nep-ind New Economics Papers
on Industrial Organization
Issue of 2010‒05‒22
eighteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competition and the signaling role of prices By F.Adriani; L.G.Deidda
  2. Why Prices Rise Faster than they Fall By Sheldon Kimmel
  3. Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms By Russell Pittman
  4. Bundling and Competition for Slots: Sequential Pricing By Jeon, Doh-Shin; Menicucci, Dominico
  5. Competition in two-sided markets with common network externalities By Bardey, David; Cremer, Helmuth; Lozachmeur, Jean-Marie
  6. Private Antitrust Enforcement in the Presence of Pre-Trial Bargaining By Bourjade, Sylvain; Rey, Patrick; Seabright, Paul
  7. Managerial Effort Incentives and Market Collusion By Aubert, Cécile
  8. Competition versus Collusion: The Impact of Consumer Inertia By Bos Iwan; Peeters Ronald; Pot Erik
  9. Using Forward Contracts to Reduce Regulatory Capture By Felix Hoeffler; Sebastian Kranz
  10. Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Nonlinear Pricing and Resale Price Maintenance By Bonnet, Céline; Dubois, Pierre
  11. The Entry Incentives of Complementary Producers: A Simple Model with Implications for Antitrust Policy By Juan S. Lleras; Nathan H. Miller
  12. Railway Mergers and Railway Alliances: Competition Issues and Lessons for Other Network Industries By Russell Pittman
  13. Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement By Nathan Miller; Matthew Osborne
  14. Competition Issues in Restructuring Ports and Railways, Including Brief Consideration of these Sectors in India By Russell Pittman
  15. Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement By Russell Pittman
  16. An Empirical Analysis of Cellular Demand in South Africa By Gasmi, Farid; Ivaldi, Marc; Recuero Virto, Laura
  17. Bundling and Competition for Slots: On the Portfolio Effects of Bundling By Jeon, Doh-Shin; Menicucci, Dominico
  18. Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry By Bardey, David; Bommier, Antoine; Jullien, Bruno

  1. By: F.Adriani; L.G.Deidda
    Abstract: In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers’ chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competi- tion among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.
    Keywords: Market for lemons; Adverse selection; Price dispersion; Price- setting; Signaling; Competition
    JEL: D4 D8 L15
    Date: 2010
  2. By: Sheldon Kimmel (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: For decades the fact that input price hikes are passed on faster than input price cuts was thought to be well explained by the assumption that competitive firms fully pass on all input price changes, so they can't price asymmetrically, so asymmetric pricing behavior is limited to oligopolies, firms that do all sorts of bizarre things (finding yet another one being no big deal). However, Peltzman found no effect of concentration on such asymmetric pricing, raising the puzzle of why competitive industries generally price asymmetrically. This paper solves that puzzle.
    Date: 2009–07
  3. By: Russell Pittman (Director of Economic Research, Economic Analysis Group, Antitrust Division, U.S. Department of Justice, and visiting professor, New Economic School, Moscow)
    Abstract: Economists sometimes decry the persistence with which firms set prices above marginal cost and thus, according to the economists, fail to maximize profits. But it is the economists who have it wrong – first, because variable accounting costs are not always a good proxy for marginal economic costs, but more importantly because in an industry with U-shaped cost curves, a firm at a long-run sustainable equilibrium faces increasing marginal costs – i.e., a rising shadow price on some constrained input – i.e., in general, acost of capital. A corollary is that in such an industry the equilibrium mark-up over variable cost varies directly with capital intensity.
    Keywords: market power, price, mark-up, marginal cost, variable cost
    JEL: B21 D24 D43 K21 L11 L40
    Date: 2009–07
  4. By: Jeon, Doh-Shin; Menicucci, Dominico
    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.
