José Luis Moraga-González

Economics: An Emerging Small World?

We study the evolution of social distance among economists over the period 1970–2000. While the number of economists has more than doubled, the distance between them, which was already small, has declined significantly. The key to understanding the short average distances is the observation that economics is spanned by a collection of interlinked stars. A star is an economist who writes with many other economists, most of whom have few coauthors and generally do not write with each other.

Strategic Pricing, Consumer Search and the Number of Firms

We examine an oligopoly model where some consumers engage in costly non-sequential search to discover prices. There are three distinct price-dispersed equilibria characterized by low, moderate and high search intensity. The effects of an increase in the number of firms on search behaviour, expected prices, price dispersion and welfare are sensitive (i) to the equilibrium consumers’ search intensity, and (ii) to the status quo number of firms. For instance, when consumers search with low intensity, an increase in the number of firms reduces search, does not affect expected price, leads to greater price dispersion and reduces welfare. In contrast, when consumers search with high intensity, increased competition results in more search and lower prices when the number of competitors in the market is low to begin with, but in less search and higher prices when the number of competitors is large. Duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms.

ADVERTISING FOR ATTENTION IN A CONSUMER SEARCH MODEL

We model the idea that when consumers search for products, they first visit the firm whose advertising is more salient. The gains a firm derives from being visited early increase in search costs, so equilibrium advertising increases as search costs rise. This may result in lower firm profits when search costs increase. We extend the basic model by allowing for firm heterogeneity in advertising costs. Firms whose advertising is more salient and therefore raise attention more easily charge lower prices in equilibrium and obtain higher profits. As advertising cost asymmetries increase, aggregate profits increase, advertising falls and welfare increases.

HYBRID R&D

We develop a model of R&D competition and collaboration in which individual firms carry out independent in-house research and also undertake joint research projects with other firms. We examine the impact of collaboration on in-house research and explore the circumstances under which a hybrid organization of R&D which combines the two is optimal for firms and society. We find that investments in independent research and in joint research are complementary: an increase in the number of joint projects also increases in-house research. Firm profits are highest under a hybrid organization if the number of firms is small (less than 5) while they are highest with pure in-house research if the number of firms is large (5 or more). However, social welfare is maximized under a hybrid organization of R&D in all cases. Our analysis also yields new results on the role of cooperative R&D. We find that non-cooperative decision making by firms leads to larger R&D investments and higher social welfare than fully cooperative decision making. However, a hybrid form of decision making where there is bilateral cooperation in joint projects and non-cooperative decision making in in-house research yields the highest level of welfare in concentrated industries.

Consumer Search and Prices in the Automobile Market

In many markets consumers have imperfect information about the utility they derive from the products that are on offer and need to visit stores to find the product that is the most preferred. This paper develops a discrete-choice model of demand with optimal consumer search. Consumers first choose which products to search; then, once they learn the utility they get from the searched products, they choose which product to buy, if any. The set of products searched is endogenous and consumer specific. Therefore imperfect substitutability across products does not only arise from variation in their characteristics but also from variation in the costs of searching them. We apply the model to the automobile industry. Our search cost estimate is highly significant and indicates that consumers conduct a limited amount of search. Estimates of own- and cross-price elasticities are lower and markups are higher than if we assume consumers have full information.

Customer Directed Advertising and Product Quality

This paper studies the relationship between three key elements of the marketing mix, namely, price, product, and promotion, in a model where a seller employs informative advertising to launch a new product. We propose a fairly general advertising technology for the study of three promotional strategies—mass, imperfectly targeted, and customer directed advertising (CDA). We find that both the private and the social incentives to use distinct advertising strategies are aligned, and that sales are likely to be promoted through CDA. Compared to mass advertising, with CDA the social planner reduces quantity and downgrades quality whereas the seller sometimes upgrades it. Our model of targeting with endogenous product quality provides some new insights into the way the transition from mass to specialized advertising can affect market outcomes. Quality distortions imply that (i) even if CDA increases the market price, the degree of market power need not increase and (ii) CDA may yield a welfare loss even if it leads to a lower market price. This discussion paper has resulted in a publication in the Journal of Economics and Management Strategy , 2006, 15(4), 943-68.

Trade policy and quality leadership in transition economies

Trade policy and quality leadership in transition economies are analyzed in a duopoly model of trade and vertical product differentiation. We first show that the incidence of trade liberalization is sensitive to whether firms in transition economies are producers of low or high quality. Second, we find that neither free trade nor the absence of a domestic subsidy are optimal: Both a tariff and a subsidy increase price competition and while the former extracts foreign rents the latter results in quality upgrading. Third, there exists a rationale for a government to commit to a socially optimal policy to induce quality leadership by the domestic firm when cost asymmetries are low. Finally, we establish an equivalence result between the effects of long-run exchange rate changes and those of trade policy on price competition (but not on social welfare).

Prices and Heterogeneous Search Costs

We study price formation in a model of consumer search for differentiated products when consumers have heterogeneous marginal search costs. We provide conditions under which a symmetric Nash equilibrium exists and is unique. Search costs affect two margins—the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density. When the search cost density has the increasing likelihood ratio property (ILRP), the effect of lowering search costs on the intensive search margin has a dominating influence and prices decrease. By contrast, when the search cost density has the decreasing likelihood ratio property (DLRP), the effect on the extensive search margin is dominant and lower search costs result in higher prices. We compare these results with those obtained when consumers have heterogeneous fixed search costs.

Strategic Targeted Advertising

We present a strategic game of pricing and targeted-advertising. Firms cansimultaneously target priceadvertisements to different groups of customers, or to the entiremarket. Pure strategy equilibria do not exist and thus marketsegmentation cannot occur surely. Equilibria exhibit random advertising--to induce an unequal distribution of information in the market-- andrandom pricing --to obtain profits from badly informed buyers--. Wecharacterize a positive profits equilibrium where firms advertise lowprices to a segment of consumers, high prices to a distinct segment ofconsumers, and intermediate prices to the entire market. As a resultthe market is segmented only from time to time and presentssubstantial price dispersion across segments.

Antidumping, intra-industry trade, and quality reversals

We examine an export game where two (home and foreign) firms produce vertically differentiated products. The foreign firm is more RD otherwise, reciprocal dumping occurs. For some parameters, a domestic antidumping policy leads to a quality reversal in the international market whereby the home firm becomes the quality leader. This policy is desirable for the implementing country, though world welfare decreases.