nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒01‒26
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Strategic Capacity Investment Under uncertainty By Huisman, K.J.M.; Kort, P.M.
  2. Regulation of Road Accident Externalities when Insurance Companies have Market Power By Maria Dementyeva; Paul R. Koster; Erik T. Verhoef
  3. Market Structure and Cost Pass-Through in Retail By Nicholas Li; Gee Hee Hong
  4. Delays in Leniency Application: Is There Really a Race to the Enforcer's Door? By Gärtner, Dennis L.; Zhou, Jun
  5. Mergers in Bidding Markets By Maarten Janssen; Vladimir Karamychev

  1. By: Huisman, K.J.M.; Kort, P.M. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper considers investment decisions within an uncertain dynamic and competitive framework. Each investment decision involves to determine the timing and the capacity level. In this way we extend the main bulk of the real options theory where the capacity level is given. We consider a monopoly setting as well as a duopoly setting. Our main results are the following. In the duopoly setting we provide a fully dynamic analysis of entry deterrence/accommodation strategies. We find that the first investor overinvests in capacity in order to delay entry of the second investor. In very uncertain economic environments the first investor always ends up being the largest firm in the market. If uncertainty is moderately present, a reduced value of waiting implies that the preemption mechanism forces the first investor to invest so soon that a large capacity cannot be afforded. Then it will eventually end up with a capacity level being lower than the second investor.
    Keywords: Investment under Uncertainty;Entry Deterrence/Accomodation;Duopoly;Capacity Choice
    JEL: E22 C73 L13
    Date: 2013
    URL: http://d.repec.org/n?u=RePEc:dgr:kubcen:2013003&r=ind
  2. By: Maria Dementyeva (VU University Amsterdam); Paul R. Koster (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam)
    Abstract: Accident externalities are among the most important external costs of road transport. We study the regulation of these when insurance companies have market power. Using analytical models, we compare a public-welfare maximizing monopoly with a private profit-maximizing monopoly, and markets where two or more firms compete. A central mechanism in the analysis is the accident externality that individual drivers impose on one another via their presence on the road. Insurance companies will internalize some of these externalities, depending on their degree of market power. We derive optimal insurance premiums, and "manipulable" taxes that take into account the response of the firm to the tax rule applied by the government. Furthermore, we study the taxation of road users under different assumptions on the market structure. We illustrate our analytical results with numerical examples, in order to better understand the determinants of the relative performance of different market structures.
    Keywords: accident externalities; traffic regulation; safety; second-best; market power
    JEL: D43 D62 R41 R48
    Date: 2013–01–18
    URL: http://d.repec.org/n?u=RePEc:dgr:uvatin:20130019&r=ind
  3. By: Nicholas Li; Gee Hee Hong
    Abstract: We examine the extent to which vertical and horizontal market structure can together explain incomplete pass-through. We develop a model that highlights the interactions between horizontal and vertical structure and their effects on pass-through from commodity to wholesale prices and wholesale to retail prices. Using scanner data from a large U.S. retailer, we estimate product level pass-through rates for three different vertical structures: national brands, private label goods not manufactured by the retailer and private label goods manufactured by the retailer. We find that greater control of the value chain by the retailer results in higher commodity price pass-through into retail prices compared to national brands – 40% higher for private label manufactured goods and 10% higher for private label non-manufactured goods. We also find substantial effects of horizontal structure on pass-through – products and brands with higher market shares have higher retail markups and lower cost pass-through. Our results emphasize that accounting for both vertical and horizontal structure is important for understanding how market structure affects pass-through, as a reduction in double-marginalization can raise pass-through directly but can also reduce it indirectly by increasing market share.
    Keywords: pass-through; market structure; market power; pricing; retail; vertical integration; intra-firm; private labels;
    JEL: D4 E3 E31
    Date: 2013–01–14
    URL: http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-470&r=ind
  4. By: Gärtner, Dennis L.; Zhou, Jun
    Abstract: This paper studies cartels’ strategic behavior in delaying leniency applications, a take-up decision that has been ignored in the previous literature. Using European Commission decisions issued over a 16-year span, we show, contrary to common beliefs and the existing literature, that conspirators often apply for leniency long after a cartel collapses. We estimate hazard and probit models to study the determinants of leniency-application delays. Statistical tests find that delays are symmetrically affected by antitrust policies and macroeconomic fluctuations. Our results shed light on the design of enforcement programs against cartels and other forms of conspiracy.
    Keywords: corporate leniency program; cartel; leniency application delays
    JEL: D43 K21 K42 L13
    Date: 2012–12
    URL: http://d.repec.org/n?u=RePEc:trf:wpaper:395&r=ind
  5. By: Maarten Janssen (University of Vienna); Vladimir Karamychev (Erasmus University Rotterdam)
    Abstract: We analyze the effects of mergers in first-price sealed-bid auctions on bidders' equilibrium bidding functions and on revenue. We also study the incentives of bidders to merge given the private information they have. We develop two models, depending on how after-merger valuations are created. In the first, single-aspect model, the valuation of the merged firm is the maximum of the valuations of the two firms engaged in the merger. In the multi-aspect model, a bidder's valuation is the sum of two components and a merged firm chooses the maximum of each component of the two merging firms. In the first model, a merger creates incentives for bidders to shade their bids leading to lower revenue. In the second model, the non-merging firms do not shade their bids and revenue is actually higher. In both models, we show that all bidders have an incentive to merge.
    Keywords: Mergers; first-price sealed-bid auctions
    JEL: D44 D82
    Date: 2013–01–10
    URL: http://d.repec.org/n?u=RePEc:dgr:uvatin:20130012&r=ind

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