New Economics Papers
on Industrial Organization
Issue of 2010‒03‒13
five papers chosen by

  1. A Property of Solutions to Linear Monopoly Problems By Gregory Pavlov
  2. Complementary Patents and Market Structure By Klaus Schmidt
  3. Simulation and Prosecution of a Cartel with Endogenous Cartel Formation By Johannes Paha
  5. Competition in complementary goods: Airport handling markets and Council Directive 96/67/EC By Maria Cristina Barbot

  1. By: Gregory Pavlov (University of Western Ontario)
    Abstract: We extend the ‘no-haggling’ result of Riley and Zeckhauser (1983) to the class of linear multiproduct monopoly problems when the buyer’s valuations are smoothly distributed. In particular we show that there is no loss for the seller in optimizing over mechanisms such that all allocations belong to the boundary of the feasible set. The set of potentially optimal mechanisms can be further restricted when the costs are sufficiently low: the optimal mechanisms use only allocations from the ‘north-east’ boundary of the feasible set and the null allocation.
    Keywords: Multidimensional screening; Price discrimination; Optimal selling strategies; Mechanism design
    JEL: C78 D42 D82 L11
    Date: 2010
  2. By: Klaus Schmidt (University of Munich)
    Abstract: Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always benefits from entry and innovation
    Keywords: IP rights, complementary patents, standards, licensing, patent pool, vertical integration
    JEL: L1 L4
    Date: 2009–08
  3. By: Johannes Paha (Justus-Liebig-University Gießen)
    Abstract: In many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a Differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.
    Keywords: Collusion, Cartel Detection, Cartel Formation, Differential Evolution, Heuristic Optimization, Industry Simulation
    JEL: C51 C69 C72 D43 L12 L13 L40
    Date: 2010
  4. By: Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros); Anne Layne-Farrar (LECG Consulting); A. Jorge Padilla (LECG Consulting)
    Abstract: Under the legal doctrine of first sale, or patent exhaustion, a patent holder's ability to license multiple parties along a production chain is restricted. How and when such restrictions should be applied is a controversial issue, as evidenced by the Supreme Court's granting certiorari in the Quanta case. The issue is important, as it has significant implications for how firms can license in verically disaggregated industries. We explore this issue from an economic viewpoint and find that under ideal circumstances how royalty rates are split along the production chain has no real consequence for social welfare. Even when we depart from ideal conditions, however, we still find no economic justification for a strict application of patent exhaustion. To the contrary, we show there are often private and social advantages to charging royalties at multiple stages. Our results advocate for a flexible application of the first sale doctrine, where exhaustion holds as a default rule but can be easily overwritten in patent contracts.
    Date: 2010–02
  5. By: Maria Cristina Barbot (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: This paper addresses the case of complementary services with vertical relations. Using the example of airport handling activities, we develop a model to investigate the effects on welfare and competitiveness of four different handling market situations. We find out that the usual Cournot result on welfare when firms compete in complementary goods is verified unless there are efficiency gaps between the firms, or if vertically related firms also compete on the same market. We also find that the presence of a horizontally integrated firm may lead to market foreclosure. Moreover, we add a few remarks on regulatory issues, where we show that regulation may be pointless or even anti-competitive. In particular, we show that Council Directive 96/67/EC, while intending to increase competition, may lead to anti-competitive situations and consumers surplus decreases.
    Keywords: Complementary goods competition; airport handling; vertical relations.
    Date: 2010–02

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