Department of Economics University of Louisville Seal
   
Yong Chao
 
   
 Assistant Professor
 
 
Research Interests
 
  Applied Microeconomics Theory, Industrial Organization, Antitrust and Regulatory Policies, Behavioral Economics
 
Current Research Topics
 
  Three-Part Tariffs, All-Units Discounts, Bundled Discounts, Two-Sided Markets, Behavior-Based Pricing Strategy
   
Publications
   
  ¡°Strategic Effects of Three-Part Tariffs under Oligopoly.¡± International Economic Review 54(3): 977-1015.
 
  Abstract
 
  A three-part tariff refers to a pricing scheme consisting of a fixed fee, a free allowance of units up to which the marginal price is zero, and a positive per-unit price for additional demand beyond that allowance. The three-part tariff and its variations are commonly used in both final-goods and intermediate-goods markets. Recently, the offering of three-part tariffs and the like by dominant firms has become a prominent antitrust issue (e.g., U.S. v. Microsoft Corp. and AMD v. Intel). Existing studies have focused on monopoly models, interpreting the three-part tariff as a price discrimination device. In this paper, I investigate strategic effects of three-part tariffs in a sequential-move game and offer an equilibrium theory of three-part tariffs in a competitive context. I show that, compared with linear pricing equilibrium and two-part tariff equilibrium, a three-part tariff always strictly increases the dominant firm¡¯s (the leader¡¯s) profit when competing against a rival (the follower) with substitute products, in the absence of usual price discrimination motive. To explore the effects of a three-part tariff on welfare, I further perform comparative statics analysis using general differentiated linear demand system. I show that the competitive effect of a three-part tariff in contrast to linear pricing depends on the degree of substitutability between products: Competition is intensified when two products are more differentiated, yet softened when two products are more substitutable. This is in stark contrast with the competitive scenario posed by a two-part tariff: A two-part tariff always enhances competition and gives the highest total surplus of these three pricing schemes. Moreover, the rival firm always gets hurt in both profit and quantity sale when the dominant firm switches from linear pricing to a two-part tariff, yet it enjoys higher profit when the dominant firm moves from a two-part tariff to the more ornate three-part tariff, despite the fact that its quantity and market share are decreased even further. My findings offer a new perspective on three-part tariffs, a perspective which could help antitrust enforcement agencies distinguish the exclusionary three-part tariff from the pro-competitive one.
   
 
  Abstract
 
  We extend the traditional literature on bundling and the burgeoning literature on two-sided markets by presenting a theoretical monopoly model of mixed bundling in the context of the portable video game console market¡ªa prototypical two-sided market. We show that the monopoly platform¡¯s dominant strategy is to offer a mixed bundle rather than pure bundle or no bundle. Deviating from both traditional bundling literature and standard two-sided markets literature, we find that, under mixed bundling, both the standalone console price on the consumer side and the royalty rate on the game developer side are lower than their counterparts under independent pricing equilibrium. In our setting, mixed bundling acts as a price discrimination tool segmenting the market more efficiently as well as functions as a coordination device helping solve ¡°the chicken or the egg¡± problem in two-sided markets. After theoretically evaluating the impact mixed bundling has on prices and welfare, we further test the model predictions with new data from the portable video game console market in the early to middle 2000s, during which Nintendo was a monopolist. We employ a reduced form approach, and find empirical support for all theoretical predictions.
   
Research Papers
   
  ¡°All-Units Discount and Capacity Constraint¡± with Guofu Tan
 
  Abstract
 
  An all-units discount (AUD) is a pricing scheme that lowers a buyer’s marginal price on every unit purchased when the buyer’s purchase exceeds or is equal to a pre-specified threshold. The AUD and its variations are commonly used in both final-goods and intermediate-goods markets. The usual antitrust concern about the AUD and its variations is their potential foreclosure effects when adopted by a dominant firm to compete against a small rival. The existing literature has so far focused on interpreting the AUD as a price discrimination tool, investment incentive program, or rent-shifting instrument.
      In this article, we investigate strategic effects of volume-threshold based AUD used by a dominant firm in the presence of a smaller, capacity-constrained rival. We show that the AUD adopted by a dominant firm leads to a “partial foreclosure” of a capacity-constrained rival in the sense that the rival is under-supplied strictly below its capacity and its profit is reduced. The volume threshold under the AUD committed by the dominant firm helps expanding its sales at the expense of the small rival and may hurt the buyer. This result holds even when the rival has a lower marginal cost. When the rival’s capacity level is in the range of low values, the buyer is worse off under the AUD as compared to linear pricing. The intuition for our findings is that, due to the limited capacity of the rival, the dominant firm that has a “captive” portion of the buyer’s demand in the context of a single product is able to use the AUD to leverage its market power on the “captive” portion to the “competitive” portion of the demand, much like the tied-in selling strategy in the context of multiple products. Our analysis applies to other similar settings in which the dominant firm has some “captive” market when it offers “must-carry” brands or wider range of products.
   
 
  Abstract
 
  Using a game theoretic framework, we show that not only can pay-whatyou-want pricing generate positive profits, but it can also be more profitable than charging a fixed price to all consumers. Further, whenever it is more profitable, it is also Pareto-improving. We derive conditions in terms of two cost parameters, namely the marginal cost of production and the psychological cost of the consumer for paying too little compared to her reference price.
   
  ¡°Pay-What-You-Want Pricing and Competition: Breaking the Bertrand the Bertrand Trap¡± with Jose Fernandez and Babu Nahata (Under Review)
 
  Abstract
 
  Under pay-what-you-want (PWYW) pricing, each consumer has total control over the price she wants to pay, which could potentially result in negative profits for the firm. In the standard Bertrand competition, two identical firms earn zero profits when they both charge the uniform price. We show that when one firm deviates and uses PWYW pricing, both firms could earn positive profits in equilibrium, breaking the so-called Bertrand trap. Although behavioral concerns are the driving factors for voluntary payments under PWYW, they may not always help the viability of PWYW pricing in the presence of competition..
   
  ¡°All-Units Discount as an Anti-competitive Market Dividing Device¡± with Guofu Tan
   
  ¡°Platform Pricing and Competition¡± with Byung-Cheol Kim
   
  ¡°Bundled Loyalty Discount with Differentiated Products under Oligopoly¡±
   
  ¡°Three-Part Tariffs under Two-Dimensional Demand Uncertainties¡±
   
  ¡°Endogenous Entry Effects on Competition: Empirical Evidence from California Procurement Auctions¡±, Winner of Best Second-Year Paper Award at USC