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Frank Knight's theory of monopoly price has received relatively little attention in the literature on Risk, Uncertainty and Profit. We argue that Knight accepted and refined the monopoly price theory of Carl Menger and his followers. Knight highlights the difference between monopoly as an inevitable outcome of departures from perfect competition, and monopoly as a contingent or ‘culture-history fact’. In the latter case, coercive institutional barriers to potential competition shape the choice set of consumers and producers, and provide a crucial method for identifying monopoly gains. There are three benefits to this account of Knight's contributions: it rehabilitates the focus on the institutional determinants of monopoly price, as opposed to the mainstream emphasis on market frictions and imperfections; it opens the way for a Mengerian monopoly price theory that seriously engages the study of institutions; and it adds new evidence and nuance to ongoing debates about Knight's place in economics.

We analyze the short- and long-run implications of third-degree price discrimination in input markets. In contrast to the extant literature, which typically assumes that the supplier is an unconstrained monopolist, in our model input prices are constrained by the threat of demand-side substitution. In our model, the more efficient buyer receives a discount. A ban on price discrimination thus benefits smaller but hurts more efficient, larger firms. It also stifles incentives to invest and innovate. With linear demand, a ban on price discrimination benefits consumers in the short run but reduces consumer surplus in the long run, which is once again the opposite of what is found without the threat of demand-side substitution.

We develop a dynamic model of experience goods pricing with independent private valuations. We show that the optimal paths of sales and prices can be described in terms of a simple dichotomy. In a mass market, prices are declining over time. In a niche market, the optimal prices are initially low followed by higher prices that extract surplus from the buyers with a high willingness to pay. We consider extensions of the model to integrate elements of social rather than private learning and turnover among buyers.

Cartel detection is one of the most basic and most complicated tasks of competition authorities. In recent years, however, variance filters have provided a fairly simple tool for rejecting the existence of price-fixing, with the added advantage that the methodology requires only a low volume of data. In this paper we analyze two aspects of variance filters: (i) the relationship that can be established between market structure and price rigidity, and (ii) the use of different benchmarks for implementing the filters. This paper addresses these two issues by applying a variance filter to a gasoline retail market that is characterized by a set of unique features. Our results confirm the positive relationship between monopoly and price rigidity, and confirm the variance filter's ability to detect non-competitive behavior when an appropriate benchmark is used. Our findings should serve to promote the implementation of this methodology among competition authorities, albeit in the awareness that a more exhaustive complementary analysis is required.

If consumer valuations change over time, then secondary-market frictions may raise monopoly profits and cause durability to be distorted away from the cost-minimizing level. A monopolist who favors such frictions overinvests in durability, but planned obsolescence instead may be preferred when market frictions exist but a monopolist wishes they did not. Evidence from the book market is presented.

In a class of asymmetric-cost duopoly price competition games, price-elastic individual demand reveals a threshold of informed buyers below which equilibrium is in monopoly prices. Even if the threshold is met, unless all buyers are informed, monopoly prices are listed and are more likely between less alike sellers. An increase in the efficient seller’s cost weakly reduces its rival’s price (in a first order stochastic dominated sense) without disturbing its profit. Lastly, increasing the number of sellers increases competitive pricing incentives.

Second-degree price discrimination, that is, vertical differentiation, is widely practiced by firms selling physical goods to consumers with heterogeneous valuations. This strategy leads to market segmentation and has been shown to be optimal by many researchers. On the other hand, researchers have also demonstrated, under certain restrictive conditions, that vertical differentiation may not be optimal for information goods. We analyze vertical differentiation for a monopolist, continuing the practice of modeling consumer valuation as a linear function of product quality and consumer type but generalizing assumptions about marginal costs and consumer distributions. We show that the firm's optimal product line depends on the benefit-to-cost ratio of qualities in the choice vector. We find that a vertical differentiation strategy is not optimal when the highest quality product has the best benefitto-cost ratio. Many information goods satisfy this property.

Abstract In a two-country Hotelling type duopoly model of price competition, we show that parallel import (PI) policy can act as an instrument of strategic trade policy. The home firm's profit is higher when it cannot price discriminate internationally if and only if the foreign market is sufficiently bigger than the domestic one. The key mechanism in the model is that the home firm's incentive to keep its domestic price close to the optimal monopoly price affects its behavior during price competition abroad. We also analyze the welfare implications of PI policies and show that our key insights extend to quantity competition. // ABSTRACT IN : A l'aide d'un modèle de duopole avec discrimination par les prix à la Hotelling pour deux pays, on montre que la politique d'importation parallèle peut servir d’ ;instrument de politique commerciale stratégique. Le profit de la firme domestique est plus élevé quand elle ne peut pas faire de discrimination internationale par les prix, si et seulement si le marchéétranger est suffisamment plus grand que le marché domestique. Le mécanisme clé dans ce modèle est que l'incitation de la firme domestique à garder le prix près du prix optimal de monopole affecte son comportement dans la concurrence des prix au plan international. On analyse les implications en termes de bien-être des politiques d'importation parallè ;le et on montre que les conclusions auxquelles on est arrivé tiennent aussi pour la concurrence par les quantités.

Although previous research demonstrates the profitability of partial refund policies in a monopoly setting, there is a certain lack of ubiquity in practice about these refunds in competitive service markets. This raises the question of how a partial refund policy may work and whether it is even sustainable in a competitive environment. This study investigates how competition may influence the profitability and the equilibrium choice of refund policies. It is shown that partial refunds may endogenously change the nature of strategic interaction between service providers from local monopolies into a competition regime, which moderates the gains from exploiting the efficiency-enhancing effect of partial refunds. A whole range of pure-strategy equilibria can be obtained as a result of the interplay between the efficiency-improving and the competition-intensifying effects. When the capacity is small (large) such that the efficiency-improving (the competition-intensifying) effect is dominant, both firms in equilibrium follow identical partial (zero) refund policies. Moreover, interestingly, the symmetric firms may end up in an asymmetric equilibrium in which one firm follows a partial refund policy and the other adopts a zero refund policy.

This paper reformulates and simplifies a recent model by Heidhues and Kxoszegi (The impact of consumer loss aversion on pricing, Mimeo, 2005), which in turn is based on a behavioral model due to Kxoszegi and Rabin (Q J Econ 121:1133-1166, 2006). The model analyzes optimal pricing when consumers are loss averse in the sense that an unexpected price hike lowers their willingness to pay. The main message of the Heidhues-Kxoszegi model, namely that this form of consumer loss aversion leads to rigid price responses to cost fluctuations, carries over. I demonstrate the usefulness of this 'cover version' of the Heidhues-Kxoszegi-Rabin model by obtaining new results: (1) loss aversion lowers expected prices; (2) the firm's incentive to adopt a rigid pricing strategy is stronger when fluctuations are in demand rather than in costs. Reprinted by permission of Springer