nep-ind New Economics Papers
on Industrial Organization
Issue of 2005‒11‒19
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Antitrust Analysis for the Internet Upstream Market: a BGP Approach By Alessio D’Ignazio; Emanuele Giovannetti
  2. Statistical Moments Analysis of Production and Profits in Multi-Product Cournot Oligopoly By Hennessy, David A.; Lapan, Harvey E.
  3. Advertising and Price Signaling of Quality in a Duopoly with Endogenous Locations By Philippe Bontems; Valérie Meunier
  4. Information Exchange, Market Transparency and Dynamic Oligopoly By Per Baltzer Overgaard; Peter Møllgaard
  5. Pricing Discretion and Price Regulation in Competitive Industries By Alberto Iozzi; Roberta Sestini
  6. Dominant Firms, Barriers to Entry Capital and Entry Dynamics By Willi Semmler; Mika Kato
  7. Advertising, Pricing & Market Structure in Competitive Matching Markets By Edner Bataille; Benoit Julien

  1. By: Alessio D’Ignazio; Emanuele Giovannetti
    Abstract: In this paper we study concentration in the European Internet upstream access market. Measurement of market concentration depends on correctly defining the market, but this is not always possible as Antitrust authorities often lack reliable pricing and traffic data. We present an alternative approach based on the inference of the Internet Operators interconnection policies using micro-data sourced from their Border Gateway Protocol tables. Firstly we propose a price-independent algorithm for defining both the vertical and geographical relevant market boundaries, then we calculate market concentration indexes using two novel metrics. These assess, for each undertaking, both its role in terms of essential network facility and of wholesale market dominance. The results, applied to four leading Internet Exchange Points in London, Amsterdam, Frankfurt and Milan, show that some vertical segments of these markets are extremely competitive, while others are highly concentrated, putting them within the special attention category of the Merger Guidelines.
    Keywords: Network Industries, Internet, Market Concentration, Essential Facilities, BGP
    JEL: K21 L40 L86 L96
    Date: 2005–11
  2. By: Hennessy, David A.; Lapan, Harvey E.
    Abstract: Our context involves firms producing products at constant marginal costs, and behaving as Cournot oligopolists. When preferences are quasi-linear, we study the relationships between second moments of unit costs and second moments of firm-level production. Larger variance in unit costs of a product increases own output variance and variance of any other output. We also investigate how second moments of unit costs affect the first and second moments of profit across firms. Larger variance in unit costs can reduce profit variance, even for a single product oligopoly.
    Keywords: Complementarity; Covariance matrix; Separability
    JEL: C72 C8 C9 C6 C7 D0 D1 D2 D3 D4 D43
    Date: 2005–11–08
  3. By: Philippe Bontems (Université des Sciences Sociales de Toulouse); Valérie Meunier (University of Aarhus)
    Abstract: We analyze a two-sender quality-signaling game in a duopoly model where goods are horizontally and vertically dierentiated. While locations are chosen under quality uncertainty, firms choose prices and advertising expenditures being privately informed about their types. We show that pure price separation is impossible, and that dissipative advertising is necessary to ensure existence of separating equilibria. Equilibrium refinements discard all pooling equilibria and select a unique separating equilibrium. When vertical differentiation is not too high, horizontal differentiation is maximum, the high-quality firm advertises, and both firms adopt prices that are distorted upwards (compared to the symmetric-information benchmark). When vertical differentiation is high, firms choose identical locations and ex post, only the high-quality firm obtains positive profits. Incomplete information and the subsequent signaling activity are shown to increase the set of parameters values for which maximum horizontal differentiation occurs.
    Keywords: advertising; location choice; quality; incomplete information; multi-sender signaling game
    JEL: D43 L15
    Date: 2005–11
  4. By: Per Baltzer Overgaard (University of Aarhus); Peter Møllgaard (Copenhagen Business School)
    Abstract: In the economics literature, various views on the likely (efficiency) effects of information exchange, communication between firms and market transparency present themselves. Often these views on information flows are highly conflicting. On the one hand, it is argued that increased information dissemination improves firm planning to the benefit of society (including customers) and/or allows potential customers to make the right decisions given their preferences. On the other hand, the literature also suggests that increased information dissemination can have significant coordinating or collusive potential to the benefit of firms but at the expense of society at large (mainly, potential customers). In this chapter, we try to make sense of these views, with the aim of presenting some simple lessons for antitrust practice. In addition, the chapter presents some cases, from both sides of the Atlantic, where informational issues have played a significant role.
