Shared Manufacturing in A Differentiated Duopoly with Capacity Constraints

This study sets up a differentiated duopoly model considering capacity constraints and shared manufacturing, investigates the equilibrium results, examines the effects of product differentiation and capacity constraints in three scenarios, and compares the equilibrium outcomes in three cases under Cournot and Stackelberg competition. We find that capacity constraints affect the relationships among product differentiation, equilibrium results, and the market share of enterprises. Shared manufacturing impacts the degree of excess capacity, profits, consumer surplus, and social welfare; however, it may sometimes play a negative role in alleviating excess capacity. Moreover, Cournot competition is a better choice for enterprises with capacity constraints compared to Stackelberg competition.

Bunching with the Stars: How Firms Respond to Environmental Certification

Voluntary environmental certification programs have been a popular tool used by governments, industry groups, and nonprofit organizations alike. A central question in the design of such programs is who should pay for them. In a context where firms respond strategically to a certification, the answer to this question is a priori ambiguous and, ultimately, empirical. This paper provides important insights on this question using ENERGY STAR, a voluntary certification program for energy-efficient products, as a case study. I show that firms are highly strategic with respect to this certification and extract consumer surplus associated with certified products via three mechanisms. They offer products that bunch at the certification requirement, differentiate certified products in the energy and nonenergy dimensions, and charge a price premium on certified products. I use these findings to motivate a structural econometric model with firms’ strategic behaviors with respect to product line and pricing decisions and to investigate the incidence of a certification licensing fee to fund the certification program. This paper was accepted by Juanjuan Zhang, marketing.

Is It Possible to Monetarily Quantify the Emotional Value Transferred by Companies and Organizations? An Emotional Accounting Proposal

Social accounting focuses on value transactions between organizations and their stakeholders; both market ones, where the value perceived by the different stakeholders is identified, and non-markets ones, where transactions are monetized at their fair value. There was long awareness of an emotional value translation, linked to the transfer of different products, services, remunerations, and incentives, regardless of whether they were market or non-market. Yet that emotional value seemed to be anchored in the field of psychology and managed to elude economic science. This study seeks to identify emotional value with consumer surplus and, by extension, of the other stakeholders in a value transfer process. This proposal allows the emotional value to be anchored in the micro-economy and allows it to be objectively calculated using a regression involving three elements: the market price, the fair value interval, and a perceived satisfaction score by the different stakeholders in the form of significant sampling. The result obtained not only allows Social Accounting to be complemented with emotional value, but it also facilitates its incorporation in the strategy to optimize the emotional value. Furthermore, it enables a quantification of the perceived subjective utility, which opens up a research path where some possible lines are clearly identified.

Pricing and quality decisions in a supply chain with consumers' privacy concern

<p style='text-indent:20px;'>This study considers a supply chain consists of one manufacturer produces a product with a quality level and sells it through one retailer. A stylized model is developed to investigate the impacts of consumers' privacy concerns on pricing, quality decisions, and profitability through the relationship between product quality and personal information. When consumers' privacy concern is considered, the product quality level, the wholesale price, the payoffs of the manufacturer and retailer, and consumer surplus decrease with the personal information loss, whereas the selling price increases if this loss is low. Our results also show that the retailer prefers to charge a high selling price if the information benefit and the personal information loss are low, or the information benefit is relatively high. Moreover, a "win-win-win" outcome can be achieved among the manufacturer, retailer, and consumers if the personal information loss is sufficiently low. In the case of quality-differentiated products, however, although the manufacturer improves the product quality level, the wholesale prices are increased if the information benefit and the personal information loss are low, or the information benefit is high.</p>

Signaling Quality with Return Insurance: Theory and Empirical Evidence

This paper examines an innovative return policy, return insurance, emerging on various shopping platforms such as Taobao.com and JD.com. Return insurance is underwritten by an insurer and can be purchased by either a retailer or a consumer. Under such insurance, the insurer partially compensates consumers for their hassle costs associated with product return. We analyze the informational roles of return insurance when product quality is the retailer’s private information, consumers infer quality from the retailer’s price and insurance adoption, and the insurer strategically chooses insurance premiums. We show that return insurance can be an effective signal of high quality. When consumers have little confidence about high quality and expect a significant gap between high and low qualities, a high-quality retailer can be differentiated from a low-quality retailer solely through its adoption of return insurance. We confirm, both analytically and empirically with a data set consisting of more than 10,000 sellers on JD.com, that return insurance is more likely adopted by higher-quality sellers under information asymmetry. Furthermore, we find that the presence of the third party (i.e., the insurer) leads to double marginalization in signaling, which strengthens a signal’s differentiating power and sometimes renders return insurance a preferred signal, in comparison with free return, whereby retailers directly compensate for consumers’ return hassles. As an effective and costly signal of quality, return insurance may also improve consumer surplus and reduce product returns. Its profit advantage to the insurer is most pronounced under significant quality uncertainty. This paper was accepted by Vishal Gaur, operations management.

