nep-ind New Economics Papers
on Industrial Organization
Issue of 2011‒12‒13
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price Discrimination in Many-to-Many Matching Markets By Renato Gomes; Alessandro Pavan
  2. The Welfare Effects of Third-Degree PriceDiscrimination in a Differentiated Oligopoly By Takanori Adachi; Noriaki Matsushima
  3. Buyer Power and Intraband Coordination. By Miklos-Thal, Jeanine; Rey, Patrick; Vergé, Thibaud
  4. Product Bundling and Incentives for Merger and Strategic Alliance By Sue Mialon
  5. The monopoly benchmark on two-sided markets By Mueller, Christopher; Boehme, Enrico
  6. Leadership in Multi-sided Markets By Federico Etro
  7. Markups and export pricing By Gullstrand, Joakim; Olofsdotter, Karin; Thede, Susanna
  8. Patent Length, Investment and Social Welfare By James Bergin
  9. Internet access and investment incentives for broadband service providers By Baranes, Edmond; Poudou, Jean-Christophe
  10. Competition, regulation and broadband access to the internet By Götz, Georg
  11. Agame-theoretical approach to network capacity planning under competition By Waldman, Helio; Bortoletto, Rodrigo C.; Pavani, Gustavo S.
  12. Persistent markups in bidding markets with financial constraints By Pablo F. Beker; Ángel Hernando-Veciana

  1. By: Renato Gomes; Alessandro Pavan
    Abstract: We study second-degree price discrimination in markets where the product traded by the monopolist is access to other agents. We derive necessary and sufficient conditions for the welfareand the profit-maximizing mechanisms to employ a single network or a menu of non-exclusive networks. We characterize the optimal matching schedules under a wide range of preferences, derive implications for prices, and deliver testable predictions relating the structure of the optimal pricing strategies to conditions on the distribution of match qualities. Our analysis sheds light on the distortions associated with the private provision of broadcasting, health insurance and job matching services. JEL Code: D82
    Keywords: matching, two-sided markets, networks, adverse selection, incentives, mechanism design
    Date: 2011–09
  2. By: Takanori Adachi (School of Economics, Nagoya University); Noriaki Matsushima (Institute of Social and Economic Research, Osaka University)
    Abstract: This paper studies the welfare effects of third-degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the "strong" market (where the discriminatory price is higher than the uniform price) than in the "weak" market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely due to an increase in the firms' profits.
    Keywords: Third-degree price discrimination, Oligopoly, Social welfare, Horizontal product differentiation, Substitutability, Complementarity
    JEL: D43 L11 L13
    Date: 2011–12
  3. By: Miklos-Thal, Jeanine; Rey, Patrick; Vergé, Thibaud
    Date: 2011–08
  4. By: Sue Mialon
    Abstract: This paper analyzes firms' choice between a merger and a strategic alliance in bundling their product with other complementary product. We consider a framework in which firms can improve profits only from product bundling. While mixed bundling is not profitable, pure bundling is because pure bundling reduces consumers' choices, and thus, softens competition among firms. Firms benefit the most from this reduced competition if they form an alliance. Firms do not gain as much from a merger because, internalizing the complementarity between the two products, a merged firm is inclined to pursue aggressive pricing to gain market share. Yet, firms may be motivated to choose a merger over an alliance because of foreclosure possibility as foreclosure is not possible under strategic alliance. However, in response, unmerged rivals can use a strategic alliance to avert foreclosure. Hence, the possibility of counter-bundling via strategic alliance by rivals reduces the incentives for merger. In equilibrium, bundling is offered only through strategic alliances.
    Date: 2011–07
  5. By: Mueller, Christopher; Boehme, Enrico
    Abstract: The literature on the effects of market concentration in platform industries or two-sided markets often compares the competitive outcome against a benchmark. This benchmark is either the “joint management” solution in which one decision maker runs all platforms or a “pure” monopoly with just one platform. Literature has not generally discussed, which benchmark is the appropriate one. We show that the appropriate benchmark, i.e. how many platforms the monopolist will operate, depends on whether agents multi- or singlehome, whether the externalities are positive or negative, and in some cases on the properties of the demand functions. Different situations require different benchmarks. Our results also help to anticipate the effects of proposed platform mergers, where the assessment might crucially depend on the number of platforms after a merger.
    Keywords: two-sided markets; market concentration; monopoly
    JEL: K20 L51 L13 D42 D43 L12
    Date: 2011–11–01
  6. By: Federico Etro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: I analyze the role of leadership in multi-sided markets as online advertising. Search and display advertising are better characterized by (respectively) quantity and price competition. A platform that reached dominance in search may have an incentive to limit services to consumers to be aggressive with the advertisers, to exploit its scale in search to build barriers to entry, or to adopt click-weighted auctions to manipulate the pricing of sponsored links. On the other side, a dominant platform in display advertising may increase the rewards of content providers to increase prices on advertisers, or may adopt exclusive clauses to predate on other platforms.
