nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒03‒19
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Entry and exit in a vertically differentiated industry By Silviano Esteve-Pérez
  2. Strategic Choice of Channel Structure in an Oligopoly By X. Henry Wang; Lin Liu; JBill Z. Yang
  3. Noisy Signaling Monopoly By Leonard J. Mirman; Marc Santugini
  4. Price-Cost Margins and Shares of Fixed Factors By Konings, Jozef; Roeger, Werner; Zhao, Liqiu
  5. Targeted advertising with consumer search: an economic analysis of keywords advertising By Alexandre De Cornière

  1. By: Silviano Esteve-Pérez (University of Valencia)
    Abstract: This paper presents a duopoly model of firm rivalry in a vertically differentiated industry when market dynamics is explicitly accounted for. It shows how the interplay between demand (degree of product differentiation, demand elasticity) and cost (fixed and quality costs) factors determine firms' relative strength when quality is irreversible. The main strategic choices are product quality, price and the timing of entry and exit. Further, firms incur sunk quality costs at time of entry and operating fixed costs of maintaining quality. Although the low quality firm may outlast its rival in the declining phase, both firms wish to be the "quality leader".
    Keywords: Entry; Exit; Vertical product differentiation
    JEL: L13 L11
    Date: 2011–03
  2. By: X. Henry Wang (Department of Economics, University of Missouri-Columbia); Lin Liu; JBill Z. Yang
    Abstract: The traditional wisdom holds that the benefits of a decentralized channel structure arise from downstream competitive relationships. In contrast, Arya and Mittendorf (2007) showed that the value of decentralization can also arise from upstream interaction when the downstream firm conveys internal strife (decentralization) to an upstream external supplier. This paper extends the single firm centralization- decentralization choice model of Arya and Mittendorf (2007) to a strategic choice model in which all downstream competitors play a strategic centralization-decentralization game. We demonstrate that whether the main conclusions in the context of non-strategic choice of channel structure continue to hold when all firms play a centralization-decentralization game depends critically on the market structure of the upstream input market. Specifically, the conclusions are valid if all firms have exclusive upstream input suppliers but not so if the upstream input market is monopolized. Thus, whether the value of decentralization can arise from upstream interaction depends critically on the market structure of the upstream market.
    Keywords: Strategic Choice, Channel Structure, Oligopoly
    JEL: L22 D21
    Date: 2011–03–09
  3. By: Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal)
    Abstract: We provide a closed-form solution of the monopoly problem when the price imperfectly signals quality to the uninformed buyers, as well as expressions for the effects of noise on output, price, and information flows.
    Keywords: Asymmetric information, monopoly, learning, noise, quality, signaling
    Date: 2011–03
  4. By: Konings, Jozef; Roeger, Werner; Zhao, Liqiu
    Abstract: Reduced form approaches to estimate markups typically exploit variation in observed input and output. However, these approaches ignore the presence of fixed input factors, which may result in an overestimation of the price-cost margins. We first propose a new methodology to simultaneously estimate price-cost margins and the shares of fixed inputs. We then use Belgian firm level data for manufacturing and service sectors to show that markups are lower when taking into account fixed input factors. We find that the average price-cost margin of manufacturing firms is 0.041, compared to 0.090 when we do not control for fixed costs of production. We also show that price-cost margins increase with the share of fixed costs in turnover. Our findings provide new insights about observed high price-cost margins in service industries. In particular, we show that once fixed costs are taken into account, price-cost margins in service industries are comparable to those in manufacturing.
    Keywords: fixed input costs; price-cost margins; Solow residual
    JEL: L11 L13 L60
    Date: 2011–03
  5. By: Alexandre De Cornière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This article investigates the role of a search engine as an intermediary between firms and consumers. Search engines enable firms to target consumers who have revealed some specific needs through their query. In a framework with horizontal product differentiation, imperfect product information and in which consumers incur search costs, I show that introducing a "neutral" targeted advertising mechanism reduces social inefficiencies and tends to reduce the equilibrium price. Moreover, the accuracy of the mechanism has a non monotonic effect on the price of the good: the price is lowest when the accuracy is intermediate.
    Keywords: search-engine ; targeted advertising ; consumer search, product differentiation
    Date: 2011–03–09

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