nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒01‒03
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Prices and Deadweight Loss in Multi-Product Monopoly By Rabah Amir; Jim Y. Jin; Gerald Pech; Michael Tröge
  2. Network Effects, Market Structure and Industry Performance By Rabah Amir; Natalia Lazzati
  3. Tying, Bundling, and Loyalty/Requirement Rebates By Nicholas Economides
  4. Discounts For Qualified Buyers Only By David McAdams
  5. The Economics of Network Neutrality By Nicholas Economides; Benjamin Hermalin
  6. Corporate R&D and firm efficiency: Evidence from Europe’s top R&D investors By Subal C. Kumbhakar; Raquel Ortega-Argilés; Lesley Potters; Marco Vivarelli; Peter Voigt
  7. Using Rival Effects to Identify Synergies and Improve Merger Typologies By Joseph A. Clougherty; Tomaso Duso
  8. Welfare Tradeoffs in U.S. Rail Mergers By Ivaldi, Marc; Mccullough, Gerard
  9. An Empirical Assessment of the 2004 EU Merger Policy Reform By Tomaso Duso; Klaus Gugler; Florian Szücs
  10. Advertising and R&D: Theory and evidence from France By Philippe Askenazy; Thomas Breda; Delphine Irac

  1. By: Rabah Amir (University of Arizona and University of Luxembourg); Jim Y. Jin (University of St Andrews); Gerald Pech (American University in Bulgaria); Michael Tröge (ESCP-Europe)
    Abstract: This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firm's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market and/or by technological improvements. We also characterize the e¤ects of market structure on industry performance, with an emphasis on departures from standard markets. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustrative examples with closed-form solutions are also provided.
    Keywords: multi-product monopoly prices, interdependent products, pricing complements, pricing substitutes, linear demand
    JEL: L12 D42
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:luc:wpaper:10-15&r=ind
  2. By: Rabah Amir (University of Luxembourg and University of Arizona); Natalia Lazzati (University of Arizona)
    Abstract: This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firmr's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market and/or by technological improvements. We also characterize the e¤ects of market structure on industry performance, with an emphasis on departures from standard markets. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustrative examples with closed-form solutions are also provided.
    Keywords: Network effects, demand-side externalities, monotone comparative statics, Cournot oligopoly, supermodularity
    JEL: C72 D43 L13 L14
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:luc:wpaper:10-16&r=ind
  3. By: Nicholas Economides (Stern School of Business, NYU)
    Abstract: I discuss the impact of tying, bundling, and loyalty/requirement rebates on consumer surplus in the affected markets. I show that the Chicago School Theory of a single monopoly surplus that justifies tying, bundling, and loyalty/requirement rebates on the basis of efficiency typically fails. Thus, tying, bundling, and loyalty/requirement rebates can be used to extract consumer surplus and enhance profit of firms with market power. I discuss the various setups when this occurs.
    Keywords: tying, ties, bundling, bundled rebates, loyalty discounts, loyalty requirement rebates, single monopoly surplus, monopolization, market power, foreclosure, antitrust
    JEL: C72 D42 D43 K21 L12 L40 L41 L42
    Date: 2010–12
    URL: http://d.repec.org/n?u=RePEc:net:wpaper:1026&r=ind
  4. By: David McAdams
    Abstract: The standard monopoly pricing problem is re-considered when the buyer can disclose his type (e.g. age, income, experience) at some cost. In the optimal sales mechanism with costly disclosure, the seller posts a price list, including a \sticker price" available to any buyer and a schedule of discounts available to those who disclose certain types. Unambiguous welfare implications of such a pricing policy are available in the limiting case when the buyer's type is fully informative: (i) The buyer is better o and the monopolist worse o when disclosure is more costly. (ii) When discounts are suciently rare, social welfare is strictly less than if the seller could not oer discounts.
