Yongmin Chen

University of Colorado Boulder | CUB · Department of Economics

I review models of consumer search and competition when product quality is uncertain and differs across firms. Although firms are vertically—and possibly also horizontally—differentiated, an appropriate symmetric price equilibrium with optimal consumer search can be neatly characterized. I propose a “random‐quality” framework that unifies these mod...

We introduce a search model where products differ in horizontal attributes and unobserved quality (“experience goods”), and firms can establish quality reputation. We show that the inability of consumers to observe quality before purchase significantly changes how search frictions affect market performance. In equilibrium, higher search costs reduc...

When providing professional services, an expert may misbehave by either prescribing “wrong” treatment for consumer's problem or failing to exert proper effort to diagnose it. We show that under a range of liabilities the expert will recommend the appropriate treatment based on his private information if markups for alternative treatments are close...

This paper studies how foreign direct investment (FDI) affects innovation in the host country, using matched firm-level patent data of Chinese firms. The data contain multidimensional information about patent counts and citations, which, together with an identification strategy based on Lu et al. (2017), allows us to measure innovation comprehensiv...

We study the international protection of consumer data in a model where data from product sales generate additional revenue to firms but disutility to consumers. When data usage lacks transparency, a firm suffers a commitment problem and overuses consumer data. Greater transparency enables the firm to commit to less data usage, which boosts consume...

We analyze welfare under differential versus uniform pricing across oligopoly markets that differ in costs of service, and establish general demand conditions for differential pricing by symmetric firms to increase consumer surplus, profit, and total welfare. The analysis reveals why competitive differential pricing is generally beneficial—more tha...

The digital economy has substantially reduced market frictions but also posed new challenges for the efficient functioning of markets. In particular, the drastic reductions in the costs of search, entry, transportation, and reproduction have profound implications for the role of platforms, the value of innovation, and the balance between firms' dat...

We analyze the optimal design of damages for patent infringement when a follow‐on innovator may infringe the patent of an initial innovator. We consider damage rules that are linear combinations of the popular “lost profit” (LP) and “unjust enrichment” (UE) rules, coupled with a lump‐sum transfer between innovators. Such linear rules can sometimes...

We present a model where firms conduct R&D in both a safe and a risky direction. As patentability standards rise, an innovation in the risky direction is less likely to receive a patent, which decreases the static incentive for new entrants to conduct risky R&D, but can increase their dynamic incentive. These, together with a strategic substitution...

Retrospective studies of horizontal mergers have focused on their price effects, leaving the important question of how mergers affect product quality largely unanswered. This paper empirically investigates this issue for two recent airline mergers. Consistent with the theory that mergers facilitate coordination but diminish competitive pressure for...

When procuring multiple products from competing sellers, a buyer may choose separate purchase, pure bundling, or mixed bundling. We show that pure bundling maximizes buyer surplus when there are two sellers and trade for each good is likely efficient, whereas separate purchase can be optimal for the buyer when there are more sellers or one good has...

This paper develops a new rationale for decentralization in distribution channels: providing a one-stop comparison shopping experience for consumers. In our duopoly model, when consumers are knowledgeable about their brand preferences, each manufacturer would distribute through its own vertically integrated retail outlets only. When some consumers...

This paper discusses how intermediaries, such as a search engine and an online marketplace, may affect consumer search. We propose an analytical framework that encompasses several models of search for differentiated products, with a high-quality firm being more likely to offer a product that meets each consumer's need. An intermediary improves cons...

A firm's incentive to invest in product safety is affected by both market environment and product liability. We investigate the relationship between competition and product liability in a spatial model of oligopoly, where reputation provides a market incentive for safety investment and higher liability may distort consumers' incentive for product c...

This article provides a theoretical analysis to reconcile the controversy between rating deflation versus inflation. In our model, the credit rating agency trades off between the current incomes paid by the issuer upon receiving a favorable rating and the future reputation costs. We show that both rating deflation and rating inflation can occur in...

The welfare effects of entry are studied in a model of consumer search. Potential entrants differ in quality, with high quality sellers being more likely to meet consumer needs. Contrary to the standard view in economics that more entry benefits consumers, we find that free entry is excessive for both consumer welfare and total welfare when entry c...

An important question in horizontal merger analysis is what share of a firm's lost output from a unilateral price increase will divert to its merger partner. This ‘diversion ratio’ is often estimated using data on customer switching from a firm to its rivals (‘churn’). We use a tractable oligopoly model to investigate the potential biases of such e...

