21.5 More Market Structure
Dixit (1980)
Based on Bain-Sylos postulate: incumbents can build capacity such that entry is unprofitability
Investment in capacity is not a credibility threat if incumbents can change their capacity.
Incumbent cannot deter entry
Tyagi (1999a)
More retailers means greater competition, which leads to lower prices for customers.
Effect of \((n+1)\) st retailer entry
Competition effect (lower prices)
Effect on price (i.e., wholesale price), also known as input cost effect
Manufacturers want to increase wholesale price because now manufacturers have higher bargaining power, which leads other retailers to reduce quantity (bc their choice of quantity is dependent on wholesale price), and increase in prices.
Jerath, Sajeesh, and Zhang (2016)
Organized Retailer enters a market
Inefficient unorganized retailers exit
Remaining unorganized retailers increase their prices. Thus, customers will be worse off.
Amaldoss and Jain (2005)
consider desire for uniqueness and conformism on pricing conspicuous goods
Two routes:
higher desire for uniqueness leads to higher prices and profits
higher desire for conformity leads to lower prices and profits
Under the analytical model and lab text, consumers’ desire for unique is increased from price increases, not the other way around.
Snob:
\[ U_A = V - p_A - \theta t_s - \lambda_s(n_A) \\ U_B = V - p_B - (1-\theta) t_s - \lambda_s(n_B) \]
where
\(\lambda_s\) = sensitivity towards externality.
\(\theta\) is the position in the Hotelling’s framework.
\(t_s\) is transportation cost.
Conformist
\[ U_A = V - p_A - \theta t_s + \lambda_c(n_A) \\ U_B = V - p_B - (1-\theta) t_s + \lambda_c(n_B) \]
Rational Expectations Equilibrium
If your expectations are rational, then your expectation will be realized in equilibrium
Say, Marginal Snob = \(\theta_s\) and \(\beta\) = number of snob in the market
Snobs
\[ U_A^c \equiv U_B^c = \theta_s \]
Conformists
\[ U_A^c =U_B^c = \theta_c \]
Then, according to rational expectations equilibrium, we have
\[ \beta \theta_s +( 1- \beta) \theta_c = n_A \\ \beta (1-\theta_s) +( 1- \beta) (1-\theta_c) = n_B \]
where
\(\beta \theta_s\) = Number of snobs who buy from firm A
\((1-\beta)\theta_c\) = Number of conformists who buy from firm B
\(\beta(1-\theta_s)\) = Number of snobs who buy from firm B
\((1-\beta)(1-\theta_c)\) = Number of conformists who buy from firm B
which is the rational expectations equilibrium (whatever we expect happens in reality).
In other words, expectation are realized in equilibrium.
The number of people expected to buy the product is endogenous in the model, which will be the actual number of people who will buy it in the market.
We should not think of the expected value here in the same sense as expected value in empirical research (\(E(.)\)) because the expected value here is without any errors (specifically, measurement error).
- The utility function for snobs is such that overall when price increase for one product, snob will like to buy the product more. When price increases, conformist will reduce the purchase.
Balachander and Stock (2009)
Adding a Limited edition product has a positive effect on profits (via increased willingness of consumers to pay for such a product), but negative strategic effect (via increasing price competition between brands)
Under quality differentiation, high-quality brand gain from LE products
Under horizontal taste differentiation, negative strategic effects lead to lower equilibrium profits for both brands, but they still have to introduce LE products because of prisoners’ dilemma
Sajeesh, Hada, and Raju (2020)
two consumer segments:
functionality-oriented
exclusivity-oriented
Firm increase value enhancements when functionality-oriented consumers perceive greater product differentiation
Firms decrease value enhancements if exclusivity-oriented perceive greater product differentiation