nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒04‒13
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Definition in Two-Sided Markets: Theory and Practice By Lapo Filistrucchi; Damien Geradin; Eric van Damme; Pauline Affeldt
  2. Monopolistic Competition and Optimum Product Selection: Why and how heterogeneity matters By Nocco, Antonella; Ottaviano, Gianmarco; Salto, Matteo
  3. Learning Cycles in Bertrand Competition with Differentiated Commodities and Competing Learning Rules By Mikhail Anufriev; D?vid Kop?nyiz; Jan Tuinstra
  4. Anatomy of Cartel Contracts By Hyytinen, Ari; Steen, Frode; Toivanen, Otto
  5. Cable Regulation in the Internet Era By Crawford, Gregory S
  6. Antitrust as facilitating factor for collusion By Vermeulen A.J.; Bos A.M.; Letterie W.A.
  7. The profit-sharing rule that maximizes sustainability of cartel agreements By João Correia-da-Silva; Joana Pinho
  8. Selling to a cartel of retailers: a model of hub-and-spoke collusion By Sahuguet, Nicolas; Walckiers, Alexis
  9. Private vs Public Antitrust Enforcement: Evidence from Chile By Aldo González; Alejandro Micco
  10. The Economic Value of Patent Portfolios By Gambardella, Alfonso; Harhoff, Dietmar; Verspagen, Bart
  11. Intercontinental airport competition By Wim BENOOT; Jan BRUECKNER; Stefan PROOST
  12. Competition and Growth: Reinterpreting their Relationship By Daria Onori

  1. By: Lapo Filistrucchi (DISEI, Università degli studi di Firenze); Damien Geradin; Eric van Damme; Pauline Affeldt
    Abstract: Drawing from the economics of two-sided markets, we provide suggestions for the definition of the relevant market in cases involving two-sided platforms, such as media outlets, online intermediaries, payment cards companies and auction houses. We also discuss when a one-sided approach may be harmless and when instead it can potentially lead to a wrong decision. We then show that the current practice of market definition in two-sided markets is only in part consistent with the above suggestions. Divergence between our suggestions and practice is due to the failure to fully incorporate the lessons from the economic theory of two-sided markets, to the desire to be consistent with previous practice and to the higher data requirements and the higher complexity of empirical analysis in cases involving two-sided platforms. In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and non-transaction markets and have been misled by the traditional argument that where there is no price, there is no market.
    Keywords: two-sided markets, two-sided platforms, market definition, SSNIP test, Hypothetical Monopolist test
    JEL: L40 L50 K21
    Date: 2013
  2. By: Nocco, Antonella; Ottaviano, Gianmarco; Salto, Matteo
    Abstract: After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.
    Keywords: heterogeneity; monopolistic competition; product diversity; selection; welfare
    JEL: D4 D6 F1 L0 L1
    Date: 2013–04
  3. By: Mikhail Anufriev (Economics Discipline Group, University of Technology, Sydney); D?vid Kop?nyiz (CeNDEF, Amsterdam School of Economics, University of Amsterdam); Jan Tuinstra (CeNDEF, Amsterdam School of Economics, University of Amsterdam)
    Abstract: This paper stresses the importance of heterogeneity in learning rules. We introduce an evolutionary competition between different learning rules and demonstrate that, though these rules can coexist, their convergence properties are strongly affected by heterogeneity. We consider a Bertrand oligopoly with differentiated goods. Firms do not have full information about the demand structure and they want to maximize their perceived one-period profit by applying one of two different learning rules: OLS learning and gradient learning. We analytically show that the stability of gradient learning depends on the distribution of learning rules over firms. In particular, as the number of gradient learners increases, gradient learning may become unstable. We study evolutionary competition between the learning rules by means of computer simulations and illustrate that this change in stability for gradient learning may lead to cyclical switching between the rules. Stable gradient learning typically gives higher average profit than OLS learning, making firms switch to gradient learning. This however, destabilizes gradient learning which, because of decreasing profits, makes firms switch back to OLS learning. This cycle may repeat itself indefinitely.
