nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒07‒23
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Power market structure and performance By Vagliasindi, Maria
  2. Endogenous Market Structures and Welfare By Federico Etro
  3. The Theory of Endogenous Market Structures: A Survey By Federico Etro
  4. Market Thickness, Prices and Honesty: A Quality Demand Trap By Siddhartha Bandyopadhyay
  5. Does Merger Simulation Work? A "Natural Experiment" in the Swedish Analgesics Market Market By Björnerstedt, Jonas; Verboven, Frank
  6. On the Price Effects of Horizontal Mergers : A Theoretical Interpretation By Emilie Dargaud; Carlo Reggiani
  7. Mergers, concurrent marketing mechanisms and the performance of sequential auctions By Jeddy, Mohamed; Larue, Bruno
  8. Competition between Managed Care Organizations and Indemnity Plans in Health Insurance Markets By Edmond Baranes; David Bardey

  1. By: Vagliasindi, Maria
    Abstract: Unbundling power generation, transmission, and distribution is not an end itself, but rather a means to achieve better performance. The key objective of the analytical framework of this paper is to explore the links between alternative market structures and performance (in terms of access, price, quality, and technical and financial performance). The results are crucial for providing policy advice, by offering alternative options to policy makers based on the lessons learned from the taxonomy of different market structures, tailored to different national contexts. The analysis is based on unique data, including a panel of 22 countries for the period beginning in 1989 and extending through 2009. The results of the analysis carried out for this study confirm the following conclusions for policy guidance on power market restructuring for developing countries. First, unbundling delivers results in terms of several performance indicators when used as an entry point to implement broader reforms, particularly introducing a sound regulatory framework, reducing the degree of concentration of the generation and distribution segments of the market by attracting public and private players and private sector participation. Second, there seems to be a credible empirical basis for selecting a threshold power system size and per capita income level below which unbundling of the power supply chain is not expected to be worthwhile. Finally, partial forms of vertical unbundling do not appear to drive improvements, probably because the owner was able to continue exercising control over the affairs of the sector and hinder the development of competitive pressure within the power market.
    Date: 2012–07–01
  2. By: Federico Etro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: I characterize microfounded endogenous market structures with Bertrand and Cournot competition and perform welfare analysis generalizing the Mankiw-Whinston condition for excess entry. The impact of market leaders on welfare is reconsidered, with a number of policy implications about strategic investments, vertical contracts, bundling, mergers and more. The neutrality of consumer surplus holds only when utility is homothetic. Under quantity competition, aggressive (accommodating) leaders increase consumer surplus if the elasticity of utility is decreasing (increasing) in consumption. This provides general rules to evaluate mergers and abuse of dominance issues in antitrust policy.
    Keywords: Endogenous entry, oligopoly, welfare
    JEL: L1
    Date: 2012
  3. By: Federico Etro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: Most market structures are neither perfectly or monopolistically competitive: they are characterized by a small number of large firms engaged in strategic interactions in their production and investment decisions. Yet, most of our economic theories are still based on a simplified world where firms are either small price takers producing under constant returns to scale (perfect competition) or isolated price setters (monopolistic competition). The theory of EMSs analyzes markets in partial and general equilibrium where strategies affect entry and entry affects strategies, and only exogenous primitive conditions on technology and preferences affect the equilibrium outcome. Understanding market structures means to understand how many firms are active in a market, which strategies they adopt and how primitive conditions and policy shocks affect them in a static or dynamic perspective.
    Keywords: Endogenous entry, oligopoly, sunk costs, general equilibrium
    JEL: L1 E20 E32 F12
    Date: 2012
  4. By: Siddhartha Bandyopadhyay
    Abstract: We analyze how product quality, prices and demand interact in a dynamic model of asymmetric information. We show that in markets for experience goods, even in the absence of certification, trade may occur, arising from a relation between market thickness and the incentive of sellers to produce high quality. We characterize the equilibrium prices, which depend on the distribution of buyer valuations. Finally, we show that the relationship between market thickness and incentive to produce high quality goods exists up to a certain threshold level of demand.
