nep-ind New Economics Papers
on Industrial Organization
Issue of 2005‒02‒13
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Advertising, Brand Loyalty and Pricing By Ioana Chioveanu
  2. Bigger and Better: A Dynamic Regulatory Mechanism for Optimum Quality By De Fraja, Gianni; Iozzi, Alberto
  3. Price Competition in a Differentiated Products Duopoly Under Network Effects By Griva, Krina; Vettas, Nikolaos
  4. Does Microsoft Stifle Innovation? Dominant Firms, Imitation and R&D Incentives By Cabral, Luís M B; Polak, Ben
  5. Competition, Incomplete Discrimination and Versioning By Diaw, Khaled; Pouyet, Jérôme
  6. Competition, Consumer Welfare and Monopoly Power By Donald J. Brown; G.A. Wood

  1. By: Ioana Chioveanu
  2. By: De Fraja, Gianni; Iozzi, Alberto
    Abstract: Vogelsang and Finsinger’s seminal paper (Bell Journal of Economics, 1979) proposes a mechanism for price regulation with some desirable properties, such as convergence to a second best optimum. This mechanism applies to situations where quality is fixed: in practice, quality can be varied by the firm, and regulators have typically imposed constraints on the firm’s quality choice. This Paper lays a rigorous theoretical foundation to the inclusion of quality measures in the constraints faced by a regulated firm. We identify a potential pitfall in the approach taken in practice by regulators, and show that, in order to avoid it, the regulated firm should be subject to an additional constraint, which, loosely speaking, requires firms’ choices not to be too erratic.
    Keywords: price cap; quality; regulation; RPI-X
    Date: 2004–08
  3. By: Griva, Krina; Vettas, Nikolaos
    Abstract: We examine price competition under product-specific network effects, in a duopoly where the products are differentiated horizontally and vertically. When consumers' expectations are not affected by prices, firms may share the market equally, or one firm (possibly the low-quality one) may capture the entire market. When product qualities are different, we may also have interior asymmetric equilibria. With expectations affected by prices, firms' competition becomes more intense and the high quality firm captures a larger market share.
    Keywords: network effects; price competition; product differentiation; product variety; quality
    JEL: D43 L13
    Date: 2004–08
  4. By: Cabral, Luís M B; Polak, Ben
    Abstract: We provide a simple framework to analyse the effect of firm dominance on incentives for R&D. An increase in firm dominance, which we measure by a premium in consumer valuation, increases the dominant firm's incentives and decreases the rival firm's incentives for R&D. These changes influence the probability of innovation through two effects: changes in total R&D effort and changes in how this total is distributed between the two firms. For a given level of total research effort, the shift from the rival firm to the dominant firm is a good thing as it decreases the likelihood of duplicate innovation (we call this the duplication effect). The shift in research effort is not one-to-one, however. The dominant firm's benefit from increased dominance is more inframarginal than marginal when compared to the rival firm's disincentive. As a result, total research effort decreases when firm dominance increases (we call this the total effort effect). We show the total effort effect dominates the duplication effect when intellectual property protection is weak, and the opposite when property rights are strong. That is, firm dominance is good for innovation when (but only when) property rights are strong. We also examine consumer and social surplus.
    Keywords: dominant firm; imitation; innovation; R&D
    JEL: L13 L41 O31
    Date: 2004–08
  5. By: Diaw, Khaled; Pouyet, Jérôme
    Abstract: Two producers offer differentiated goods to a representative consumer. The buyer has distinct marginal valuations for the quality of the products. Each producer knows perfectly the consumer’s taste for its own product, but remains uninformed about its taste for the rival’s product. When each product cannot be purchased in isolation of the other one, a phenomenon of endogenous preferences arises since a firm’s offer to the consumer depends on the information unknown by the rival firm. Multiple equilibria emerge and the consumer’s rent increases with their valuation for one product and decreases with the valuation for the other product. This provides some foundations for the phenomenon of versioning, which has been observed in some digital goods markets. By contrast, when each product can be purchased in isolation of the other one, at the unique equilibrium consumers with larger valuations for a product earn higher rents. The analysis is undertaken under two alternative pricing policies: in the partially-discriminatory case, producers make use of the known information only; in the fully-discriminatory case, each producer offers second-degree price discriminates the consumer according to the unknown information. We show that, sometimes, firms prefer partial to full discrimination to soften competition.
    Keywords: price competition; price discrimination; versioning
    JEL: D82 L13
    Date: 2004–09
  6. By: Donald J. Brown (Cowles Foundation, Yale University); G.A. Wood
    Abstract: An applied general equilibrium analysis of monopoly power is proposed as an alternative to the partial equilibrium analyses of monopoly pricing current in antitrust economics. This analysis introduces a new notion of market equilibrium where firms with monopoly power are cost-minimizing price-takers in competitive factor markets and make supracompetitive profits in equilibrium, i.e., the monopoly price exceeds the marginal cost of production. We assume that the primary goals of antitrust policy are the promotion of competition and the enhancement of consumer welfare. To that end, we use Debreu's coefficient of resource utilization to determine the counterfactual competitive price levels in monopolized markets and then impute the economic costs of monopolization.
    Keywords: Monopoly power, Antitrust economics, Applied general equilibrium analysis
    JEL: D42 D58 D61 L12 L41
    Date: 2004–05

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