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:duk:dukeec:10-62&r=ind
  5. By: Nicholas Economides (Stern School of Business, NYU); Benjamin Hermalin (Haas School of Business, U.C. Berkeley)
    Abstract: Pricing of Internet access has been characterized by two properties. Parties are directly billed only by the Internet Service Provider (ISP) through which they connect to the Internet and the ISP charges them on the basis of the amount of information transmitted rather than its content. These properties define a regime known as “network neutrality.” In 2005, some large ISPs proposed that application and content providers directly pay them additional fees for accessing the ISPs’ residential clients, as well as differential fees for prioritizing certain content. We analyze the private and social incentives to introduce such fees when the network is congested and more traffic implies delays. We find that network neutrality is welfare superior to bandwidth subdivision (granting or selling priority service). We also consider the welfare properties of the various regimes that have been proposed as alternatives to network neutrality. In particular, we show that the benefit of a zero-price “slow lane” is a function of the bandwidth the regulator mandates be allocated it. Extending the analysis to consider ISPs’ incentives to invest in more bandwidth, we show that, under general conditions, their incentives are greatest when they can price discriminate; this investment incentive offsets to some degree the allocative distortion created by the introduction of price discrimination. A priori, it is ambiguous whether the offset is sufficient to justify departing from network neutrality.
    Keywords: network neutrality, two-sided markets, Internet, monopoly, price discrimination, regulation, congestion
    JEL: L1 D4 L12 L13 C63 D42 D43
    Date: 2010–12
    URL: http://d.repec.org/n?u=RePEc:net:wpaper:1025&r=ind
  6. By: Subal C. Kumbhakar (State University of New York at Binghamton); Raquel Ortega-Argilés (IN+ Centre for Innovation, Technology and Policy Research, Instituto Superior Técnico); Lesley Potters (Utrecht School of Economics); Marco Vivarelli (Università Cattolica, Milano-Piacenza); Peter Voigt (JRC-IPTS)
    Abstract: The main objective of this study is to investigate the impact of corporate R&D activities on firm performance, measured by labour productivity. To this end, the stochastic frontier technique is used on a unique unbalanced longitudinal dataset on top European R&D investors over the period 2000–2005. The study quantifies technical inefficiency of individual firms. From a policy perspective, the results of this study suggest that – if the aim is to leverage firms’ productivity – emphasis should be put on supporting corporate R&D in high-tech sectors and, to some ex-tent, in medium-tech sectors. On the other hand, corporate R&D in the low-tech sector is found to have a minor effect in explaining productivity. Instead, encouraging investment in fixed assets appears important for the productivity of low-tech industries. Hence, the allocation of support for corporate R&D seems to be as important as its overall increase and an ‘erga omnes’ approach across all sectors appears inappropriate. However, with regard to technical efficiency, R&D intensity is found to be a pivotal factor in explaining firm efficiency. This is true for all industries.
    Keywords: Corporate R&D, productivity, technical efficiency, stochastic frontier analysis
    JEL: L2 O3
    Date: 2010–12
    URL: http://d.repec.org/n?u=RePEc:ipt:wpaper:201011&r=ind
  7. By: Joseph A. Clougherty; Tomaso Duso
    Abstract: The strategic management literature has found it difficult to differentiate between collusive and efficiency-based synergies in horizontal merger activity. We propose a schematic to classify mergers that yields more information on merger types and merger effects, and that can, moreover, distinguish between mergers characterized largely by collusion-based synergies and mergers characterized largely by efficiency-based synergies. Crucial to the proposed measurement procedure is that it encompasses the impact of merger events not only on merging firms – as is custom – but also on non-merging competitor firms (the rivals). Employing the event-study methodology with stock-market data on samples of large horizontal mergers drawn from the US and UK (an Anglo-Saxon sub-sample) and from the European continent, we demonstrate how the proposed schematic can better clarify the nature of merger activity. <br> <br> <i>ZUSAMMENFASSUNG - Die Literatur über strategisches Management hatte bisher Schwierigkeiten, zwischen wettbewerbsschädlichen und Effizienz steigenden Synergien bei horizontalen Zusammenschlüssen zu differenzieren. Wir schlagen einen konzeptionellen Rahmen vor, um Fusionen zu klassifizieren, welcher mehr Informationen sowohl über die Fusionstypologie als auch über die Wirkung von Zusammenschlüssen entschlüsselt und welcher eine klare Abgrenzung zwischen wettbewerbsschädlichen und wettbewerbsfreundlichen Fusionen erlaubt. Fundamental für diesen konzeptionellen Rahmen ist, dass er nicht nur die Wirkung der Fusion auf die fusionierenden Unternehmen (was typisch in der Literatur ist) umfasst, sondern auch ihre Wirkung auf die Rentabilität der Wettbewerber. Wir wenden eine Ereignisstudienmethode mit Aktiendaten an, um unsere Kategorisierung empirisch umzusetzen. Im Vergleich einer Stichprobe von Fusionen in der angelsächsischen Welt (US und Großbritannien) mit Fusionen zwischen kontinentaleuropäischen Firmen zeigen wir, wie unsere Methodologie hilfreich sein kann, die Art der Fusionsaktivitäten zu identifizieren.<i>
    Date: 2010–10
    URL: http://d.repec.org/n?u=RePEc:wzb:wzebiv:spii2010_13&r=ind
  8. By: Ivaldi, Marc; Mccullough, Gerard
    Abstract: The renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts. However, assessing the cost of such renegotiation remains an open issue from an empirical viewpoint. To address this question, we fit a structural principal-agent model with renegotiation on a set of urban transport service contracts. The model captures two important features of the industry. First, only two types of contracts are used in practice (fixed-price and cost-plus). Second, subsidies increase over time. We compare a scenario with renegotiation and a hypothetical situation with full commitment. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators.
