nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒06‒24
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price-Matching leads to the Cournot Outcome By Norovsambuu Tumennasan; Mongoljin Batsaikhan
  2. The Dynamics of Bertrand Price Competition with Cost-Reducing Investments By Fedor Iskhakov; John Rust; Bertel Schjerning
  3. Do cartel breakdowns induce mergers? Evidence from EC cartel cases By Hüschelrath, Kai; Smuda, Florian
  4. Production Arrangements and Strategic Brand Level Competition in a Vertically Linked Market By Ahmad, Waseem; Anders, Sven; Marcoul, Philippe
  5. Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs By Rosato, Antonio

  1. By: Norovsambuu Tumennasan (Department of Economics and Business, Aarhus University); Mongoljin Batsaikhan (Georgetown University)
    Abstract: We study the effects of price-matching in a duopoly setting in which each firm selects both its price and output, simultaneously. We show that the availability of a pricematching option leads to the Cournot outcome in this setting. This result is a stark contrast to the one obtained in the standard Bertrand competition that the market price in the presence of a price-matching option ranges from the monopolistic price to the Bertrand price. Our result suggests that the effect of price-matching depends on whether the output is a choice variable for the firms.
    Keywords: Price matching
    JEL: L00 D4
    Date: 2013–06–18
  2. By: Fedor Iskhakov (CEPAR, University of New South Wales); John Rust (Georgetown University); Bertel Schjerning (University of Copenhagen)
    Abstract: We present a dynamic extension of the classic static model of Bertrand price competition that allows competing duopolists to undertake cost-reducing investments in an attempt to “leapfrog” their rival to attain low-cost leadership—at least temporarily. We show that leapfrogging occurs in equilibrium, resolving the Bertrand investment paradox., i.e. leapfrogging explains why firms have an ex ante incentive to undertake cost-reducing investments even though they realize that simultaneous investments to acquire the state of the art production technology would result in Bertrand price competition in the product market that drives their ex post profits to zero. Our analysis provides a new interpretation of “price wars”. Instead of constituting a punishment for a breakdown of tacit collusion, price wars are fully competitive outcomes that occur when one firm leapfrogs its rival to become the new low cost leader. We show that the equilibrium involves investment preemption only when the firms invest in a deterministically alternating fashion and technological progress is deterministic. We prove that when technological progress is deterministic and firms move in an alternating fashion, the game has a unique Markov perfect equilibrium. When technological progress is stochastic or if firms move simultaneously, equilibria are generally not unique. Unlike the static Bertrand model, the equilibria of the dynamic Bertrand model are generally inefficient. Instead of having too little investment in equilibrium, we show that duopoly investments generally exceed the socially optimum level. Yet, we show that when investment decisions are simultaneous there is a “monopoly” equilibrium when one firm makes all the investments, and this equilibrium is efficient. However, efficient non-monopoly equilibria also exist, demonstrating that it is possible for firms to achieve efficient dynamic coordination in their investments while their customers also benefit from technological progress in the form of lower prices.
    Keywords: duopoly, Bertrand-Nash price competition, Bertrand paradox, Bertrand investment paradox, leapfrogging, cost-reducing investments, technological improvement, dynamic models of competition, Markov-perfect equilibrium, tacit collusion, price wars, coordination and anti-coordination games, strategic preemption
    JEL: D92 L11 L13
    Date: 2013–03–15
  3. By: Hüschelrath, Kai; Smuda, Florian
    Abstract: We investigate the impact of cartel breakdowns on merger activity. Merging information on cartel cases decided by the European Commission (EC) between 2000 and 2011 with a detailed data set of worldwide merger activity, we find that, first, the average number of all merger transactions increase by up to 51 percent when comparing the three years before the cartel breakdowns with the three years afterwards. Second, for the subset of horizontal mergers, merger activity is found to increase even more - by up to 83 percent - after the cartel breakdowns. Our results not only suggest that competition authorities should consider mergers as potential 'second-best' alternative to cartels but also imply that resource (re)allocations in competition authorities, law practices and economic consultancies may become necessary to handle the increase in merger cases. --
    Keywords: antitrust policy,cartels,mergers,cartel breakdown,European Union
    JEL: L41 K21
    Date: 2013
  4. By: Ahmad, Waseem; Anders, Sven; Marcoul, Philippe
    Abstract: This paper develops and tests different theoretical models of competition in a vertically linked market assuming different production arrangements for retailer private label brands (PL). We then empirical estimate retailer manufacturer competitive behavior based on best-fit games and determine the impact of PL production arrangements on pricing strategies for PLs and NBs. Retailers are using different production arrangements to produce PL products. In fact, a retailer may own a production facility, a national brand manufacturer (NB) produces the PL product exclusively for the retailer or the retailer outsources PL production to a non-NB manufacturer. These possible, different production arrangements can have significant implications for the competitive interactions and market outcomes between retailers and NB manufacturers. Existing economic literature has identified a significant degree of variation in the type of competitive interactions across grocery product categories. However, the majority empirical studies in IO have typically imposed assumptions about the nature of vertical production arrangement without formally and explicitly investigating the nature of PL-NB competitive interaction under different production arrangements. The analysis builds on the Non-Nested Model Comparison (NNMC) approach and employs weekly store-level retail scanner data, for a major North American retail chain. The findings from different theoretical models and their empirical application reveal that no consistent pattern of competitive interactions exists between PLs and NBs across different food product categories. Competitive patterns and outcomes vary depending on the nature of the PL production arrangement. Our study contributes to the IO literature by being the first to consistently derive and estimate the impact of PL production arrangement on brand-level competition.
    Keywords: Competition, Bertrand Nash, Stackelberg leader follower, Non-Nested Model Comparison, Canadian retail level, Private label, National brand, Production arrangements, Consumer/Household Economics, Marketing, Production Economics,
    Date: 2013
  5. By: Rosato, Antonio
    Abstract: Why are some sale items subject to limited availability while other substitute items are available in large quantities and are priced relatively high at the same point in time? Can such a retail strategy lure consumers into purchasing the more expensive item? This paper characterizes the profit-maximizing pricing and product-availability strategies for a retailer selling two substitute goods to loss-averse consumers and shows that limited-availability sales can manipulate consumers into an ex-ante unfavorable purchase. Consumers have unit demand, are interested in buying only one good, and their reference point is given by their recent rational expectations about what consumption value they would receive and what price they would pay. The seller maximizes profits by raising the consumers' reference point through a tempting discount on a good available only in limited supply (the bargain) and cashing in with a high price on the other good (the rip-off), which the consumers buy if the bargain is not available to minimize their disappointment. The seller might prefer to offer a deal on the more valuable product, using it as a bait, because consumers feel a larger loss, in terms of forgone consumption, if this item is not available. I also show that the bargain item can be a loss leader, that the seller's product line is not welfare-maximizing and that she might supply a socially wasteful product. The model suggests that the current FTC Guides Against Bait Advertising, by allowing retailers to employ limited-availability sales, could reduce consumer and social welfare.
    Keywords: Retail Pricing; Reference-Dependent Preferences; Loss Aversion; Limited Availability; Bait and Switch; Loss Leaders.
    JEL: D11 D42 L11
    Date: 2013

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