This paper examines whether, and to what extent, the spot LNG markets in different regions (East Asia, Iberia, Northwest Europe, and South America) are integrated and how market integration evolves over time. We first lay out a framework of market integration in the context of global LNG market where the main supplier (e.g. Qatar) may have market power. Estimating a time-varying coefficients model, we find that a varying degree of market integration exists between all four LNG indices particularly after the Fukushima incident in 2011. We complement the time-varying coefficient analysis with a test of price convergence among the LNG indices using the Phillips-Sul (2007) methodology. The results reveal that, there is strong evidence that the spot LNG prices are converging after the Fukushima accident and they are also converging with the price of NBP in the UK. The empirical result is consistent with the change of market power of the main supplier.
{"title":"Towards an Integrated Spot LNG Market: An Interim Assessment","authors":"Xiaoyi Mu, Haichun Ye","doi":"10.2139/ssrn.2967797","DOIUrl":"https://doi.org/10.2139/ssrn.2967797","url":null,"abstract":"This paper examines whether, and to what extent, the spot LNG markets in different regions (East Asia, Iberia, Northwest Europe, and South America) are integrated and how market integration evolves over time. We first lay out a framework of market integration in the context of global LNG market where the main supplier (e.g. Qatar) may have market power. Estimating a time-varying coefficients model, we find that a varying degree of market integration exists between all four LNG indices particularly after the Fukushima incident in 2011. We complement the time-varying coefficient analysis with a test of price convergence among the LNG indices using the Phillips-Sul (2007) methodology. The results reveal that, there is strong evidence that the spot LNG prices are converging after the Fukushima accident and they are also converging with the price of NBP in the UK. The empirical result is consistent with the change of market power of the main supplier.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122753367","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article is about the interpretation of Nash equilibria of one-shot oligopoly games in competition analysis. Such equilibria are often understood as steady-state equilibria of the corresponding game with continuous interaction between the market players. In my view, such interpretations are misguided. In one-shot games assuming the other players keep their strategies fixed, as the Nash equilibrium does, is a rational device for profit maximization. In a setting with continuous interaction it is only rational if the assumption remains rational when the other players are given a chance to adjust their choices. That is seldom the case.
{"title":"One-Shot Versus Continuous Interaction in Oligopoly Games","authors":"Adriaan ten Kate","doi":"10.2139/ssrn.2901289","DOIUrl":"https://doi.org/10.2139/ssrn.2901289","url":null,"abstract":"This article is about the interpretation of Nash equilibria of one-shot oligopoly games in competition analysis. Such equilibria are often understood as steady-state equilibria of the corresponding game with continuous interaction between the market players. In my view, such interpretations are misguided. In one-shot games assuming the other players keep their strategies fixed, as the Nash equilibrium does, is a rational device for profit maximization. In a setting with continuous interaction it is only rational if the assumption remains rational when the other players are given a chance to adjust their choices. That is seldom the case.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128296667","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Should a monopolistic vendor adopt the selling model or the leasing model for information goods or services? We study this question in the context of consumer valuation depreciation. Using a two-period game-theoretic model, we consider two types of consumer valuation depreciation for information goods or services: vintage depreciation and individual depreciation. Vintage depreciation assumes that a good or service loses some of its appeal to consumers as it becomes dated, and this effect persists independent of usage. Individual depreciation instead assumes that valuation depreciation happens only for consumers who have consumed or experienced the good or service. We identify conditions under which each pricing model is preferred. For vintage depreciation information goods, the leasing model dominates the selling model in vendor profit. For individual depreciation information goods, the selling model dominates the leasing model as long as the magnitude of individual depreciation exceeds a certain threshol...
{"title":"Selling or Leasing? Pricing Information Goods with Depreciation of Consumer Valuation","authors":"Yifan Dou, Yu Jeffrey Hu, D. J. Wu","doi":"10.2139/ssrn.2367183","DOIUrl":"https://doi.org/10.2139/ssrn.2367183","url":null,"abstract":"Should a monopolistic vendor adopt the selling model or the leasing model for information goods or services? We study this question in the context of consumer valuation depreciation. Using a two-period game-theoretic model, we consider two types of consumer valuation depreciation for information goods or services: vintage depreciation and individual depreciation. Vintage depreciation assumes that a good or service loses some of its appeal to consumers as it becomes dated, and this effect persists independent of usage. Individual depreciation instead assumes that valuation depreciation happens only for consumers who have consumed or experienced the good or service. We identify conditions under which each pricing model is preferred. For vintage depreciation information goods, the leasing model dominates the selling model in vendor profit. For individual depreciation information goods, the selling model dominates the leasing model as long as the magnitude of individual depreciation exceeds a certain threshol...","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132086399","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Intermediation chains represent a common pattern of trade in over-the-counter markets. We study a classic problem impeding trade in these markets: an agent uses his market power to inefficiently screen a privately informed counterparty. We show that, generically, if efficient trade is implementable via any incentive-compatible mechanism, it is also implementable via a trading network that takes the form of a sufficiently long intermediation chain. We characterize information sets of intermediaries that ensure this striking result. Sparse trading networks featuring long intermediation chains might thus constitute an efficient market response to frictions, in which case no regulatory action is warranted.
