Oksana Loginova

Real and Virtual Competition

Goods sold by electronic firms are not perfect substitutes for otherwise identical goods sold by their offline counterparts. Online purchases are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional retailer, on the other hand, involves positive travelling costs. In this paper I extend the circular city model to include two types of firms, conventional and electronic. I show that under some parameter configurations, conventional stores actually raise their prices in response to entry of electronic firms. Moreover, economic welfare goes down.

Incentive Schemes in Peer-to-Peer Networks

In this paper we study the optimal file-sharing mechanism in a peer-to-peer network with a mechanism design perspective. This mechanism improves upon existing incentive schemes. In particular, we show that peer-approved scheme is never optimal and service-quality scheme is optimal only under certain circumstances. Moreover, we find that the optimal mechanism can be implemented by a mixture of peer-approved and service-quality schemes.

Customization with Vertically Differentiated Products

We analyze a duopoly game in which products are initially differentiated in variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. We show that in equilibrium either both firms customize, only the higher quality firm customizes, or no firm customizes. Even if customization is costless, the firms might not customize. This happens when the quality difference between the firms is small. We explore how the total welfare changes with the fixed cost of customization. Interestingly, the relationship is not always monotonic. Contrasting with the situation when customization is not feasible, both consumer surplus and total welfare are higher when one or both firms customize.

Learning in Advance Selling with Heterogeneous Consumers

The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.

Competitive Effects of Mass Customization

The existing theoretical literature on mass customization maintains that customization reduces product differentiation and intensifies price competition. In contrast, operations management studies argue that customization serves primarily to differentiate a company from its competitors. Interactive involvement of the customer in product design creates an affective relationship with the firm, relaxing price competition. This paper provides a model that incorporates consumer involvement to explain the phenomena described in the operations management literature.Two firms on the Hotelling line compete for a continuum of consumers with heterogeneous brand preferences. An exogenously given fraction of consumers is potentially interested in customization. Consumer benefits from customization are the rewards from a special shopping experience and the value of product customization (a better fitting product); these benefits are higher for consumers located closer to the customizing brand. When a consumer purchases a customized product, he/she incurs waiting costs. Each firm simultaneously decides whether to offer standard products, customized products, or both, and then engage in price competition. I show that customization increases product differentiation, leading to less intense price competition. Depending on the parameter values, in equilibrium either both firms offer customized products, one firm offers customized products and the other standard and customized products, or one firm offers customized products and the other standard products. I perform comparative statics analysis with respect to the fraction of consumers interested in customization, the waiting costs, and the fixed cost of customization.

Advance Selling, Competition, and Brand Substitutability

This paper studies the impact of competition on the benefits of advance selling. I construct a two-period price-setting game with heterogeneous consumers and two firms that produce different brands. Some consumers prefer one brand, others prefer the other brand. Consumers derive common value from their preferred brand, but they differ in how strongly they dislike their less preferred brand. I consider the situation in which one firm can offer consumers the opportunity to pre-order its product in advance of the regular selling season. I calculate the benefits of advance selling when this firm faces competition from the other firm in the regular selling season and when it does not. I show that competition enhances the benefits of advance selling when in the advance selling season consumers are uncertain about which brand they will prefer. Comparative statics analysis with respect to brand substitutability reveals some interesting results. For example, I find that in the competitive setting the firm has greater incentives to advance sell when the brands are more substitutable, while the reverse holds in the monopolistic setting.

Information and Online Reviews

Online review aggregators, such as TripAdvisor, HotelClub and OpenTable help consumers identify the products and services that best match their preferences. The goal of this study is to understand the impact of online review aggregators on firms and consumers. We adopt Salop’s circular city model in which consumers initially do not know the locations of the firms in the product space. The firms decide whether or not to be listed on an online review aggregator’s website and choose their prices. When a firm resorts to the aggregator, its location and price become observable to the consumers who visit the website. We consider two different scenarios, depending on the possibility for online firms to offer discounts to the consumers who book online. We show that in equilibrium not all firms will go online – some will remain offline. Online firms attract more customers than their offline counterparts due to reduced mismatch costs, but face a tougher price competition. Comparing the equilibrium prices, profits and the number of firms that go online across the scenarios, we derive interesting conclusions from the private and the social standpoints.