nep-ind New Economics Papers
on Industrial Organization
Issue of 2005‒04‒16
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price Competition and Product Differentiation when Goods have Network Effects By Klaus CONRAD
  2. The determining factors of entry of new firms into industrial sectors: a survey By Christian Garavaglia
  3. Patents Hinder Collusion By Klaus Kultti; Tuomas Takalo; Juuso Toikka
  4. U.S. Domestic Airline Pricing, 1995-2004 By Severin Borenstein
  5. Financing of Media Firms: Does Competition Matter? By Kind, Hans Jarle; Nilssen, Tore; Sørgard, Lars
  6. Bank Mergers, Competition and Liquidity By Carletti, Elena; Hartmann, Philipp; Spagnolo, Giancarlo
  7. Hard Core Cartels and Avoidance of Investigation in the Presence of an Antitrust Authority By Gianmaria Martini
  8. Endogenous Timing in a Mixed Oligopoly with Foreign Competitors By Yuanzhu Lu
  9. Stable pricing in monopoly and equilibrium-core of cost games By Vincent Iehlé
  10. Advertising in the US Personal Computer Industry By Michelle Sovinsky Goeree
  11. Impact of Market Entry and Exit on EU Productivity and Growth Performance By Michele Cincera; Olivia Galgau
  12. E-commerce, two-sided markets and info-mediation By Alexandre Gaudeul; Bruno Jullien
  13. Peanut Butter Patents Versus the New Economy: Does the Increased Rate of Patenting Signal More Invention or Just Lower Standards? By Paroma Sanyal
  14. Asymmetric Wholesale Pricing: Theory and Evidence By Sourav Ray; Haipeng Chen; Mark Bergen; Daniel Levy

  1. By: Klaus CONRAD (University of Mannheim Department of Economics)
    Abstract: The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be either one with the firm offering the conventional engine as the only producer, one with the firm offering the new technology as the only producer, or one in which both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important. In order to find out whether private decision on the type of engine coincides with a socially optimal product differentiation, we determine the position of the two types of engine by a welfare maximizing authority.
    Keywords: Price competition; Quality competition; Environmental awareness; Network effects; Automobiles.
    JEL: L Q H L
    Date: 2005–02–07
  2. By: Christian Garavaglia (Cattaneo University (LIUC))
    Abstract: Entry is a common feature of all industries and it represents a key aspect to be studied in order to understand the dynamics that characterise the evolution of industrial sectors. It is the purpose of this paper to analyse the process of entry of firms into markets and the nature of the factors that could play a role in determining it and in shaping the evolution of market structures. Different fields of economic literature examine the dynamic process of entry of new firms. In this paper, we focus our attention on the differences that characterise these approaches: the traditional approach, the technological regime theory, the role of “competence-enhancing” and “competence-destroying” technological change, the industry life cycle theory, the role of information and uncertainty, the organisational ecology approach and the psychological view. We claim that the relationship of the entry processes with the evolution of market structures, then, can be deeply understood only if we take into account the distinctions and the complementarities offered by these views.
    Date: 2004–03
  3. By: Klaus Kultti (University of Helsinki); Tuomas Takalo (University of Toulouse & Bank of Finland); Juuso Toikka (Helsinki School of Economics)
    Abstract: We argue that a patent system makes collusion among innovators more difficult. Our simple argument is based on two properties of the patent system. First, a patent not only protects against infringement but also against retaliation by former collusion members. Second, a deviator has an equal chance with former collusion members to get a patent on new innovations. We show that if a patent system reduces spillovers, it renders collusion impossible. Moreover, it is possible to design a patent system that simultaneously increases knowledge spillovers and eliminates collusion
    Keywords: Patens, Collusion, Secrecy, Innovation
    JEL: L
    Date: 2005–03–31
  4. By: Severin Borenstein (Haas School of Business, University of California, Berkeley)
    Abstract: Between 1995 and 2004, I find that airline prices fell more than 20% adjusted for inflation. I also show that premia at hub airports declined and that there is now substantially less disparity between the cheaper and more expensive airports than there was a decade ago. Still, I find that prices remain quite high at a few dominated airports.
    Keywords: Airline Competition, Airline Hubs, Price Indices
    JEL: L13 L93 E31
    Date: 2005–04–14
  5. By: Kind, Hans Jarle (Norwegian School of Economics and Business Administration); Nilssen, Tore (Dept. of Economics, University of Oslo); Sørgard, Lars (Norwegian Competition Authority)
    Abstract: This paper analyses how competition between media firms influences the way they are financed. In a setting where monopoly media firms choose to be completely financed by consumer payments, competition may lead the media firms to be financed by advertising as well. The closer substitutes the media firms’ products are, the less they rely on consumer payment and the more they rely on advertising revenues. If media firms can invest in programming, they invest more the less differentiated the media products are perceived to be.
