nep-ind New Economics Papers
on Industrial Organization
Issue of 2010‒08‒28
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Imperfect Competition and Efficiency in Lemons Markets By Muthoo, Abhinay; Mutuswami, Suresh
  2. Information and Industry Dynamics By Emin M. Dinlersoz; Mehmet Yorukoglu
  3. Cournot or Stackelberg competition? A survey on experimental evidence By Hildenbrand, Andreas
  4. Competitive Insurance Markets and Adverse Selection in the Lab By Dorra Riahi; Louis Lévy-Garboua; Claude Montmarquette
  5. Cross-border Merger, Vertical Structure, and Spatial Competition By Beladi, Hamid; Chakrabarti, Avik; Marjit, Sugata
  6. Analyzing Entry Strategies in the Canadian Wireless Industry: The Case of the Discount Market By Sandy Mokbel
  7. The Creation of a Market for Retail Electricity Supply By Littlechild, S.
  8. The Strength of Direct Ties: Evidence from the Electronic Game Industry By Claussen, Jörg; Falck, Oliver; Grohsjean, Thorsten
  9. What drives patent performance of German biotech firms? The impact of R&D subsidies, knowledge networks and their location By Dirk Fornahl; Tom Broekel; Ron Boschma

  1. By: Muthoo, Abhinay (Department of Economics, University of Warwick); Mutuswami, Suresh (Department of Economics, University of leicester)
    Abstract: This paper studies the impact of competition on the degree of inefficiency in lemons markets. More precisely, we characterize the second-best mechanism (i.e., the optimal mechanism with private information) in a stylized lemons market with finite numbers of buyers and sellers. We then study the relationship between the degree of efficiency of the second-best mechanism and market competitiveness. The relationship between the first-best and second-best mechanisms is also explored. JEL Classification: C7 ; D4 ; D61 ; D82
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:wrk:warwec:939&r=ind
  2. By: Emin M. Dinlersoz; Mehmet Yorukoglu
    Abstract: This paper develops a dynamic industry model in which firms compete to acquire customers over time by disseminating information about themselves under the presence of random shocks to their efficiency. The properties of the model’s stationary equilibrium are related to empirical regularities on firm and industry dynamics. As an application of the model, the effects of a decline in the cost of information dissemination on firm and industry dynamics are explored.
    Keywords: Information, industry dynamics, entry and exit, firm growth
    JEL: D80 L11 L16 M37
    Date: 2010–08
    URL: http://d.repec.org/n?u=RePEc:cen:wpaper:10-16&r=ind
  3. By: Hildenbrand, Andreas
    Abstract: In this survey, I look into experimental studies on duopolistic quantity competition with homogeneous products and duopolistic price competition with heterogeneous products. The focus is on the sequence of competition. That is, I summarize and analyze experimental studies checking Cournot competition against Stackelberg competition. I find that while Stackelberg equilibrium outcomes are seldom under quantity competition, under price competition, the Stackelberg equilibrium prediction seems to be more appropriate. However, after discussing the experimental setups, I conclude that some methodological problems are present. Moreover, I make recommendations for further research.
