nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒02‒26
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competitive Prices as Profit-Maximizing Cartel Prices By Harold Houba; Evgenia Motchenkova; Quan Wen
  2. Free Entry, Market Diffusion, and Social Inefficiency with Endogenously Growing Demand By Hiroshi Kitamura; Akira Miyaoka; Misato Sato
  4. Platform Pricing Structure and Moral Hazard By Guillaume Roger; Luis I. Vasconcelos
  5. Inverse Adverse Selection: The Market for Gems By Giuseppe Dari-Mattiacci; Sander Onderstal; Francesco Parisi
  6. Market Power in Water Markets By Erik Ansink; Harold Houba

  1. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University)
    Abstract: Even under antitrust enforcement, firms may still form a cartel in an infinitely-repeated oligopoly model when the discount factor is sufficiently close to one. We present a linear oligopoly model where the profit-maximizing cartel price converges to the competitive equilibrium price as the discount factor goes to one. We then identify a set of necessary conditions for this seemingly counter-intuitive result.
    Keywords: Antitrust enforcement; Cartel; Oligopoly; Repeated game
    JEL: L4 C7
    Date: 2010–04–27
  2. By: Hiroshi Kitamura (Faculty of Economics, Sapporo Gakuin University); Akira Miyaoka (Graduate School of Economics, Osaka University); Misato Sato (Graduate School of Economics, GeorgeWashington University)
    Abstract: This paper analyzes market diffusion in the presence of oligopolistic interaction among firms. Market demand is positively related to past market size because of consumer learning, networks, and bandwagon effects. Firms enter the market freely in each period with fixed costs and compete in quantities. We demonstrate that free entry leads to a socially inefficient number of firms over time, and that the nature of the inefficiency changes as the market grows: the number of firms is initially insufficient but eventually excessive. This is in contrast with previous findings in the theoretical literature.
    Keywords: Free Entry; Market Diffusion; Intertemporal Externalities; Entry Regulation.
    JEL: D11 L11 L14
    Date: 2011–02
  3. By: Marco Capasso; Elena Cefis; Koen Frenken
    Abstract: We compare the industrial dynamics in the core, semi-periphery and periphery in The Netherlands in terms of firm entry-exit, size, growth and sectoral location patterns. The contribution of our work is to provide the first comprehensive study on spatial differentiation in industrial dynamics for all firm sizes and all sectors, including services. We find that at the aggregate level the spatial pattern of industrial dynamics is consistent with the spatial product lifecycle thesis: entry and exit rates are highest in the core and lowest in the periphery, while the share of persistently growing firms is higher in the periphery than in the core. Disaggregating the analysis to the sectoral level following the Pavitt-Miozzo-Soete taxonomy, findings are less robust. Finally, sectoral location patterns are largely consistent with the spatial product lifecycle model: Fordist sectors are over-represented in the periphery, while sectors associated with the ICT paradigm are over-represented in the core, with the notable exception of science-based manufacturing.
    Keywords: Entry, exit, spatial product lifecycle, Fordist paradigm, ICT paradigm
    JEL: L25 L26 L60 L80 O18 O33 R10
    Date: 2011–01
  4. By: Guillaume Roger (School of Economics, The University of New South Wales); Luis I. Vasconcelos (Department of Economics, Universidade Nova de Lisboa)
    Abstract: We study pricing by a monopoly platform that matches buyers and sellers in an environment with cross-market externalities. Said platform has no private information, does not set the commodity's price and can only charge trading parties for the transaction. Our innovation consists in introducing moral hazard on the sellers' side and an equilibrium notion of platform reputation in an infinite horizon model. With linear fees the platform can mitigate, but not eliminate, the loss of reputation induced by moral hazard. If lump-sum fees (registration fees) can be levied, moral hazard can be overcome. The upfront payment determines the participation threshold of sellers and extracts them, while (lower) transactions fees provide incentives for good behavior. This breaks the equivalence of lump-sum payments and linear fees (Rochet and Tirole (2006)). We draw implications for the role of subsidies (Caillaud and Jullien (2003)).
    Keywords: Platforms; Two-Sided Markets; Reputation; Moral Hazard
    JEL: L11 L12 L14 L81 D21 D82
    Date: 2010–11
  5. By: Giuseppe Dari-Mattiacci (University of Amsterdam); Sander Onderstal (University of Amsterdam); Francesco Parisi (University of Minnesota, and University of Bologna)
    Abstract: This paper studies markets plagued with asymmetric information on the quality of traded goods. In Akerlof's setting, sellers are better informed than buyers. In contrast, we examine cases where buyers are better informed than sellers. This creates an inverse adverse selection problem: The market tends to disappear from the bottom rather than from the top. In contrast to the traditional model, it is the high-value goods (gems) that are traded on the market, rather than the low-value goods (lemons). We investigate the consequences of this inverse adverse selection and its potential solutions. The uninformed buyer in a traditional market for lemons experiences the quality of the good he purchased; instead, the uninformed seller may never know the quality of the good that he sold. This renders the conventional legal and contractual solutions to the lemons problem often ineffective in the gems case. We further explore the theoretical and practical appeal of m arket, contractual, and legal solutions. Our results show that auctions (competition among many informed buyers) provide a solution to the inverse adverse selection problem.
    Keywords: Lemons; Gems; Adverse selection; Asymmetric information; Auction
    JEL: D44 D82 D86 K12
    Date: 2011–01–27
  6. By: Erik Ansink (IVM, VU University Amsterdam, and Wageningen University); Harold Houba (VU University Amsterdam)
    Abstract: Water markets with market power are analysed as multi-market Cournot competition in which the river structure constrains access to local markets and limited resources impose capacity constraints. Conditions for uniqueness are identified. Lerner indices are larger under binding resource constraints. The number of cases explodes in the number of local markets. Under quadratic benefit functions and symmetric constant marginal extraction costs, closed-form solutions for selected cases are derived, and numerical implementation through a single optimization program is available. Upstream locations face less competition than downstream. Observed price patterns in the Goulburn-Murray Irrigation District are consistent with the theoretical results.
    Keywords: Water markets; oligopoly; market power; Cournot-Walras equilibrium
    JEL: C72 C73 Q25
    Date: 2010–05–27

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