Research Joint Ventures: The Role of Financial Constraints
with Igor Letina and Armin Schmutzler
Published in European Economic Review
Abstract: This paper provides a novel theory of research joint ventures for financially constrained firms. When firms choose R&D portfolios, an RJV can help to coordinate research efforts, reducing investments in duplicate projects. This can free up resources, increase the variety of pursued projects and thereby increase the probability of discovering the innovation. RJVs improve innovation outcomes when market competition is weak and external financing conditions are bad. An RJV may increase the innovation probability and nevertheless lower total R&D costs. RJVs that increase innovation tend to be profitable, but innovation-reducing RJVs also exist. Finally, we compare RJVs to innovation-enhancing mergers.
Cross- and Upselling with Context Effects
with Christian Zihlmann
Abstract: This paper studies firms' optimal pricing strategies of cross- and upselling, a common practice where consumers are offered optional extras or upgrades during the purchase process. Unlike conventional models that assume exogenous consumer insensitivity to additional prices, we endogenize this insensitivity by positing that consumers are more likely to buy overpriced extras when these constitute a smaller share of their total expenditure. This behavior is microfounded in relative thinking, diminishing sensitivity, or reference dependence. Our contribution is threefold. (i) We characterize the optimal pricing strategy. Conditions under which firms should adjust prices in response to context-sensitive consumers are identified. Our findings show that context-sensitive consumers weaken incentives to compete in the base good market, leading to an endogenous price floor that profit-maximizing firms should not undercut. (ii) We compare the resulting prices to those in a benchmark economy where all consumers have standard preferences. In our model, optimal prices depend on the proportion of context-sensitive consumers and the level of competition. The optimal base good price is non-monotonic and can fall below or rise above the benchmark economy price. (iii) We analyze the consequences on the economy. Two key findings from models with exogenous insensitivity no longer hold: context‐sensitive consumers can exert negative externalities on standard consumers, and overall consumer surplus is threatened even under perfect competition.
Regulating Hidden Fees with Consumer Heterogeneity
with Alexander Rasch and Tobias Wenzel
Abstract: We study hidden prices and fees added during the purchasing process in a general framework that applies to many common demand functions. (Some) Consumers are inattentive to such additional costs, which induces excess demand. We allow for consumer heterogeneity in demand and inattention. This leads to two novel effects that are important to consider when regulating hidden prices. First, when attention and price sensitivity of demand are strongly correlated, the pass-through rate of hidden prices on the total price can be negative, and regulation leads to a higher total price. Second, inattentive consumers misperceive a positive pass-through rate to be negative. This can lead to increasing aggregate demand while the total price also increases. In this case, regulation increases consumer surplus by reducing the total price and excess demand. When the latter effect is not present, a policy has opposing effects on excess demand and the total price, leading to a trade-off for policymakers.
Consumer Search and Limited Attention (with Markus Reisinger and Özlem Bedre-Defolie)
Merger Spillovers on Competitors (with Leyla Gilgen)
Expectation Management and Misattribution of Reference Dependence (with Robin Ng)