We develop a new approach to discrete choice demand for differentiated products, using copulas to separate the marginal distribution of consumer values for product varieties from their dependence relationship, and apply it to the issue of how preference dependence affects market outcomes in symmetric multiproduct industries. We show that greater de...

We use data from restaurants in Shanghai, China to conduct a new empirical analysis of prices and coupons. Our results show a positive relationship between prices and online coupons. Moreover, the price premium from couponing is higher for restaurants about which consumer values appear to be more uncertain. When consumer uncertainty is high, restau...

This article analyzes the welfare effects of monopoly differential pricing in the important, but largely neglected, case where costs of service differ across consumer groups. Cost-based differential pricing is shown to increase total welfare and consumer welfare relative to uniform pricing for broad classes of demand functions, even when total outp...

This paper studies a model of interpersonal bundling, in which a monopolist offers a good for sale under a regular price and a group purchase discount if the number of consumers in a group—the bundle size—belongs to some menu of intervals. We find that this is often a profitable selling strategy in response to demand uncertainty, and it can achieve...

This technical appendix describes intermediate steps in derivations and details of calculations. Computationally intensive details are regulated to supplemental programs available from the authors upon request.

Under continual innovation, greater patent strength expands innovating firms’ profit against imitation, but also shifts profit from current to past innovators. We show how the impact of patents on innovation, as determined by these two opposing effects, varies with industry characteristics. When the discount factor is sufficiently high, the negativ...

In contrast to Arrow's result for process innovations, we show that the gain from a product innovation can be larger to a secure monopolist than to a rivalrous firm that would face competition from independent sellers of the old product. A monopolist incurs profit diversion from its old good but may gain more than a rivalrous firm on the new good b...

This paper investigates discount pricing, the common marketing practice whereby a price is listed as a discount from an earlier, or regular, price. We discuss two reasons why a discounted price - as opposed to a mearly low price - can make a rational consumer more willing to purchase the item. First, the information that the product was initially s...

Credit rating agencies play a crucial role in financial markets. There are two competing views regarding their behavior: some argue that they engage in rating inflation, while others suggest that they deflate ratings. This article offers a rationale that reconciles the two opposite arguments. We find that both rating inflation and rating deflation...

Sellers sometimes offer goods for sale under both a regular price and a discount for group purchase if the consumer group reaches some minimum size. This selling practice, which we term interpersonal bundling, has been popularized on the Internet by companies such as Groupon. We explain why interpersonal bundling is a profitable strategy in the pre...

A firm can increase product safety through ex ante investment and can remedy quality problems after sales. An increase in product liability raises returns to ex ante investment through higher consumer demand, but may also negatively affect the investment incentive due to more ex post remedial activities. The trade‐off between these “output” and “su...

There exist two approaches in the literature concerning the multinational firm’s mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm transfers primarily knowledge‐based assets and assumes that knowledge is non‐excludable. A more recent approach takes the propert...

A vertically integrated firm, having acquired the intellectual property (IP) through innovation to become an input monopolist, can extract surplus by supplying efficient downstream competitors. That the monopolist would refuse to do so is puzzling and has led to numerous debates in antitrust. In this article, I clarify the economic logic of refusal...

We extend Philippe Aghion and Patrick Bolton's (1987) classic model to analyze the equilibrium incidence and impact of exclusive contracts in a setting where research and development (R&D) drives industry performance. An exclusive contract between an incumbent supplier and a buyer arises when patent protection and/or the incumbent's R&D ability are...

Using copulas to model the stochastic dependence of values, this article establishes new general conditions for the profitability of product bundling. A multiproduct monopolist generally achieves higher profit from mixed bundling than from separate selling if consumer values for two of its products are negatively dependent, are independent, or have...

This article develops a theory of dynamic pricing in which firms may offer separate prices to different consumers based on their past purchases. Brand preferences over two periods are described by a copula admitting various degrees of positive dependence. When commitment to future prices is infeasible, each firm offers lower prices to its rival's c...

Using copulas to model the stochastic dependence of values, this paper estab-lishes new general results on the pro…tability of product bundling. A multiproduct mo-nopolist achieves higher pro…t from mixed bundling than from separate selling if consumer values for two products are negatively dependent, independent, or have limited positive dependenc...

