nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒07‒27
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Merger efficiency and welfare implications of buyer power By Özlem Bedre-Defolie; Stéphane Caprice
  2. The Deterrence Effects of U.S. Merger Policy Instruments By Clougherty, Joseph A.; Seldeslachts, Jo
  3. Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs By Adrienne M. Ohler
  4. Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices By Charles J. Courtemanche; Art Carden

  1. By: Özlem Bedre-Defolie (ESMT European School of Management and Technology); Stéphane Caprice (Toulouse School of Economics)
    Abstract: This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are “waterbed effects,” that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, “anti-waterbed effects,” if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the final price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.
    Keywords: buyer mergers, non-linear supply contracts, merger efficiencies, size discounts, waterbed effects
    JEL: D43 K21 L42
    Date: 2011–07–14
    URL: http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-11-07&r=ind
  2. By: Clougherty, Joseph A.; Seldeslachts, Jo
    Abstract: We estimate the deterrence effects of U.S. merger policy instruments with respect to the composition and frequency of future merger notifications. Data from the Annual Reports by the U.S. DOJ and FTC allow industry based measures over the 1986-1999 period of the conditional probabilities for eliciting investigations, challenges, prohibitions, court-wins and court-losses: deterrence variables akin to the traditional conditional probabilities from the economics of crime literature. We find the challenge-rate to robustly deter future horizontal (both relative and absolute) merger activity; the investigation-rate to slightly deter relative-horizontal merger activity; the court-loss-rate to moderately affect absolute-horizontal merger activity; and the prohibition-rate and court-win-rate to not significantly deter future horizontal mergers. Accordingly, the conditional probability of eliciting an antitrust challenge (i.e., remedies and prohibitions) involves the strongest deterrence effect from amongst the different merger policy instruments.
    Keywords: antitrust; deterrence; merger policy
    JEL: K21 L40 L49
    Date: 2011–07
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:8482&r=ind
  3. By: Adrienne M. Ohler (Department of Economics, Illinois State University; Montana State University)
    Abstract: We examine the relationship between population characteristics and price dispersion for 75 prescription drugs in five markets. Based on models of price dispersion, we consider that search costs are likely lower for the elderly, who are repeat purchasers. Expected benefits from search are likely higher for low income households, who lack insurance. Our results are consistent with the hypothesis that for communities with a large percentage of elderly and poor population, search effort is greater for pharmaceutical drugs, causing lower price dispersion. By understanding the characteristics of who searches for low drug prices, we begin to identify the motives of consumers that might also lead to search for the lowest cost healthcare provider or lowest cost insurance. The results suggest that the 2004 Medicare legislation that closed the pharmaceutical donut hole may have reduced search by the elderly, increased price dispersion, and potentially increased the average price of prescription drugs.
    Keywords: search cost; price dispersion; prescription drugs
    JEL: D12 D83 I1
    Date: 2011–07
    URL: http://d.repec.org/n?u=RePEc:ils:wpaper:20110701&r=ind
  4. By: Charles J. Courtemanche; Art Carden
    Abstract: Prior research shows grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big box retailers – Costco and Walmart-owned Sam's Club – are quite different. Using city-level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers, and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along non-price dimensions such as product quality or quality of the shopping experience. We find no evidence that Sam’s Club entry affects grocery stores’ prices, consistent with Sam’s Club’s focus on small businesses instead of consumers.
    JEL: L11 L13 L81 R10
    Date: 2011–07
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:17220&r=ind

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