nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒04‒09
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Longitudinal Study on the Performance of U.S. Pharmaceutical Firms: The Increasing Role of Marketing By Pattikawa, L.H.
  2. Deregulating the Norwegian Pharmaceuticals Market - Consequences for Costs and Availability By Rudholm, Niklas
  3. Entry and Market Selection of Firms: A Laboratory Study By Jordi Brandts; Ayça Ebru Giritligil
  4. A Simple Model of Outsourcing with Cournot Competition By Michael Hübler
  5. Competition for Firms in an Oligopolistic Industry: Do Firms or Countries Have to Pay? By Haufler, Andreas; Wooton, Ian
  6. Generic entry into a regulated pharmaceutical market By Iván Moreno Torres; Jaume Puig; Joan-Ramon Borrell-Arqué
  7. Pricing behaviour under competition in the UK electricity supply industry By Giulietti, Monica; Otero, Jesus; Waterson, Michael
  8. Two Tales on Resale By Felix Höffler; Klaus M. Schmidt
  9. Dynamic environmental taxes in an international duopoly By Shuichi Ohori
  10. Oligopoly Model of a Debit Card Network By Manchev, Peter
  11. Rationing-Based Price Discrimination By Ruhai Wu; Xianjun Geng; Andrew B. Whinston
  12. The Effects of the Asymmetry of Information Intrafirms on Oligopolistic Market Outcomes By Testuya Shinkai; Makoto Okamura

  1. By: Pattikawa, L.H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Nowadays, the U.S. pharmaceutical industry has been under thorough scrutiny. Popular press claims of intensive marketing activities that go beyond R&D, the strong increase of me-too drugs, and, at the same time, the high industry profitability have contributed to public skepticism. Despite this increasing role of marketing, studies on the profitability of pharmaceutical firms mainly focus on the role of R&D. In this paper, we investigate the impact of advertising and product differentiation on pharmaceutical firms? market value over the period 1971-2005. Especially, we examine whether there has been a change in the pattern of returns in these variables over this period. Our results show that, nowadays, pharmaceutical firms? performance is not only closely linked to their R&D activities but also to marketing activities such as advertising and product differentiation. Since the 1990s, the return of advertising has become three times larger than that of R&D. In addition, we found that the impact of product differentiation came largely from the introduction of the so called incrementally modified drugs (IMD). The vast increase of the number of IMDs since the 1990s is likely to contribute to this development. Our results emphasize the role of advertising and product differentiation in the virtuous rent-seeking behavior in the pharmaceutical industry.
    Keywords: Advertising;Product differentiation;Marketing;Market value;Panel data;Pharmaceutical industry;
    Date: 2007–03–28
    URL: http://d.repec.org/n?u=RePEc:dgr:eureri:300010401&r=ind
  2. By: Rudholm, Niklas (The Swedish Retail Institute)
    Abstract: The aim of this paper is to analyze the impact of the deregulation of the Norwegian pharmaceuticals market in 2001 on costs and availability of pharmaceutical products. Data has been collected from the annual reports of a sample of Norwegian pharmacies before and after the deregulation of the market. In addition, data regarding the number of pharmacies in each region in Norway has also been collected. In order to study costs, a translog function is estimated. Regressin models for the number of pharmacies in each region in Norway are also estimated. The results show that the costs of the individual pharmacies have not decreased as a consequence of the deregulation of the Norwegian pharmaceuticals market. The deregulation of the market did, however, increase the availability to pharmacy services substantially. The number of pharmacies increased from 392 in year 2000 to 524 in June 2004.
    Keywords: Deregulation; pharmaceuticals; translog cost function
    JEL: I11 I18 L11
    Date: 2007–04–04
    URL: http://d.repec.org/n?u=RePEc:hhs:huiwps:0007&r=ind
  3. By: Jordi Brandts; Ayça Ebru Giritligil
    Abstract: We study competition in experimental markets in which two incumbents face entry by three other firms. Our treatments vary with respect to three factors: sequential vs. block or simultaneous entry, the cost functions of entrants and the amount of time during which incumbents are protected from entry. Before entry incumbents are able to collude in all cases. When all firms' costs are the same entry always leads consumer surplus and profits to their equilibrium levels. When entrants are more efficient than incumbents, entry leads consumer surplus to equilibrium. However, total profits remain below equilibrium, due to the fact that the inefficient incumbents produce too much and efficient entrants produce too little. Market behavior is satisfactory from the consumers' standpoint, but does not yield adequate signals to other potential entrants. These results are not affected by whether entry is simultaneous or sequential. The length of the incumbency phase does have some subtle effects.
