nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒06‒05
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Discount Pricing By Mark Armstrong; Yongmin Chen
  2. How regulation affects network and service quality in related markets By Haucap, Justus; Klein, Gordon J.
  3. Advertising Pricing Models in Media Markets: Lump-Sum versus Per-Consumer Charges By Helmut Dietl; Markus Lang; Panlang Lin
  4. Adverse Effects of Patent Pooling on Product Development and Commercialization By Thomas D. Jeitschko; Nanyun Zhang
  5. Termination-Based Price Discrimination: Tariff-Mediated Network Effects and the Fat-Cat Effect By Claussen, Jörg; Trüg, Moritz; Zucchini, Leon
  6. Bargaining Failures and Merger Policy By Roberto Burguet; Ramon Caminal
  7. The Proposed Merger of AT&T and T-Mobile: Are There Unexhausted Scale Economies in U.S. Mobile Telephony? By Russell Pittman
  8. Choice, Price and Service Characteristics in the Irish Broadband Market By Lyons, Seán; Savage, Michael

  1. By: Mark Armstrong; Yongmin Chen
    Abstract: This paper investigates discount pricing, the common marketing practice whereby a price is listed as a discount from an earlier, or regular, price. We discuss two reasons why a discounted price - as opposed to a mearly low price - can make a rational consumer more willing to purchase the item. First, the information that the product was initially sold at a high price can indicate the product is high quality. Second, a discounted price can signal that the product is an unusual bargain, and there is little point searching for lower prices. We also discuss a behavioral model in which consumers have an intrinsic preference for paying a below-average price. Here, a seller has an incentive to offer different prices to identical consumers, so that a proportion of its consumers enjoy a bargain. We discuss in each framework when a seller has an incentive to offer false discounts, in which the reference price is exaggerated.
    Keywords: Reference dependence, Price discounts, Sales tactics, False advertising
    JEL: D03 D18 D83 M3
    Date: 2012
  2. By: Haucap, Justus; Klein, Gordon J.
    Abstract: We analyze how network regulation affects investment into network infrastructure and complementary services. While regulation negatively affcets investment incentives in the regulated network market, the effects of network regulation on investment in complementary services can be either negative or positive, depending on the relative weight consumers assign to infrastructure versus service quality. We also find constellations, where regulation can enhance perceived total quality. --
    JEL: D43 L13 L51 L96
    Date: 2012
  3. By: Helmut Dietl (Department of Business Administration, University of Zurich); Markus Lang (Department of Business Administration, University of Zurich); Panlang Lin (Department of Business Administration, University of Zurich)
    Abstract: This paper develops a model of asymmetric competition between a pay and a free media platform. The pay media platform generates revenues from media consumers through subscription fees, while the free media platform generates revenues from charging advertisers either on a lump-sum basis (regime A) or on a per-consumer basis (regime B). The paper shows that the advertising level on the free platform is higher and this platform attracts more consumers in regime A than B even though advertisers have to pay more for an ad and consumers dislike ads. Moreover,\ the pay media platform faces a higher subscription fee and a lower consumer demand in regime A than B. Compared to regime B, the profit of the free (pay) media platform is higher (lower) in regime A, while aggregate profits are only higher if the consumers' disutility from ads is sufficiently low. The advertisers are better off in regime A than B, while the opposite is true for the media consumers. Finally, in small media markets, social welfare is lower in regime A than B, while this is true in large media markets only if the media consumers' disutility from advertising is sufficiently high.
    Keywords: Advertising, media platform, two-sided market, lump-sum charge, per-consumer charge, asymmetric competition
    JEL: D40 L10
    Date: 2012–05
  4. By: Thomas D. Jeitschko (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Nanyun Zhang (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: The conventional antitrust wisdom is that the formation of patent pools is welfare en- hancing when patents are complementary, since the pool avoids a double-marginalization problem associated with independent licensing. The focus of this paper is on (down- stream) product development and commercialization on the basis of perfectly comple- mentary patents. We consider development technologies that entail spillovers between rivals, and assume that nal demand products are imperfect substitutes. When pool formation facilitates information sharing and either increases spillovers in development or decreases the degree of product di erentiation, patent pools can adversely a ect welfare by reducing the incentives towards product development and product mar- ket competition|even with perfectly complementary patents. This modi es and even negates the conventional wisdom for some settings and suggests why patent pools are uncommon in science-based industries such as biotech and pharmaceuticals, despite there being frequent policy advocacy for them.
    Keywords: Patent Pools, Research and Development, Innovation, BioTechnology, Electronics
    JEL: L1 L2 L4 L6 D2 D4
    Date: 2012–04
  5. By: Claussen, Jörg; Trüg, Moritz; Zucchini, Leon
    Abstract: Mobile telecommunications operators routinely charge higher prices for off-net than on-net calls. Previous research provides two alternative propositions on whether on-net / off-net price differentials (OOD) are more attractive for large or for small operators. On the one hand studies on tariff-mediated network effects suggest that large operators use OOD to damage smaller rivals. On the other hand research on consumer behavior suggests that small operators may use OOD to attract customers with low on-net prices, trapping large operators with the “Fat-cat effectâ€. We test the relative strength of the two effects using data on tariff setting in the German market for mobile telecommunications from 2004 to 2009. We find that large operators are more likely to offer tariffs with OOD but that there is no significant difference between large and small operators in the magnitude of the differentials. Our findings support the proposition that large firms use tariff-mediated network effects as a competitive instrument, but also suggest the alternative theory may have some merit.
    Keywords: Telecommunications; Competition; Network effects; Customers; Pricing
    JEL: D22 L11 L96
    Date: 2011–12
  6. By: Roberto Burguet; Ramon Caminal
    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
  7. By: Russell Pittman (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: From the beginning, the debate on the likely results of the proposed acquisition of T-Mobile USA by AT&T focused more on the claims of the parties that “immense” merger efficiencies would overwhelm any apparent losses of competition than on the presence or absence of those losses, and the factors that might affect them, such as market definition. The companies based their “economic model” of the merger on estimates of efficiencies on AT&T’s “engineering model”, without addressing the credibility of the results of the latter in the context of the economics literature on the telecommunications sector. In this paper we first argue that the economics literature on economies of scale (especially) and economies of density in mobile telephony suggests caution in expecting such massive cost reductions from increasing the size of an already very large firm. We then present new econometric evidence from an international data base supporting the notion that most large mobile telephone service providers have reached the point of constant or even (rarely) declining returns to scale.
    Date: 2012–04
  8. By: Lyons, Seán; Savage, Michael
    Abstract: Using detailed plan-level data, this paper examines the choice, price and quality of broadband services available to consumers in Ireland over time. We find modest geographical (county level) variation in broadband services. Hedonic regression analysis is used to value various components of the broadband service. Download and upload speed attract positive valuations, whereas contention ratio is valued negatively as expected. The results suggest that the marginal valuation of download speed decreases as the speed level increases, with little value currently placed upon speeds above about 60 Mb/s.
    Date: 2012–05

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