|By:||Jiawei Chen (Department of Economics, University of California, Irvine, 3151 Social Science Plaza, Irvine, CA 92697, USA)
Michael Sacks (Department of Economics, West Virginia University, 1601 University Ave., PO Box 6025, Morgantown, WV 26506-6025, USA)
This paper investigates firms’ decisions to reimburse consumers’ switching costs in network industries. Prior literature finds that switching costs incentivize firms to harvest their locked-in consumers rather than price aggressively for market dominance, resulting in a lower market concentration. Using a dynamic duopoly model, we show that this result is reversed if firms have the option to reimburse consumers’ switching costs. In that case the larger firm offers a bigger reimbursement to switching consumers than the smaller firm does, as an additional instrument to propel itself to market dominance. Consequently, an increase in switching cost increases market concentration. Compared to the case without reimbursements, allowing firms the option to reimburse results in greater consumer welfare despite having a much higher market concentration. Consumers’ benefits from a larger network and switching cost reimbursement outweigh the higher price charged by a dominant firm.
|Keywords:||network goods, price discrimination, reimbursement, switching costs|
|By:||Weijia (Daisy) Dai (Lehigh University)
Michael Luca (Harvard Business School, Negotiation, Organizations & Markets Unit)
Paid search has become an increasingly common form of advertising, comprising about half of all online advertising expenditures. To shed light on the effectiveness of paid search, we design and analyze a large-scale field experiment on the review platform Yelp.com. The experiment consists of roughly 18,000 restaurants and 24 million advertising exposures – randomly assigning paid search advertising packages to more than 7,000 restaurants for a three-month period, with randomization done at the restaurant level to assess the overall impact of advertisements. We find that advertising increases a restaurant’s Yelp page views by 25% on average. Advertising also increases the number of purchase intentions – including getting directions, browsing the restaurant’s website, and calling the restaurant – by 18%, 9%, and 13% respectively, and raises the number of reviews by 5%, suggesting that advertising also affects the number of restaurant-goers. All advertising effects drop to zero immediately after the advertising period. A back of the envelope calculation suggests that advertising would produce a positive return on average for restaurants in our sample.
Local interactions and network structures appear to be a prominent feature of many environmental problems. This paper discusses a wide range of issues and potential areas of application, including the role of relational networks in the pattern of adoption of green technologies, common pool resource problems characterized by a multiplicity of sources, the role of social networks in multi-level environmental governance, infrastructural networks in the access to and use of natural resources such as oil and natural gas, the use of networks to describe the internal structure of inter-country relations in international agreements, and the formation of bilateral “links” in the process of building up an environmental coalition. For each of these areas, we examine why and how network economics would be an effective conceptual and analytical tool, and discuss the main insights that we can foresee.
|Keywords:||networks; environmental externalities; technological diffusion; gas pipelines; common-pool-resources; multi-level governance; coalitions|