nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒03‒09
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Impact of Competition on Prices with Numerous Firms By Xavier Gabaix; David Laibson; Deyuan Li; Hongyi Li; Sidney Resnick; Casper G. de Vries
  2. Price Formation in Consumer Markets By Farm, Ante
  3. Profitable Entry into an Unprofitable Market By Ahmad Reza Saboori Memar
  4. Piracy in a two-sided software market By Rasch, Alexander; Wenzel, Tobias
  5. R&D Incentives in Vertically Related Markets By Ahmad Reza Saboori Memar; Georg Götz
  6. Collusion Among Many Firms: The Disciplinary Power of Targeted Punishment By Catherine Roux; Christian Thöni
  7. Mixed oligopoly in education By Helmuth Cremer; Dario Maldonado
  8. Port Privatization in an International Oligopoly By Noriaki Matsushima; Kazuhiro Takauchi
  9. Dynamics of Investment and Firm Performance: Comparative evidence from manufacturing industries By Marco Grazzi; Nadia Jacoby; Tania Treibich
  10. The Market for Tractors in the EU: Price Differences and Convergence By Jörgensen, Christian; Persson, Morten
  11. Market Specific News and Its Impact on Electricity Prices – Forward Premia By Lazarczyk, Ewa
  12. Integration and convergence in European electricity markets By Carlo Andrea Bollino; Davide Ciferri; Paolo Polinori
  13. Prices vs. Quantities: Incentives for Renewable Power Generation - Numerical Analysis for the European Power Market By Nagl, Stephan

  1. By: Xavier Gabaix (NYU Stern, CEPR and NBER); David Laibson (Harvard University and NBER); Deyuan Li (Fudan University); Hongyi Li (University of New South Wales); Sidney Resnick (Cornell University); Casper G. de Vries (Economic Science Institute, Chapman University, Erasmus University Rotterdam, Tinbergen Institute)
    Abstract: We use extreme value theory (EVT) to develop insights about price theory. Our analysis reveals "detail-independent" equilibrium properties that characterize a large family of models. We derive a formula relating equilibrium prices to the level of competition. When the number of firms is large, markups and prices are pinned down by the tail properties of the noise distribution and prices are independent of many other institutional details. The elasticity of the markup with respect to the number of firms is shown to be the EVT tail exponent of the distribution for preference shocks and in most leading cases is relatively insensitive to the number of firms. For example, for the Gaussian case asymptotic markups are proportional to one over the square root of log n, implying a zero asymptotic elasticity of the markup with respect to the number of firms. Thus competition only exerts weak pressure on prices. We also study applications of the model, including endogenizing the level of noise.
    Date: 2013
  2. By: Farm, Ante (Swedish Institute for Social Research, Stockholm University)
    Abstract: .
    Keywords: Pricing; oligopoly; price leadership; market shares; marketing
    Date: 2013–02–05
  3. By: Ahmad Reza Saboori Memar (University of Giessen)
    Abstract: This paper shows how market entry into an unprofitable market can be profitable for a firm. A firm's expansion into a new market can have a beneficial feedback effect for that firm in its “old market”. By entering into a new market, the firm increases its produced quantity and has higher incentives to invest in process R&D. This is a credible signal to the competitors that the firm will be more aggressive in its R&D investments. This weakens the competitors since they scare off and invest less in process R&D. This feedback effect of expanding in foreign markets increases the profits of the expanding firm in its “old market” and if this profit gain exceeds the losses through market entry, then the market entry is profitable for the firm. I also consider how the results change under Bertrand vs Cournot regime and how results change if price discrimination is possible or not. Beside that I show how higher R&D costs or lower demand in a market can lead to lower profits of one firm, but higher profits of the other firm.
