New Economics Papers
on Industrial Organization
Issue of 2008‒05‒31
five papers chosen by

  1. Asymmetric Cartels - a Theory of Ring Leaders By Ganslandt, Mattias; Persson, Lars; Vasconcelos, Helder
  2. Bertrand Competition in Markets with Network Effects and Switching Costs By Irina Suleymanova; Christian Wey
  3. Is Google the next Microsoft? Competition, Welfare and Regulation in Internet Search By Pollock, Rufus
  4. The Determinants of Pricing in Pharmaceuticals: Are U.S. prices really so high? By Antonio Cabrales; Sergi Jiménez-Martín
  5. Patterns of Restructuring: The U.S. Class 1 Railroads from 1984 to 2004 By Friebel, Guido; McCullough, Gerard; Padilla Angulo, Laura

  1. By: Ganslandt, Mattias; Persson, Lars; Vasconcelos, Helder
    Abstract: Many convicted cartels have a leader which is substantially larger than its rivals. In a setting where firms face indivisible costs of collusion, we show that: (i) firms may have an incentive to merge so as to create asymmetric market structures since this enables the merged firm to cover the indivisible cost associated with cartel leadership; and (ii) forbidding mergers leading to symmetric market structures can induce mergers leading to asymmetric market structures with a higher risk of collusion. Thus, these results have implications for the practice of the current EU and US merger policies.
    Keywords: Cartels; Collusion; Cost Asymmetries; Merger Policy; Ring Leader
    JEL: D43 L41
    Date: 2008–05
  2. By: Irina Suleymanova; Christian Wey
    Abstract: We analyze market dynamics under Bertrand duopoly competition in industries with network effects and consumer switching costs. Consumers form installed bases, repeatedly buy the products, and differ with respect to their switching costs. Depending on the ratio of switching costs to network effects, our model generates convergence to monopoly as well as market sharing as equilibrium outcomes. Convergence can be monotone or alternating in both scenarios. A critical mass effect, where consumers are trapped into one technology for sure only occurs for intermediate values of switching costs, whereas for large switching costs market sharing is the unique equilibrium and for small switching costs both monopoly and market sharing equilibria emerge. We also analyze stationary and stable equilibria, where we show that a monopoly outcome is almost inevitable, if switching costs or network effects increase over time. Finally, we examine firms' incentives to make their products compatible and to create additional switching costs.
    Keywords: Network effects, switching costs, Bertrand competition, market dynamics
    JEL: L13 D43 L41
    Date: 2008
  3. By: Pollock, Rufus
    Abstract: Internet search (or perhaps more accurately `web-search') has grown exponentially over the last decade at an even more rapid rate than the Internet itself. Starting from nothing in the 1990s, today search is a multi-billion dollar business. Search engine providers such as Google and Yahoo! have become household names, and the use of a search engine, like use of the Web, is now a part of everyday life. The rapid growth of online search and its growing centrality to the ecology of the Internet raise a variety of questions for economists to answer. Why is the search engine market so concentrated and will it evolve towards monopoly? What are the implications of this concentration for different `participants' (consumers, search engines, advertisers)? Does the fact that search engines act as `information gatekeepers', determining, in effect, what can be found on the web, mean that search deserves particularly close attention from policy-makers? This paper supplies empirical and theoretical material with which to examine many of these questions. In particular, we (a) show that the already large levels of concentration are likely to continue (b) identify the consequences, negative and positive, of this outcome (c) discuss the possible regulatory interventions that policy-makers could utilize to address these.
    Keywords: Search Engine; Regulation; Competition; Antitrust; Technology
    JEL: L10 L50 L40
    Date: 2008–05
  4. By: Antonio Cabrales; Sergi Jiménez-Martín
    Abstract: This paper studies price determination in pharmaceutical markets using data for 25 countries, six years and a comprehensive list of products from the MIDAS IMS database. A key finding is that the U.S. has prices that are not significantly higher than those of countries with similar income levels, specially those that are "lightly regulated". More importantly, price differences to the US levels increase for "branded" or innovative products, and decrease, regardless of the level of regulation for mature or widely diffused molecules. In addition, the nationality of the producer appears to have a small and often in significant impact on prices. We have constructed a theoretical model that accounts for all these findings simultaneously. One interesting aspect of the model is that it shows that reference pricing confers a degree of protection against government intervention. Thus, there is a sense in which a reference price (or similar) policy in one country becomes a “commitment device to avoid lowering price in another one.
    Date: 2008–05
  5. By: Friebel, Guido; McCullough, Gerard; Padilla Angulo, Laura
    Abstract: After deregulation in 1980, competitive pressures forced the large U.S. freight railroads to restructure. Much attention has focused on defensive (cost-cutting) restructuring: until 2004 employment was reduced by 60%, and railroads abandoned many of their lines. Less attention has been given to strategic restructuring: many firms changed the skill structure of employment and their output mix. We investigate the effects of defensive and strategic restructuring on financial performance between 1984 and 2004. In a simple regression, line abandonments (reduction of network size) have positive effects on performance but employment reductions do not. Controlling for the interaction between defensive and strategic restructuring, however, changes the picture significantly. Employment reductions then do have positive performance effects. There are also significant complementarities between defensive restructuring and strategic changes in skill and output mix. We provide the first in-depth analysis of the anatomy of restructuring in this important industry. Our analysis re-enforces the view that downsizing works best when accompanied by strategic restructuring.
    Keywords: defensive and strategic restructuring; downsizing; labour effects of deregulation; panel data
    JEL: J23 L25 L92
    Date: 2008–05

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