nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒01‒13
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price and Capacity Competition By Daron Acemoglu; Kostas Bimpikis; Asuman Ozdaglar
  2. Competitiveness and Conjectural Variation in Duopoly Markets By Jim Jin; Osiris J. Parcero
  3. A Consumer Surplus Defense in Merger Control By Fridolfsson, Sven-Olof
  4. Industry Concentration and Welfare - On the Use of Stock Market Evidence from Horizontal Mergers By Fridolfsson, Sven-Olof; Stennek, Johan
  5. Competition vs. Regulation in Mobile Telecommunications By Stennek, Johan; Tangerås, Thomas
  6. Advertising and price signaling of quality in a duopoly with endogenous locations By Bontems, P.; Meunier, V.
  7. The Q-Theory of Mergers: International and Cross-Border Evidence By Peter L. Rousseau

  1. By: Daron Acemoglu; Kostas Bimpikis; Asuman Ozdaglar
    Abstract: We study the efficiency of oligopoly equilibria in a model where firms compete over capacities and prices. The motivating example is a communication network where service providers invest in capacities and then compete in prices. Our model economy corresponds to a two-stage game. First, firms (service providers) independently choose their capacity levels. Second, after the capacity levels are observed, they set prices. Given the capacities and prices, users (consumers) allocate their demands across the firms. We first establish the existence of pure strategy subgame perfect equilibria (oligopoly equilibria) and characterize the set of equilibria. These equilibria feature pure strategies along the equilibrium path, but off-the-equilibrium path they are supported by mixed strategies. We then investigate the efficiency properties of these equilibria, where "efficiency" is defined as the ratio of surplus in equilibrium relative to the first best. We show that efficiency in the worst oligopoly equilibria of this game can be arbitrarily low. However, if the best oligopoly equilibrium is selected (among multiple equilibria), the worst-case efficiency loss has a tight bound, approximately equal to 5/6 with 2 firms. This bound monotonically decreases towards zero when the number of firms increases. We also suggest a simple way of implementing the best oligopoly equilibrium. With two firms, this involves the lower-cost firm acting as a Stackelberg leader and choosing its capacity first. We show that in this Stackelberg game form, there exists a unique equilibrium corresponding to the best oligopoly equilibrium. We also show that an alternative game form where capacities and prices are chosen simultaneously always fails to have a pure strategy equilibrium. These results suggest that the timing of capacity and price choices in oligopolistic environments is important both for the existence of equilibrium and for the extent of efficiency losses in equilibrium.
    JEL: C72 L13
    Date: 2006–12
  2. By: Jim Jin; Osiris J. Parcero
    Abstract: Duopoly competition can take different forms: Bertrand, Cournot, Bertrand-Stackelberg, Cournot-Stackelberg and joint profit maximization. In comparing these market structures this paper make three contributions. First, we find a clear price (output) ranking among these five markets when goods are substitutes (complements). Second, these rankings can be explained by different levels of conjectural variation associated with each market structure. Third, in a more general non-linear duopoly model we find that CV in prices tends to hurt consumers, while CV in quantities is often good for social welfare. In this last case the policy recommendation for regulators seems to be to encourage the establishment of firms’ reputation in quantity responses, but to discourage it in price responses.
    Keywords: Optimal Bertrand, Cournot, Stackelberg, monopoly, ranking, conjectural variation.
    JEL: L11 L13 D43
    Date: 2006–12
  3. By: Fridolfsson, Sven-Olof (Research Institute of Industrial Economics)
    Abstract: A government wanting to promote an efficient allocation of resources as measured by the total surplus, should strategically delegate to its competition authority a welfare standard with a bias in favour of consumers. A consumer bias means that some welfare increasing mergers will be blocked. This is optimal, if the relevant alternative to the merger is another change in market structure that will even further increase the total surplus. Furthermore, a consumer bias is shown to enhance welfare even though it blocks some welfare increasing mergers when the relevant alternative is the status quo.