    JEL: L11 L13 L41 L92
    Date: 2010–09–08
    URL: http://d.repec.org/n?u=RePEc:tse:wpaper:23459&r=ind
  9. By: Tomaso Duso; Klaus Gugler; Florian Szücs
    Abstract: Based on a database of 326 merger cases scrutinized by the European Commission between 1990 and 2007, we evaluate the economic impact of the change in Euro-pean merger legislation in 2004. We first propose a general framework to assess merger policy effectiveness, which is based on standard oligopoly theory and makes use of stock market reactions as an external assessment of the merger and the merger control decisions. We then focus on four different dimensions of effec-tiveness: 1) legal certainty; 2) frequency and determinants of type I and type II er-rors; 3) rent-reversion achieved by different merger policy tools; and 4) deterrence of anti-competitive mergers. To infer the economic impact of the merger policy reform, we compare the results of our four tests before and after its introduction. Our results suggest that the policy reform seems to have been only a modest im-provement of European merger policy. <br> <br> <i>ZUSAMMENFASSUNG - Eine empirische Bewertung der in 2004 eingeführten Reform der Europäischen Fusionskontrolle - Basierend auf einer Stichprobe von 326 Fusionsfällen, welche der Europäischen Kommission zwischen Januar 1990 und Dezember 2007 vorlagen, wird in diesem Beitrag die Wirkung der in Mai 2004 eingeführten neuen Regulierung für Firmenfusionen erforscht. Zuerst wird ein allgemeiner Ansatz vorgeschlagen, um die Effektivität der Fusionskontrolle zu evaluieren, welcher auf der Oligopoltheorie beruht und Fusionen und Fusionskontrollentscheidungen anhand der Reaktionen von Aktienmärkten bewertet. Vier unterschiedliche Aspekte der Effektivität der Fusionskontrolle werden dann untersucht: 1) die Rechtssicherheit, 2) die Häufigkeit und Determinanten von Entscheidungsfehlern erster und zweier Ordnung seitens der Kommission, 3) die effektive Reduzierung der wettbewerbswidrigen Wirkungen von Fusionen, erzielt von unterschiedlichen wettbewerbspolitischen Instrumenten und 4) die Abschreckung von wettbewerbsschädigenden Fusionen. Um die Wirking der neuen Regulierung abzuschätzen, werden die Resultate der vier Tests vor und nach der Einführung der Reform verglichen. Die Ergebnisse zeigen, dass die Reform nur zu einer mäßigen Verbesserung der Europäischen Fusionskontrolle geführt hat. <i>
    Keywords: merger control, regulatory reform, EU Commission, event-study
    Date: 2010–11
    URL: http://d.repec.org/n?u=RePEc:wzb:wzebiv:spii2010_16&r=ind
  10. By: Philippe Askenazy; Thomas Breda; Delphine Irac
    Abstract: This paper exploits a unique panel of 59,000 French firms over 1990-2004 to investigate the interactions between R&D, advertising and the competitive environment. The empirical findings confirm the predictions of a dynamic model that complements results known in static frameworks. First, more competition pushes Neck and Neck firms to advertise more to attract a larger share of consumers on their products or services. Second, for a given competitive environment, quality leaders spend more in advertising in order to extract maximal rents; thus, lower costs of ads may favor R&D.
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:pse:psecon:2010-45&r=ind

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