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Essays on Strategic Pricing and Quality Decisions

  • Author(s): Choi, Ji-Hung
  • Advisor(s): Tyagi, Rajeev K
  • Kolay, Sreya
  • et al.
Abstract

In the first essay, we study a business‐to‐business (B2B) contract between truck

carriers (sellers) and shippers (buyers). With the increase in the price of oil, fuel

surcharges are now widely used in the transportation industry. However, there is suspicion

that truck carriers use fuel surcharges to make profits beyond the cost of fuel. The purpose of this paper is to apply economic theory to investigate why freight carriers impose fuel surcharges instead of raising the freight rate. We analyze how well the formula for fuel surcharges widely used in the transportation industry mirrors truck carriers’ fuel cost changes. The analysis shows that, in a market where both the seller and the buyer are risk averse against the actual fuel price volatility, imposing a fuel surcharge can prevent the buyer’s utility from being overly reduced. Hence the seller can extract more of the buyer’s utility. If the seller is sufficiently risk averse, implementing a fuel surcharge prevents the seller from losing expected profit due to cost uncertainty. Therefore, both the seller and the buyer are willing to make a contract even when each individual’s risk averseness is sufficiently high if a fuel surcharges schedule is offered. In addition, when there are multiple buyers, a lower type buyer is more likely to bear the burden of risk due to fuel price uncertainty.

In the second essay, we study channel member’s strategic price and quality

decisions on their products. It has been conventionally known that the introduction of a

store brand can be used as a tool for customer segmentation or store profitability. More

recent studies investigate the similarity in quality levels between store and national

brands, but ignored the retailers’ competitive behaviors. This paper investigates how

retailers design store brand products under different market characteristics, such as the

intensity of competition, consumer heterogeneity, and the manufacturer’s strategic

decisions. We find that symmetric retailers have an incentive to decrease the product

quality of their store brands as the competition among them gets more intense, while a

monopolistic retailer positions its store brand product relatively close to the national

brand.

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