New Economics Papers
on Industrial Organization
Issue of 2005‒04‒03
five papers chosen by

  1. Inefficiency in Repeated Cournot Oligopoly Games By Harrison Cheng
  2. Interdependencies in the Dynamics of Firm Entry and Exit By Nyström, Kristina
  3. Do Vertical Mergers Facilitate Upstream Collusion? By Volker Nocke; Lucy White
  4. Price Discimination and Efficient Matching By Damiano, Ettore; Li, Hao
  5. Reciprocal dumping with Bertrand competition By Friberg, Richard; Ganslandt, Mattias

  1. By: Harrison Cheng
    Abstract: A widely accepted view says that Folk Theorem holds in the repeated Cournot oligopoly games with imperfect price signals satisfying generic conditions. We show that this view is not justi- fied. We argue that maintaining asymptotic joint monopoly outcome is not possible with noisy price signals. When firms have the choice of increasing outputs at equilibrium as a deviation strategy, it is not possible to maintain such collusive outcome, even if the discount rate is close to 1.
    Keywords: Oligopoly, ineffciency, repeated games, imperfect price signal, Folk Theorem
    JEL: D23 D8
    Date: 2005–01
  2. By: Nyström, Kristina (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper investigates the dynamics of firm entry and exit with a focus on differences between industrial sectors. The paper discusses how entry and exit rates in industrial sectors are affected by previous exit and entry rates. Economic theory presents two different approaches to how entry and exit of firms are interrelated to each other, the multiplier effect and the competition effect. This paper intends to investigate which force that is the predominant one. The empirical analysis is based on data for 25 Swedish manufacturing industries at the 2-digit SIC-level, for firms with more than five employees during the period 1991-2000. A dynamic panel data approach as suggested by Anderson and Hsio (1981) and Arellano and Bond (1991) are used in estimating the relationships. The empirical results find some evidence of the multiplier effect being the predominant effect explaining entry while competition effects are more important for explaining exit patterns.
    Keywords: Entry; exit; dynamic panel data
    JEL: C33 L10
    Date: 2005–03–18
  3. By: Volker Nocke (Department of Economics, University of Pennsylvania); Lucy White (Harvard Business School)
    Abstract: We investigate the impact of vertical mergers on upstream firms' ability to sustain tacit collusion in a repeated game. We identify several effects and show that the net effect of vertical integration is to facilitate collusion. Most importantly, vertical mergers facilitate collusion through the operation of an outlets effect: cheating unintegrated firms can no longer profitably sell to the downstream affiliates of their integrated rivals. However, vertical integration also gives rise to an opposing punishment effect: it is typically more difficult to punish an integrated structure, so that integrated firms are able to make more profits in the punishment phase than unintegrated upstream firms. When downstream firms can condition their prices or quantities on upstream firms' contract offers, two additional effects arise, both of which further facilitate upstream collusion. First, an unintegrated upstream firm's deviation profits are reduced by the reaction effect which arises since the downstream unit of the integrated firm will now react aggressively to upstream deviations. Second, an integrated firm's deviation profit is reduced by the lack-of-commitment effect as it cannot commit to its own downstream price when deviating upstream.
    Keywords: vertical merger, collusion, vertical restraint, vertical integration, repeated game, penal code
    JEL: L13 L42 D43
    Date: 2005–03–08
  4. By: Damiano, Ettore; Li, Hao
    Abstract: This paper considers the problem of a monopoly matchmaker that uses a schedule of entrance fees to sort different types of agents on the two sides of a matching market into exclusive meeting places, where agents randomly form pairwise matches. We make the standard assumption that the match value function exhibits complementarities, so that matching types at equal percentiles maximizes total match value and is efficient. We provide necessary and sufficient conditions for the revenue-maximizing sorting to be efficient. These conditions require the match value function, modified to incorporate the incentive cost of eliciting private type information, to exhibit complementarities along the efficient path of matching types at equal percentiles.
    Date: 2005–03–21
  5. By: Friberg, Richard (Dept. of Economics, Stockholm School of Economics); Ganslandt, Mattias (IUI)
    Abstract: This paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that welfare is a U-shaped function in the transport cost as long as trade occurs in equilibrium. With a Cournot duopoly trade can reduce welfare compared to autarchy for any degree of product differentiation. Under Bertrand competition we show that trade may reduce welfare compared to autarchy, if firms produce sufficiently close substitutes and the autarchy equilibrium is sufficiently competitive. Otherwise it can not.
    Keywords: Reciprocal dumping; intra-industry trade; oligopoly; product differentiation; transport costs
    JEL: F12 F15 L13
    Date: 2005–03–23

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