nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒03‒23
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price setting in an innovative market By Adam Copeland; Adam Hale Shapiro
  2. Exit and voice: a game-theoretic analysis of customer complaint management By Liang, Pinghan
  3. Duopoly Competition and Regulation in a Two-Sided Health Care Insurance Market with Product Differentiation By Audrey Boilley
  4. Differential market entry determinants for for-profit and nonprofit long-term care providers By Katsuyoshi Nakazawa
  5. The Effect of Deceptive Advertising on Consumption of the Advertised Good and its Substitutes: The Case of Over-the-Counter Weight Loss Products By Cawley, John; Avery, Rosemary; Eisenberg, Matthew

  1. By: Adam Copeland; Adam Hale Shapiro
    Abstract: We examine how the confluence of competition and upstream innovation influences downstream firms’ profit-maximizing strategies. In particular, we analyze how, in light of these forces, the downstream firm sets the price of the product over its life cycle. We focus on personal computers (PCs) and introduce two novel data sets that describe prices and sales in the industry. Our main result is that a vintage-capital model that combines a competitive market structure with a rapid rate of innovation is well able to explain the observed paths of prices, as well as sales and consumer income, over a typical PC’s product cycle. The analysis implies that rapid price declines are not caused by upstream innovation alone, but rather by the combination of upstream innovation and a competitive environment.
    Keywords: Technological innovations ; Computer industry ; Prices
    Date: 2013
  2. By: Liang, Pinghan
    Abstract: We develop a multi-agent communication model with participation decisions to address the customer complaining behavior and the corresponding management policy. Privately informed customers choose among costly complain, keep silence, and exit, and a firm decides complaining barriers and whether to undertake a corrective action. It is shown that customers truthfully complain only under a moderate complaining barrier. The observed low complaint/dissatisfaction ratio and costly complaint arise as one equilibrium outcome. Customers' expectations, the precision of signals, and the temptation of outside options are identified as the determinants of complaint management policy. Firms are likely to set socially excessive complaining barriers.
    Keywords: Customer complaint management, Communication, Exit
    JEL: D82 L15 L51 M31
    Date: 2013
  3. By: Audrey Boilley (CRESE, Université de Franche-comté)
    Abstract: We compare duopoly competition with a regulated public monopoly in the health care insurance sector using the two-sided market approach. Health plans allow policyholders and physicians to interact. Policyholders have a preference for one of two health plans and value the diversity of physicians. Physicians value the number of policyholders because they are paid on a fee-for-service basis. This is a positive network externality. We find that the resulting Nash equilibria are explained by the two standard effects of product differentiation: the price competition effect and the market share effect, and by two opposing effects related to the network externality. We call these the positive earning effect and the negative spending effect. Overall the comparison between the two types of organizations shows that regulation is preferred when the physicians' market is not covered and competition is preferred when it is covered. But each time the choice is made at the expense of one type of agent.
    Keywords: Two-Sided Markets, Managed Care Competition, Network Effects, Product Differentiation, Hotelling, Public Policy
    JEL: C72 D21 D43 L11
    Date: 2013–03
  4. By: Katsuyoshi Nakazawa (University of Toyo)
    Abstract: This study considers market entry determinants for both for-profit and non-profit at-home longterm care providers in Japan. It examines market structure incentives and barriers to entry using a panel dataset of 48 Japanese municipalities for the 2003–2011 period. Estimation results show that forprofits and non-profits face different determinants of entry. Potential for-profit entrants are sensitive to profit considerations and therefore adapt to the market structure and clear barriers to entry. However, potential non-profits with preferential tax treatment and the constraint of non-distribution of profits enter disadvantaged municipalities. Both profits and non-profits have become integrated in Japanese at-home care markets.
    Keywords: Entry, For-profit, Non-profit, Long-term at-home care, SUR
    JEL: C33 L22 L33 R19
    Date: 2013
  5. By: Cawley, John (Cornell University); Avery, Rosemary (Cornell University); Eisenberg, Matthew (Carnegie Mellon University)
    Abstract: This paper is the first to estimate the impact of exposure to deceptive advertising on consumption of the advertised product and its substitutes. We study the market for over-the-counter (OTC) weight-loss products, a market in which deceptive advertising is rampant and products are generally ineffective with potentially serious side effects. We control for the targeting of ads using indicator variables for each unique magazine read and television show watched. Our estimates indicate that exposure to deceptive advertising is associated with a lower probability that women, and a higher probability that men, consume OTC weight loss products. We find evidence of spillovers; exposure to deceptive print ads is associated with a higher probability of dieting and exercising for both men and women. We also find evidence that better-educated individuals are more sophisticated consumers of advertising and use it to make more health-promoting decisions.
    Keywords: advertising, weight loss, obesity, deception, information, drugs, health
    JEL: I1 I18 M37 M38 D83
    Date: 2013–02

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