34 research outputs found
Loss leader or low margin leader? Advertising and the degree of product differentiation
No full textThis paper attempts to isolate the conditions that give rise to loss leader pricing. I show that for sufficiently low distance between firms, the advertised good is priced below cost irrespective of whether firms advertise the same or different products. Instead, if products are sufficiently differentiated, loss leader pricing may result only if firms advertise the low reservation value product, otherwise the advertised good is a low margin leader. Thus, whether the advertised good is a loss leader or a low margin leader is primarily a function of the extent of differentiation between competing firms.Informative advertising, loss leader, low margin leader, product di¤erentiation
PRODUCT DIFFERENTIATION - AN ALTERNATIVE TO CVDS: A COMMENT
No full textThis note is a comment to Wang (2008)'s contribution in the SAJE (Vol. 76 (3)). We show that when firms' strategic variables are prices and not quantities, Wang's findings are largely reversed. In particular, the foreign government levies an export tax on its producer as opposed to an export subsidy. Further, both the "optimal tax" and the domestic welfare are non-monotonic in the degree of product differentiation. Copyright (c) 2010 The Author. Journal compilation (c) 2010 Economic Society of South Africa.
Informative Advertising: Competition or Cooperation?
No full textI compare the outcome when firms semicollude on advertising to the outcome in the Grossman and Shapiro (1984) model of informative advertising. I show that advertising is lower but prices and profits are higher under semicollusion on advertising. I also show that semicollusion on advertising is detrimental to welfare. Although firms earn higher profits when colluding on advertising, fewer consumers are informed, and as a result, welfare is lower. Compared to semicollusion on price, semicollusion on advertising is not always less profitable. Hence I lend theoretical support to empirical studies that find evidence of collusion on advertising rather than price.Informative advertising, semicollusion, competition, product differentiation
Informative advertising when only some goods are advertised
No full textWe study how price advertising of a subset of products affects equilibrium pricing and advertising under two product differentiation regimes. We find that, when firms sell products with the same reservation price, loss-leader pricing obtains only when differentiation is low. However, when reservation prices differ, equilibrium may entail loss-leader pricing even when differentiation is high. This enables us to shed some light on the seemingly paradoxical empirical findings in the marketing literature that loss-leader pricing fails to increase store traffic, loss-leader sales and hence to increase profits. We also examine welfare implications
Exchange rates and product variety
No full textWe study the role of exchange rate variability in the firm's choice of whether to offer one or two varieties. We show that variability induces the firm to vertically segment markets (offer two varieties). This happens because variability in the exchange rate affects income dispersion and hence the firm's incentives to extract consumer surplus. To better extract surplus, the firm offers two price-quality menus, a high-quality variant geared for top-end surplus extraction and a low-quality variant to address market coverage concerns. Copyright © 2007 John Wiley & Sons, Ltd.
Exchange rates and product variety
No full textWe study the role of exchange rate variability in the firm's choice of whether to offer one or two varieties. The firm sells in both the Home market and the Foreign market. It is shown that variability in the exchange rate induces the firm to vertically segment markets (i.e., offer two varieties). This happens because variability in the exchange rate affects income dispersion and hence the firm's incentives to extract consumer surplus. To better extract surplus, the firm offers two price-quality menus, high quality variant (priced high) for top-end surplus extraction and a low quality variety (priced low) to address market coverage concerns. We extend the model to allow for horizontal segmentation. We find that the profitability of second degree price discrimination increases as markets become horizontally segmented. Hence, when the costs of segmenting markets are not too high, variability in the exchange rate will lead to both greater variety and international market segmentation
Exchange Rates and Product Variety
No full textWe study the role of exchange rate variability in the firm's choice of whether to o¤er one or two varieties. We show that variability induces the firm to vertically segment markets (offer two varieties). This happens because variability in the exchange rate a¤ects income dispersion and hence the firm's incentives to extract consumer surplus. To better extract surplus, the firm offers two price-quality menus, a high quality variant geared for top-end surplus extraction and a low quality variant to address market coverage concerns.exchange rate variability, income dispersion, surplus extraction, product variety
Loss leader or low margin leader? Advertising and the degree of product differentiation
No full textThis paper attempts to isolate the conditions that give rise to loss leader pricing. I show that for sufficiently low distance between firms, the advertised good is priced below cost irrespective of whether firms advertise the same or different products. Instead, if products are sufficiently differentiated, loss leader pricing may result only if firms advertise the low reservation value product, otherwise the advertised good is a low margin leader. Thus, whether the advertised good is a loss leader or a low margin leader is primarily a function of the extent of differentiation between competing firms
