Limit price

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Industrial Organization: Contemporary Theory and Empirical Applications

Abstract: List of Figures. List of Tables. About the Authors. Preface to the Fourth Edition. Part I: Foundations: . 1. Industrial Organization: What, How, and Why? . 1.1 What Is Industrial Organization?. 1.2 How We Study Industrial Organization. 1.3 Why? Antitrust and Industrial Organization Theory. Summary. Problems. References. Appendix: Excerpts from Key Antitrust Statutes. 2. Basic Microeconomics . 2.1 Competition versus Monopoly: The Poles of Market Performance. 2.2 Profit Today versus Profit Tomorrow: Firm Decision-making over Time. 2.3 Efficiency, Surplus, and Size Relative to the Market. Summary. Problems. References. 3. Market Structure and Market Power . 3.1 Measuring Market Structure. 3.2 Measuring Market Power. 3.3 Empirical Application: Monopoly Power-How Bad Is It?. Summary. Problems. References. 4. Technology and Cost . 4.1 Production Technology and Cost Functions for the Single Product Firm. 4.2 Sunk Cost and Market Structure. 4.3 Costs and Multiproduct Firms. 4.4 Noncost Determinants of Industry Structure. 4.5 Empirical Application: Cost Function Estimation-Scale and Scope Economies. Summary. Problems. References. Part II: Monopoly Power in Theory and Practice: . 5. Price Discrimination and Monopoly: Linear Pricing . 5.1 Feasibility of Price Discrimination. 5.2 Third-degree Price Discrimination or Group Pricing. 5.3 Implementing Third-degree Price Discrimination or Group Pricing. 5.4 Product Variety and Third-degree Price Discrimination or Group Pricing. 5.5 Third-degree Price Discrimination or Group Pricing and Social Welfare. Summary. Problems. References. 6. Price Discrimination and Monopoly: Non-linear Pricing . 6.1 First-degree Price Discrimination or Personalized Pricing. 6.2 Second-degree Price Discrimination or Menu Pricing. 6.3 Social Welfare with First- and Second-degree Price Discrimination. Summary. Problems. References. 7. Product Variety and Quality Under Monopoly . 7.1 A Spatial Approach to Horizontal Product Differentiation. 7.2 Monopoly and Horizontal Differentiation. 7.3 Is There Too Much Product Variety?. 7.4 Monopoly and Horizontal Differentiation with Price Discrimination. 7.5 Vertical Product Differentiation. 7.6 Empirical Application: Price Discrimination, Product Variety, and Monopoly versus Competition. Summary. Problems. References. Appendix A: Location Choice with Two Shops. Appendix B: The Monopolist's Choice of Price When Her Shops Have Different Costs. 8. Commodity Bundling and Tie-in Sales . 8.1 Commodity Bundling and Price Discrimination. 8.2 Required Tie-in Sales. 8.3 Complementary Goods, Network Externalities, and Monopoly Pricing. 8.4 Antitrust, Bundling, and Tie-in Sales. Summary. Problems. References. Appendix: Formal Proof of the Inefficiency Induced by the Marketing of Complementary Goods by Separate Monopolists. Part III: Oligopoly and Strategic Interaction: . 9. Static Games and Cournot Competition . 9.1 Strategic Interaction: Introduction to Game Theory. 9.2 Dominant and Dominated Strategies. 9.3 Nash Equilibrium as a Solution Concept. 9.4 Static Models of Oligopoly: The Cournot Model. 9.5 Variations on the Cournot Theme: Many Firms and Different Costs. 9.6 Concentration and Profitability in the Cournot Model. Summary. Problems. References. 10. Price Competition . 10.1 The Bertrand Duopoly Model. 10.2 Bertrand Reconsidered. 10.3 Bertrand in a Spatial Setting. 10.4 Strategic Complements and Substitutes. 10.5 Empirical Application: Brand Competition and Consumer Preferences-Evidence from the California Retail Gasoline Market. Summary. Problems. References. 11. Dynamic Games and First and Second Movers. 11.1 The Stackelberg Model of Quantity Competition. 11.2 Sequential Price Competition. 11.3 Credibility of Threats and Nash Equilibria for Dynamic Games. 11.4 The Chain Store Paradox. Summary. Problems. References. Part IV: Anticompetitive Strategies: . 12. Limit Pricing and Entry Deterrence . 12.1 Monopoly Power and Market Structure Over Time: Some Basic Facts. 12.2 Predatory Conduct and Limit Pricing. 12.3 Preemption and the Persistence of Monopoly. 12.4 Evidence on Predatory Capacity Expansion. Summary. Problems. References. 13. Predatory Conduct: More Recent Developments . 13.1 Predatory Pricing: Myth or Reality?. 13.2 Predation and Imperfect Information. 13.3 Contracts as a Barrier to Entry. 13.4 Predatory Conduct and Public Policy. 13.5 Empirical Application: Entry Deterrence in the Pharmaceutical Industry. Summary. Problems. References. 