TRANSACTION COST, TWO-PART TARIFFS, AND COLLUSION

When two goods exhibit demand complementarity, the sellers would generally charge lower prices under collusion than under rivalry–a cartel internalizes cross effects that independent firms ignore. For the particular case of "two-part" tariffs consisting of entrance fees and per-unit prices, this paper shows that entrance fees are indeed lower under collusion than under rivalry, but that per-unit prices are unaffected. The demand complementarity arises from transaction costs borne by consumers who enter the market. The policy implication is that collusion can be socially preferable to competition in the presence of such transaction costs.     

PRICING ANOMALIES IN THE MARKET FOR DIAMONDS: EVIDENCE OF CONFORMIST BEHAVIOR

Some goods are consumed not just for their intrinsic utility but also for the impression their consumption has on others. We analyze the market for such a commodity—diamonds. We collect data on price and other attributes from the inventories of three large online retailers of diamonds. We find that people are willing to pay premiums upward of 18% for a diamond that is one‐half carat rather than slightly less than a half carat and between 5% and 10% for a one‐carat rather than a slightly less than one‐carat stone. Since a major portion of larger gem‐quality diamonds are used for engagement rings, such an outcome is consistent with Bernheim's model of conformism, where individuals try to conform to a single standard of behavior that is often established at a focal point. In this case, prospective grooms signal their desirability as a mate by the size of the diamond engagement ring they give their fiancées. (JEL A1, D4)     

COMPOUND PRICING

Compound pricing makes the price or availability of some goods conditional on the purchase (or non-purchase) of other goods. Tie-ins and requirements contracts, two well-known examples, are analyzed here.
Contrary to some opinion, such practices need not be innocuous or benign. This analysis shows that compound pricing can produce price, output, profit, and welfare results that are practically indistinguishable from those got when a firm increases its monopoly power in more obvious and direct ways. By some standards, the requirements and exclusive dealing contracts analyzed here are predatory.     

DISCOUNT PRICING

We investigate the practice of framing a price as a discount from an earlier price, with information such as “was $200, now $100.” We discuss two reasons why a discounted price—rather than a merely low price—can make a consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, when a seller with limited stock runs a clearance sale, later consumers infer that unsold stock has higher expected quality when its initial price was higher. We also suggest a behavioral explanation, which is that consumers with reference-dependence preferences are more likely to buy if they perceive the price as a bargain relative to the earlier price. Discount pricing is therefore an effective marketing technique, and a seller may wish to deceive potential customers by offering a false discount. The welfare effects of regulation to prevent fictitious pricing are subtle, with potential unintended consequences, and depend on whether consumers are sophisticated or naive. (JEL D18, D42, D83, L15, M31)     

UNIFORM TWO-PART TARIFFS AND BELOW MARGINAL COST PRICES: DISNEYLAND REVISITED

This paper completely characterizes the demand and cost parameters which induce a constant cost monopolist charging a uniform two-part tariff to choose a marginal price less than marginal cost when selling to two types of consumers with different linear demands. It also provides a quantitative assessment of the potential significance of such pricing. Pricing below marginal cost maximizes profits in large regions of the model parameter space, contrary to widely held beliefs. If fixed costs are zero, pricing below marginal cost can increase profits by a factor of √2, although for most parameters the profit increase is much smaller. ( JEL D42, L11)     

EFFICIENCY IN EMPLOYMENT BASED HEALTH INSURANCE: THE POTENTIAL FOR SUPRA-MARGINAL COST PRICING

Currently, the majority if privately insured individuals in the U.S. are insured through their employers. This has significant implications for competition and the ability qf a "competitive" insurance industry to assure marginal-cost pricing. The central barrier to competition arises when employers restrict their employees' ability to select among insurance carriers. Several models 4 insurer proft maximization are explored which demonstrate that supra-marginal cost pricing is likely to persist euen when the insurance market appears "cornpetitiue."     

MONOPOLY® PRICING

There is a large and rich literature in economics on monopoly pricing. However, a close examination of this literature reveals a surprising gap: there have been virtually no studies of Monopoly^® pricing. We fill that void with an empirical examination of the pricing of the board game Monopoly^®. In particular, we examine market‐level, quarterly prices from 1990 to 2002 and find substantial evidence of the phenomenon of customary pricing. (JEL L83, L1, L12, Z11, D42)     

IMPERFECT COMPETITION AND BASING-POINT PRICING

This article investigates the relationship between imperfect competition and basing point pricing. Basing-point pricing can emerge if firms at the base site are Bertrand competitors, firms at non-base locations are less than perfectly competitive with each other and are von Stackleberg leaders with respect to base site production, and the products produced at the base and non-base locations are perfect substitutes. Basing-point pricing is associated with competitive prices by base site firms but with markups by non-base site firms equal to their phantom freight charges.     

MULTIPRODUCT PRICING IN MAJOR LEAGUE BASEBALL: A PRINCIPAL COMPONENTS ANALYSIS

The empirical analysis of multiproduct pricing lacks clear theoretical guidance and appropriate data, which often render traditional regression‐based analyses impractical. Under these circumstances the factors underlying price variation can be inferred using a new methodology based on principal components. Analyzing ticket, parking, and concession pricing in Major League Baseball with this methodology demonstrates that general demand shifts are the primary factor, but explain only half of overall price variation. Also important are price interactions deriving from demand interrelationships between goods and attempts to maximize the capture of consumer surplus in the presence of heterogeneous demand. (JEL D40, L11, L13)     

PRICING UNDER FEDERAL MILK MARKET REGULATION

Federal milk market regulation sets the wholesale price of most fluid milk in this country. This paper explores the purposes served by price-setting procedures under regulation and their quantitative impact. The institutional and theoretical background is provided, and an econometric model of a regulated milk market is estimated. The latter demonstrates that actual prices are consistent with those which would maximize producer benefit in 1960 and 1970, and that regulation produces quite substantial effects on prices and quantities within markets, on price patterns among markets, and on income distribution and economic efficiency.     

THE NEAR OPTIMALITY OF MARK-UP PRICING

Mark-up pricing policies result in a loss of profits compared to marginal pricing behavior. These losses, however, are often very small, even for large changes in the money supply. But by adopting a simple pricing rule the firm does not have to forecast the future, and avoids the informational and computational costs required to determine the profit maximizing price each period. Thus, even if these costs are small, mark-up pricing policies may be optimal, or approximately so, at least for some firms. In a macro model this is likely to imply large monetary non-neutralities.