nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒05‒14
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Cournot Oligopoly and concavo-concave demand By Christian Ewerhart
  2. Monopolistic competition in general equilibrium: beyond the CES By ZHELOBODKO, Evgeny; KOKOVIN, Sergey; PARENTI, Mathieu; THISSE, Jean - François
  3. Entry and Competition in Differentiated Products Markets By Schaumans, C.B.C.; Verboven, F.L.
  4. Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms? By Brekke, Kurt R.; Siciliani, Luigi; Straume, Odd Rune
  5. The complementarity foundations of industrial organization By CALCIANO, Filippo L.
  6. Mergers and Partial Ownership. By Foros, Øystein; Kind, Hans Jarle; Shaffer, Greg
  7. Merger simulations with observed diversion ratios. By Mathiesen, Lars; Nilsen, Øivind Anti; Sørgard, Lars
  8. The quality factor in patent systems By Bruno van Pottelsberghe
  9. Individual Preferences, Organization, and Competition in a Model of R&D Incentive Provision By Nicola Lacetera; Lorenzo Zirulia

  1. By: Christian Ewerhart
    Abstract: Using an expanded notion of concavity, the N-fi…rm Cournot model is reviewed to obtain generalized and unifi…ed conditions for existence of a pure strategy Nash equilibrium. The main theorem imposes independent conditions on inverse demand (generalized concavity) and cost functions (monotonicity). No separate assumption for large outputs is needed. We also find new conditions for strict quasiconcavity and equilibrium uniqueness.
    Keywords: Cournot competition, existence and uniqueness of Nash equilibrium, generalized concavity, supermodular games.
    JEL: L13 C72 C62
    Date: 2011–04
  2. By: ZHELOBODKO, Evgeny (Novosibirsk State University, Russia); KOKOVIN, Sergey (Novosibirsk State University and Sobolev Institute of Mathematics, Russia); PARENTI, Mathieu (Université Paris 1 and PSE, France); THISSE, Jean - François (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; Paris School of Economics and CEPR)
    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: 2011–02–01
  3. By: Schaumans, C.B.C.; Verboven, F.L. (Tilburg University, Center for Economic Research)
    Abstract: We propose a methodology for estimating the competition effects from entry when firms sell differentiated products. We first derive precise conditions under which Bres- nahan and Reiss'entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition effects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition effects from entry. We apply our approach to seven different local service sectors. We find that entry typically leads to significant market expansion, implying that traditional ETRs may substantially underestimate the com- petition effects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insignificant effects. In one sector, we find that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.
    Keywords: competition;entry;local services sectors;entry threshold ratios.
    JEL: K21 L13 L41
    Date: 2011
  4. By: Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Siciliani, Luigi (University of York); Straume, Odd Rune (University of Minho)
    Abstract: In many markets, such as education, health care and public utilities, firms are often profit-constrained either due to regulation or because they have non-profit status. At the same time such firms might have altruistic concerns towards consumers. In this paper we study semi-altruistic firms’ incentives to invest in quality and cost-reducing effort when facing constraints on the distribution of profits. Using a spatial competition framework, we derive the equilibrium outcomes under both quality competition with regulated prices and qualityprice competition. Profit constraints always lead to lower cost-efficiency, whereas the effects on quality and price are ambiguous. If altruism is high (low), profit-constrained firms offer higher (lower) quality and lower (higher) prices than firms that are not profit-constrained. Compared with the first-best outcome, the cost-efficiency of profit-constrained firms is too low, while quality might be over- or underprovided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.
    Keywords: Profit constraints; Quality competition; Semi-altruistic providers.
    JEL: D21 D43 L13 L30
    Date: 2011–02–07
  5. By: CALCIANO, Filippo L. (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; Department of Economics, University of Rome 3, Italy)
    Abstract: In this paper we review the state of the art of Games with Strategic Complementarities (GSC), which are fundamental tools in modern Industrial Organization. The originality of the paper lies in the way the material is presented. Indeed, the mathematical aspects of GSC are complex and scattered in a literature which spans a long time period and a variety of research fields such as economics, applied mathematics and operations research. We organize a large amount of material in a unified and self-contained way, and concentrate on the intuitions and conceptual points that lie in the background of the mathematical modeling, with special emphasis on the modeling of complementarity. On the technical side, we investigate in details the choice and content of the assumptions. The scope of the paper is to allow the applied researcher to understand the theory, so that she may rapidly develop her own ability to deal with concrete problems.
