nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒01‒24
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Recommendation Effect in the Hotelling Game - A New Result for an Old Model By Maximilian Conze; Michael Kramm
  2. Innovation Markets, Future Markets, or Potential Competition: How Should Competition Authorities Account for Innovation Competition in Merger Reviews? By Benjamin Kern
  3. Why Branded Firm may Benefit from Counterfeit Competition By Ding, Yucheng
  4. Bargaining power in manufacturer-retailer relationships By Haucap, Justus; Heimeshoff, Ulrich; Klein, Gordon J.; Rickert, Dennis; Wey, Christian
  5. Cooperation and competition in markets with network externalities or learning curves By Morasch, Karl
  6. The Liquidity Advantage of Quote-driven Markets: Evidence from the Betting Industry By Raphael Flepp; Stephan Nüesch; Egon Franck
  7. Industrial Policy for the Medium to Long-term By Crafts, Nicholas; Hughes, Alan
  8. Competition, Competition Policy, Competitiveness, Globalisation and Development By Singh, Ajit
  9. Price Regulation and Parallel Imports of Pharmaceuticals By Kurt R. Brekke; Tor Helge Holmås; Odd Rune Straume
  10. Regulating Pharmaceutical Prices in the European Union By Csizmazia, Roland Attila
  11. Pharmaceutical regulation and health policy objectives By Birg, Laura
  12. The Industrial Organization of Health Care Markets By Martin Gaynor; Kate Ho; Robert Town
  13. Challenges to Regulatory Decentralization: Lessons from State Health Technology Regulation By Jill R. Horwitz; Daniel Polsky

  1. By: Maximilian Conze; Michael Kramm
    Abstract: Hotelling’s famous "Principle of Minimum Differentiation" suggests that two firms engaging in spatial competition will decide to locate at the same place. Interpreting spatial competition as modeling product differentiation, firms will thus offer products that are not differentiated and equally share the market demand. We extend (a fixed price version of) Hotelling’s model by introducing sequential consumer purchases and a second dimension of variation of the goods, quality. Consumers have differential information about the qualities of the goods and uninformed consumers observe the decision of their predecessors. With this extension a rationale for differentiating products emerges: Differentiation makes later consumers’ inference from earlier consumers’ purchases more informative, so that firms are confronted with two offsetting effects. On the one hand, differentiating one’s product decreases the likelihood that it is bought in earlier periods, but on the other hand, by making inference more valuable, it increases the likelihood that later consumers buy the differentiated good. We show that the second effect, the recommendation effect, can dominate, leading to an equilibrium with differentiated products. Our model thus introduces an aspect similar to the herding literature in that consumers might base their decisions on observable actions of others and thus potentially on "wrong" decisions.
    Keywords: Hotelling; herding; principle of minimum differentiation; consumer learning
    JEL: L13 L15 D83
    Date: 2013–12
  2. By: Benjamin Kern (University of Marburg)
    Abstract: The relevant competitors in regard to innovation might, but not necessarily do, correspond to the identified competitors on actual product markets. Hence, the conventional analysis of product markets, in order to assess the potential anticompetitive effects of mergers, is insufficient to capture innovation competition in its full extent. As a consequence, the aim of this article is to introduce and compare the existing alternative approaches which can, in principle, be used for the assessment of anticompetitive innovation effects in merger review. By focusing on the applied U.S. Antitrust, it turns out that none of the existing approaches seems to be appropriate to fully account for innovation competition. However, the ‘Innovation Market Analysis’, the first framework especially designed for the assessment of innovation aspects, might still serve as a good starting point for the development of a revised assessment framework.
