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on Industrial Organization |
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Issue of 2011‒11‒07
fourteen papers chosen by |
| By: | Batlome Janjgava; Sergey Slobodyan |
| Abstract: | In this paper, we study an imperfect monitoring model of duopoly under similar settings as in Green and Porter (1984), but here firms do not know the demand parameters and learn about them over time though the price signals. We investigate how a deviation from rational expectations affects the decision making process and what kind of behavior is sustainable in equilibrium. We find that the more common information firms analyze to update their beliefs, the more room is for implicit coordination. This might propagate escapes from the Cournot- Nash Equilibrium and the formation of cartels without explicit cooperative motives. In contrast to Green and Porter (1984), our results show that in a model with learning, breakdown of a cartel happens even without a demand shock. Moreover, in this model an expected price serves as an endogenous price threshold, which triggers a price war. Finally, by investigating the durations of the cooperative and price war phases, we find that in industries with a higher Nash equilibrium output and a lower volatility of firm-specific shocks, it is easier to maintain a cartel and harder to break it down. |
| Keywords: | beliefs; escape dynamics; implicit collusion; self-confirming equilibrium; learning; |
| JEL: | D83 D43 L13 L40 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp445&r=ind |
| By: | Marcel Boyer; Pierre Lasserre; Michel Moreaux |
| Abstract: | We model capacity-building investments in a homogeneous product duopoly facing uncertain demand growth. Capacity building is achieved through the addition of production units that are durable and lumpy and whose cost is irreversible. While building their capacity over time, firms compete à la Cournot in the product market given their installed capacity. There is no exogenous order of moves, no commitment regarding future decisions, and no finite horizon. We investigate Markov Perfect Equilibrium (MPE) paths of the investment game, which may include episodes during which firms invest at different times, a preemption pattern, and episodes in which firms invest simultaneously, a tacit collusion pattern. These episodes may alternate and are typically several. When firms have yet to invest in capacity, the sole pattern that is MPE-compatible is a preemption episode: firms invest at different times but have equal value. The first such investment may occur earlier and therefore be riskier than socially optimal. When both firms hold capacity, tacit collusion episodes may be MPE-compatible: firms invest simultaneously at a postponed time (hence holding back production in the meantime), thereby generating an investment wave in the industry. Such investment episodes are more likely with higher demand volatility, faster market growth, and lower cost of capital (discount rate). <P> |
| Keywords: | Real Options; Dynamic Duopoly; Lumpy Investments; Preemption; Investment Waves; Tacit Collusion, |
| JEL: | C73 D43 D92 L13 |
| Date: | 2011–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2011s-65&r=ind |
| By: | Mandell, Svante (VTI); Brunes, Fredrik (KTH) |
| Abstract: | A common approach for procuring large construction projects is through Unit Price Contracts. By the means of a simple model, we study the optimal quantity to procure under uncertainty regarding the actual required quantity given that the procurer strives to minomize expected total costs. The model shows that the quantity to procure in optimum follows from a trade-off between the risk of having to pay for more units than actually necessary and of having to conduct costly renogotiations. The optimal quantity increases in costs associated with possible renegotiations, decreases in expected per unit price, and, if a renegotiation does not increase per unit price too much, decreases in the uncertainty surrounding the actual quantity required. |
| Keywords: | Unit price contracts; procurement; construction |
| JEL: | D44 H54 H57 |
| Date: | 2011–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2011_004&r=ind |
| By: | Zhiyong Yao (Department of Industrial Economics, School of Management, Fudan University); Wen Zhou (School of Business, The University of Hong Kong) |
| Abstract: | We study merger waves in vertically related industries where firms can engage in both vertical and horizontal mergers. Even though any individual merger would have been profitable, firms may refrain from merging for fear of negative impacts from other mergers. When they do merge, however, they always merge in waves, which is either vertical or horizontal depending on the relative intensity of double markup and horizontal competitions in the two industries. Finally, merger waves may happen with or without any fundamental change in the underlying economic conditions. |
| Keywords: | merger wave, horizontal mergers, vertical mergers, stable market structure |
| JEL: | L13 L42 D43 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1134&r=ind |
| By: | Carlos Canon (Toulouse School of Economics) |
| Abstract: | This paper studies a "market creating" firm (platform) that offers a matching environment by charging an access fee to a population of high and low type users who wish to form a match. We focus on an environment where users only observe a signal of their randomly assigned partner's type and where the informativeness of the signal is controlled by the firm. We study how both tools, access fee and signal informativeness, can be used to screen particular segments of the population. We finish by characterizing the set of optimal menus. The paper proposes three results. We show that information provision has a screening role when network effects are heterogeneous because a platform cannot induce every level of participation using only the access fee. Secondly, any platform will optimally offer a menu such that only high types participate, or where every user participates. In the former the signal is perfectly informative; in the latter it is partially informative. Lastly, the profit maximizing firm will over-provide information in relation to the surplus maximizing firm, and the higher the heterogeneity in the population, the higher the chance of the optimal menu excluding low type users. |