Optimal Green Operation and Information Leakage Decisions under Government Subsidy and Supply Uncertainty

This study investigated optimal green operation and information leakage decisions in a green supply chain system. The system consists of one supplier, one leader retailer 1, one follower retailer 2, and the government. In this system, the government subsidizes each retailer based on the selling price of the product. The supplier is subject to a yield uncertainty process. The suppler decides whether to leak leader retailer 1′s order quantity to follower retailer 2 or not. In this study, we first built a Stackelberg game to address the equilibrium green operation decisions, when the supplier has and has not information leakage behavior, respectively. Subsequently, we identify the supplier’s information leakage equilibrium and how such behavior affects retailers’ ex ante profits, consumer surplus, and social welfare through a numerical study. Interestingly, we obtained the following results: (1) Supplier leaks are the unique equilibrium of the supplier. The product’s green degree and wholesale price at supplier’s equilibrium are higher under information leakage than under no information leakage. (2) The supplier’s information leakage behavior is good for leader retailer 1 and bad for follower retailer 2. (3) Information leakage behavior increases both consumer surplus and social welfare under certain conditions. (4) In general, key system parameters (e.g., the subsidy rate, supply uncertainty, supply correlation, and forecast accuracies) positively correlate with consumer surplus and social welfare in the same direction, while they affect retailer 1′s and retailer 2′s ex ante profit in the opposite direction. These findings provide useful insights for businesses to manage demand forecast information and make decisions on the green level of the product in green supply chain management.

The Perils of Personalized Pricing with Network Effects

This research shows when, why, and how network effects can make it such that price personalization reduces profit, demand, and consumer surplus.

Value appropriation in hepatitis C

Background In 2015, the Swedish government in an unprecedented move decided to allocate 150 million € to provide funding for new drugs for hepatitis C. This was triggered by the introduction of the first second generation of direct-acting antivirals (DAAs) promising higher cure rates and reduced side effects. The drugs were cost-effective but had a prohibitive budget impact. Subsequently, additional products have entered the market leading to reduction in prices and expansions of the eligible patient base. Methods We estimated the social surplus generated by the new DAAs in Stockholm, Sweden, for the years 2014–2019. The actual use and cost of the drugs was based on registry data. Effects on future health care costs, indirect costs and QALY gains were estimated using a Markov model based primarily on Swedish data and using previous generations of interferon-based therapies as the counterfactual. Results A considerable social surplus was generated, 15% of which was appropriated by the producers whose share fell rapidly over time as prices fell. Most of the consumer surplus was generated by QALY gains, although 10% was from reduced indirect costs. QALY gains increased less rapidly than the number of treated patients as the eligibility criteria was loosened. Conclusions The transfer of funds from the government to the regions helped generate substantial surplus for both consumers and producers with indirect costs playing an important role. The funding model may serve as a model for the financing of innovative treatments in the future.

Content and Access Provision in a Discrete Competition Model

The non-rival, non-excludable and infinitely expansible characteristics of digital goods with marginal cost of zero strongly favours the use of bundling strategies. Theoretical tractability requires most models in the current literature to make highly stylized assumptions, rarely observed or anticipated in the real-life situations, motivating inquiry. This paper considers a competition model in which: * the firms, consumers and differentiated products are finite in number; * prices are discrete and not continuous; * consumers may purchase multiple items in a single product category where the degree of complementarity or substitutability of the product categories can also vary across consumers; and * where consumer-specific cost savings are obtained when purchasing multiple items from the same firm. Approximate solutions are obtained through numerical simulation. Firms act in concert to maximise the total firm revenue. Our main finding is that the interplay between maximal firm revenue, consumer surplus and prices is very complex and that high firm revenue and high consumer surplus are not antithetic. It suggests also that consumer surplus and market concentration are not necessarily related. Many market outcomes that are observed may be due to chance rather than design as diverse outcomes can accompany situations that are, to the firms, difficult to distinguish.

Individual consumer surplus in the Edgeworth Box

Subject. The consumer surplus conception is an important part of the modern microeconomic theory at the introductory and intermediate levels. Consumer surplus measures the change in the consumer’s real welfare. The article addresses the peculiarities of generation and the main property of the generalized individual consumer surplus, using the Edgeworth Box case. Objectives. The purpose is to find the main property of individual consumer surplus in the Edgeworth Box economy. Methods. The study draws on methods of logical and mathematical analysis. The generalized consumer surplus is correctly constructed, using the mathematical theory of curve integrals of the second type (the theory of line integrals in the Western mathematics). Results. The generalized individual consumer surplus is defined through the respective curve integral along some admissible trajectory in the simple exchange economy (Edgeworth Box). The paper also introduces the notion of the marginal individual consumer surplus, and demonstrates that consumer surplus is a correct individual welfare measure in the Edgeworth Box, and that consumer surplus is zero along any given indifference curve. I consider the numerical example of individual surplus calculation and presentation in the Edgeworth Box. Conclusions. The generalized individual consumer surplus is a correct measure of consumer’s utility change along monotone (weakly monotone) trajectories in the Edgeworth Box. Geometrically, the consumer surplus is presented as an area limited by the reservation price curve from the top and by the reallocation line (curve) from the bottom.