nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒05‒29
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Menu Costs and Dynamic Duopoly By Kano, Kazuko
  2. Pricing and Signaling with Frictions By Alain Delacroix; Shouyong Shi
  3. Cartel Pricing Dynamics, Price Wars and Cartel Breakdown By Manganelli, Anton-Giulio
  4. Bargaining failures and merger policy By Roberto Burguet; Ramon Caminal
  5. Mergers and Innovation in the Pharmaceutical Market By Comanor, William S.; Scherer, Frederic Michael
  6. The Pricing of Art and the Art of Pricing: Pricing Styles in the Concert Industry By Courty, Pascal; Pagliero, Mario
  7. Push-Me Pull-You: Comparative Advertising in the OTC Analgesics Industry By Anderson, Simon P; Ciliberto, Federico; Liaukonyte, Jura; Renault, Régis

  1. By: Kano, Kazuko
    Abstract: Scrutinizing a state-dependent pricing model in the presence of menu costs and dynamic duopolistic interactions, this paper claims that the assumption about market structure is crucial for identifying menu costs for price changes. Prices in a dynamic duopoly market can be more rigid than those in more competitive markets such as monopolistically competitive one. If so, estimates of menu costs under monopolistic competitions are potentially biased upwards due to the price rigidity from strategic interactions between dynamic duopoly rms. Developing and estimating a dynamic discrete-choice model with duopoly to correct this potential bias, this paper provides empirical evidence that not only menu costs but also dynamic strategic interactions play an important role to explain the observed degree of price rigidity in data of weekly retail prices.
    Keywords: Menu Cost; Dynamic Discrete Choice Game; Retail Price
    JEL: L13 L81 D43
    Date: 2011–12–14
  2. By: Alain Delacroix; Shouyong Shi
    Abstract: We study a large market with directed search and signaling. Each seller chooses an investment that determines the quality of the good which is the seller's private information. A seller also chooses the price of the good and the number of selling sites. After observing sellers' choices of prices and sites, but not quality, buyers choose which price to search. The sites posting the same price and the buyers searching for that price match with each other randomly. In this environment, a seller's choices of prices and sites can direct buyers' search decisions and signal quality ex-ante. After matching, a buyer also receives an imperfectly informative signal about the quality of the good and decides whether to trade at the posted price. When the latter signal received is sufficiently accurate, we prove that there is a unique equilibrium. Moreover, when the quality differential is large, the equilibrium (under private information) implements the socially efficient allocation under public information. When the quality differential is small, the equilibrium is inefficient in the quality of goods produced or/and the number of sites created. This inefficiency is caused by a conflict between the search-directing role and the signaling role of a posted price. We also compare the price-posting equilibrium with the equilibrium under bargaining. The bargaining equilibrium features efficient quality, but inefficient entry. It is superior to the price-posting equilibrium when a seller's bargaining power is intermediate and the quality differential is small.
    Keywords: Directed search; Search, Signaling; Pricing; Efficiency
    JEL: D8 C78 E24
    Date: 2012–05–18
  3. By: Manganelli, Anton-Giulio
    Abstract: This paper gives an unified explanation of some of the most widely known facts of the cartel literature: prices gradually rise, then remain constant, there can be price wars and some cartels break down. In this model consumers are loss averse and efficiency of a competitive fringe is not publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that rises in time with consumers’ expectations. This increasing price path is bounded from above by the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there can be price wars and collusion can eventually break down.
    Date: 2012–05
  4. By: Roberto Burguet; Ramon Caminal
    Abstract: Abstract In this paper we study the optimal ex-ante merger policy in a model where merger proposals are the result of strategic bargaining among alternative candidates. We allow for firm asymmetries and, in particular, we emphasize the fact that potential synergies generated by a merger may vary substantially depending on the identity of the participating firms. The model demonstrates that, under some circumstances, relatively inefficient mergers may take place. That is, a particular merger may materialize despite the existence of an alternative merger capable of generating higher social surplus and even higher profits. Such bargaining failures have important implications for the ex-ante optimal merger policy. We show that a more stringent policy than the ex-post optimal reduces the scope of these bargaining failures and raises expected social surplus. We use a bargaining model that is flexible, in the sense that its strategic structure does not place any exogenous restriction on the endogenous likelihood of feasible mergers.
    Keywords: endogenous mergers, merger policy, bargaining, synergies
    JEL: L13 L41
    Date: 2012–05–17
  5. By: Comanor, William S.; Scherer, Frederic Michael
    Abstract: The U.S. pharmaceutical industry has experienced in recent years two dramatic changes: stagnation in the growth of new molecular entities approved for marketing, and a wave of mergers linking inter alia some of the largest companies. This paper explores possible links between these two phenomena and proposes alternative approach to merger policy. It points to the high degree of uncertainty encountered in the discovery and development of new pharmaceutical entities and shows how optimal strategies entail the pursue of parallel research and development paths. Uncertainties afflict both success rates and financial gains contingent upon success. A new model simulating optimal strategies given prevalent market uncertainties is presented. Parallelism can be sustained both within individual companies’ R&D programs and across competing companies. The paper points to data showing little parallelism of programs within companies and argues that inter-company mergers jeopardize desirable parallelism across companies.
    Date: 2011
  6. By: Courty, Pascal; Pagliero, Mario
    Abstract: We document the existence of pricing styles in the concert industry. Artists differ in the extent to which they rely on second- and third-degree price discrimination and in how likely they are to sell out concerts. Most strikingly, artists who use multiple seating categories are more likely to vary prices across markets and less likely to sell out concerts. These patterns are difficult to explain under a standard profit maximization paradigm. The hypothesis that artists differ in their willingness to exploit market power provides a plausible framework for explaining these patterns in artist pricing style.
    Keywords: Behavioral pricing; exploitation of market power; Fair pricing; Price discrimination; Pricing style; Rationing
    JEL: D42 D45 L21 L82 Z11
    Date: 2012–05
  7. By: Anderson, Simon P; Ciliberto, Federico; Liaukonyte, Jura; Renault, Régis
    Abstract: We model comparative advertising as brands pushing up own brand perception and pulling down the brand image of targeted rivals. We watched all TV advertisements for OTC analgesics 2001-2005 to construct matrices of rival targeting and estimate the structural model. These attack matrices identify diversion ratios and hence comparative advertising damage measures. We find that outgoing comparative advertising attacks are half as powerful as self-promotion in raising own perceived quality and cause more damage to the targeted rival than benefit to the advertiser. Comparative advertising causes most damage through the pull-down effect and has substantial benefits to other rivals.
    Keywords: advertising targets; analgesics; attack matrix; comparative advertising; diversion ratios; push and pull effects
    JEL: L13 L65 M37
    Date: 2012–05

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