New Economics Papers
on Industrial Organization
Issue of 2012‒11‒24
seven papers chosen by

  1. Buyer power and suppliers' incentives to innovate By Köhler, Christian; Rammer, Christian
  2. Deceptive advertising with rational buyers By Ursino, Giovanni; Piccolo, Salvatore; Tedeschi, Piero
  3. Interfirm Bundled Discounts in Oligopolies By Jong-Hee Hahn; Sang-Hyun Kim
  4. Electricity Demand in Wholesale Italian Market By Simona Bigerna; Carlo Andrea BOLLINO
  5. Airline alliances, antitrust immunity and market foreclosure By Bilotkach, Volodymyr; Hüschelrath, Kai
  6. Factors affecting productivity of research-based pharmaceutical companies following mergers and acquisitions By Tjandrawinata, Raymond R.; Simanjuntak, Destrina Grace
  7. Austrian-style gasoline price regulation: How it may backfire By Obradovits, Martin

  1. By: Köhler, Christian; Rammer, Christian
    Abstract: Buyer power is widely considered to decrease innovation incentives of suppliers. However, there is little empirical evidence for this statement. Our paper analyses how buyer power influences innovation incentives of upstream firms while taking into account the type of competition in the downstream market, namely price and technology. We explore this relationship empirically for a unique dataset containing 1,129 observations of German firms from manufacturing and service sectors including information on the economic dependency of firms from their buyers. Using a generalised Tobit model, we find a negative effect of buyer power on a supplier's likelihood to start R&D activities. This negative effect is mitigated if the supplier faces powerful buyers operating under strong price competition. There is also weak evidence for a negative effect of buyer power on suppliers' R&D intensity if the powerful buyer operates under strong technology competition. --
    Keywords: Innovation,Buyer Power
    JEL: L11 O31
    Date: 2012
  2. By: Ursino, Giovanni; Piccolo, Salvatore; Tedeschi, Piero
    Abstract: We study a Bertrand game where two sellers supplying products of different and unverifiable qualities can outwit potential clients through their (costly) deceptive advertising. We characterize a class of pooling equilibria where sellers post the same price regardless of their quality and low quality ones deceive buyers. Although in these equilibria low quality goods are purchased with positive probability, the buyer (expected) utility can be higher than in a fully separating equilibrium. It is also argued that low quality sellers invest more in deceptive advertising the better is their reputation vis-à-vis potential clients — i.e., firms that are better trusted by customers, have greater incentives to invest in deceptive advertising when they produce a low quality product. Finally, we characterize the optimal monitoring effort exerted by a regulatory agency who seeks to identify and punish deceptive practices. When the objective of this agency is to maximize consumer surplus, its monitoring effort is larger than under social welfare maximization.
    Keywords: Misleading advertising; Deception; Bayesian Consumers; Asymmetric Information
    JEL: L1
    Date: 2012–11–08
  3. By: Jong-Hee Hahn (school of economics, Yonsei Uneversity); Sang-Hyun Kim (Department of Economics, Michigan State University)
    Abstract: This paper shows that firms producing homogeneous goods (e.g. Bertrand competitors) can achieve supernormal profits using interfirm bundled discounts, which connect their product with a specific brand of other firm with market power. By committing to a price discount exclusively to buyers of a particular brand of another good, the firms create a sort of artificial switching costs and attain a semi-collusive outcome. In fact, the discount scheme allows the firms with no market power to avoid Bertrand trap by leveraging other firms' market power. Consumers are worse off due to higher prices under bundled discounts.
    Keywords: Brand-specific discounts, bundling, co-branding, co-promotion
    Date: 2012–07–13
  4. By: Simona Bigerna; Carlo Andrea BOLLINO
    Abstract: In this paper we pursue two objectives: firstly we construct a theory based behavioral model of electricity demand in the Italian market; secondly we measure demand elasticity at hourly level, directly from consumer behavior. This is a novel approach providing the first attempt in the literature to estimate demand elasticity using individual demand bid data, in the Italian Power Exchange (IPEX). Econometric estimation allows us to identify robust results, showing that elasticity varies significantly with: time of the day; day of the week; season of the year; pattern of line congestion, as well as according to the level of equilibrium price. This has a policy implication: fostering more competition on the supply side could yield lower equilibrium prices and proportionately much higher quantities, for a lower offer curve, shifted to the right, would intersect a flatter portion of the demand curve.
    Date: 2012–10–15
  5. By: Bilotkach, Volodymyr; Hüschelrath, Kai
    Abstract: We examine the issue of market foreclosure by airline partnerships with antitrust immunity. Overlapping data on frequency of service and passenger volumes on non-stop transatlantic routes with information on the dynamics of airline partnerships, we find evidence consistent with the airlines operating under antitrust immunity refusing to accept connecting passengers from the outside carriers at respective hub airports. Following the antitrust immunity, airlines outside the partnership reduce their traffic to the partner airlines' hub airports by 4.1-11.5 percent. We suggest regulators should take possible market foreclosure effects into account when assessing the competitive effects of antitrust immunity for airline alliances. --
    Keywords: air transportation,alliances,antitrust immunity,foreclosure
    JEL: L41 L93 K21
    Date: 2012
  6. By: Tjandrawinata, Raymond R.; Simanjuntak, Destrina Grace
    Abstract: This paper analyzes the impact of mergers and acquisitions (M&A) activities in research-based pharmaceutical companies, specifically the impact of R&D expenditure, profitability, and sales revenue on firms’ productivity, R&D intensity, in pharmaceutical industries following M&A activities. The model was estimated using annual data, gathered from seven large research-based pharmaceutical companies pre and post-M&A, during the period 2003 until 2010. The regression analysis method uses a fixed effect method with generalized least square (GLS) analysis. The result further shows that following M&A activities, firms’ one-year lagged R&D expenditure (t-1) and lagged profitability (t-1) to be positive in increasing significantly the firms’ amount of R&D intensity in research-based pharmaceutical industries, while, surprisingly firms’ one-year lagged sales revenue (t-1) have a negative impact in increasing significantly the firms’ amount of R&D intensity in research-based pharmaceutical industries.
    Keywords: Mergers and Acquisitions (M&A); R&D Expenditure; Profitability; Sales Revenue; R&D Intensity
    JEL: D21 D24
    Date: 2012–11
  7. By: Obradovits, Martin
    Abstract: In January 2011, a price regulation was established in the Austrian gasoline market which prohibits firms from raising their prices more than once per day. Similar restrictions have been discussed in New York State and Germany. Despite their intuitive appeal, this article argues that Austrian-type policies may actually harm consumers. In a two-period duopoly model with consumer search, I show that in face of the regulation, firms will distort their prices intertemporally in such a way that their aggregate expected profit remains unchanged. This implies that, as some consumers find it optimal to delay their purchase due to expected price savings, but find it inconvenient to do so, a friction is introduced that decreases net consumer surplus in the market.
    Keywords: Price Regulation; Consumer Search; Price Dispersion; Intertemporal Search; Regulation; Austria
    JEL: L5 L13 D83
    Date: 2012–11–08

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