nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒03‒06
eight papers chosen by
Russell Pittman
US Department of Justice

  1. Intra-firm Coordination and Horizontal Merger By Lilia Filipova; Peter Welzel
  2. Advertising in Specialized Markets: Example from the US Pharmaceutical Industry By Amrita Bhattacharyya
  4. Boutique Fuels and Market Power By Ujjayant Chakravorty; Céline Nauges
  5. Demand for Coffee: The Role of Prices, Preferences and Market Power By Durevall, Dick
  6. The Rules of Standard Setting Organizations: An Empirical Analysis By Benjamin Chiao; Josh Lerner; Jean Tirole
  7. Electricity Derivatives and the Spot Market in Italy. Mitigating Market Power in the Electricity Market By TERMINI VALERIA; CAVALLO LAURA
  8. Strategic Procurement, Openness and Market Structure By Maria del Carmen Garcia-Alonso; Paul Levine

  1. By: Lilia Filipova (University of Augsburg, Department of Economics); Peter Welzel (University of Augsburg, Department of Economics)
    Abstract: We examine the effects of ex post revelation of information about the risk type or the risk-reducing behavior of insureds in automobile insurance markets both for perfect competition and for monopoly. Specifically, we assume that insurers can offer a contract with information revelation ex post, i.e., after an accident has occurred, in addition to the usual second-best contracts. Under moral hazard this always leads to a Pareto-improvement of social welfare. For adverse selection we find that this is also true except when bad risks under self-selecting contracts received an information rent, i.e., under monopoly or under competition with cross-subsidization from low to high risks. Regulation can be used to establish Pareto-improvement also in these cases. Privacy concerns do not alter our positive welfare results.
    Keywords: information moral hazard, adverse selection, insurance
    JEL: D82 G22
    Date: 2005–02
  2. By: Amrita Bhattacharyya (Boston College)
    Abstract: Pharmaceutical companies spend billions of dollars on advertising prescription drugs to doctors and also to consumers directly. People wonder why is direct-to-consumer-advertising (DTCA) concentrated among only a few classes of drugs, what explains the within-class variation of DTCA, how are DTCA and physician advertising related. We analyze the advertising equilibriums in prescription drugs market and find that it is possible to have a sub-game perfect non-symmetric Nash-equilibrium when, (i)the number of patients who are aware of a treatment is very low, and (ii) there are very few people who insist on having a particular drug. Otherwise, for very familiar diseases a non-advertising equilibrium is most likely. We also find that, all competing brands in a class are likely to advertise to consumers if the number of insisting patients is very high. Finally, advertising to consumers does not substitute for advertising directed to physicians.
    Keywords: advertising, DTCA, prescription, expert, Nash equilibrium
    JEL: L0 M3 I0
    Date: 2005–02–28
  3. By: Roberts Waddle
    Abstract: This paper builds a theory of profit sharing between two firms in a duopoly market through which firms seek to increase their profits and, in turn, to limit the competition. We use a general model to show the direct (negative) and indirect (positive) effects of this strategy. We then focus on some oligopolistic models to analyze more deeply and more precisely these two opposite effects in search of the dominant one. We thus show that giving away profits is a rewarding strategy for firms in some (but not all) models of oligopolistic competition.
    Date: 2005–02
  4. By: Ujjayant Chakravorty; Céline Nauges
    Abstract: The US Clean Air Act allows individual states to implement their own clean fuel programs to address local or regional air quality concerns. These regulations have led to a proliferation of fuel blends known as “boutique fuels.” For each of the three grades of gasoline, more than 15 types of boutique fuels are currently in use, leading to about 45 different fuel blends in use nationally. These fuels are costly to produce, but they also segment the market and increase the market power of refiners. Using measures that differentiate gasoline regulation in a given state from those in neighboring states, we find that both cost and market segmentation significantly affect wholesale gasoline prices. In particular, the greater the regulatory “distance” between a state and its neighboring states, the higher the wholesale price in that state. Simulations suggest that for some states regulating a single boutique fuel nationally may lead to a counter-intuitive outcome: gasoline prices may decline, even though a larger share of their market will be under regulation.
    Date: 2005–02
  5. By: Durevall, Dick (Department of Economics, School of Economics and Commercial Law, Göteborg University)
    Abstract: The purpose of this paper is to evaluate the role of prices in determining demand for roasted coffee in Sweden. This is of interest because many believe that consumer prices are high relative to green coffee-bean prices, and that lower consumer prices would increase demand for coffee beans. Coffee demand is estimated on data for the period 1968-2002. In the long run, changing preferences appear to determine demand for roasted coffee, and a reduction in consumer prices would only have a temporary impact on consumption. Hence a permanent decrease in consumer prices would only increase exports of coffee beans to Sweden for a couple of years. <p>
    Keywords: Coffee exports; Coffee Prices; Market Power; Multinationals; Preferences; Sweden
    JEL: F14 F23 L13 L66 L81
    Date: 2005–02–28
  6. By: Benjamin Chiao; Josh Lerner; Jean Tirole
    Abstract: This paper empirically explores the procedures employed by standard-setting organizations. Consistent with Lerner-Tirole (2004), we find (a) a negative relationship between the extent to which an SSO is oriented to technology sponsors and the concession level required of sponsors and (b) a positive correlation between the sponsor-friendliness of the selected SSO and the quality of the standard. We also develop and test two extensions of the earlier model: the presence of provisions mandating royalty-free licensing is negatively associated with disclosure requirements, and when there are only a limited number of SSOs, the relationship between concessions and user friendliness is weaker.
    JEL: L2 O3
    Date: 2005–02
    Abstract: The increased uncertainty regarding electricity prices caused by the liberalization of the sector and the launch of wholesale spot electricity markets has led to the development of financial derivatives both in regulated and over-the-counter markets. The ability of the spot market to stimulate the economic efficiency and competitiveness of the energy sector depends crucially on its efficiency and liquidity. However, as the theoretical analyses developed after the Californian crisis show, the concentration of spot-market transactions in the day-ahead market in a non-competitive industry exposes electricity prices to excessive peaks and volatility. This is due to their higher exposure to the exercise of market power by the dominant producer as well as to contingent events. This paper argues that introducing a regulated market for standardized derivatives, while giving consumers a strategic role in the market, would contribute to solving the trade-off between the liquidity of the market and the stability of the system. Some interesting policy implications emerge
    Date: 2003–04
  8. By: Maria del Carmen Garcia-Alonso; Paul Levine
    Abstract: We examine strategic procurement behaviour by governments and its effect on market structure in sectors, such as defence, where the government is the dominant consumer. In a world economy with trade between producers, and between producers and non-producers, we use a modified Dixit-Stiglitz utility function with an independent taste for variety. Governments can, in effect, choose the number of domestic firms and their size by adjusting the procurement price. Unlike the standard model with no independent taste for variety and no external sector of non-producers, there are incentives for subsidies, openness impacts on industrial structure and there are potential gains from procurement coordination between producer countries.
    Keywords: procurement; openness; market structure; defence and pharmaceutical sectors
    JEL: F12 H56 L10
    Date: 2005–02

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