14. Price Fixing and Repeated Games . 14.1 The Cartel's Dilemma. 14.2 Repeated Games. 14.3 Collusion: The Role of the Antitrust Authorities. 14.4 Empirical Application: Estimating the Effects of Price Fixing. Summary. Problems. References. 15. Collusion: Detection and Public Policy . 15.1 The Cartel Problem. 15.2 Factors that Facilitate Collusion. 15.3 An Illustration: Collusion on the NASDAQ Exchange. 15.4 Detecting Collusion among Firms. 15.5 Cartel Leniency (Amnesty) Programs. 15.6 Empirical Application: Experimental Investigation of Leniency Programs. Summary. Problems. References. Part V: Contractual Relations between Firms: . 16. Horizontal Mergers . 16.1 Horizontal Mergers and the Merger Paradox. 16.2 Mergers and Cost Synergies. 16.3 The Merged Firm as a Stackelberg Leader. 16.4 Horizontal Mergers and Product Differentiation. 16.5 Public Policy toward Horizontal Mergers. 16.6 Empirical Application: Evaluating the Impact of Mergers with Computer Simulation. Summary. Problems. References. Appendix A: Bertrand Competition in a Simple Linear Demand System. Appendix B: Equilibrium Prices in the Spatial Model without a Merger. Appendix C: Equilibrium Prices in the Spatial Model after Firm 1 and Firm 2 Merge. 17. Vertical and Conglomerate Mergers . 17.1 Procompetitive Vertical Mergers. 17.2 Possible Anticompetitive Effects of Vertical Mergers. 17.3 Formal Oligopoly Models of Vertical Integration. 17.4 Conglomerate Mergers. 17.5 A Brief Digression on Mergers and the Theory of the Firm. 17.6 Empirical Application: Vertical Integration in the Ready-mixed Concrete Industry. Summary. Problems. References. 18. Vertical Price Restraints . 18.1 Resale Price Maintenance: Some Historical Background. 18.2 Vertical Price Restraints as a Response to Double Marginalization. 18.3 RPM Agreements and Retail Price Discrimination. 18.4 RPM Agreements to Ensure the Provision of Retail Services. 18.5 Retail Price Maintenance and Uncertain Demand. Summary. Problems. References. Appendix: Manufacturer's Optimal Wholesale Price When Retailer Discriminates between Two Markets. 19. Nonprice Vertical Restraints . 19.1 Upstream Competition and Exclusive Dealing. 19.2 Exclusive Selling and Territorial Arrangements. 19.3 Aftermarkets. 19.4 Public Policy toward Vertical Restraints. 19.5 A Brief Discussion of Franchising and Divisionalization. 19.6 Empirical Application: Exclusive Dealing in the U.S. Beer Industry. Summary. Problems. References. Part VI: Nonprice Competition: . 20. Advertising, Market Power, and Information . 20.1 The Extent of Advertising. 20.2 Advertising, Product Differentiation, and Monopoly Power. 20.3 The Monopoly Firm's Profit-maximizing Level of Advertising. 20.4 Advertising as Consumer Information. 20.5 Persuasive Advertising. 20.6 Advertising and Signaling. 20.7 Suppressed Advertising Content. 20.8 Truth versus Fraud in Advertising. Summary. Problems. References. 21. Advertising, Competition, and Brand Names . 21.1 Advertising as Wasteful Competition. 21.2 Advertising and Information in Product-differentiated Markets. 21.3 What's in a Brand Name?. 21.4 Too Much or Too Little Advertising: The Question Revisited. 21.5 Cooperative Advertising. 21.6 Empirical Application: Advertising, Information, and Prestige. Summary. Problems. References. 22. Research and Development . 22.1 A Taxonomy of Innovations. 22.2 Market Structure and the Incentive to Innovate. 22.3 A More Complete Model of Competition via Innovation. 22.4 Evidence on the Schumpeterian Hypothesis. 22.5 R&D Cooperation between Firms. 22.6 Empirical Application: R&D Spillovers in Practice. Summary. Problems. References. 23. Patents and Patent Policy . 23.1 Optimal Patent Length. 23.2 Optimal Patent Breadth. 23.3 Patent Races. 23.4 Monopoly Power and "Sleeping Patents". 23.5 Patent Licensing. 23.6 Recent Patent Policy Developments. 23.7 Empirical Application: Patent Law and Practice in the Semiconductor Industry. Summary. Problems. References. Part VII: Networks and Auctions: . 24. Network Issues. 24.1 Monopoly Provision of a Network Service. 24.2 Networks, Competition, and Complementary Services. 24.3 Systems Competition and the Battle over Industry Standards. 24.4 Network Goods and Public Policy. 24.5 Empirical Application: Network Externalities in Computer Software-Spreadsheets. Summary. Problems. References. 25. Auctions and Auction Markets . 25.1 A Brief Taxonomy of Auctions. 25.2 The Revenue Equivalence Theorem. 25.3 Common Value Auctions. 25.4 Auction Design: Lessons From Industrial Organization. Summary. Problems. References. Answers to Practice Problems. Index

