nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒10‒18
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The F.T.C., Oligopoly, and Shared Monopoly By Scherer, F. M.
  2. Does Market Size Matter? A Dynamic Model of Oligopolistic Market Structure, Featuring Costs of Creating and Maintaining a Market By Harry Bloch; B. Curtis Eaton; R. Rothschild
  3. Price competition and reputation in markets for experience goods: An experimental study By Huck, Steffen; Lünser, Gabriele K.; Tyran, Jean-Robert
  4. Entry and Product Variety with Competing Supply Chains By Matteo Bassi; Marco Pagnozzi; Salvatore Piccolo
  5. Merger Efficiency and Managerial Incentives By Kräkel, Matthias; Müller, Daniel
  6. Mergers, Coordinated Effects and Efficiency in the Portuguese Non-Life Insurance Industry By Duarte Brito; Pedro Pereira; Joaquim Ramalho
  7. Bundling Incentives in Markets with Product Complementarities: The Case of Triple-Play By Joao Macieira; Pedro Pereira; Joao Vareda
  8. Costs and Benefits of Dynamic Trading in a Lemons Market By Fuchs, William; Skrzypacz, Andrzej
  9. Deferred Patent Examination By Rudyk, Ilja
  10. Quantifying the Impacts of Digital Rights Management and E-Book Pricing on the E-Book Reader Market By Jin-Hyuk Kim; Tin Cheuk Leung
  11. Platform or Wholesale? Different Implications for Retailers of Online Product By Young Kwark; Jianqing Chen; Srinivasan Raghunathan
  12. Migration Between Platforms By Gary Biglaiser; Jacques CreÌmer; AndreÌ Veiga
  13. Optimal Design of Two-Sided Market Platforms: An Empirical Case Study of eBay By Aaron Bodoh-Creed; Jörn Boehnke; Brent R. Hickman

  1. By: Scherer, F. M. (Harvard University)
    Abstract: This paper, written for a centennial commemoration of the founding of the U.S. Federal Trade Commission, reviews the history of two major cases tackling one of the most difficult problems in U.S. antitrust jurisprudence: the tetracycline case of the 1950s and 1960s and the suit against four (eventually three) breakfast cereal manufacturers in the 1970s.
    Date: 2013–09
  2. By: Harry Bloch; B. Curtis Eaton (University of Calgary); R. Rothschild
    Abstract: In their efforts to create a position in a market, and to maintain that position, firms make positioning investments of various sorts, in R&D, plant, advertising, and location, or more generally, in product development and maintenance. The heart of this paper is the hypothesis that the success of these positioning investments is not assured. In an environment where the success of positioning investments is stochastic, the positioning game played by firms that compete to serve a market is necessarily dynamic. We model the positioning and operating decisions of firms in an environment of this sort. When the market is large enough to support at least one active firm, the expected number of firms serving the market at a point in time is a nearly continuous function of market size, in sharp contrast to the familiar integer valued step function seen in classic models of market structure. As a result, equilibrium expected total surplus and expected consumer surplus are higher than standard non-stochastic models would suggest, especially in circumstances where the expected number of firms is small. This suggests that classic models of market structure are not always a sound guide for policy.
    Date: 2013–10–11
  3. By: Huck, Steffen; Lünser, Gabriele K.; Tyran, Jean-Robert
    Abstract: We experimentally examine the effects of price competition in markets for experience goods where sellers can build up reputations for quality. We compare price competition to monopolistic markets and markets where prices are exogenously fixed (somewhere between the endogenous oligopoly and monopoly prices). While oligopolies benefit consumers regardless of whether prices are fixed or endogenously chosen, we find that price competition lowers efficiency as consumers pay too little attention to reputation for quality. This provides empirical support to recent models in behavioral IO that assume that consumers may with increasing complexity of the market place focus on selected dimensions of products (see, for example, Spiegler 2006). -- Wir untersuchen auf experimentellem Wege die Auswirkungen des Preiswettbewerbs auf Märkten, auf denen Verkäufer sich eine Reputation für die Qualität ihrer Produkte erwerben können ('experience goods'). Dabei vergleichen wir den Preiswettbewerb mit monopolistischen Märkten und Märkten, auf denen Preise exogen festgelegt werden (in einer Range zwischen endogenen Oligopol- und Monopolpreisen). Während Oligopole den Konsumenten zugutekommen, egal ob Preise festgesetzt werden oder sich endogen ergeben, mindert Preiswettbewerb die Effizienz, da die Konsumenten der Reputation der Verkäufer hinsichtlich der Qualität ihrer Produkte zu wenig Aufmerksamkeit widmen. Dieser Befund belegt auf empirischem Wege neuere Modelle der Behavioral Industrial Organization, die davon ausgehen, dass bei zunehmender Komplexität der Märkte die Konsumenten ihren Blick selektiv auf bestimmte Produkteigenschaften einengen (siehe beispielsweise Spiegler 2006).