    Keywords: Market Thickness, Endogenous Quality, Multiple Equilibria, Price Mechanism
    JEL: L14 L15 O12 O17
    Date: 2012–07
  5. By: Björnerstedt, Jonas; Verboven, Frank
    Abstract: We exploit a natural experiment associated with a large merger in the Swedish market for analgesics (painkillers). We confront the predictions from a merger simulation study, as conducted during the investigation, with the actual merger effects over a two-year comparison window. The merger simulation model is based on a constant expenditures specification for the nested logit model (as an alternative to the typical unit demand specification). The model predicts a large price increase of 34% by the merging firms, because there is strong market segmentation and the merging firms are the only competitors in the largest segment. The actual price increase after the merger is of a similar order of magnitude: +42% in absolute terms and +35% relative to the
    Keywords: analgesics; constant expenditures nested logit; ex post merger analysis; merger simulation
    JEL: L40 L41
    Date: 2012–07
  6. By: Emilie Dargaud (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Carlo Reggiani (School of Social Sciences - University of Manchester)
    Abstract: Horizontal mergers are usually under the scrutiny of antitrust authorities due to their potential undesirable effects on prices and consumer surplus. Ex-post evidence, however, suggests that not always these effects take place and even relevant mergers may end up having negligible price effects. The analysis of mergers in the context of non-localized spatial competition may offer a further interpretation to the ones proposed in the literature : in this framework both positive and zero price effects are possible outcomes of the merger activity.
    Keywords: horizontal mergers; price effects; spokes model
    Date: 2012–07–13
  7. By: Jeddy, Mohamed; Larue, Bruno
    Abstract: We analyze the effects of mergers and the introduction of concurrent marketing mechanisms on the seller’s revenue, price trend and efficiency in sequential auctions under complete information with asymmetric bidders. First, we provide conditions for bidders to be strategic when the number of objects is less or greater than the number of bidders as this impacts upon the set of possible mergers. Second, we show that mergers may simultaneously increase the seller’s revenue and improve efficiency. Third, we show that having a marketing mechanism working alongside the auction can increase or decrease the average auction price. We use weekly data about Quebec’s daily hog auction to ascertain the effects of a merger and of changes in the weights of concurrent marketing mechanisms on daily auction prices. Our empirical analysis relies on an endogenous structural change test which detected three breaks corresponding to: i) the introduction of a new concurrent mechanism, ii) a joint-venture partnership of the two largest hog processing firms and iii) an announcement by Canada’s Competition Bureau authorizing the full merger of the same two firms.
    Keywords: Multi-unit sequential auctions, mergers, concurrent marketing mechanisms, endogenous structural changes, Industrial Organization, Institutional and Behavioral Economics, Livestock Production/Industries, D4, L7,
    Date: 2012–02
  8. By: Edmond Baranes; David Bardey
    Abstract: This paper examines a model of competition between two types of health insurers: Managed Care Organizations (MCOs) and “Conventional Insurers”. MCOs vertically integrate health care providers and pay them at a competitive price, while conventional insurers work as indemnity plans and pay the health care providers that are freely chosen by their policyholders at a wholesale price. This first difference is called input price effect. Moreover, we assume that policyholders put a positive value on providers. diversity supplied by their health insurance plan and that this value increases with their probability of disease. Due to the restricted choice of health care providers in MCOs, a risk segmentation occurs: policyholders who choose conventional insurers are characterized by a higher risk. Surprisingly, our results point out that the effects of this input price and risk segmentation can be countervailing and do not necessarily work in the same direction. More precisely, we show that vertical integration in health insurance markets can create an anti-raise rivals’ cost effect. Consequently, our results reveal that the penetration of vertical integration may decrease conventional insurers’ premiums, which is a sufficient condition to be Pareto-improving. After more than three decades of vertical integration waves, our model may also explain why we observe an interior equilibrium in which conventional insurers have survived.
    Date: 2012–07–03

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