Periodic Reporting for period 3 - INSTRUCT (Information structures in consumer markets)
Berichtszeitraum: 2022-07-01 bis 2023-08-31
Information flows are fundamental to how well, or how badly, markets work for consumers and firms. This research project will investigate how the structure of information in consumer markets affects market performance. Broad themes include: Which kinds of information about consumer preferences help firms exploit their customers (information which consumers may wish to conceal or anonymise), and which kinds of information intensify competition for their custom (which they are happy to reveal)? Conversely, which kinds of information about firms’ products help consumers secure a good deal, and which kinds harm them? Do consumers and firms have congruent interests about the use of some kinds of information? How do firms compete when consumers have limited and heterogeneous consideration sets? (Here, a “consideration set” is the set of firms a consumer is able or willing to consider for her purchase.) How do the dual information channels of consumer search and advertising interact? What role should public policy—in areas such as privacy, price discrimination, the costs of consumer search and advertising, and the protection of captive customers—play with regard to the provision of information in consumer markets? These research questions are addressed through a number of inter-related projects: to develop innovative modelling techniques to understand how the structure of information about consumer preferences (possessed by firms and by consumers themselves) affects overall surplus and how that surplus is divided between firms and consumers; to analyse market performance when consumers have limited and heterogeneous consideration sets; and to analyse how the information channels of advertising by firms and search by consumers interact and which is more important for the efficient functioning of markets.
The project's major achievements were its main papers. The titles, publication details (where relevant), and abstracts of the five best papers are as follows:
“Discriminating Against Captive Customers”, (2019), American Economic Review: Insights 1: 257-271 (with John Vickers). Abstract: We analyze a market where some consumers only consider buying from a specific seller while other consumers choose the best deal from several sellers. When sellers are able to discriminate against their captive customers, we show that discrimination harms consumers in aggregate relative to the situation with uniform pricing when sellers are approximately symmetric, while the practice tends to benefit consumers in sufficiently asymmetric markets. We also show how the asymmetry of markets may be affected by the information that firms have on consumer captivity.
“Patterns of Competitive Interaction”, (2022), Econometrica: 90: 153-191 (with John Vickers). Abstract: We explore patterns of price competition in an oligopoly where consumers vary in the set of firms they consider for their purchase and buy from the lowest-priced firm they consider. We study a pattern of consideration, termed “symmetric interactions,” that generalizes models used in existing work (duopoly, symmetric firms, and firms with independent reach). Within this class, equilibrium profits are proportional to a firm's reach, firms with a larger reach set higher average prices, and a reduction in the number of firms (either by exit or by merger) harms consumers. However, increased competition (either by entry or by increased consumer awareness) does not always benefit consumers. We go on to study patterns of consideration with asymmetric interactions. In situations with disjoint reach and with nested reach, we find equilibria in which price competition is “duopolistic”: only two firms compete within each price range. We characterize the contrasting equilibrium patterns of price competition for all patterns of consideration in the three-firm case.
“Consumer Information and the Limits to Competition”, (2022), American Economic Review 112: 534-577 (with Jidong Zhou). Abstract: This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures that induce pure-strategy pricing equilibria, we derive signal structures that are optimal for firms and those that are optimal for consumers. The firm-optimal policy amplifies underlying product differentiation, thereby relaxing competition, while ensuring consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal policy dampens differentiation, which intensifies competition, but induces some consumers to buy their less preferred product. Our analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.
“Multiproduct Cost Passthrough: Edgeworth’s Paradox Revisited”, (2023), Journal of Political Economy 131: 2645-65 (with John Vickers). Abstract: Edgeworth’s paradox of taxation occurs when an increase in the unit cost of a product causes a multiproduct monopolist to reduce prices. We give simple illustrations of the paradox and a general analysis of the case of linear marginal cost and demand conditions, and we characterize which matrices of cost pass-through terms are consistent with profit maximization. When the firm supplies at least one pair of substitute products, we show how Edgeworth’s paradox always occurs with a suitable choice of cost function. We then establish a connection between Ramsey pricing and the paradox in a form relating to consumer surplus.