    Keywords: research and development, price discrimination, product differentiation, process innovation, interbrand competition, strategic commitment, separated markets
    JEL: L13 D43 O30
    Date: 2013
  4. By: Rasch, Alexander; Wenzel, Tobias
    Abstract: This paper studies the impact of software piracy in a two-sidedmarket setting. Software platforms attract developers and users to maximize their profits. The equilibrium price structure is affected by piracy: license fees to developers are higher with more software protection but the impact on user prices is ambiguous. A conflict between platforms and software developers over software protection may arise: whereas one side benefits from better protection, the other party loses out. Under platform compatibility, this conflict is no longer present. --
    Keywords: developer,piracy,platform,software,two-sided markets
    JEL: L11 L86
    Date: 2013
  5. By: Ahmad Reza Saboori Memar (University of Giessen); Georg Götz (University of Applied Science)
    Abstract: This paper focuses on incentives to invest in research and development (R&D) in vertically related markets. In a bilateral duopoly setup, we consider how process R&D incentives of the firms in both upstream and downstream market depend on the intensity of simultaneous interbrand and intrabrand competition. Among the results: both interbrand and intrabrand competition have twofold effects on R&D incentives. Existence of a vertically related market with imperfect competition lowers both the incentives to invest in process R&D and the competitive advantage through the R&D investment. We will show how the impact of a firm's R&D investments in either market on consumer surplus as well as on the profits of all firms in both markets depends on exogenous parameters.
    Keywords: research and development, vertical relations, bilateral oligopoly, product differentiation, process innovation, interbrand and intrabrand competition
    JEL: L13 D43 O30
    Date: 2013
  6. By: Catherine Roux; Christian Thöni
    Abstract: We explore targeted punishment as an explanation for collusion among many firms. In a series of Cournot oligopoly experiments with various numbers of firms, we compare production decisions with and without the possibility to target punishment at specific market participants. We find strong evidence that targeted punishment enables firms to establish and maintain collusion. More so, we find that the collusive effect of targeted punishment is even stronger in markets with more competitors, suggesting a reversal of the conventional wisdom that collusion is easier the fewer the firms.
    Keywords: Cournot oligopoly; Experiments; Collusion; Targeted punishment
    JEL: L13 K21 C91
    Date: 2013–02
  7. By: Helmuth Cremer; Dario Maldonado
    Abstract: Abstract: This paper studies oligopolistic competition in education markets when schools can be private and public and when the quality of education depends on “peer group" effects. In the first stage of our game schools set their quality and in the second stage they fix their tuition fees. We examine how the (subgame perfect Nash) equilibrium allocation (qualities, tuition fees and welfare) is affected by the presence of public schools and by their relative position in the quality range. When there are no peer group effects, efficiency is achieved when (at least) all but one school are public. In particular in the two school case, the impact of a public school is spectacular as we go from a setting of extreme differentiation to an efficient allocation. However, in the three school case, a single public school will lower welfare compared to the private equilibrium. We then introduce a peer group e¤ect which, for any given school is determined by its student with the highest ability. These PGE do have a signi.cant impact on the results. The mixed equilibrium is now never efficient. However, welfare continues to be improved if all but one school are public. Overall, the presence of PGE reduces the e¤ectiveness of public schools as regulatory tool in an otherwise private education sector.
    Date: 2013–02–28
  8. By: Noriaki Matsushima; Kazuhiro Takauchi
    Abstract: We investigate how port privatization affects port charges, firm profits, and welfare. Our model consists of an international duopoly with two ports and two markets. When the unit transport cost is large, privatization of ports decreases the prices for port usage, although neither government has an incentive to privatize its port. The equilibrium governmental decisions are inconsistent with the desirable outcome if the unit transport cost is not large enough. The smaller countryfs government is more likely to privatize its port, although the larger countryfs government is more likely to nationalize its port to protect its domestic market.
    Date: 2013–02
  9. By: Marco Grazzi; Nadia Jacoby; Tania Treibich
    Abstract: If the relation between investment and economic growth is well established in the macroeconomic literature, the existence of a similar link at the level of the firm has been challenged by empirical work. This paper investigates the channels linking investment and firm performance in the French and Italian manufacturing industries. It does so by putting forth a novel methodology to identify investment spikes that corrects for size dependence. While maintaining the desired properties of a spike measure, our chosen proxy retrieves the expected relation between investment and firm performance. Ex-ante, more efficient and fast growing firms display a higher probability to invest; in turn, after an investment spike has taken place the group of investing firms shows further gains in performance. Finally, expansionary investment episodes, as proxied by the opening of new plants, have a negative effect on profitability while they are associated with higher sales and employment levels.