| Keywords: | Pricing; Market Design; Matching; Information Provision; Heterogeneous Network Effects |
| JEL: | L11 L15 D42 D83 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1120&r=ind |
| By: | Monic Sun (Graduate School of Business, Stanford University); Feng Zhu (Marshall School of Business, University of Southern California) |
| Abstract: | Many scholars argue that content providers, when incentivized by ad revenue, are more likely to tailor their content to attract “eyeballs,” and as a result, popular content may be excessively supplied. We empirically test this prediction by taking advantage of the launch of an ad-revenue-sharing program initiated by a major Chinese portal site in September 2007. Participating bloggers allow the site to run ads on their blogs and receive 50% of the revenue generated by these ads. After analyzing 4.4 million blog posts, we find that, relative to nonparticipants, popular content increases by about 13 percentage points on participants¡¯ blogs after the program takes effect. This increase can be partially attributed to topics shifting toward three domains: the stock market, salacious content, and celebrities. We also find evidence that, relative to nonparticipants, participants¡¯ content quality increases after the program takes effect. |
| Keywords: | Ad-Sponsored Business Model, Media Content, Blog, Revenue-Sharing |
| JEL: | L82 L86 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1132&r=ind |
| By: | Yao Luo (Department of Economics, Penn State University) |
| Abstract: | This paper proposes to incorporate product customization in the Maskin and Riley (1984) nonlinear pricing model in order to capture major features of mobile service data. In particular, consumers are characterized by a two-dimensional type. One dimension is observed by the provider and integrates product customization, while the other is a standard parameter of adverse selection, which is unobserved by the provider and makes it necessary for the provider to discriminate among consumers with different tastes through nonlinear pricing. We then propose a novel method to aggregate the multiple-dimensional voice consumption into one-dimensional index. We show that the model structure is identified under the following conditions: The marginal utility function is multiplicatively separable in consumers' tastes, and consumers' observed and unobserved heterogeneity are independent. Empirical results show that both dimensions of heterogeneity are important. Due to asymmetric information, 50% of the "second-best" social welfare is left "on the table" in order to screen heterogeneous consumers. Moreover, if costly product customization does not affect subscribers' utility, 20% of subscribers would not be served. |
| Keywords: | Nonlinear Pricing, Product Customization, Mobile Service |
| JEL: | L11 L12 L25 L96 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1128&r=ind |
| By: | Sjaak Hurkens (Institute for Economic Analysis (CSIC)); Ángel Luis López (Public-Private Sector Research Center, IESE Business School, University of Navarra) |
| Abstract: | We examine the effects of mobile termination rate regulation in asymmetric oligopolies. We do this by extending existing models of asymmetric duopoly and symmetric oligopoly where consumer expectations about market shares are passive. We ?first calibrate product differentiation parameters using detailed data from the Spanish market from 2010. Next, we predict equilibrium outcomes and welfare effects under alternative scenarios of future termination rates. Lowering termination rates typically lowers pro?fits of all networks and improves consumer and total surplus. |
| Keywords: | Mobile Termination Rates, Network Effects, Simulations, Telecommunications, Welfare |
| JEL: | D43 K23 L51 L96 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1109&r=ind |
| By: | Nicholas Economides (Stern School of Business, New York University); David Henriques (Nova School of Business and Economics) |
| Abstract: | In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same final good price regardless of the means of payment chosen by the customer. In this paper, we analyze a three-party model (consumers, merchants, and proprietary EPNs) to assess the impact of a NSR on the electronic payments system, in particular, on competition among EPNs, network pricing to merchants and consumers, EPNs’ profits, and social welfare. We show that imposing a NSR has a number of effects. First, it softens competition among EPNs and rebalances the fee structure in favor of cardholders and to the detriment of merchants. Second, we show that the NSR is a profitable strategy for EPNs if and only if the network effect from merchants to cardholders is sufficiently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are sufficiently weak (strong) and the merchants’ market power in the goods market is sufficiently high (low). Our policy advice is that regulators should decide on whether the NSR is appropriate on a market-by-market basis instead of imposing a uniform regulation for all markets. |
| Keywords: | Electronic Payment System, Market Power, Network Externalities, No-Surcharge Rule, Regulation, Two-sided Markets, MasterCard, Visa, American Express, Discover. |
