nep-ind New Economics Papers
on Industrial Organization
Issue of 2006‒08‒26
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Incentive for Vertical Integration By Nicholas Economides
  2. Pricing of Complementary Goods and Network Effects* By Nicholas Economides; V. Brian Viard
  3. Digital Rights Management and the Pricing of Digital Products By Yooki Park; Suzanne Scotchmer
  4. Congestion Pricing in an Internet Market By Jose Canals-Cerda
  5. Patents, Price Controls and Access to New Drugs: How Policy Affects Global Market Entry By Jean O. Lanjouw
  6. The Doubtful Profitability of Foggy Pricing By Eugenio J. Miravete
  7. Quantifying the Benefits of Entry into Local Phone Service, By Nicholas Economides; V. Brian Viard; Katja Seim

  1. By: Nicholas Economides (Stern School of Business, NYU)
    Abstract: This paper evaluates the incentive of firms to vertically integrate in a simple 2X2 Bertrand model of two substitutes that are each comprised of two complementary components. It confirms that all prices fall as a result of a vertical merger. Further, we find that, when the composite goods are poor substitutes, producers of complementary components are better off after integration. Thus, at equilibrium, each pair of complementary goods is produced by a single firm (parallel vertical integration). In contrast, when the composite goods are close substitutes, vertical integration reduces profits of the merging firms and is therefore undesirable. Thus, at equilibrium, all four products are produced by independent firms (independent ownership). The reason for the change in the direction of the incentive to merge is that, as the composite goods become closer substitutes, competition between them reduces prices (in comparison to full monopoly) thereby eliminating the usefulness of a vertical merger in accomplishing the same price effect. We also find that, for intermediate levels of substitution, firms producing complementary components prefer to merge only if the substitute good is produced by an integrated firm. Thus, for intermediate levels of substitution, both parallel vertical integration and independent ownership are equilibria. When the demand system is symmetric, total surplus is higher in parallel vertical integration, for all degrees of substitution among the products, even for the case when the goods are close substitutes and parallel vertical integration is not the equilibrium outcome. Thus, the market provides less vertical integration than is optimal from a social surplus maximizing point of view.
    Keywords: Mergers, vertical integration
    JEL: L1 D4
    Date: 2005–01
  2. By: Nicholas Economides (Stern School of Business, NYU); V. Brian Viard (Graduate School of Business, Stanford University)
    Abstract: We discuss the case of a monopolist of a base good in the presence of a complementary good provided either by it or by another firm. We assess and calibrate the extent of the influence on the profits from the base good that is created by the existence of the complementary good, i.e., the extent of the network effect. We establish an equivalence between a model of a base and a complementary good and a reduced-form model of the base good in which network effects are assumed in the consumers’ utility functions as a surrogate for the presence of direct or indirect network effects, such as complementary goods produced by other firms. We also assess and calibrate the influence on profits of the intensity of network effects and quality improvements in both goods. We evaluate the incentive that a monopolist of the base good has to improve its quality rather than that of the complementary good under different market structures. Finally, based on our results, we discuss a possible explanation of the fact that Microsoft Office has a significantly higher price than Microsoft Windows although both products have comparable market shares.
    JEL: L12 L13 C63 D42 D43
    Date: 2005–11
  3. By: Yooki Park (University of California, Berkeley); Suzanne Scotchmer (University of California, Berkeley)
    Abstract: Digital products such as movies, music and computer software are protected both by self-help measures such as encryption and copy controls, and by the legal right to prevent copying. We explore how digital rights management and other technical protections a®ect the pricing of content, and consequently, why content users, content vendors, and antitrust authorities might have di®erent views on what technical capabilities should be deployed. We discuss the potential for \collusion through technology."
    Keywords: technical protections, DRM, antitrust, trusted systems
    JEL: L13 L14 L15 K21 O33
    Date: 2004–09–30
  4. By: Jose Canals-Cerda (University of Colorado at Boulder)
    Abstract: This paper analyzes a unique dataset of art auctions on eBay. We study the behavior of buyers and sellers, demand and supply, by means of a novel structural estimation approach. Our empirical framework considers the process of arrival of new bidders as well as the distribution of bidder valuations of artworks being auctioned. We use this empirical framework to quantify the e(ect of market congestion, and congestion pricing strategies implemented by the market intermediary. Because we explicitly model the process of arrival of new bidders, we can estimate the e(ect of congestion pricing on the number of bidders, the distribution of bidders’ valuations, and the final selling price. Using the structural model we can also measure the impact of congestion pricing on the revenues of the artists and the market intermediary, as well as its e(ect on consumer surplus. Our results indicate that the congestion pricing policy acts as a coordination mechanism that facilitates the match between buyers and sellers.
    JEL: C51 C72 D44 L11 L14
    Date: 2005–09
  5. By: Jean O. Lanjouw
    Abstract: We consider how patent rights and price regulation affect whether new drugs are marketed in a country, and how quickly. The analysis covers a large sample of 68 countries at all income levels and includes all drug launches over the period 1982-2002. It uses newly compiled information on legal and regulatory policy, and is the first systematic analysis of the determinants of drug launch in poor countries. Price control tends to discourage rapid product entry, while the results for patents are mixed. There is evidence that local capacity to innovate matters and that international pricing externalities may play a role.
    Keywords: patent, drugs, access, market entry, price control
    JEL: D62 D4 K2 K10 I11 I18
  6. By: Eugenio J. Miravete (University of Pennsylvania)
    Abstract: This paper studies whether competition may induce firms abandoning deceptive pricing strategies aimed to profit from mistaken choices of consumers. The empirical analysis focuses on the pricing practices of early U.S. cellular firms, both under monopoly and duopoly. Foggy tariff options are those that are dominated by another option or a combination of other tariff options offered by the firm. I also define a measure of fogginess of non-dominated tariffs based on the range of airtime usage for which they are the least expensive option among those available. Results indicate that firms offer more dominated tariff options in a competitive market than under monopoly. While markets are profitable, perhaps because they grow or because firms collude, the use of foggy tactics is not frequent. However, if the market is more mature, or if firms do not cooperate, thus reducing the return to their investment, then they commonly turn to foggy pricing.
    Keywords: Nonlinear Pricing; Foggy Strategies; Co-opetition
    JEL: D43 L96 M21
    Date: 2004–10
  7. By: Nicholas Economides (Stern School of Business, NYU); V. Brian Viard (Graduate School of Business, Stanford University); Katja Seim (Stanford University)
    Abstract: See #46
    JEL: D43 K23 L11 L13 L96
    Date: 2005–11

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