Competition and Price Variation when Consumers Are Loss Averse

2008 ◽  
Vol 98 (4) ◽  
pp. 1245-1268 ◽  
Author(s):  
Paul Heidhues ◽  
Botond Kőszegi
Keyword(s):  
Reference Point ◽  
Price Competition ◽  
Differentiated Products ◽  
Symmetric Equilibrium ◽  
Price Equilibrium ◽  
Price Variation ◽  
Market Prices ◽  
Intensity Of Competition ◽  
Price Responsiveness

We modify the Salop (1979) model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase. Consumers' sensitivity to losses in money increases the price responsiveness of demand—and hence the intensity of competition—at higher relative to lower market prices, reducing or eliminating price variation both within and between products. When firms face common stochastic costs, in any symmetric equilibrium the markup is strictly decreasing in cost. Even when firms face different cost distributions, we identify conditions under which a focal-price equilibrium (where firms always charge the same “focal” price) exists, and conditions under which any equilibrium is focal. (JEL D11, D43, D81, L13)

scholarly journals Simultaneous Search for Differentiated Products: The Impact of Search Costs and Firm Prominence

2020 ◽  
Author(s):  
José L Moraga-González ◽  
Zsolt Sándor ◽  
Matthijs R Wildenbeest
Keyword(s):  
Search Costs ◽  
Equilibrium Price ◽  
Differentiated Products ◽  
Necessary And Sufficient Condition ◽  
Symmetric Equilibrium ◽  
Price Equilibrium ◽  
Search Cost ◽  
Equilibrium Prices ◽  
Necessary And Sufficient ◽  
The Impact

Abstract We extend the literature on simultaneous search by allowing for differentiated products and search cost heterogeneity. We show conditions under which a symmetric price equilibrium exists. We provide a necessary and sufficient condition under which an increase in search costs may result in a lower, equal or higher equilibrium price. We extend this analysis to the case with more than two firms. The effects of prominence on equilibrium prices are also studied. The prominent firm charges a higher price than the non-prominent firm and both their prices are below the symmetric equilibrium price. Consequently, market prominence increases the consumers’ surplus.

scholarly journals Do Switching Costs Make Markets Less Competitive?

2009 ◽  
Vol 46 (4) ◽  
pp. 435-445 ◽  
Author(s):  
Jean-Pierre Dubé ◽  
Günter J. Hitsch ◽  
Peter E. Rossi
Keyword(s):  
Price Competition ◽  
Switching Costs ◽  
Realistic Model ◽  
Differentiated Products ◽  
Product Price ◽  
Equilibrium Prices ◽  
Dynamic Price ◽  
Packaged Goods ◽  
Order Of Magnitude ◽  
Lock In

The conventional wisdom in economic theory holds that switching costs make markets less competitive. This article challenges this claim. The authors formulate an empirically realistic model of dynamic price competition that allows for differentiated products and imperfect lock-in. They calibrate this model with data from frequently purchased packaged goods markets. These data are ideal in the sense that they have the necessary variation to identify switching costs separately from consumer heterogeneity. Equally important, consumers exhibit inertia in their brand choices, a form of psychological switching cost. This makes the results applicable to the broad range of products that are distinctly identified (i.e., branded) rather than just to products for which there is a product adoption cost or explicit switching fee. In the simulations, prices are as much as 18% lower with than without switching costs. More important, equilibrium prices do not increase even in the presence of switching costs that are of the same order of magnitude as product price.

Eurotunnel versus the Ferries

2017 ◽  
pp. 1-17
Author(s):  
David Besanko ◽  
Christopher Stori ◽  
Ed Kalletta
Keyword(s):  
Competitive Advantage ◽  
Price Competition ◽  
Marginal Cost ◽  
Pricing Strategy ◽  
Differentiated Products ◽  
Horizontal Differentiation ◽  
Passenger Traffic ◽  
History Of ◽  
Key Drivers ◽  
The Cross

Considers the competitive strategy of the Channel Tunnel just prior to the time it opened for business in 1994. Focusing specifically on the tunnel's Le Shuttle service for freight and passenger traffic, gives students an opportunity to explore whether Le Shuttle should follow a premium pricing strategy relative to the cross-channel ferries, match the ferries' prices, or undercut the ferries' prices. Following a section on the history of the tunnel's construction, provides an in-depth discussion of the cross-channel ferry business and the Le Shuttle services. Concludes by posing the question: What pricing strategy should Le Shuttle follow?To illustrate the key drivers of price competition in a differentiated products industry: differences in marginal cost; vertical differentiation among competitors; the degree of horizontal differentiation in the market; and the sources and sustainability of competitive advantage.

