nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒08‒31
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Industry Differences in the Firm Size Distribution By Halvarsson, Daniel
  2. The Cournot-Bertrand profit differential: A Reversal result in network goods duopoly By Rupayan Pal
  3. Generation Capacity Investments in Electricity Markets: Perfect Competition By Gürkan, G.; Ozdemir, O.; smeers, Y.
  4. Optimal Pricing and Quality of Academic Journals and the Ambiguous Welfare Effects of Forced Open Access: A Two-sided Model By Mueller-Langer, Frank; Watt, Richard
  5. Judo Economics in Markets with Multiple Firms By Daniel Cracau; Benjamin Franz
  6. Measuring Market Power in the Banking Industry in the Presence of Opportunity Cost By Antonis Michis
  7. Strategic Generation Capacity Choice under Demand Uncertainty: Analysis of Nash Equilibria in Electricity Markets By Gürkan, G.; Ozdemir, O.; smeers, Y.
  8. R&D cooperation and industry cartelization By Prokop, Jacek; Karbowski, Adam
  9. Practice Makes Perfect: Entrepreneurial-Experience Curves and Venture Performance By Toft-Kehler, Rasmus; Wennberg, Karl; Kim, Phillip
  10. Adverse selection and moral hazard in anonymous markets By Klein, Tobias J.; Lambertz, Christian; Stahl, Konrad O.
  11. Do first mover advantages for producers of energy efficient appliances exist? The case of refrigerators By Cleff, Thomas; Rennings, Klaus
  12. The effect of regulatory scrutiny asymmetric cost pass-through in power wholesale and its end By Mokinski, Frieder; Wölfing, Nikolas

  1. By: Halvarsson, Daniel (Ratio)
    Abstract: This paper empirically examines industry determinants of the shape of Swedish firm size distributions at the 3-digit (NACE) industry level between 1999-2004 for surviving firms. Recent theoretical studies have begun to develop a better understanding of the causal mechanisms behind the shape of firm size distributions. At the same time there is a growing need for more systematic empirical research. This paper therefore presents a two-stage empirical model, in which the shape parameters of the size distribution are estimated in a first stage, with firm size measured as number of employees. In a second stage regression analysis, a number of hypotheses regarding economic variables that may determine the distributional shape are tested. The result from the first step are largely consistent with previous statistical findings confirming a power law. The main finding, however, is that increases in industry capital and financial constraint exert a considerable influence on the size distribution, shaping it over time towards thinner tails, and hence fewer large firms.
    Keywords: Firm size distribution; Zipf's law; Gibrat's law
    JEL: D22 L11 L25
    Date: 2013–08–21
  2. By: Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: We revisit the classic profit-ranking of Cournot and Bertrand equilibria and the issue of endogenous choice of a price or a quantity contract, but for a network goods duopoly. We show that, if network externalities are strong (weak), each firm earns higher (lower) profit under Bertrand competition than under Cournot competition. Therefore, unless network externalities are weak, the classic profit-ranking is reversed. When modes of product market competition are endogenously determined, Cournot equilibrium always constitutes the subgame perfect Nash equilibrium (SPNE). However, a prisoners's dilemma type of situation arises and the SPNE is Pareto inefficient, unless network externalities are weak.