We examine the impact of vertical industry structure on upstream process innovation. We find that vertical integration (VI) generally enhances innovation under downstream Cournot competition, but can diminish innovation under downstream Bertrand competition. We also find that under Bertrand competition, VI can increase innovation when the direct in...

Unlike Arrow's result for process innovations, the gain from a product innovation can be larger to a secure monopolist than to a rivalrous …rm that would face competition from independent sellers of the old product. A monopolist incurs pro…t diversion from its old good but may gain more than a rivalrous …rm on the new good by coordinating the price...

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...

This paper takes the new approach of using a copula to characterize con-sumer preferences in a discrete choice model of product di¤erentiation, and applies it to the economics of monopoly and duopoly. The comparative statics of demand strength and preference diversity, both properties of the marginal distribution of val-ues for each product variety...

This paper takes the new approach of using a copula to characterize consumer preferences in a discrete choice model of product differentiation, and applies it to the economics of monopoly and duopoly. The comparative statics of demand strength and preference diversity, both properties of the marginal distribution of values for each product variety,...

Children in households reporting the receipt of free or reduced price school meals through the National School Lunch Program (NSLP) are more likely to have negative health outcomes than eligible nonparticipants. Assessing the causal effects of the program is made difficult, however, by the presence of endogenous selection into the program and syste...

We examine the optimal design of regulated input prices, accounting explicitly for their impact on incentives for process innovation. Optimal input prices are shown to vary both with the prevailing vertical industry structure and with the nature of downstream competition. The optimal input pricing rule tends to provide stronger incentives for innov...

This paper presents a model in which some consumers shop on the basis of price alone, without attention to product quality. A firm may “cheat” (i.e., cut quality) to exploit these inattentive consumers. In the unique symmetric equilibrium, firms follow a mixed strategy involving both price and quality dispersion. Firms are less likely to cheat when...

This paper develops a new approach to discrete choice demand for mul-tiproduct industries, using copulas to separate the marginal distribution of consumer values for each product from their dependence relationship. The comparative statics of demand strength and preference diversity, both properties of the marginal distribu-tion, are remarkably simi...

Abstract There exist two approaches in the literature concerning the multinational firm’s mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm transfers primarily knowledge-based assets and assumes that knowledge is non-excludable. A more recent approach takes th...

This paper considers variants of a dynamic duopoly model where one firm has a stronger market position than its competitor. Consumers' past purchases may reveal their different valuations for the two firms' products. Price discrimination based on purchase histories tends to benefit consumers if it does not cause the weaker firm to exit; otherwise i...

In a discrete choice model of product differentiation, the symmetric duopoly price may be lower than, equal to, or higher than the single-product monopoly price. Whereas the market share effect encourages a duopolist to charge less than the monopoly price because a duopolist serves fewer consumers, the price sensitivity effect motivates a higher pr...

This paper considers variants of a dynamic duopoly model where one firm has a stronger market position than its competitor. Consumers' past purchases may reveal their different valuations for the two firms' products. Price discrimination based on purchase histories tends to benefit consumers if it does not cause the weaker firm to exit; otherwise i...

This paper studies a model of buyer investment and its effect on the variety and vertical structure of international trade. A distinction is made between two types of buyer investment: "Flexible" and "specific", which differ in the ability of a buyer to match with a seller. The interaction of buyer investment with the entry and pricing incentives o...

This study examines the pricing behavior of online retailers (e-tailers) in Chinese e-commerce markets. Descriptive statistics indicate that prices have not converged in China's e-commerce markets and that there is relatively more price variation in markets for cosmetics, compact discs, gifts and books. Fixed effects model estimates show that e-tai...

An important issue in economics is how market structure affects prices. While the standard view is that competition lowers prices, Chen and Riordan (2006) argued that with product differentiation it is not exceptional for prices to be higher under duopoly than monopoly. This paper empirically investigates one implication from Chen and Riordan, name...

This article uncovers an unnoticed connection between exclusive contracts and vertical organization. A vertically integrated firm can use exclusive dealing to foreclose an equally efficient upstream competitor and to cartelize the downstream industry. Neither vertical integration nor exclusive dealing alone achieves these anticompetitive effects. T...

This paper studies the competitive effects of airline codeshare alliances. We consider an airline market with two firms offering two differentiated final products: a direct flight and an indirect flight between two destinations. An intermediate (complementary) flight is needed to complete the indirect flight. When the intermediate flight is offered...