    Date: 2005–11
  5. By: Alberto Iozzi (Universita degli Studi di Roma); Roberta Sestini (University of Rome I; Universita D'Annunzio)
    Abstract: Price capped firms enjoy a large degree of pricing discretion, which may damage captive customers and have adverse effects on the development of competition when regulated firms also operate in competitive industries. We study two alternative regulatory approaches to limit such a discretion. The first one places a fixed upper limit to the prices charged in captive markets; the other constrains the captive prices relatively to the price asset in the more competitive markets. We refer to the former approach as the Absolute regime, and to the latter as the Relative regime. We analyse the effects on prices, competition, and welfare stemming from the two regimes in a simple model where the regulated firm faces competition by a competitive fringe in some of the markets it serves. We find that the Relative regime is not much more effective in protecting captive customers since captive prices may be identical under both regimes. Moreover, since it makes more costly to the incumbent regulated firm to reduce its competitive price, this is weakly higher than under the Absolute regime. However, this is also the reason why the Relative regime turns out to be more pro-competitive: the total output supplied by competitors and/or the number of firms entering the potentially competitive market might be enhanced under this rule. The effects on aggregate welfare are ambiguous. We provide some evidence that the Relative regime is more likely to positively affect consumers' surplus and social welfare the more efficient is the competitive fringe.
    Keywords: price regulation, pricing discretion, competition
    JEL: L13 L50
    Date: 2005–04–04
  6. By: Willi Semmler; Mika Kato (Department of Economics Howard University)
    Abstract: Recent literature in Industrial Organization has shown that the threat of entry limits the price setting power of dominant firms and stimulates the incumbents to increase innovations ---both leading to welfare improvements. On the other hand dominant firms as incumbents strive to build up entry preventing capital. In such an environment of heterogeneous firms, we study the dynamics of competition as suggested in an earlier paper by Brock (1983). When dominant firms face a threat of the competitive fringe’s entry in the industry they, therefore, will have an incentive to prevent it. Investing into barriers to entry capital through engaging in production activities with increasing returns and high adjustment cost of investment as well as through advertising, lobbying and patents the dominant firm can create thresholds above which fringe firms cannot induce price competition and stimulate innovations. The dominant firms thus face two types of investment: Entry-deterring investment and investment in physical capital for production activities. Depending on how the competitive fringe responds to the first type of investment, complex dynamics, multiple steady states and thresholds, separating different domains of attraction, may emerge. Since the effectiveness of entry-deterring investment depends in part on regulatory rules set and enforced by antitrust institutions, we show how an antitrust and competition policy can be designed that may prevent the build up of entry preventing capital strengthening incentives for price competition and innovations
    Keywords: entry-deterring investment
    JEL: L1 L4
    Date: 2005–11–11
  7. By: Edner Bataille (California State University-Bakersfield); Benoit Julien (Australian Graduate School of Management, University of New South Wales)
    Abstract: This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers. Sellers' expenditure on directly informative advertising attracts consumers only probabilistically. Consumers who happen to observe advertisements randomize over the advertised sellers using symmetric mixed strategies. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed, including the interplay of prices and advertising with the market structure. The model generates a unimodal (inverted U-shape) relationship between both, individual and industry advertising level, and market structure. The relationship results from a trade off between a price effect and a market structure-matching effect. We find that the decentralized market has underprovision of advertising, both for individual sellers and industry wide, and that entry is excessive relative to the efficient level. We present a quantitative analysis to highlight properties of the models and to demonstrate the extent of inefficiency.
    Keywords: Advertising, pricing, market structure, endogenous matching, asymmetric information, efficiency.
    JEL: B21 C72 C78 D40 D43 D61 D83 J41 L11 M37
    Date: 2005–11–15

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