Research
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We propose a model of Bertrand competition in which consumers choose firms based on prices and qualities. Service quality depends on congestion, which is a function of capacity and output. We first present theoretical properties of the model. Next, we calibrate the model to the wireless industry and use it to evaluate the impacts of changes in spectrum allocation on consumer welfare and profits. Simulations of the model show that when one firm acquires more spectrum, consumer welfare at all firms increases due to congestion externality effects. We find that a transfer of spectrum from one firm to another can either raise or lower consumer welfare at the firms not involved in the transaction, again due to externality effects. Where it is possible to compare the results of our model to the wireless industry, they are consistent with the data.
Credit or Debit? How Surcharging Affects Customers, Merchants, and the Platform
Payment cards were used to complete over 87 billion transactions in the United States in 2012, worth over $4 trillion. The cost for merchants of these transactions is significant, with merchants paying over $66 billion in fees to payment card networks (e.g., Visa) in 2012, and also varies widely based on the type of payment card used, with credit cards often twice as costly for merchants as debit cards. Historically, with limited exceptions, merchants have been prohibited, both by law and by the contract permitting the acceptance of that network's cards, from what is known as ``surcharging,'' that is, charging a customer a higher or lower price depending upon the cost to the merchant of the customer's payment method. Merchants have raised legal challenges against this prohibition on surcharging, claiming it is anti-competitive, increases their costs, and reduces their profits. Recent concessions made by several major payment networks in response to these legal challenges raises the possibility that this paradigm might change in the future.
I consider a population of customers who have different valuations for a good sold by two competing merchants, as well as varying preferences over the merchant from which to purchase the good and the payment form with which to make the purchase, and examine what the effects might be if merchants were allowed to surcharge. When the merchants have identical marginal costs, both merchants have higher profits when allowed to surcharge. However, if merchants are asymmetric, the merchant with lower costs, typically a larger retailer, benefits from surcharging, whereas the merchant without an ability to reduce costs, typically a smaller retailer, does not.
Click here for an interactive appendix with a version of Figure 3 that allows you to see how the figure changes when you change parameter values and prices. Click the title above for a PDF of the paper.
Worth the Wait? Cooperation in a Repeated Prisoner's Dilemma with Search
A population of more-patient and less-patient types interact in a repeated prisoner's dilemma embedded in a search model. I use this framework to determine, when is the first-best outcome in which all players cooperate feasible, and when it is not, can welfare be improved over the uncooperative equilibrium by exploiting separation within or across markets? I find that the first-best is achievable in a wide range of circumstances despite minimal informational and strategic requirements. When the first-best is infeasible, both types prefer separation-by-action to the fully-uncooperative equilibrium, while separation across markets provides further Pareto improvement opportunities, results indicating the potential of sorting to increase welfare.