The spokes model of nonlocalised spatial competition provides a new analytical tool for differentiated oligopoly and a representation of spatial monopolistic competition. An increase in the number of firms leads to lower equilibrium prices when consumers have relatively high product valuations, but, surprisingly, to higher equilibrium prices for in...

Children in households reporting the receipt of free or reduced price school meals through the National School Lunch Program (NSLP) are more likely to have negative health outcomes than eligible nonparticipants. Assessing the causal effects of the program is made difficult, however, by the presence of endogenous selection into the program and syste...

While it is easier to obtain price information online, electronic commerce (e-commerce) may exacerbate information asymmetry about product quality, since the buyer cannot physically inspect the product before purchase. This suggests seller reputation may play a more important role in the online market. As a transition economy, where markets are les...

The effects of information on market design are explored in a simple setting where firms have private information about their correlated fixed costs and the government aims to maximize its expected revenue conditional on achieving efficient allocations. Government revenues are higher when the costs are less correlated (or are more of a private valu...

"This paper provides an economic analysis of marketing innovation. A dynamic duopoly model is developed to study two forms of marketing innovation: Gamma, which allows a firm to acquire consumer information effectively; and sigma, which reduces consumer transaction costs. The incentives and effects of marketing innovation differ markedly from those...

Paid placement, where advertisers bid payments to a search engine to have their products displayed prominently among the results of a keyword search, has emerged as a predominant form of advertising on the Internet. This article studies a model of product differentiation in which the auction of advertisement positions is embedded in a market game o...

This paper studies a simple model of buyer investment and its effect on the variety and vertical structure of international trade. A distinction is made between two types of buyer investment: "flexible" and "specific." Their interactions with the entry and pricing incentives of suppliers are analyzed. It is shown that (i) there can be multiple equi...

We find that it is optimal for higher-quality departments to search broadly across many or even all fields in faculty recruiting, whereas it is optimal for lower-quality departments to conduct narrower searches. We develop a simple search model in which optimal search scope is shown to increase in department quality. Using data from Job Openings fo...

This paper studies intellectual property rights (IPRs) and innovation in developing countries. A model is developed to illustrate the trade-off between imitating foreign technologies and encouraging domestic innovation in a developing country's choice of IPRs. It is shown that innovations in a developing country increase in its IPRs, and a country'...

We generalize an earlier model of international vertical pricing to explain key features of parallel imports, or unauthorized trade in legitimate goods. When a manufacturer (or trademark owner) sells its product through an independent agent in one country, the agent may find it profitable to engage in parallel trade, selling the product to another...

With economies of scale, a vertically integrated firm can lower its upstream cost by supplying downstream competitors. The competitors may strategically choose not to purchase from the integrated firm, unless the latter's price for the intermediate good is sufficiently lower than those of alternative suppliers. In a simple model of dynamic scale ec...

[eng] We present a two-sided search model where agents differ by their human capital endowment and where workers of different skill are imperfect substitutes. Then the labor market endogenously divides into disjoint segments and wage inequality will depend on the degree of labor market segmentation. The most important results are : 1) overall wage...

A model where sellers choose sequentially between any two selling mechanisms is studied. With monotonicity and minimum mechanism difference, there exists a unique equilibrium where all sellers choose the mechanism of higher per-seller surplus at a critical number of sellers.

We consider the equilibrium choice of selling mechanisms by competing firms. For a model where a number of sellers choose sequentially between any two selling mechanisms, there is a unique (subgame perfect) equilibrium under fairly natural assumptions about the monotonicity and differences of the two mechanisms. All sellers choose the mechanism tha...

This paper uncovers an unnoticed connection between vertical integration and exclusive dealing. A vertically integrated firm has the incentive and ability to use exclusive contracts to foreclose an equally efficient upstream competitor and to effect a cartelization of the downstream industry. Its ability to do so may be limited when downstream firm...

This paper uncovers an unnoticed connection between exclusive contracts and vertical organization. The combination of vertical integration and exclusive contracts results in the exclusion of an equally (or even more) e#cient upstream competitor and the increase of downstream prices. Neither of these practices alone achieves these anticompetitive e#...

Parallel imports are goods traded without the authorization of an original trademark or copyright owner. In this paper, a model where parallel imports arise because of incentive problems in vertical distributions is discussed. A distributor receiving goods from a manufacturer at a low wholesale price can profitably sell the goods in another country...