scholarly journals Learning to Coordinate: A Study in Retail Gasoline

2019 ◽  
Vol 109 (2) ◽  
pp. 591-619 ◽  
Author(s):  
David P. Byrne ◽  
Nicolas de Roos
Keyword(s):  
Price Competition ◽  
Equilibrium Selection ◽  
Price Leadership ◽  
Market Prices ◽  
Retail Gasoline ◽  
Gasoline Industry ◽  
Urban Market ◽  
Dominant Firms ◽  
Equilibrium Transition ◽  
Detection Strategies

This paper studies equilibrium selection in the retail gasoline industry. We exploit a unique dataset that contains the universe of station-level prices for an urban market for 15 years, and that encompasses a coordinated equilibrium transition mid-sample. We uncover a gradual, three-year equilibrium transition, whereby dominant firms use price leadership and price experiments to create focal points that coordinate market prices, soften price competition, and enhance retail margins. Our results inform the theory of collusion, with particular relevance to the initiation of collusion and equilibrium selection. We also highlight new insights into merger policy and collusion detection strategies. (JEL G34, L12, L13, L71, L81, Q35)

Prices Return

2019 ◽  
pp. 195-217
Author(s):  
Philip T. Hoffman ◽  
Gilles Postel-Vinay ◽  
Jean-Laurent Rosenthal
Keyword(s):  
Interest Rate ◽  
Asymmetric Information ◽  
Price Competition ◽  
Credit Rationing ◽  
Late Nineteenth Century ◽  
Price Equilibrium ◽  
Economics Literature ◽  
Late Nineteenth ◽  
Pooling Equilibria ◽  
Shed Light

This chapter considers the transition to a new equilibrium in 1899 by reviewing some economics literature that deals with three different issues that arise in the transition from a single-price equilibrium to a range of prices. The first suggests that when there is substantial asymmetric information, price competition in credit markets may be reduced, if not eliminated, in favor of credit rationing. Next, the chapter studies why the equilibrium in a credit rationing market may feature a single interest rate. Finally, it examines a third approach that analyzes conditions under which such pooling equilibria may unravel. This economics literature helps shed light on the transition from the near universal five-percent interest rate equilibrium to a regime with a distribution of rates in the late nineteenth century.

Procurement Mechanisms for Assortments of Differentiated Products

2021 ◽  
Author(s):  
Daniela Saban ◽  
Gabriel Y. Weintraub
Keyword(s):  
Mechanism Design ◽  
Price Competition ◽  
Consumer Surplus ◽  
Differentiated Products ◽  
The World ◽  
Substitute Products ◽  
Practical Implications ◽  
Chilean Government

Many procurement agencies around the world construct assortments of differentiated products from which consumers can buy from. A leading example is framework agreements, a type of procurement mechanism commonly used by governments. This type of practice is studied head on. The authors introduce a mechanism design formulation of the procurement agency’s problem and solves it under progressively more realistic implementation constraints. The results show how restricting entry of close-substitute products into the assortment can increase price competition, reducing spending significantly, without much damage to the variety offered to consumers. Furthermore, the results have practical implications that can be used by procurement agencies to increase consumer surplus and have already been used to redesign FAs in the Chilean government.

Preempting the Entry of Near Perfect Substitutes

2020 ◽  
Author(s):  
Vilen Lipatov ◽  
Damien Neven ◽  
Georges Siotis
Keyword(s):  
Price Competition ◽  
Generic Version ◽  
Differentiated Products ◽  
Quality Competition ◽  
Pharmaceutical Drug ◽  
Market Shares ◽  
Number Of Firms

Abstract When firms compete on price and quality-enhancing promotion in a market for differentiated products, entry of a nearly perfect substitute to one of such products, for example, a generic version of a pharmaceutical drug, intensifies price competition but softens quality competition. We show that consumers are likely to gain from entry when quality is relatively unimportant for them, when business stealing generated by promotion is substantial, and when products are poor substitutes. We also show that entry may be more attractive for consumers in less concentrated markets, as a smaller number of firms and asymmetric market shares may be associated with higher quality.

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