nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒04‒02
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competitive Targeted Advertising with Price Discrimination By Rosa Branca Esteves; Joana Resende
  2. Repositioning Dynamics and Pricing Strategy By Ellickson, Paul B.; Misra, Sanjog; Nair, Harikesh S.
  3. Monopolistic Competition in General Equilibrium: Beyond the CES By Evgeny Zhelobodko; Sergey Kokovin; Mathieu Parenti; Jacques-François THISSE
  4. Access Regulation, Entry and the Investment Ladder in Telecommunications By Fabio Manenti; Antonio Sciala'
  5. Antitrust Immunity and International Airline Alliances By William Gillespie; Oliver M. Richard

  1. By: Rosa Branca Esteves (Universidade do Minho - NIPE); Joana Resende (Universidade do Porto - FEP)
    Abstract: This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market where the distribution of consumers' preferences is discrete and where advertising plays two major roles. It is used by firms as a way to transmit relevant information to otherwise uninformed consumers, and it is used as a price discrimination device. We compare the firms' optimal marketing mix (advertising and pricing) when they adopt mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. If firms are able to adopt targeted advertising strategies, we find that the symmetric price equilibrium is in mixed strategies, while the advertising is chosen deterministically. Our results also unveil that as long as we allow for imperfect substitutability between the goods, ?rms do not necessarily target more ads to their own market. In particular, firms' optimal marketing mix leads to higher advertising reach in the rival's market than in the firms' own market, provided that advertising costs are sufficiently low in relation to the consumer's reservation value. The comparison of the optimal marketing-mix under mass advertising strategies and targeted advertising strategies reveals that targeted advertising might constitute a tool to dampen price competition. In particular, if advertising costs are sufficiently low in relation to the value of the goods, we obtain that average prices with non-discrimination (mass advertising) are below those with price discrimination and targeted advertising (regardless of the market segment). Accordingly, when (i) goods are imperfect substitutes, (ii) advertising is not too expensive, and (iii) targeted advertising constitutes an effective price discrimination tool, price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry profits at the expense of consumer surplus.
    Date: 2011
  2. By: Ellickson, Paul B. (University of Rochester); Misra, Sanjog (University of Rochester); Nair, Harikesh S. (Stanford University)
    Abstract: We measure the revenue and cost implications to supermarkets of changing their price positioning strategy in oligopolistic downstream retail markets. Our estimates have implications for long-run market structure in the supermarket industry, and for measuring the sources of price rigidity in the economy. We exploit a unique dataset containing the price-format decisions of all supermarkets in the U.S. The data contain the format-change decisions of supermarkets in response to a large shock to their local market positions: the entry of Wal-Mart. We exploit the responses of retailers to WalMart entry to infer the cost of changing pricing-formats using a .revealed-preference. argument similar to the spirit of Bresnahan and Reiss (1991). The interaction between retailers and Wal-Mart in each market is modeled as a dynamic game. We find evidence that suggests the entry patterns of WalMart had a significant impact on the costs and incidence of switching pricing strategy. Our results add to the marketing literature on the organization of retail markets, and to a new literature that discusses implications of marketing pricing decisions for macroeconomic studies of price rigidity. More generally, our approach which incorporates long-run dynamic consequences, strategic interaction, and sunk investment costs, outlines how the paradigm of dynamic games may be used to model empirically firms' positioning decisions in Marketing.
    Date: 2011–01
  3. By: Evgeny Zhelobodko (Novosibirsk State University (Russia)); Sergey Kokovin (Novosibirsk State University and Sobolev Institute of Mathematics (Russia)); Mathieu Parenti (Université de Paris 1 and PSE (France)); Jacques-François THISSE (CORE, Université catholique de Louvain (Belgium), Université du Luxembourg, CEPR, and RIEB, Kobe University)
    Abstract: We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results.
    Keywords: monopolistic competition, additive preferences, love for variety, heterogeneous firms.
    JEL: D43 F12 L13
    Date: 2011–03
  4. By: Fabio Manenti (Università di Padova); Antonio Sciala' (Universita' Roma Tre)
    Abstract: This paper presents a model of competition between an incumbent and an entrant firm in telecommunications. The entrant has the option to enter the market with or without having preliminary invested in its own infrastructure; in case of facility based entry, the entrant has also the option to invest in the provision of enhanced services. In case of resale based entry the entrant needs access to the incumbent network. Unlike the rival, the incumbent has always the option to upgrade the existing network to provide advanced services. We study the impact of access regulation on the type of entry and on firms' investments. Without regulation, we find that the incumbent sets the access charge to prevent resale based entry and this overstimulates rival's investment that may turn out to be socially inefficient. Access regulation may discourage welfare enhancing investments, thus also inducing a socially inefficient outcome. We extend the model to account for negotiated interconnection in case of facilities based entry.
    Keywords: telecommunications, ladder of investment, access regulation, interconnection.
    JEL: L86 L96 L51
    Date: 2010–09
  5. By: William Gillespie (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Oliver M. Richard
    Abstract: Most of the major carriers worldwide have joined one of three international airline alliances. The U.S. Department of Transportation has granted immunity from the U.S. antitrust laws to many carriers within these alliances. This article assesses the competitive effects and efficiencies associated with such grants. A grant of antitrust immunity to carriers in an alliance reduces competition in routes where these carriers offer competing flights, and the data show that fares paid by passengers for travel in non-stop trans-Atlantic flights are higher in routes with fewer independent competitors. The data also show that the alliances can produce pricing efficiencies for trans-Atlantic passengers who travel with connecting itineraries, but antitrust immunity within an alliance is not necessary to achieve such efficiencies.
    Date: 2011–02

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