nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒11‒03
sixteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Communication in Cournot Oligopoly By Maria Goltsman; Gregory Pavlov
  2. Quality Pricing-to-Market By Raphael Anton Auer; Thomas Chaney; Philip Ulrich Sauré
  3. Price Differentiation and Menu Costs in Credit Card Payments By Marcos Valli Jorge; Wilfredo Leiva Maldonado
  4. Game Theory in Oligopoly By Marx Boopathi
  5. Profits and competition in a unionized duopoly model with product differentiation and labour decreasing returns By Luciano Fanti; Nicola Meccheri
  6. Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity By Snir, Avichai; Levy, Daniel; Gotler, Alex; Chen, Haipeng (Allan)
  7. Using Cost Pass-Through to Calibrate Demand By Nathan H. Miller; Marc Remer; Gloria Sheu
  8. Calibrating the AIDS and Multinomial Logit Models with Observed Product Margins By Gloria Sheu; Charles Taragin
  9. The dynamics of a banking duopoly with capital regulations. By Luciano Fanti
  10. Asymmetric Price Adjustments in Airlines By Escobari, Diego
  11. Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application By Nathan H. Miller; Conor Ryan; Marc Remer; Gloria Sheu
  12. Merger results under price competition and plant-specific unions By Luciano Fanti; Nicola Meccheri
  13. Price competition, merger and welfare under firm-specific unions: on the role of unions’ preference towards wages By Luciano Fanti; Nicola Meccheri
  14. Differentiated duopoly and horizontal merger profitability under monopoly central union and convex costs By Luciano Fanti; Nicola Meccheri
  15. The role of ownership as R&D incentive in business groups By Enrico Guzzini; Donato Iacobucci
  16. Customer Service Quality and Incomplete Information in Mobile Telecommunications: A Game Theoretical Approach to Consumer Protection By Rafael López Zorzano; Teodosio Pérez-Amaral; Teresa Garín-Muñoz; Covadonga Gijón Tascón

  1. By: Maria Goltsman (University of Western Ontario); Gregory Pavlov (University of Western Ontario)
    Abstract: We study communication in a static Cournot duopoly model under the assumption that the firms have unverifiable private information about their costs. We show that cheap talk between the firms cannot transmit any information. However, if the firms can communicate through a third party, communication can be informative even when it is not substantiated by any commitment or costly actions. We exhibit a simple mechanism that ensures informative communication and interim Pareto dominates the uninformative equilibrium for the firms.
    Keywords: Cournot oligopoly; communication; information; cheap talk; mediation
    JEL: C72 D21 D43 D82 D83
    Date: 2012
  2. By: Raphael Anton Auer; Thomas Chaney; Philip Ulrich Sauré
    Abstract: We document that in the European car industry, exchange rate pass-through is larger for low than for high quality cars. To rationalize this pattern, we develop a model of quality pricing and international trade based on the preferences of Musa and Rosen (1978). Firms sell goods of heterogeneous quality to consumers that differ in their willingness to pay for quality. Each firm produces a unique quality of the good and enjoys local market power, which depends on the prices and qualities of its closest competitors. The market power of a firm depends on the prices and qualities of its direct competitors in the quality dimension. The top quality firm, being exposed to just one direct competitor, enjoys the highest market power and equilibrium markup. Because higher quality exporters are closer to the technological leader, markups are generally increasing in quality, exporting is relatively more profitable for high quality than for low quality firms, and the degree of exchange rate pass-through is decreasing in quality.
    Date: 2012
  3. By: Marcos Valli Jorge; Wilfredo Leiva Maldonado
    Abstract: We build a model of credit card payments where the retailers are allowed to charge differential prices depending on the instrument of payment chosen by the consumer. We follow the approach in Rochet and Wright (2010) but assume a credit card system without any type of non-surcharge rule. In a Hotelling competition framework at the retailers level, the competitive equilibrium prices are computed assuming that the store credit provided by the retailer is less cost efficient than the one provided by the credit card. In accordance with the literature, we obtain that the interchange fee becomes neutral if we eliminate the no-surcharge rule, when the interchange fee loses its ability to distort the individual consumer’s decisions and displace the aggregate consumers’ welfare from its maximum level. We prove that the average price obtained under price differentiation is smaller than the single retail price under the non-surcharge rule, despite the retailer’s margins being the same in both scenarios. In addition, we introduce menu costs to prove that there is a value for the interchange fee such that there is equilibrium with price differentiation if and only if that fee is above this value. It must be interpreted as an endogenous cap for the interchange fee fixed by the credit card industry. Finally, we also obtain that under price differentiation with menu costs there is a non cooperative Nash equilibrium as in the well known “prisoner’s dilemma” game.