    JEL: B52 K21 L12 L41 O31
    Date: 2014
  3. By: Ding, Yucheng
    Abstract: A durable good monopolist sells its branded product over two periods. In period 2, when there is entry of a counterfeiter, the branded firm may charge a high price to signal its quality. Counterfeit competition thus enables the branded firm to commit to high future price in period 2, alleviating the classic time-inconsistency problem under durable good monopoly. This can increase the branded firm's profit by encouraging consumer purchase without delay, despite the revenue loss to the counterfeiter. Total welfare can also increase, because early purchase eliminates delay cost and consumers enjoy the good for both periods.
    Keywords: Counterfeits, Coase Conjecture, Quality Signaling
    JEL: D82 L11 L13
    Date: 2014–01–10
  4. By: Haucap, Justus; Heimeshoff, Ulrich; Klein, Gordon J.; Rickert, Dennis; Wey, Christian
    Abstract: Research on bargaining power in vertical relationships is scarce. It remains particularly unclear which factors drive bargaining power between the two negotiating parties in a vertical structure. We use a demand model where the consumer demand determines the total pie of industry profits. Moreover, we apply a bargaining concept on the supply side to analyze how profit is split between retailers and manufacturers. Estimates show that bargaining power can be explained by several decision variables for retailers and manufacturers. Options for both indicate that any analysis of bargaining power has to consider a dynamic view on the relevant parameters. --
    Keywords: Bargaining Power,Buyer Power,Antitrust,Discrete Choice,Demand Estimation
    JEL: L1 L4
    Date: 2013
  5. By: Morasch, Karl
    Abstract: The related phenomena of learning curve and network effects are quite common in oligopolistic markets. In this context the present paper discusses the incentives of a technological leader to share its exclusive technology with potential competitors. An alliance may be preferable because partner firms may be blocked. On the other hand compeition between the alliance partners will be intensied. It is shown that tha alliance solution will be chosen for medium values of learning curve or network effects. In almost all cases where firms decide to form an alliance this well enhance welfare. --
    Keywords: Alliances,Network externalities,Learning curve,Oligopoly
    JEL: L13 D43 L15
    Date: 2013
  6. By: Raphael Flepp (Department of Business Administration, University of Zurich); Stephan Nüesch (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich)
    Abstract: This paper investigates the puzzling coexistence of the quote-driven market struc- ture characterized by traditional bookmakers and the order-driven market structure characterized by betting exchanges in the betting industry. Even though betting exchanges are considered as the superior business model due to less operational risk and lower information costs, bookmakers continue to be successful. We show that liquidity, which is only guaranteed at the bookmaker market, significantly improves the bookmakers’ price competitiveness. Using matched panel data of both book- maker and betting exchange odds for 17,682 soccer matches played worldwide, we find that a major bookmaker offers more favorable odds than a major betting ex- change in the early pre-play betting period and less favorable odds shortly before match start.
    Keywords: Market Structure, Market Performance, Liquidity, Betting Market
    JEL: D40 L10 L83
    Date: 2013–12
  7. By: Crafts, Nicholas (University of Warwick); Hughes, Alan (University of Cambridge)
    Abstract: This report reviews the market failure and systems failure rationales for industrial policy and assesses the evidence on part experience of industrial policy in the UK. In the light of this, it reviews options for reshaping the design and delivery of industrial policy towards UK manufacturing. These options are intended to encourage a medium- to long-term perspective across government departments and to integrate science, innovation and industrial policy.
    Keywords: UK manufacturing, industrial policy
    Date: 2014
  8. By: Singh, Ajit
    Abstract: This paper explores the connections between globalization, competition, competition policy and competitiveness. These concepts and the relationships between them have emerged as important issues in the current development debate at both national and international levels. The significance at the national level arises from the privatization and liberalization policies which have been adopted by many developing countries in recent decades. The international significance is directly related to globalization and the continuing deep integration of the world economy through multinational companies and fast growth of global trade.
