Working Papers

Winning Back the Unfaithful while Exploiting the Loyal; Retention Offers and Heterogeneous Switching Costs

Joint work with Wim Siekman.

We study retention offers, the practice that firms lower prices to consumers that want to cancel their contract. In a two-period Hotelling model, consumers have either low or high switching costs. In the second period, firms try to poach consumers. Consumers with a poaching offer can solicit a retention offer from their original supplier. In equilibrium, only low switching costs go though the effort of obtaining a poaching offer. Hence, retention offers serve as a mechanism to price discriminate against high switching cost consumers. In our model, the possibility of retention offers increases prices and profits. Consumer surplus decreases.

This version: May 19, 2021

The Competitive Effects of Consumer Boycotts

I introduce the possibility of consumer boycotts in a Hotelling model. The more a firm complies with consumers’ wishes, the higher its marginal cost, but the lower the
probability of facing a consumer boycott. I show that the threat of a consumer boycott can increase the expected profits of firms. Firms lose out when they do face a boycott, but gain even more when their competitor does, giving them more market power. The stronger a boycott will be, the more a firm will cater to consumers’ wishes. Yet, the effect of more competition is ambiguous.

This version: May 4, 2021.

Games with Possibly Naive Hyperbolic Discounters

Joint work with Dominic Hauck

We propose a solution concept for games that are played among players with present-biased preferences that are possibly naive about their own, or about their opponent’s future time inconsistency. Our perception-perfect outcome essentially requires each player to take an action consistent with the subgame perfect equilibrium, given her perceptions concerning future types, and under the assumption that other present and future players have the same perceptions. Applications include a common pool problem and Rubinstein bargaining. When players are naive about their own time inconsistency and sophisticated about their opponent’s, the common pool problem is exacerbated, and Rubinstein bargaining breaks down completely.

This version: April 29, 2021.

Choosing your Battles: Endogenous Multihoming and Platform Competition

Joint work with Nannette Stoffers and Gijsbert Zwart

There is a cartoon video version here.

We study how digital platforms can choose competitive strategies to influence the number of multihoming consumers. Platforms compete for consumers and advertisers. A platform earns a premium from advertising to singlehomers, as it is a gatekeeper to these consumers. Competitive strategies leading to intense competition on the consumer side reduce profits on that side, but also increase consumer singlehoming and hence market power over advertisers. The size of the singlehoming premium determines where this competitive strategy ‘seesaw’ will end up. We apply this insight to four strategic choices that may increase singlehoming: reducing product differentiation, portfolio diversification through conglomerate mergers, the choice of compatibility and tying.

This version: April 26, 2021

Competition with List Prices

Joint work with Pim Heijnen and Martin Obradovits

This paper studies the competitive role of list prices. We argue that such prices are often more salient than actual retail prices, so consumers’ purchase decisions may be
influenced by them. Two firms compete by setting prices in a homogeneous product
market. They first set a list price that serves as an upper bound on their retail price.
Then, after having observed each other’s list price, they set retail prices. Building on the canonical Varian (1980) model, we assume that some consumers observe no prices, some observe all prices, and some only observe list prices. We show that if the latter partially informed consumers use a simple rule of thumb, the use of list prices leads to lower retail prices on average. This effect is weakened if partially informed consumers are rational.

University of Innsbruck Working Papers in Economics and Statistics 2021-08

This version: March 4, 2021.

Leniency Programs and the Design of Antitrust: Experimental Evidence with Free-Form Communication

Joint work with Peter Dijkstra and Bert Schoonbeek.

We present experimental evidence on the effectiveness of corporate leniency programs. Different from other leniency experiments, ours allows subjects to have free-form communication. We do not find much of an effect of leniency programs. Leniency does not deter cartels. It only defers them.  Free-form communication allows subjects to build trust and resolve conflicts. Reporting and defection rates are low, especially when compared to experiments with restricted communication. Indeed, communication is so effective that, with leniency, prices are not affected if cartels are fined and cease to exist.

This version: September 28, 2020.