    Keywords: Market selection, Imperfect competititon, Entry, Experiments
    JEL: C72 D43 D83 L13
    Date: 2006–09–01
    URL: http://d.repec.org/n?u=RePEc:aub:autbar:690.07&r=ind
  4. By: Michael Hübler
    Abstract: The paper analyses a partial equilibrium outsourcing model with Cournot competition in intermediate good production. Final production is located in western Europe, whereas the intermediate good can be manufactured by a western (outsourcing) or eastern European supplier (offshore outsourcing). Interregional production (factor) allocation depending on factor prices and productivity levels is investigated analytically and graphically. The main results are: Higher production costs in one region reduce intermediate good production in both regions leading to a substitution effect between high- and low-skilled labour intensive inputs rather than between eastern and western low-skilled labour intensive inputs. The sensitivity of outsourcing activities to production cost changes is highest when the interregional cost differential is smallest.
    Keywords: Offshoring, outsourcing, Cournot competition, intermediate good
    JEL: D24 D43 F20 J31
    Date: 2007–03
    URL: http://d.repec.org/n?u=RePEc:kie:kieliw:1320&r=ind
  5. By: Haufler, Andreas; Wooton, Ian
    Abstract: We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in a symmetric equilibrium where firms are dispersed. As economic integration proceeds, equilibrium taxes decline, switching from positive to negative levels, and then rise as trade costs fall even further. A range of trade costs is identified where economic integration raises the welfare of the small country, but lowers welfare in the large country.
    Keywords: tax and subsidy competition; oligopolistic markets
    JEL: H25 H73 F15
    Date: 2007–03
    URL: http://d.repec.org/n?u=RePEc:lmu:muenec:1399&r=ind
  6. By: Iván Moreno Torres; Jaume Puig; Joan-Ramon Borrell-Arqué
    Abstract: The aim of this paper is to analyse empirically entry decisions by generic firms into markets with tough regulation. Generic drugs might be a key driver of competition and cost containment in pharmaceutical markets. The dynamics of reforms of patents and pricing across drug markets in Spain are useful to identify the impact of regulations on generic entry. Estimates from a count data model using a panel of 86 active ingredients during the 1999–2005 period show that the drivers of generic entry in markets with price regulations are similar to less regulated markets: generic firms entries are positively affected by the market size and time trend, and negatively affected by the number of incumbent laboratories and the number of substitutes active ingredients. We also find that contrary to what policy makers expected, the system of reference pricing restrains considerably the generic entry. Short run brand name drug price reductions are obtained by governments at the cost of long run benefits from fostering generic entry and post-patent competition into the markets.
    Keywords: Entry; Generic Drugs; Pharmaceutical industry; Reference pricing
    JEL: I11 L11 L65
    Date: 2007–02
    URL: http://d.repec.org/n?u=RePEc:upf:upfses:1014&r=ind
  7. By: Giulietti, Monica (Aston Business School); Otero, Jesus (Universidad del Rosario, Colombia); Waterson, Michael (University of Warwick)
    Abstract: This paper investigates the evolution of electricity prices for domestic customers in the UK following the introduction of competition. The empirical analysis is based on a panel data set containing detailed information about electricity supply prices over the period 1999 to 2006. The analysis aims to test theoretical hypotheses about the nature of consumers’ switching and search costs. The econometric analysis of persistence and price dispersion provides only limited support for the view that the market is becoming more competitive and also indicates that there remain significant potential benefits to consumers from searching alternative suppliers.
