THE INCENTIVES FOR RESALE PRICE MAINTENANCE UNDER IMPERFECT INFORMATION

This paper considers both the incentives for and the welfare effects of resale price maintenance (RPM) in retail markets characterized by imperfect consumer information. In markets where point-of-sale information on the product is essential for sales and information on prices is costly, RPM permits manufacturers with some monopoly power to resolve two incentive conflicts with retailers. First, because retailers with price-setting powers do not appropriate the gains in profit to an upstream manufacturer from actions taken to increase demand, their incentives to inform consumers of the product and to set low prices are inadequate. This purely vertical externality results in the classic "double mark-up" of final prices. Second, when consumers' costs of price search vary, stores offering low prices and no information can exist in the market equilibrium. These discount houses free-ride on the informational services of high-price informing retail outlets — a horizontal externality. In the imperfect information setting of this paper, (1) administered pricing improves monopolists' profits by resolving the incentive conflict; (2) the profitable use of a price floor reduces the maximum retail price charged and may reduce the average retail price; (3) price floors or administered prices can be Pareto-improving and more likely welfare (surplus)-improving; (4) price floors are welfare-improving.     

Manufacturer suggested retail prices,loss aversion and competition

We study a model of vertical relations with imperfect retail competition in which a fraction of the consumers display reference-dependent demand with respect to the manufacturer’s suggested retail price. We demonstrate that in equilibrium the suggestion will either be undercut or complied with by the retailers, but never surpassed: undercutting occurs if competition is fierce, the impact from consumers affected by reference-dependent preferences is significant, and high price suggestions are credible; compliance occurs otherwise. We provide comparisons, and discuss implications, for consumer surplus for the scenarios with suggested retail prices, without vertical restraints and with resale price maintenance.     

DOES THE PER SE RULE DETER VERTICAL PRICE-FIXING?

Manufacturers can easily circumvent legal restrictions on resale price maintenance. They can coordinate and finance their retailers' meet-the-competition price guarantees and guarantee the margins of retailers damaged by price-cutting rivals. Or they can offer various other rewards to outlets that do not discount. Hence, no retailer wants to discount first, and in equilibrium all charge the "suggested" resale price. Antitrust enforcers who want to prevent manufacturers from controlling resale prices would need to scrutinize the whole range of transfers between manufacturers and retailers. Unfortunately, doing so could stifle essential services and penalize innocent firms.     

Environmental certification of forests: The evolution of environmental governance in a commodity network

Non-governmental organizations (NGOs) influence social and environmental aspects of commodity production through certification schemes like organic and forest certification. As these become mainstream, however, they are often compromised by the interests of more powerful agents. Utilizing the concept of governance in global commodity networks, this article examines the mainstreaming of forest certification. By working with retailers, forest certification expanded rapidly. The retailer focus, however, limits the spread of forest certification among medium-sized, small, and community forest management operations. It also raises questions of fairness because it imposes costs on forest managers without providing compensation through higher prices. NGOs now implement programs to make Forest Stewardship Council (FSC) certification more accessible and more useful to forest managers, but these do not resolve the imbalance of power between the big retailers demanding certification and the small forest managers who must absorb increased costs. The dominance of big retailers in commodity networks provides an attractive route to rapidly mainstream certification schemes, but it also limits their reach and compromises their equity.     

FORCED INFORMATION DISCLOSURE AND THE FALLACY OF TRANSPARENCY IN MARKETS

A theory advanced in regulatory hearings holds that market performance will be improved if one side of the market is forced to publicly reveal preferences. For example, wholesale electricity producers claim that retail electricity consumers would pay lower prices if wholesale public utility demand is disclosed to producers. Experimental markets studied here featured decentralized, privately negotiated contracts, typical of the wholesale electricity markets. Two conclusions emerge: (1) such markets generally converge to the competitive equilibrium and (2) forced disclosure works to the disadvantage of the disclosing side. Information disclosure would result in higher wholesale and thus higher retail electricity prices. (JEL L50 , L94 , D43 )     

Consumers' Online Information Search Behavior and the Phenomenon of Search vs. Experience Products

This study investigates consumers' importance evaluation and usage of the Internet as an information source, compared with other traditional information sources. The main issue is the extent to which experience products can be transformed so as to be searchable on the Internet. The results of a web-based survey showed that consumers of experience products tended to use more online information than those of search products. Online information sources from other consumers and neutral sources were perceived to be more important and were used more often by the consumers of experience products; whereas retailer/manufacturer websites were perceived to be more useful by consumers of search products. Perceived usefulness, perceived ease-of-use, market mavenism, and usage of offline information sources were also positively related to the usage of online information.     

