nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒03‒08
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition By Jose L. Moraga-Gonzalez; Vaiva Petrikaite
  2. Endougenous Timing in a Mixed Duopoly By Rabah Amir; Giuseppe De Feo
  3. Profits and Competition in a Unionized Duopoly Model with Product Differentiation and Labour Decreasing Returns By Luciano Fanti; Nicola Meccheri
  4. Bundling, Competition and Quality Investment: a Welfare Analysis By Alessandro Avenali; Anna D'Annunzio; Pierfrancesco Reverberi
  5. Differentiated Duopoly and Horizontal Merger Profitability under Monopoly Central Union and Convex Costs By Luciano Fanti; Nicola Meccheri
  6. Efficient Horizontal Mergers in Polluting Industries with Cournot Competition By L. Lambertini; A. Tampieri
  7. Vertical Integration and Market Structure By Timothy F. Bresnahan; Jonathan D. Levin
  8. Crossing takeover premiums and mix of payment: Empirical test of contractual setting in M&A transactions By Hubert De La Bruslerie
  9. Spatial Concentration in the Financial Industry By Palmberg, Johanna
  10. Empowering Customer Choice in Electricity Markets By Douglas Cooke
  11. Testing for spatial location patterns of Bogotá’s small and medium size manufacturing firms (2006-2008) By Hernán Enríquez; Juan Tomás Sayago

  1. By: Jose L. Moraga-Gonzalez (VU University Amsterdam); Vaiva Petrikaite (University of Groningen)
    Abstract: This paper studies the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search for satisfactory deals. In the pre-merger symmetric equilibrium, the probability that a firm is the next one to be visited by a consumer is equal across firms not yet visited. However, in the short-run after a merger, because insiders raise their prices more than what the outsiders do, consumers start searching for good deals at the non-merging stores. Only when they do not find any product satisfactory enough, they continue searching at the merging stores. When search costs are sufficiently large, consumer traffic from the non-merging firms to the merged ones is so small that mergers become unprofitable. This new merger paradox,which is more likely the higher the number of non-merging firms, can be overcome in the mediumto long-run if the merging firms choose to stock their shelves with all the products of the constituent firms, which generates sizable search economies. Such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the outsiders. In that case, consumers visit first the merged entity and the firms outside the merger lose out. Search cost economies may render a merger beneficial for consumers and so overall welfare may increase.
    Keywords: mergers; insiders; outsiders; short-run; long-run; consumer search; demand-side economies; economies of search; order of search; sequential search; prominence
    JEL: D40 D83 L13
    Date: 2012–02–21
  2. By: Rabah Amir (Department of Economics, University of Arizona); Giuseppe De Feo (Department of Economics, University of Pavia)
    Abstract: This paper applies the framework of endogenous timing in games to mixed quantity duopoly, wherein a private – domestic or foreign – firm competes with a public, welfare maximizing firm. We show that simultaneous play never emerges as a subgame-perfect equilibrium of the extended game, in sharp contrast to private duopoly games. We provide sufficient conditions for the emergence of public and/or private leadership equilibrium. In all cases, private profits and social welfare are higher than under the corresponding Cournot equilibrium. From a methodological viewpoint we make extensive use of the basic results from the theory of supermodular games in order to avoid common extraneous assumptions such as concavity, existence and uniqueness of the different equilibria, whenever possible. Some policy implications are drawn, in particular those relating to the merits of privatization.
    Keywords: Mixed markets, endogenous timing, Cournot equilibrium, Stackelberg equilibrium, privatization.
    JEL: C72 D43 H42 L13
    Date: 2012–02
  3. By: Luciano Fanti (Department of Economics, University of Pisa, Italy); Nicola Meccheri (Department of Economics, University of Pisa, Italy)
    Abstract: In this paper, we aim at investigating if the conventional wisdom, that an increase of competition linked to a decrease in the degree of product differentiation always reduces firms’ profits, remains true in a unionized duopoly model with labour decreasing returns. In this context, mixed results emerge. In particular, we show that a decrease in the degree of product differentiation may affect wages, hence profits, differently, depending on both the mode of competition in the product market (Cournot or Bertrand competition) and the particular unionization structure (firm-specific or industry-wide union(s)). Interestingly, it is shown that the conventional wisdom can actually be reversed, even if under Bertrand competition only.
    Keywords: unionized duopoly, labour decreasing returns, product differentiation, profits
    JEL: J43 J50 L13
    Date: 2012–02
  4. By: Alessandro Avenali (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma); Anna D'Annunzio (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma); Pierfrancesco Reverberi (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma)
    Abstract: We show how a monopolist in a primary market uses mixed bundling to extract surplus from quality-enhancing investment by a single-product rival in a complementary market, or even force the rival to provide low quality. In our model, bundling does not hinge on commitment ability. Although we assume that bundling creates efficiency gains, we find that bundling reduces consumer surplus and may reduce social welfare, even if the rival is not foreclosed, and investment is not blockaded. Nonetheless, bundling improves welfare when prevents inefficient investment. We propose to check bundled offers via a price test that controls the monopoly component stand-alone price to preserve efficiencies from both bundling and investment. When the rival invests, the test improves consumer surplus and welfare compared with the 'do-nothing' scenario, or a ban on bundling. The test is not consistent with the predatory pricing framework. Qualitative results hold when we endogenize the bundling strategy.
