nep-ind New Economics Papers
on Industrial Organization
Issue of 2008‒03‒15
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Bertrand and Price-Taking Equilibria in Markets with Product Differentiation By Germán Coloma
  2. Dynamic Price Competition with Network Effects By Luis Cabral
  3. Monopoly, Diversification through Adjacent Technologies, and Market Structure By Karaaslan, Mehmet E.
  4. Efficiency gains and mergres By Giuseppe, DE FEO
  5. Antitrust Policy and Industrial Policy: A View from the U.S. By Lawrence J. White
  6. The Growing Influence of Economics and Economists on Antitrust: An Extended Discussion By Lawrence J. White
  7. Industry Size and the Distribution of R&D Investment By John Asker; Mariagiovanna Baccara
  8. Electricity Markets and Energy Security: Friends or Foes? By Brennan, Timothy J.
  9. Legally Separated Joint Ownership of Bidder and Auctioneer: Illustrated by the Partial Deregulation of the EU Electricity Markets By Silvester van Koten
  10. Giving the German Cartel Office the Power of Divestiture. The Conformity of the Reform with Constitutional Law By Christoph Engel

  1. By: Germán Coloma
    Abstract: In this paper we show that a homogeneous-product market with multiple Bertrand equilibria becomes a market with a single Bertrand equilibrium when we introduce a small degree of product differentiation. When differentiation tends to zero, that Bertrand equilibrium converges to the unique price-taking equilibrium of the homogeneous-product market, which is in turn one of the multiple Bertrand equilibria for that market.
    Keywords: Bertrand equilibrium, price-taking equilibrium, product differentiation
    JEL: D43 L13
    Date: 2008–02
  2. By: Luis Cabral
    Date: 2008
  3. By: Karaaslan, Mehmet E.
    Abstract: The theoretical literature on technological competition has been mostly concerned with various aspects of innovative activity in a single market. By contrast, this paper studies the adoption of a sequence of product innovations in two markets characterized by a common technology base, and illustrates the effects of technological rivalry and preemption. Under a perfect information scenario, it is shown in a two incumbent model that if the innovation is drastic (total replacement of the old product), under certain conditions the fear of being preempted by the entrant forces the firms to diversify their product lines by adopting the innovations across each other's markets. On the other hand, with non-drastic innovation (partial replacement of the old product), it is more likely for the firms to diversify in their own product lines. Out of a class of equilibria characterized under non-drastic innovation, one is optimal in which innovations are adopted in the firms' own markets. In the Pareto inferior equilibria, the firms either adopt innovations in each other's market so that incumbency changes hands or jointly adopt both innovations in two separate product lines. Perfect Bayesian equilibria are characterized under an asymmetric information scenario where one of the firms is assumed to have complete information about the relevant costs of adopting an innovation in a separate product line. If the priors are based on pessimism, it is more often subject to exploitation by the informed firm leading to pooling equilibrium, while optimistism more often leads to diversification and to a competitive market structure in both product lines under a separating equilibrium. In all the cases considered, both innovations are adopted, and in most cases they are adopted by the high cost entrant. The former is socially desirable, but the latter is not. More competitiveness necessarily implies wasteful expenditure by the high cost firm. Lack of competitiveness and technological rivalry, on the other hand, imply that maximum product diversity may not be achieved.
    Keywords: tehnological rivalry; preemption; adoption of innovations; upgrading
    JEL: L10 O31
    Date: 2007–10–01
  4. By: Giuseppe, DE FEO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: In the theoretical literature, strong arguments have been provided in support of the efficiency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could offset the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournot framework by Farrel and Shapiro (1990), is that (not too large) mergers that are profitable are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson’s results underestimate the welfare loss due to a price increase and overestimate the effect of efficiency gains. Then, we prove that the conditions for welfare improving mergers defined by Farrel and Shapiro (1990) hold true only when consumers are adversely affected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more “consumers-priented”. In this respect, we provide a necessary and sufficient condition for a consumer surplus improving merger : in a two firm merger, efficiency gains must be larger than the pre-merger average markup.
    Keywords: mergers, efficiency gains, Cournot oligopoly
    JEL: D43 L11 L22
    Date: 2008–02–15
  5. By: Lawrence J. White
    Date: 2008
  6. By: Lawrence J. White
    Date: 2008
  7. By: John Asker; Mariagiovanna Baccara
    Date: 2008
  8. By: Brennan, Timothy J. (Resources for the Future)
    Abstract: For a host of economic, geopolitical, and environmental reasons, the security of energy supplies has moved to the forefront of U.S. policy concerns. Here, I address the extent to which the U.S. electricity sector is affected by these factors and, in turn, whether increased electricity competition exacerbates them. After defining four dimensions of energy security that might pertain to electricity, I examine the role of global energy markets on that sector. Oil is currently used to generate only a small fraction of U.S. electricity supplies, although as recently as the late 1970s it generated about one-sixth of the total. Oil markets can affect electricity indirectly via substitution with natural gas. Competition in electricity markets should improve energy security by adding redundancy, but competition is threatened by unanticipated price increases, peak-load management, and risks associated with separating competitive generation from regulated transmission and distribution. Other complications include residential aversion to competition, residual market power, and the aspiration to reduce demand through conservation policies. The central security issue has been and remains the degree of conflict between competition and central control necessary to maintain reliability of the grid.
    Keywords: electricity markets, electricity market restructuring, energy policy, energy security
    JEL: L94 Q48 L51
    Date: 2007–11–12
  9. By: Silvester van Koten
    Abstract: In the EU electricity industry, many Vertically Integrated Utilities (VIUs) have ownership both of electricity generators and of transmission, hence VIU-owned or allied generators often are bidders in auctions for VIU-owned transmission. In Van Koten (2006) I show that welfare suffers and the holding company benefits – through increased auction revenue – from more aggressive bidding by the allied bidder and that it does not make a difference whether transmission is legally separated from the VIU or not. Here I analyze the regulatory measure of also legally separating the allied generator from the VIU; this measure effectively transforms the VIU into a holding company and prevents the “VIU” from influencing day-to-day decision-making of the “VIU”-owned generator and bans cross-subsidization between divisions. I show that such a measure may not improve welfare; the holding company can formulate a simple compensation scheme that does not violate the restrictions imposed by legal separation but induces the manager of the allied generator to bid more aggressively, thereby increasing the profits of the holding company and decreasing welfare, as in Van Koten (2006).
    Keywords: Asymmetric auctions, bidding behavior, electricity markets, strategic delegation, regulation, vertical integration.
    JEL: L22 L43 L51 L94 L98
    Date: 2007–12
  10. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Triggered by the concentration process in the electricity and gas markets, the land of Hesse proposes to give the German cartel office power to divest dominant firms or oligopolies if this is necessary to restore competition. The paper shows that the reform would be in line with constitutional law, and with freedom of property in particular. Depending on how divestiture is brought about, it would interfere with this basic freedom. It would however not amount to taking. In practice, the main effect would be through bargaining between the divested company and the cartel office. This poses problems under rule of law, but these problems are not insurmountable. The main justification for the reform is the almost total failure of interventions to combat the abuse of dominant positions. In the US, divestiture has not always been successful. But close scrutiny of the American experiences demonstrates that the tool is sufficiently effective to meet the constitutional standard. If divestiture is brought about by forcing the firm to sell entities or assets, the necessary compensation comes from the price it receives from the buyer.
    Keywords: divestiture, freedom of property
    JEL: D42 D43 K21 L12 L13 L41 L44
    Date: 2007–12

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