Measuring market power when firms price discriminate

Kutlu, Levent; Sickles, Robin C.

doi:10.1007/s00181-017-1251-4

Cited by 13 publications

(1 citation statement)

References 31 publications

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“…For example, Puller [83] incorporates capacity constraints; Puller [82] and Kutlu and Sickles [63] incorporate dynamic strategic factors; Graddy [42] and Kutlu and Sickles [64] incorporate price discrimination in their conduct parameter models. Corts [25] and Kutlu and Sickles [64] state that in the language of conjectural variations theory, the conduct is described in terms of firms' conjectural variations, which are their expectations about other firms' reactions. Conduct parameter models use the conduct parameters to represent the conjectural variations of the firms.…”

Section: Conduct Parameter Approachmentioning

confidence: 99%

Market Structures in Production Economics

Garcia

Kutlu

Sickles

2020

Handbook of Production Economics

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Our chapter begins by discussing the structure-conduct-performance (SCP) paradigm, which is an early descriptive literature that provided many of the stylized facts about market behaviors. This is followed by a discussion of the bounds approach, which concentrates on making predictions that can hold across a broad range of industries and is achieved by aiming conclusions based on minimal assumptions. We then briefly talk about commonly used fundamental market structures and illustrate how different combinations of various standard concepts are combined to describe market structures. As dynamic en and markets with product differentiation play important roles in defining market structures, we provide additional information about models with dynamic environments and models with product differentiation in separate sections. We finalize our review by discussing in depth the literature on market structure on innovation, productivity slowdowns and related problems of income inequality.

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Section: Conduct Parameter Approachmentioning

confidence: 99%

Market Structures in Production Economics

Garcia

Kutlu

Sickles

2020

Handbook of Production Economics

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Price dispersion and optimal price categories with limited memory consumers

Baris

Kutlu

2017

Manage Decis Econ

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JEL Classification: L11; L13; L20In this paper, we study consumers with limited memory and examine the effects of their price categorization on the pricing strategies of competing firms. The valuations of consumers are assumed to be heterogeneous. We find that it is possible to observe price dispersion even when each firm charges a single price if the consumers categorize prices non-optimally. Moreover, we demonstrate that the likelihood of a price dispersion outcome is reduced when consumers with limited memory set up the price categories optimally. These findings suggest that the consumers' limited memory and their sub-optimal behavior, that is, their inability to choose price categories optimally can be a reason for observed price dispersion. | INTRODUCTIONConsumers are not endowed with perfect information. Thus, they are not able to recall all prices every time. Often, some consumers do not recall the prices of the products they just bought (Wakefield & Inman, 1993). One way consumers deal with their cognitive limitations is by categorizing prices according to their perceived similarities, for example, when prices are close to each other. These categories serve as imperfect but practical approximations for consumers. According to the terminology of the bounded rationality literature, satisficing is a cognitive heuristic that can explain consumers' behavior to stop optimizing when they get a near-satisfactory result (Simon, 1956).Price categorization is in line with this concept. In this paper, we demonstrate that a likely outcome of this categorization process is the practice of firms charging different prices for the same product: a case known as price dispersion. Chen, Iyer, and Pazgal (2010) consider a market mixed with informed consumers, who have limited memory to recall exact prices, and uninformed consumers and find that firms randomize their pricing strategies to generate guaranteed profits from their uninformed consumers. In their setting, consumers have homogeneous valuations and this process leads to price dispersion as a mixed strategy equilibrium. In a similar yet different framework, Kutlu (2015) assumes consumers to have heterogeneous valuations and explains that firms charge different prices at the unique pure strategy Nash equilibrium.Following an analogous duopoly framework, consumers in our model have heterogeneous valuations as in Kutlu (2015). Further, we introduce price categorization. Consumers recall the categories but not the exact prices. We find that it is possible to observe price dispersion in a pure strategy equilibrium, even when each firm charges a single price, when consumers choose price categories non-optimally.Conversely, price dispersion tends to disappear if the consumers optimally set their categorization scheme. These results confirm that observed price dispersion in some markets may exist due to consumers' memory limitations. In addition, we find that an additional contributing factor is their inability to optimally allocate their memory, that is, non-optimal price ca...

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