Production Targets

We present a dynamic quantity setting game, where players may continuously adjust their quantity targets, but incur convex adjustment costs when they do so. These costs allow players to use quantity targets as a partial commitment device. We show that the equilibrium path of such a game is hump-shaped and that the final equilibrium outcome is more competitive than its static analog. We then test the theory using monthly production targets of the Big Three U.S. auto manufacturers during 1965-1995 and show that the hump-shaped dynamic pattern is present in the data. Initially, production targets steadily increase until they peak about 2-3 months before production. Then, they gradually decline to eventual production levels. This qualitative pattern is fairly robust across a range of similar exercises. We conclude that strategic considerations play a role in the planning phase in the auto industry, and that static models may therefore under-estimate the industry's competitiveness.

Costly search and design

Firms compete by choosing both a price and a design from a family of designs that can be represented as demand rotations. Consumers engage in costly sequential search among firms. Each time a consumer pays a search cost he observes a new offering. An offering consists of a price quote and a new good, where goods might vary in the extent to which they are good matches for the consumer. In equilibrium, only two design- styles arise: either the most niche where consumers are likely to either love or loathe the product, or the broadest where consumers are likely to have similar valuations. In equilibrium, different firms may simultaneously offer both design-styles. We perform comparative statics on the equilibrium and show that a fall in search costs can lead to higher industry prices and profits and lower consumer surplus. Our analysis is related to discussions of how the internet has led to the prevalence of niche goods and the "long tail" phenomenon.Product design, search costs, long tail

Diversity and demand externalities: How cheap information can reduce welfare

Goods and services vary along a number of dimensions independently. Customers can choose to acquire information on the quality of some dimensions and not others. Their choices affect firms’ incentives to invest in quality and so lead to indirect externalities in consumers’ choices. We illustrate these ideas in a simple model with a monopolist selling a product with two characteristics, investments in quality with stochastic realizations and heterogeneous consumers. A fall in the cost of acquiring information on the quality of one characteristic leads more consumers to verify that characteristic. Consequently, the firm may under-provide quality on the other. This may paradoxically reduce consumer surplus, profits and welfare. Our discussion concludes with a number of potential extensions and applications of the basic framework

Information Gathering and Marketing

Consumers have only partial knowledge before making a purchase decision, but can choose to acquire more detailed information. A Örm can make it easier or harder for these consumers to obtain such information. We explore consumersíinformation gathering and the Örmís integrated strategy for marketing, pricing, and investment in quality. In particular, we highlight that when consumers are ex-ante heterogeneous, the Örm might choose an intermediate marketing strategy for two quite di§erent reasons. First, it serves as a non-price means of discriminationó it can make information only partially available, in a way that induces some, but not all, consumers to acquire the information. Second, when the Örm cannot commit to a given investment in quality, it can still convince all consumers of its provision by designing a pricing and marketing policy that induces some consumers to actively gather further information. This mass of consumers, in exchange, is su¢ ciently large to discipline the monopolist to invest in the quality of the product

Locating inside the Salop circle: Demand rotations in a micro-founded model

We present a micro-founded model of design, that provides a framework in which design leads to demand rotations. We show simple sufficient conditions that determine when design should be extreme (fully standardized or fully tailored) or rather be only partially tailored

Locating inside the Salop circle: Demand rotations in a micro-founded model

We present a micro-founded model of design, that provides a framework in which design leads to demand rotations. We show simple sufficient conditions that determine when design should be extreme (fully standardized or fully tailored) or rather be only partially tailored

Search, Design, and Market Structure

The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena