimination, high-pressure selling, exploding offers, buy-now discounts, costly recall.

Inattentive Consumers and Product Quality

This paper studies a model in which some consumers shop on the basis of price alone, without attention to potential differences in product quality. A firm may offer a low-quality product to exploit these inattentive consumers. In the unique symmetric equilibrium of the model, firms choose prices with mixed strategies, similarly to Varian (1980) in which some consumers purchase from a random seller without attention to market prices. In our model, though, firms also choose quality stochastically, and there is both price and quality dispersion. Two stylized policy interventions are considered: competition policy, which acts to increase the number of sellers, and market transparency reforms which act to increase the fraction of attentive consumers. With fewer inattentive consumers, firms are less likely to "cheat" (i.e., cut quality) which therefore improves welfare, but profit and consumer surplus can either increase or decrease. When there is a large number of sellers, approximately half the sellers cheat (regardless of the fraction of inattentive consumers), and introducing more sellers boosts consumers surplus and reduces profit, while the impact on welfare is ambiguous.Oligopoly; Complex Products; Market transparency; Competition Policy

Conditioning prices on search behaviour

We consider a market in which firms can partially observe each consumer's search behavior in the market. In our main model, a firm knows whether a consumer is visiting it for the first time or whether she is returning after a previous visit. Firms have an incentive to offer a lower price on a first visit than a return visit, so that new consumers are offered a "buy-now" discount. The ability to offer such discounts acts to raise all prices in the market. If firms cannot commit to their buy-later price, in many cases firms make "exploding" offers, and consumers never return to a previously sampled firm. Likewise, if firms must charge the same price to all consumers, regardless of search history, we show that they sometimes have the incentive to make exploding offers. We also consider other ways in which firms could use information about search behaviour to determine their prices.Consumer search; oligopoly; price discrimination; high-pressure selling; exploding offers; costly recall

Behavioral economics as applied to firms: a primer

We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behavior in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.Behavioral economics, bounded rationality, experimental economics, oligopoly, antitrust

Paying for prominence

We investigate three ways in which firms can become "prominent" and thereby influence the order in which consumers consider options. First, firms can affect an intermediary's sales efforts by means of commission payments. When firms pay commission to a salesman, the salesman promotes the product with the highest commission, and steers ignorant consumers towards the more expensive product. Second, sellers can advertise prices on a price comparison website, so that consumers investigate the suitability of products in order of increasing price. In such a market, equilibrium prices are lower when search costs are higher since a firm's benefit from being investigated first increases with search costs. Finally, consumers might first consider their existing supplier when they purchase a new product, which suggests a relatively benign rationale for the prevalence of cross-selling in markets such as retail banking.Consumer search, e-commerce, price comparison websites, cross-selling, mis-selling, commission sales.

Exploding offers and buy-now discounts

We consider a market with sequential consumer search in which firms can distinguish potential customers visiting for the first time from returning visitors. We show that firms often have an incentive to make it costly for its visitors to return after investigating rivals, either by making an "exploding offer" (which permits no return once the consumer leaves) or by offering a "buy-now discount" (which makes the price paid by first-time visitors lower than that for returning visitors). Prices often increase when return costs are artificially increased in this manner, and this harms consumers and market performance. If firms cannot commit to their buy-later price the outcome depends on whether there is an intrinsic cost of returning to a firm: if the intrinsic return cost is zero, it is often an equilibrium for firms not to offer any buy-now discount; if the return cost is positive, firms are forced to make exploding offers.Consumer search; oligopoly; price discrimination; high-pressure selling; buy-now discounts; costly recall

Regulation, Competition and Liberalization

In many countries throughout the world, regulators are struggling to determine whether and how to introduce competition into regulated industries. This essay examines the complexities involved in the liberalization process. While stressing the importance of case-specific analyses, this essay distinguishes liberalization policies that generally are pro-competitive from corresponding anti-competitive liberalization policiesCompetition, Regulation, Liberalization