nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒02‒24
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Entry Decision and Pricing Policies By Sílvia Jorge; Cesaltina Pires
  2. Discriminatory Limit Pricing By Sílvia Jorge; Cesaltina Pires
  3. Efficiency Gains and Structural Remedies in Merger Control By Vasconcelos, Helder
  4. Anti- versus Pro-Competitive Mergers By Fridolfsson, Sven-Olof
  5. Endogenous Capacities and Price Competition: The Role of Demand Uncertainty By de Frutos, Maria-Angeles; Fabra, Natalia

  1. By: Sílvia Jorge (Universidade de Aveiro); Cesaltina Pires (Universidade de Évora)
    Abstract: We extend the analysis of the impact of firms' pricing policies upon entry to a framework where price competition and differentiated products are present. We consider a model where an incumbent serves two distinct and independent geographical markets and an entrant may enter in one of the markets. Entry under discriminatory pricing is more likely than under uniform pricing when entry is profitable under discriminatory pricing but unprofitable under uniform pricing. Our results show entry under discriminatory pricing may be more, less or equally likely than under uniform pricing. We show that the degree of product substitutability affects the impact of pricing policies upon entry decision.
    Keywords: Entry, Product Differentiation, Discriminatory Pricing, Uniform Pricing
    JEL: D40 L11 L13
    Date: 2007–02
  2. By: Sílvia Jorge (Universidade de Aveiro); Cesaltina Pires (Universidade de Évora)
    Abstract: We consider a two-period framework where a multimarket incumbent firm faces, in one of the markets, a single potential entrant offering a differentiated product. The incumbent has private information about his production cost and may use both pre-entry prices as predatory signals. We find multiple pure strategy perfect bayesian equilibria. Using equilibrium refine- ments, we show that there is always a unique reasonable perfect bayesian equilibrium. Our results show that in some cases this unique equilibrium entails a downward distortion in both low cost incumbent's pre-entry prices. Moreover, we show that this distortion is identical in both markets and increasing with the discount factor, the degree of product substitutability and the efficiency of the entrant.
    Keywords: Entry Deterrence, Product Differentiation, Asymmetric Information, Discriminatory Pricing
    JEL: D40 D82 L11 L12 L13
    Date: 2007–02
  3. By: Vasconcelos, Helder
    Abstract: This paper studies the role of structural remedies in merger control in a Cournot setting where (endogenous) mergers are motivated by prospective efficiency gains and must be submitted to an Antitrust Authority (AA) which might require partial divestiture for approval. Both positive and negative effects of merger remedies are identified. First, structural remedies create new merger opportunities to firms. Second, when divestitures are required, the AA over-fixes, i.e., goes beyond the recreation of the level of competition that existed prior to the transaction. Finally, by insisting in over-fixing, the AA may discourage firms to look for more efficient mergers, inducing a final outcome where consumers' surplus is lower than if divestitures couldn't be required. Overall, however, structural remedies are shown to be good: consumers' surplus ex-ante is higher with than without remedies.
    Keywords: efficiency gains; endogenous mergers; failing firm defence.; merger remedies
    JEL: D43 L13 L41 L51
    Date: 2007–02
  4. By: Fridolfsson, Sven-Olof (Research Institute of Industrial Economics)
    Abstract: In a framework where mergers are mutually excluding, I show that firms pursue anti- rather than (alternative) pro-competitive mergers. Potential outsiders to anti-competitive mergers refrain from pursuing pro-competitive mergers if the positive externalities from anti-competitive mergers are strong enough. Potential outsiders to pro-competitive mergers pursue anti-competitive mergers if the negative externalities from the pro-competitive mergers are strong enough. Potential participants in anti-competitive mergers are cheap targets due to the risk of becoming outsiders to pro-competitive mergers. Firms may even pursue an unprofitable and anti-competitive merger, when alternative mergers are profitable and pro-competitive.
    Keywords: Anti- and Pro-Competitive Mergers; Consumers' Welfare; Coalition Formation; Endogenous Split of Surplus
    JEL: L12 L13 L41
    Date: 2007–02–05
  5. By: de Frutos, Maria-Angeles; Fabra, Natalia
    Abstract: This paper analyzes a model of capacity choice followed by price competition under demand uncertainty. Under various assumptions regarding the nature and timing of demand realizations, we obtain general predictions concerning the role of demand uncertainty on equilibrium outcomes. We show that it reduces the multiplicity of equilibria, it may rule out the existence of symmetric equilibria, and it leads to endogenous capacity asymmetries even though firms are ex-ante symmetric. Furthermore, as compared to the certainty equivalent game, demand uncertainty reduces prices and increases consumer surplus, but it also decreases total welfare because of the emergence of idle capacity. By relying on the analysis of firms' reaction functions as well as on the theory of submodular games, we are able to show that a subgame perfect equilibrium always exists and to fully characterize it.
    Keywords: demand uncertainty; investment; price competition; submodular game
    JEL: D43 D80 L11
    Date: 2007–02

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