    Keywords: Network externalities, Cournot, Bertrand, Profit ranking, Endogenous mode of competition
    JEL: D43 L13
  3. By: Gürkan, G.; Ozdemir, O.; smeers, Y. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: In competitive electricity markets, markets designs based on power exchanges where supply bidding (barring demand-side bidding) is at the sole short run marginal cost may not guarantee resource adequacy. As alternative ways to remedy the resource adequacy problem, we focus on three different market designs in detail when demand is inelastic, namely an energy-only market with VOLL pricing (or a price cap), an additional capacity market, and operating-reserve pricing. We also discuss demand-side bidding (i.e., a price responsive demand) which can be seen as a categorically different alternative to remedy the resource adequacy problem. We consider a perfectly competitive market consisting of three types of agents: generators, a transmission system operator, and consumers; all agents are assumed to have no market power. For each market design, we model and analyze capacity investment choices of firms using a two-stage game where generation capacities are installed in the first stage and generation takes place in future spot markets at the second stage. When future spot market conditions are assumed to be known a priori (i.e., deterministic demand case), we show that all of these two-stage models with different market mechanisms, except operating-reserve pricing, can be cast as single optimization problems. When future spot market conditions are not known in advance (i.e., under demand uncertainty), we essentially have a two-stage stochastic game. Interestingly, an equilibrium point of this stochastic game can be found by solving a two-stage stochastic program, in case of all of the market mechanisms except operating-reserve pricing. In case of operatingreserve pricing, while the formulation of an equivalent deterministic or stochastic optimization problem is possible when operating-reserves are based on observed demand, this simplicity is lost when operatingreserves are based on installed capacities. We generalize these results for other uncertain parameters in spot markets such as fuel costs and transmission capacities. Finally, we illustrate how all these models can be numerically tackled and present numerical experiments. In our numerical experiments, we observe that uncertainty of demand leads to higher total generation capacity expansion and a broader mix of technologies compared to the investment decisions assuming average demand levels. Furthermore for the same VOLL (or price cap) level and under the assumptions of random demand with finite support and no forced outages, energy-onlymarkets with VOLL pricing tend to lead to total generation capacity below the peak load with a certain probability whereas energy markets with a forward capacity market or operating-reserve pricing result in higher investments. Finally, the regulator decisions (e.g., reserve capacity target) in capacity markets and operating-reserve pricing can be chosen in such a way that results in very similar investment levels and fuel mix of generation capacities in b
    Date: 2013
  4. By: Mueller-Langer, Frank; Watt, Richard
    Abstract: We analyse optimal pricing and quality of a monopolistic journal and the optimality of open access in a two-sided model. The predominant aspect of the model that determines the quality levels at which open access is optimal is the nature of the (non-linear) externalities between readers and authors in a journal. We show that there exist scenarios in which open access is a feature of high-quality journals. Besides, we find that the removal of copyright (and thus forced open access) will likely increase both readership and authorship, will decrease journal profits, and may increase social welfare.
    Keywords: Two-sided markets; academic journals; open access; removal of copyright; welfare effects
    JEL: L11 L82 O34
    Date: 2013–08–21
  5. By: Daniel Cracau (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Benjamin Franz (University of Oxford, Mathematical Institute)
    Abstract: We study a sequential Bertrand game with one dominant market incumbent and multiple small entrants selling homogeneous products. Whilst the equilibrium for the case of a single entrant is well-known from Gelman and Salop (1983), we derive properties of the N-firm equilibrium and present an algorithm that can be used to calculate this equilibrium. Using this algorithm we derive the exact equilibrium for the cases of two and three small entrants. For more than three entrants only approximate results are possible. We use numerical results to gain further understanding of the equilibrium for an increasing number of firms and in particular for the case where N diverges to infinity. Similarly to the two-firm Judo equilibrium, we see that a capacity limitation for the small rms is necessary to achieve positive profits.
    Keywords: Sequential Bertrand Competition, Judo Economics, N-firm oligopoly
    JEL: D43 L11
    Date: 2013–07
  6. By: Antonis Michis (Central Bank of Cyprus)
    Abstract: A conjectural variations model is developed to measure market power in the banking industry. Unlike previous studies, which use complete cost function specifications in the modelling framework, this study defines marginal cost based on an opportunity cost, which is represented by the interest rate on minimum reserves offered by the monetary authorities in a country. Deposits with the monetary authorities are considered to be an alternative use of available funds that are usually allocated to loans. The estimates of market power in the banking industry in Cyprus, using the proposed model, reject the monopoly hypothesis.
    Keywords: market power, conjectural variations, interest rates, opportunity cost.
