Economics Referee Report
Published 04 Aug 2016
All throughout the paper, examinations based on empirical data show and break into details how competition drives down prices. Particularly so with its effects on price discrimination for Yellow Pages advertising, a specially suitable avenue for this discussion since advertising prices represents second degree price discrimination. Nothing on it is to suggest that there are no other basic arguments that may have different interpretations as compared to the results of the researchers, as we will see later on.
The paper clearly shows the inverse proportionality of prices paid by some buyers relative to increased competition in Yellow pages advertising, enough to raise the margin of the surplus gains of consumers. However, knowledge on the variations of individual prices markedly affects the calculation of aggregate consumer gains, which cannot be accounted for only by an analysis based on a cross-sectional pricing.
Inasmuch as relationships between competition and second degree price discrimination, a form of price discrimination in which a seller charges different prices for different quantities of a good (AmosWeb), does not offer a vivid overview of who should benefit more from increasing competition, high or low valuation customers, the paper aims to measure the effects of competition on price discrimination.
It is observed that increasing magnitude of competition in the market edges down price levels price levels, especially in large advertisements. This is particularly an advantage for high valuation customers since an array of choices is laid down before them. Thus, they have the dispositions which substitute to pick as these alternatives compete in offering much lower prices for the product or service. This is the model presented by Rochet and Stole.
By contrast, Stole’s model shows that high valuation customers are the greatest brand loyal, which is everything to infer that they stick to only one item in the market. Not only does inconsistency arises from this discrepancy but more so confusion over which model bears more practicability.
Another discussion of the results revolves around a monopolist’s price discrimination. A general problem faced by a monopolist is on maximizing profits and gaining loyalty of customers. One of the most commendable ways to address this obstacle is to offer the high valuation customer a good deal of price. Mix other tricks, too. Using an economically efficient quantity, offer the customer with a price low enough that she can’t afford to abandon it and, thus, prefer the next lowest price. This clearly makes out the high valuation customer the most promising to extract bigger profit from to the extent that lower valuation customer loses all of her surplus gains.
One model posed by Rochet and Stole speaks of the customer’s preference of brand, another factor that affects price discrimination. That is one side of the coin. The other dimension of the model is the customer’s willingness to spend for additional quantity. This implies that the relationship of competition to large quantities is more inversely proportional than it is to small ones.
To put another way the effect of competition to price discrimination, consider the sizes of the advertisements publishers offer. Directories with large advertisements compel the publishers to increase efforts to sell their ads to get more usage and patronage. This is tougher than what they have to do in monopoly publishing obviously.
Another factor that causes prices to plummet down is novelty for new publishers who are financially constrained, giving them to seek out buyers with more promises of profits. Therefore, competition is most tight with the largest ads affecting proportionately, too, their prices.
In a similar set-up employed by Rochet and Stole, efforts to reduce price to win customers from their less preferred brand would lead to the line below profitability. It comes natural to think, then, that prices can be seen to fall with the less brand-loyal low valuation customers who can be easily persuaded to switch to another brand.
There are three categories of publishers: Regional Bell Operating Company (RBOC), independent telephone company publishers, and non-utility publishers.
The first two categories of publishers distribute their directories in a certain areas not covered by other phone companies. This is one strategy that non-utility publishers imitate, only that it finds location in suburban areas and covers areas larger than what utility publishers have.
An empirical study of the paper shows that two directories from two separate publishers are distributed to the media person. Generally, the data provide an insight into the increasing number of publishers with decreasing percentage of people.
Convincingly, the paper went through the details of how competition affects the price discrimination for Yellow Pages advertisement. Results of empirical data show that an increase in rates of discount is proportionally induced by an increase in competition.
Analysis shows that the drop of price of advertisement is two times larger or more in full pages than in quarter columns, a marginal gap favoring a full page advertisement.