Insider Trading, Competition, and Real Activities Manipulation

2021 ◽  
Author(s):  
Hui Chen ◽  
Bjorn N. Jorgensen
Keyword(s):  
Insider Trading ◽  
Ownership Structure ◽  
Consumer Surplus ◽  
Comparative Statics ◽  
Common Market ◽  
Horizontal Merger ◽  
Market Maker ◽  
Cost Information ◽  
Real Activities Manipulation ◽  
Firm Profit

We consider a setting where managers manipulate the firms’ real activities in anticipation of insider trading opportunities. Managers choose strictly higher production quantities than the quantities chosen absent insider trading, implying lower firm profit but higher consumer surplus. Through comparative statics, we show the overproduction is mitigated by the degree of competition in the industry, the manager’s current equity stake in the firm, and the precision of cost information. We also analyze the effects of insider trading in several extensions including asymmetric ownership structure, potential horizontal merger, and common market maker. This paper was accepted by Shiva Rajgopal, accounting.

scholarly journals Power to Choose? An Analysis of Consumer Inertia in the Residential Electricity Market

2017 ◽  
Vol 9 (4) ◽  
pp. 192-226 ◽  
Author(s):  
Ali Hortaçsu ◽  
Seyed Ali Madanizadeh ◽  
Steven L. Puller
Keyword(s):  
Electricity Market ◽  
Low Cost ◽  
Consumer Surplus ◽  
Retail Competition ◽  
Search Frictions ◽  
Cost Information ◽  
Household Level ◽  
Consumer Benefits ◽  
Level Data ◽  
Residential Electricity

Many jurisdictions around the world have deregulated utilities and opened retail markets to competition. However, inertial decision making can diminish consumer benefits of retail competition. Using household-level data from the Texas residential electricity market, we document evidence of consumer inertia. We estimate an econometric model of retail choice to measure two sources of inertia: search frictions/inattention and a brand advantage that consumers afford the incumbent. We find that households rarely search for alternative retailers, and when they do search, households attach a brand advantage to the incumbent. Counterfactual experiments show that low-cost information interventions can notably increase consumer surplus. (JEL D12, D83, L81, L94, L98, M31)

scholarly journals Transparency of Behavior-Based Pricing

2019 ◽  
Vol 57 (1) ◽  
pp. 78-99 ◽  
Author(s):  
Xi Li ◽  
Krista J. Li ◽  
Xin (Shane) Wang
Keyword(s):  
Social Welfare ◽  
Consumer Surplus ◽  
Unintended Consequences ◽  
History Data ◽  
Consumer Data ◽  
Behavior Based ◽  
The Cost ◽  
Firm Profit ◽  
Commitment Device

Behavior-based pricing (BBP) refers to the practice in which firms collect consumers’ purchase history data, recognize repeat and new consumers from the data, and offer them different prices. This is a prevalent practice for firms and a worldwide concern for consumers. Extant research has examined BBP under the assumption that consumers observe firms’ practice of BBP. However, consumers do not know that specific firms are doing this and are often unaware of how firms collect and use their data. In this article, the authors examine (1) how firms make BBP decisions when consumers do not observe whether firms perform BBP and (2) how the transparency of firms’ BBP practice affects firms and consumers. They find that when consumers do not observe firms’ practice of BBP and the cost of implementing BBP is low, a firm indeed practices BBP, even though BBP is a dominated strategy when consumers observe it. When the cost is moderate, the firm does not use BBP; however, it must distort its first-period price downward to signal and convince consumers of its choice. A high cost of implementing BBP serves as a commitment device that the firm will forfeit BBP, thereby improving firm profit. By comparing regimes in which consumers do and do not observe a firm’s practice of BBP, the authors find that transparency of BBP increases firm profit but decreases consumer surplus and social welfare. Therefore, requiring firms to disclose collection and usage of consumer data could hurt consumers and lead to unintended consequences.

Quality Disclosure Under Consumer Loss Aversion

2020 ◽  
Author(s):  
Jianqiang Zhang ◽  
Krista J. Li
Keyword(s):  
Decision Making ◽  
Social Welfare ◽  
Loss Aversion ◽  
Consumer Surplus ◽  
Quality Disclosure ◽  
Disclosure Decisions ◽  
Future Outcomes ◽  
The Cost ◽  
Firm Profit ◽  
First Mover

Consumers experience a sense of loss when a product’s quality does not match their expectations. To alleviate consumer loss aversion (CLA), firms can disclose information to reduce consumers’ uncertainty about product quality and the resulting psychological loss. In this paper, we investigate the implications of CLA on firm profit, consumer surplus, and social welfare when firms endogenously make quality disclosure decisions. We find that CLA leads symmetric firms to disclose quality more often. Given that CLA weakly reduces consumers’ utility from buying a product and quality disclosure is costly, intuition suggests that CLA is detrimental to firms. We find that this intuition is true only in a monopoly. Surprisingly, CLA makes both firms in a competition better off. Moreover, CLA increases firms’ profit when they invest in quality disclosure instead of money-back guarantees to respond to CLA. We also find that CLA decreases consumer surplus and social welfare. Therefore, educating consumers to improve decision-making skills by deliberating on future outcomes and emotions can benefit firms at the cost of consumers and society. When firms disclose quality sequentially, CLA can discourage the follower from disclosing quality. A strong level of CLA increases the leader’s profit over the follower’s, thereby encouraging firms to be the first mover in quality disclosure. This paper was accepted by Juanjuan Zhang, marketing.