    Keywords: Media; Advertising; Two-sided markets
    JEL: L22 L82 L86 M37
    Date: 2005–04–06
  6. By: Carletti, Elena (Center for Financial Studies); Hartmann, Philipp (European Central Bank); Spagnolo, Giancarlo (Stockholm School of Economics)
    Abstract: We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger creates an internal money market that affects reserve holdings and induces financial cost advantages, but also withdraws liquidity from the interbank market. Loan market competition modifies the heterogeneity in the size of banks, thus affecting aggregate liquidity. Mergers among large banks tend to increase aggregate liquidity needs and thus the liquidity provision in monetary operations by the central bank.
    Keywords: Credit market competition; bank reserves; internal money market; banking system liquidity
    JEL: D43 G21 G28 L13
    Date: 2005–03–01
  7. By: Gianmaria Martini (University of Bergamo)
    Abstract: Hard Core Cartels aim to design, being aware of the presence of an antitrust authority, market practices granting avoidance of antitrust investigations. We show, in a dynamic game, that they can reach this goal and get extra--normal profits. However, the bulk of this opportunity does not lay, here, in limiting price changes across periods (as in Harrington [2004b]), but rather in sending a signal to the authority which has a twofold effect: (1) it does make evident that cartel's members are currently not engaged in an ``excessive'' degree of collusion, (2) it credibly shows that this moderate collusive activity has a persistence effect, i.e. it will be maintained also in future periods. We also show that antitrust remedies (e.g. behavioral constraints or injunction reliefs) are more powerful, in limiting the collusive activity, than fines. Last, we show that social welfare is higher if Hard Core Cartels have limited information about the type of authority (i.e. tough or accommodating) they are facing.
    JEL: D43 L13 L41
    Date: 2005–02–23
  8. By: Yuanzhu Lu (National University of Singapore)
    Abstract: Endogenous order of moves is analyzed in a mixed oligopoly with one public firm, n1 domestic private firms and n2 foreign private firms, where the firms first choose the timing for choosing their quantities. We consider the observable delay game of Hamilton and Slutsky (1990) in the context of a quantity setting mixed oligopoly where firms first choose the timing of choosing their quantities before quantity choice and find subgame perfect Nash equilibria (SPNE). The main result is that the public firm chooses to be a follower of all the domestic private firms and not to be a leader of all the foreign private firms, and that the number of SPNE depends on the number of domestic private firms and of foreign private firms.
    Keywords: Mixed Oligopoly; Endogenous Timing; Foreign Competitors
    JEL: C72 D43 H42 L13
    Date: 2005–03–01
  9. By: Vincent Iehlé (CERMSEM)
    Abstract: We prove the existence of subsidy free and sustainable pricing schedule in multiproduct contestable markets. We allow firms to discriminate the local markets that are composed by a set of the products line and a set of agents. Results are obtained under an assumption of fair sharing cost and under boundary condition of demand functions. The pricing problem is modelled in terms of equilibrium-core allocations of parameterized cost games.
    Keywords: Cooperative games, contestable markets, sustainability, subsidy free, parameterized cost games
    JEL: C71 L11 L12
    Date: 2004–10
  10. By: Michelle Sovinsky Goeree (Claremont McKenna College)
    Abstract: Traditional models of consumer choice assume consumers are aware of all products for sale.This assumption is questionable, especially when applied to markets characterized by a high degree of change, such as the personal computer (PC) industry. I present an empirical discrete-choice model of limited information on the part of consumers, where advertising influences the set of products from which consumers choose to purchase. Multi-product firms choose prices and advertising in each medium to maximize their profits. I apply the model to the US PC market, in which advertising expenditures are over $2 billion annually. The estimation technique incorporates macro and micro data from three sources. Estimated median industry markups are 19% over production costs. The high industry markups are explained in part by the fact that consumers know only some of the products for sale.Indeed estimates from traditional consumer choice models predict median markups of one fourth this magnitude. I find that product-specific demand curves are biased towards being too elastic under traditional models of consumer choice. The estimates suggest that PC firms use advertising media to target high-income households, that there are returns to scope in group advertising, and that word-of-mouth or experience plays a role in informing consumers. The top firms engage in higher than average advertising and earn higher than average markups.
