nep-ind New Economics Papers
on Industrial Organization
Issue of 2009‒10‒24
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. "Hotelling's Spatial Competition Reconsidered" By Takatoshi Tabuchi
  2. Endogenous Mergers Under Multi-Market Competition By Tina Kao; Flavio Menezes
  3. Welfare Enhancing Mergers Under Product Differentiation By Tina Kao; Flavio Menezes
  4. The search for trading partners and the cross-border merger decision. By T.Huw Edwards; Ben Ferrett
  5. Patent Office in innovation policy: Nobody's perfect By Bernard Caillaud; Anne Duchêne
  6. Input pricing by an upstream monopolist into imperfectly competitive downstream markets By Ioannis Pinopoulos
  7. Product Durability in Markets with Consumer Lock-in By Tobias Langenberg

  1. By: Takatoshi Tabuchi (Faculty of Economics, University of Tokyo)
    Abstract: Oligopoly models are usually analyzed in the context of two firms anticipating that market outcomes would be qualitatively similar in the case of three or more firms. This is not an exception in the literature on Hotelling's location-then-price competition. In this paper, we show that the main findings in Hotelling's duopoly, brand bunching and the max-min principle of product differentiation no longer hold once three or more firms are allowed to enter the market. That is, oligopolists with three or more firms proliferate brands and neither maximize nor minimize product differentiation.
    Date: 2009–09
  2. By: Tina Kao; Flavio Menezes
    Abstract: This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play out. The first is the selection effect, which acts to increase welfare, as shutting down the relatively more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works to increase prices and, therefore, decrease consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.
    JEL: L11 L13 L44
    Date: 2009–10
  3. By: Tina Kao; Flavio Menezes
    Abstract: This paper considers a model of duopoly with differentiated products to examine the welfare effects of a merger between two asymmetric firms. We find that for quantity competition, the parameter range for welfare enhancing merger widens if the products are closer substitutes. On the other hand, mergers are never welfare enhancing in this setting when firms compete in prices.
    JEL: L11 L12
    Date: 2009–10
  4. By: T.Huw Edwards (Dept of Economics, Loughborough University); Ben Ferrett (Dept of Economics, Loughborough University)
    Abstract: We investigate the merger decision between two firms in an outsourcing relationship, one upstream and the other downstream. The inter-firm relationship is subject both to ex ante matching uncertainty and to contractual efficiency issues. Cross-border merger is assumed to solve the latter problem, but at the expense of curtailing the match-searching process. The trade-off between these two factors is assumed to determine the dynamics of foreign direct investment in this kind of industry.
    Keywords: Trade, search, outsourcing, merger.
    JEL: F12 F23
    Date: 2009–10
  5. By: Bernard Caillaud; Anne Duchêne
    Abstract: The number of patent applications and "bad" patents issued has been rising rapidly in recent years. Based on this trend, we study the overload problem within the Patent Office and its consequences on the firms' R&D incentives. We assume that the examination process of patent applications is imperfect, and that its quality is poorer under congestion. Depend- ing on policy instruments such as submission fees and the toughness of the non-obviousness requirement, the system may result in a high-R&D equilibrium, in which firms self-select in their patent applications, or in an equilibrium with low R&D, opportunistic patent applications and the issuance of bad patents. Multiple equilibria often coexist, which deeply undermines the effectiveness of policy instruments. We investigate the robustness of our conclusions as to how the value of patent protection is formalized, taking into consideration the introduction of a penalty system for rejected patent applications, as well as the role of commitment to a given IP protection policy.
    Date: 2009
  6. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: In downstream markets where entry is independent from profitability conditions, the upstream supplier’s optimal pricing policy is invariant with respect to downstream market structure. This price invariant result, however, is reversed when there is free entry in downstream market. When entry is endogenously dependent on profitability conditions, the upstream supplier’s price-setting behavior depends on the number of operative firms in the final good market. We show that the upstream supplier charges a higher input price under a free entry situation in downstream market than under a no-entry condition. We also show that a higher input price is set under Bertrand competition than under Cournot competition in a downstream market with free entry.
    Keywords: Vertical relationship; Pricing; Competition; Oligopoly; Free entry.
    JEL: L11 L13 D43
    Date: 2009–10
  7. By: Tobias Langenberg (Free University of Berlin)
    Abstract: This paper examines a two-period duopoly where consumers are locked-in by switching costs that they face in the second period. The paper's main focus is on the question of how the consumer lock-in affects the firms' choice of product durability. We show that firms may face a prisoners' dilemma situation in that they simultaneously choose non-durable products although they would have higher profits by producing durables. From a social welfare perspective, firms may even choose an inefficiently high level of product durability.
    Keywords: Consumer Lock-in, Product Durability, Duopoly
    JEL: L13 D21
    Date: 2009–10

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