nep-ind New Economics Papers
on Industrial Organization
Issue of 2009‒03‒07
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Dynamics of Entry and Exit By André van Stel; Roy Thurik; Dennis Fok; Andrew Burke
  2. Quantity-setting games with a dominant firm By Tasnádi, Attila
  3. What is the best firm size to invest? By Kitov, Ivan
  4. Predicting Market Power in Wholesale Electricity Markets By David Newbery

  1. By: André van Stel; Roy Thurik; Dennis Fok; Andrew Burke
    Abstract: The relation between profits and the number of firms in a market is one of the essential topics in the field of industrial organization. Usually, the relation is modeled in an error-correction framework where profits and/or the number of firms respond to out-of-equilibrium situations. In an out-of-equilibrium situation one or both of these variables deviate from some long-term sustainable level. These models predict that in situations of equilibrium, the number of firms does not change and hence, entry equals exit. Moreover, in equilibrium entry and exit are expected to be equal to zero. These predictions are at odds with real life observations showing that entry and exit levels are significantly positive in all markets of substantial size. Moreover, entry and exitlevels often differ drastically. In this paper we develop a new model for the relation between profit levels and the number of firms by specifying not only an equation for the equilibrium level of profits in a market but also equations for the equilibrium levels of entry and exit. In our empirical application we show that our entry and exit equations satisfy usual error-correction conditions. We also find that a one-time positive shock to entry or profits has a small but permanent positive effect on both the number of firms and total industry profits.
    Date: 2009–03–03
    URL: http://d.repec.org/n?u=RePEc:eim:papers:h200907&r=ind
  2. By: Tasnádi, Attila
    Abstract: We consider a possible game-theoretic foundation of Forchheimer's model of dominant-firm price leadership based on quantity-setting games with one large firm and many small firms. If the large firm is the exogenously given first mover, we obtain Forchheimer's model. We also investigate whether the large firm can emerge as a first mover of a timing game.
    Keywords: Forchheimer; Dominant firm; Price leadership
    JEL: L13 D43
    Date: 2009–02–24
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:13612&r=ind
  3. By: Kitov, Ivan
    Abstract: Significant differences in the evolution of firm size distribution for various industries in the United States have been revealed and documented. For theoretical considerations, this finding puts major constraints on the modelling of firm growth. For practical purposes, the observed differences create a solid basis for selective investment strategies.
    Keywords: firm size distribution; Pareto distribution; the USA; evolution; investment
    JEL: L11 L17 G10
    Date: 2009–03–02
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:13721&r=ind
  4. By: David Newbery
    Abstract: The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.
    Keywords: Residual Supply Index, Cournot equilibrium, Lerner Index, electricity markets, market power
    JEL: D43 K21 L94
    Date: 2009–02–02
    URL: http://d.repec.org/n?u=RePEc:rsc:rsceui:2009/03&r=ind

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