    JEL: L11 E42 G18
    Date: 2012–10
  4. By: Marx Boopathi
    Abstract: The game theory techniques are used to find the equilibrium of a market. Game theory refers to the ways in which strategic interactions among economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents. The oligopolistic market structures are taken and how game theory applies to them is explained.
    Date: 2012–10
  5. By: Luciano Fanti; Nicola Meccheri
    Abstract: In this paper, we aim at investigating if the conventional wisdom, that an increase of competition linked to a decrease in the degree of product differentiation always reduces firms’ profits, remains true in a unionized duopoly model with labour decreasing returns. In this context, mixed results emerge. In particular, we show that a decrease in the degree of product differentiation may affect wages, hence profits, differently, depending on both the mode of competition in the product market Cournot or Bertrand competition) and the particular unionization structure (firm-specific or industry-wide union(s)). Interestingly, it is shown that the conventional wisdom can actually be reversed, even if under Bertrand competition only.
    Keywords: unionized duopoly, labour decreasing returns, product differentiation, profits.
    JEL: J43 J50 L13
    Date: 2012–03–01
  6. By: Snir, Avichai; Levy, Daniel; Gotler, Alex; Chen, Haipeng (Allan)
    Abstract: There is evidence that 9-ending prices are more common and more rigid than other prices. We use data from three sources: a laboratory experiment, a field study, and a large US supermarket chain, to study the cognitive underpinning and the ensuing asymmetry in rigidity associated with 9-ending prices. We find that consumers use 9-endings as a signal for low prices, and that this signal interferes with price information processing. Consequently, consumers are less likely to notice a bigger price when it ends with 9, or a price increase when the new price ends with 9, in comparison to a situation where the prices end with some other digit. We also find that retailers respond strategically to this consumer bias by setting 9-ending prices more often after price increases than after price decreases. 9-ending prices, therefore, usually increase only if the new prices are also 9-ending. Consequently, there is an asymmetry in the rigidity of 9-ending prices: they are more rigid than non 9-ending prices upward but not downward.
    Keywords: Price Points; Price Recall; Sticky Prices; Rigid Prices; Price Adjustment; 9-Ending Prices; Psychological Prices
    JEL: L16 D03 M31 E31 D80 C93 C91
    Date: 2012–10–26
  7. By: Nathan H. Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Marc Remer (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Gloria Sheu (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We demonstrate that cost pass-through can be used to inform demand calibration, potentially eliminating the need for data on margins, diversion, or both. We derive the relationship between cost pass-through and consumer demand using a general oligopoly model of Nash-Bertrand competition and develop specic results for four demand systems: linear demand, logit demand, the Almost Ideal Demand System (AIDS), and log-linear demand. The methods we propose may be useful to researchers and antitrust authorities when reliable measures of margins or diversion are unavailable.
    Date: 2012–10
  8. By: Gloria Sheu (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Charles Taragin (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We show how observed product margins may be used in lieu of an observed market elasticity to calibrate parameters for two commonly used demand forms: the Almost Ideal Demand System (AIDS) and the multinomial logit. This technique is useful for antitrust practitioners interested in simulating the e ects of a merger, since estimates of product margins are often easier to obtain than estimates of market elasticities.
    Keywords: demand calibration, multinomial logit, almost ideal demand system, AIDS
    JEL: L40 K21
    Date: 2012–10
  9. By: Luciano Fanti
    Abstract: We analyse the dynamics of a banking duopoly game with heterogeneous players (as regards the type of expectations’ formation) ,to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement may stabilise the market equilibrium. Moreover, we show that when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos. Therefore, although on the one side the capital regulation is harmful for the equilibrium loans’ volume and profit, on the other side it is effective in keeping or restoring the stability of the Cournot-Nash equilibrium in the banking duopoly.
    Keywords: Bifurcation; Chaos; Cournot; Oligopoly; Banking; Capital regulation.
    JEL: C62 G21 G28 D43 L13
    Date: 2012–09–01
  10. By: Escobari, Diego
    Abstract: This paper uses a unique daily time series data set to investigate the asymmetric response of airline prices to capacity costs driven by demand fluctuations. We use a Markov regime-switching model with time-varying transition probabilities to capture the time variation in the response. The results show strong evidence of asymmetric price adjustments: positive cost shifts have a large positive effect, while negative cost shifts have no effect. The asymmetry is also explained by summer travel, but not by the size of cost shifts. The findings show the importance of consumer heterogeneity and capacity constraints as a source of asymmetric responses.
