nep-ind New Economics Papers
on Industrial Organization
Issue of 2010‒04‒04
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price and Quality Competition By Chioveanu, Ioana
  2. Dynamic Price Competition with Fixed Capacities By Kalyan Talluri; Víctor Martínez de Albéniz
  3. Strategic Accessibility Competition By E. Bacchiega; E. Randon; L. Zirulia
  4. Licences, "Use or Lose" Provisions and the Time of Investment By Michele Moretto; Cesare Dosi
  5. The Dynamics of Brand Equity: A Hedonic Regression Approach to the Laser Printer Market By Ludwig von Auer; Mark Trede
  6. Much Ado About Nothing? – Smoking Bans and Germany’s Hospitality Industry By Michael Kvasnicka; Harald Tauchmann

  1. By: Chioveanu, Ioana
    Abstract: This study considers an oligopoly model with simultaneous price and quality choice. Ex-ante homogeneous sellers compete by offering products at one of two quality levels. The consumers have heterogeneous tastes for quality: for some consumers it is efficient to buy a high quality product, while for others it is efficient to buy a low quality product. In the symmetric equilibrium firms use mixed strategies that randomize both price and quality, and obtain strictly positive profits. This framework highlights trade-offs which determine the impact of consumer protection policy in the form of quality standards.
    Keywords: Oligopoly; Price and quality competition; Quality standards
    JEL: L5 L13 L15
    Date: 2009–08–01
  2. By: Kalyan Talluri; Víctor Martínez de Albéniz
    Abstract: Many revenue management (RM) industries are characterized by (a) fixed capacities in the short term (e.g., hotel rooms, seats on an airline flight), (b) homogeneous products (e.g., two airline flights between the same cities at similar times), and (c) customer purchasing decisions largely influenced by price. Competition in these industries is also very high even with just two or three direct competitors in a market. However, RM competition is not well understood and practically all known implementations of RM software and most published models of RM do not explicitly model competition. For this reason, there has been considerable recent interest and research activity to understand RM competition. In this paper we study price competition for an oligopoly in a dynamic setting, where each of the sellers has a fixed number of units available for sale over a fixed number of periods. Demand is stochastic, and depending on how it evolves, sellers may change their prices at any time. This reflects the fact that firms constantly, and almost costlessly, change their prices (alternately, allocations at a price in quantity-based RM), reacting either to updates in their estimates of market demand, competitor prices, or inventory levels. We first prove existence of a unique subgame-perfect equilibrium for a duopoly. In equilibrium, in each state sellers engage in Bertrand competition, so that the seller with the lowest reservation value ends up selling a unit at a price that is equal to the equilibrium reservation value of the competitor. This structure hence extends the marginal-value concept of bid-price control, used in many RM implementations, to a competitive model. In addition, we show that the seller with the lowest capacity sells all its units first. Furthermore, we extend the results transparently to n firms and perform a number of numerical comparative statics exploiting the uniqueness of the subgame-perfect equilibrium.
    Keywords: revenue management, bid-prices, subgame-perfect equilibrium.
    JEL: C73 D43 M11
    Date: 2010–02
  3. By: E. Bacchiega; E. Randon; L. Zirulia
    Abstract: We analyze the effect of competition in market-accessibility enhancement among quality-differentiated firms. Firms are located in regions with different ex-ante transport costs to reach the final market. We characterize the equilibrium of the two-stage game in which firms first invest to improve market accessibility and then compete in prices. Efforts in accessibility improvement crucially depend on the interplay between the willingness to pay for the quality premium of the median consumer and the ex-ante difference in accessibility between regions. From the social standpoint, all the accessibility investment should be carried out by the high-quality firm. Finally quality choice is endogenized.
    JEL: L13 R42 L90
    Date: 2010–03
  4. By: Michele Moretto (University of Padova); Cesare Dosi (University of Padova, and CRIEP - Centro Universitario)
    Abstract: Exclusive rights granted by public authorities, like concessions to develop natural resources or electromagnetic spectrum licences, often have option-like features. However, to avoid licences being unused for lengthy periods, regulators sometimes set time limits, after which the exclusive right of exercise may be revoked. In this paper we analyse the impact of use or lose ("UOL") provisions upon the private time of investment. We find that the risk of losing the licence because of inaction generally increases the probability of early investment. However, when capital costs are expected to decline over time, UOL provisions may involve a "perverse effect", by increasing, rather than reducing, the expected time of investment, with respect to a situation where the date of investment is left entirely to the licencee’s discretion.
    Keywords: Licences, Real Options, Use or Lose Provisions, Time of Investment
    JEL: L51 D44 D92
    Date: 2010–02
  5. By: Ludwig von Auer; Mark Trede
    Abstract: The authors develop a dynamic approach to measuring the evolution of comparative brand premium, an important component of brand equity. A comparative brand premium is defined as the pairwise price difference between two products being identical in every respect but brand. The model is based on hedonic regressions and grounded in economic theory. In constrast to existing approaches, the authors explicitly take into account and model the dynamics of the brand premia. By exploiting the premia’s intertemporal dependence structure, the Bayesian estimation method produces more accurate estimators of the time paths of the brand premia than other methods. In addition, the authors present a novel yet straightforward way to construct confidence bands that cover the entire time series of brand premia with high probability. The data required for estimation are readily available, cheap, and observable on the market under investigation. The authors apply the dynamic hedonic regression to a large and detailed data set about laser printers gathered on a monthly basis over a four-year period. It transpires that, in general, the estimated brand premia change only gradually from period to period. Nevertheless the method can diagnose sudden downturns of a comparative brand premium. The authors’ dynamic hedonic regression approach facilitates the practical evaluation of brand management.
    Keywords: brand equity, price premium, hedonic regression, Bayesian estimation, dynamic linear model
    JEL: C23 L11
    Date: 2010–03
  6. By: Michael Kvasnicka; Harald Tauchmann
    Abstract: Over the last years, public smoking bans have been introduced in most European countries. Unlike elsewhere, in Germany such bans were introduced at state level at diff erent points in time, which provides important intra-country regional variation that can be exploited to identify the eff ects of such bans on the hospitality industry. Using monthly data from a compulsory survey carried out by the German Federal Statistical Offi ce, we study the short-run eff ects that these bans had on establishments’ sales. In contrast to the largely US-based literature, we fi nd that smoke-free policies had a negative (yet moderate) eff ect on establishment sales. Closure rates of businesses in the hospitality industry, however, were not signifi cantly aff ected by the introduction of state smoking bans.
    Keywords: smoking bans; sales; intra-country regional variation
    JEL: L51 I12
    Date: 2010–03

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