Pricing, Retail competition, Market frictions.
- Aviv Nevo and Federico Rossi (2008) An Approach for Extending Dynamic Models to Settings with Multi-Product Firms, Economics Letters, vol.100, pp. 49-52.
We propose an approach to extend the standard framework of dynamic games to settings with multi-product firms. Our approach applies to industries with a large number of products offered by a small number of firms.
- Federico Rossi and Pradeep Chintagunta (2016) Price Transparency and Retail Prices: Evidence from Fuel Price Signs in the Italian Highway System, Journal of Marketing Research, vol.53 n.3, pp. 407-423.
Price transparency initiatives are typically undertaken by third parties to ensure that consumers can compare the prices of competing offers in markets where obtaining such information is costly. Such practices have recently become widespread, yet it is unclear whether the increased price competition due to lower search costs overcomes the potential for collusion between competitors due to lower price coordination costs. Motivated by this question, we investigate the effect of mandatory price posting (on large electronic signs) by competing gas stations on their pricing behavior in the Italian motorway. When prices are posted, the average price of gasoline decreases by 1 cent per liter, which represents about 20% of stations' margins. About half the price decrease can be attributed to the introduction of a sign posting a station's own price and those of its nearest neighbors, with the other half coming from the introduction of other signs posting the prices of other stations on the same road. Despite the price reduction, however, the introduction of signs seems to have little impact on price dispersion, suggesting that price uncertainty persists even after the policy is implemented. Analysis of customer transaction data confirms this finding, showing that less than 10% of consumers use the posted prices effectively.
- Federico Rossi (2017) Lower Price or Higher Reward? Measuring the Effect of Consumers' Preferences on Reward Programs, Management Science, forthcoming.
Despite criticisms regarding their effectiveness, reward programs today represent a prevalent and apparently successful form of marketing investment for several industries such as airlines, hotels, gas stations, and credit cards. To understand what might contribute to their success, this paper investigates the purchase behavior of consumers who participate in a reward program from the travel industry. We estimate a dynamic demand model of gasoline purchase, and compare the value that consumers attach to rewards with the value they attach to the money spent for gasoline. We find that there exists a significant portion of frequent travelers who extract more value from one dollar's worth of rewards than from one dollar spent for gasoline. Most of the effectiveness of the reward program is due to the behavior of these consumers. Their insensitivity to price induces firms to increase fuel prices by 1 euro cent per liter, which corresponds to about 10% increase in their margins. The program also contributes to soften competition, increasing margins by 4%.
- Federico Rossi and Pradeep Chintagunta (2016) Price Uncertainty and Market Power in Retail Gasoline: The Case of an Italian Highway
Previous research suggests that consumers' price information influences fuel prices. In this paper we quantify the effect of consumers' price uncertainty on gasoline prices and margins on an Italian highway. We observe the change in prices triggered by a longitudinal change in consumers' price information from one in which drivers on the highway had no information on the prices of stations they encountered to one that allows consumers to observe the prices of four upcoming stations on a single price sign by the side of the highway. Using these data, we estimate a model of consumer search and purchase behavior and a corresponding model of gas station pricing. We then measure the impact of varying degrees of price information on equilibrium prices, including (i) no price information, (ii) the mandatory policy and (iii) full price information. We also compare the current policy with an alternative policy in which stations' prices are advertised with individual price signs. We find that when consumers do not have price information, gas stations are able to charge 35% more, in terms of higher price-cost margins, than when prices are known. Our welfare analysis suggests that price information is worth 60 euro cents to consumers every time they take the highway. Relative to the current mandatory policy, advertising price on individual signs is worth 26 euro cents more to consumers.