Benny Mantin

The structure of the defense industry and the security needs of the country: a differentiated products model

This paper models the interactions between the defense needs of the USA and Western Europe, which produce several heterogeneous defense goods, and the defense industry market structure. The results show that net defense costs of the USA and Europe are lower when the number of defense firms in each arms‐producing country is small and when the world prices of the defense goods are high. The model predicts that the increase in world prices will crowd‐out countries in the developing world from the market for modern weapon systems and may force them to develop and use ‘cheap and dirty’ weapon systems.

The hidden information content of price movements

Dynamic patterns of prices in different markets may motivate (strategic) consumers, who could be monitoring price movements over time, to game vendors. Do past price movements carry information about the probability and magnitude of future price drops? Conducting empirical work in the airline industry on near 1000 US domestic routes, we find that some price-metrics carry information about future price swings: these variables can assist in predicting the likelihood and magnitude of price drops. These price-metrics yield significantly different signals which also vary as the prediction horizon changes.

Strategic inventories with quality deterioration

Retailers may carry inventories strategically in order to induce the suppliers to lower the wholesale price in their future negotiations. Earlier literature on strategic inventories assumed that units carried from one period over to the next were perfect substitutes to newly procured ones. However, in practice, when inventories are carried their quality is subject to deterioration over time. Thus, inventoried units become vertically differentiated from newer units. Such quality deterioration affects the supplier–retailer interaction: first, it significantly limits the retailer’s ability to carry strategic inventories (only when both their deterioration and the cost of holding them is not too high). This occurs as the deterioration enables the supplier to set a wholesale price such that the retailer is discouraged from holding strategic inventories. Yet, the supplier is worse off in the presence of product deterioration; second, despite the carrying of strategic inventories, it may result with a wholesale price, as well as a selling price, that increase, rather than decrease, over time; third, some product deterioration may be beneficial for the supply chain. We further characterize differences that occur as a consequence of the consideration inventory deterioration.

Airport Privatization in International Inter-Hub and Spoke Networks

This paper investigates strategic interactions in airport privatization by two countries. Each country has a (gateway) hub and a local airport. In each country, a hub carrier operates hub–local and international hub–hub flights, whereas a regional carrier operates hub–local flights and forms an alliance with the foreign hub carrier. Previous studies considered a limited network with a (hub) airport per country and showed that privatizing the hub is generally the dominant strategy. By contrast, in our more general network, privatizing the hub (alone or along with the local airport) could be one of the equilibria only if the international hub–hub market is sufficiently large. If the hub–hub market is relatively large, governments have an incentive to privatize both their hub and local airports to a single operator on the condition that the operator is allowed to cross subsidize. We further find that governments may be trapped in a Prisoners׳ Dilemma.

Fare Prediction Websites and Transaction Prices: Empirical Evidence from the Airline Industry

The marketing and operations disciplines have increasingly accounted for the presence of strategic consumer behavior. Theory suggests that such behavior exists when consumers are able to consider future distribution of prices, and that this behavior exposes firms to intertemporal competition that results with a downward pressure on prices. However, deriving future distribution of prices is not a trivial task. Online decision support tools that provide consumers with information about future distributions of prices can facilitate strategic consumer behavior. This paper studies whether the availability of such information affects transacted prices by conducting an empirical analysis in the context of the airline industry. Studying the effect at the route level, we find significant price reduction effects as such information becomes available for a route, both in fixed-effects and difference-in-differences estimation models. This effect is consistent across the different fare percentiles and amounts to a reduction of approximately 4%–6% in transactions’ prices. Our results lend ample support to the notion that price prediction decision tools make a statistically significant economic impact. Presumably, consumers are able to exploit the information available online and exhibit strategic behavior.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mksc.2015.0965 .

Mature or emerging markets: Competitive duopoly investment decisions

We develop a competitive investment model wherein two competing firms consider investing into two projects targeting, separately, a mature and an emerging market. The returns firms obtain from investments into these markets are assumed to follow an S-shaped curve and depend on both firms’ actions. Considering symmetric environments (in terms of investment opportunities), we find that different forms of interactions may arise (e.g., Prisoner’s Dilemma and Game of Chicken) and outline corresponding strategies that offer higher returns by exploiting first-mover advantages, cooperation opportunities and aggressive choices. We also discuss the market conditions that can lead to these outcomes. Finally, considering non-symmetric environments, we show that a firm may be better off when its competitor’s budget increases.

International Airline Markets: On Government and Airline Contracts

This paper provides evidence of the impact on frequencies and airfares of the type of codeshare agreement signed between airlines and the level of liberalization signed between governments in the international aviation market. Our work distills two basic insights: (i) increasing the level of liberalization has a positive effect on frequency which grows substantially and significantly as a function of the level of freedom and overshadows the impact of codeshares; (ii) codeshare agreements are heterogeneous in the sense that hardblock codeshares, pooling and royalty agreements generally result in higher airfares whereas free sale and soft block codeshares are generally associated with lower airfares. However, these effects may vary by fare class (e.g., premium and economy). Additionally, none of the codeshare agreements have a significant and consistent impact on market frequency. Our results suggest that governments and policy makers should liberalize the international aviation markets in order to increase frequency that stimulates reductions in airfares, and it further suggests that carve outs on the hub to hub links in a codeshare agreement may not need to be enforced, rather restrictions should be imposed on the type of codeshare agreements signed by the airlines.

Transaction Prices and Strategic Consumer Behavior: Pricing Evidence From the Airline Industry

The operations literature has increasingly accounted for the presence of strategic consumer behavior. Theory suggests that such a behaviour exposes firms to intertemporal competition and exerts downwards pressure on prices. However, little evidence exists to demonstrate the outcome effect and the magnitude effects of such consumer behavior. This paper fills this gap by providing evidence for the effects of strategic consumer behaviour supported by online decision support tools. Online decision support tools that provide consumers with information about future distributions of prices support strategic consumer behavior. This paper studies whether the availability of such information affects transacted prices. We conduct an empirical analysis in the context of the airline industry, where airfares are associated with frequent changes. We study the effect at the route level and find significant price differences between routes for which airfare prediction information is available, and routes without airfare prediction information. We find that the availability of information about future fare distributions is associated with lower transacted airfares. This effect was consistent across the different fare percentiles and amounted to transactions with prices approximately 3% lower. We further find that while the magnitude of the effect is most profound shortly after route fare prediction information is introduced, the negative effect on transacted airfares persists in the long run. Interestingly, we do not find evidence that low cost carriers are affected by such availability of information, whereas legacy carriers are affected across all fare percentiles. Our results lend support to the notion that price prediction decision tools make a statistically significant economic impact. Presumably, consumers are able to exploit the information available online and behave more strategically.

Offsets and Public Procurement

Major government or public procurements directly and indirectly impact a country’s economy, infrastructure, industry base and even security. Foreign competition has the potential of reducing governments’ procuring costs. However, this will hurt local industries and employment. Hence, governments impose offset requirements: a form of contractual obligation such that a portion of what a foreign firm supplies must be produced locally. Offsets are prevalent in key areas of public infrastructure such as energy, communications and transportation, and especially in defense and security. Using the defense industry as a leading example, we develop a model where two governments seek to minimize their Net Defense Costs (NDC). Using a standard definition for NDC, we find that governments — when they act independently — will set full offset requirements. However, coordination of offset policy requirements could achieve lower NDCs for governments. In this case we find that offset are eliminated. Taking a broader definition for NDC that also accounts for gravitation of production from one country to the other, governments may set partial, rather than full, offset requirements, whereas joint decision is always full offset.