nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒10‒13
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Excess capacity and pricing in Bertrand-Edgeworth markets: Experimental evidence By Fonseca, Miguel A.; Normann, Hans-Theo
  2. Agent-Based Spatial Competition By Eveline Van Leeuwen; Mark Lijesen
  3. Monopolistic Location Choice in Two-Sided Industries By Böhme, Enrico; Müller, Christopher
  4. Excess Liquidity against Predation By Dai Zusai
  5. A More General Theory of Commodity Bundling By Mark Armstrong
  6. Does Inpu Purchase Cooperation Foster Downstream Collusion? By Aldo González; Loreto Ayala
  7. Competitive Dynamics, IP Litigation and Acquisitions - The Struggle for Positional Advantage in the Emerging Mobile Internet By Timo Seppälä; Martin Kenney
  8. The Ideal Loan and the Patterns of Cross-Border Bank Lending By Joern Kleinert; Bettina Brueggemann; Esteban Prieto
  9. Design of Consumer Review Systems and Product Pricing By Yabing Jiang; Hong Guo
  10. Two-Sided Platform Competition in the Online Daily Deals Promotion Market By Byung-Cheol Kim; Jeongsik "Jay" Lee; Hyunwoo Park
  11. Welfare Effects of Water Pricing in Germany By Müller, Christopher

  1. By: Fonseca, Miguel A.; Normann, Hans-Theo
    Abstract: We conduct experiments testing the relationship between excess capacity and pricing in repeated Bertrand-Edgeworth duopolies and triopolies. We systematically vary the experimental markets between low excess capacity (suggesting monopoly) and no capacity constraints (suggesting perfect competition). Controlling for the number of firms, higher production capacity leads to lower prices. However, the decline in prices as industry capacity rises is less pronounced than predicted by Nash equilibrium, and a model of myopic price adjustments has greater predictive power. With higher capacities, Edgeworth-cycle behavior becomes less pronounced, causing lower prices. Evidence for tacit collusion is limited and restricted to low-capacity duopolies. --
    Keywords: tacit collusion,excess capacity,Edgeworth cycles
    JEL: C72 C90 D43
    Date: 2012
  2. By: Eveline Van Leeuwen; Mark Lijesen
    Abstract: Equilibrium in the Hotelling model of spatial competition is guaranteed if the distribution of consumers is log concave. In the real world, nothing guarantees such a log concave distribution however, rendering the analytical model unable to provide a primer as to what one might expect from empirical applications. We develop an agent-based model of spatial competition that is capable of reproducing the results of the analytical model and also provides meaningful results for some cases where the distribution of consumers is not log concave. Using numerous simulations, on randomly drawn distributions, we derive equilibrium locations and prices and test for uniqueness. Moreover, we check whether the relationships between characteristics of the distribution (e.g. concentration, skewness) and outcomes are consistent with the analytical model. Key-words: Hotelling, agent-based modelling, spatial competition
    Date: 2012–10
  3. By: Böhme, Enrico; Müller, Christopher
    Abstract: We analyze the optimal location choice of a monopolistic firm that operates two platforms on a two-sided market. We show that the optimal platform locations are equivalent to the one-sided benchmark if both sides are either restricted to single- or multi-homing. In the mixed case (one side single-homes, the other one multi-homes), the optimal platform locations are determined by the relative profitability of both market sides. Our results indicate that modeling mergers on two-sided markets with fixed locations is often inappropriate.
    Keywords: two-sided markets; location choice; monopoly; merger simulation
    JEL: K20 L51 L12 D42
    Date: 2012–10–05
  4. By: Dai Zusai (Department of Economics, Temple University)
    Abstract: We consider precautionary liquidity holding as counter-strategy for the entrant to protect himself from predation. Threat of predation, even if avoided in equilibrium, affects the financial contract to raise precautionary liquidity and the equilibrium outcome in the product market competition. When the incumbent's strategy is unverifiable, the entrant with small start-up capital cannot raise large enough precautionary liquidity; consequently, he shrinks his business so as to avoid predation. Predation evolves in the model only as perturbation from equilibrium strategy. We provide the revelation principle for a sequential equilibrium to select a sensible outcome by imposing robustness to such perturbation.
    Keywords: Predation, excess liquidity, revelation principle, sequential equilibrium, strategic uncertainty
    JEL: L12 D86 G30
    Date: 2012–06
  5. By: Mark Armstrong
    Abstract: This paper discusses the incentive to bundle when consumer valuations are non-additive and/or when products are supplied by separate sellers. Whether integrated or separate, a firm has an incentive to introduce a bundle discount when demand for the bundle is more elastic than the overall demand for products. When separate sellers coordinate on a bundle discount, they can use the discount to relax competition, which can harm welfare.
    Keywords: Price discrimination, Bundling, Discrete choice, Oligopoly, Common agency
    JEL: D11 D43 D82 D86 L13 L41
    Date: 2012
  6. By: Aldo González; Loreto Ayala
    Abstract: We set up a model where two retailers compete downstream and buy their inputs from a single producer. Retailers may collude downstream, when fixing the retail price and cooperate upstream by jointly negotiating the wholesale price with the producer. We find that purchase cooperation renders downstream collusion more likely. First it expands the range of differentiation where downstream collusion is a profitable strategy. Second it makes more stable the agreement downstream since the punishment becomes harsher due to the increase in the wholesale price coming from the breakdown of common upstream negotiation. The results are robust to a scenario of upstream price rigidity where the wholesale price cannot be immediately renegotiated after a deviation downstream has occurred.
