nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒11‒14
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Cross-ownership and stability in a Cournot duopoly By Fanti, Luciano; Gori, Luca
  2. Product Quality in Different Markets and Cost Structure By Kiyoshi Matsubara
  3. Models of Spatial Competition: A critical review By Ricardo Biscaia; Isabel Mota
  5. Price Discrimination in Input Markets: Quantity Discounts and Private Information By Herweg, Fabian; Müller, Daniel
  6. Price Rigidity and Strategic Uncertainty An Agent-based Approach By Robert Somogyi; Janos Vincze
  7. Scale Economies in Nonprofit Provision, Technology Adoption and Entry By Scharf, Kimberley Ann
  8. Transmission Investment in the Peruvian Electricity Market: Theory and Applications By Erix Ruiz; Juan Rosellón

  1. By: Fanti, Luciano; Gori, Luca
    Abstract: This paper analyses the dynamics of a Cournot duopoly under cross-ownership participation when players have heterogeneous, i.e. bounded rational and naïve, expectations. We find that when the shareholder that owns firm also holds a percentage of firm , the parametric stability region of the unique Cournot-Nash equilibrium is larger than when every firm is owned by a unique shareholder, and an increase in the fraction of shares that the shareholder that owns firm has in firm tends to stabilise the market equilibrium. Moreover, when products are (horizontally) differentiated, a rise in the fraction of shares of firm held by the shareholder that owns firm acts as an economic (de)stabiliser when products of variety and are (complements) substitutes between each other. The policy implication is that, despite on the one hand, cross-ownership acts as an anti-competitive device that indeed tends to reduce social welfare with the corresponding anti-trust consequences, on the other hand, it acts as an economic stabiliser (except when products are complements).
    Keywords: Bifurcation; Cournot; Cross-ownership; Duopoly
    JEL: L13 D43 C62 L40
    Date: 2011–11–07
  2. By: Kiyoshi Matsubara
    Abstract: This paper analyzes the behavior of monopoly firm serving its products to two countries. The main focus of this paper is on how the product-quality choice in different markets are related with the cost structure of the firm. First, This paper examines the effects of production and R&D costs on the product quality separately, and then discusses the general case where the both costs exists. This paper shows that if only production costs exist, providing different levels of product quality is optimal and that if only R&D costs exist, providing the same level of quality is optimal. About the general case, this paper shows the conditions with which the same-quality strategy is optimal in terms of utility and other parameters. As an application, this paper discusses the firm’s decision on entry in a foreign market either by exports or FDI. The result is consistent with observations in emerging economies.
    Date: 2011–09
  3. By: Ricardo Biscaia; Isabel Mota
    Abstract: According to Duranton (2008), the main focus of spatial economics is the location choice of the economic agents. In order to explain the location and the agglomeration of agents in certain locations, one must relax the core assumptions of the neoclassic competitive framework. According to Fujita and Thisse (2002), three alternatives emerged and had huge attention in the literature: the assumption of heterogeneity of locations, as in comparative advantage models or in pioneering static location models; the externality models, in which economic activity endogenously generates spillovers that motivates the agglomeration of the agents; the assumption of imperfect markets, implying that the agents have to interact with each other, as in spatial competition models or in the monopolistic competition approach. This review will focus on the development of spatial competition models. Specifically, the main purpose is to study models in which the location choice by firms plays a major role. Therefore, after a brief review of the roots of spatial competition models, this paper intends to offer a critical analysis over the recent developments in spatial competition modeling. The starting point is the recognition of the increased importance of this topic through the quantification of the research in this field by using bibliometric tools. After that, this study proceeds by identifying the main research paths within spatial competition modeling. Specifically, the type of strategie (Bertrand vs. Cournot competition) and its implications over location equilibria are discussed. Additionally, it is presented a comparison of the impact of the most studied assumptions in literature, that respect to the market (linear vs. circular), production costs, transportation costs, as well as the number of firms. Finally, the type of information (complete vs. incomplete) and its effects over the equilibria are also discussed.
