nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒06‒04
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Why define markets in competition cases? By Willem H. Boshoff
  2. Welfare-increasing third-degree price discrimination By Simon GB Cowan
  3. Competitive Targeted Advertising with Price Discrimination By Rosa Branca Esteves; Joana Resende
  4. Monopolistic Competition: A Dual Approach with an Application to Trade By Paolo Bertoletti; Federico Etro
  5. Are joint patents collusive? Evidence from the US and Europe By Fosfuri, A.; Helmers, C.; Roux, C.
  6. Caught Between Theory and Practice: Government, Market and Regulatory Failures in Electricity By Nepal, Rabindra; Jamasb, Tooraj
  7. Unobserved heterogeneous effects in the cost efficiency analysis of electricity distribution systems By AGRELL, Per; FARSI, Mehdi; FILIPPINI, Massimo; KOLLER, Martin

  1. By: Willem H. Boshoff (Department of Economics, University of Stellenbosch)
    Abstract: Competition policy investigations usually commence with a definition of the relevant product and geographic market. The relevant market provides a first evaluation of competitive conditions and allows for the calculation of market shares, which aids in the assessment of firms’ market power. Given its implications for assessing market power, the market definition in a competition case is frequently contested. Critics argue that market definition is often arbitrary and should be avoided. Instead, IO scholars argue that modern econometric methods are capable of directly estimating market power and competitive effects without the need for defining markets. We argue that market definition not only offers a valuable first screen for market power, but actually involves a substitution analysis that lies at the heart of any competition case. We argue that it is suboptimal to promote a single encompassing econometric model instead of the multi-faceted empirical approach underlying most market definition exercises in practice. In addition, we note that market definition involves much more than merely the estimation of price elasticities, which are in any event difficult to estimate in most competition cases.
    Keywords: market, market definition, market share, substitutability, price elasticity, antitrust, competition policy, mergers, monopolization
    JEL: L11 L40 L41 K21
    Date: 2013
  2. By: Simon GB Cowan
    Abstract: The welfare and output effects of monopoly third-degree price discrimination are analyzed when inverse demand functions are parallel.  Welfare is higher with discrimination than with a uniform price when demand functions are derived from the logistic distribution, and from a more general class of distributions.  The sufficient condition in Varian (1985) for a welfare increase holds for these demand functions.  Total output is higher with discrimination for a large set of demand functions including those derived from strictly log-concave distributions with increasing cost pass-through, such as the normal, logistic and extreme value, and standard log-convex demands.
    Keywords: Third-degree price discrimination, monopoly, social welfare, output
    JEL: D42 L12 L13
    Date: 2013–04–22
  3. By: Rosa Branca Esteves (Universidade do Minho - NIPE); Joana Resende (Universidade do Porto - FEP)
    Abstract: This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market in which advertising plays two major roles. It transmits relevant information to otherwise uninformed consumers and it acts as a price discrimination device. We look at the …firms' optimal advertising and pricing decisions in two settings, namely mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. In the case of targeted advertising, we show that …firms advertise more in its weak market than in its strong market. The analysis highlights that targeted advertising might constitute a tool to dampen price competition. We show that average prices with mass advertising/non-discrimination can be below those with targeted advertising/price discrimination (regardless of the market segment). We also fi…nd that, when advertising costs are not too high, price discrimination by means of targeted advertising can boost industry pro…fits at the expense of consumer and overall welfare. Finally, we show that overall welfare and consumer surplus falls when …firms use targeted advertising instead of mass advertising.
    Date: 2013
  4. By: Paolo Bertoletti (Department of Economics and Management, University Of Pavia); Federico Etro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms' size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms' size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry. Finally, we provide an application to trade.
    Keywords: Monopolistic competition, Indirect additivity, Dixit-Stiglitz model, Endogenous entry
    JEL: D11 D43 L11 F12
    Date: 2012
  5. By: Fosfuri, A.; Helmers, C.; Roux, C. (Tilburg University, Tilburg Law and Economics Center)
    Date: 2012
  6. By: Nepal, Rabindra; Jamasb, Tooraj
    Abstract: The world-wide electricity sector reforms of the early 1990s have revealed the complexities of introducing market driven reforms and making them work in network and infrastructure industries. This paper re-flects on the experience to date with the process and outcomes of market-based electricity reforms in less-developed, transition and developed economies. Evidence suggests similar problems facing the electricity sector of these countries though the contexts vary significantly. Many developing and developed economies continue to have investment inadequacy concerns and the need to balance economic efficiency, sustainability and social equity after more than two decades of experience with reforms. We also use case studies of three selected countries that in many respects represent the current state of the reform though they are rarely examined. Nepal, Belarus and Ireland are chosen as country-specific case studies for this purpose. We conclude that the changing dynamics of the electricity supply industry (ESI) and policy objectives imply that reforms evolve continuously and thus remain work in progress making their success or failure a complex function of micro, macro, and institutional factors.
    Keywords: liberalisation, politics, market, reforms.
    JEL: L52 L94 P00
    Date: 2013–03–01
  7. By: AGRELL, Per (Université catholique de Louvain, CORE and Louvain School of Management, Belgium); FARSI, Mehdi (University of Neuchatel); FILIPPINI, Massimo (ETH Zurich and University of Lugano); KOLLER, Martin (ETH Zurich)
    Abstract: The purpose of this study is to analyze the cost efficiency of electricity distribution systems in order to enable regulatory authorities to establish price- or revenue cap regulation regimes. The increasing use of efficiency analysis in the last decades has raised serious concerns among regulators and companies regarding the reliability of efficiency estimates. One important dimension affecting the reliability is the presence of unobserved factors. Since these factors are treated differently in various models, the resulting estimates can vary across methods. Therefore, we decompose the benchmarking process into two steps. In the first step, we identify classes of similar companies with comparable network and structural characteristics using a latent class cost model. We obtain cost best practice within each class in the second step, based on deterministic and stochastic cost frontier models. The results of this analysis show that the decomposition of the benchmarking process into two steps has reduced unobserved heterogeneity within classes and, hence, reduced the unexplained variance previously claimed as inefficiency.
    Keywords: efficiency analysis, cost function, electricity sector, incentive regulation
    JEL: L92 L50 L25
    Date: 2013–02–22

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