| JEL: | L13 L42 L80 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1103&r=ind |
| By: | Lesley Chiou (Occidental College); Catherine Tucker (Sloan, MIT) |
| Abstract: | The digital revolution has dramatically reduced search costs for information. Consumers can now access information that is aggregated from many sources. We ask whether aggregators encourage users to ``skim" or investigate content in depth. We exploit a contract dispute that led a major aggregator to remove content from a content provider. We find that after the removal, users were less likely to investigate additional content in depth. Further analysis suggests that the presence of information benefited either very national or local content the most. Our study is the first to measure how new communications technology affects information gathered by consumers. |
| Keywords: | News, Online, Search |
| JEL: | L86 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1118&r=ind |
| By: | Joachim Kaldasch |
| Abstract: | Presented is an evolutionary model of consumer non-durable markets, which is an extension of a previously published paper on consumer durables. The model suggests that the repurchase process is governed by preferential growth. Applying statistical methods it can be shown that in a competitive market the mean price declines according to an exponential law towards a natural price, while the corresponding price distribution is approximately given by a Laplace distribution for independent price decisions of the manufacturers. The sales of individual brands are determined by a replicator dynamics. As a consequence the size distribution of business units is a lognormal distribution, while the growth rates are also given by a Laplace distribution. Moreover products with a higher fitness replace those with a lower fitness according to a logistic law. Most remarkable is the prediction that the price distribution becomes unstable at market clearing, which is in striking difference to the Walrasian picture in standard microeconomics. The reason for this statement is that competition between products exists only if there is an excess supply, causing a decreasing mean price. When, for example by significant events, demand increases or is equal to supply, competition breaks down and the price exhibits a jump. When this supply shortage is accompanied with an arbitrage for traders, it may even evolve into a speculative bubble. Neglecting the impact of speculation here, the evolutionary model can be linked to a stochastic jump-diffusion model. -- |
| Keywords: | non-durables,evolutionary economics,economic growth,price distribution,Laplace distribution,replicator dynamics,firm growth,jump-diffusion model |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:50531&r=ind |
| By: | Joachim Kaldasch |
| Abstract: | The model presented here derives the product life cycle of durable goods. It is based on the idea that the purchase process consists of first purchase and repurchase. First purchase is determined by the market penetration process (diffusion process), while repurchase is the sum of replacement and multiple purchase. The key property of durables goods is to have a mean lifetime in the order of several years. Therefore replacement purchase creates periodic variations of the unit sales (Juglar cycles) having its origin in the initial diffusion process. The theory suggests that there exists two diffusion processes. The first can be described by Bass diffusion and is related to the information spreading process within the social network of potential consumers. The other diffusion process comes into play, when the price of the durable is such, that only those consumers with a sufficient personal income can afford the good. We have to distinguish between a monopoly market and a polypoly/oligopoly market. In the first case periodic variations of the total sales occur caused by the initial Bass diffusion, even when the price is constant. In the latter case the mutual competition between the brands leads with time to a decrease of the mean price. This change is associated with an effective increase of the market volume, which can be interpreted as a diffusion process. Based on an evolutionary approach, it can be shown that the mean price decreases exponentially and the corresponding diffusion process is governed by Gompertz equation (Gompertz diffusion). Most remarkable is that Gibrat's rule of proportionate growth is a direct consequence of the competition between the brands. The model allows a derivation of the lognormal size distribution of product sales and the logistic replacement of durables in competition. A comparison with empirical data suggests that the theory describes the main trend of the product life cycle superimposed by short term events like the introduction of new models. -- |
| Keywords: | Consumer Durables,Product Life Cycle,Product Diffusion,Bass Diffusion,Gompertz Diffusion,Replicator Dynamics,Logistic Growth,Evolutionary Economics,Monopoly,Gibrat's Rule,Juglar Cycles |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:50530&r=ind |
| By: | Branstetter, Lee G.; Chatterjee, Chirantan; Higgins, Matthew |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_240&r=ind |
| By: | Daveri, F.; Lecat, R.; Parisi , M L. |
| Abstract: | We use firm-level data for France and Italy to explore the impact of service regulation reform implemented in the two countries on the mark-up and eventually on the performance of firms between the second half of the 1990s and 2007. In line with some previous studies, we find that the relation between entry barriers and productivity is negative. This relation is intermediated through the firm’s mark up and is stronger in the long than in the short run. |
| Keywords: | regulation, services, performance, TFP. |
| JEL: | D24 K20 L51 O40 O57 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:346&r=ind |