nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒03‒21
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Contributions to oligopoly theory By Pavlopoulos, Antonios
  2. The Arm's Length Principle and Tacit Collusion By Choe, Chongwoo; Matsushima, Noriaki
  3. Optimal regulation in the presence of reputation concerns By Andrew Atkeson; Christian Hellwig; Guillermo L. Ordonez
  4. Insider Trading With Product Differentiation By Wassim Daher; Harun Aydilek; Fida Karam; Asiye Aydilek

  1. By: Pavlopoulos, Antonios
    Abstract: In the context of the Cournot model a demand function parameter is treated as the dual of the firm’s profit. Following the demand theory’s duality approach it’s possible to introduce the concept of the compensated reaction function (or compensated best-response function), as well as the concepts of net strategic complementarity/substitutability. The firm’s reaction function is analysed into a type-1 and a type-2 effect, which are the counterparts, respectively, of the demand theory substitution and income effects. Further, new results are obtained regarding Cournot equilibrium in the case of profit functions which are homogeneous in their arguments.
    Keywords: Cournot model; compensated reaction function; net strategic complementarity/substitutability
    JEL: L13 D43
    Date: 2012–02–25
  2. By: Choe, Chongwoo; Matsushima, Noriaki
    Abstract: The arm's length principle states that the transfer price between two associated enterprises should be the price that would be paid for similar goods in similar circumstances by unrelated parties dealing at arm's length with each other. This paper examines the effect of the arm's length principle on dynamic competition in imperfectly competitive markets. It is shown that the arm's length principle renders tacit collusion more stable. This is true whether firms have exclusive dealings with unrelated parties or compete for the demand from unrelated parties.
    Keywords: Transfer price; arm's length principle; tacit collusion; stability of collusion
    JEL: M41 L13 L41 D43
    Date: 2011–11–23
  3. By: Andrew Atkeson; Christian Hellwig; Guillermo L. Ordonez
    Abstract: We study a market with free entry and exit of firms who can produce high-quality output by making a costly but efficient initial unobservable investment. If no learning about this investment occurs, an extreme “lemons problem” develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. If the market operates with spot prices, simple regulation can enhance the role of reputation to induce investment, thus mitigating the “lemons problem” and improving welfare.
    Date: 2012
  4. By: Wassim Daher (Gulf University for Science and Technology (GUST) - Department of Mathematics and Natural Sciences, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Harun Aydilek (Gulf University for Science and Technology (GUST) - Department of Mathematics and Natural Sciences); Fida Karam (Gulf University for Science and Technology (GUST) - Department of Economics and Finance); Asiye Aydilek (Gulf University for Science and Technology (GUST) - Department of Economics and Finance)
    Abstract: In this paper, we analyze the effect of Cournot competition with differentiated products on the real and financial decisions of a publicly-owned firm, with three different structures in the financial market : monopoly, duopoly and Stackelberg. We shows that the degree of product differentiation does not affect the results found in the literature on insider trading, concerning the effect of the financial market structure on firms' outputs, the revelation of information and the insiders' orders. Besides, firms' output, the amount of information revealed in the stock price, the insiders' trading orders and the owners' profits are independent of the degree of product differentiation. The real market structure through the degree of product differentiation is found to determine the level of the compensation scheme earned by the manager, the market makers' response to the total order flow signal as well as the managers' profits.
    Keywords: Insider trading, product differentiation, correlated signals, Kyle model.
    Date: 2012–02

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