nep-ind New Economics Papers
on Industrial Organization
Issue of 2010‒10‒02
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Entry Deterrence in the Presence of Learning-by-Doing By Ana Espinola-Arredondo; Felix Munoz-Garcia
  2. Price and Brand Competition between Differentiated Retailers: A Structural Econometric Model By Dubois, Pierre; Jodar-Rosell, Sandra
  3. A Dynamic Duopoly Investment Game under Uncertain Market Growth By Boyer, Marcel; Lasserre, Pierre; Moreaux, Michel
  4. Quasi‐linear Utility and Two‐Market Monopoly By Layson, Stephen
  5. Does market concentration of downstream buyers squeeze upstream suppliers’ market power? By Carlos F. Alves; Cristina Barbot
  6. Leniency programs for multimarket firms: The effect of Amnesty Plus on cartel formation By LEFOUILI, Yassine; ROUX, Catherine
  7. Prosecution and Leniency Programs: a Fool's Game By Sauvagnat, Julien
  8. The visible hand: electric power capacity arrangements By Léautier, Thomas-Olivier

  1. By: Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University)
    Abstract: TThis paper investigates a signaling entry deterrence model under learning-by-doing. We show that a monopolist’s practice of entry deterrence imposes smaller welfare losses (or larger welfare gains) when learning effects are present than when they are absent, making the intervention of antitrust authorities less urgent. If, however, the welfare loss associated to entry deterrence is still significant, and thus intervention is needed, our paper demonstrates that the incumbent’s practice of entry deterrence is easier to detect by a regulator who does not have access to accurate information about the incumbent’s profit function. Learning-by-doing hence facilitates the regulator’s ability to detect entry deterrence, thus suggesting its role as an “ally” of antitrust authorities.
    Keywords: Learning-by-doing, Entry deterrence, Incomplete information, Spillovers
    JEL: L12 D82 D83
    Date: 2010–06
  2. By: Dubois, Pierre; Jodar-Rosell, Sandra
    Abstract: We develop a model of competition between retailer chains with a structural estimation of the demand and supply in the supermarket industry in France. In the model, supermarkets compete in price and brand offer over all food products to attract consumers, in particular through the share of private labels versus national brands across all their products. Private labels can serve as a differentiation tool for the retailers in order to soften price competition. They may affect the marginal costs of all products for the retailer because of eventual quality differences and also by helping retailers to obtain better conditions from their manufacturers. Differentiation is taken into account by estimating a discrete-continuous choice model of demand where outlet choice and total expenditures are determined endogenously. On the supply side, we consider a simultaneous competition game in brand offer and price between retailers to identify marginal costs. After estimation by simulated maximum likelihood, the structural estimates allow to simulate the effect on the equilibrium behavior of retailer chains of a demand shock through an increase in transportation costs for consumers and a merger between two retailer chains.
    JEL: L13 L22 L81
    Date: 2010–04
  3. By: Boyer, Marcel (Université de Montréal); Lasserre, Pierre (Université du Québec à Montréal); Moreaux, Michel (Toulouse School of Economics (IDEI and LERNA))
    Abstract: We model investments in capacity in a homogeneous product duopoly facing uncertain demand growth. Capacity building is achieved through adding production units that are durable and lumpy and whose cost is irreversible. There is no exogenous order of moves, no first-mover or second-mover advantage, no commitment, and no finite horizon; while building their capacity over time, firms compete `a la Cournot in the product market. We investigate Markov Perfect Equilibrium (MPE) paths of the investment game, which may include preemption episodes and tacit collusion episodes. However, when firms have not yet invested in capacity, the sole pattern that is MPEcompatible is a preemption episode with firms investing at different times, but both have equal value. The first such investment may occur earlier, and therefore be riskier, than socially optimal. When both firms hold capacity, tacit collusion episodes may be MPE-compatible with firms investing simultaneously at a postponed time (generating an investment wave in the industry). We show that the emergence of such episodes is favored by higher demand volatility, faster market growth, and lower discount rate (cost of capital).