    Keywords: Bertrand competition; heterogeneous agents; least squares learning; gradient learning; endogenous switching; learning cycle
    JEL: C63 C72 D43
    Date: 2013–04–01
  4. By: Hyytinen, Ari; Steen, Frode; Toivanen, Otto
    Abstract: We study cartel contracts using data on 18 contract clauses of 109 legal Finnish manufacturing cartels. One third of the clauses relate to raising profits; the others deal with instability through incentive compatibility, cartel organization, or external threats. Cartels use three main approaches to raise profits: Price, market allocation, and specialization. These appear to be substitutes. Choosing one has implications on how cartels deal with instability. Simplifying, we find that large cartels agree on prices, cartels in homogenous goods industries allocate markets, and small cartels avoid competition through specialization.
    Keywords: antitrust; cartels; competition policy; contracts; industry heterogeneity
    JEL: K12 L40 L41
    Date: 2013–02
  5. By: Crawford, Gregory S
    Abstract: The market for multi-channel video programming has undergone considerable change in the last 15 years. Direct-Broadcast Satellite service, spurred by 1999 legislation that leveled the playing field with cable television systems, has grown from 3% to 33% of the U.S. MVPD (cable, satellite, and telco video) market. Telephone operators have entered in some parts of the US and online video distributors are a growing source of television viewing. This chapter considers the merits of cable television regulation in light of these developments. It surveys the dismal empirical record on the effects of price regulation in cable and the more encouraging but incomplete evidence on the benefits of satellite and telco competition. It concludes with a consideration of four open issues in cable markets: horizontal concentration and vertical integration in the programming market, bundling by both cable systems and programmers, online video distribution, and temporary programming blackouts from failed carriage negotiations for both broadcast and cable programming. While the distribution market is clearly now more competitive, concerns in each of these areas remain.
    Keywords: bundling; cable television; competition; foreclosure; internet; pay television; regulation; satellite television
    JEL: L41 L42 L43 L50
    Date: 2013–01
  6. By: Vermeulen A.J.; Bos A.M.; Letterie W.A. (GSBE)
    Abstract: We study collusion in an infinitely repeated prisoners' dilemma when firms' discount factor is private information. If tacit collusion is not feasible, firms that are capable of sustaining high prices may still be willing and able to collude explicitly. Firms eager to collude may signal their intentions when forming the agreement is costly, but not too costly. As antitrust makes explicit collusion costly in expected terms, it may in fact function as a signaling device. We show that there always exists a cost level for which explicit collusion is viable. Moreover, our analysis suggests that antitrust enforcement is unable to fully deter collusion.
    Keywords: Market Structure, Firm Strategy, and Market Performance: General;
    Date: 2013
  7. By: João Correia-da-Silva (CEF.UP and Faculdade de Economia, Universidade do Porto); Joana Pinho (FCT and RGEA, Universidad de Vigo)
    Abstract: We propose a profit-sharing rule that maximizes sustainability of cartel agreements. This rule is such that the critical discount factor is the same for all the firms. If a cartel applies this rule, then asymmetries among firms may not hinder collusion (contrarily to the typical finding in the literature). In the simplest case of a Cournot duopoly in which firms differ in their stocks of capital, we find that the cartel is the least sustainable when one of the firms is approximately two times bigger than the other.
    Keywords: Collusion sustainability, Profit-sharing rule.
    JEL: L11 L13 L41
    Date: 2012–08
  8. By: Sahuguet, Nicolas; Walckiers, Alexis
    Abstract: This model describes the working of hub-and-spoke collusion that has been discussed recently by competition policy authorities. We develop a model of tacit collusion between a manufacturer and two retailers, competing a la Rotemberg and Saloner (1986). The best collusive equilibrium between retailers is inefficient and it is in the interest of the supplier to help retailers reach a more efficient collusive equilibrium. The hub and spoke conspiracy reduces double marginalization, but raises the ability of retailers to collude. The impact of a hub-and-spoke cartel on consumer's welfare depends on the bargaining power in the relationship. If the supplier has the bargaining power, the agreement, comparable to a vertical restraint, can be welfare improving in reducing double marginalization. When retailers have the bargaining power, the agreement is closer to an horizontal agreement in which retailers use the supplier to improve their collusive scheme, which leads to a loss of welfare. The result has important implications for competition policy and antitrust enforcement which are further developed in our companion paper Sahuguet and Walckiers (2013).
