nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒10‒15
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Option Package Bundling By Takanori Adachi; Takeshi Ebina; Makoto Hanazono
  2. Network Interconnectivity with Regulation and Competition By Jolian McHardy; Michael Reynolds; Stephen Trotter
  3. Do States Free Ride in Antitrust Enforcement? By Robert M. Feinberg; Thomas A. Husted
  4. Brand value in horizontal alliances : the case of twin-cars. By Esteban Bravo, Mercedes; Lado, Nora
  5. Estimating the Degree of Buyers' Market Power: Evidence from the Ukrainian Meat Processing Industry By Perekhozhuk, Oleksandr; Matyukha, Andriy; Glauben, Thomas
  6. Stability analysis in a Bertrand duopoly with different product quality and heterogeneous expectations By Luciano Fanti; Luca Gori
  7. Stability in a Cournot duopoly under asymmetric unionism By Luciano Fanti; Luca Gori
  8. The dynamics of a differentiated duopoly with quantity competition By Luciano Fanti; Luca Gori

  1. By: Takanori Adachi (School of Economics Nagoya University); Takeshi Ebina (School of Management Tokyo University of Science); Makoto Hanazono (School of Economics Nagoya University)
    Abstract: This paper analyzes the optimality of package bundling by focusing on the ?main and accessory?relationship between two goods. In particular, we consider option package bundling in which an optional good is valuable only if it is consumed together with a certain (nonoptional) base good. We develop a model of option package bundling for a monopolist in which buyers?valuations are independently and uniformly distributed. We also allow inter-relationship between valuations by assuming that the reservation value of the bundle can be greater or less than the sum of the innate value of both goods. Our analysis observes that mixed bundling, in which the base good is sold with or without the optional good, yields a higher pro?t than pure bundling if and only if the range of the optional good valuation exceeds a threshold value. We then conduct a welfare analysis of the bundling choice. The result is surprising: pure bundling is always desirable from the social welfare viewpoint when a monopolist chooses mixed bundling.
    Keywords: Multiproduct monopoly; Bundling; Optional goods; Interdepen-dent valuations.
    JEL: D42 L11
    Date: 2011–10
  2. By: Jolian McHardy (Department of Economics, The University of Sheffield); Michael Reynolds; Stephen Trotter
    Abstract: A simple theoretical network model is introduced to investigate the problem of network interconnection. Prices, profits and welfare are compared under welfare maximisation, network monopoly and network monopoly with competition over one part of the network. Given that inducing actual competition may bring disbenefits such as cost duplication and co-ordination costs, we also explore the possibility of a regulator using the threat of entry on a section of the monopoly network in order to bring about the socially preferred level of interconnectivity. We show that there are feasible parameter values for which such a threat is plausible.
    Keywords: Network interconnectivity, monopoly, competition, regulation
    JEL: L14 L33 L50
    Date: 2011–10
  3. By: Robert M. Feinberg; Thomas A. Husted
    Abstract: Recent research has documented a substantial role in antitrust enforcement by U.S. states. While many of the cases litigated involve small local firms, a non-trivial portion encompass multiplestate issues. Some previous literature has investigated whether states engage in free-riding behavior in environmental regulation, and whether governments free ride on private decisions in provision of public goods. In this paper, we analyze a sample of antitrust cases involving crossstate impacts (from the Multi-State Antitrust Database, provided by the National Association of Attorneys General) and explain the determinants of free-riding (which we define as participatingin a case, but not as a lead plaintiff). JEL classification:
    Date: 2011–10
  4. By: Esteban Bravo, Mercedes; Lado, Nora
    Abstract: Rival firms often cooperate horizontally in order to share risks and achieve scale advantages in production or in their research and development projects. The output of these strategic alliances is usually sold by the individual ally company under its own brand and using its own marketing mix strategies. Marketing strategies create a cumulative effect that is reflected in brand value. Although horizontal alliances often have a significant overall impact on firm profitability, undesired brand value dilution is a worrisome possibility for the partners and therefore a relevant subject of study. In this paper, we consider brand value to be the economic added value of a brand, and propose two marketbased measures of brand value: (1) price premia (which are relevant for a unit sale) and (2) revenue premia (which also account for the premia in sales volume). We apply this analysis to the Spanish market for new automobiles, in which successful and long-lasting horizontal alliances have formed. Our findings suggest that, during the introduction stage of the product life cycle, horizontal allies did not charge different price premia, but that horizontal allies profit from differences in brand reputation obtained from demand side effects such as revenue premia (specifically, the impact on sales volume). Consequently, horizontal cooperation among brands does not dilute their value at the introduction stage. Furthermore, our results suggest that horizontal allies do charge different price premia during the growth stage of the product life cycle. Consequently, horizontal allies have recognized strategies that do not dilute brand value in intense competition mitigating the brand value diluting risk
    Keywords: Brand value; Revenue premia; Automobile market; Price premia; Marketing;
    Date: 2011–08
  5. By: Perekhozhuk, Oleksandr; Matyukha, Andriy; Glauben, Thomas
    Abstract: This study develops a structural market model for the econometric analysis of buyersâ market power in the Ukrainian meat processing industry, because there is some evidence that suggests that meat processors may excise market power in the agricultural market of slaughtered livestock. The estimation results did not produce any evidence suggesting the existence of buyersâ market power. Contrary to many other NEIO-studies, we extended the market structure market model by the three subsequent models. Using endogenously determined values for market power parameter, we found that meat processors concerning the buyersâ market for slaughtered livestock behave consistently with Cournot conjectures.
