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« Back to Results

Pricing Strategies

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Marriott Philadelphia Downtown, Meeting Room 405
Hosted By: American Economic Association
  • Chair: Marc Remer, Swarthmore College

Missed Sales and the Pricing of Ancillary Goods

Renato Gomes
,
Toulouse School of Economics
Jean Tirole
,
Toulouse School of Economics

Abstract

Firms often sell a basic good as well as ancillary
ones. Hold-up concerns have led to ancillary good regulations such
as transparency and price caps. The hold-up narrative, however, runs
counter to evidence in many retail settings where drip prices (charged
for ancillary goods) are below cost (e.g. free shipping, or limited
card surcharging in countries where the "no-surcharge
rule" was lifted). We argue that the key to unifying
these conflicting narratives is that the seller may absorb partly
or fully the ancillary good's cost so as not to miss
sales on the basic good. A supplier with market power on the ancillary
good market then takes advantage of cost absorption and jacks up its
wholesale price. Hold-ups occur only when consumers are initially
uninformed or naive about the drip price and shopping costs are
high. The price of the basic good then acts as a signal of the drip
price, since a high markup on the basic good makes the firm more wary
of missed sales. Regardless of whether consumers are informed, uninformed-but-rational,
or naive, regulation that imposes price transparency
together with a ban on loss-making sales on the ancillary good leads to (i) an efficient consumption of the ancillary good,
and (ii) a reduction on its wholesale price, generating strict welfare
gains.

Dynamic Competition in the Era of Big Data

Patrick J. Kehoe
,
Stanford University
Bradley Larsen
,
Stanford University
Elena Pastorino
,
Stanford University

Abstract

The advent of rich and highly--detailed information on individual web--browsing and purchase histories (an instance of so--called "Big data") has begun to make feasible sophisticated forms of personalized pricing, heretofore considered too informationally demanding to implement. We argue these pricing strategies are especially relevant in markets for differentiated experience goods. Taking the view that this ability to price discriminate both intertemporally and interpersonally will become increasingly relevant in the future, here we investigate its implications on the dynamics of prices and on efficiency in such markets. In particular, we derive a simple characterization of the equilibrium pricing rule that shows how prices contain a variety--specific dynamic component that depends on the relative informativeness of competing varieties about consumers' tastes. Over time, this pricing rule leads to discontinuous price changes that take the form of fluctuating price discounts for a given consumer, reminiscent of those observed in the data. We also investigate the limits to which efficiency results typical of duopoly models with one variety per firm can be extended to multi--variety and multi--firm settings, and provide simple, intuitive examples of the type of inefficiencies characteristic of these more general environments. Finally, we provide evidence on the gains associated with these sophisticated forms of price discrimination using eBay data.

Price Discrimination and Dispersion under Asymmetric Profiling of Consumers

Wouter Vergote
,
CEREC, USL-B and CORE, University Catholic Louvain
Paul Belleflamme
,
Aix-Marseille University
Wynne Lam
,
University of Liege

Abstract

We study a model of price competition between firms in a homogenous good setting. Thanks to a clever use of big data, firms are able to identify any consumer's willingness to pay and have the opportunity to charge a personalized price to consumers they are able to `recognize', while charging a `uniform' price to all consumers who remain `anonymous'. Yet, they can only do this imperfectly: there is always a positive probability that any particular consumer will remain anonymous. This may be due to the available data being not sufficiently precise, or to consumers acting to protect their privacy. If both firms have profiling technologies of the exact same precision, or if one firm cannot use any profiling technology, then the Bertrand paradox continues to prevail. However, if firms have technologies of different precisions, then the price equilibrium exhibits both price discrimination and price dispersion, with positive expected profits. Improving the precision of both firms' technologies does not necessarily harm consumers and in some cases increases simultaneously consumer surplus and firms' profits. We present the following policy conclusions. First, exclusivity contracts offered by data brokers do not necessarily harm consumers: in our model exclusivity leads to more and not to less competition. Second, consumers benefit from having knowledge of and access to listed prices, as the targeted prices of firms now not only compete against the price(s) of their competitor but also against their own listed price. Third, more privacy regulation benefits some consumers, but hurts others: some low value consumers would not have access to the good should there be stricter privacy regulations. On the other hand, some high value consumers would welcome more privacy in order to purchase the good at a lower uniform price.

The Cyclicality of Durable Goods Prices and Their Add-ons: 11 Years of Evidence From a Nationwide Retailer

Sacha Kapoor
,
Erasmus University Rotterdam
Branko Boskovic
,
University of Alberta
Barry Scholnick
,
University of Alberta

Abstract

We use data on the universe of transactions during 1999-2010 from a Canadian nationwide retailer of household durables to study the importance of add-on goods. Specifically, we examine the pricing and markups of extended warranties, a classic example of an add-on good that is typically unobserved by researchers, and compare it to the pricing and markups for the associated durable good. We find that extended warranty prices are strongly procyclical, whereas durables prices do not fluctuate in response to local business cycles. Additionally, we find that the number of durable goods sales does not change over the business cycle, but customers are more likely to purchase warranties. Finally, we show that estimates of demand elasticities and inflation exhibit several bias if they are based on the prices for durable goods alone. The findings imply that data on add-ons for durable goods is critical for understanding how the firm and customers adjust behavior over the business cycle.
JEL Classifications
  • D4 - Market Structure, Pricing, and Design