nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒01‒30
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Merger enforcement in two-sided markets By Przemyslaw Jeziorski
  2. Sunk costs, market contestability, and the size distribution of firms By Kessides, Ioannis N.; Tang, Li
  3. Endogenous Market Structures and Innovation By Federico Etro
  4. Oligopolistic Screening and Two-way Distortion By Michela Cella; Federico Etro
  5. Strategic Advertising for Entry Deterrence Purposes By COCCORESE, Paolo
  6. Competitive mixed bundling of vertically differentiated products By Illtae Ahn; Kiho Yoon
  7. Networks of Collaboration in Multi-market Oligopolies By Billand, Pascal; Bravard, Christophe; Chakrabarti, Subhadip; Sarangi, Sudipta
  8. Rationally Inattentive Seller: Sales and Discrete Pricing By Filip Matejka
  9. Posted Pricing as a Plus Factor By Przemyslaw Jeziorski and Ilya Segal
  10. Taxicab regulation and urban residents' expectations from policy makers: a survey in eight cities By Richard Darbéra

  1. By: Przemyslaw Jeziorski
    Abstract: This paper studies mergers in two-sided markets by estimating a structural supply and demand model and performing counterfactual experiments. The analysis is performed on data for a merger wave in U.S. radio that occurred between 1996 and 2006. The paper makes two main contributions. First, I identify the conflicting incentives of merged firms to exercise market power on both sides of the market (listeners and advertisers in the case of radio). Second, I disaggregate the effects of mergers on consumers into changes in product variety and changes in supplied ad quantity. I find that firms have moderate market power over listeners in all markets, extensive market power over advertisers in small markets and no market power over advertisers in large markets. Counterfactuals reveal that extra product variety created by post-merger repositioning increased listeners' welfare by 1.3% and decreased advertisers' welfare by about $160m per-year. However, subsequent changes in supplied ad quantity decreased listener welfare by 0.4% (for a total impact of +0.9%) and advertiser welfare by an additional $140m (for a total impact of -$300m).
    Date: 2010–07
  2. By: Kessides, Ioannis N.; Tang, Li
    Abstract: This paper offers a new economic explanation for the observed inter-industry differences in the size distribution of firms. The empirical estimates--based on three temporal (1982, 1987, and 1992) cross-sections of the four-digit United States manufacturing industries--indicate that increased market contestability, as signified by low sunk costs, tends to reduce the dispersion of firm sizes. These findings provide support for one of the key predictions of the theory of contestable markets: that market forces under contestability would tend to render any inefficient organization of the industry unsustainable and, consequently, tighten the distribution of firms around the optimum.
    Keywords: Markets and Market Access,Economic Theory&Research,Water and Industry,Access to Markets,Debt Markets
    Date: 2011–01–01
  3. By: Federico Etro (Department of Economics, University Of Venice, Ca’ Foscari)
    Abstract: One of the pioneering works on endogenous market structures, by Tandon (1984), has extended the standard Cournot model with linear demand to endogenous entry and sunk R&D costs to show that the endogenous number of firms is independent from the size of the market. I generalize the model in many directions and show that, as long as the exogenous fixed costs are positive, the endogenous market structure is naturally characterized by an inverted-U relation between market size and number of firms, in line with the celebrated hypothesis of Sutton (1991).
    Keywords: Oligopoly, Endogenous entry, Sunk costs, RD investment
    JEL: L1
    Date: 2010
  4. By: Michela Cella (Department of Economics, University Of Milan, Bicocca); Federico Etro (Department of Economics, University Of Venice, Ca’ Foscari)
    Abstract: We analyze the choice of incentive contracts by oligopolistic firms that compete on the product market. Managers have private information and in the first stage they exert cost reducing effort. In equilibrium the standard "no distortion at the top" property disappears and two way distortions are optimal. We extend our analysis to other informational, contractual and competitive settings.
    Keywords: Oligopoly, screening, two way distortion, incentives, RD investment
    JEL: D21 D82 D86 L13 L22
    Date: 2010
  5. By: COCCORESE, Paolo (CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy)
    Abstract: This paper evaluates the possible effects of advertising on conditions of entry in a market with one incumbent and one potential entrant. Through a game-theoretic framework, it is shown that the use of pre-entry advertising expenditures (which are supposed to exhibit diminishing returns) may discourage entry even when firms behave rationally and face the same conditions of cost and demand.