    Keywords: Bundling, Vertical differentiation, Price discrimination, Price test
    JEL: L13 L41
    Date: 2011
  5. By: Luciano Fanti (Department of Economics, University of Pisa, Italy); Nicola Meccheri (Department of Economics, University of Pisa, Italy)
    Abstract: Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex production costs) and centralised unionisation in a differentiated duopoly model. It is pointed out that the wage fixed by a monopoly central union in the post-merger case is higher than in the pre-merger/Cournot equilibrium, opening up the possibility that merger reduces profits. Indeed, it is shown that this “reversal result” actually applies when the central union is sufficiently little interested to wages with respect to employment. Moreover, the lower the degree of substitutability between firms’ products and the higher the workers’ reservation wage, the higher ceteris paribus the probability that profits decrease as a result of the merger.
    Keywords: merger profitability, unionised duopoly, convex costs
    JEL: D43 L13 J50
    Date: 2012–02
  6. By: L. Lambertini; A. Tampieri
    Abstract: We investigate the feasibility of horizontal mergers in a homogeneous triopoly where firms compete in quantities and production is polluting the environment. We show that the degree of alignment between private and social incentives increases in the intensity of pollution.
    JEL: L13 L41 Q51
    Date: 2012–02
  7. By: Timothy F. Bresnahan; Jonathan D. Levin
    Abstract: Contractual theories of vertical integration derive firm boundaries as an efficient response to market transaction costs. These theories predict a relationship between underlying features of transactions and observed integration decisions. There has been some progress in testing these predictions, but less progress in quantifying their importance. One difficulty is that empirical applications often must consider firm structure together with industry structure. Research in industrial organization frequently has adopted this perspective, emphasizing how scale and scope economies, and strategic considerations, influence patterns of industry integration. But this research has paid less attention to contractual or organizational details, so that these two major lines of research on vertical integration have proceeded in parallel with only rare intersection. We discuss the value of combining different viewpoints from organizational economics and industrial organization.
    JEL: D23 L14 L22 M20
    Date: 2012–03
  8. By: Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)
    Abstract: Analysis of the tender offer premiums and of the means of payment should not be done separately. In the empirical literature these two variables are often considered independently although they may have endogenous relation in a contractual setting. Using a sample of European M&As over the 2000-2010 decade, we show that these two variables are jointly set in a contractual empirical approach. The relationship between the percentage of cash and the offer premium is positive: higher premiums will yield payments with more cash. We highlight that the payment choice is not a continuum between full cash and full share payment. Two different regimes of payment in M&A transactions are empirically characterized. We analyze the major determinants of M&A terms when the offer premium and the means of payment are jointly set. The underlying rationale of asymmetry of information and risk sharing calculus is found significant in the setting of the agreement.
    Keywords: M&A, takeover premium, means of payment, contract setting
    Date: 2011–06
  9. By: Palmberg, Johanna (The Ratio Institute)
    Abstract: This paper investigates factors that determine the spatial concentration in the financial industry. Why does the financial industry have such a high spatial concentration? The theoretical framework is based on theories from regional economics, with a focus on agglomeration effects, externalities, and the regional clustering of an industry. The positive agglomeration effects arise from access to i) specialized labor, ii) specialized suppliers, and iii) knowledge dispersion (Marshall 1920). Jacobs (1961, 1969) contributes to a discussion of the role of cities (urban economies) in terms of innovations and entrepreneurship. The high degree of spatial concentration in the financial sector emphasizes the importance of local embeddedness, networks, face-to-face communication, knowledge spillovers, and spatial proximity for the organization of the financial industry. These factors accentuate the importance of local knowledge and the dispersion of knowledge, factors that have been thoroughly discussed and analyzed in the field of Austrian economics. Therefore, an Austrian view is included to examine the role of knowledge in the spatial concentration of financial centers. Scholars such as Hayek (1937; 1945) and Lachmann (1978 [1956]) contribute to understanding the use of knowledge in society.
    Keywords: Spatial Concentration; Financial Industries; Knowledge; Information; Face-to-face communication
    JEL: B26 B53 D53
    Date: 2012–02–28
  10. By: Douglas Cooke
    Abstract: Timely and effective deployment of demand response could greatly increase power system flexibility, electricity security and market efficiency. Considerable progress has been made in recent years to harness demand response. However, most of this potential remains to be developed. The paper draws from IEA experience to identify barriers to demand response, and possible enablers that can encourage more timely and effective demand response including cost reflective pricing, retail market reform, and improved load control and metering equipment. Governments have a key role to play in developing and implementing the policy, legal, regulatory and market frameworks needed to empower customer choice and accelerate the development and deployment of cost-effective demand response.
    Date: 2011–10
  11. By: Hernán Enríquez; Juan Tomás Sayago
    Abstract: The purpose of this paper is to test the spatial patterns in small and medium size manufacturing firms (11 to 50 employees for small size firms and 51 to 200 for medium size firms) in Bogotá, Colombia, from 2006 to 2008. For this, the Ripley’s K(r) function distance based method is used in order to measure the firms´ spatial concentration, using level of employment and firm size as identification variables, for a sample of four ISIC digits industries located inside the urban perimeter. In this case, the K(r) function allows the reader to establish clustering agglomeration tendencies in each industry and additionally evaluate if dynamic spatial concentration, dispersion, or randomness between firms thru time exists. Evaluating location by firm size would indicate us trends of employment and predominant industry activity in the city, and its relation with other urban features.
    Date: 2011–12–22

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