nep-ind New Economics Papers
on Industrial Organization
Issue of 2009‒11‒27
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Third-Degree Price Discrimination and Consumer Surplus By Simon Cowan
  2. Price and quality in spatial competition By Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
  3. Switching Costs in Network Industries By Jiawei Chen
  4. A Fallacy of Division: The Failure of Market Concentration as a Measure of Competition in U.S. Banking By Jaap W.B. Bos; Ivy Chan; James W. Kolari; Jiang Yuan

  1. By: Simon Cowan
    Abstract: his paper presents simple conditions for monopoly third-degree price discrimination to have negative or positive effects on aggregate consumer surplus. Consumer surplus is often reduced by discrimination, for example when total welfare (consumer surplus and profits) falls. Surplus increases with discrimination, however, in two cases: first, when the marginal revenues without discrimination are close together and inverse demand in the market where the price will fall with discrimination is more convex; second, when inverse demand functions are highly convex and the discriminatory prices are close together.
    Keywords: Third-degree price discrimination, Monopoly, Consumer surplus
    JEL: D42 L12 L13
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:oxf:wpaper:462&r=ind
  2. By: Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
    Abstract: We study the relationship between competition and quality within a spatial competition framework where firms compete in prices and quality. We generalise existing literature on spatial price-quality competition along several dimensions, including utility functions that are non-linear in income and cost functions that are non-separable in output and quality. Our main message is that the scope for a positive relationship between competition and quality is underestimated in the existing literature. If we allow for income effects by assuming that utility is strictly concave in income, we find that lower transportation costs always lead to higher quality. The presence of income effects might also reverse a previously reported negative relationship between the number of firms and equilibrium quality. This reversal result is further strenghtened if there are cost substitutabilities between output and quality. Equilibrium quality provision is always less than socially optimal in the presence of income effects.
    Keywords: Income effects; Quality; Spatial competition
    JEL: D21 L13 L15
    Date: 2009–08
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:7422&r=ind
  3. By: Jiawei Chen (Department of Economics, University of California-Irvine)
    Abstract: In network industries, switching costs have two opposite effects on the tendency towards market tipping. First, the fat-cat effect makes the larger firm price less aggressively and lose consumers to the smaller firm. This effect tends to prevent tipping. Second, the network-solidifying effect reinforces network effects by making a network size advantage longer-lasting and hence more valuable, thus intensifying price competition when networks are of comparable size. This effect tends to cause tipping. I find that when switching costs are high, the fat-cat effect dominates and an increase in switching costs can change the market from a tipping equilibrium to a sharing equilibrium. When switching costs are low, the network-solidifying effect dominates and an increase in switching costs can change the market from a sharing equilibrium to a tipping equilibrium. Policy intervention to remove switching costs in network industries may substantially reduce the likelihood of market tipping.
    Keywords: Switching Costs, Network Effects, Dynamic Oligopoly, Market Tipping, Pricing
    Date: 2009–10
    URL: http://d.repec.org/n?u=RePEc:net:wpaper:0925&r=ind
  4. By: Jaap W.B. Bos; Ivy Chan; James W. Kolari; Jiang Yuan
    Abstract: Empirical literature and related legal practice using concentration as a proxy for competition measurement are prone to a fallacy of division, as concentration measures are appropriate for perfect competition and perfect collusion but not intermediate levels of competition. Extending the classic Cournot-type competition model of Cowling and Waterson (1976) and Cowling (1976) used to derive the Hirschman-Herfindahl Index (HHI) of market concentration, we propose an adaptation of this model that allows collusive rents for all, none, or some of the firms in a market. Application of our model to data for U.S. commercial banks in the period 1984-2004 confirms that concentration measures are unreliable competition metrics. While collusion is prevalent in the banking industry at the state level, the critical market shares at which market power is achieved, rents earned from collusion, and collusive concentration levels vary widely across states. These and other results lead us to conclude that a fallacy of division exists in concentration-based competition tests.
    Keywords: SCP hypothesis, competition, Cournot, conjectural variation, efficiency hypothesis
    JEL: G21 L11 L22
    Date: 2009–11
    URL: http://d.repec.org/n?u=RePEc:use:tkiwps:0933&r=ind

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