STRATEGIC INFORMATION DISCLOSURE: THE CASE OF MULTIATTRIBUTE PRODUCTS WITH HETEROGENEOUS CONSUMERS

We examine the incentives for firms to voluntarily disclose otherwise private information about the quality attributes of their products. In particular, we focus on the case of differentiated products with multiple attributes and heterogeneous consumers. We show that there exist certain configurations of consumers' multidimensional preferences under which a firm, no matter whether producing a high‐ or low‐quality product, may choose not to reveal the quality even with zero disclosure costs. The failure of information unraveling arises when providing consumers with more information results in more elastic demand, which triggers more intensive price competition and leads to lower prices and profits for competing firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory. (JEL L15, L5)     

ADVANCE PRODUCTION,INVENTORIES, AND MARKET POWER: AN EXPERIMENTAL INVESTIGATION

We report an experiment that assesses the effects of alterations in production conditions and product durability on market power in Bertrand‐Edgeworth duopolies. Static equilibrium analysis predicts that advance (rather than “to demand”) production raises prices, but does not affect profits. The further addition of a simple inventory option causes prices to fall and seller earnings to increase. Contrary to these predictions, we observe similar prices in baseline and advance production treatments, but lower profits given advance production. An inventory option reduces both prices and earnings. Results are driven by the treatments' effects on sellers' capacities to tacitly collude. (JEL C9, D4, L4)     

BARRIERS TO ENTRY IN THE MARKET FOR STUD SERVICES: GOVERNMENT AND "NON-PROFIT" INSTITUTIONS IN COLLUSION

Modern technologies are banned in the breeding of Thoroughbred horses. These practices have been banned by the states defining a Thoroughbred as a horse registered by the Jockey Club of New York, and by the Club refusing to register horses bred "unnaturally." Modern technologies would vastly increase the number of high quality foals and lead to a decline in industry prices and profits. The breeding restrictions protect the wealth of owners at the expense of consumers, potential input suppliers, and new breeders. Because of the distribution of costs and benefits in the political process, we foresee no end to legislatively mandated stagnation.     

Evaluating retailer behavior in preventing youth access to harmful legal products a feasibility test

This article reports results from a feasibility study of a community effort to reduce the availability of legal products that youth can use to get high. The study evaluated the potential of youth purchase attempts to detect actual changes in retail availability of harmful legal products. These results were triangulated with self-reports from retailers about their own policies and practices. Before the intervention, less than half of retailers reported using any of six possible strategies identified as ways to reduce youth access to harmful products, and less than 8% of baseline youth attempts to purchase potentially harmful legal products were refused or questioned. After the low-dosage intervention, retailers reported increased use of three strategies and a statistically significant increase in the percentage of purchase attempts that were either questioned or refused by retail clerks. These findings (a) demonstrate the potential feasibility of retailer-focused environmental strategies and (b) support continued use of youth purchase attempts as a measure of actual retailer behavior.     

PEAK LOAD PRICING IN COMPETITIVE MARKETS

The paper offers an explanation for temporal price dispersion. Temporal price dispersion in the model is due neither to exogenous shifts in demand nor to price discrimination motives as shown in other papers. In this paper the explanation relies on peak-load pricing. In the model presented, consumers decide to purchase a given product in a certain time period according to the satisfaction they derive from the product at that time and to the prices and number of customers they expect at each firm and period. The demand in each period is controlled by sellers through prices. By offering different prices in different periods, sellers motivate consumers to spread themselves across periods in a profitable way. Therefore, the demand and price in each time period is determined endogeneously.     

The role of financial incentives in utility-sponsored residential conservation programs: A review of customer surveys

A number of utility programs are encouraging residential customers to invest in energy-efficient equipment by providing financial incentives for these actions. Subsidized loans are the most common type of incentive offered by utility programs, although discounts, rebates, lower rates, and free materials or labor also have been provided.Given the large sums involved in utility loan programs, an understanding of the impact of these financial incentives on retrofit investment decisions has a high potential policy value. The purpose of this paper is to review the available evidence on this issue and to suggest ways that additional evidence can be obtained.     