    JEL: G21 L11
    Date: 2013–06
  7. By: Gürkan, G.; Ozdemir, O.; smeers, Y. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We analyze a two-stage game of strategic firms facing uncertain demand and exerting market power in decentralized electricity markets. These firms choose their generation capacities at the first stage while anticipating a perfectly competitive future electricity spot market outcome at the second stage; thus it is a closed loop game. In general, such games can be formulated as an equilibrium problem with equilibrium constraints (EPEC) and examples have been posed in the literature that have multiple or no equilibria. Therefore, it is of interest to define general sets of conditions under which solutions exist and are unique, which would enhance the value of such models for policy andmarket intelligence purposes. In this paper, we consider various types of such a closed loop model regarding the underlying price-demand relations (elastic and inelastic demand), the assumed demand uncertainty with a broad class of continuous distributions, and any finite number of players with symmetric or asymmetric costs. We establish sufficient conditions for the random demand’s probability distribution which guarantee existence and uniqueness of equilibria in most of the cases of this closed loop model. We identify a broad class of commonly used continuous probability distributions satisfying these conditions.
    Keywords: electricity markets;strategic generation investment modeling;demand uncertainty;existence and uniqueness of equilibrium.
    JEL: C62 C68 C72 D43 L94
    Date: 2013
  8. By: Prokop, Jacek; Karbowski, Adam
    Abstract: The objective of this paper is to investigate the impact of R&D cooperation on cartel formation in the product market. The R&D investments that precede the production process are aimed at the reduction of the unit manufacturing costs, and could create positive externalities for the potential competitors. In contrast to the preceding literature, we assume that the competition between firms on the product market takes place according to the Stackelberg leadership model. For simplicity we focus on the case of duopoly. Numerical analysis shows that a closer cooperation at the R&D stage may strengthen the incentives to create a cartel in the product market. --
    Keywords: R&D cooperation of firms,industry cartelization,Stackelberg competition
    JEL: O31 L41 L13
    Date: 2013
  9. By: Toft-Kehler, Rasmus (Copenhagen Business School, Symbion Entrepreneurial Learning Lab); Wennberg, Karl (Ratio and Stockholm School of Economics); Kim, Phillip (Wisconsin School of Business)
    Abstract: This study tackles the puzzle of why increasing entrepreneurial experience does not always lead to improved financial performance of new ventures. We propose an alternate framework demonstrating how experience translates into expertise by arguing that the positive experience-performance relationship only appears to expert entrepreneurs, while novice entrepreneurs may actually perform increasingly worse because of their inability to generalize their experiential knowledge accurately into new ventures. These negative performance implications can be alleviated if the level of contextual similarity between prior and current ventures is high. Using matched employee-employer data of an entire population of Swedish founder-managers between 1990 and 2007, we find a non-linear relationship between entrepreneurial experience and financial performance consistent with our framework. Moreover, the level of industry, geographic, and temporal similarities between prior and current ventures positively moderates this relationship. Our work provides both theoretical and practical implications for entrepreneurial experience—people can learn entrepreneurship and pursue it with greater success as long as they have multiple opportunities to gain experience, overcome barriers to learning, and build an entrepreneurial-experience curve.
    Keywords: Serial Entrepreneurship; Learning Curves; Experience; Similarity; Performance
