nep-ind New Economics Papers
on Industrial Organization
Issue of 2012‒11‒17
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price as a signal of product quality: Some experimental evidence By Giovanni Mastrobuoni; Franco Peracchi; Aleksey Tetenov
  2. Capacity Choice under Uncertainty with Product Differentiation By Christiaan Behrens; Mark Lijesen
  3. Merger Efficiencies and Competition Policy By Scherer, F. M.
  4. Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing By Koichiro Ito
  5. Competition and Price Discrimination in the Parking Garage Industry By Haizhen Lin; Yijia Wang

  1. By: Giovanni Mastrobuoni (Collegio Carlo Alberto and CeRP); Franco Peracchi (Tor Vergata University and EIEF); Aleksey Tetenov (Collegio Carlo Alberto)
    Abstract: We separate the budgetary and non-budgetary effects of price on demand using choice data from wine tasting experiments in which consumers tasted wines of different quality accompanied by fictitious price information. The non-budgetary effect is present and nonlinear: it is strongly positive between 3 and 5 euro, and undetectable between 5 and 8 euro. We find a similar nonlinear price-quality relationship in a large sample of wine ratings from the same price segment, supporting the hypothesis that consumer behavior in the experiment is consistent with rationally using prices as signals of quality. Price signals also have greater importance for inexperienced (young) consumers.
    Date: 2012
  2. By: Christiaan Behrens (VU University Amsterdam); Mark Lijesen (VU University Amsterdam)
    Abstract: This article analyses the capacity-then-price game for a duopoly market. We add to the literature by explicitly taking product differentiation into account. We study the impact of capacity costs, demand uncertainty, and vertical and horizontal product differentiation on equilibrium capacities, efficiency, and price dispersion. We identify a minimum degree of vertical product differentiation, relative to horizontal product differentiation, for which the subgame perfect Nash equilibrium in pure strategies is guaranteed to exist. We find that if firms' quality differences exactly offset cost differences, asymmetric outcomes in the capacity stage arise, with the low-cost, low-quality firm providing more capacity than its competitor. We show that the highest level of efficiency is reached at the degree of vertical product differentiation where it would be optimal for welfare if firms had equal capacities. Furthermore, our model provides an explanation for ambiguous results in empirical research on price dispersion.
    Keywords: Price competition; Capacity choice; Demand uncertainty; Product differentiation; Price dispersion
    JEL: D43 L11 L13
    Date: 2012–10–26
  3. By: Scherer, F. M. (Harvard University)
    Abstract: Since the United States changed its guidelines in 1984, many industrialized nations have included efficiencies defenses in their rules for judging whether mergers and other activities that might lessen competition are on balance desirable. This paper was written for an OECD competition policy conference in Paris October 25, 2012. It presents the standard Williamson "tradeoff" analysis and explores why consumer price benefits might be required in the current economic environment, with its substantial unemployment and Keynesian liquidity traps that limit the reinvestment of efficiency-based profits in additional output. It also explores the difficulty of assessing efficiency benefits in advance of mergers and suggests alternative approaches to the problem.
    Date: 2012–10
  4. By: Koichiro Ito
    Abstract: Nonlinear pricing and taxation complicate economic decisions by creating multiple marginal prices for the same good. This paper provides a framework to uncover consumers’ perceived price of nonlinear price schedules. I exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing. Using household-level panel data from administrative records, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. This sub-optimizing behavior makes nonlinear pricing unsuccessful in achieving its policy goal of energy conservation and critically changes the welfare implications of nonlinear pricing.
    JEL: L11 L51 L94 L98 Q41 Q48 Q58
    Date: 2012–11
  5. By: Haizhen Lin (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Yijia Wang (NERA Economic Consulting)
    Abstract: We study the relationship between competition and price discrimination through an empirical examination of hourly price schedules in the parking garage industry. We find that the degree of price schedule curvature decreases with competition, implying a greater proportionate drop in low-end prices than in high-end prices when competition intensifies. We provide an explanation for our findings using differences in search behaviors between short- and long-term customers.
    Keywords: competition, price curvature, price discrimination, consumer search, parking garage industry
    JEL: L0 L11 L12
    Date: 2012–10

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