    Keywords: Markets,Price competition,Behavioral IO,Price regulation,Reputation,Trust,Moral hazard,Experience goods
    JEL: C72 C90 D40 D80 L10
    Date: 2013
  4. By: Matteo Bassi (Università di Napoli Federico II and CSEF); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica delSacro Cuore di Milano and CSEF)
    Abstract: We study a supply chain model where competing manufacturers located around a circle contract with privately informed and exclusive retailers. The number of brands in the market (determined by the manufacturers’ zero profit condition) depends on the level of asymmetric information within supply chains and on the types of contracts between manufacturers and retailers. With two-part tariffs, wholesale prices fully reflect retailers’ costs. With linear contracts, wholesale prices are constant and independent of retailers’ costs. The number of brands is lower (resp. higher) with asymmetric information than with complete information when contracts are linear (resp. with two-part tariffs). Moreover, the number of brands is always higher with linear contracts than with two-part tari¤s. We also analyze the effects of endogenous entry on welfare.
    Keywords: Product Variety, Entry, Competing Supply Chains, Vertical Contracting, Asymmetric Information
    JEL: D43 D82 L13 L51
    Date: 2013–10–10
  5. By: Kräkel, Matthias; Müller, Daniel
    Abstract: We consider a two-stage principal-agent model with limited liability in which a CEO is employed as agent to gather information about suitable merger targets and to manage the merged corporation in case of an acquisition. Our results show that the CEO systematically recommends targets with low synergies—even when targets with high synergies are available—to obtain high-powered incentives and, hence, a high personal income at the merger-management stage. We derive conditions under which shareholders prefer a self-commitment policy or a rent-reduction policy to deter the CEO from opportunistic recommendations.
    Keywords: acquisition; merger; moral hazard
    JEL: D82 D86 G34
    Date: 2013–06–02
  6. By: Duarte Brito (Universidade Nova de Lisboa and CEFAGE-UE); Pedro Pereira (Autoridade da Concorrência and CEFAGE-UE); Joaquim Ramalho (CEFAGE-UE)
    Abstract: We evaluate the impact on market power and efficiency of a series of mergers on three Portuguese non-life insurance markets. We specify and estimate, with a panel of firmlevel data, a structural model which includes: preferences, technology, and a market equilibrium condition. Firms’ demand curves are not very elastic. Firms’ technologies exhibit scale and scope economies and high cost efficiency scores. We find that, for the period following the mergers, there is no evidence of: (i) an increase in market power through coordinated behavior, or (ii) changes in cost efficiency levels. In addition, social welfare increased.
    Keywords: Mergers; Market Power; Efficiency; Non-Life Insurance.
    JEL: D43 K21 L13
    Date: 2013
  7. By: Joao Macieira (Department of Economics, Virginia Tech); Pedro Pereira (Autoridade da Concorrencia and Centro de Estudos e Formacao Avancada em Gestao e Economia, Universidade de Evora); Joao Vareda (Autoridade da Concorrencia and Centro de Estudos e Formacao Avancada em Gestao e Economia, Universidade de Evora)
    Abstract: We analyze firms' incentives to bundle and tie in the telecommunications industry. As a first step, we develop a discrete-choice demand model where firms sell products that may combine several services in bundles, and consumers choose assortments of different types of products available from various vendors. Our approach extends standard discrete-choice demand models of differentiated product to allow for both flexible substitution patterns and to map demand for each choice alternative onto the demand for each service or bundle that a firm may sell. We exploit these properties to examine bundling behavior when firms choose: (i) prices, and (ii) which products to sell. Using consumer-level data and survey data from the Portuguese telecommunications industry, we estimate our demand model and identify firm incentives to bundle and tie in this industry. We use the model to perform several policy related conterfactuals and evaluate their impact on prices and product provision.
    Keywords: Bundles, Discrete-Choice Model, Equilibrium Simulation, Differentiated Product, Consumer Level Data.
    JEL: D43 K21 L44 L96
    Date: 2013–09
  8. By: Fuchs, William (University of CA, Berkeley); Skrzypacz, Andrzej (Stanford University)
    Abstract: We study a dynamic market with asymmetric information that creates the lemons problem. We compare efficiency of the market under different assumptions about the timing of trade. We identify positive and negative aspects of dynamic trading, describe the optimal market design under regularity conditions and show that continuous-time trading can be always improved upon.
    Date: 2013–08
  9. By: Rudyk, Ilja
    Abstract: Most patent systems allow applicants to defer patent examination by some time. Deferred examination was introduced in the 1960s, first at the Dutch patent office and subsequently in many other countries, as a response to mounting backlogs of unexamined patent applications. Some applicants allow the examination option to lapse and never request examination once they learn about the value of their invention. Examination loads are reduced substantially in these systems, albeit at the cost of having a large number of pending patent applications. Economic models of patent examination and renewal have largely ignored this important feature to date. We construct a model of patent application, examination and renewal in which applicants have control over the timing of examination and study the tradeoffs that applicants face. Using data from the Canadian patent office and a simulated GMM estimator, we obtain estimates for parameter values of the value distributions and of the learning process. We use our estimates to assess the value of Canadian patents as well as applications. We find that a considerable part of the value is realized before a patent is even granted. In addition, we simulate the counterfactual impact of changes in the deferment period. The estimates we obtain for the value of one additional year of deferment are relatively high and may explain why some applicants embark on delay tactics (such as continuations or divisionals) in patent systems without a statutory deferment option.