We overview the international policy debate concerning parallel imports, which are goods traded without the authorization of an original trademark or copyright owner. Parallel imports are likely to have multiple causes, including vertical price control, which we model. A manufacturer selling its product through an independent agent needs to set the...

It is well known that vertical integration cats change the pricing incentive of an upstream producer. However, it has not been noticed that vertical integration may also change the pricing incentive of downstream producer and the incentive of a competitor in choosing input suppliers. I develop an equilibrium theory of vertical merger that incorpora...

This paper surveys issues in economics of standards-the contribution to the understanding of standards based on economic theories. The survey focuses on standards in telecommunications. The economic nature of standards, their consequences, and the advantages/disadvantages of standards are investigated. Selected literature from 1984 to 2000 is exami...

Who will win the bidding to become the sole producer of a new product: the monopolist of a related product or a new entrant? When there exists potential entry to the monopolist's existing business, the standard result that monopoly persists (1982) may or may not hold, depending crucially on how the new product relates to the existing product of the...

A transaction involving a buyer and a competitive seller is studied under the hypothesis that individuals may have a certain tendency to keep promises. The parties can choose a complete contract where costly arrangements are made so that it is verifiable whether the seller has delivered a certain quality. Alternatively, they can choose an incomplet...

A dynamic pricing model is studied where a seller of an asset faces a sequence of potential buyers whose valuation distribution is unknown to the seller. The seller learns more about the distribution in the selling process and becomes less optimistic as the object remains unsold. We characterize the optimal posted prices which incorporate updated b...

Oligopoly price discrimination in the retail market prevents a manufacturer from inducing optimal retail margins through any wholesale price. This motivates the manufacturer to impose resale price maintenance. In a model of third-degree price discrimination by rival retailers, a retail price ceiling (or floor) enables the manufacturer to restore th...

This article offers a new explanation of why firms diversify. I present a model in which a firm has private information about both its own cost and the demand function of the market on which it competes with another firm. I show that diversification can be used by the informed firm to signal private information in order to obtain competitive advant...

This paper studies the business practice of offering discounts to new customers in markets with switching costs. In a two-period homogeneous-good duopoly model, it is shown that the equilibrium amount of discounts increases continuously in the expected switching costs of a typical consumer. In equilibrium, firms offer the same prices and discounts...

This article offers an equilibrium theory of product bundling by rival firms. In several models where a primary good is produced in a duopoly market and one or more other goods is produced under perfectly competitive conditions, bundling is shown to emerge as an equilibrium strategy of one or both of the duopolists for its role as a product-differe...

The establishment of an asking, or ceiling, price from which reductions can be bargained is a common selling practice. For a monopolist seller of a single object, this article characterizes the best such ceiling price and shows that its use is optimal among all incentive-compatible mechanisms in a class of situations characterized by customers (1)...

A dynamic model of duopoly is considered in which a fixed fraction of the customer population changes loyalties in each period from the current high-price setter to the current low-price setter. The model is a stochastic game, and it is shown to have a Markov perfect equilibrium with distinctive economic features. Effects of changes in the duopolis...

This paper explores the implications of the hypothesis that an asking price is a ceiling to which a seller commits in order to provide incentives for potential buyers to incur search costs. Having attracted such a potential buyer, the seller must also determine how low to set the floor price, below which it is preferable to wait for another custome...

This paper explains why firms might be excessively short-term oriented even when they are able to inform the capital market about the true quality of their assets. The information a firm reveals to the capital market can be used by competitors to the firm's detriment. In this case, the future profitability of the firm's assets is no longer exogenou...

: We overview the international policy debate concerning parallel imports, which are goods traded without the authorization of an original trademark or copyright owner. Parallel imports are likely to have multiple causes, including vertical price control, which we model. A manufacturer selling its product through an independent agent needs to set t...

We examine the impact of vertical industry structure on upstream process innovation. We find that vertical integration (VI) generally enhances innovation under downstream Cournot competition, but can diminish innovation under downstream Bertrand competition. We also find that under Bertrand competition, VI can increase innovation when the direct in...

Cost overruns are endemic in military procurement projects and pervasive in other areas. This paper studies a model in which the apparent cost overruns arise not as systematic expectational errors but as equilibrium phenomena. The possibility of renegotiating payments when cost overruns occur results in firms bidding below their true estimate of ex...