{"title":"On the Efficiency of Long Intermediation Chains","authors":"Vincent Glode, C. Opp, Xingtan Zhang","doi":"10.2139/ssrn.2785836","DOIUrl":"https://doi.org/10.2139/ssrn.2785836","url":null,"abstract":"Intermediation chains represent a common pattern of trade in over-the-counter markets. We study a classic problem impeding trade in these markets: an agent uses his market power to inefficiently screen a privately informed counterparty. We show that, generically, if efficient trade is implementable via any incentive-compatible mechanism, it is also implementable via a trading network that takes the form of a sufficiently long intermediation chain. We characterize information sets of intermediaries that ensure this striking result. Sparse trading networks featuring long intermediation chains might thus constitute an efficient market response to frictions, in which case no regulatory action is warranted.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"110 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121468198","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Chien-Yu Lai, Andreas Lange, J. List, Michael K. Price
This note links the commodity bundling literature with the literature on the private provision of public goods. We discuss the potential profitability of bundling strategies for both private firms and charitable organizations. Even in the absence of consumption complementarities, we show important cases when private and public goods should be bundled. For example, both a monopolist and a charity can profit from bundling the goods they provide. Linking sales to charitable contributions can also be beneficial for for-profit firms as it alleviates price-competition. Beyond providing a theoretical framework for understanding the incentive properties of bundling private and public goods, the study lends insights into the debate on the efficacy of corporate social responsibility.
{"title":"The Business of Business is Business: Why (Some) Firms Should Provide Public Goods When They Sell Private Goods","authors":"Chien-Yu Lai, Andreas Lange, J. List, Michael K. Price","doi":"10.3386/w23105","DOIUrl":"https://doi.org/10.3386/w23105","url":null,"abstract":"This note links the commodity bundling literature with the literature on the private provision of public goods. We discuss the potential profitability of bundling strategies for both private firms and charitable organizations. Even in the absence of consumption complementarities, we show important cases when private and public goods should be bundled. For example, both a monopolist and a charity can profit from bundling the goods they provide. Linking sales to charitable contributions can also be beneficial for for-profit firms as it alleviates price-competition. Beyond providing a theoretical framework for understanding the incentive properties of bundling private and public goods, the study lends insights into the debate on the efficacy of corporate social responsibility.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122154292","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Evidence shows that marketers can direct consumers’ limited attention to specific product attributes by making them “prominent.” This research asks: How should firms decide which attribute to make prominent in competitive environments? A key feature of this setting is that consumers’ preferences are context-dependent and that a firm’s choice of an attribute affects the evaluation of all products in the category. We develop a model in which firms selectively promote one of two attributes (e.g., image or performance) before competing in price. We find when consumers evaluate both attributes, perceived differentiation within an attribute can become diluted; we call this the dilution effect. This implies that making the same attribute prominent can arise in equilibrium. Only if there is a sufficient quality advantage in an attribute do we find equilibria with firms making different attributes prominent. We also show how the dilution effect can be a disincentive for investments in quality improvements. Data an...
{"title":"Prominent Attributes under Limited Attention","authors":"Yi Zhu, Anthony J. Dukes","doi":"10.2139/ssrn.2633851","DOIUrl":"https://doi.org/10.2139/ssrn.2633851","url":null,"abstract":"Evidence shows that marketers can direct consumers’ limited attention to specific product attributes by making them “prominent.” This research asks: How should firms decide which attribute to make prominent in competitive environments? A key feature of this setting is that consumers’ preferences are context-dependent and that a firm’s choice of an attribute affects the evaluation of all products in the category. We develop a model in which firms selectively promote one of two attributes (e.g., image or performance) before competing in price. We find when consumers evaluate both attributes, perceived differentiation within an attribute can become diluted; we call this the dilution effect. This implies that making the same attribute prominent can arise in equilibrium. Only if there is a sufficient quality advantage in an attribute do we find equilibria with firms making different attributes prominent. We also show how the dilution effect can be a disincentive for investments in quality improvements. Data an...","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-12-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127901930","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We consider an oligopoly model in which consumers engage in sequential search based on partial product information and advertised prices. By applying Weitzman's (1979) optimal sequential search solution, we derive a simple static condition that fully summarizes consumers' shopping outcomes and translates the pricing game among the sellers into a familiar discrete‐choice problem. Exploiting the discrete‐choice reformulation, we provide sufficient conditions that guarantee the existence and uniqueness of market equilibrium and analyze the effects of preference diversity and search frictions on market prices. Among other things, we show that a reduction in search costs raises market prices.
