Browsing by Subject "Price Dispersion"
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Item Essays in economics of electronic commerce(2009-06-02) Sengupta, AnirbanThe advent of the internet has revolutionized the way people buy and sell. The internet is characterized by increased access to information. This increased information should foster convergence to the ?law of one price,? for homogenous goods. The surge of electronic markets has motivated a stream of research focusing on comparing the efficiency of the internet market to the traditional one. This dissertation contributes to the existing literature of consumer search behavior in electronic markets and its effects on the price level and dispersion in the market more generally. A part of this dissertation assesses the direct and indirect effect of increased internet usage on the prices of airline tickets, using a unique contemporaneous online and offline transaction data for airline tickets, covering the final quarter of 2004. The study also investigates the relationship between increased internet usage and price dispersion in the market for airline tickets. This study also includes an exhaustive set of controls for airline ticket characteristics, namely refundability, advance purchase requirements, travel and stay restrictions, class of travel, departure and return day of the week and time, flight level load factor along with other market structure data used in the standard airlines literature. The existing theoretical literature in consumer search extended to the electronic markets assumes, for simplicity, that all consumers in the internet markets are the ?searchers,? looking for the lowest price. The internet, however, also plays the role of a convenient shopping medium for a group of consumers whose primary motivation is not to search for the lowest price. The contemporary literature incorrectly categorizes these consumers as the traditional searchers. The remaining part of this dissertation provides a modification to the existing theoretical models of consumer search to accommodate both searchers and non-searchers in each of the electronic and traditional markets and derive the implications of the increased internet usage on the average level of prices and price dispersion in a market selling a homogenous good.Item Essays on the Relationship of Competition and Firms' Price Responses(2012-02-14) Lee, SungbokThis dissertation investigates the relationship of competition and firms' price responses, by analyzing: i) whether new entry reduces price discrimination, ii) when incumbents reduce price discrimination preemptively in response to the threat of entry, and iii) how competition increases prices. The dissertation consists of three independent essays addressing each of the above questions. The first two essays present an empirical analysis of the airline industry and the third essay presents a theoretical analysis of the credit card industry. In the empirical study of the relationship between competition and firms' pricing in the airline industry, I emphasize the importance of distinguishing the equilibrium behaviors with respect to different market characteristics. Major airlines can price discriminate differently in a market where they compete with low-cost carriers comparing to in another market where they don't, and also they can respond dfferently to the threat of entry depending on whether they are certain about the rival's future entry. The study reveals that competition has a positive effect on price discrimination in the routes where major airlines compete against one anther. In these routes, competition reduces lower-end prices to a greater extent than upper-end prices. In contrast, an entry by low-cost carriers results in a significant negative relationship between competition and price discrimination. Thus, the opposite results in the literature are both evident in the airline industry, and it is very important to identify the different forces of competition on price discrimination. Firms can respond to potential competition as well as actual competition. So, I extend the study to the relationship of potential competition and price discrimination, specially in cases where major airlines compete against one another while facing Southwest's threat of entry. I also attempt to suggest major airlines' motives of reducing price discrimination preemptively. The results of the study suggest that incumbents reduce price dispersion when it is possible to deter the rival's entry and that the potential rival discourages incumbents from deterring entry by announcing before its beginning service. Finally, I examine when competition can increase prices in a market, by analyzing the issuing side of the credit card industry. This industry is characterized by a two-sided market with a platform. Under the no-surcharge rule that restricts merchants to set the same price for cash and card purchases, the equilibrium interchange fee increases with competition. This occurs because issuers can compensate losses from competing on the issuing side by collectively increasing the interchange fee. As a result, limiting competition may improve social welfare when the interchange fee is higher than the social optimal level. In contrast, in the absence of the no-surcharge rule, the analysis shows that competition always improves social welfare by lowering the price of the market.Item Market concentration, strategic suppliers, and price dispersion(2009-05-15) Wade, Chad R.A central result in price theory is the law of one price: prices of a homogeneous good sold at different locations should be equal. Empirical studies of the law of one price find that it is often violated. In my dissertation I explore the allocation problem that suppliers face when supplying multiple markets. I use the experimental method to examine the effect of an increase in the number of suppliers in a market, ceteris paribus, has on the allocation decisions of market participants. I also use the experimental method to investigate suppliers that are strategic and show that market concentration and transportation costs restrict the supplier?s ability to coordinate on an efficient equilibrium. A strategic supplier takes account his own effect on prices. Strategic supplies face a difficult strategy coordination problem. If they cannot solve it, then an inefficient outcome may result. Coordination failure may result in price dispersion across the markets. Resulting price signals do not inform suppliers who should respond and by how much. Price signals are not sufficient for suppliers to solve the strategy coordination problem. In the experiments, I observe that increasing the quantity of suppliers, that is the Herfindahl index of concentration, in the market will decrease the frequency of the equilibrium strategy to be played, holding other things constant. Increasing the number of firms in a market, ceteris paribus, increases price dispersion and coordination on an efficient market allocation is decreased. The experiments reveal that the ability of suppliers to coordinate is directly correlated with the optimization premium: the expected payoff difference between best responding to an opponents strategy and the payoff to an inferior response. The incentive is greater to best respond when the optimization premium is larger. Coordination at the equilibrium allocation is quicker.