Research

Personalized Pricing and Competition [March 2024] (with Jidong Zhou) 

Accepted at American Economic Review

We study personalized pricing in a general oligopoly model. The impact of personalized pricing relative to uniform pricing hinges on the degree of market coverage. If market conditions are such that coverage is high (e.g., the production cost is low, or the number of firms is high), personalized pricing harms firms and benefits consumers, whereas the opposite is true if coverage is low. When only some firms have data to personalize prices, consumers can be worse off compared to when either all or no firms personalize prices.

The Online Appendix can be accessed here

Platform Design when Sellers Use Pricing Algorithms (with Justin Johnson and Matthijs Wildenbeest)

Econometrica, Vol. 91, Issue 5, pp. 1841-1879, 2023

We investigate the ability of a platform to design its marketplace to promote competition, improve consumer surplus, and increase its own payoff. We consider demand-steering rules that reward firms that cut prices with additional exposure to consumers. We examine the impact of these rules both in theory and by using simulations with artificial intelligence pricing algorithms (specifically Q-learning algorithms, which are commonly used in computer science). Our theoretical results indicate that these policies (which require little information to implement) can have strongly beneficial effects, even when sellers are infinitely patient and seek to collude. Similarly, our simulations suggest that platform design can benefit consumers and the platform, but that achieving these gains may require policies that condition on past behavior and treat sellers in a non-neutral fashion. These more sophisticated policies disrupt the ability of algorithms to rotate demand and split industry profits, leading to low prices.

Multiproduct Mergers and Quality Competition  (with Justin Johnson)

RAND Journal, Vol. 52, Issue 3, pp. 633-661, 2021

We investigate mergers in markets where quality differences between products are central and firms may reposition their product lines by adding or removing products of different qualities following a merger. Such mergers are materially different from those studied in the existing literature. Mergers without synergies may exhibit a product-mix effect which raises consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Post-merger synergies may lower consumer surplus. The level of, and changes in, the Herfindahl-Hirschman Index may give a misleading assessment of how a merger affects consumers. A merger may benefit some outsiders but harm others.

Multiproduct Intermediaries (with Makoto Watanabe and Jidong Zhou)

Journal of Political Economy, Vol. 129, Issue 2, pp. 421-464 , 2021

This paper develops a new framework for studying multiproduct intermediaries when consumers demand multiple products and face search frictions. We show that a multiproduct intermediary is profitable even when it does not improve consumer search efficiency. The intermediary optimally stocks high-value products exclusively to attract consumers to visit and then profits by selling nonexclusive products that are relatively cheap to buy from upstream suppliers. Relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively. We use the framework to study the design of shopping malls and the impact of direct-to-consumer sales by upstream suppliers on the retail market.  

(Supplementary document.)

Consumer Search and Retail Market Structure (with Jidong Zhou)

Management Science, Vol.65, Issue 6, pp. 2607-2623 , 2019

A puzzling feature of many retail markets is the coexistence of large multiproduct firms and smaller firms with narrow product ranges. This paper provides a possible explanation for this puzzle, by studying how consumer search frictions in‡fluence the structure of retail markets. In our model single-product firms which supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products, and due to search frictions value the one-stop shopping convenience associated with a multiproduct firm. We find that when search frictions are relatively large all firms are multiproduct in equilibrium. However when search frictions are smaller the equilibrium market structure is asymmetric, with different retail formats coexisting. This allows firms to better segment the market, and as such typically leads to the weakest price competition. When search frictions are low this asymmetric market structure is also the worst for consumers. Moreover due to the endogeneity of market structure, a reduction in the search friction can increase market prices and harm consumers.

False advertising (with Chris Wilson)

RAND Journal, Vol. 49, Issue 2, pp. 348-369, 2018

There is widespread evidence that some firms use false advertising to overstate the value of their products. We consider a model in which a policymaker is able to punish such false claims. We characterize an equilibrium where false advertising actively influences rational buyers, and analyze the effects of policy under different welfare objectives. We establish precise conditions where policy optimally permits a positive level of false advertising, and show how these conditions vary intuitively with demand and market parameters. We also consider the implications for product investment and industry self-regulation, and connect our results to the literature on demand curvature.

(Working paper version.)

Multiproduct Retailing

The Review of Economic Studies, Vol. 82, Issue 1, pp. 360 - 390, 2015.

We study the pricing behavior of a multiproduct firm, when consumers must pay a search cost to learn its prices. Equilibrium prices are high, because consumers understand that visiting a store exposes them to a hold-up problem. However a firm with more products charges lower prices, because it attracts consumers who are more price-sensitive. Similarly when a firm advertises a low price on one product, consumers rationally expect it to charge somewhat lower prices on its other products as well. We therefore find that having a large product range, and advertising a low price on one product, are substitute ways of building a `low price image'. Finally, we show that in a competitive setting each product has a high regular price, with firms occasionally giving random discounts that are positively correlated across products.

(Previously circulated as 'Multiproduct Pricing and the Diamond Paradox')

Re-examining the effects of switching costs

Economic Theory, Vol. 57, Issue 1, pp. 161-194, 2014

Consumers often incur costs when switching from one product to another. Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple  condition which determines whether switching costs raise or lower long-run prices. We also show that switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.