    Keywords: Cournot competition; simultaneous competition; simultaneous play; Stackelberg competition; sequential competition; sequential play; duopoly; homogeneous products; heterogeneous products; experiemtal economics
    JEL: L13 D43 C72 C91
    Date: 2010–08–17
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:24468&r=ind
  4. By: Dorra Riahi; Louis Lévy-Garboua; Claude Montmarquette
    Abstract: We provide an experimental analysis of competitive insurance markets with adverse selection. Our parameterized version of the lemons’ model (Akerlof 1970) in the insurance context predicts total crowding out of low-risks when insurers offer a single full insurance contract. The therapy proposed by Rothschild and Stiglitz (1976) to solve this major inefficiency consists of adding a partial insurance contract so as to obtain a self-selection of risks. We test the theoretical predictions of these two well-known models in two experiments. A clean test is obtained by matching the parameters of the two experiments and by controlling for the risk neutrality of insurers and the common risk aversion of their clients by means of the binary lottery procedure. The results reveal a partial crowding out of low risks in the first experiment. Crowding out is not eliminated in the second experiment and it is not even significantly reduced. Finally, instead of the predicted separating equilibrium, we find pooling equilibria. We interpret these results by observing that, in any period, some high risks do not purchase full insurance at lower than fair price and some low risks purchase insurance at a price higher than their induced willingness to pay. These robust findings are inconsistent with expected utility maximization. The observed distortion of probabilities leads to a partial homogenization of perceived risks. <P>Ce travail offre une analyse expérimentale des marchés d’assurance avec anti-sélection. Nous nous intéressons particulièrement aux modèles canoniques d’Akerlof [1970] et de Rothschild et Stiglitz [1976]. Selon Alerlof (1970) l’anti-sélection peut aboutir à une éviction complète des agents les moins risqués. Selon Rothschild et Stiglitz (1976), les contrats de franchise permettent de dépasser cette limite en organisant la sélection des risques : à l’équilibre de marché, les contrats sont spécialisés en fonction des risques individuels. La présente contribution vise à tester ces prédictions théoriques à travers deux expériences de marché d’assurance. Afin de respecter au mieux les hypothèses de base des modèles d’Akerlof et de Rothschild et Stiglitz, nous recourons, dans l’expérimentation, à la technique des loteries binaires. Cette technique génère une neutralité au risque pour les assureurs et une même aversion au risque pour les assurés. Ces expériences sont, à notre connaissance, les premières visant à tester les prédictions des modèles d’assurance avec anti-sélection avec un contrôle des préférences des participants. Les résultats démontrent une éviction partielle des bas risques dans le contexte d’Akerlof (expérience 1). Une éviction qui ne disparaît pas après l’introduction des contrats de franchise (expérience 2). Enfin, à l’opposé de l’équilibre séparateur préconisé par Rothschild et Stiglitz, c’est l’équilibre de pooling qui apparaît (expérience 2). Nous interprétons ces résultats en observant que, dans certaines périodes, certains hauts risques n’achètent pas une assurance complète à un prix inférieur au prix équitable et que certains bas risques achètent une assurance à un prix supérieur à leur volonté induite à payer. Ces résultats robustes sont incompatibles avec la maximisation de l'utilité attendue. La distorsion observée des probabilités conduit à une homogénéisation partielle des risques perçus.
    Keywords: experimental economics, insurance markets, adverse selection, binary lottery procedure, expected utility , économie expérimentale, marché d’assurance, anti-sélection, loterie binaire
    JEL: C91 D82 G22
    Date: 2010–08–01
    URL: http://d.repec.org/n?u=RePEc:cir:cirwor:2010s-34&r=ind
  5. By: Beladi, Hamid; Chakrabarti, Avik; Marjit, Sugata
    Abstract: This analysis is a natural follow up of continued efforts to assess the consequences of cross-border mergers in industries with a vertical structure. Absent free trade, in a vertically related industry, the downstream firms will not choose the social optimum under spatial price discrimination when none of the downstream firms produce all the varieties that consumers demand. We show that free trade will induce the downstream firms to gravitate toward the social optimum but an upstream merger across borders, under free trade, will pull the downstream firms away from the social optimum back to their autarkic positions.
    Keywords: Product-differentiation; Price-discrimination; Spatialcompetition; Firm-location; Cross-border Merger
    JEL: L13 F12 D43
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:24474&r=ind
  6. By: Sandy Mokbel
    Abstract: This study examines entry strategies in the Canadian wireless discount market. Analysis was mainly focused on the incumbents’ strategic choices when faced with the threat of sequential entry. The main model used is Fudenberg and Tirole’s taxonomy of business strategies that is studied in the context of multimarket contact and when entry deterrence might be considered as a public good. The core of the analysis is done with two interconnected two stage games. It is argued that Fido, Solo and Virgin adopted a Puppy Dog strategy to face Koodo’s entry, then might have aligned with their new competitor and switched to a Top Dog attitude when faced with the threat of a second round of market entries. <P>Cette étude examine les stratégies d’entrée sur le marché canadien des télécommunications sans-fil à escompte. L’analyse porte principalement sur les choix stratégiques des entreprises établies qui font face à des menaces d’entrée séquentielles sur le marché. Le modèle, essentiellement basé sur la taxonomie des stratégies de gestion de Fudenberg et Tirole, est étudié dans un contexte de firmes ayant des contacts sur plusieurs marchés et en supposant que la dissuasion à l’entrée pourrait avoir les mêmes caractéristiques qu’un bien public. L’analyse se base sur deux jeux à deux phases interconnectés. Ce modèle supposerait alors que Fido, Solo et Virgin auraient adopté la stratégie d’un Gentil Chiot en préparation à l’entrée de Koodo, et se seraient ensuite alignés avec leur nouveau concurrent en adoptant ce qui semblerait être une attitude de Chien Méchant lorsque soumis à des menaces d’une nouvelle vague d’entrées.