    JEL: L15 D12 D21 M37 L63
    Date: 2005–03–10
  11. By: Michele Cincera (Université Libre de Bruxelles-DULBEA-CERT & CEPR); Olivia Galgau (Université Libre de Bruxelles-DULBEA)
    Abstract: The European Union and its Member States have been engaged in product market reforms over a long period with notable reforms including the Single Market Program and the Lisbon Agenda launched in March 2000. Product market reforms are seen as exerting both a direct and an indirect impact on productivity, however, the net effects of the direct effect were found to be small. This study concentrates on the impact of product market reforms on firm entry and exit that can itself be decomposed into two effects: internal restructuring which refers to productivity growth of individual firms present in the industry and external restructuring whereby the process of market selection leads to a reallocation of resources among individual firms. The change in firm entry and exit will in turn affect macroeconomic performance.
    Keywords: Market entry and exit, product market reforms, macroeconomic performance
    JEL: L16 L50 O47 O52
    Date: 2005–03–28
  12. By: Alexandre Gaudeul (University of East Anglia - Norwich and ESRC-CCP); Bruno Jullien (IDEI - GREMAQ - University of Toulouse)
    Abstract: Participants in a market, buyers and sellers, may need the service of an intermediary who will put them into contact and give them information about their potential trading partner. The intermediary chooses what price it will charge to each side to have access to its service. It also chooses what information it will reveal, for example to the buyer about the value of the seller’s product. In a market with network externalities, it would be optimal that everybody had access to the other side, as each side wants as many agents from the other side to be present as possible. This is however not feasible as the intermediary must charge positive access prices if it is to make any profit. In a market with asymmetric information, it would be optimal that all information about the buyers’ and sellers’ valuation for the traded product be available, but the intermediary will want to conceal or manipulate that information to increase its profit. The paper examines in the first part how network externalities play out in the intermediary’s access pricing strategies in both a monopoly and a competitive setting. In the second part, the paper shows how the intermediary will strategically manipulate and conceal information to extract the surplus from trade in the market it intermediates.
    Keywords: Intermediation, internet, asymmetric information, information goods, network effects, two sided markets, matching.
    JEL: D4 L1
    Date: 2005–03–31
  13. By: Paroma Sanyal (Brandeis University)
    Abstract: The rate of patenting in the U.S. has exploded in the last half of the 1990s. It is widely believed that the increase in patent grants is at least partly a result of the apparent decline in examination standards. There has been little exploration, however, of the theoretical prediction that a decline in examination standards would itself induce an increase in dubious applications. We estimate a simultaneous equation model, in which the number applications depend on the perceived rigor of the examination process, amongst other things and patent grants depend on the number and quality of applications. We have a multi-dimensional panel, with data on the application and grant rates for each year, countries of origin, and jurisdiction of examination. We find that a ‘loosening’ of the grants standards by one percent increases applications by 8 percent in the full sample and by 3 percent in the Non-US sample. This result points to the importance of accounting for the endogenous application response particularly for the US case. Controlling for this effect, we find that application elasticity of grants is around 0.124 for the full sample and 0.145 for the Non-US one, and is declining over time in both. In addition countries whose patent applications are more likely to be successful in the US are more likely to be successful in other countries as well. These findings confirm that inventors respond to increased likelihood of success at the patent office by filing more applications, but also confirm earlier findings that the surge in patenting in the US in the last two decades appears to be driven to a significant extent by an increase in the underlying invention rate.
    Keywords: Patents, Examination Standard
    JEL: L10 O31 O34
    Date: 2005–04–13
  14. By: Sourav Ray (McMaster University); Haipeng Chen (University of Miami); Mark Bergen (University of Minnesota); Daniel Levy (Bar- Ilan University)
    Abstract: Asymmetric pricing is the phenomenon where prices rise more readily than they fall. We articulate, and provide empirical support for, a theory of asymmetric pricing in wholesale prices. In particular, we show how wholesale prices may be asymmetric in the small but symmetric in the large, when retailers face costs of price adjustments. Such retailers will not adjust prices for small changes in their costs. Upstream manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes. The implication is asymmetric – small wholesale increases are more profitable because manufacturers will not lose customers from higher retail prices; yet, small wholesale decreases are less profitable, because these will not create lower retail prices, hence no extra revenue from greater sales. For larger changes, this asymmetry at wholesale vanishes as the costs of changing prices are compensated by increases in retailers’ revenue that result from correspondingly large retail price changes. We first present a formal economic model of a channel with forward looking retailers facing costs of price adjustment to derive the testable propositions. Next, we test these on manufacturer prices in a supermarket scanner dataset to find support for our theory. We discuss the contributions of the results for the asymmetric pricing, distribution channels and cost of price adjustment literatures, and implications for public policy.
    Keywords: Asymmetric Pricing, Channel Pricing, Costs of Price Adjustment, Menu Costs, Wholesale Prices, Channels of Distribution, Retailing, Scanner Data
    JEL: E31 E12 L11 L16 L22 L81 M21 M31
    Date: 2005–03–24

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