Essays on Price Competition and Firm Strategies in Oligopolies

Abstract

This dissertation is part of the effort to contribute to our understanding of Price Competition and Firm Strategies in oligopolistic markets with certain characteristics. It comprises of three chapters. Chapter 1 provides the introduction and background of the research and a brief summary of results.

Chapter 2: Firms practice poaching of their rival's customers in markets where they are able to identify between their own customers and those of the rivals. This practice results in inefficiently high switching. In some of these markets firms also use strategies that make poaching by rival firms harder. In this chapter I explore the practice of firms requiring customers to sign contracts that are of pre-specified duration specifying early termination charges (or breach penalty). If contract with breach penalty is available, firms find it privately optimal to use it. However when all firms use it they are worse off and results in lower than efficient switching. Consumers may be better off or worse off.

Chapter 3: In this chapter we examine the pricing decision of a typical firm that sells more than one product in markets where products are strategic complements and the firms have some market power. We show that such a firm internalizes the strategic complementarities when optimally choosing its prices leading to higher prices. We then empirically test and confirm in the US wholesale market for unbranded gasoline that a major refiner charges a higher wholesale price for unbranded gasoline in cities where it also sells its brand gasoline at retail compared to cities where it does not. Furthermore, in the cities where the refiner has brand presence at retail we find empirical evidence that its wholesale price of unbranded gasoline is higher the higher is the market share of its brand in retail.