    Date: 2011–09
  4. By: Alicia Barroso (Universidad Carlos III de Madrid); Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This article proposes a novel approach to assess the dynamic effect that advertising expenditures have regarding which products consumers include in their choice sets. In a discrete-choice model consumers face choice sets that evolve according to their awareness of each product. Advertising expenditures have a dynamic effect in the sense that they raise consumer awareness of a product, increasing present and future sales. To estimate this effect the authors explicitly model the firms' dynamic advertising decisions and illustrate the model using data from the Spanish automobile market. The results show that the effect of advertising on awareness is dynamic and that accounting for it is crucial in explaining the evolution of product sales over its life cycle. Furthermore, we show that the awareness process can be significantly sped up by advertising. Thus there is a great heterogeneity in the awareness process among products depending on the level of advertising expenditures and it may range from one to six years.
    Keywords: Advertising, discrete choice models, consumer choice set, awareness process, new products.
    JEL: L13 L62 M11 M37
    Date: 2011–10
  5. By: Herweg, Fabian; Müller, Daniel
    Abstract: We consider a monopolistic supplier’s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on thirddegree price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts—the usual legal practice in the EU and US— often is beneficial for social welfare. This result is shown to be robust even when the upstream supplier faces competition in the form of fringe supply.
    Keywords: Asymmetric Information; InputMarkets; Quantity Discounts; Price Discrimination; Screening; Vertical Contracting
    JEL: D43 L11 L42
    Date: 2011–11
  6. By: Robert Somogyi (Paris School of Economics); Janos Vincze (Institute of Economics - Hungarian Academy of Sciences, Corvinus University of Budapest)
    Abstract: The phenomenon of infrequent price changes has troubled economists for decades. Intuitively one feels that for most price-setters there exists a range of inaction, i.e. a substantial measure of the states of the world, within which they do not wish to modify prevailing prices. However, basic economics tells us that when marginal costs change it is rational to change prices, too. Economists wishing to maintain rationality of price-setters resorted to fixed price adjustment costs as an explanation for price rigidity. In this paper we propose an alternative explanation, without recourse to any sort of physical adjustment cost, by putting strategic interaction into the center-stage of our analysis. Price-making is treated as a repeated oligopoly game. The traditional analysis of these games cannot pinpoint any equilibrium as a reasonable "solution" of the strategic situation. Thus there is genuine strategic uncertainty, a situation where decision-makers are uncertain of the strategies of other decision-makers. Hesitation may lead to inaction. To model this situation we follow the style of agent-based models, by modelling firms that change their pricing strategies following an evolutionary algorithm. Our results are promising. In addition to reproducing the known negative relationship between price rigidity and the level of general inflation, our model exhibits several features observed in real data. Moreover, most prices fall into the theoretical "range" without explicitly building this property into strategies.
    Keywords: Agent-based modeling, Evolutionary algorithm, Price rigidity, Social learning, Strategic Uncertainty
    JEL: L13 C63 B52
    Date: 2011–09
  7. By: Scharf, Kimberley Ann
    Abstract: We study competition between nonprofit providers supplying a collective service through increasing-returns-to-scale technologies. When providers adopt a not-for-profit mission, the absence of a residual claimant can impede entry, pro- tecting the position of an inefficient incumbent. Moreover, when the goods provided are at least partly public in nature, buyers face individual incentives to divert donations towards providers that adopt low-fixed cost technologies, and so providers may forgo the adoption of more efficient technologies that require fixed costs. In these situations, government grants in support of core costs can have a non-neutral effect on entry, technology adoption, and industry performance.
    Keywords: core funding; entry; not-for-profit organizations
    JEL: L1 L3
    Date: 2011–10
  8. By: Erix Ruiz; Juan Rosellón
    Abstract: This research presents an application of the Hogan, Rosellón and Vogelsang (2010) (HRV) mechanism to promote electricity transmission network expansion in the Peruvian electricity transmission system known as SEIN (Sistema Eléctrico Interconectado Nacional). The HRV mechanism combines the merchant and regulatory approaches to promote investment into transmission grids. This mechanism gives incentives for efficient investment in expansion of the network by the rebalancing over time of the fixed and variable charges of a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of Financial Transmission Rights (FTR's) for the congested lines. The mechanism is applied for 103 nodes of the SEIN using detailed characteristics of generators, nodes and transmission lines. Under Laspeyres weights and linear cost of expansion of transmission capacity, it is shown that prices converge to lower levels as a result of increased transmission capacity.
    Keywords: Electricity transmission expansion, incentive regulation, Peru, congestion management
    JEL: L51 L91 L94 Q40
    Date: 2011

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