Publications
Bundling, vertical differentiation, and platform competition Review of Network Economics, Volume 17, Issue 1, Pages 1–23, 2018.
Journal Artical
Abstract
This paper studies the bundling strategies of two firms that each sell a horizontally differentiated platform and a complementary good. When the complementary goods are vertically differentiated, the firm that sells the superior one can commit to a more aggressive pricing strategy through bundling. In the presence of asymmetry in externalities between the two sides in the platform market, bundling may be profitable without foreclosing the rival when platforms implement cross subsidies from the high-externality side (developers) to the low-externality side (consumers). Bundling has a positive effect on welfare because it allows for better internalization of the indirect network effects and reduces the developer cost of multi-homing, but it also has a negative effect because some consumers consume less-preferred components. Consequently, bundling is socially desirable when platforms are not too differentiated and the vertical differentiation between the complementary goods is high.
Journal Artical
Abstract
This paper studies the bundling strategies of two firms that each sell a horizontally differentiated platform and a complementary good. When the complementary goods are vertically differentiated, the firm that sells the superior one can commit to a more aggressive pricing strategy through bundling. In the presence of asymmetry in externalities between the two sides in the platform market, bundling may be profitable without foreclosing the rival when platforms implement cross subsidies from the high-externality side (developers) to the low-externality side (consumers). Bundling has a positive effect on welfare because it allows for better internalization of the indirect network effects and reduces the developer cost of multi-homing, but it also has a negative effect because some consumers consume less-preferred components. Consequently, bundling is socially desirable when platforms are not too differentiated and the vertical differentiation between the complementary goods is high.
Working papers
Product returns and channel for consumer experimentation
In a market where consumers face uncertainty regarding products' fit with their preferences, we study duopolistic online retailers' return policies and pricing strategies. Retailers face the trade-off between locking in consumers with a high restocking fee and communicating product information to consumers by offering experiments with the product. We show that an asymmetric equilibrium exists such that one retailer offers the free return policy (FRP) while the other free rides when product differentiation is high. Buying with the FRP gives consumers a complementary good, an experiment to resolve the fit uncertainty, and this complementary good has the characteristics of a public good. Consequently, retailers avoid price competition by monopolizing consumers who prefer a given product over the rival's. We then examine how retailers use online and offline channels to facilitate consumer experimentation when retailers also operate brick-and-mortar stores. We show that retailers can segment the market by choosing different channels for experimentation based on consumers' probabilities of making returns because of a poor fit. When it is too costly to handle returns, retailers subsidize consumers for the search cost through product prices and increase restocking fees to induce consumers who have a high enough probability of making returns to visit the store instead, so that these consumers can make informed purchases.
In a market where consumers face uncertainty regarding products' fit with their preferences, we study duopolistic online retailers' return policies and pricing strategies. Retailers face the trade-off between locking in consumers with a high restocking fee and communicating product information to consumers by offering experiments with the product. We show that an asymmetric equilibrium exists such that one retailer offers the free return policy (FRP) while the other free rides when product differentiation is high. Buying with the FRP gives consumers a complementary good, an experiment to resolve the fit uncertainty, and this complementary good has the characteristics of a public good. Consequently, retailers avoid price competition by monopolizing consumers who prefer a given product over the rival's. We then examine how retailers use online and offline channels to facilitate consumer experimentation when retailers also operate brick-and-mortar stores. We show that retailers can segment the market by choosing different channels for experimentation based on consumers' probabilities of making returns because of a poor fit. When it is too costly to handle returns, retailers subsidize consumers for the search cost through product prices and increase restocking fees to induce consumers who have a high enough probability of making returns to visit the store instead, so that these consumers can make informed purchases.
On the market structure in one-way intra-industry trade (with Haokai Ning)
Spencer (1986) argues that the strategic trade policy should aim for highly concentrated domestic industry involved in exporting, this paper argues that utilizing antitrust regulation to promote competition in the domestic industry improves the social welfare of the exporting country. We consider a one-way intra-industry trade model with one exporting country and one importing country in the presence of government interventions. When the exporting country's market structure is a monopoly, the social welfare of the exporting country is lower than that of the importing country. As more competition emerges in the exporting country, the social welfare of the exporting country turns out to be higher than that of the importing country. Moreover, more competition in the local market of the exporting country unambiguously increases its social welfare regardless of the degree of product differentiation. But the social welfare of the importing country may increase or decrease hinging on the degree of product differentiation in the exporting country. Finally, we show that the importing country has no incentive to sign a free trade agreement regardless of the market structure in the exporting country.