    Keywords: Multisided markets, Leadership, Dominance
    JEL: L1
    Date: 2011
  7. By: Gullstrand, Joakim (Department of Economics, Lund University); Olofsdotter, Karin (Department of Economics, Lund University); Thede, Susanna (Department of Economics, Lund University)
    Abstract: We analyze empirically product-price variation across export destinations using detailed firm-product data. Most recent studies using highly disaggregated data emphasize variations in product quality as an explanation as to why firms charge different prices for the same product on different export markets. In this paper, we take an alternative approach and assume that variations in firms' export prices reflect market segmentation and investigate the relationship between price variation and average firm markup. We study an entire supply chain in order to see how price discrimination varies across sectors with different distribution networks. Specifically, we make use of firm-level data for exporting firms in the Swedish food supply chain. The results offer new information about the behavior of exporting firms. Hence, for the food-processing industry, firms with greater ability to discriminate between markets are associated with a higher markup. However, the results also reveal that markups are a complex function of firm characteristics and that the price-setting behavior of firms in the manufacturing sector is not necessarily observed in other sectors of the supply chain.
    Keywords: Markups; Export prices; Price discrimination; Firm-level data
    JEL: D40 F12 F14
    Date: 2011–11–24
  8. By: James Bergin (Queen's University)
    Abstract: The intent of the patent system is to encourage innovation by granting the innovator exclusive rights to a discovery for a limited period of time: with monopoly power, the innovator can recover the costs of creating the innovation which otherwise might not have existed. And, over time, the resulting innovation makes everyone better off. This presumption of improved social welfare is considered here. The paper examines the impact of patents on welfare in an environment where there are large numbers of (small) innovators. With patents, because there is monopoly for a limited time the outcome is necessarily not socially optimal, although social welfare may be higher than in the no-patent state. Patent acquisition and ownership creates two opposing incentives at the same time: the incentive to acquire monopoly rights conferred by the patent spurs innovation, but subsequent ownership of those rights inhibits innovation (both own innovation and that of others). On balance, which effect will dominate? In the framework of this paper separate circumstances are identified under which patents are either beneficial or detrimental to innovation and welfare; and comparisons are drawn with the socially optimal level of investment in innovation.
    Keywords: Patents, Investment in R&D, Welfare
    JEL: D61 D64 O31 O34
    Date: 2011–10
  9. By: Baranes, Edmond; Poudou, Jean-Christophe
    Abstract: This paper studies a model of the Internet broadband market as a platform in order to show how different pricing schemes from the so-called net neutrality may increased economic efficiency by allowing more investment of access providers and enhancing consumers surplus and social welfare. --
    Keywords: Network neutrality,Flat rates,Termination fees
    JEL: L51 L86 L96
    Date: 2011
  10. By: Götz, Georg
    Abstract: This paper re-examines the effect of the regulatory regime on both penetration and coverage of broadband access to the internet. The framework also allows for an evaluation of different public policy measures such as subsidization of broadband demand and supply. A welfare analysis asks what the optimal regulatory regime is and whether and how high-speed access to the internet should be subsidized. Using an approach similar to Valletti et al. (2002), the paper highlights the importance of population density for whether firms invest to provide internet access. The analysis reveals a trade-off between coverage and penetration. --
    Keywords: broadband internet,penetration,coverage,subsidies
    JEL: L51 L96
    Date: 2011
  11. By: Waldman, Helio; Bortoletto, Rodrigo C.; Pavani, Gustavo S.
    Abstract: The paper discusses the dimensioning strategies of two network providers (operators) that supply channels to the same population of users in a competitive environment. Usersare assumed to compete for best service (lowest blocking probability of new request), while operators wishto maximize their profits. This setting gives rise to two interconnected, noncooperative games: a) a users game, in which the partition of primary traffic between operators is determined by the operators' channel capacities and by the users' blocking-avoidance strategy; and b) a network dimensioning game between operators in which the players alternate dimensioning decisions thatmaximize their profit rate under the current channel capacity of his/her opponent. At least for two plausible users' blocking avoidance strategies discussed in the paper, the users game will always reach some algorithmic equilibrium. In the operators' game, the player strategies are given by their numbers of deployed chanels, limited by their available infrastructure resources. If the infrastrucutre is under-dimensioned with respect to the traffic rate, the operators game willreach a Nash equilibrium when both players reach full use of their available infrastructures. Otherweise, a Nash equilibrium may also arise if both operators incur the same deployment costs. If costs are asymmetric, though, the alternating game may enter a loop. If the asymmetry is modest, both players may then try to achieve a competitive monopoly in which the opponent is forced to leave the game or operate with a loss (negative profit). However, if the asymmetry is high enough, only the player with the lower costs can force his opponent to leave the game while still holding a profitable operation. --
    Keywords: network dimensioning,game theory,duopoly,Nash equilibrium,circuit switching,blocking probability
    JEL: C72
    Date: 2011
  12. By: Pablo F. Beker; Ángel Hernando-Veciana
    Abstract: This paper studies the impact of financial constraints on the persistency of high markups in a class of markets, including most of public procurement, known by practitioners as bidding markets. We develop an infinite horizon model in which two firms optimally reinvest working capital and bid for a procurement contract each period. Working capital is constrained by the firm’s cash from previous period and some exogenous cash flow, it is costly and it increases the set of acceptable bids. The latter is because the risk of non-compliance means that only bids that have secured financing are acceptable and less profitable bids have access to less external financing. We say that the firm is (severely) financially constrained if its working capital is such that only bids (substantially) above production cost are acceptable. We show that markups are positive (high) if and only if one firm is (severely) financially constrained. Our main result is that markups are persistently high because one firm is severely financially constrained most of the time
    Keywords: Bidding markets, Financial constraints, Markups
    JEL: L13 D43 D44
    Date: 2011–10

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