    Keywords: strategic complementarity, oligopoly theory, supermodularity, Nash equilibria, lattices
    JEL: C60 C70 C72
    Date: 2011–01–01
  6. By: Foros, Øystein (Dept of Finance and Management Science, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Shaffer, Greg (University of Rochester and University of East Anglia)
    Abstract: In this paper we compare the profitability of a merger to the pro…tability of a partial ownership arrangement and …nd that partial ownership arrangements can be more profiable for the acquiring and acquired firm because they can result in a greater dampening of competition. We also derive comparative statics on the prices of the acquiring firm, the acquired firm, and the outside firms. In a dual context, we show that a cross-majority owner may have incentives to sell a fraction of the shares in one of the firms he controls to a silent investor who is outside the industry. Aggregate ex post operating profit in the two firms controlled by the cross-majority shareholder then increases, such that both the cross-majority shareholder and the silent investor will be better o¤ with than without the partial divestiture.
    Keywords: Media economics; Mergers; Corporate Control; Financial Control
    JEL: L13 L22 L82
    Date: 2010–01–21
  7. By: Mathiesen, Lars (Dept. of Economics, Norwegian School of Economics and Business Administration); Nilsen, Øivind Anti (Dept. of Economics, Norwegian School of Economics and Business Administration); Sørgard, Lars (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: A common approach to merger simulations used in antitrust cases is to calibrate demand from market shares and a few additional parameters. When the products involved in the merger case are differentiated along several dimensions, the resulting diversion ratios may be very different from those based upon market shares. This again may affect the predicted post-merger price effects. This article shows how merger simulation can be improved by using observed diversion ratios. To illustrate the effects of this approach we use diversion ratios from a local grocery market in Norway. In this case diversions from the acquired to the acquiring stores were considerably smaller than suggested by market shares, and the predicted average price increase from the acquisition was 40 % lower using this model rather than a model based upon market shares. This analysis also suggests that even a subset of observed diversion ratios may significantly change the prediction from a merger simulation based upon market shares.
    Keywords: Merger simulation; diversion ratio; asymmetric differentiation; merger policy.
    JEL: K21 L11 L41
    Date: 2010–09–30
  8. By: Bruno van Pottelsberghe
    Abstract: In this paper, Bruegel senior Fellow Bruno van Pottelsberghe develops a methodology to compare the quality of examination services in different patent offices. Quality is defined as the extent to which patent offices comply with their patentability conditions in a transparent way. The methodology consists of a two-layer analytical framework encompassing 'legal standards' and their 'operational design', which includes several interdependent components that affect the stringency and transparency of the filtering process.
    Date: 2010–07
  9. By: Nicola Lacetera; Lorenzo Zirulia
    Abstract: Understanding the organization of R&D activities requires the simultaneous consideration of scientific workers' talent and tastes, companies' organizational choices, and the characteristics of the relevant industry. We develop a model of the provision of incentives to corporate scientists, in an environment where (1) scientists engage in multiple activities when performing research; (2) knowledge is not perfectly appropriable; (3) scientists are responsive to both monetary and non-monetary incentives; and (4) firms compete on the product market. We show that both the degree of knowledge spillovers and of market competition affect the incentives given to scientists, and these effects interact. First, high knowledge spillovers lead firms to soften incentives when product market competition is high, and to strengthen incentives when competition is low. Second, the relationship between the intensity of competition and the power of incentives is U-shaped, with the exact shape depending on the degree of knowledge spillovers. We also show that the performance-contingent pay for both applied and basic research increases with the non-pecuniary benefits that scientists obtain from research. We relate our findings to the existing empirical research, and also discuss their implications for management and public policy.
    JEL: L1 L22 M12 O31 O32
    Date: 2011–05

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