nep-ind New Economics Papers
on Industrial Organization
Issue of 2009‒06‒10
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Bertrand's price competition in markets with fixed costs By Alejandro Saporiti; German Coloma
  2. Contestability, Technology and Banking By Corvoisier, Sandrine; Gropp, Reint Eberhard

  1. By: Alejandro Saporiti (University of Manchester); German Coloma (Universidad del CEMA)
    Abstract: This paper provides necessary and sufficient conditions for the existence of a pure strategy Bertrand equilibrium in a model of price competition with fixed costs. It unveils an interesting and unexplored relationship between Bertrand competition and natural monopoly. That relationship points out that the non-subadditivity of the cost function at the output level corresponding to the oligopoly break-even price, denoted by D(pL (n)), is sufficient to guarantee that the market supports a (not necessarily symmetric) Bertrand equilibrium in pure strategies with two or more firms supplying at least D(pL (n)). Conversely, the existence of a pure strategy equilibrium ensures that the cost function is not subadditive at every output greater than or equal to D(p(n)).
    Keywords: Bertrand competition, cost subadditivity, fixed costs, natural monopoly.
    JEL: D43 L13
    Date: 2009–05
  2. By: Corvoisier, Sandrine; Gropp, Reint Eberhard
    Abstract: We estimate the effect of internet penetration on retail bank margins in the euro area. Based on an adapted Baumol [1982] type contestability model, we argue that the internet has reduced sunk costs and therefore increased contestability in retail banking. We test this conjecture by estimating the model using semi-aggregated data for a panel of euro area countries. We utilise time series and cross-sectional variation in internet penetration. We find support for an increase in contestability in deposit markets, and no effect for loan markets. The paper suggests that for time and savings deposits, the presence of brick and mortar bank branches may no longer be of first order importance for the assessment of the competitive structure of the market.
    Keywords: Banking structure, Contestability, Internet
    JEL: D43 E43 G21
    Date: 2009

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