    Keywords: Merger Control; Competition Policy; Consumer Surplus
    JEL: L11 L13 L41
    Date: 2007–01–03
  4. By: Fridolfsson, Sven-Olof (Research Institute of Industrial Economics); Stennek, Johan (Research Institute of Industrial Economics)
    Abstract: There is diverging empirical evidence on the competitive effects of horizontal mergers: consumer prices (and thus presumably competitors' profits) often rise while competitors' share prices fall. Our model of endogenous mergers provides a possible reconciliation. It is demonstrated that anticompetitive mergers may reduce competitors' share prices, if the merger announcement informs the market that the competitors' lost a race to buy the target. Also the use of "first rumor" as an event may create similar problems of interpretation. We also indicate how the event-study methodology may be adapted to identify competitive effects and thus, the welfare consequences for consumers.
    Keywords: Mergers & Acquisitions; Event Studies; Antitrust; In-play; Coalition Formation
    JEL: G14 G34 L12 L41
    Date: 2006–12–06
  5. By: Stennek, Johan (Research Institute of Industrial Economics); Tangerås, Thomas (Research Institute of Industrial Economics)
    Abstract: This paper questions whether competition can replace sector-specific regulation of mobile telecommunications. We show that the monopolistic outcome prevails independently of market concentration when access prices are determined in bilateral negotiations. A light-handed regulatory policy can induce effective competition. Call prices are close to the marginal cost if the networks are sufficiently close substitutes. Neither demand nor cost information is required. A unique and symmetric call price equilibrium exists under symmetric access prices, provided that call demand is sufficiently inelastic. Existence encompasses the case of many networks and high network substitutability.
    Keywords: Network Competition; Two-way Access; Access Price Competition; Entry; Regulation; Network Substitutability
    JEL: L51 L96
    Date: 2006–12–20
  6. By: Bontems, P.; Meunier, V.
    Abstract: We analyze a two-sender quality-signaling game in a duopoly model where goods are horizontally and vertically differentiated. While locations are chosen under quality undertainty, firms choose prices and advertising expenditures being privately informed about their thpes. 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 at a maximum, the high-quality firm advertises, and both firms adopt prices that are distorted upwards (compared to the symmetric-informati on benchmark). When vertical differentiation is high, firms choose identical locations and espost, only the high-quality firm obtains positive profits and signals its type through advertising only. Incomplete information and the subsequant signaling activity are chowh to increase the set of parameters values for which maximum horizontal differentiation occurs. ...French Abstract : Les auteurs étudient dans cet article, un modèle de concurrence au sein d'un duopole dans un contexte de différenciation horizontale. Les produits vendus par les firmes peuvent aussi potentiellement différer selon leur qualité. Les firmes choisissent tout d'abord leurs localisations de manière séquentielle puis simultanément leurs prix. A l'étape de localisation, la qualité du suiveur est connaissance commune tandis que la qualité du leader est incertaine mais révélée de manière privée avant l'étape de compétition par les prix. Ils montrent que la perspective de devoir signaler une qualité haute par le prix induit le leader à accroître au maximum la différenciation horizontale du produit. Ce résultat contraste fortement avec l'équilibre en information complète, qui peut impliquer une différenciation minimale ou intermédiaire selon les paramètres du modèle. Ainsi, le principe de différentiation maximale est restauré en présence d'information incomplète.
    JEL: D43 L15
    Date: 2006
  7. By: Peter L. Rousseau (Vanderbilt University)
    Abstract: The main implications of the Q-theory of mergers are tested for United States and seven continental European countries in both the domestic and cross-border cases. I find that European firms, much like those in the United States, tend to use mergers and acquisitions to make large increases in their capital stocks, that this choice is more sensitive to the acquirer's Tobin's Q than its direct investment, and that mergers raise the efficiency of target assets. Data from cross-border mergers between U.S. acquirers and European targets support the theory most emphatically
    Keywords: reallocation, Tobin's Q, European Union
    JEL: O3 L2
    Date: 2006–12–03

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