nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒01‒14
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Why Should a Firm Choose to Limit the Size of Its Market Area? By Marco Alderighi
  2. Competition, Monopoly Maintenance, and Consumer Switching Costs By Morita, Hodaka; Waldman, Michael
  3. Uniform pricing and social welfare By Bertoletti, Paolo
  4. Mergers, Litigation and Efficiency By Oliver Gürtler; Matthias Kräkel
  5. Economies of Scale and Spatial Scope in the European Airline Industry By Manuel Romero-Hernandez; Hugo Salgado
  6. Acquisition versus greenfield: The impact of the mode of foreign bank entry on information and bank lending rates By Sophie Claeys; Christa Hainz

  1. By: Marco Alderighi
    Abstract: We analyze a variant of the standard Dixit-Stiglitz (AER, 1977) model, adding transport costs and assuming that, in addition to price, a firm can choose the size of the market area and the quality of the product. We also modify the standard cost function, making variable costs and fixed costs increasing in both "reach" and quality. We characterize the solution of the model and we find the conditions under which a firm decides to limit the market area. Finally, we show that the firm's behavior is constrained socially optimal.
    Date: 2006–08
  2. By: Morita, Hodaka; Waldman, Michael
    Abstract: Significant attention has been paid to why a durable-goods producer with little or no market power would monopolize the maintenance market for its own product. This paper provides an explanation for this practice that is based on consumer switching costs and the choice of consumers between maintaining and replacing used units. In our explanation, if a firm does not monopolize the maintenance market for its own product, then consumers sometimes maintain used units when it would be efficient for the units to be replaced. In turn, the return to monopolizing the maintenance market is that the practice allows the firm to avoid this inefficiency. An interesting aspect of our analysis that has significant public-policy implications is that, in contrast to most previous explanations for why a durable-goods producer with little or no market power would monopolize the maintenance market for its own product, in our explanation the practice increases rather than decreases both social welfare and consumer welfare.
    Keywords: durable goods; aftermarkets; switching costs
    JEL: L12 L41
    Date: 2006–11
  3. By: Bertoletti, Paolo
    Abstract: We re-examine the case for uniform pricing in a monopolistic third-degree price-discrimination setting by introducing differentiated costs. A profit-maximizing monopolist could then use price differentiation to reduce the production of the more costly goods, thereby decreasing average cost and increasing welfare. Indeed, monopolistic price differentiation can improve welfare and also aggregate consumer surplus even if, as in the benchmark linear case, total output does not increase. Accordingly, the welfare criterion based on total output fails and should be replaced by the computation of well-defined price indexes. These results possibly pave the way for a more optimistic assessment of monopolistic pricing.
    Keywords: uniform pricing; third-degree price discrimination; welfare bounds; price and quantity indexes
    JEL: L51 D11 D42
    Date: 2005–09
  4. By: Oliver Gürtler (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany. tel: +49-228-739214, fax: +49-228-739210.; Matthias Kräkel (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany. tel: +49-228-739211, fax: +49-228-739210.
    Abstract: We consider antitrust enforcement within the adversarial model used by the United States. We show that, under the adversarial system, the Antitrust Authority may try to prohibit mergers also in those cases in which litigation is inefficient. Even if market concentration and technological disadvantages lead to a significant welfare reduction after merger, from society’s perspective the agency’s lawsuit may be inefficient. We can show that these inefficiencies may be aggravated if the takeover is hostile.
    Keywords: hostile takeover; litigation contest, merger
    JEL: D43 K21 L40
    Date: 2006–12
  5. By: Manuel Romero-Hernandez; Hugo Salgado
    Abstract: In this article we use four different indices to measure cost performance of the European Airline Industry. By using the number of routes as an indicator of Network Size, we are able to estimate indicators of Economies of Scale and Spatial Scope. By estimating total and variable cost functions we are also able to calculate an index of the excess capacity of the firms. For this purpose, we use data from the years 1984 to 1998, a period during which several deregulation measures were imposed on the European airline industry. Some of the implications of this deregulation process for the cost performance of the industry are presented and discussed. Our results suggest that in the year 1998, almost all the firms had Economics of Density in their existing networks, while several of the firms also had Economies of Scale and Economies of Spatial Scope. All of the firms had excess capacity of fixed inputs. These results support our hypothesis that fusion, alliance, and merger strategies followed by the principal European airlines after 1998 are not just explained by marketing strategies, but also by the cost structure of the industry.
    Date: 2006–08
  6. By: Sophie Claeys (Research Division, Sveriges Riksbank, SE-103 37 Stockholm and Ghent University, W. Wilsonplein 5D, B-9000 Ghent.; Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich.
    Abstract: Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from ten Eastern European countries for the period 1995-2003.
    Keywords: banking, foreign entry, mode of entry, interest rate, asymmetric information
    JEL: G21 D4 L31
    Date: 2006–11

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