{"title":"Consumer Search and Price Competition","authors":"Michael Choi, A. Dai, Kyungmin Kim","doi":"10.2139/ssrn.2865162","DOIUrl":"https://doi.org/10.2139/ssrn.2865162","url":null,"abstract":"We consider an oligopoly model in which consumers engage in sequential search based on partial product information and advertised prices. By applying Weitzman's (1979) optimal sequential search solution, we derive a simple static condition that fully summarizes consumers' shopping outcomes and translates the pricing game among the sellers into a familiar discrete‐choice problem. Exploiting the discrete‐choice reformulation, we provide sufficient conditions that guarantee the existence and uniqueness of market equilibrium and analyze the effects of preference diversity and search frictions on market prices. Among other things, we show that a reduction in search costs raises market prices.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"37 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114807990","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Generalising the idea of the classical EM algorithm that is widely used for computing maximum likelihood estimates, we propose an EM-Control (EM-C) algorithm for solving multi-period finite time horizon stochastic control problems. The new algorithm sequentially updates the control policies in each time period using Monte Carlo simulation in a forward-backward manner; in other words, the algorithm goes forward in simulation and backward in optimization in each iteration. Similar to the EM algorithm, the EM-C algorithm has the monotonicity of performance improvement in each iteration, leading to good convergence properties. We demonstrate the effectiveness of the algorithm by solving stochastic control problems in the monopoly pricing of perishable assets and in the study of real business cycle.
{"title":"EM Algorithm and Stochastic Control in Economics","authors":"S. Kou, X. Peng, Xingbo Xu","doi":"10.2139/ssrn.2865124","DOIUrl":"https://doi.org/10.2139/ssrn.2865124","url":null,"abstract":"Generalising the idea of the classical EM algorithm that is widely used for computing maximum likelihood estimates, we propose an EM-Control (EM-C) algorithm for solving multi-period finite time horizon stochastic control problems. The new algorithm sequentially updates the control policies in each time period using Monte Carlo simulation in a forward-backward manner; in other words, the algorithm goes forward in simulation and backward in optimization in each iteration. Similar to the EM algorithm, the EM-C algorithm has the monotonicity of performance improvement in each iteration, leading to good convergence properties. We demonstrate the effectiveness of the algorithm by solving stochastic control problems in the monopoly pricing of perishable assets and in the study of real business cycle.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124164427","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the technology industry one product category commonly builds on another. For instance, a smart television product enhances a smart phone. However, because firms can enhance the experience if they produce both products, the utility gained by owning both products from the same firm is greater than the sum of the two products’ utility if purchased from two separate firms. One would think this would increase the margins of the second product, as it does in aftermarkets. However, we show that in a duopoly environment the additional utility produced by the firms offset each other. This explains why we have not seen a dramatic increase in profit margins from hardware producers such as Apple, Google and Samsung.
{"title":"A Path To Consumer Surplus & Loyalty: How Path Dependent Products Result in Lower Prices and Order-Dependent Consumer Loyalty","authors":"S. Akhundjanov, Ben Smith, Max St. Brown","doi":"10.2139/ssrn.2717505","DOIUrl":"https://doi.org/10.2139/ssrn.2717505","url":null,"abstract":"In the technology industry one product category commonly builds on another. For instance, a smart television product enhances a smart phone. However, because firms can enhance the experience if they produce both products, the utility gained by owning both products from the same firm is greater than the sum of the two products’ utility if purchased from two separate firms. One would think this would increase the margins of the second product, as it does in aftermarkets. However, we show that in a duopoly environment the additional utility produced by the firms offset each other. This explains why we have not seen a dramatic increase in profit margins from hardware producers such as Apple, Google and Samsung.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"76 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123121656","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we develop a framework to generally characterize the equilibrium trial and pricing strategies of oligopoly software market, when there exist competition, network effects (externalities), uncertainty on software functionality, network maintaining cost and compatibility issues. We find that, in equilibrium, the restriction on network effects is decreasing with network effects, but increasing with consumers’ basic willingness to pay. Meanwhile, the restriction on functionality is increasing with the posterior on the functionality after trial. The equilibrium price has a non-linear relation with the equilibrium network effects in a monopoly market and a market with completely incompatible software. However, the equilibrium price is set to maintaining cost in a market with completely compatible software. Moreover, we find that incompatibility could generate an equilibrium under which identical firms choose different trial and pricing strategies, and all consumers who want to purchase software are divided by firms on the market.
{"title":"Trial and Pricing Strategies of Software Market with Competition and Network Effects","authors":"Zhenhua Wu, Zhijie Lin, Yong Tan","doi":"10.2139/ssrn.2832599","DOIUrl":"https://doi.org/10.2139/ssrn.2832599","url":null,"abstract":"In this paper, we develop a framework to generally characterize the equilibrium trial and pricing strategies of oligopoly software market, when there exist competition, network effects (externalities), uncertainty on software functionality, network maintaining cost and compatibility issues. We find that, in equilibrium, the restriction on network effects is decreasing with network effects, but increasing with consumers’ basic willingness to pay. Meanwhile, the restriction on functionality is increasing with the posterior on the functionality after trial. The equilibrium price has a non-linear relation with the equilibrium network effects in a monopoly market and a market with completely incompatible software. However, the equilibrium price is set to maintaining cost in a market with completely compatible software. Moreover, we find that incompatibility could generate an equilibrium under which identical firms choose different trial and pricing strategies, and all consumers who want to purchase software are divided by firms on the market.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"16 3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116710884","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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