    Date: 2012–06
  7. By: Timo Seppälä; Martin Kenney
    Abstract: This article investigates how current global intellectual property (IP) litigation provides insight into the competitive landscape of mobile internet, the strategic thinking processes of firms, and the old mobile telecommunications incumbents and new entrants from internet that are vying for space in the new world of mobile internet. To understand the contemporary industry of smart devices, we used the latest IP litigation data from the U.S. to illustrate how the world of essential patents (i.e., the old incumbents in mobile telecommunications) and the world of platform patents (i.e., the new entrants into mobile internet) have become two complementary areas of technology. This analysis address the necessity for understanding the firms involved in IP litigation cases for smart devices in particular and the corresponding patents these firms use in current global IP litigation. This article provides evidence that elucidates the current turmoil in mobile telecommunications; identifies the valuable patents, corresponding patent categories and technology areas; and discusses and analyzes the competitive landscape of mobile internet through the eyes of IP litigation and IP acquisitions. Furthermore, we provide additional evidence that the patent acquisitions by Apple, Google, and Microsoft changed the nature of their ownership of different technologies and important patents in the world of essential patents.
    Keywords: Apple, Google, Microsoft, Nokia, ICT, Intellectual Property (IP), IP Litigation, IP Acquisitions
    Date: 2012–10–04
  8. By: Joern Kleinert (Karl-Franzens University of Graz); Bettina Brueggemann (University of Frankfurt); Esteban Prieto (University of Tuebingen)
    Abstract: A typical loan offer is a differentiated product with various negotiated characteristics (maturity, amount, timing, collateral, disclosure requirements) which involve costs that go beyond the mere interest rate. Taking into account all costs, a firm chooses the cost minimizing loan offer. Based on this decision criterion, we derive the probability of a firm from country i to choose a loan contract from a bank in country j. We use this probability to derive a gravity equation for cross-border bank loans. Finally, we estimate the gravity equation based on the theoretical model controlling for the unobserved heterogeneity proposed by our theoretical model.
    Keywords: Product differentiation, Gravity Equation, Cross-border bank lending
    JEL: L14 F34 G21
    Date: 2012–09
  9. By: Yabing Jiang (Lutgert College of Business, Florida Gulf Coast University); Hong Guo (Mendoza College of Business, University of Notre Dame)
    Abstract: Consumer review systems have become an important marketing communication tool through which consumers share and learn product information. Although there is abundant evidence that consumer reviews have significant impact on consumer purchasing decisions, the design of consumer review systems and its impact on review outcomes and product sales have not yet been well examined. This paper analyzes firms’ review system design and product pricing strategies. We formally model two design features of consumer review systems – rating scale and disclosure of specific product attribute information. We show that firms’ optimal strategies critically depend on contextual characteristics such as product quality, product popularity, and consumer misfit cost. Our results suggest that firms should choose a low rating scale for niche products and a high rating scale for popular products. Firms should disclose specific product attribute information to attract the desired consumer segment when product quality is low relative to misfit cost, and the resulting optimal size of the targeted consumer market increases in product popularity and product quality. Different pricing strategies should be deployed during the initial sale period for different product types. For niche products, firms are advised to adopt lower-bound pricing for high-quality products to take advantage of the positive word of mouth. For popular products, firms are advised to adopt upper-bound pricing for high-quality products to enjoy the direct profit from the initial sale period, even after taking into account the negative impact of high price on consumer reviews.
    Keywords: economic modeling, e-commerce, consumer reviews, online word of mouth, product uncertainty
    JEL: D42 L86 M15
    Date: 2012–09
  10. By: Byung-Cheol Kim (School of Economics, Georgia Institute of Technology); Jeongsik "Jay" Lee (Scheller College of Business, Georgia Institute of Business); Hyunwoo Park (School of Industrial and System Engineering)
    Abstract: We empirically investigate the platform competition in the online daily deals promotion market that is characterized by intense rivalry between two leading promotion sites, Groupon and LivingSocial, that broker between merchants and consumers. We find that deals offered through Groupon, the incumbent, sell more and generate higher revenues than those offered by LivingSocial, the entrant. We show that the greater network size in the consumer side entirely explains the incumbent's lead in the merchant side performance, indicating the existence of cross-side network effects at the aggregated market level. However, this performance advantage is dampened by the entrant's competitive chasing at local markets through offers of greater discounts and lower prices. Moreover, the incumbent advantage quickly attenuates as the merchants repeat promotions over time. These countering forces appear to prevent this market from achieving a tipping equilibrium. Our findings thus help explain why different market structures arise in two-sided markets with network externalities.
    Keywords: two-sided market, platform competition, cross-side network effects, online daily deals, reputation effect
    JEL: D40 L10 M20
    Date: 2012–09
  11. By: Müller, Christopher
    Abstract: The observed two-part tariff price structure (consisting of a lump-sum price and a linear marginal price) for drinking water in Germany does not reflect the cost structure reported in the literature. Recovering marginal costs from a sample of 251 German counties, we see that there are positive price–cost margins, while lump-sum prices are too low. A price-structure readjustment along welfare-economic principles (marginal cost pricing; lump-sum price ensures cost recovery) would increase the mean consumer surplus by 0.037% of the local GDP or € 2.129 million per county, assuming a share of 15% variable costs in total costs.
    Keywords: residential water demand; welfare measurement; public water supply; equity– efficiency trade-off; marginal versus average price sensitivity; natural monopoly; public services
    JEL: L32 H42 O25 L95 Q21 D61
    Date: 2012–09–19

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