"Multibrand Price Dispersion", (2023), unpublished (with John Vickers). Abstract: We study a market in which several firms potentially each supply a number of brands of fundamentally the same product. Consumers differ in which products they consider, and firms compete using (multi-dimensional) mixed pricing strategies. We show when firms apply uniform pricing across their brands, and when they use segmented pricing so that one ìdiscountî brand is always priced below another. In duopoly models we derive equilibria for all parameters. We discuss the impact of introducing a new brand, of imposing a requirement to set uniform prices across a firm's brands, and of mergers between single-brand firms.
“Discriminating Against Captive Customers”, (2019), American Economic Review: Insights 1: 257-271 (with John Vickers). Abstract: We analyze a market where some consumers only consider buying from a specific seller while other consumers choose the best deal from several sellers. When sellers are able to discriminate against their captive customers, we show that discrimination harms consumers in aggregate relative to the situation with uniform pricing when sellers are approximately symmetric, while the practice tends to benefit consumers in sufficiently asymmetric markets. We also show how the asymmetry of markets may be affected by the information that firms have on consumer captivity.
“Patterns of Competitive Interaction”, (2022), Econometrica: 90: 153-191 (with John Vickers). Abstract: We explore patterns of price competition in an oligopoly where consumers vary in the set of firms they consider for their purchase and buy from the lowest-priced firm they consider. We study a pattern of consideration, termed “symmetric interactions,” that generalizes models used in existing work (duopoly, symmetric firms, and firms with independent reach). Within this class, equilibrium profits are proportional to a firm's reach, firms with a larger reach set higher average prices, and a reduction in the number of firms (either by exit or by merger) harms consumers. However, increased competition (either by entry or by increased consumer awareness) does not always benefit consumers. We go on to study patterns of consideration with asymmetric interactions. In situations with disjoint reach and with nested reach, we find equilibria in which price competition is “duopolistic”: only two firms compete within each price range. We characterize the contrasting equilibrium patterns of price competition for all patterns of consideration in the three-firm case.
“Consumer Information and the Limits to Competition”, (2022), American Economic Review 112: 534-577 (with Jidong Zhou). Abstract: This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures that induce pure-strategy pricing equilibria, we derive signal structures that are optimal for firms and those that are optimal for consumers. The firm-optimal policy amplifies underlying product differentiation, thereby relaxing competition, while ensuring consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal policy dampens differentiation, which intensifies competition, but induces some consumers to buy their less preferred product. Our analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.
“Multiproduct Cost Passthrough: Edgeworth’s Paradox Revisited”, (2023), Journal of Political Economy 131: 2645-65 (with John Vickers). Abstract: Edgeworth’s paradox of taxation occurs when an increase in the unit cost of a product causes a multiproduct monopolist to reduce prices. We give simple illustrations of the paradox and a general analysis of the case of linear marginal cost and demand conditions, and we characterize which matrices of cost pass-through terms are consistent with profit maximization. When the firm supplies at least one pair of substitute products, we show how Edgeworth’s paradox always occurs with a suitable choice of cost function. We then establish a connection between Ramsey pricing and the paradox in a form relating to consumer surplus.
"Multibrand Price Dispersion", (2023), unpublished (with John Vickers). Abstract: We study a market in which several firms potentially each supply a number of brands of fundamentally the same product. Consumers differ in which products they consider, and firms compete using (multi-dimensional) mixed pricing strategies. We show when firms apply uniform pricing across their brands, and when they use segmented pricing so that one ìdiscountî brand is always priced below another. In duopoly models we derive equilibria for all parameters. We discuss the impact of introducing a new brand, of imposing a requirement to set uniform prices across a firm's brands, and of mergers between single-brand firms.
The previous section described the project's outputs up to the end of the grant.