Can prominence matter even in an almost frictionless market? 

    The Economic Journal, Vol. 121, Issue 556, pp. F297-F308, 2011

Consumer search on the internet is rarely random. Sponsored links appear higher up a webpage and consumers often click them. Firms also bid aggressively for these 'prominent' positions at the top of the page. But why should prominence matter, when visiting an additional website is almost costless? We present a model in which consumers know their valuations for the products offered in the market, but do not know which retailer sells which product. We show that a prominent retailer earns significantly more profit than other firms, even when the cost of searching websites and comparing products is essentially zero.

Behavior-based pricing with experience goods (with Romain de Nijs)

Economics Letters, Vol. 118, Issue 1, pp. 155-158, 2013

We consider a two-period model in which duopolists sell experience goods and practice behavior-based price discrimination (BBPD). We give general conditions for when firms should offer a lower price to existing customers ('pay-to-stay') or to new customers ('pay-to-switch'). We also demonstrate that unlike previous results, BBPD may intensify competition in the first period but weaken it in the second.

A Survey on Drip Pricing and Other False Advertising

To appear as two separate chapters in the Elgar Encyclopedia on the Economics of Competition and Regulation (ed. Michael Noel) 

Drip pricing arises when a firm initially advertises a low price, then reveals additional fees as the consumer advances through the purchase process. We give examples of firms that have been pursued for engaging in drip pricing. We summarize theoretical papers on the topic, emphasizing the importance of whether drip prices are optional or mandatory, as well as the degree of consumer sophistication. We also discuss empirical papers which examine how consumers respond to drip pricing, and which examine how the ability to do drip pricing affects firm profitability. False advertising arises when firms make false claims about the "quality" of their product, which in turn cause consumers to pay more than they otherwise might. We give examples of firms that have been pursued for making such false claims. We summarize theoretical papers on the topic, emphasizing that it may not be optimal for consumers or society to impose very large fines for false advertising. For example, we argue this can be true when consumers are sophisticated and the market is relatively healthy. We also discuss empirical evidence which shows that false advertising can affect consumers' purchase behavior, and that firms are more likely to use it when the returns are higher. 

Autonomous algorithmic collusion: economic research and policy implications (with Stephanie Assad, Emilio Calvano, Giacomo Calzolari, Robert Clark, Vincenzo Denicolò, Daniel Ershov, Justin Johnson, Sergio Pastorello, Lei Xu and Matthijs Wildenbeest )

Oxford Review of Economic Policy, Vol. 37, Issue 3, pp. 459–478, 2021

Markets are being populated with new generations of pricing algorithms, powered with artificial intelligence (AI), that have the ability to autonomously learn to operate. This ability can be both a source of efficiency and cause of concern for the risk that algorithms autonomously and tacitly learn to collude. In this paper we explore recent developments in the economic literature and discuss implications for policy.

Combating Anti-Competitive Behavior Involving Algorithms: Platform Design and Organizational Process (with Justin Johnson and Matthijs Wildenbeest)

Competition Policy International, July 2020 

In this article we examine anti-competitive effects associated with algorithms and what can be done about them. We focus on how regulators can promote competition by better understanding the organizational process behind the design of algorithms, and also on how platforms can design their own algorithms to fight anti-competitive behavior by others. 

Personalization and Privacy Choice [April 2024] (with Jidong Zhou)

This paper studies consumers' privacy choices when firms can use their data to make personalized offers. We first introduce a general framework of personalization and privacy choice, and then apply it to personalized recommendations, personalized prices, and personalized product design. We argue that due to firms' reaction in the product market, consumers who share their data often impose a negative externality on other consumers. Due to this privacy-choice externality, too many consumers share their data relative to the consumer optimum; moreover, more competition, or improvements in data security, can lower consumer surplus by encouraging more data sharing.

Flexible Demand Estimation with Search Data [May 2022] (with Tomomichi Amano and Stephan Seiler)

Revise and resubmit at Quantitative Marketing and Economics

Traditional methods for estimating demand are not always well-suited to online markets, where individual products are sold infrequently, unobserved factors such as webpage layout drive substitution, and often only a limited set of product characteristics is observed. We propose a demand model where browsing data-which is abundant in many online settings-is used to infer individual consumers' consideration sets. In our model, the underlying variables which drive consideration can be correlated arbitrarily across products. We estimate the model through a constraint maximization approach, based on the insight that these correlations should rationalize the product-pair co-search frequencies that are observed in the data. In turn, these correlations make it possible to estimate more flexible substitution patterns. We apply the model to data from an online retailer, recover the elasticity matrix, and solve for optimal prices. 

Dynamic Consumer Search (with Alexei Parakhonyak) [coming soon]

Merger Remedies in Multiproduct and Multimarket Oligopoly (with Volker Nocke) [coming soon]

Price Dispersion, Active Search, and the Diamond Paradox (with Martin Obradovits)

History-based price discrimination in markets with switching costs: who gains and who loses?