Browsing by Author "Liu, Xueying"

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    Pricing Strategies in Competitive Environments
    (2020-04-24) Liu, Xueying; Pazgal, Amit
    This thesis studies multiple pricing strategies in different competitive environments. It provides an in-depth analysis of pricing, customization, and product quality in oligopoly settings. The first essay investigates the pricing and optimal customization level in different market structures. The second essay examines the optimal product quality and pricing for different channel structures in the presence of gray markets. The continued development of new technologies has allowed firms to address the individual needs of their customers better. The first study in this dissertation examines firms’ choices regarding the range of customized products they offer and their impact on optimal pricing and profits in a competitive environment. Customization is increasingly important; with the development of manufacturing and information technologies, firms can customize products to fit their consumers’ individual needs at a reasonable price. Most of the research about customization characterizes optimal pricing. In this chapter, I address not only pricing but also the optimal “amount,” or level, of customization. Firms decide on the optimal amount of customization (called the “range of customization lengths”) that they offer their consumers. I investigate different competitive situations and the range of customization and pricing strategies that arise in them. I show that when two firms compete, they may find themselves in a “prisoner’s dilemma” type of situation. Both will offer customized products in equilibrium, leading to lower profits than without customization. This chapter further shows that, when more than two firms compete, the symmetric a-priori firms can end up in a state of asymmetric customization equilibrium, a phenomenon that few researchers had previously directly explored. It is important to note that customization costs have two components: technology (convex) and per-product (linear). My most important finding is that equilibrium outcomes depend on cost in a particular way. If the per-product customization cost is low enough, firms will offer a range of customized products regardless of how expensive the customization technology is. As the per-product customization cost increases, there are fewer firms customizing in the equilibrium. In the second study, I explore pricing in the presence of gray markets. Gray market products are original products that are sold through an unauthorized channel. They tend to have lower prices because consumers view them as lower quality even though they are authentic. Taking this into account, very little research has ever examined whether manufacturers should change the offered products’ quality, given their knowledge that gray markets exist. Most papers examine manufacturers’ pricing in the presence of the gray market and show ambiguous results. The manufacturer can be better off because gray markets increase the demand for their products and allow for better segmentation. However, they can be worse off because gray markets also lower their sales, the loss of which is not compensated for by the gain of selling through the gray marketer. This chapter expands on the previous literature by making quality choices endogenous. I show that, when the manufacturer sells directly to consumers, gray markets have a negative effect on both price and quality of products as well as manufacturer profits. However, when the manufacturer sells through a distribution channel, the quality of the offered products and the manufacturer’s and retailers’ profits can increase regardless of the source of the gray market goods. My study further shows, as expected, that gray markets always increase the total consumer surplus.