nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒11‒10
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On a foundation for Cournot equilibrium By Alex Dickson; Roger Hartley
  2. DOWNSTREAM MERGERS AND ENTRY By Ramón Faulí-Oller; Joel Sandonís
  3. Time Series Econometrics in a Post-Acquisition Antitrust Analysis: The Brazilian Iron Ore Market By Eduardo P. S. Fiuza; Fabiana F.M. Tito
  4. Understanding the Lack of Competition in Natural Gas Markets: The Impact of Storage Ownership and Upstream Competition By Michal Mravec
  5. Revisiting the Price Elasticity of Gasoline Demand By Alfredo A. Romero
  6. Search Engine Advertising: Pricing Ads to Context By Avi Goldfarb; Catherine Tucker;
  7. Dynamic Advertising with Spillovers: Cartel vs Competitive Fringe By Luca Lambertini; Arsen Palestini

  1. By: Alex Dickson (Keele University, Centre for Economic Research and School of Economic and Management Studies); Roger Hartley (Department of Economics, University of Manchester)
    Abstract: We show in the context of a bilateral oligopoly where all agents are allowed to behave strategically the unexpected result that when the number of buyers becomes large the outcomes in a strategic market game do not converge to those at the Cournot equilibrium. However, convergence to Cournot outcomes is restored if the game is sequential: sellers move simultaneously as do buyers, but the former always move before the latter. This suggests that the ability to commit to supply decisions is an essential feature of Cournot equilibrium.
    Keywords: Cournot competition, strategic market game, strategic foundation.
    JEL: C72 D43 D51 L13
    Date: 2007–10
  2. By: Ramón Faulí-Oller (Universidad de Alicante); Joel Sandonís (Universidad de Alicante)
    Abstract: We consider an upstream firm selling an input to several downstream firms through observable two-part tariff contracts. Downstream firms can alternatively buy the input from a less efficient source of supply. We show that downstream mergers lead to lower wholesale prices. They translate into lower final prices only when the alternative supply is inefficient enough. Downstream mergers are very profitable in this setting and monopolization is the equilibrium outcome of a merger game even for unconcentrated markets. Finally, the expectation of monopolization stimulates wasteful entry of downstream firms in the industry, which calls for policy intervention.
    Keywords: downstream mergers, entry, two-part tariff contracts
    JEL: L11 L13 L14
    Date: 2007–11
  3. By: Eduardo P. S. Fiuza; Fabiana F.M. Tito
    Abstract: In Brazil, mergers and acquisitions are usually analyzed by the Antitrust Authorities ex post, following a SCP framework close to the Merger Guidelines applied in the USA. However, this framework was unable to address a set of acquisitions of four mining companies by the newly privatized national champion CVRD. The present article reports an econometric exercise undertaken by the Brazilian Ministry of Justice, which came to reinforce the definition of the relevant geographic market and to test for structural breaks in the price series. Though international prices Grangercaused domestic prices in Brazil, they explain less than a third of the variance. A price surge on the acquired miners? series was observed above the export price increase not long after the acquisitions, such that a structural break could not be rejected.
    Date: 2007–10
  4. By: Michal Mravec
    Abstract: Motivated by the failure of competition to emerge after the natural gas market in the Czech Republic was liberalized, I explore the impact of natural gas storage ownership and upstream competition on the downstream level. I extend standard Cournot models to understand current and likely future developments, paying particular attention to the impact of market liberalization on a country characterized by a lack of domestic production, limited foreign upstream competition, and highly concentrated (and bundled) control over an essential input in the production of the final product: gas storage. I show that the upstream producer may practice his market power to capture some of the benefits of liberalization and increase the wholesale price, which hinders the desired decline of the end-user price in the long run. This pricing change in turn makes the entry of new players in the transition period more difficult. I furthermore analyze three prominent storage structure scenarios and conclude that higher consumer welfare can be reached only in the case of regulated storage access.
    Keywords: Natural gas, liberalization, deregulation, successive oligopoly, monopoly, Czech Republic, gas storage.
    JEL: D42 D43 L11 L12 L13 L51
    Date: 2007–09
  5. By: Alfredo A. Romero (Department of Economics, College of William and Mary)
    Abstract: In this document, we investigate the evolution of the income elasticity and the price elasticity of the demand for gasoline over the period 1975-2006. By using the Probabilistic Reduction Approach, we were able to model changes in mean heterogeneity and variance heterogeneity directly into the model. This method allowed us to determine the timing and the size of shifts in the elasticities. Our estimates are consistent with the current literature: there has been a shift in the price elasticity of gasoline demand. This shift, not present in the income elasticity, occurred almost at the beginning of the period of study. We use these estimates to compute several welfare measures. We also present a sketch of the relationship between a Monthly Fixed Effect panel data model and a Time Series Model with Monthly Dummy Variables.
    Keywords: Price Elasticity, Income Elasticity, Gasoline Demand, Time Heterogeneity, Dummy Variables, Monthly Fixed Effects Panel Data Models, Time Series Models, Compensating Variation, Deadweight Loss.
    JEL: D12 L91 Q31 Q41 C22 C23 C50
    Date: 2007–10–29
  6. By: Avi Goldfarb (Rotman School of Management, University of Toronto); Catherine Tucker (Sloan School of Management, MIT);
    Abstract: Each search term put into a search engine produces a separate set of results. Correspondingly, each of the sets of ads displayed alongside these results is priced using a separate auction. Search engine advertising prices therefore reflect willingness to pay for context, unlike traditional ad prices that reflect willingness to pay for audience demographics. A growing policy debate asks if this marketing strategy merely makes advertising more informative, or whether it also effectively extracts rent from advertisers. To inform this debate and to better understand search engine advertising more generally, we examine advertising prices paid by lawyers for 174 Google search terms in 195 locations and exploit a natural experiment in “ambulance-chaser” regulations across states. Where contingency fee limits exist, the relative price of advertising is $2.27 lower. This suggests that context-based pricing allows prices to reflect heterogeneity in the profitability of customer leads. When lawyers cannot contact a client in writing, the relative price per ad click is $0.93 higher. This suggests that context-based pricing allows prices to reflect heterogeneity in advertisers’ other advertising options, even within a given local market. Thus, our results suggest that search engine advertising does give market power to the media platform; however, this market power is mitigated by substantial competition from offline marketing communications channels.
    Keywords: search engines, advertising, market power, advertising prices
    JEL: L86 M37
    Date: 2007–09
  7. By: Luca Lambertini (University of Bologna and The Rimini Centre for Economics Analysis, Italy.); Arsen Palestini (University of Bologna, Italy)
    Abstract: A differential oligopoly game with advertising is investigated, where different dynamics occur between two groups of agents, the former playing a competitive Nash game and the latter cooperating as a cartel. Sufficient conditions for stability and a qualitative analysis of the profit ratio and social welfare at equilibrium are provided. A threshold value for the size of the competitive fringe is pointed out by a suitable numerical simulation.
    Keywords: Advertising, Differential games, Oligopoly, Collusion
    JEL: C73 D43 D92 L13 M37
    Date: 2007–07

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