nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒03‒28
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stackelberg equilibria in a multiperiod vertical contracting model with uncertain and price-dependent demand By Sandal, Leif K.; Ubøe, Jan
  2. Spatial Competition and market Share: An Application to Motion Pictures. By Darlene C. Chisolm; George Norman
  3. A more general theory of commodity bundling By Armstrong, Mark
  4. Who Benefits from Misleading Advertising? By Keisuke Hattori; Keisaku Higashida
  5. The advertising mix for a search good By Anderson, Simon P.; Renault, Régis
  6. Price competition in the spatial real estate market: Allies or rivals? By Iwata, Shinichiro; Sumita, Kazuto; Fujisawa, Mieko
  7. Price and Frequency Competition in Freight Transportation By Shah, Nilopa; Brueckner, Jan K.

  1. By: Sandal, Leif K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Ubøe, Jan (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In this paper, we consider Stackelberg games in a multiperiod vertical contracting model with uncertain demand. Demand has a distribution with a mean and variance that depend on the current retail price, and this dependence may vary from period to period. We focus on a class of problems in which the market has a memory-based scaling of demand, and the mean scaling is a function of previous retail prices. This leads to a strategic game in which the parties must balance high immediate profits with reduced future earnings. We propose a complete solution to this multiperiod Stackelberg game, covering cases with finite and infinite horizons. The theory is illustrated by using a Cobb-Douglas demand function with an additive, normally distributed random term, but the theory applies to more general settings.
    Keywords: Stackelberg game; multiperiod vertical contracting model; price-dependent demand
    JEL: C61 C73 D81
    Date: 2012–02–27
  2. By: Darlene C. Chisolm; George Norman
    Abstract: This paper presents an empirical assessment of movie theatre attendance in two major metropolitan markets and provides strong support for the importance of spatial characteristics in determing attendance. We consider the hypothesis that attendance at particular movie theatres reflects a tension between two effects: a negative competion effect and a positive agglomeration effect. We find evidence that the competition effect dominates. Further, we identify a pattern of systematic spatial decay in the impact of this effect on demand.
    JEL: L11 D43 L82
    Date: 2011
  3. By: Armstrong, Mark
    Abstract: This paper extends the standard model of bundling as a price discrimination device to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand-alone products. Product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the model with additive preferences), while substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts. When separate sellers coordinate on an inter-firm discount, they can use the discount to overturn product substitutability and relax competition.
    Keywords: Price discrimination; bundling; oligopoly
    JEL: L13 D82 D4
    Date: 2012–03
  4. By: Keisuke Hattori (Faculty of Economics, Osaka University of Economics); Keisaku Higashida (School of Economics, Kwansei Gakuin University)
    Abstract: We develop a Hotelling model of horizontally and vertically differentiated brands with misleading advertising competition. We investigate the question of who benefits or loses from the misinformation created by advertising competition and related regulatory policies. We show that the quality gaps between two brands are crucial for determining the effect of misinformation on the firms’ profits, aggregate or individual consumer surplus, and national welfare. Although the misinformation tricks consumers into buying products that they would not have purchased otherwise, it may improve welfare even if the advertising does not expand the overall demand for the brands. We also show that, although endogenous advertising competition may lead to a prisoner’s dilemma for firms, it makes some consumers better off. We also consider the effects of several regulatory policies, such as advertising taxes, ad valorem and unit taxes on production, comprehensive and partial prohibitions of misleading advertising, government provisions of quality certification or counter-information, and the education of consumers.
    Keywords: Misinformation, Advertising Competition, Regulation, Product Differentiation
    Date: 2012–03
  5. By: Anderson, Simon P.; Renault, Régis
    Abstract: We extend the persuasion game to bring it squarely into the economics of advertising. We model advertising as exciting consumer interest into learning more about the product, and determine a firm's equilibrium choice of advertising content over quality information, price information, and horizontal match information. Equilibrium is unique whenever advertising is necessary. The outcome is a separating equilibrium with quality unravelling. Lower quality firms need to provide more information. For a given quality level, as a function of consumer visit costs, first quality information is disclosed, then price information and then horizontal product information are added to the advertising mix. Some suggestive evidence is provided from airline ads in newspapers.
    Keywords: advertising; content analysis; information; persuasion game; search
    JEL: D42 L15 M37
    Date: 2012–01
  6. By: Iwata, Shinichiro; Sumita, Kazuto; Fujisawa, Mieko
    Abstract: This paper examines real estate pricing featuring the price response curve, both theoretically and empirically. The Bertrand model with differentiated products suggests that the price response of real estate may differ when properties in the vicinity are priced by an affiliated firm or one's own firm. This is because the firm can maintain the collusive state if real estate prices in the neighborhood are priced by allies, whereas it loses it if prices are priced by rivals. To examine this prediction, a spatial autoregressive model with autoregressive and heteroskedastic disturbances, including a share of allies in the vicinity, is estimated using data on the residential condominium market in central Tokyo. Empirical results provide support for the model prediction.
    Keywords: Real estate prices; Strategic pricing; Spatial econometrics
    JEL: D21 L85 C31 D43 R31
    Date: 2012–03
  7. By: Shah, Nilopa; Brueckner, Jan K.
    Abstract: This paper develops a simple analytical model of price and frequency competitionamong freight carriers. In the model, the full price faced by a shipper (a goodsproducer) includes the actual shipping price plus an inventory holding cost, whichis inversely proportional to the frequency of shipments offered by the freight carrier. Taking brand loyalty on the part of shippers into account, competing freightcarriers maximize profit by setting prices, frequencies and vehicle carrying capacities. Assuming tractable functional forms, long- and short-run comparative-staticresults are derived to show how the choice variables are affected by the model’sparameters. The paper also provides an efficiency analysis, comparing the equilibrium to the social optimum, and it attempts to explain the phenomenon of excesscapacity in the freight industry.
    Keywords: Social Sciences, Other
    Date: 2011–09–01

This nep-ind issue is ©2012 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.