nep-ind New Economics Papers
on Industrial Organization
Issue of 2008‒10‒28
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do Strategic Substitutes Make Better Markets? A Comparison of Bertrand and Cournot Markets By Douglas D. Davis
  2. Intense Network Competition By Johan Stennek; Thomas TangerŒs
  3. Market Dominance and Barriers to Competition in Financial Trading Venues By Ricardo Ribeiro

  1. By: Douglas D. Davis (Department of Economics, VCU School of Business)
    Abstract: Recent experiments suggest that games where actions are strategic substitutes rather than strategic complements exhibit some desirable performance characteristics. This paper reports an experiment conducted to test whether these characteristics extend to differentiated product Cournot and Bertrand markets. We find that Cournot markets do not generally outperform Bertrand markets, and that the opposite is often true. Bertrand markets exhibit comparatively higher convergence levels and speeds, particularly when products are close substitutes. Bertrand sellers do engage in more signaling activity than Cournot sellers. Such efforts, however, affect market outcomes only occasionally, and only when products are differentiated. Analysis of individual decisions suggests that the observed differences in convergence levels and speeds are driven by a propensity for sellers to use forecast and inertia anchors as bases for action choices in addition to best replies. Given these propensities, Bertrand markets converge more rapidly and more completely to static Nash predictions, particularly when products are close substitutes, because the differences between the various anchors is smaller in Bertrand markets.
    Keywords: Experiments, Market Concentration, Market Power
    JEL: C9 D4 L4
    Date: 2008–10
  2. By: Johan Stennek (Gothenburg University); Thomas TangerŒs (Research Institute of Industrial Economics)
    Abstract: First, we demonstrate how unregulated price setting in mobile telecommunications may lead to monopolization, even when networks are highly substitutable. Second, we demonstrate that a menu of structural rules, including (i) mandatory interconnection, (ii) reciprocal access prices and (iii) a ban on price discrimination of calls to other networks, may restore competition. This regulation requires neither demand data nor information about call costs.
    Keywords: network competition; two-way access; mobile termination rates; network substitutability; entry deterrence
    JEL: L12 L14 L51 L96
    Date: 2008–09
  3. By: Ricardo Ribeiro (STICERD, The London School of Economics and Political Science)
    Abstract: The Market in Financial Instruments Directive (MiFID) aims to increase competition and to foster client protection in the European financial market. Among other provisions, it abolishes the concentration rule and challenges the market power of existing trading venues. The directive introduces venue competition in order to achieve better execution and ultimately lower trading costs. In this paper I address the question of whether fostering competition between alternative trading venues alone may or not be able to impact actual competition in the market. I consider two reasons for why it may not: direct network effects together with increasing returns to scale, and post-trading constraints. In particular, I (a) evaluate the actual degree of competition between trading venues, (b) measure the impact of network effects on competition, and lastly (c) assess the barriers to competition induced by post-trading constraints. The results imply that financial intermediaries tend to value liquidity more (than total fees) when deciding where to route a given order for execution - implying that being the incumbent venue translates into a competitive advantage. Furthermore, eliminating the mentioned barriers to competition seems to be associated with a significant decrease (of a similar magnitude) in the asymmetry of the industry.
    Keywords: Market Dominance, Network Effects, Financial Trading, Demand, Barriers to Competition
    JEL: C13 G10 L11 L84
    Date: 2008–10

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