Third-degree price discrimination may be socially desirable without an increase in total output in an oligopoly with potential entrants (Armstrong and Vickers, 1993, Jorge and Pires, 2013), differential production costs (Galera and Zaratiegui, 2006), or markets that differ in costs (Chen et al., 2021). This work is motivated by the online–offline debate on whether online price discrimination should be allowed.1 Online social platforms and data mining technology allow firms to capture the digital trails of their customers and set up differential prices accordingly.
We ask when and whether online price discrimination is socially desirable under online–offline competition. Consider an online firm that engages in price competition with one local offline firm in each of two separate markets with unequal sizes. The online firm has the advantage of extracting personal information (such as zip code information) to enact discrimination between the two markets. Online transactions suffer a distaste cost but enjoy a lower unit cost.
We find that online price discrimination is socially desirable when the intensity of online–offline competition is strong (represented by a large online–offline cross-demand parameter), even though the total online and offline outputs are unchanged due to our linear demand setting. This is because the cross-demand effect dominates the output-misallocation effect. Unsurprisingly, the total consumer surplus is worse under online discrimination. However, online discrimination is beneficial to the online firm and benefits (harms) the offline firm in the large (small) local market. Alternatively, in the case of a uniform-pricing chain store, online discrimination is always socially undesirable.
Among the other recent studies on price discrimination, Dobson and Waterson (2005) showed the possibility that allowing differential prices is not profitable for the chain-store but increases the consumer welfare. Jorge and Pires (2013) and Armstrong and Vickers (2019) explored the case with captive customers who only buy from specific sellers. Tremblay (2019) analyzed a situation in which implemented first-degree price discrimination can be Pareto superior to uniform-pricing without receiving a consumer backlash. Our study also reinforces the importance of emerging online competition studies by Liu et al. (2006), Loginova (2009), and Guo and Lai (2017).
Suppose there are two separate local markets (1 and 2), where each has one offline firm selling a differentiated product to the local residents and one online firm selling a product to both markets.2 Assume that the online and offline demand for the differentiated products in market are respectively and , ,
Online price discrimination and social welfare
Whether online price discrimination benefits firms’ profits, consumer surplus, and social welfare is shown as follows:
Proposition 1 When online price discrimination is allowed: discrimination is welfare-superior to non-discrimination if and only if the cross-demand parameter is large. That is, iff . Consumer welfare is always worse. Online firms benefit and the total profit of offline firms increases. However, discrimination benefits the offline firm in a large local
When online price discrimination is allowed: discrimination is welfare-superior to non-discrimination if and only if the cross-demand parameter is large. That is, iff . Consumer welfare is always worse. Online firms benefit and the total profit of offline firms increases. However, discrimination benefits the offline firm in a large local
Now, consider the offline markets served by a chain-store firm with a total profit . If this chain store is allowed to set offline discriminatory prices, the previous analysis applies. If the chain store can only set a uniform price, we have a different welfare comparison for online discrimination. The chain store firm maximizes its profit by . Online price discrimination always worsens social welfare, since . This is because the cross-demand
Online price discrimination can be welfare-improving under an online–offline competition framework, in which an online firm engages in Bertrand competition with a local offline firm in each separate market, even though the total output remains unchanged. Our policy implication of online price discrimination is that it would be valuable to examine whether the online–offline cross-demand parameter is sufficiently large to override the traditional misallocation effect.
Selling cross-border in online markets: The impact of the ban on geoblocking strategies
2023, International Journal of Industrial Organization
We develop a model of strategic geoblocking, where two competing multi-channel retailers, located in different countries, can decide to block access to their online store from foreign consumers. We characterize the equilibrium when firms decide unilaterally whether to introduce geoblocking restrictions. We show that geoblocking allows firms to soften competition, but at the cost of lower demand. A ban on geoblocking leads to lower prices, both offline and online. However, when firms can invest in increasing online demand, the ban may have adverse effects on investment and social welfare. We extend our analysis to account for price discrimination and investigate the role of shipping costs.
Managerial delegation, network externalities and loan commitment
2023, Manchester School
Urban/Rural Spatial Price Discrimination with Online Competition
Passive forward ownership and upstream collusion
Economics Letters, Volume 216, 2022, Article 110608
We investigate the effects of passive forward ownership on the sustainability of upstream collusion. We consider a homogeneous Cournot duopoly with competing vertical chains, where each upstream firm has symmetric passive ownership over its downstream exclusive client. With general demand, (i) we show that passive forward ownership increases collusive profits, (ii) we identify two opposing effects of passive forward ownership on punishment and deviating profits: a positive (direct) effect due to ownership and a negative effect working through input prices. By considering three demand functions, including the widely-used linear demand, we show that passive forward ownership hinders upstream collusion.
Sequential search with partial depth
Economics Letters, Volume 216, 2022, Article 110624
Using the classical framework by Wolinsky (1986) and Anderson and Renault (1999), this paper explores partial-depth search and shows that consumers search products partially when search cost is large, and firms’ prices and consumer surplus are non-monotonic in search cost.
Personalized pricing with a price sensitive demand
Economics Letters, Volume 213, 2022, Article 110396
This paper assesses the profit and welfare effects of firms’ ability to charge personalized prices in markets where consumer demand is sensitive to price changes. In a mill pricing model, regardless of demand elasticity, personalized pricing (PP) raises consumer surplus at the expense of profits. In contrast, in a delivered pricing model, if demand is sufficiently elastic, PP boosts profits at the expense of consumer surplus and overall welfare. Moving from PP in a mill to a delivered pricing model, benefits industry profits and harms consumer surplus and welfare.
Can waste aversion affect demand for insurance? Evidence from experiment and survey
Economics Letters, Volume 216, 2022, Article 110594
Evidence shows that people are discouraged from buying fair insurance by the thought that if they do not suffer a loss, they will have wasted their money. We extend this theory to test if waste aversion could lead to a reduction in the amount of coverage sought. We deploy a multimethod design wherein we first run incentive-compatible experiments to establish a cause-and-effect relationship. We follow it up with a survey rolled out to actual buyers of insurance to generate external validity for our results. Our findings show that waste averters demand lesser insurance coverage than non-waste averters.
Some evidence of regulatory convergence
Economics Letters, Volume 216, 2022, Article 110522
We find some evidence of regulatory convergence in four distinct areas of business activity over the 2005–2019 period. This convergence is most pronounced for countries in the French and German civil law tradition.
Just the two of us, we can(’t) make it if we try: Owner-CEO gender and discouragement
Economics Letters, Volume 216, 2022, Article 110596
Research suggests that women are more discouraged from applying for a loan than men. Using cross-country data, we find that discouragement prevails only among woman-led firms with a higher share of woman owners, challenging the trend to promote gender diversity.
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