nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒08‒15
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Bertrand competition in markets with network effects and switching costs By Suleymanova, Irina; Wey, Christian
  2. Entry deterrence in banking: the role of cost asymmetry and adverse selection By Mallick, Indrajit
  3. Prediction Markets to Forecast Electricity Demand By Nabil I. Al-Najjar; Luciano De Castro
  4. Second-degree Price Discrimination and Inter-group Effects in Airline Routes between European Cities By Marco Alderighi; Alessandra Cento; Peter Nijkamp; Piet Rietveld
  5. Connectivity and Competition in Airline Networks: A Complexity Analysis of Lufthansa's Network By Aura Reggiani; Peter Nijkamp; Alessandro Cento

  1. By: Suleymanova, Irina; Wey, Christian
    Abstract: We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our modelerates four different market patterns: monopolization and market sharing which can be either monotone or alternating. A critical mass effect, where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effcts both monopoly and market sharing equilibria exist. Our welfare analysis reveals a fundamental conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms' incentives for compatibility and we examine how market outcomes are affected by the switching costs, market expansion, and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents' discount factors. --
    Keywords: Network Effects,Switching Costs,Bertrand Competition
    JEL: L13 D43 L41
    Date: 2011
  2. By: Mallick, Indrajit
    Abstract: Abstract In this paper, we review and explore the strategic mechanisms that deter entry in banking. The literature relies on externality between banks to generate entry deterrence. Typically, the externality generated is caused by differential adverse selection faced by incumbents and entrants. In this paper it is shown that adverse selection problem between a bank and its borrowers is neither a necessary nor a sufficient condition for entry deterrence. We show that cost asymmetry between different types of incumbents and private information about costs can generate conditional entry deterrence. This source of externality can cause entry deterrence just as other types of externalities created by differential adverse selection. Forward contracts can act as signaling device for incumbent costs. Incorporating adverse selection problem in the credit market in fact relaxes entry conditions: entry can take place even if the incumbent is of strong type and can signal credibly.
    Keywords: Key Words: Entry Deterrence; Cost Asymmetry; Adverse Selection; Signaling
    JEL: C70 G21
    Date: 2011–07–08
  3. By: Nabil I. Al-Najjar; Luciano De Castro
    Abstract: A preference is invariant with respect to a transformation tau if its ranking of acts is unaffected by a reshuffling of the states under tau. We show that any invariant preference must be parametric: there is a unique sufficient set of parameters such that the preference ranks acts according to their expected utility given the parameters. This property holds for all non-trivial preferences, provided only that they are reflexive, transitive, monotone, continuous and mixture linear.
    Date: 2010–10–01
  4. By: Marco Alderighi (Universita della Valle d'Aosta, Aosta, Italy; Universita Bocconi, Italy); Alessandra Cento (KLM Royal Dutch Airlines, Milano, Italy); Peter Nijkamp (VU University Amsterdam); Piet Rietveld (VU University Amsterdam)
    Abstract: This paper presents a model of second-degree price discrimination and inter-group effects to describe the full-service pricing behaviour in the passenger aviation market. Consumer heterogeneity is assumed on both a horizontal and a vertical dimension, while various distinct market structures, some of which include low-cost carriers (LCCs), are considered. In the theoretical model framework, we derive that the rivalry between full-service carriers (FSCs) reduces fare differences between the business and leisure segments. Furthermore, the presence of LCCs increases fare gaps between leisure and business travellers, and it also induces FSCs to decrease fares in the leisure segment and eventually to increase them in the business one. This last outcome emerges from a change in passenger arrangements caused by inter-group effects. In our empirical analysis, we use data on published airfares of Lufthansa, British Airways, KLM and Alitalia for the main city-pairs from Italy to Germany, the UK and the Netherlands. Our results show that the empirical results provide support for our theoretical propositions.
    JEL: L1 L93 D4
    Date: 2011–08–09
  5. By: Aura Reggiani (University of Bologna, Italy); Peter Nijkamp (VU University Amsterdam); Alessandro Cento (KLM Royal Dutch Airlines, Milan, Italy)
    Abstract: Information, communication and transport networks have always been in a state of flux, while they also influence each other. Extensive research efforts have been made to investigate the dynamics in the structure and use of networks, e.g., by means of network geometries, small-world effects and scale-free phenomena. We will illustrate these new developments on the basis of airline network evolution. The present paper provides a new contribution to the analysis of topological properties of complex airline networks. Using Lufthansa's networks as an example, this paper aims to show the empirical relevance of various network indicators - such as connectivity and concentration - for understanding changing patterns in airline network configurations. After an extensive discussion of various statistical results, a decision-aid method, viz. multi-criteria analysis, is used to investigate the robustness of our findings. The results highlight the actual strategi c choices made by Lufthansa for its own network, as well in combination with its partners in Star Alliance.
    Keywords: airline networks; complexity; connectivity; concentration; degree distribution; network geometry; multicriteria analysis
    JEL: L93
    Date: 2011–08–09

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