    Keywords: patent; patent value; value of patent applications; patent examination; deferred patent examination
    Date: 2013–06
  10. By: Jin-Hyuk Kim (Department of Economics, University of Colorado at Boulder); Tin Cheuk Leung (Department of Economics, Chinese University of Hong Kong)
    Abstract: The demand for electronic books (e-books) and the e-book readers are complementary. On the one hand, the emergence of e-book readers such as Amazon's Kindle has triggered the recent growth of the e-book market. On the other hand, several issues in the e-book market can affect the future of the e-book reader market. Considering this complementarity, this paper quantifies the impact of digital rights management (DRM) and discounted e-book pricing on the demand for e-book readers. We collect conjoint survey data to estimate a random coefficient demand model using a hierarchical Bayesian method. Our counterfactual experiments suggest two things. First, Kindle's and Nook's market shares would increase by dropping DRM. Consumer welfare would increase seven percent if all e-book readers dropped DRM. Second, an increase in e-book prices would increase iPad's market share at the expense of that of Kindle and Nook. Consumer welfare would decrease 6 to 10 percent if Kindle's and Nook's e-book prices went up by 50 percent.
    Keywords: electronic book, demand estimation, DRM, agency model
    JEL: L15 L63 O30
    Date: 2013–09
  11. By: Young Kwark (Warrington College of Business Administration, University of Florida); Jianqing Chen (Jindal School of Management, The University of Texas at Dallas); Srinivasan Raghunathan (Jindal School of Management, The University of Texas at Dallas)
    Abstract: Online retailing is dominated by a channel structure in which a retailer either buys products from competing manufacturers and resells to consumers (wholesale scheme) or lets manufacturers directly sell to consumers on its platform for a commission (platform scheme), and is characterized by easy access to product reviews to facilitate consumers' purchase decisions. We study how different types of information revealed by reviews affect the retailer under the wholesale scheme and platform scheme. We find that information provided by reviews on quality dimension homogenizes consumers' perceived utility differences between products and increases upstream competition, which benefits the retailer under the wholesale scheme but hurts the retailer under the platform scheme. Information provided by reviews on fit dimension heterogenizes consumers' estimated fits to products and softens upstream competition, which hurts the retailer under the wholesale scheme and benefits the retailer under the platform scheme. Together, we demonstrate that the quality information and fit information play very different roles in changing upstream competition, and whether the retailer benefits from reviews critically depends on its pricing scheme choice.
    Keywords: Online Product Reviews, Pricing Scheme, Competition
    JEL: L11 L15 D83
    Date: 2013–09
  12. By: Gary Biglaiser (University of North Carolina, Department of Economics); Jacques CreÌmer (Toulouse School of Economics); AndreÌ Veiga (Toulouse School of Economics)
    Abstract: We develop a model of dynamic platform formation under positive platform externalities. Users can switch between an incumbent and entrant platforms, switching opportunities arise stochastically and users can choose whether to accept or reject an opportunity to switch. For homogeneous users, we characterize the incumbency advantage implied by a given equilibrium realization of the switching process. For linear utility, incumbency advantage increases in the mean and dispersion of the incumbent’s share during the switching process, which captures the momentum and coordination of the process. Heterogeneity in preferences may lead some users to delay their switching or never switch at all. Assuming that switching opportunities arrive according to a Poisson process, users switch to the entrant platform if the average preference favors the entrant and if preferences are not too polarized.
    Keywords: platform Formation, Migration, Standardization and Compatibility, Industry Dynamics
    JEL: D85 L14 R23 L15 L16
    Date: 2013–09
  13. By: Aaron Bodoh-Creed (University of California at Berkeley); Jörn Boehnke (University of Chicago); Brent R. Hickman (University of Chicago)
    Abstract: While much is known about optimal design of auctions within the context of a single item for sale, little is known about optimal design of large platform markets like eBay and auto auction houses that house large numbers of concurrent auctions. We attempt a macro-level empirical market design exercise by combining a unique dataset on tablet sales collected from eBay over the course of a year with methodologies developed by Bodoh-Creed (2011) and Backus and Lewis (2013). The former proposes a tractable approach to studying dynamic auction markets when the number of participants on both sides is sufficiently large. The model also delivers predictions on optimal fee schedule design -- specifically, in terms of listing fees and percentage charges for a sale -- for an auction house wishing to maximize profits by attracting the appropriate mix of buyers and sellers into the market. We begin by empirically investigating the key assumptions of the model which deliver (computational and empirical) tractability, and find that they are reasonable. We then estimate consumer demand, market supply, and the distributions of market entrants (this part still in progress). These figures are plugged into the Bodoh-Creed (2011) framework in order to compute optimal fee schedules and draw comparisons to actual fee schedules, as well as to make policy prescriptions.
    Keywords: Online Auctions, eBay, Market Design, Large Markets
    JEL: C92 L33 L51 L92
    Date: 2013–09

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