Spencer (1986) argues that the strategic trade policy should aim for highly concentrated domestic industry involved in exporting, this paper argues that utilizing antitrust regulation to promote competition in the domestic industry improves the social welfare of the exporting country. We consider a one-way intra-industry trade model with one exporting country and one importing country in the presence of government interventions. When the exporting country's market structure is a monopoly, the social welfare of the exporting country is lower than that of the importing country. As more competition emerges in the exporting country, the social welfare of the exporting country turns out to be higher than that of the importing country. Moreover, more competition in the local market of the exporting country unambiguously increases its social welfare regardless of the degree of product differentiation. But the social welfare of the importing country may increase or decrease hinging on the degree of product differentiation in the exporting country. Finally, we show that the importing country has no incentive to sign a free trade agreement regardless of the market structure in the exporting country.
Coupons, precommitment, and platform competition (with Jing Xu)
We study various forms of behavior-based price discrimination (BBPD) by horizontally differentiated platforms that compete for heterogeneous sellers and consumers in a two-period dynamic setting. Platforms may offer loyal consumers a discount on the second-period price; they may precommit to a special price or a discount for loyal consumers to be effective in the next period. We illustrate that consumer prices in the second period are lower than those in the first period. If platforms offer loyal consumers a discount on the second-period price or precommit to a special price for loyal consumers, platforms effectively discriminate against loyal consumers. However, if platforms precommit to a discount for loyal consumers, they will commit to a non-discriminatory pricing scheme. We also show that these forms of BBPD reduce platform profits while enhance consumer welfare compared to uniform prices in each period. Regarding different dimensions of pricing strategies, we conclude that platforms obtain higher profits if they practice BBPD in the form of prices rather than coupons and if they avoid precommitment of either form.
We study various forms of behavior-based price discrimination (BBPD) by horizontally differentiated platforms that compete for heterogeneous sellers and consumers in a two-period dynamic setting. Platforms may offer loyal consumers a discount on the second-period price; they may precommit to a special price or a discount for loyal consumers to be effective in the next period. We illustrate that consumer prices in the second period are lower than those in the first period. If platforms offer loyal consumers a discount on the second-period price or precommit to a special price for loyal consumers, platforms effectively discriminate against loyal consumers. However, if platforms precommit to a discount for loyal consumers, they will commit to a non-discriminatory pricing scheme. We also show that these forms of BBPD reduce platform profits while enhance consumer welfare compared to uniform prices in each period. Regarding different dimensions of pricing strategies, we conclude that platforms obtain higher profits if they practice BBPD in the form of prices rather than coupons and if they avoid precommitment of either form.
Environmental federalism: centralized or decentralized enforcement? (with Jing Xu)
This paper studies whether enforcement powers of environmental regulation should be assigned to the central authority or regional authorities. We develop a two-stage model in which responsible authorities choose the inspection strategies and then regulated firms determine their compliance behaviors. We highlight the key tradeoff: centralized enforcement internalizes externalities of a global pollutant, whereas decentralized enforcement addresses various aspects of heterogeneity across regions. We show that firms underreport their actual emissions in the presence of imperfect inspections from authorities. Centralized enforcement is more stringent when there is low heterogeneity across regions in their environmental concerns or in inspection effectiveness. Decentralized enforcement yields higher total surplus when there is high heterogeneity in inspection effectiveness across regions. However, moving from centralized enforcement to decentralized enforcement is not a Pareto improvement even when the latter yields higher total surplus. Our results reveal the potential conflict of interests between different tiers of authority.
This paper studies whether enforcement powers of environmental regulation should be assigned to the central authority or regional authorities. We develop a two-stage model in which responsible authorities choose the inspection strategies and then regulated firms determine their compliance behaviors. We highlight the key tradeoff: centralized enforcement internalizes externalities of a global pollutant, whereas decentralized enforcement addresses various aspects of heterogeneity across regions. We show that firms underreport their actual emissions in the presence of imperfect inspections from authorities. Centralized enforcement is more stringent when there is low heterogeneity across regions in their environmental concerns or in inspection effectiveness. Decentralized enforcement yields higher total surplus when there is high heterogeneity in inspection effectiveness across regions. However, moving from centralized enforcement to decentralized enforcement is not a Pareto improvement even when the latter yields higher total surplus. Our results reveal the potential conflict of interests between different tiers of authority.
