2021 - Working Papers: Managerial Economics
Vertical relations and dynamic exclusion of product improvement, 50 pp.
D. Gilo and Y. Yehezkel
(Working Paper no. 5/2021)
Research no.: 03420100
We consider repeated relations between a manufacturer of an established product and a retailer that can sell an inferior new product that improves over time. We find that the retailer sells the new product more than what maximizes industry profits. The manufacturer’s exclusionary strategy consists of a below-cost wholesale price and “vertical collusion” with the retailer to exclude via a future reward of a reduced fixed fee. The latter tool is available only in an infinite game. Exclusive dealing or a vertical merger between the manufacturer of the established product and the retailer replicates the vertically integrated outcome.
How do markets clear without price adjustments? Service time in online grocery, 50 pp.
I. Ater and A. Shany
(Working Paper no. 6/2021)
Research no.: 07821100
This paper studies how firms use service time to respond to local competition and demand conditions when their prices are uniformly set at the national level. Using comprehensive data collected twice a week over three years from 180 Israeli localities, we first show that online grocers set identical prices in all markets where they operate. In contrast, service times are shorter in more competitive markets, on low-demand/low-cost days of the week, and for deliveries offered by high-priced grocers. Next, we exploit regional and temporal variation in entry decisions to examine how incumbents respond. We find that incumbents reduce service time when facing entry, but only on low-demand/low-utilization days. This reduction begins shortly before entry and is greater in monopolistic markets and when entrants pose a larger threat to the incumbent. Service time falls also in markets that do not experience entry yet are served by a fulfillment center serving markets facing entry. We use the classic newsvendor problem model to explain our findings, and in doing so emphasize the importance of accounting for both competitive and supply-side considerations when analyzing firms’ response, particularly when prices are unresponsive.