scholarly journals A Theoretical Analysis of the Pricing and Advertising Strategies with Lévy-Walking Consumers

2021 ◽  
Vol 16 (6) ◽  
pp. 2129-2150
Author(s):  
Wei Wang ◽  
Gang Li
Keyword(s):  
Consumer Surplus ◽  
Economic Effects ◽  
Product Price ◽  
Informative Advertising ◽  
Walking Behavior ◽  
Advertising Strategy ◽  
Advertising Strategies ◽  
Movement Distance ◽  
Welfare Implications ◽  
Firm Profit

The pervasive adoption of mobile devices and proximity technologies enables firms to trace consumers’ trajectories and locations. This connects firms’ marketing and operations strategies more tightly with consumer mobility. In this paper, we propose a novel analytical model to examine the economic effects of consumer mobility on pricing and advertising strategies by incorporating consumers’ Lévy-walking behavior into advertising economics models. We ascertain the convergent effect of consumer mobility, i.e., consumers’ convergence to a firm leads to higher product price and advertising level. Meanwhile, it improves social welfare by increasing firm profit and consumer surplus. More interestingly, we find that consumers’ average movement distance (AMD) has opposing influences in pricing and advertising strategies. Specifically, longer AMD strengthens the convergent effect on advertising strategy but weakens that on pricing strategy. Finally, we also conduct a numerical analysis to uncover the impacts of the presence of proximity technologies on advertising outcomes. The results of this paper provide advisable guidance to firms on how to craft and adjust pricing and advertising strategies in accordance to consumer mobility. Moreover, the results present insights on welfare implications of informative advertising from the perspective of consumer mobility.

scholarly journals Endogenizing the Cost Parameter in Cournot Oligopoly

2020 ◽  
Vol 22 (02) ◽  
pp. 2040004
Author(s):  
Stefanos Leonardos ◽  
Costis Melolidakis
Keyword(s):  
Incomplete Information ◽  
Demand Uncertainty ◽  
Wholesale Price ◽  
Consumer Surplus ◽  
Comparative Statics ◽  
High Price ◽  
Cournot Oligopoly ◽  
Market Demand ◽  
Two Stage ◽  
Stage Game

We study the effects of endogenous cost formation in the classic Cournot oligopoly through an extended two-stage game. The competing Cournot firms produce low-cost but limited quantities of a single homogeneous product. For additional procurements, they may refer to a revenue-maximizing supplier who sets a wholesale price prior to their orders. We express this chain as a two-stage game and study its equilibrium under two different information levels: complete and incomplete information on the side of the supplier about the actual market demand. In the deterministic case, we derive the unique subgame-perfect Nash equilibrium for different values of the retailers’ capacity levels, supplier’s cost and market demand. To study the incomplete information case, we model demand uncertainty via a continuous probability distribution. Under mild assumptions, we characterize the supplier’s optimal pricing policy as a fixed point of a proper translation of his expectation about the orders that he will receive from the retailers. If this expectation is decreasing in his price, then such an optimal policy always exists and is unique. Based on this characterization, we are able to proceed with comparative statics and sensitivity analysis, both analytically and numerically. Incomplete information gives rise to market inefficiencies because the supplier may ask for a too high price. Increasing supplier’s cost results in increasing wholesale prices, decreasing orders from the retailers and hence decreasing consumer surplus. Increasing retailers’ production capacities results in decreasing wholesale prices and increasing consumer surplus. Finally, as the number of second-stage retailers increases, the supplier’s profit may initially rise but eventually drops.

Disclosure to Regulate Learning in Product Markets from the Stock Market

2021 ◽  
Author(s):  
Anil Arya ◽  
Ram NV Ramanan
Keyword(s):  
Stock Market ◽  
Stock Price ◽  
One Dimension ◽  
Cost Information ◽  
Competitive Effects ◽  
Competitive Edge ◽  
Demand Information ◽  
Disclosure Strategy ◽  
Production Decision ◽  
Firm Profit

A firm’s stock price may reveal information to a variety of participants, including its strategic partners and competitive rivals.  This paper establishes that when a firm discloses cost information it can confound decision-relevant demand information embedded in the stock price that observers can otherwise extract.  With stock price valuing firm profit (not cost and revenue separately), a disconnect is introduced between the firm’s actions and its intent – it discloses more (less) on one dimension when its intent is to conceal (reveal) on another.  Moreover, the firm’s intent can be to either reveal or conceal information depending on what gives its partner the best competitive edge over its rival.  Consequently, a firm’s disclosure is made strategically, incorporating valuation and competitive effects.  Interestingly, the firm’s disclosure strategy is designed in close concert with its production decision, i.e., the firm’s optimal accounting and real decisions interact with each other for maximum impact.

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