    JEL: D4 K21 L13 L41 L82
    Date: 2009–08
  5. By: Bardey, David (University of Rosario, Bogota); Cremer, Helmuth (TSE (GREMAQ-CNRS)); Lozachmeur, Jean-Marie (TSE (GREMAQ-CNRS))
    Abstract: We study competition in two sided markets with common network externality rather than with the standard inter-group effects. This type of externality occurs when both groups bene…fit, possibly with different intensities, from an increase in the size of one group and from a decrease in the size of the other. We explain why common externality is relevant for the health and education sectors. We focus on the symmetric equilibrium and show that when the externality itself satis…es an homogeneity condition then platformspro…ts and price structure have some speci…fic properties. Our results reveal how the rents coming from network externalities are shifted by platforms from one side to other, according to the homogeneity degree. In the specifi…c but realistic case where the common network externality is homogeneous of degree zero, platforms pro…t do not depend on the intensity of the (common) network externality. This is in sharp contrast to conventional results stating that the presence of network externalities in a two-sided market structure increases the intensity of competition when the externality is positive (and decreases it when the externality is negative). Prices are affected but in such a way that platforms only transfer rents from consumers to providers.
    JEL: D42 L11 L12
    Date: 2009–10
  6. By: Bourjade, Sylvain; Rey, Patrick; Seabright, Paul
    Abstract: We study the effect of encouraging private actions for breaches of competition law. We develop a model in which a plaintiff, who may have private information about whether a breach of law has been committed, decides whether to open a case against a defendant. If opened, the case may be settled out of court or may proceed to full trial. The authorities can facilitate private actions by lowering the costs of opening a case or of proceeding to a full trial, or by raising the damages to be expected in the event of success. We show that facilitating private action increases the number of cases opened and sometimes but not always makes plaintiffs more aggressive in pre-trial bargaining. The latter, if it occurs, tends to make defendants who have committed anti-trust violations more likely to settle than innocent defendants. We also show that for screening to work requires the Court to be committed to rely only on submitted evidence in the case, and not on other possibly relevant background material. We finally study how to design the rules so as to enhance the role of private litigation on antitrust enforcement and prove that it is better to increase damages that to reduce costs of initiating a suit. In particular we find large benefits from introducing a system of compensation for Defendants found non-liable, paid by unsuccessful plaintiffs.
    JEL: K41 K42 L40
    Date: 2009–05
  7. By: Aubert, Cécile
    Abstract: We investigate the interactions between managers’ incentives to collude or compete, and incentives to exert effort. A manager privately chooses the competitive strategy of the firm, and his own effort to improve productivity; He may substitute collusion to effort to increase profits. High profit targets — i.e., strong effort incentives — make participating in a cartel more attractive. To answer this double moral hazard, owners may have to give the manager information rents, and to choose inefficient effort levels. This affects cartel sustainability and profitability. Because of reduced internal efficiency, welfare losses may arise even when the industry remains competitive. Antitrust policy has a novel value, specifically thanks to individual sanctions: They foster internal efficiency in competing firms while worsening it in cartelized firms. This improves both efficiency under competition and cartel deterrence. Individual fines are thus more beneficial than corporate fines; criminal sanctions are even more effective. Last, individual leniency programs have ambiguous effects, even when not used in equilibrium.
    Keywords: collusion, managerial incentives, leniency programs
    JEL: D82 K21 L41
    Date: 2009–12
  8. By: Bos Iwan; Peeters Ronald; Pot Erik (METEOR)
    Abstract: We consider a model of dynamic price competition to analyze the impact of consumer inertia on the ability of firms to sustain high prices. Three main consequences are identified, all of which contrast with predictions of the standard model of collusion: (i) maintaining high prices does not require punishment strategies when firms are sufficiently myopic, (ii) if buyers are sufficiently inert, then high prices can be sustained for all discount factors, and (iii) the ability to maintain high prices may depend non-monotonically on the level of the discount factor when the industry exhibits network externalities and demand is sufficiently viscous. These results provide a number of interesting insights with regard to competitive and collusive pricing behavior. In particular, we illustrate how direct communication between firms may facilitate collusion.
    Keywords: microeconomics ;
    Date: 2010
  9. By: Felix Hoeffler (Department WHU - Otto Beisheim School of Management); Sebastian Kranz (Bonn Graduate School of Economics, University of Bonn)
    Abstract: A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.
    Keywords: incentive regulation, regulatory capture, virtual power plants
    JEL: L42 L51 K23 L94
    Date: 2010–02
  10. By: Bonnet, Céline; Dubois, Pierre
    Date: 2009–05
  11. By: Juan S. Lleras (University of California, Berkeley); Nathan H. Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We model competition between two firms in a vertical upstream-downstream relationship. Each firm can pay a sunk cost to enter the other’s market. For equilibria in which both firms enter, the downstream price can be lower than the joint profit maximizing level, and coordination (e.g., through merger) is anticompetitive.