    JEL: L26 M13
    Date: 2013–07–17
  10. By: Klein, Tobias J.; Lambertz, Christian; Stahl, Konrad O.
    Abstract: We study the effects of improvements in eBay's rating mechanism on seller exit and continuing sellers' behavior. Following a large sample of sellers over time, we exploit the fact that the rating mechanism was changed to reduce strategic bias in buyer rating. That improvement did not lead to increased exit of poorly rated sellers. Yet, buyer valuation of the staying sellers-especially the poorly rated ones-improved significantly. By our preferred interpretation, the latter effect results from increased seller effort; also, when sellers have the choice between exiting (a reduction in adverse selection) and improved behavior (a reduction in moral hazard), then they prefer the latter because of lower cost. -- Anonyme Märkte wie solche, die im Internet tagtäglich geöffnet werden, sind gekennzeichnet durch asymmetrische Information zwischen den Marktteilnehmern. Tatsächlich weiß die Käuferin vor dem Tauschakt nicht, ob der Verkäufer das Gut korrekt beschrieben hat, und ob er nach ihrer Kaufentscheidung die Transaktion gewissenhaft durchführt. Ohne Abhilfe lösen diese Informationsasymmetrien Adverse Selektion und Moralisches Risiko aus: Adverse Selektion entsteht dadurch, dass gewissenhafte Verkäufer den Markt verlassen (oder erst gar nicht in ihn eintreten), solange ihre Gewissenhaftigkeit durch die Käufer mangels korrekter ex ante Information nicht honoriert wird. Moralisches Risiko entsteht dadurch, dass aus dem gleichen Grund die im Markt verbleibenden Verkäufer ihre Anstrengungen gering halten. Die Konsequenzen von Adverser Selektion und Moralischem Risiko sind inzwischen theoretisch sorgfältig analysiert und gut verstanden. Jedoch gibt es bisher wenige empirische Tests zu den aus der Theorie abgeleiteten Hypothesen. Internetmärkte bieten dafür eine nützliche Umgebung. Aufgrund der offensichtlichen Konsequenzen entwickelten die Designer von Internet-Märkten schon aus Eigeninteresse frühzeitig Instrumente zur Abwehr der adversen Effekte; vor allem in Form von Reputationsmechanismen, unter denen Käufer und Verkäufer ihre Performanz gegenseitig bewerten und daraus Reputationskapital entwickeln können. Diese Mechanismen wurden im Laufe der Zeit verbessert, in Reaktion auf opportunistisches Berichtsverhalten auf beiden Marktseiten.
    Keywords: Anonymous markets,adverse selection,moral hazard,reputation building mechanisms
    JEL: D83 L15
    Date: 2013
  11. By: Cleff, Thomas; Rennings, Klaus
    Abstract: Energy efficiency regulation is an important driver for innovations in environmental technologies. Improvements of energy efficiency do not only contribute to reach envi-ronmental policy targets, they can be furthermore economically profitable. E.g. private households can reduce their costs in the long term by using efficient household appli-ances. But how can the specific competitive position on this market be assessed for German producers, and how strong is the competitiveness from firms coming from emerging economies? We analyse - as an example - the global refrigerator market, using the lead market approach for environmental innovations. As our results show, Germany has the most lead market potentials for energy-efficient refrigerators, followed by Korea und Italy. First mover advantages for high-tech energy efficient appliances can be realised on the German market. This is backed by high en-ergy efficiency standards in Europe which diffuse after some years to other countries. Since the pay-off time for energy efficient household appliances is with 7 to 10 years quite long, also a cost strategy with low prices can be successful. Especially in the case when the price of electricity and the national income are low. Markets for such products are for example in Asia and Russia. Producers use the existence of both strategy options to operate with different brands and product lines in different market niches at the same time. For firms in countries that do not have sufficient lead market potentials, innovations in energy efficiency must be targeted to fit the preferences of users in the lead market. The screening of the lead market can take on varying degrees of intensity. A good way for a company to estab-lish ties with a lead market is via producers with long experience on the Lead Market. It can be realised through a simple sales cooperation with local producers or a merger with a local producer of the lead market. --
    Keywords: Household appliances,energy efficiency,refrigerators,lead market,first mover
    JEL: Q55 O33 Q01 Q58
    Date: 2013
  12. By: Mokinski, Frieder; Wölfing, Nikolas
    Abstract: We find an asymmetric pass-through of European Emission Allowance (EUA) prices to wholesale electricity prices in Germany and show that this asymmetry has disappeared in response to a report on investigations by the competition authority. The asymmetric pricing pattern, however, was not detected at the time of the report, nor had it been part of the investigations. Our results therefore provide evidence of the deterring effect of regulatory monitoring on firms which exhibit non-competitive pricing behavior. We do not find any asymmetric pass-through of EUA prices in recent years. Several robustness checks support our results. --
    Keywords: asymmetric price adjustment,regulatory monitoring,wholesale electricity markets,emission trading
    JEL: L4 L94 Q41 Q52
    Date: 2013

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