Combining multiple climate policy instruments: how not to do it

Abstract: Putting a price on carbon is critical for climate change policy. Increasingly, policymakers combine multiple policy tools to achieve this, for example by complementing cap-and-trade schemes with a carbon tax, or with a feed-in tariff. Often, the motivation for doing so is to limit undesirable fluctuations in the carbon price, either from rising too high or falling too low. This paper reviews the implications for the carbon price of combining cap-and-trade with other policy instruments. We find that price intervention may not always have the desired effect. Simply adding a carbon tax to an existing cap-and-trade system reduces the carbon price in the market to such an extent that the overall price signal (tax plus carbon price) may remain unchanged. Generous feed-in tariffs or renewable energy obligations within a capped area have the same effect: they undermine the carbon price in the rest of the trading regime, likely increasing costs without reducing emissions. Policymakers wishing to support carbon prices should turn to hybrid instruments — that is, trading schemes with price-like features, such as an auction reserve price — to make sure their objectives are met.

Price setting behaviour in Spain: stylised facts using consumer price micro data

Abstract: This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state-dependent pricing strategies. JEL Classification: E31, D40, C25

Setting Value, Not Price

Abstract: The first task is to map benefits versus price - as the customer sees them Bear in mind that equal value doesn't mean equal market share The key decision: do you stay on the line of value equivalence, or get off? A manufacturer of high-quality medical testing equipment introduces a vastly improved version of its best-selling diagnostic device at a price 5 percent higher than that of the older model it replaces. For three months, the new model is successful, gaining rave reviews from customers and increased market share. One month later, prices in the sector collapse and the company has to discount its superior new product just to maintain its traditional market share. A highly regarded manufacturer of commercial paper prides itself on delivering extremely consistent quality and service. That consistency notwithstanding, the company is baffled by vacillations in its market share that accompany shifts from tight to loose supply in the industry. A consumer packaged goods company executes one of the most common business tactics - it matches a competitor's price on a large contract to supply a leading food retailer. In the months that follow, a bitter price war breaks out, destroying almost all of the industry's profitability in this product category. These disparate cases have at least one thing in common: apparently sound marketing strategies and tactics that produced unexpected and costly results. But could they have been avoided? Here we will explore how these and other common and expensive marketing missteps might be averted by applying a discipline called "dynamic value management" to the pricing and product positioning that are at the core of what most marketers do. "Value" may be one of the most overused and misused terms in marketing and pricing today. "Value pricing" is too often misused as a synonym for low price or bundled price. The real essence of value revolves around the tradeoff between the benefits a customer receives from a product and the price he or she pays for it. The management of this tradeoff between benefits and price has long been recognized as a critical marketing mix component. Marketers implicitly address it when they talk about positioning their product vis-a-vis competitors' offerings and setting the right price premium over, or discount under, them. Marketers frequently err along the two dimensions of value management, however. First, they fail to invest adequately to determine what the "static" positioning for their products on a price/benefit basis against competitors should be. Second, even when this is well understood, they ignore the "dynamic" effect of their price/benefit positioning - the reactions triggered among competitors and customers, and the effect on total industry profitability and on the transfer of surplus between suppliers and customers. To illuminate the nature and magnitude of this missed value-management opportunity, value needs to be defined properly. Customers do not buy solely on low price. They buy according to customer value, that is, the difference between the benefits a company gives customers and the price it charges. More precisely, customer value equals customer-perceived benefits minus customer-perceived price. So, the higher the perceived benefit and/or the lower the price of a product, the higher the customer value and the greater the likelihood that customers will choose that product. (We will return to this later.) Static value management Many marketing and strategic assessments can be made by using a simple tool called a value map, and by considering how customers are distributed within the map for a given segment. The value map explores the way customer value and the price/benefit tradeoff work in real markets for a given segment [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. The horizontal axis quantifies benefits as perceived by the customer; the vertical axis shows perceived price. …