nep-ind New Economics Papers
on Industrial Organization
Issue of 2010‒10‒16
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Oligopolistic Price Competition with Informed and Uninformed Buyers By Michal Ostatnicky
  2. Competition and Productivity: Evidence from the Post WWII U.S. Cement Industry By Timothy Dunne; Shawn Klimek; James Schmitz, Jr.
  3. Competitive Balance and Revenue Sharing in Sports Leagues with Utility-Maximizing Teams By Helmut Dietl; Martin Grossmann; Markus Lang
  4. An Empirical Study of Online Software Outsourcing: Signals under Different Contract Regimes By Mingfeng Lin; Siva Viswanathan; Ritu Agarwal
  5. "Duopoly in the Japanese Airline Market: Bayesian Estimation for the Entry Game" By Shinya Sugawara; Yasuhiro Omori
  6. Entry Regulation and Entrepreneurship: Empirical Evidence from a German Natural Experiment By Davud Rostam-Afschar
  7. Computer Networks and Productivity Revisited: Does Plant Size Matter? Evidence and Implications By Henry Hyatt; Sang Nguyen
  8. Large stores and contracting for mall locations By Tarun Sabarwal; Randal Watson
  9. Timing of Investment and Dynamic Pricing in Privatized Sectors. By Ornella Tarola; Sandro Trento
  10. The effects of transport regulation on the oil market. Does market power matter? By Snorre Kverndokk and Knut Einar Rosendahl

  1. By: Michal Ostatnicky
    Abstract: The standard price competition of two or more players leads to Bertrand equilibrium in basic economic theory (if complete information is assumed, there are no capacity constraints, etc.). In reality, even on highly competitive Internet-based markets, the prices of seemingly undifferentiated goods (e.g. books and CDs on Amazon and similar e-shops) vary, although competition seems prima facie based on prices. I follow the literature that originated with Varian’s (1980) model, especially Kocas and Kiyak (2006), and analyze oligopolistic markets where buyers have reservation values drawn from a common distribution function rather than a single value (inelastic demand), as typically assumed in the models of Varian’s or Kocas and Kiyak’s type. The model presented in this paper is developed from the simplest symmetric set-up (uninformed buyers are assigned to sellers evenly) to the most complex asymmetric set-up with many competing sellers (uninformed buyers are distributed over sellers unevenly). The most complex set-up theoretically rationalizes the empirical findings of Kocas and Kiyak. In the equilibrium of my model, all sellers randomly choose prices from a non-trivial interval for (almost) every seller, while in Kocas and Kiyak’s theoretical model only two sellers randomize while others always offer the same price.
    Keywords: Oligopoly; price competition; price dispersion
    JEL: L11 D43
    Date: 2010–08
  2. By: Timothy Dunne; Shawn Klimek; James Schmitz, Jr.
    Abstract: In the mid 1980s, the U.S. cement industry faced a large increase in foreign competition. Foreign cement producers began offering cement at very large discounts on U.S. prices. We show that productivity (measured by TFP) in the industry was falling during the 1960s and 1970s, but that following the increase in competition, productivity has reversed course and is growing strongly. When foreign competition was weak, productivity fell. When it was strong, productivity grew robustly. We explore the reasons for the large productivity increase. We argue that a large share of the productivity gains resulted from significant changes in management practices at plants.
    Date: 2010–09
  3. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: This paper develops a contest model of a professional sports league in which clubs maximize a weighted sum of profits and wins (utility maximization). The model analyzes how more win-orientated behavior of certain clubs affects talent investments, competitive balance and club profits. Moreover, in contrast to traditional models, we show that revenue sharing does not always reduce investment incentives due to the dulling effect. We identify a new effect of revenue sharing called the "sharpening effect". In the presence of the sharpening effect (dulling effect), revenue sharing enhances (reduces) investment incentives and improves (deteriorates) competitive balance in the league.
    Keywords: Competitive balance, contest, invariance proposition, objective function, revenue sharing, team sports league, utility maximization
    JEL: L83 D43 C72
    Date: 2010–10
  4. By: Mingfeng Lin (Department of Management Information Systems, Eller College of Management, University of Arizona); Siva Viswanathan (Department of Decision, Operations and Information Technologies, R.H. Smith School of Business, University of Maryland, College Park); Ritu Agarwal (Department of Decision, Operations and Information Technologies, R.H. Smith School of Business, University of Maryland, College Park)
    Abstract: We study whether and how contractual arrangements (fixed price vs. time-and-materials contracts) change the effect of reputation, certification, and language characteristics on the chances of winning outsourcing contracts. Using a comprehensive dataset from an online outsourcing marketplace, we model how buyers choose among bidding vendors, and how the effects of these variables change under different contract forms. Our results show that online reputation is an important predictor of success only for fixed-price contracts, but not significant for times-and-materials contracts. In other words, contract forms can mitigate the typical Matthew Effect associated with online reputation systems. Contrary to popular belief, certifications do not increase the chances of winning regardless of the contract forms. Linguistic features of private communications from the vendor to the buyer also affect the chances of winning, and different dimensions have different effects when contract forms change. Our study is one of the first to study the interaction between contract formats and different signals that vendors can reveal to buyers in the competitive bidding process, and is also one of the first to investigate how texts of private communications affect buyers' contracting decisions.
