A conduct parameter model of price discrimination

Kutlu, Levent

doi:10.1111/sjpe.12135

Cited by 4 publications

(4 citation statements)

References 14 publications

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“…This is in line with the findings of Chen et al () who examine the same environment in the homogeneous valuations setting. Similar findings are presented in Hazledine () and Kutlu (, , ), where firms price discriminate through quantity choices by optimally segmenting consumers. Hence, in our setting, the consumers segment (categorize) the prices and choose prices; whereas in their setting, the firms segment the consumers and choose quantities.…”

Section: Resultssupporting

confidence: 84%

“…For both cases, the memory size (the number of categories) is given in our model. However, in contrast to Chen et al (), we consider consumers' valuations to be heterogeneous as in Hazledine (), Kutlu (, , ), Kumar and Kutlu () and Kutlu and Sickles () . In the bounded rationality literature, some examples related to our paper dealing with non‐optimal consumer behavior include the case of a monopolist facing consumers with different memory capacities (Rubinstein, ), consumers who round the prices to the nearest dollar (Basu, ), and consumers who cannot perfectly recall their own past decisions (Hirshleifer & Welch, ).…”

Section: Introductionmentioning

confidence: 99%

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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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Section: Resultssupporting

confidence: 84%

Section: Introductionmentioning

confidence: 99%

Price dispersion and optimal price categories with limited memory consumers

Baris

Kutlu

2017

Manage Decis Econ

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“…In particular, capacity constraints (e.g., Puller, 2007;Kutlu and Wang, 2018), dynamic factors (e.g., Corts, 1999;Puller, 2009;Kutlu and Sickles, 2012), managerial inefficiency (e.g., Koetter et al, 2012;Kutlu and Sickles, 2012;Kutlu and Wang, 2018), multi-output production (e.g., Berg and Kim, 1988;O'Donnell, 2007;Kutlu and Wang, 2018), price discrimination (e.g., Graddy, 1995;Kutlu, 2017;Kutlu and Sickles, 2017), and other characteristics of the market and firms can be incorporated to the game theoretical model, which describes the characteristics of the imperfect competition and market. In the literature, most conduct parameter models assume imperfectly competitive behavior by firms only in one side of the market, e.g., output market, and the other side of the market, e.g., input market, is assumed to be perfectly competitive.…”

Section: Measures Related To Market Powermentioning

confidence: 99%

Pricing Inputs and Outputs: Market Prices Versus Shadow Prices, Market Power, and Welfare Analysis

Bhattacharyya

Kutlu

Sickles

2019

The Palgrave Handbook of Economic Performance Analysis

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“…Another potential extension of our conduct parameter model is so that the …rms price discriminate. For example, the marginal cost e¢ ciency concept can be incorporated into the conduct parameter games of Kutlu (2012aKutlu ( , 2017a and Kutlu and Sickles (2017). Such an extension would enable us to understand the connection between price discrimination, market power, and e¢ ciency better.…”

Section: Summary and Concluding Remarksmentioning

confidence: 99%

Estimation of cost efficiency without cost data

Kutlu

Wang²

2018

J Prod Anal

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One of the advantages of conduct parameter games is that they enable estimation of market power without total cost data. In line with this, we develop a conduct parameter based model to estimate the …rm spe-ci…c "marginal cost e¢ ciency"and conduct without using total cost data. The marginal cost e¢ ciency is an alternative measure of e¢ ciency that is based on deadweight loss. We illustrate our methodology by estimating …rm-route-quarter speci…c conducts and marginal cost e¢ ciencies of U.S. airlines for Chicago based routes without using route-level total cost data.

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A conduct parameter model of price discrimination

Cited by 4 publications

References 14 publications

Price dispersion and optimal price categories with limited memory consumers

Price dispersion and optimal price categories with limited memory consumers

Pricing Inputs and Outputs: Market Prices Versus Shadow Prices, Market Power, and Welfare Analysis

Estimation of cost efficiency without cost data

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