Presenter: Seongyeob Kim

Location: 368A Heady Hall

Title: Product Purchasing Contest: A Strategy to Leverage Competition among Consumers

Abstract: While contests are typically utilized as resource allocation and incentive mechanisms, they may also be a business strategy used by multi-product producers to improve profits. This strategy incentivizes consumers to repeatedly purchase a firm’s regular good (e.g., music albums) to maximize the expected value of winning the firm’s premium good (e.g., artist meet-and-greets) with limited availability. Consumers are thus effectively put in a product purchasing contest, generating public concerns over the potential harms to consumer welfare and social waste. Extending the classic Tullock contest (Tullock 1980), I propose a novel contest model where a firm’s regular and premium goods play a central role. Consumers derive utility from competing with the regular good purchases, while the firm optimally chooses the amount and quality of regular and premium goods.  The model generates two key findings. First, prohibiting product purchasing contest may cause unintended consequences, as the optimal contest achieves the first best outcome, though not in a Pareto-improving way (hurting consumers). Second, the optimal Tullock lottery outperforms alternative mechanisms such as all-pay and winner-pay auctions, suggesting that the traditional equivalence across the mechanisms does not hold. Still, winner-pay auctions may be a justified policy alternative as they help mitigate extreme welfare distribution between winners and losers.