    Keywords: Cournot competition, market power, meat processing industry, new empirical industrial organisation (NEIO), Ukraine, Livestock Production/Industries, Marketing,
    Date: 2011–09–02
  6. By: Luciano Fanti; Luca Gori
    Abstract: We study the local stability properties of a duopoly game with price competition, different product quality and heterogeneous expectations. We show that the Nash equilibrium can loose stability through a flip bifurcation when the consumer’s type range increases. This result occurs irrespective of whether the high(low)-quality firm has either bounded rational (naïve) or naïve (bounded rational) expectations about the price that should be set in the future by the rival to maximise profits. Therefore, although, on the one hand, an increase in the consumer’s types range increases profits, on the other hand, it contributes to reduce the parametric stability region of the unique interior equilibrium. Moreover, we show that the stability region is larger when the high-quality firm has naïve expectations and the low-quality firm has bounded rational expectations. This implies that when the expectations formation mechanism of the high-quality firm becomes more complicated than the naïve one, and, in particular, it follows the mechanism proposed by Dixit (1986), the stability of the Nash equilibrium in a duopoly market with price competition becomes under increasing strain.
    Keywords: Bifurcation; Different product quality; Duopoly; Heterogeneous players; Price competition.
    JEL: C62 D43 L13 L15
    Date: 2011–01–09
  7. By: Luciano Fanti; Luca Gori
    Abstract: We analyse the stability issue in a Cournot duopoly with asymmetric unionism and heterogeneous players. We show that labour market institutions matter or the stability of the unique interior Cournot-Nash equilibrium. Interestingly, the role played by the existence of firm-specific unions on stability, when the degree of unionism is asymmetric between the two firms, is at all different depending on whether the (more) unionised firm has bounded rational or naive expectations. Indeed, a shift in the union’s preference from employment towards wages acts as an economic (de)stabiliser when workers are paid with the (competitive) unionised wage by the bounded rational firm and with the (unionised) competitive wage by the naïve firm.
    Keywords: Bifurcation; Cournot; Heterogeneous expectations; Monopoly union.
    JEL: C62 D43 J51 L13
    Date: 2011–01–09
  8. By: Luciano Fanti; Luca Gori
    Abstract: We analyse the dynamics of a Cournot duopoly game with heterogeneous players to investigate the effects of micro-founded differentiated products demand. The present analysis, which modifies and extends Zhang et al. (2007) Zhang, J., Da, Q., Wang, Y., 2007. Analysis of nonlinear duopoly game with heterogeneous players. Economic Modelling 24, 138–148) and Tramontana, F., (2010) (Tramontana, F., 2010. Heterogeneous duopoly with isoelastic demand function. Economic Modelling 27, 350–357), reveals that a higher degree of product differentiation may destabilise the market equilibrium. Moreover, we show that a cascade of flip bifurcations may lead to periodic cycles and ultimately chaotic motions. Since a higher degree of product differentiation implies weaker competition, then a theoretical implication of our findings, that also constitute a policy warning for firms, is that a fiercer (weaker) competition tends to stabilise (destabilise) the unique positive Cournot-Nash equilibrium of the economy.
    Keywords: Bifurcation; Chaos; Cournot; Oligopoly; Product differentiation.
    JEL: C62 D43 L13
    Date: 2011–01–09

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