nep-ind New Economics Papers
on Industrial Organization
Issue of 2008‒09‒13
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A surplus and welfare analysis of asymmetric regulation By Cédric Clastres; Laurent David
  2. Licensing Uncertain Patents: Per-Unit Royalty vs Up-Front Fee By David Encaoua; Yassine Lefouili
  3. A Network Model of Price Dispersion By Giacomo Pasini; Paolo Pin; Simon Weidenholzer

  1. By: Cédric Clastres (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II); Laurent David (Research Division - Gaz de France)
    Abstract: Some European regulators have decided to force competition in their nationalmarkets. They have decided to go beyond the second directive and apply asymmetric regulation. Gas release programs and market shares constraints are the two asymmetric decisions imposed to incumbents. When a regulator imposes a gas release program to an incumbent, this operator is compelled to release quantities of its long term contracts to its competitor. In this paper, we will focus on gas release and its impact on welfare, consumer surplus and on the level of released quantities set by regulators. The aim of a gas release program is to give access to natural gas to competitors. They become actives on the market and are in competition with the incumbent. These programs are time limited. They only help competitors in expecting the development of hubs or new investments in importation infrastructures. If competitors want to stay active after the program, they may find others supply sources to increase security of supply. The gas release can induce Raising Rival’s Costs or “Self-Sabotage” strategies. We use a Cournot model with capacity constraints to answer two questions. First, we will study the impact of these strategies on consumer surplus and welfare. We will show that there are no impact on consumer surplus but the welfare decreases. The gas release program introduces a transfer of profit between competitor and incumbent, reduces welfare because of the increase in costs of supply, but has no impact on total consumed quantities. Then, we will suppose that the regulator is setting released quantities maximising welfare. Gas release price is often based on costs plus a bid or a fixed premium. Quantities are set with a less obvious process. We will demonstrate that the regulator must set released quantities :- that would not be so high if incumbent’s supplies are small to avoid Self- Sabotage or RRC strategies ;- as a function of incumbent’s supplies if they are in intermediate values to avoid strategies seen above and to optimise quantities sold on the market ;- at a sufficient level to let the two operators playing their Cournot best reply function. Finally, we will conclude that the regulator can avoid RRC or Self-Sabotage strategies in maximising the welfare when it decides gas released quantities. Gathering from empirical studies, these quantities should not be so high in order to let a significant difference between the capacities of both competitor and incumbent to avoid collusive behaviours.
    Keywords: Energy market ; Gas release ; Regulation ; Optimal released quantities ; Efficiency ; Welfare
    Date: 2008
  2. By: David Encaoua (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Yassine Lefouili (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: In this paper we examine the implications of uncertainty over patent validity on patentholders' licensing strategies. Two licensing mechanisms are examined: per-unit royalty and up-front fee.We provide conditions under which uncertain patents are licensed in order to avoid patent litigation. It is shown that while it is possible for the patentholder to reap som e "extra profit" by selling an uncertain patent under the pure per-unit royalty regime, the opportunity to do so does not exist under a pure up-front fee regime. We also establish that the relatively high bargaining power the licensor has even when its patent is weak can be reduced if the patentholder cannot refuse to license an unsucessful challenger or if collective challenges are allowed for. Furthermore we show that the patentee may prefer to license through the per-unit royalty mechanism rather than the fixed fee mechanism, especially if its patent is weak. This finding contradicts the traditional theoretical result that fixed fee licensing dominates royalty rate licensing from the patentholder's perspective.
    Date: 2008–07
  3. By: Giacomo Pasini (Ca' Foscari University in Venice); Paolo Pin (Abdus Salam Internazional Centre for Theoretical Physics); Simon Weidenholzer (Institut für Volkswirtschaftslehre, Universität Wien)
    Abstract: We analyze a model of price competition ? la Bertrand in a network environment. Firms only have a limited information on the structure of network: they know the number of potential customers they can attract and the degree distribution of customers. This incomplete information framework stimulates the use of Bayesian-Nash equilibrium. We find that, if there are customers only linked to one firm, but not all of them are, then an equilibrium in randomized strategies fails to exist. Instead, we find a symmetric equilibrium in randomized strategies. Finally, we test our results on US gasoline data. We find empirical evidence consistent with firms playing random strategies.
    Keywords: Bertrand Competition, Bayesian- Nash Equilibrium, Mobility Index
    JEL: D43 D85 L11
    Date: 2008–03

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