Centre for Firms in the Global Economy Pricing in Global Markets

Luke Garrod and Chris Wilson

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Pricing in Global Markets Theme: The effects of policy, market structure and other market characteristics on firms’ pricing strategies in oligopolistic markets, in which multinational firms tend to operate.  how and under which conditions, firms collude to raise prices  how mergers and other forms of entry affect market structure and firms’ pricing strategies  how advertising and the dissemination of information influence prices  how transaction costs and imperfections in consumer behaviour determine market prices

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Main Members

Luke Garrod

Chris Wilson

Fields:

Fields:

Industrial Organisation Competition Policy Consumer Policy

Industrial Organisation Consumer Policy

Behavioural Economics

Information Economics Behavioural Economics 3

Some Relevant Papers – Luke Garrod "Collusive Price Rigidity under Price-Matching Punishments," (2012), International Journal of Industrial Organization "Early Settlement in European Merger Control," resubmit), Journal of Industrial Economics, (with Lyons, B.)

(revise

and

"When Are Excessive Prices Unfair?" (2011), Journal of Competition Law and Economics (with Akman, P.) "Competition Remedies in Consumer Markets," (2009), Loyola Consumer Law Review, (with Hviid, M., Loomes, G. and Waddams Price, C.)

"Assessing the Effectiveness of Potential Remedies in Consumer Markets," (2008), Office of Fair Trading (with Hviid, M., Loomes, G. and Waddams Price, C.) 4

Some Relevant Papers – Chris Wilson “Market Frictions: A Unified Model of Search and Switching Costs” (2012), European Economic Review “Ordered Search and Equilibrium Obfuscation” (2010), International Journal of Industrial Organization "Nonlinear Pricing and Tariff Differentiation: Evidence from the British Electricity Market" (2014), Energy Journal, (with Davies, S. and Catherine Waddams Price, C.) “Advertising, Search and Intermediaries on the Internet: Introduction” (2011) Economic Journal (Feature Introduction)

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Garrod (2012) "Collusive Price Rigidity under Price-Matching Punishments" International Journal of Industrial Organisation The Old Theory of the Kinked Demand Curve (Sweezy, 1939; and Hall and Hitch, 1939):

There exists a focal price, p* Each firm expects that: (i) (ii)

a lower price will be matched a higher price will not

This implies a kink in demand at p* p* optimal for a range of marginal costs

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Previous Literature No game theoretic support for the results of the kinked demand curve The logic of the original kinked demand curve contrast with: (i) game theoretic models of the rivalry of the kinked demand curve which find no link between price matching and price rigidity (e.g. Bhaskar, 1988; Maskin and Tirole, 1988; and Kalai and Satterthwaite,1994) (ii) the contemporary (infinitely) repeated game collusion literature (e.g. Rotemberg and Saloner, 1986; and Haltiwanger and Harrington, 1991) - the best collusive prices vary with cost and/or demand fluctuations - also, within these models it is assumed that firms more-than-match any downward price deviation in a way that does not resemble the original rivalry 7 of the kinked demand curve

Garrod (2012) - Summary In contrast, Garrod (2012) provides original game-theoretic support for the kinked demand curve by analysing an infinitely repeated game where: (i) costs fluctuate between high and low states over time (ii) firms follow price-matching punishments (Lu and Wright, 2010) Price rigidity occurs in best collusive SPNE if cost fluctuations are sufficiently small As expected, the best rigid price is between the high-cost one-shot Nash equilibrium price and the low-cost monopoly level Price rigidity is more likely when: - high costs phases are expected to be temporary - there are fewer firms in the market, provided product differentiation is low 8

Wilson (2012) “Market Frictions: A Unified Model of Search and Switching Costs” European Economic Review Market frictions tend to restrict consumer choice and create a source of market power. Typically, within industrial organisation, two different forms of friction are studied:  Search costs – costs of gathering information about alternative suppliers; Baye et al (2006)  Switching costs – direct costs of changing suppliers, e.g. effort, service disruption, reduced compatibility or lost loyalty discounts; Klemperer (1995) or Farrell and Klemperer (2007) Despite the co-existence of the two costs in many markets, the two literatures have remained largely independent and so little is known about their potential differences, interactions or associated policy implications. 9

Wilson (2012) - Theoretical Contribution: Introduce search costs and switching costs into Perloff and Salop's (1985) model of oligopoly with differentiated products. Mature market, where consumers can search firms sequentially. After search, consumers decide whether or not to switch to a searched alternative. Subtle distinctions and effects, but government authorities may prefer policies to improve consumers' information rather than to ease the switching process: Search costs deter consumers from starting to search and prompt consumers to search fewer firms. Switching costs also deter consumers from initiating any search activity, and discourage consumers from switching to an alternative firm.

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Wilson (2012) - Empirical Contribution: Previous literature has focussed on estimating the magnitude of either search costs or switching costs. Use the theory model to present a quick methodology for simultaneously calculating some `back of the envelope' measures of both costs. Highlights the potential importance of accounting for both frictions by showing how some `single-cost' empirical approaches can exhibit an upward bias. Presents a potential source of identification that can be built on for more sophisticated future studies. The two costs affect consumers’ ex post state differently - no search, search/no switch, search/switch.

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Some Relevant Work in Progress: Luke Garrod: “Collusion under Private Monitoring with Asymmetric Capacity Constraints" (with Olczak, M.) "A Unified Model of Tacit and Explicit Collusion" (with Olczak, M.) Chris Wilson: “Sales Competition with Informative Advertising” (with Shelegia, S.) “False Advertising and Consumer Protection” (with Rhodes, A.)

Happy to discuss any topics from today’s presentation! 12