    Keywords: Asymmetric pricing; Airlines; Regime switching; Capacity costs
    JEL: L93 C22
    Date: 2012–10–21
  11. By: Nathan H. Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Conor Ryan (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Marc Remer (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Gloria Sheu (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We analyze the accuracy of first order approximation, a method developed theoretically in Jaffe and Weyl (2012) for predicting the price effects of mergers, and provide an empirical application. Approximation is an alternative to the model-based simulations commonly employed in industrial economics. It provides predictions that are free from functional form assumptions, using data on either cost pass-through or demand curvature in the neighborhood of the initial equilibrium. Our numerical experiments indicate that approximation is more accurate than simulations that use incorrect structural assumptions on demand. For instance, when the true underlying demand system is logit, approximation is more accurate than almost ideal demand system (AIDS) simulation in 79.1 percent of the randomly-drawn industries and more accurate than linear simulation in 90.3 percent of these industries. We also develop, among other results, (i) how accuracy changes across a variety of economic environments, (ii) how accuracy is affected by incomplete data on cost pass-through, and (iii) that a simplified version of approximation provides conservative predictions of price increases.
    Date: 2012–10
  12. By: Luciano Fanti; Nicola Meccheri
    Abstract: This paper analyses the effects of a downstream merger in a differentiated duopoly under price competition and plant-specific unions. We show, in contrast with the preceding literature, that the standard welfare results may be reversed: a downstream merger may increase consumer surplus and overall welfare. In particular, this applies when unions are sufficiently wage-oriented and the market size is included in a certain intermediate range.
    Keywords: mergers, social welfare, price competition, plant-specific unions.
    JEL: D43 L13 J50
    Date: 2012–03–01
  13. By: Luciano Fanti; Nicola Meccheri
    Abstract: This paper analyses the effects of a downstream merger in a differentiated duopoly under price competition and firm-specific unions. In contrast with the acquired wisdom, we show that a downstream merger may increase overall welfare when products are sufficienly substitutes and unions are sufficiently oriented towards wages.
    Keywords: mergers, social welfare, price competition, plant-specific unions.
    JEL: D43 L13 J50
    Date: 2012–04–01
  14. By: Luciano Fanti; Nicola Meccheri
    Abstract: Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex production costs) and centralised unionisation in a differentiated duopoly model. It is pointed out that the wage fixed by a monopoly central union in the post-merger case is higher than in the pre-merger/Cournot equilibrium, opening up the possibility that merger reduces profits. Indeed, it is shown that this “reversal result” actually applies when the central union is sufficiently little interested to wages with respect to employment. Moreover, the lower the degree of substitutability between firms’ products and the higher the workers’ reservation wage, the higher ceteris paribus the probability that profits decrease as a result of the merger.
    Keywords: merger profitability, unionised duopoly, convex costs.
    JEL: D43 L13 J50
    Date: 2012–03–01
  15. By: Enrico Guzzini (Università degli Studi e-Campus, Italy); Donato Iacobucci (Dept. of Information Engineering Università Politecnica delle Marche, Italy)
    Abstract: Several empirical papers have shown that firms belonging to business groups have a higher propensity to engage in R&D. The purpose of the paper is to demonstrate that this higher propensity depends on the ownership share of controlled companies, besides the presence of co-ordination mechanisms. We develop an analytical model and we empirically test the predictions of the model using a dataset of Italian manufacturing firms. From the development of this model we derive three main implications: a) that there is no difference in R&D propensity between stand-alone firms and firms at the bottom of business groups; b) that head and intermediate firms have a higher R&D propensity compared to stand-alone and firms at the bottom of the group; c) that the intensity of R&D depends on the ownership shares in controlled companies. Overall the results of the empirical analysis are in accordance with the implications of the model.
    Keywords: business groups; R&D investment; knowledge spillovers.
    JEL: L2 O32
    Date: 2012–10
  16. By: Rafael López Zorzano (Universidad Complutense, Spain.); Teodosio Pérez-Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid.); Teresa Garín-Muñoz (UNED, Spain.); Covadonga Gijón Tascón (Universidad Complutense, Spain.)
    Abstract: There is growing evidence that low-quality customer service prevails in the mobile telecommunications industry. In this paper we provide theoretical support to this empirical observation by using simple game theoretical models where inefficient low-quality service levels are part of an equilibrium strategy for the firms. We also find that the inefficiency is due to a demand-side market failure generated by incomplete information, and that it does not necessarily vanish with competition or with repeated interaction. This is particularly important in terms of policy implications because it suggests that the inefficiency should be solved through regulation via consumer protection.
    Keywords: Mobile telecommunications, Consumer protection, Game theory, Customer services, Competition, Oligopoly, Market failure, Experience goods, Incomplete information.
    JEL: D18 D43 D82 L15 L96
    Date: 2012–09

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