    Keywords: collusion; competition policy; horizontal relations; hub-and-spoke; vertical relations
    JEL: D43 L41 L42
    Date: 2013–03
  9. By: Aldo González; Alejandro Micco
    Abstract: This article measures the impact of the agency responsible for enforcing competition law, in the outcome of antitrust trials in Chile. Using statistics on lawsuits since the inception of the new Competition Tribunal in 2004, we find that the involvement of the public agency increases the probability of obtaining a guilty verdict in an antitrust lawsuit by 40 percentage points. Conditional to the issuance of a verdict, the participation of the prosecutor raises the likelihood of a conviction by 38 percentage points. The results are robust to possible selection bias by the public agency. The prosecutor is inclined to takes part in cases involving sensitive markets and in accusations of collusion. The State-related character of the accused entity, in addition to its size, does not affect the probability of intervention by the prosecutor in a lawsuit.
    Date: 2013–03
  10. By: Gambardella, Alfonso; Harhoff, Dietmar; Verspagen, Bart
    Abstract: Patent holders may choose to protect innovations with single patents or to develop portfolios of multiple, related inventions. We propose a simple decision-making model in which patent-holders may allocate resources to either expanding the number of related patents or investing in higher value of patents in the portfolio. We estimate the derived value equation using portfolio value data from an inventor survey. We find that investments in individual inventions exhibit diminishing returns, and that much of the value of a portfolio depends on adding new inventions. These effects are less pronounced in high-techology industries, when the inventions rely on external information, and when the inventor holds a doctorate. We also find higher returns to an increase of the number of inventions when firms perceive patent protection to be strong. Thus, a higher number of inventions in a portfolio may reflect both genuine creation of value or stronger appropriability via patents.
    Keywords: intellectual property rights; inventors; patents; technical change
    JEL: L20 O31 O33 O34
    Date: 2013–01
  11. By: Wim BENOOT; Jan BRUECKNER; Stefan PROOST
    Abstract: This paper analyzes strategic interaction between intercontinental airports, each of which levies airport charges paid by airlines and chooses its own capacity under conditions of congestion. Congestion from intercontinental flights is common across the airports since departure and arrival airports are linked one to one, while purely domestic traffic also uses each airport. The paper focuses on five questions. First, if both continents can strategically set separate airport charges for domestic and intercontinental flights, how will the outcome differ from the first-best solution? Second, how is the impact of strategic airport behavior affected by the extent of market power of the airlines serving the intercontinental market? Third, what happens if one continent has several competing intercontinental airports, each with its own regulator, while the other has a single airport and regulator? Fourth, how effective is a non-discrimination clause for airport charges, which prevents independent strategic use of the intercontinental charge? Fifth, what is the effect of higher airport operating costs on one continent (a result of security or immigration procedures) on the strategic outcome? The questions are addressed with an algebraic model and results are illustrated numerically.
    Date: 2012–03
  12. By: Daria Onori (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS; Université catholique de Louvain, IRES; University of Rome “La Sapienza”, Departement of Economics and Law, Faculty of Economics)
    Abstract: In this paper we modify a standard quality ladder model by assuming that R&D is driven by outsider firms and the winners of the race sell licenses over their patents, instead of entering directly the intermediate good sector. As a reward they get the aggregate profit of the industry. Moreover, in the intermediate good sector firms compete à la Cournot and it is assumed that there are spillovers represented by strategic complementarities on costs. We prove that there exists an interval of values of the spillover parameter such that the relationship between competition and growth is an inverted-U-shape.
    Keywords: quality ladder; Cournot oligopoly; strategic complementarities; competition
    JEL: L13 L16 O31 O52
    Date: 2013–04–02

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