    Keywords: two-sided markets, asymmetric information, contract, outsourcing, offshoring, reputation, certification, text analysis.
    JEL: D02 D82 D83 D86 L14 L86 M51
    Date: 2010–10
  5. By: Shinya Sugawara (Graduate School of Economics, University of Tokyo); Yasuhiro Omori (Faculty of Economics, University of Tokyo)
    Abstract: This paper provides an econometric analysis on a duopoly game in the Japanese domestic airline market. We establish a novel Bayesian estimation approach for the entry game, which is free from the conventional identification problem and thus allows the incorporation of flexible inference techniques. We find asymmetric strategic interactions between Japanese firms, which implies that competition will still be influenced by the former regulation regime. Furthermore, our prediction analysis indicates that the new Shizuoka airport will suffer from a lack of demand.
    Date: 2010–10
  6. By: Davud Rostam-Afschar
    Abstract: The amendment to the German Trade and Crafts Code in 2004 offers a natural experiment to asses the causal effects of this reform on the probabilities of being self-employed and transition into and out of self-employment, using cross-sections (2002-2006) of German microcensus data. This study applies the difference-in-differences technique in logit models for four occupational groups. Easing the educational entry requirement has fostered self-employment significantly for less qualified craftsmen, almost doubling the entry probability, even as exit rates remained unaffected. Weaker effects occur for other occupational groups. These findings have implications for the design of regulations with educational requirements.
    Keywords: Regulation, Entrepreneurship, Educational entry requirement, Natural experiment, Craftsmanship
    JEL: L51 J24 I28 M13
    Date: 2010
  7. By: Henry Hyatt; Sang Nguyen
    Abstract: Numerous studies have documented a positive association between information technology (IT) investments and business- and establishment-level productivity, but these studies usually pay sole or disporportionate attention to small- or medium-sized entities. In this paper, we revisit the evidence for manufacturing plants presented in Atrostic and Nguyen (2005) and show that the positive relationship between computer networks and labor productivity is only found among small- and medium-sized plants. Indeed, for larger plants the relationship is negative, and employment-weighted estimates indicate computer networks have a negative relationship with the productivity of employees, on average. These findings indicate that computer network investments may have an ambiguous relationship with aggregate labor productivity growth.
    JEL: L6 O3
    Date: 2010–09
  8. By: Tarun Sabarwal (Department of Economics, University of Kansas); Randal Watson (Department of Economics, University of Texas)
    Abstract: We analyze the contracting problem between a shopping mall and potential anchors (large stores) in a market where consumers with high search costs must choose shopping destinations prior to learning prices. Our model incorporates the interaction between contracting and asymmetric firm sizes into a framework of competing platforms. The mall is but one of three potential destinations in the market, complemented by a stand-alone location for a large store, and a competitive ‘downtown’ centre occupied by small retailers. As in Dudey’s (1990) homogeneousgood framework, consumers choose to visit only one of these locations, based on expected prices at each site. A game of sequential contracting for slots at the mall determines the equilibrium distribution of firms across locations based on their costs and relative bargaining power. We analyze the effects of three policies. First, prohibition of the stand-alone site can increase social welfare, by alleviating excess entry and countering inefficiencies in contracting between the mall owner and potential anchors. Second, subsidies for downtown may push prices at the mall closer to socially efficient levels, but can never increase welfare if the market is initially dominated by a stand-alone big store. A subsidy’s effect on the equilibrium size distribution of mall tenants depends on the concavity of demand. Third, a merger between two big stores can increase social welfare, in part by ameliorating a problem of externalities on non-traders in the contracting with the mall owner. Merged anchor stores that operate at stand-alone sites may retain occupancy of mall space for purely strategic reasons, in order to deter entry.
    Date: 2010–10
  9. By: Ornella Tarola; Sandro Trento
    Abstract: Firms in equipment-intensive sectors, where investment in production is performed at diminishing marginal cost, spend billions of dollars in equipment and production capacity. Typically, this expenditure is induced by either the replacement of existing equipment, which deteriorates with age and can result in higher operating costs and lower production capacity, or further investment, to benefit from any technological improvement embedded in new equipment. We identify the optimal price policy, and the ensuing optimal sequence of investment timing a privatized firm selects through time and compare them with choices made at the time when such a type of firm was under public-ownership.
    Keywords: planning investment; dynamic programming; economic behavior; privatization
    JEL: D21 L21 L23
    Date: 2010–10
  10. By: Snorre Kverndokk and Knut Einar Rosendahl (Statistics Norway)
    Abstract: Popular instruments to regulate consumption of oil in the transport sector include fuel taxes, biofuel requirements, and fuel efficiency. Their impacts on oil consumption and price vary. One important factor is the market setting. We show that if market power is present in the oil market, the directions of change in consumption and price may contrast those in a competitive market. As a result, the market setting impacts not only the effectiveness of the policy instruments to reduce oil consumption, but also terms of trade and carbon leakage. In particular, we show that under monopoly, reduced oil consumption due to increased fuel efficiency will unambiguously increase the price of oil.
    Keywords: Transport regulations; oil market; monopoly; terms-of-trade effects; carbon leakage
    JEL: D42 Q54 R48
    Date: 2010–09

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