Does showrooming necessarily harm brick-and-mortar stores?
In a market where consumers face valuation uncertainty, we study the effects of showrooming on competition between a brick-and-mortar (BM) store and an online retailer selling a homogeneous product. We show that showrooming increases the profit of the BM store and reduces that of the online seller compared with an equilibrium in which showrooming does not arise. Without showrooming, consumers decide which retailing channel to buy the product through when they decide whether to visit the BM store. They take account of the cost of traveling to the store, and consequently the BM store is at a competitive disadvantage. Showrooming allows consumers to make their purchasing decisions after visiting the BM store, when the traveling cost is already sunk, and so it becomes irrelevant to the decision making. Thus, showrooming offsets the BM store's competitive disadvantage. We also examine the effects of reverse showrooming and pseudo-showrooming on consumer behavior and cross-channel competition.
In a market where consumers face valuation uncertainty, we study the effects of showrooming on competition between a brick-and-mortar (BM) store and an online retailer selling a homogeneous product. We show that showrooming increases the profit of the BM store and reduces that of the online seller compared with an equilibrium in which showrooming does not arise. Without showrooming, consumers decide which retailing channel to buy the product through when they decide whether to visit the BM store. They take account of the cost of traveling to the store, and consequently the BM store is at a competitive disadvantage. Showrooming allows consumers to make their purchasing decisions after visiting the BM store, when the traveling cost is already sunk, and so it becomes irrelevant to the decision making. Thus, showrooming offsets the BM store's competitive disadvantage. We also examine the effects of reverse showrooming and pseudo-showrooming on consumer behavior and cross-channel competition.
Ad-sponsored platform
This paper analyzes the platform's choice of business model between the pure subscription-based and the hybrid ad-sponsored business models when facing a subscription-based rival. Under the hybrid ad-sponsored business model, the platform adjusts the consumer subscription price to compensate for the perceived platform quality drop due to advertising, which affects consumer and developer demands, hence platform profits. My results show that, when consumers have increasing marginal disutility towards advertising, the hybrid ad-sponsored business model is more profitable independent of the degree of network externalities, and it improves consumer welfare. In this paper, I also study whether platforms have incentives to set two-sided prices sequentially. In the presence of asymmetric network externalities, setting the developer subscription price before the consumer subscription price intensifies price competition on the high-externality side and softens competition on the low-externality side. Consequently, it increases platform profits at the expenses of consumers.
This paper analyzes the platform's choice of business model between the pure subscription-based and the hybrid ad-sponsored business models when facing a subscription-based rival. Under the hybrid ad-sponsored business model, the platform adjusts the consumer subscription price to compensate for the perceived platform quality drop due to advertising, which affects consumer and developer demands, hence platform profits. My results show that, when consumers have increasing marginal disutility towards advertising, the hybrid ad-sponsored business model is more profitable independent of the degree of network externalities, and it improves consumer welfare. In this paper, I also study whether platforms have incentives to set two-sided prices sequentially. In the presence of asymmetric network externalities, setting the developer subscription price before the consumer subscription price intensifies price competition on the high-externality side and softens competition on the low-externality side. Consequently, it increases platform profits at the expenses of consumers.
How venture capitalist compensation affects investment decisions (with Nuno Alvim)
We study the conflict of interests between limited partners (LPs) and the Venture Capitalist (VC) in a venture capital fund, highlighting the impact of the value-of-distribution rules on the VC's starting and exit decisions of investments. The value-of-distribution rules specify when the VC receives profit distributions, and often generate interest-free loans between the VC and LPs. We provide the first-best investment decisions, where the roles of capital provider and decision maker coincide, as a benchmark. Our results show that a high enough percentage of profit distribution for the VC can restore the first-best investment duration under the Escrow method but has no effect on restoring the first-best investment starting dates.
We study the conflict of interests between limited partners (LPs) and the Venture Capitalist (VC) in a venture capital fund, highlighting the impact of the value-of-distribution rules on the VC's starting and exit decisions of investments. The value-of-distribution rules specify when the VC receives profit distributions, and often generate interest-free loans between the VC and LPs. We provide the first-best investment decisions, where the roles of capital provider and decision maker coincide, as a benchmark. Our results show that a high enough percentage of profit distribution for the VC can restore the first-best investment duration under the Escrow method but has no effect on restoring the first-best investment starting dates.