    Keywords: Firm heterogeneity, investment spike, industrial dynamics, corporate performance, capital accumulation, technical change
    Date: 2013–02–13
  10. By: Jörgensen, Christian; Persson, Morten
    Abstract: This study evaluates the degree of segmentation of the market for agricultural machinery and equipment in the EU. We focus on agricultural tractors, the most common and biggest investment in machinery and equipment in the agricultural sector. By using country price data for individual tractor models, we test the law of one price, i.e. the existence of a common price for tractors across EU member states. We find that significant price differences exist, yet unlike most other studies we find that large price deviations are penalised within a short time. The study also shows that transport costs are an important source of price differences, as domestic production leads to lower prices on the domestic market and as price convergence is negatively correlated with distance. Finally, price differences should not solely be understood from a geographical perspective, as evidence supports the idea that farmers’ buying power is significant in explaining price differences within countries.
    Date: 2013–01
  11. By: Lazarczyk, Ewa (Research Institute of Industrial Economics (IFN))
    Abstract: This paper studies the impact of market specific news on the short-time forward premia on the Scandinavian electricity market. I show that the short time premia between the day-ahead and intra-day electricity prices on the Scandinavian market can be explained by the arrival of news specific to the power market. By exploring the types of news I indicate that production failures shape the premia. Production disruptions in coal-powered units are most frequent and have the greatest effect on the differences between the day-ahead and intra-day prices.
    Keywords: Intra-day electricity market; Forward premia; Market specific news; Supply shocks
    JEL: D40 G14 L94 Q40
    Date: 2013–01–31
  12. By: Carlo Andrea Bollino; Davide Ciferri; Paolo Polinori
    Abstract: In this paper we investigate wholesale electricity prices integration process in the main European markets. After reforms introduced in the last decades in Europe, wholesale electricity prices are now determined in regulated markets. However, while market institutional frameworks show several similarities, there are still differences in fuel mix, generation units technologies, market structure. Using multivariate cointegration techniques we test integration dynamics within four European markets (Austria, Germany, France and Italy) for which we have collected a novel dataset of spot prices from 2004 to 2010. We provide evidence that German market constitutes a common stochastic trend driving the long-run behavior of other markets. Our results are robust to causality test, to Granger causality test, to oil price relevance test and provide additional evidence to assess the efficient market hypothesis in European electricity markets.
    Keywords: European electricity markets, electricity spot prices, cointegration, structural MA representation
    JEL: C32 L16 Q41
    Date: 2013–01–14
  13. By: Nagl, Stephan (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: This paper outlines the effects of weather uncertainty on investment and operation decisions of electricity producers under a feed-in tariff and renewable quota obligation. Furthermore, this paper tries to quantify the sectoral welfare and investments risks under the different policies. For this purpose, a spatial stochastic equilibrium model is introduced for the European electricity market. The numerical analysis suggests that including the electricity market price in renewable policies (wholesale price + x) reduces the loss of sectoral welfare due to a renewable policy by 11-20 %. Moreover, investors face an only slightly higher risk than under fixed price compensations. However, electricity producers face a substantially larger investment risk when introducing a renewable quota obligation without the option of banking and borrowing of green certi cates. Given the scenario results, an integration of the hourly market price in renewable support mechanisms is mandatory to keep the financial burden to electricity consumers at a minimum. Additionally, following the discussion of a European renewable quota after 2020, the analysis indicates the importance of an appropriate banking and borrowing mechanism in light of stochastic wind and solar generation.
    Keywords: RES-E policy; price and quantity controls; mixed complementarity problem
    JEL: C61 L50 Q40
    Date: 2013–02–18

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