Contributions of social capital theory in predicting rural community inshopping behavior

The social environment in which the retailer conducts business is not often measured for its fundamental influences on consumers’ local purchasing behavior. This study, using social capital theory as a theoretical framework, examines whether reciprocal actions exist between community members as consumers and retailers and if these actions are persuasive in predicting the economic activity regarded as consumer inshopping. Determinants of inshopping behavior are analyzed from the community member’s perspective in a study of the rural community marketplace. The sample population consisted of consumers living in two rural Iowa communities with populations less than 10,000, agricultural-based economies, and retail mixtures of locally owned and operated small-sized businesses as well as national chain and discount organizations. Structural equation modeling estimated the causal patterns among consumers’ attachment to community with two endogenous variables regarding reciprocity and inshopping behavior. Findings offer supporting evidence that social relationships aid in predicting rural marketplace relationships.     

Do profits “crowd out” donations,or vice versa? the impact of revenues from sales on donations to local chapters of the American Red Cross

This article examines the relationship between donations to the American Red Cross and the profits, sales, costs, and prices of health and safety classes offered by local chapters. Two important questions are examined: Do profits from sales of services “crowd out” donations to local chapters of the American Red Cross? Do managers respond to changes in donations by changing prices, output, or costs of saleable services? The results suggest that nonprofit managers should pay close attention to the potential impact on donations of any change in the prices charged for saleable goods and services, and that profits, costs, and prices of services are influenced by donations.     

Enabling informed consumer choice in the long-term care insurance market.

Provisions in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) may increase private long-term care insurance sales without imposing substantially more stringent consumer-protection features. The ability of consumers to make informed choices when purchasing this complex product is examined in light of these changes. Data were collected through detailed examinations of policies and interviews with industry experts, insurance companies, agents, consumer groups, and regulators. Because of the complexity of this product, the goals of expanding, consumer choice and ensuring that consumers are able to make informed decisions often work against each other. Mechanisms are discussed through which the government can facilitate informed choice and improve consumer protection. The authors contend that, because the government is providing tax incentives that encourage consumers to purchase the product, it has the responsibility to ensure that consumers understand the long-term care insurance they purchase.     

SPECULATIVE PROFITS,INNOVATION, AND GROWTH

When technological change affects the prices of tradeable assets, innovators can obtain speculative profits by exploiting their inside information as to the occurrence of innovations. We propose a tractable model of endogenous growth that formalizes this argument, originally due to Hirshleifer (1971). We then use the model to assess two claims advanced by Hirshleifer, namely, that speculative profits can generate excessive investment in R&D when they add to monopoly rents guaranteed by patent protection, or else even in a perfectly competitive economy. The analysis confirms the first claim, but casts doubts on the second one. (JEL O30, O40)     

Enabling Informed Consumer Choice in the Long-Term Care Insurance Market

ABSTRACT

Provisions in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) may increase private long-term care insurance sales without imposing substantially more stringent consumer-protection features. The ability of consumers to make informed choices when purchasing this complex product is examined in light of these changes. Data were collected through detailed examinations of policies and interviews with industry experts, insurance companies, agents, consumer groups, and regulators. Because of the complexity of this product, the goals of expanding consumer choice and ensuring that consumers are able to make informed decisions often work against each other. Mechanisms are discussed through which the government can facilitate informed choice and improve consumer protection. The authors contend that, because the government is providing tax incentives that encourage consumers to purchase the product, it has the responsibility to ensure that consumers understand the long-term care insurance they purchase.     

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)     

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.     

PRICES,INFLATION, AND SMOKING ONSET: THE CASE OF ARGENTINA

This article examines the effect of tobacco prices on the decision to start smoking in Argentina. Argentina is an interesting case to explore given its high smoking rates, its recent experience with periods of very high and hyperinflation, and the mixed evidence of the effect of prices on smoking onset, particularly in low‐ and middle‐income countries. We used data from four cycles of two large national surveys conducted between 2005 and 2011 and discrete‐time hazard models. We found that tobacco prices had a statistically significant and fairly large impact on the hazard of smoking onset, and these findings were robust to alternative specifications. We also found that prices had little effect on the hazards of smoking onset during periods of hyper‐ and very high inflation, which provide some support for the notion that prices lose their informational role in such periods. Governments need to be cognizant that their most important policy tool to reduce tobacco use—taxes that increase real tobacco prices—is likely no longer effective during these times. (JEL C41, H20, I12, I18)