nep-ind New Economics Papers
on Industrial Organization
Issue of 2008‒03‒08
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Cournot Duopoly with Capacity Limit Plants By Fabio TRAMONTANA; Laura GARDINI; Puu TONU
  2. Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions By Thomas J Holmes; David K Levine; James A Schmitz Jr
  3. Collusion in a One-Period Insurance Market with Adverse Selection By Alexander Alegria; Manuel Willington
  4. A Model of Vertical Oligopolistic Competition By Markus Reisinger; Monika Schnitzer
  5. Merger Control as Barrier to EU Banking Market Integration By Koehler, Matthias
  6. Entry Deterrence in Postal Service Markets By Beschorner, Patrick Frank Ernst
  7. ‘Make-or-Buy’ in International Oligopoly and the Role of Competitive Pressure By Dermot, Leahy; Catia , Montagna

  1. By: Fabio TRAMONTANA (Universita' Politecnica delle Marche, Dipartimento di Economia); Laura GARDINI (Universit… degli Studi di Urbino, Istituto di Scienze Economiche); Puu TONU (CERUM, Umea University, Sweden)
    Abstract: This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each firm is assumed to operate multiple plants, which can be run alone or in combination. Each firm has two plants with different capacity limits, so it has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal cost functions come in three disjoint pieces, so the reaction functions, derived on basis of global profit maximization, as well can consist of disjoint pieces. We first analyze the case in which the firms are taken as identical, and then the generic case. It is shown that stable Cournot equilibria may coexist with several other stable cycles. Then we compare the coexistent periodic attractors in terms of the resulting profits. The main property is the non-existence of unstable cycles. This is reflected in a particular bifurcation structure, due to border collision bifurcations, and to particular basin frontiers, related to the discontinuities.
    Keywords: Border Collision Bifurcations, Capacity Limits, Cournot, Discontinuous Reaction Functions, Duopoly, Nonlinear Dynamics
    JEL: C61 C62 C72 C73 D21 D24 L13
    Date: 2008–02
  2. By: Thomas J Holmes; David K Levine; James A Schmitz Jr
    Date: 2008–02–29
  3. By: Alexander Alegria (Facultad de Ciencias Económicas y Administrativas, Ponti?cia Universidad Javeriana de Cali, Colombia); Manuel Willington (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: We show how collusive outcomes may arise as equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on Inderst and Wambach (2001) model ?they show that the Rothschild and Stiglitz separating equilibrium always exists when there are capacity constraints? and assume that insurees must pay a minimum premium; which is a common feature on many health systems. In this setup, we show that there is a range of equilibria from the zero profit one in which low-risks implicitly subsidize high risks to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance while low risks’ coverage decrease as the firms profits increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused five of the largest private health insurers of collusion after they reduced the coverage offered to their customers and significantly raised their profits. Our model is consistent with this accusation.
    Keywords: adverse selection, collusion, insurance, capacity constraints
    JEL: L41 I11
    Date: 2007–12
  4. By: Markus Reisinger (Department of Economics, University of Munich, Kaulbachstr. 45, 80539 Munich, Germany, e-mail:; Monika Schnitzer (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany, e-mail:
    Abstract: This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall proï¬tability of the two-tier structure while the upstream conditions mainly affect the distribution of proï¬ts. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.
    Keywords: Deregulation, Free Entry, Price Competition, Product Differentiation, Successive Oligopolies, Two-Part Tariffs, Vertical Restraints
    JEL: L13 D43 L40 L50
    Date: 2008–02
  5. By: Koehler, Matthias
    Abstract: In 2005, the President of the Bank of Italy blocked the cross-border acquisition of two Italian banks for ‘prudential reasons and formal errors’. Following these events, the EU Commission brought actions against Italy for infringement of the principle of the free movement of capital. Although there is anecdotal evidence that prudential control may constitute a barrier to cross-border M&A in the banking sector, empirical evidence is missing until now. The main problem is the lack of data on the scope for politicians and supervisors to block M&A in the banking sector. The main contribution of this paper is to measure this scope for interference by constructing indices on the political independence and the transparency and strength of the supervisory review process of bank M&A. The main source of information to construct these indices is a questionnaire on banking regulation that was sent to the supervisory authorities in the 25 EU member countries between October 2006 and March 2007.
    Date: 2007
  6. By: Beschorner, Patrick Frank Ernst
    Abstract: In this paper we analyze the incentive of the German postal service (Deutsche Post AG, DPAG) to increase quality in the light of the upcoming liberalization of the postal services market. Currently, there would be no incentive for DPAG to increase its quality if the market were not to be liberalized in six months. Therefore, we suggest that the current changes in market regulation have motivated this quality improvement. In particular we show that this rise in quality is only protable to DPAG because it renders entry less profitable or even impossible. However, consumers benefit from higher quality, whether entry is deterred or accommodated.
    Keywords: regulation, liberalization, postal services
    JEL: L12 L41 L51
    Date: 2007
  7. By: Dermot, Leahy; Catia , Montagna
    Abstract: We study how competitive pressure influences the make-or-buy decision that oligopolistic firms face between producing an intermediate component in-house or purchasing it from a domestic supplier. We model outsourcing as a bilateral relationship in which the supplier undertakes relationship specific investments. A home and foreign firm compete in the home market. Firms’ mode of operation decision depends on cost and strategic considerations. Competitive pressure increases firms’ incentive to outsource. Consumer gains from trade liberalisation are enhanced when it leads to less outsourcing.
    Keywords: Outsourcing; Vertical Integration; Trade Liberalisation; Oligopoly
    JEL: L2 F2 F1 L1
    Date: 2007

This nep-ind issue is ©2008 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.