nep-ind New Economics Papers
on Industrial Organization
Issue of 2009‒08‒16
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A Nonparametric Test of Strategic Behavior in the Cournot Model By Deb, Rahul; Fenske, James
  2. Strategic Vertical Separation By Sloev, Igor
  3. Bundling and Competition for Slots: Sequential Pricing By Doh-Shin Jeon; Domenico Menicucci
  4. A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments By Aguirregabiria, Victor; Ho, Chun-Yu

  1. By: Deb, Rahul; Fenske, James
    Abstract: We devise a nonparametric test of strategic behavior in a multiproduct Cournot oligopoly. It is assumed that firms have cost functions that do not change over the period of observation but that market demand can change in each period. Market prices and firm-specific production quantities are observed and it is assumed that neither the inverse demand functions nor the cost functions are known. The driving assumptions of the test are that market inverse demand functions are decreasing and differentiable at each period and that cost functions are increasing and convex for each firm. Under these very general conditions, we show that this test imposes strong restrictions on observed data. We apply the test to the crude oil market and find that strategic behavior is strongly rejected.
    Keywords: Competitive behavior; Multiproduct Cournot oligopoly; Nonparametric test; Crude oil market; OPEC.
    JEL: D21 C14 D43 C72
    Date: 2009–08–01
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:16560&r=ind
  2. By: Sloev, Igor
    Abstract: The paper explores incentives for strategic vertical separation of firms in a framework of a simple duopoly model. Each firm chooses either to be a retailer of its own good (vertical integration) or to sell its good through an independent exclusive retailer (vertical separation). In the latter case a two-part tariff is applied. Retailers compete in quantities, goods are perfect substitutes and firms' cost functions are quadratic. I show that the equilibrium outcome crucially depends on the degree of (dis)economies of scale and asymmetry of costs. Two asymmetric equilibria arise, in which one firm separates while another integrates, under conditions that both firms' cost functions exhibit a sufficiently high diseconomies of scale, or extreme asymmetry of costs. Under a moderate asymmetry of costs a unique equilibrium exists in which the firm with the lower degree of diseconomies of scale separates, while its rival integrates. With the degree of diseconomies of scale low for both firms in the unique equilibrium both firms separate.
    Keywords: Vertical oligopoly; Vertical Separation; Vertical Integration; Delegation
    JEL: L42 L22
    Date: 2009–08–10
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:16729&r=ind
  3. By: Doh-Shin Jeon; Domenico Menicucci
    Abstract: In this paper we study, as in Jeon-Menicucci (2009), competition between sellers when each of them sells a portfolio of distinct products to a buyer having limited slots. This paper considers sequential pricing and complements our main paper (Jeon- Menicucci, 2009) that considers simultaneous pricing. First, Jeon-Menicucci (2009) find that under simultaneous individual pricing, equilibrium often does not exist and hence the outcome is often inefficient. By contrast, equilibrium always exists under sequential individual pricing and we characterize it in this paper. We find that each seller faces a trade-off between the number of slots he occupies and surplus extraction per product, and there is no particular reason that this leads to an efficient allocation of slots. Second, Jeon-Menicucci (2009) find that when bundling is allowed, there always exists an efficient equilibrium but inefficient equilibria can also exist due to pure bundling (for physical products) or slotting contracts. Under sequential pricing, we find that all equilibria are efficient regardless of whether firms can use slotting contracts, and both for digital goods and for physical goods. Therefore, sequential pricing presents an even stronger case for laissez-faire in the matter of bundling than simultaneous pricing.
    Keywords: Bundling, Portfolios, Slots (or Shelf Space), Pure Bundling, Slotting Contracts
    JEL: D4 K21 L13 L41 L82
    Date: 2009–08
    URL: http://d.repec.org/n?u=RePEc:upf:upfgen:1168&r=ind
  4. By: Aguirregabiria, Victor; Ho, Chun-Yu
    Abstract: This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition that incorporates three groups of factors that may explain hub-and-spoke networks: (1) travelers may value the services associated with the scale of operation of an airline in the hub airport; (2) operating costs and entry costs in a route may decline with the airline's scale of operation in the origin and destination airports (e.g., economies of scale and scope); and (3) a hub-and-spoke network may be an effective strategy to deter the entry of other carriers. We estimate the model using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As methodological contributions, we propose and apply a method to reduce the dimension of the state space in dynamic games, and a procedure to deal with the problem of multiple equilibria when using a estimated model to make counterfactual experiments. We find that the most important factor to explain the adoption of hub-and-spoke networks is that the cost of entry in a route declines importantly with the scale of operation of the airline in the airports of the route. For some of the larger carriers, strategic entry deterrence is the second most important factor to explain hub-and-spoke networks.
    Keywords: Airline industry; Hub-and-spoke networks; Entry costs; Industry dynamics; Estimation of dynamic games; Counterfactual experiments in models with multiple equilibria.
    JEL: C10 L93 L13 C63 L10 C35 C73
    Date: 2009–08–09
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:16739&r=ind

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