    JEL: C73 D43 D92 L13
    Date: 2010–07–06
  4. By: Layson, Stephen (University of North Carolina at Greensboro, Department of Economics)
    Abstract: Given the ubiquitous assumption of quasi‐linear utility in economic policy articles, this paper presents an overdue clarification of the implications of quasi‐linear utility for two‐market monopoly. The paper begins by deriving the demands facing a two‐market monopoly from a representative consumer and then derives expressions for the profit margins expressed solely in terms of the own and cross price elasticities of demand. The paper also analyzes the implications of quasi‐linear utility for other issues in two‐market monopoly: pricing below marginal cost in a market, third‐degree price discrimination when the monopoly products are substitutes and pricing in the inelastic region of demands.
    Keywords: Quasi‐linear Utility; Multiproduct Monopoly; Third‐Degree Price Discrimination
    JEL: D42
    Date: 2010–09–22
  5. By: Carlos F. Alves (CEF.UP, Faculdade de Economia, Universidade do Porto); Cristina Barbot (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: Using a theoretical model, we examine both the relationship between a downstream dominant firm’s market share and an upstream monopoly’s Lerner index and the relationship between upstream and downstream price elasticities of demand, in a regulated industry context. We undertake an empirical study that confirms our theoretical predictions, namely that the market share of a leader downstream firm is significant in explaining the upstream producers’ Lerner indexes. Also in accordance with the results of the theoretical model, the Lerner index is negatively influenced by the competition that suppliers face and by the level of economies of density, amongst other variables.
    Keywords: vertical relations, buyers’ market power
    Date: 2010–09
  6. By: LEFOUILI, Yassine (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium); ROUX, Catherine (University of Lausanne, Faculty of Business and Economics, CH-1015 Lausanne-Dorigny, Switzerland)
    Abstract: We examine the effect of the Amnesty Plus policy on the incentives of firms to engage in cartel activities. Amnesty Plus is aimed at attracting amnesty applications by encouraging firms, convicted in one market, to report their collusive agreements in other markets. It has been vigorously advertised that Amnesty Plus weakens cartel stability. We show to the contrary that Amnesty Plus may not have this desirable effect, and, if improperly designed, may even stabilize a cartel. We suggest a simple discount-setting rule to avoid this anticompetitive effect.
    Keywords: Amnesty Plus, Leniency program, multimarket contact, antitrust policy
    JEL: K21 K42 L41
    Date: 2010–05–01
  7. By: Sauvagnat, Julien
    Abstract: We present a model where the Antitrust Authority is privately informed about the strength of the case against a given cartel. In this context, the Antitrust Authority may obtain cartel members' confessions even when it opens an investigation knowing that it has no chance to find hard evidence. More generally, we show that offering leniency allows to raise the conviction rate, which in turn enhances cartel desistance and cartel deterrence. A second contribution of the paper is to show that the optimal leniency scheme involves a single informant rule. That is, amnesty should be given only if a unique cartel member reports information.
    Keywords: Antitrust law and policy; Cartels; Collusion; Self-reporting
    JEL: K21 K42 L41
    Date: 2010–09–16
  8. By: Léautier, Thomas-Olivier
    Abstract: One of the main purposes of the restructuring of the electric power industry in the 1990s was to "push to the market" decisions and risks associated with generation investment. Yet, markets appear to have failed to deliver "optimal" generation capacity, hence policy makers around the world are implementing various capacity provision arrangements to remedy this market failure. This articles provides a systematic analysis of these arrangements. It first examines "single market" designs, and finds that average Value of Lost Load pricing, implemented in Texas, does not restore investment incentives unless generation is perfectly competitive. Even more surprising, it finds that Operating Reserves pricing can worsen the underinvestment problem. It then examines "dual markets" designs, and finds that the two most commonly advocated approaches, the "capacity markets" and "reliability options" approaches both restore optimal investment incentives. Furthermore, both coincide if the "technical" parameters selected by the System Operator also coincide.
    Date: 2010–04–30

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