    Keywords: market structure; advertising
    JEL: L10
    Date: 2011–01–18
  6. By: Illtae Ahn (Department of Economics, Chung-Ang University, Seoul, Republic of Korea); Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We examine mixed bundling in a competitive environment that incorporates vertical product differentiation. We show that, compared to the equilibrium without bundling, (i) prices, profits and social welfare are lower, whereas (ii) consumer surplus is higher in the equilibrium with mixed bundling. In addition, the population of consumers who purchase both products from the same firm is larger in the equilibrium with mixed bundling. Further, when the quality gap between brands narrows under no bundling and symmetric mixed bundling, prices and profits decrease but social welfare and consumer surplus increase. When quality differentiation is asymmetric across products, however, complicated effects occur on prices and profits due to strategic interdependence that mixed bundling creates.
    Keywords: mixed bundling, vertical differentiation, quality advantage, competitive bundling
    JEL: D43 L13
    Date: 2011
  7. By: Billand, Pascal; Bravard, Christophe; Chakrabarti, Subhadip; Sarangi, Sudipta
    Abstract: The result that firms competing in a Cournot oligopoly with pairwise collaboration form a complete network under zero or negligible link formation costs provided by Goyal and Joshi (2003) no longer hold in multi-market oligopolies. Link formation in one market affects a firm’s profitability in another market in a possibly negative way resulting in the fact that it is no longer always profitable in an unambiguous manner. With non-negative link formation costs, the stable networks have a dominant group architecture and efficient networks are charecterized by at most one non-singleton component with a geodesic distance between players that is less than three.
    Keywords: networks; collaboration; R & D
    JEL: L13 L20 C70
    Date: 2010–11–01
  8. By: Filip Matejka
    Abstract: This paper presents a model of a rationally inattentive seller responding to shocks to unit input cost. The model generates price series imultaneously exhibiting all three of the following features that can be found in the data. 1) Prices change frequently. 2) Responses of prices to aggregate variables are delayed. 3) Prices move back and forth between a few rigid values. Discrete pricing arises even if the unit input cost varies in a continuous range. Results of the model also agree with the evidence that reductions in price, e.g. sales, are usually short-lasting and that the highest price in a sample tends to be the most quoted price. Discrete and asymmetric pricing is a seller's optimal response to his limited information capacity. Moreover, the model provides rationale for faster responses to aggregate shocks in industries with more volatile idiosyncratic shocks as well as for a steeper Philip's curve in less stable aggregate conditions.
    Keywords: Rational inattention; nominal rigidity; sales
    JEL: D8 E3
    Date: 2010–03
  9. By: Przemyslaw Jeziorski and Ilya Segal
    Abstract: We study users' response to sponsored-search advertising using data from Microsoft's Live AdCenter distributed in the "Beyond Search" initiative. We estimate a structural model of utility maximizing users, which quantifies "user experience" based on their "revealed preferences," and predicts user responses to counterfactual ad placements. In the model, each user chooses clicks sequentially to maximize his expected utility under incomplete information about the relevance of ads. We estimate the substitutability of ads in users' utility function, the fixed effects of different ads and positions, user uncertainty about ads' relevance, and user heterogeneity. We find substantial substitutability of ads, which generates large negative externalities: 40% more clicks would occur in a hypothetical world in which each ad faces no competition. As for counterfactual ad placements, our simulations indicate that CTR-optimal matching increases CTR by 10.1% while user-optimal matching increases user welfare by 13.3%. Moreover, targeting ad placement to specific users could raise user welfare by 59%. Here, we find a significant suboptimality (up to 16% of total welfare) in case the search engine tries to implement a sophisticated matching policy using a misspecified model that does not account for externalities. Finally, user welfare could be raised by 14% if they had full information about the relevance of ads to them.
    Date: 2010–08
  10. By: Richard Darbéra (LATTS - Laboratoire Techniques, Territoires et Sociétés - CNRS : UMR8134 - Université Paris-Est - Ecole des Ponts ParisTech)
    Abstract: Everywhere in the world, residents want better and cheaper taxi services. But what they mean by better services and how they think prices could be lowered varies widely from one city to the other. These differences underline the specific issues both regulators and taxi operators have to address in each city. Our survey was addressed the city residents of Paris, London, New York, Amsterdam, Lisbon, Berlin, Dublin, Stockholm. These residents were screened to be representative of the urban population of each city in terms of gender, age, and location (centre and suburbs). Our questionnaire included two open questions in which they were asked to give their own opinions on two issues: (i) what reforms would you like your government to implement in your city to make taxi services better cater for your needs and (ii) what are the features of the taxis services you have experienced abroad that you would like to see at home. What we are presenting here is a detailed analysis of the 4700 answers we got to these two open questions. We already presented an analysis of the 40 multiple-choice questions results in a previous paper (2) given at the last World Conference on Transport Research (WCTR 2010 Lisbon).
    Keywords: taxi; regulation; survey;
    Date: 2010–11–05

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