    Keywords: electricity supply ; price competition ; convergence ; dynamic panels ; crosssectional dependency
    JEL: L43 L13 L94 C22 C23
    Date: 2007
    URL: http://d.repec.org/n?u=RePEc:wrk:warwec:790&r=ind
  8. By: Felix Höffler (Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany. hoeffler@coll.mpg.de); Klaus M. Schmidt (Department of Economics, University of Munich, Ludwigstrasse 28, 80539 Muenchen, Germany. klaus.schmidt@lrz.uni-muenchen.de)
    Abstract: In some markets vertically integrated firms sell directly to final customers hut also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard "retail minus X regulation" may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.
    Keywords: Resale regulation, wholesale, spatial product differentiation, non-spatial product differentiation, vertical restraints
    JEL: D43 L11 L42 L51
    Date: 2007–03
    URL: http://d.repec.org/n?u=RePEc:trf:wpaper:198&r=ind
  9. By: Shuichi Ohori (Institute of Economic Research, Kyoto University)
    Abstract: This paper studies a dynamic game of environmental taxes between two countries in a Cournot duopoly. Based on the assumption of linear demand functions, we demonstrate that the environmental tax in the steady-state equilibrium is lower in a dynamic environmental tax game than in a static environmental one. Therefore, the dynamic behavior of the governments results in an increase in the environmental damage. Further, as a result of international cooperation on environmental taxes between two countries in the first period, there is an increase in the optimal environmental tax; this is due to the decrease in the effect of the rent-shifting.
    Keywords: environmental tax, dynamic programming, international duopoly
    JEL: F18 H23 Q58
    Date: 2007–01
    URL: http://d.repec.org/n?u=RePEc:kyo:wpaper:628&r=ind
  10. By: Manchev, Peter
    Abstract: The paper builds an oligopoly model of a debit card network. It examines the competition between debit card issuers. We show that there is an optimal pricing for the debit card network, which maximizes all issuer's revenues. The paper also shows that establishing a link between debit card networks averages the costs provided that there is no growth in the customer's usage of the networks, resulting from the link.
    Keywords: debit card; payment networks; switch fees; access pricing
    JEL: G21 L13
    Date: 2006–07–28
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:2460&r=ind
  11. By: Ruhai Wu (Department of Economics, College of Business, Florida Atlantic University); Xianjun Geng (Department of Information Systems and Operations Management, University of Washington Business School); Andrew B. Whinston (Department of Information, Risk, and Operations Management, McCombs School of Business, University of Texas, Austin)
    Abstract: This paper provides a theory of rationing where rationing functions as an effective mechanism for second degree price discrimination by a monopoly seller. When a seller charges multiple prices on homogenous products to all consumers, supply at the lowest price is limited and rationed among consumers. The supply shortage differentiates products sold at the lowest price and those sold at a higher price. When high-valuation consumers identify themselves at the higher price, the seller may extract more consumer surplus and increase his profit. In the paper, we address two common rationing-based price discrimination strategies, multiple-price menu and premium advance selling.. We also show that rationing-based price discrimination can be combined with other classical price discrimination strategies to further increase the seller’s profit.
    Keywords: rationing, price discrimination
    JEL: D42 L12
    Date: 2006–12
    URL: http://d.repec.org/n?u=RePEc:fal:wpaper:06010&r=ind
  12. By: Testuya Shinkai (Kwansei Gakuin University); Makoto Okamura (Hiroshima University)
    Abstract: We consider an oligopoly with a principal-agent relationship, in which a firm's marginal cost is decreasing in a manager's managerial effort and is subject to an additive uncertainty. Two types of firms operate: one displays symmetric information between the owner and the manager, another presents asymmetric information. We show that if the marginal cost's derivative of the manager is sufficiently small, then the expected effort level in an asymmetric information firm exceeds that in a symmetric one. We also show that the expected total output and consumer surplus may reduce at equilibrium, as the number of symmetric information firms increases.
    Keywords: asymmetric information, incentive scheme, competition effort, oligopoly
    JEL: D82 L13
    Date: 2006–04
    URL: http://d.repec.org/n?u=RePEc:kgu:wpaper:29&r=ind

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