    Keywords: Competition, competition policy, globalisation, developing countries, advanced countries, MNCs
    JEL: F0 G3
    Date: 2013–12–03
  9. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics); Tor Helge Holmås (Uni Rokkan Centre); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: This paper studies the effects of price regulation and parallel imports in the onpatent pharmaceutical market. First, we develop a theory model in which a pharmacy negotiates producer prices with a brand-name firm and then sets retail prices. We show that the effects of price regulation crucially depend on whether the producer faces competition from parallel imports. While parallel imports improve the bargaining position of the pharmacy, price regulation counteracts this effect and may even be profitable for the producer. Second, we use a unique dataset with information on sales and prices at both producer and retail level for 165 substances over four years (2004-7). Exploiting exogenous variation in the regulated price caps, we show that stricter price regulation reduces competition from parallel imports. While the effect is clearly negative on producer profits for substances without parallel imports, the effect is not significant for substances with parallel imports. Finally, we show that stricterprice regulation reduces total expenditures, but the effect is much stronger for substances with parallel import. Thus, our results suggest that price regulation may promote both static and dynamic efficiency in the presence of parallel imports.
    Keywords: Pharmaceutical market; Price regulation; Parallel imports
    JEL: I11 I18 L13 L51 L65
    Date: 2014
  10. By: Csizmazia, Roland Attila
    Abstract: This case study aims to provide a better understanding of the necessity for regulation in the market for pharmaceuticals and to reveal the impacts of parallel trades in the European Union and how they may affect markets in the future. The pharmaceutical industry up to now has largely been regulated. Although the EU is a single market, it still has variable prices for pharmaceuticals. Consequently, the price gap and other EU-specific factors have created a great environment for parallel trades. The author has confined this study to the price regulations inside the EU before the enlargement in 2004.
    Keywords: Regulation, pharmaceutical market, European Union, parallel trade
    JEL: D40
    Date: 2013–12–01
  11. By: Birg, Laura
    Abstract: This paper analyzes a maximum price system and a reference price system in a vertical differentiation model with a brand-name drug and a generic. In particular, both instruments are compared with respect to their performance in reducing public expenditure, limiting financial exposure of patients, improving access to pharmaceuticals, and stimulating competition. For identical regulatory prices, free pricing under the reference system tends to result in a higher price for the brand-name drug. For identical price reductions of the brand-name drug, the lower reimbursement amount under the reference price system results in lower health expenditure, but higher financial exposure of patients. Total welfare is higher under the maximum price system. --
    Keywords: pharmaceutical regulation,reference price,maximum price,price cap,health,policy objectives
    JEL: I18 L50 H51
    Date: 2013
  12. By: Martin Gaynor; Kate Ho; Robert Town
    Abstract: The US health care sector is large and growing – health care spending in 2011 amounted to $2.7 trillion and 18% of GDP. Approximately half of health care output is allocated via markets. In this paper, we analyze the industrial organization literature on health care markets focusing on the impact of competition on price, quality and treatment decisions for health care providers and health insurers. We conclude with a discussion of research opportunities for industrial organization economists, including opportunities created by the US Patient Protection and Affordable Care Act.
    JEL: I11 L1 L10
    Date: 2014–01
  13. By: Jill R. Horwitz; Daniel Polsky
    Abstract: Policymakers often prefer decentralized regulation to central planning because decentralization allows them to better reflect the views of local residents, encourage experimentation, and evaluate various regulatory approaches. These advantages can be undermined, however, when the regulations of one government are affected by those of another. To examine the implications of such externalities, we consider the case of state certificate of need laws (CON), which require providers within the state to obtain licenses before adopting various types of health care technology. In particular, we analyze the cross-border effects of these laws on the number and location of magnetic resonance imaging providers. We find a large effect on the location of providers near borders between unregulated and regulated states. These results provide examples of some of the limitations of using states as policy laboratories as well as the ability of states to use state laws to reflect their local preferences. The results may also help explain conflicting studies on whether and why CON regulation may have failed to control costs and quantity.
    JEL: H70 I11 I18 K32 L1 L52
    Date: 2014–01

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