Coordination Issues in Industrial Organization

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Issues of coordination are important to consumers and firms. Consumers may wish to coordinate on their selection of which firm to patronize, especially if economies of scale characterize the production technology. Incumbent firms may recognize gains from coordination in the deterrence of entry. In particular if incumbent firms have superior information (as compared to a potential entrant) about the profitability of entry, then their ability to coordinate the selection of signals (prices, for example) become quite important. Most previous work has ignored the issue of coordination, by assuming that consumers act in a simple fashion and that a single incumbent firm attempts to deter entry. First, this project develops and extends a new theory of non.informative advertising, in which apparently wasteful advertisements are used to coordinate consumer purchases when economies of scale exist and price information is difficult to communicate. The analysis provides insight into observed retail advertisements, existing empirical puzzles, and a new game.theoretic methodology. The project also explores empirically the extent to which non.price advertising lowers prices. Second, consumers lacking precise price information may nevertheless restrain monopoly pricing by boycotting firms that have previously exercised monopoly power. The ability of consumers to credibility coordinate a boycott will be shown to depend on the direction of scale economies. This work draws a heretofore unexplored connection between scale economies and monopoly power. Finally, the project examines coordination among firms. When an entrant uses firms' prices as signals of the profitability of entry, incumbent firms will wish to coordinate the selection of signals. The inability to coordinate will result in signaling equilibria that involve no distortion in price. This analysis reverses previous single incumbent predictions and constitutes a methodological advance into multiple.signal.sender models. This is an exciting project that provides new insights into a wide range of substantive issues in industrial organization as well as improving our understanding of the way firms and consumers coordinate their actions in markets. The project contributes substantively and methodological to our understanding of retail advertising, consumer boycotts as a means of restraining monopoly power and entry deterrence by multiple firms in a given industry.