nep-ind New Economics Papers
on Industrial Organization
Issue of 2005‒06‒14
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Advertising and Pricing at Multiple-Output Firms: Evidence from US Thrift Institutions By DeYoung, Robert; Örs, Evren
  2. Do Mergers Improve Information? Evidence from the Loan Market By Panetta, Fabio; Schivardi, Fabiano; Shum, Matthew
  3. Entry, Cost Reduction and Competition in The Portuguese Mobile Telephone Industry By Gagnepain, Philippe; Pereira, Pedro
  4. Welfare Trade-Offs in US Rail Mergers By Ivaldi, Marc; McCullough, Gerard
  5. Dynamic Monopoly Pricing and Herding By Bose, Subir; Orosel, Gerhard O; Ottaviani, Marco; Vesterlund, Lise
  6. Should Uniform Pricing Contraints be Imposed on Entrants? By Hoernig, Steffen
  7. Perfect Price Discrimination is not So Perfect By Sara Hsu; David Kiefer

  1. By: DeYoung, Robert; Örs, Evren
    Abstract: We derive five hypotheses regarding market competition, price, and advertising from a theoretical model of a profit maximizing depository institution, and test these conjectures in a simultaneous system of deposit interest rates and advertising expenditures for a data panel of 1,867 thrift institutions that offer 13 different deposit products in 666 local markets in the US between 1994 and 2000. We find some support for each of our hypotheses – branding, information, Dorfman-Steiner, structure-advertising, and structure-price – with the strength of the results often depending on the attributes of the deposit products or the characteristics of the thrifts.
    Keywords: advertising; depository institutions; structure-performance
    JEL: G21 L10
    Date: 2004–12
  2. By: Panetta, Fabio; Schivardi, Fabiano; Shum, Matthew
    Abstract: We examine the informational effects of M&As by investigating whether bank mergers improve banks’ ability to screen borrowers. By exploiting a dataset in which we observe a measure of a borrower’s default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while non-risky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using ‘hard’ information more intensively.
    Keywords: asymmetric information; banking; mergers
    JEL: G21 L15
    Date: 2005–03
  3. By: Gagnepain, Philippe; Pereira, Pedro
    Abstract: We study the effect of entry on costs and competition in the Portuguese mobile telephony industry. We construct and estimate a model that includes demand, network, and cost equations. The latter accounts for inefficiency and cost reducing effort. We show that failure to account for cost reducing effort leads to biased estimates of competition in the industry. We also find that our estimated price-cost margins are similar to hypothetical Nash margins, if firms are patient, and have optimistic beliefs about the industry growth. Finally, our results suggest that the entry of a third operator in 1998 led to significant cost reductions, and fostered competition.
    Keywords: competition; efficiency; empirical analysis; entry; mobile telephony
    JEL: L13 L43 L93
    Date: 2005–04
  4. By: Ivaldi, Marc; McCullough, Gerard
    Abstract: Since the publication by Williamson (1968) of his seminal paper on antitrust there has been a growing recognition by regulators of the need to assess trade-offs between merger-related efficiency gains and merger-induced increases in market power. This paper addresses that need by presenting a structural econometric model of recent mergers in the US rail industry. The paper extends the structural methodology by evaluating actual (as opposed to simulated) merger effects and by incorporating parametric estimates of merger efficiencies. Our empirical finding is that consumer surplus in US rail freight markets increased by about 30% between 1986 and 2001 despite dramatic industry consolidation, suggesting that to date the Williamson trade-off has favoured rail customers. We find that behaviour in these markets is consistent with the Kreps-Scheinkman (1983) model of a two-stage game where capacities are chosen first and then prices are set to give the Cournot outcome.
    Keywords: differentiated product markets; logit models; merger analysis; railroads
    JEL: L11 L13 L41 L92
    Date: 2005–04
  5. By: Bose, Subir; Orosel, Gerhard O; Ottaviani, Marco; Vesterlund, Lise
    Abstract: This paper studies dynamic pricing by a monopolist selling to buyers who learn from each other’s purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market.
    Keywords: herd behaviour; informational cascade; monopoly; public information; social learning
    JEL: D83 L12 L15
    Date: 2005–04
  6. By: Hoernig, Steffen
    Abstract: This paper analyses the effects of universal service obligations, such as uniform pricing, coverage constraints and price caps, on markets newly opened to competition, e.g. broadband services. We show that the requirement of uniform pricing has strong repercussions on coverage decisions. Imposed on the incumbent only, it may distort his coverage decision downward to avoid duopoly entry. If also imposed on entrants it increases the likelihood that entry leads to independent monopolies rather than competition. A large enough coverage constraint on the incumbent re-establishes incentives for duopoly entry, but may lead to higher prices.
    Keywords: coverage constraints; entry; price caps; uniform pricing; universal service obligations
    JEL: L43 L51 L52
    Date: 2005–05
  7. By: Sara Hsu; David Kiefer
    Abstract: The foundation of the accepted theory on two-part tariffs is the partial equilibrium analysis first developed by Oi (1971). He argues that the profit maximum obtains from a lump-sum payment (equal to the consumer surplus) plus a unit price (equal to marginal cost), and that the resulting allocation is Pareto efficient because it is identical to perfect competition (except for lump-sum transfers to the monopoly). He shows that this outcome is identical to first-degree price discrimination. This analysis is widely included in undergraduate and graduate level textbooks, and is often cited as a basis for the public regulation of utilities. A few general equilibrium papers also validate Oi’s partial equilibrium conclusion. By contrast, we present a general equilibrium counterexample that shows that this conventional conclusion cannot be generally correct.
    Keywords: Oi; partial equalibrium analysis; price discrimination
    Date: 2005–04

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