Two research seminars - 23 June 2015 (Tuesday), 10:00 - 12:00 - Room P3.10

16 junho 2015, 11:57 • Maria do Rosário De Oliveira Silva

1.          Optional-Contingent-Product Pricing in Marketing Channels

 

Peter Kort

(Tilburg University)

 

This paper studies the pricing strategies of firms belonging to a vertical channel structure where a base and an optional contingent products are sold. Optional contingent products are characterized by unilateral demand interdependencies. That is, the base product can be used independently of a contingent product. On the other hand, the contingent product’s purchase is conditional on the possession of the base product.

 

We find that the retailer decreases the price of the base product to stimulate demand on the contingent-product market. Even a loss-leader strategy could be optimal, which happens when reducing the base product’s price has a large positive effect on its demand, and thus on the number of potential consumers of the contingent product. The price reduction of the base product either mitigates the double-marginalization problem, or leads to an opposite inefficiency in the form of a too low price compared to the price maximizing vertically integrated channel profits. The latter happens when the marginal impact of both products’ demands on the base product’s price is low, and almost equal in absolute terms. 

Joint work with Sihem Taboubi and Georges Zaccour

 

 

2.          Transmission and Power Generation Investment under Uncertainty

 

Verena Hagspiel

(NTNU)

 

The challenge of deregulated electricity markets and ambitious renewable energy targets have contributed to an increased need of understanding how market participants will respond to a transmission planner’s investment decision. We study the optimal transmission investment decision of a transmission system operator (TSO) that anticipates a power company’s (PC) potential capacity expansion. The proposed model captures both the investment decisions of a TSO and PC and accounts for the conflicting objectives and game-theoretic interactions of the distinct agents. Taking a real options approach allows to study the effect of uncertainty on the investment decisions and taking into account timing as well as sizing flexibility.

 

We find that disregarding the power company’s optimal investment decision can have a large negative impact on social welfare for a TSO. The corresponding welfare loss increases with uncertainty. The TSO in most cases wants to invest in a higher capacity than is optimal for the power company. The exception is in case the TSO has no timing flexibility and faces a relatively low demand level at investment. This implies that the TSO would overinvest if it would disregard the PC’s optimal capacity decision. On the contrary, we find that if the TSO only considers the power companies sizing flexibility, it risks installing a too small capacity. We furthermore conclude that a linear subsidy in the power company's investment cost could increase its optimal capacity and therewith, could serve as an incentive for power companies to invest in larger capacities.

Joint work with Nora S. Midttun, Afzal S. Siddiqui, and Jannicke S. Sletten