Essays on Market Competition

My dissertation consists of three chapters in each of which I analyze how specific phenomena affect market competition and the firms’ strategic decisions. Below I briefly describe the findings of each chapter. The first chapter analyzes a situation where a firm’s customers learn some unanticipated or hidden use value of the firm’s product whereas the non-customers remain uninformed about that extra value. Should the firm advertise and inform all consumers about its product’s hidden value? A monopolist will benefit from advertising its product’s hidden value. However, our analysis reveals that this may not be true when the firm faces competition in the market—the firm may actually make higher profits if it keeps its hidden value secret from its competitor’s customers even if advertising to inform those customers is costless. Not advertising the product’s hidden value creates an incentive for both firms to continue targeting their own existing customers rather than poaching each other’s customers. This can alleviate price competition and increase both firms’ profits even when firms anticipate the hidden value and compete more aggressively for customers in the early period. Our research suggests that firms can benefit from an “under-promise and over- deliver” strategy if they refrain from communicating their extra value to the competitor’s customers. Moreover, we find that positive word of mouth about a firm’s product will not necessarily benefit the firm and can in fact make all firms worse off. The second chapter of the dissertation challenges the conventional wisdom that firms will always benefit from reduced competition if their competitor exits the market or has a weakened product offering. We show that in a channel setting such intuition may not be true, and a manufacturer and its retailer can actually become worse off if the competing manufacturer exits the market (e.g., because of idiosyncratic shocks in its supply-side factors). Put differently, more intense market competition can be an all-win for the manufacturers, the retailers, and the consumers. Intuitively, although the competitor’s exit will alleviate price competition for the surviving manufacturer and retailer, it will also worsen the double-marginalization problem within the surviving manufacturer’s channel, leading to lower profits for the surviving manufacturer despite an increase in its wholesale price. The retailer may also become worse off because its benefit from alleviated competition may not be enough to compensate for the increased wholesale price. Moreover, we find that the manufacturer may benefit when the competitor’s product quality increases, i.e., a firm may prefer a stronger rather than a weak enemy. In the third chapter, we investigate the competitive implications of some consumers’ concerns for price fairness—a phenomenon that has been well-documented in the behavioral literature. We analyze a market where a fraction of consumers have fairness concerns, and their fairness perceptions are formed by comparing the competing firms’ price markups—if a firm charges a higher markup than its competitor, then “fair-minded” consumers will tend to perceive the firm as unfair and be less willing to purchase the firm’s product. One might think that the existence of fair-minded consumers would induce the firms to reduce their prices, decreasing their profits and increasing consumers’ surplus. Contrary to this conventional wisdom, our analysis reveals that having a segment of fair-minded consumers in the market has a non-monotonic effect on the firms’ profits. More specifically, if the fraction of consumers having fairness concerns is small, consumers’ fairness concerns can actually alleviate price competition, making firms better off and consumers worse off. Within that range, an increase in the fraction of fair-minded consumers can increase the firms’ profits and reduce the consumers’ surplus. But when the fraction of fair-minded consumers is sufficiently high, the firms will compete more aggressively, in which case consumers’ fairness concerns will benefit consumers and reduce the firms’ profits