    Keywords: market strategy, game theory, telecommunications, industrial organization, stratégie de marché, théorie des jeux, télécommunications, organisation industrielle
    Date: 2010–08–01
    URL: http://d.repec.org/n?u=RePEc:cir:cirwor:2010s-31&r=ind
  7. By: Littlechild, S.
    Abstract: In September 1989, as part of its privatization program, the Government laid down an eight year timetable for opening up to retail competition the entire electricity market of England and Wales, phased over the period 1990-1998. It might be assumed that the Government was in a position to specify all the arrangements, and that this was part of a considered policy to facilitate the introduction and implementation of competition. But previous accounts suggest that the outcome was part of a deal between generators and regional companies to limit competition (Henney 1994), or was intended to set targets to force companies, regulators and government to come up with practical solutions (Helm 2004). The Department of Energy’s internal History of Electricity Privatisation, only now available, shows that there is merit in these last two suggestions. However, it also documents the significantly evolving views within Government as the implications of retail competition became clearer, not least for electricity contracts and for privatization of the coal industry. Initially, retail competition was hardly worth mentioning, later it was a mild concern that could be met by a small tranche of spot-price contracts, by July 1989 the plan was to introduce full competition immediately with short-term instead of long-term contracts. But the industry resisted, and in September 1989 the Government accepted the industry proposal of a franchise monopoly to enable a mix of short, medium and long-term contracts, though it insisted that the franchise should have an eight year limit. The approach may not be a model for others, but it may not be atypical of how governments actually behave in balancing conflicting objectives and practical constraints, save perhaps for the distinctive commitment to competition exhibited by the leading actors here.
    Keywords: Retail competition, Electricity regulation
    JEL: L94
    Date: 2010–08–16
    URL: http://d.repec.org/n?u=RePEc:cam:camdae:1035&r=ind
  8. By: Claussen, Jörg; Falck, Oliver; Grohsjean, Thorsten
    Abstract: We analyze the economic effects of a developer’s connectedness in the electronic game industry. Knowledge spillovers between developers should be of special relevance in this knowledge-based industry. We calculate measures for a developer’s connectedness to other developers at multiple points in time. In a regression with developer, developing firm, publishing firm, and time fixed effects, we find that the number of a developer’s direct ties, i.e., common past experience, has a strong effect on both a game’s revenues and critics’ scores. The intensity of indirect ties makes no additional contribution to the game’s success.
    Keywords: network analysis; game industry; knowledge spillovers
    JEL: L14 L86 D83
    Date: 2010–08–18
    URL: http://d.repec.org/n?u=RePEc:lmu:msmdpa:11745&r=ind
  9. By: Dirk Fornahl; Tom Broekel; Ron Boschma
    Abstract: This paper aims to explain whether firm-specific features, their engagement in collaboration networks and their location influence patent activity of biotech firms in Germany in the period 1997-2004. First, we demonstrate that non-collaborative R&D subsidies do not increase patent intensity of biotech firms. Second, the number of knowledge links biotech firms is also not influencing their patent performance. However, strong and robust evidence is found that some but not too much cognitive distance between actors involved in R&D collaborations increases patent performance of firms. Third, being located in a biotech cluster does positively impact on patent performance.
    Keywords: relatedness, R&D subsidies, biotechnology, knowledge networks, proximity paradox
    JEL: O33 O38 R58
    Date: 2010–08
    URL: http://d.repec.org/n?u=RePEc:egu:wpaper:1009&r=ind

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