Strategic Behaviors and Market Outcomes: Two Essays

Abstract

This dissertation is comprised of two essays related, broadly, to themes of competitive dynamics and economic consequences. In Essay One, "Many Fields of Battle: How Cost Structure Affects Competition across Multiple Markets," a conjectural variation model is developed to examine what role cost structure and product differentiation play in affecting the mutual forbearance outcome arising from multi-market contact. The analytical results show that the degree of collusion (as measured by the price level) enhanced through multimarket contact is greater when multimarket contact occurs between firms with similar production costs and undifferentiated products. This hypothesis is then tested using data from the U.S. airline industry. The empirical results provide support for the view suggesting that multimarket contact blunts the edge of competition between firms. Moreover, it is found that rival carriers with similar production costs are more likely to experience such collusion facilitating effects from multimarket contact than those with dissimilar production costs. The second essay in this dissertation is entitled, "A Two-Location Inventory Model with Transshipments in a Competitive Environment." In this study, an analytical model is developed to assess the impact of transshipments on inventory replenishment decisions and the implications for firm profitability in a competitive, uncertain market environment. To incorporate the competition between stocking locations, the analytical model developed in this paper uses a marketing variable, customer's switching rate, to measure the probability of an individual consumer choosing an alternative source of supply in the event of stockout. In such an environment, firms not only cooperate through the practice of transshipments but also compete for business. A number of interesting conclusions are drawn from numerical optimization results. For instance, it is found that when firms differ in market demand, small firms benefit more from transshipments than do large firms. In addition, it is shown that there is an inverted u-shaped relationship between transshipment price and the profit improvements that large firms gain through transshipments, whereas such benefits are monotonically decreasing with transshipment price for small firms. These findings provide several managerial implications with regard to the role of transshipment price in creating benefits for participating firms.