    Date: 2009–11
  12. By: Russell Pittman (Antitrust Division, U.S. Department of Justice, and New Economic School, Moscow)
    Abstract: Freight railway enterprises in both Europe and North America are in the process of significant restructuring, with EC policy changes dictating new ownership, organization, and cooperation arrangements in Europe and a series of major mergers having already led to highly concentrated regional markets in the U.S. and Canada. Mergers, alliances, and organizational changes may raise important and complex issues regarding the level of competition facing goods shippers, with differing implications depending on the differing institutional contexts. This paper examines the competitive consequences of these developments in Europe and North America and suggests some lessons for other network industries.
    Keywords: railway, competition, mergers, alliances
    Date: 2009–05
  13. By: Nathan Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Matthew Osborne (Bureau of Economic Analysis)
    Abstract: The theoretical literature of industrial organization shows that the distances between consumers and firms have first-order implications for competitive outcomes whenever transportation costs are large. To assess these effects empirically, we develop a structural model of competition among spatially differentiated firms and introduce a GMM estimator that recovers the structural parameters with only regional-level data. We apply the model and estimator to the portland cement industry. The estimation fits, both in-sample and out-of-sample, demonstrate that the framework explains well the salient features of competition. We estimate transportation costs to be $0.30 per tonne-mile, given diesel prices at the 2000 level, and show that these costs constrain shipping distances and provide firms with localized market power. To demonstrate policy-relevance, we conduct counter-factual simulations that quantify competitive harm from a hypothetical merger. We are able to map the distribution of harm over geographic space and identify the divestiture that best mitigates harm.
    Date: 2010–03
  14. By: Russell Pittman (Director of Economic Research, Antitrust Division, U.S. Department of Justice, and Visiting Professor, New Economic School, Moscow.)
    Abstract: One important issue facing reformers considering the restructuring of the seaports and freight railways sectors of a developing country is the creation of competition ­ or, alternatively, avoiding the creation or preservation of monopoly power. In seaports a crucial distinction is often that between intraport and interport competition; in freight railways, between competition among train operating companies over a monopoly track and competition among vertically integrated railways. In both cases it is useful to frame the issue as one of competition at the component level within an open system versus competition between closed systems. In both cases as well, the market definition paradigm suggested by the Horizontal Merger Guidelines of the U.S. competition agencies provides a useful framework for analysis.
    Keywords: competition, ports, railways, market definition, India
    JEL: L14 L23 L33 L91 L92 O14 O22 R48
    Date: 2009–11
  15. By: Russell Pittman (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: Recent rate increases by U.S. freight railroads have refocused attention on regulation, deregulation, and regulatory reforms in the railroad industry. Legislation introduced into Congress would render a variety of railroad behavior newly subject to the jurisdiction of the antitrust statutes, with potential enforcement by the Antitrust Division and the FTC and through lawsuits brought by state attorneys general or private parties. This paper considers the economic issues raised by legislation and the likely impacts on competition and welfare.
    Keywords: freight railroads, captive shippers, antitrust, regulation
    JEL: K21 K23 L41 L42 L43 L51 L92
    Date: 2010–01
  16. By: Gasmi, Farid; Ivaldi, Marc; Recuero Virto, Laura
    Date: 2009–09
  17. By: Jeon, Doh-Shin; Menicucci, Dominico
    Abstract: We consider competition among sellers when each of them sells a portfolio of distinct products to a buyer having limited slots. We study how bundling affects competition for slots. Under independent pricing, equilibrium often does not exist and hence the outcome is often inefficient. When bundling is allowed, each seller has an incentive to bundle his products and an efficient equilibrium always exists. Furthermore, in the case of digital goods, all equilibria are efficient if slotting contracts are prohibited. We also identify portfolio effects of bundling and analyze the consequences on horizontal mergers. Finally, we derive clear-cut policy implications.
    JEL: D4 K21 L13 L41 L82
    Date: 2009–07–27
  18. By: Bardey, David; Bommier, Antoine; Jullien, Bruno
    JEL: I18 L11 L15 L51
    Date: 2009–07

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