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

Market Design with Correlated Valuations

The effects of information on market design are explored in a simple setting where firms have private information about their correlated fixed costs and the government aims to maximize its expected revenue conditional on achieving efficient allocations. Government revenues are higher when the costs are less correlated (or are more of a private value). The reduced correlation increases the firms' information rents, but a change in the information structure also changes the expected market structures with positive effects on government revenues. If the government faces the no-deficit constraint, there are situations where efficient allocations are achieved under asymmetric information but not under symmetric information.market structure, correlated values, market design, government revenue

Product Innovation Incentives: Monopoly vs. Competition

Arrow (1962) showed that a secure monopolist (unconcerned with preemption) has a weaker incentive than would a competitive firm to invest in a patentable process innovation. This paper shows that the ranking can be reversed for product innovations. Only the innovator sells the new product, a differentiated substitute for the old. Under alternative market structures considered, the old product is sold only by that same firm (two-product monopoly), only by a different firm (post-innovation duopoly), or in perfect competition. In an asymmetric Hotelling model, the innovation incentive under monopoly is greater than under duopoly if and only if the new product has the higher quality, and is always greater than under perfect competition.

Vertical price control and parallel imports - theory and evidence

A policy of national exhaustion says that the rights to control distribution, end upon first sale only within a country, thereby permitting rights holders to exclude parallel imports. A policy of international exhaustion states that such rights end upon first sale anywhere, and therefore permits parallel imports. The European Union has a policy of regional exhaustion within its territory. Language in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) suggests that this policy choice remains the prerogative of individual countries. The authors review the international policy debate about parallel imports, which are controversial because they erode the ability of intellectual property owners to segment markets. Against considerable opposition, for example, Australia recently deregulated its import controls in major copyrighted goods, because domestic prices were evidently sustained at high levels by those controls. Both the European Union, and the United States are considering permitting parallel imports of prescription pharmaceuticals from abroad. Developing countries must consider their exhaustion regimes in the context of competition policies, and intellectual property rights. Economic theory demonstrates that the welfare tradeoffs in regulating parallel imports, are complex and depend on circumstances. The authors advance a new model that analyzes parallel imports as a response to vertical pricing arrangements between a rights holder ("manufacturer") and a foreign distributor. In this model, if markets were segmented, the manufacturer would change a wholesale price to its foreign distributor to ensure an efficient (profit-maximizing) retail price. But if markets were integrated by parallel trade, the distributor could purchase the good at a wholesale price, and sell it back to the manufacturer's home market at the local retail price. If transport costs were low enough, this would be profitable, but would diminish the return to the manufacturer, and waste resources in costly trade. So there would be tradeoffs: Parallel imports would benefit consumers in the high-price country, but hurt consumers in the low-price country. Such trade forces the manufacturer to set an inefficientwholesale price to limit its extent; it also consumes resources. The welfare implications of allowing parallel imports are ambiguous. If the costs of engaging in such trade were low, there would be gains from permitting it; if the costs were high, it would be more sensible to ban it. Countries near each other, with low trade barriers, might prefer an open regime of parallel trade. The vertical pricing model provides an explanation of this pricing behavior that is consistent with manufacturer's preferences to deter parallel trade.Environmental Economics&Policies,Economic Theory&Research,Access to Markets,Markets and Market Access,Trade Policy

Buyer Investment, Product Variety, and Intrafirm Trade

This paper studies a simple model of buyer investment and its effect on the variety and vertical structure of international trade. A distinction is made between two types of buyer investment: "flexible" and "specific." Their interactions with the entry and pricing incentives of suppliers are analyzed. It is shown that (i) there can be multiple equilibria in the variety of products traded, and (ii) less product variety is associated with more intrafirm trade. The possibility of multiple equilibria is consistent with the observation that some similar economies, such as Taiwan and South Korea, differ substantially in their export varieties to the U.S. A formal empirical analysis confirms the negative correlation between product variety and intrafirm trade.

Improving Market Performance in the Digital Economy

The digital economy has substantially reduced market frictions but also posed new challenges for the efficient functioning of markets. In particular, the drastic reductions in the costs of search, entry, transportation, and reproduction have profound implications for the role of platforms, the value of innovation, and the balance between firms' data needs and consumer privacy. I review some recent economic research that sheds light on these issues, and discuss how well-designed policies on competition, regulation, IP protection, and consumer privacy can improve market performance in the digital economy

Improving Market Performance in the Digital Economy

The digital economy has substantially reduced market frictions but also posed new challenges for the efficient functioning of markets. In particular, the drastic reductions in the costs of search, entry, transportation, and reproduction have profound implications for the role of platforms, the value of innovation, and the balance between firms' data needs and consumer privacy. I review some recent economic research that sheds light on these issues, and discuss how well-designed policies on competition, regulation, IP protection, and consumer privacy can improve market performance in the digital economy

Consumer uncertainty and price discrimination through online coupons: an empirical study of restaurants in Shanghai

We use data from restaurants in Shanghai, China to conduct a new empirical analysis of prices and coupons. Our results show a positive relationship between prices and online coupons. Moreover, the price premium from couponing is higher for restaurants about which consumer values appear to be more uncertain. When consumer uncertainty is high, restaurants that offer coupons have an average price that is about 60 percent higher than similar restaurants that do not issue coupons. When uncertainty is low, restaurants that offer coupons have an average price that is about ten percent higher. These findings are consistent with online couponing in the restaurant industry being used for price discrimination and as a promotional device in the presence of higher uncertainty in consumer valuations.consumer uncertainty; coupons; price discrimination; price promotion

Interpersonal bundling

This paper studies a model of interpersonal bundling, in which a monopolist offers a good for sale under a regular price and a group purchase discount if the number of consumers in a group—the bundle size—belongs to some menu of intervals. We find that this is often a profitable selling strategy in response to demand uncertainty, and it can achieve the highest profit among all possible selling mechanisms. We explain how the profitability of interpersonal bundling with a minimum or maximum group size may depend on the nature of uncertainty and on parameters of the market environment, and we discuss strategic issues related to the optimal design and implementation of these bundling schemes. Our analysis sheds light on popular marketing practices such as group purchase discounts, and it offers insights on potential new marketing innovation