New Economics Papers
on Industrial Organization
Issue of 2014‒02‒21
eight papers chosen by

  1. Relative profit maximization and Bertrand equilibrium with convex cost functions By Satoh, Atsuhiro; Tanaka, Yasuhito
  2. Search Frictions and Market Power in Negotiated Price Markets By Jason Allen; Robert Clark; Jean-François Houde
  3. Signaling quality in vertical relationships By Bontems, Philippe; Mahenc, Philippe
  4. Horizontal Mergers and Product Quality- By Brekke, Kurt R.; Siciliani, Luigi; Straume, Odd Rune
  5. How Much Do Cartels Overcharge? By Boyer, Marcel; Kotchoni, Rachidi
  6. The return of public enterprise By Massimo Florio
  7. The patenting activity of the top IRI Scoreboard Companies: an introductory note By Antonio Vezzani; Fabio Montobbio; Sandro Montresor; Gianluca Tarasconi
  8. Collusion in markets characterized by one large buyer: lessons learned from an antitrust case in Russia By Andrei Y. Shastitko; Svetlana V. Golovanova

  1. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: The authors study pure strategy Bertrand equilibria in a duopoly in which two firms produce a homogeneous good with convex cost functions, and they seek to maximize the weighted sum of their absolute and relative profits. They show that there exists a range of the equilibrium price in duopolistic equilibria. This range of the equilibrium price is narrower and lower than the range of the equilibrium price in duopolistic equilibria under pure absolute profit maximization, and the larger the weight on the relative profit, the narrower and lower the range of the equilibrium price. In this sense relative profit maximization is more aggressive than absolute profit maximization. --
    Keywords: Bertrand equilibrium,convex cost function,relative profit maximization
    JEL: D43 L13
    Date: 2014
  2. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: This paper develops and estimates a search and bargaining model designed to measure the welfare loss associated with frictions in oligopoly markets with negotiated prices. We use the model to quantify the consumer surplus loss induced by the presence of search frictions in the Canadian mortgage market, and evaluate the relative importance of market power, inefficient allocation, and direct search costs in explaining the loss. Our results suggest that search frictions reduce consumer surplus by almost $20 per month on a $100, 000 loan, and that 17% of this reduction can be associated with discrimination, 30% with inefficient matching, and the remainder with the search cost. In addition, we find that product differentiation attenuates the effect of search frictions by reducing the cost of gathering quotes and improving efficiency, while posted prices do so through the ability of the first-mover to price discriminate. In contrast, competition amplifies the welfare effect of search frictions. Despite this, the overall effect of competition is to increase aggregate consumer surplus and drive prices down, but these effects are not spread equally across consumers: those with low search costs benefit more from competition.
    JEL: L13 L41 L81
    Date: 2014–02
  3. By: Bontems, Philippe; Mahenc, Philippe
    Abstract: This paper addresses the issue of price signaling in a model of vertical relationship between a manufacturer and a retailer who share the same information about quality, unlike consumers who do not observe it a priori. We show that delegating the price setting task to a retailer and controlling it through a vertical contract (two-part tari¤) helps drastically reduce the number of price signaling equilibria available to the retailer. The outcome of a unique price charged to consumers obtains without invoking the consumer sophistication usually required by selection criterions. The vertical contract turns to be the most e¢ cient way for the vertical chain to tie its hands on a unique ?nal price. This price may disclose or not information to consumers depending on their initial optimism about quality. We prove that there also exists circumstances where consumers prefer ex ante not to learn the true quality through price.
    Keywords: quality signalling, vertical relationship, information disclosure.
    JEL: D82 L12 L15
    Date: 2014–01
  4. By: Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Siciliani, Luigi (University of York); Straume, Odd Rune (University of Minho)
    Abstract: Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.
    Keywords: Horizontal mergers; Quality; Spatial Competition.
    JEL: L13 L15 L41
    Date: 2014–02–10
  5. By: Boyer, Marcel; Kotchoni, Rachidi
    Abstract: The estimation of cartel overcharges lies at the heart of antitrust policy on cartel prosecution as it constitutes a key element in the determination of fines. Connor and Lande (2008) conducted a survey of cartels and found a mean overcharge estimate in the range of 31% to 49%. By examining more sources, Connor (2010) finds a mean of 50.4% for successful cartels. However, the data used in those studies are estimates obtained from different methodologies, sources and contexts rather than by direct observations. Therefore, these data are subject to model error, estimation error and publication bias. A quick examination of the Connor database reveals that the universe of overcharge estimate is asymmetric, heterogenous and contains a number of influential observations. Beside the fact that overcharge estimate are potentially biased, fitting a linear regression model to the data without providing a carefull treatment of the problems raised above may produce distorted results. We conduct a meta-analysis of cartel overcharge estimate in the spirit of Connor and Bolotova (2006) while providing a sound treatment of these matters. We find a bias-corrected mean and median overcharge estimate of 15.76% and 16.43%. Clearly, our results have significant antitrust policy implications.
    Keywords: Antitrust, Cartel overcharges, Heckman, Meta-analysis
    Date: 2014–01–31
  6. By: Massimo Florio (DEAS, Universita' di Milano)
    Abstract: Public enterprises never disappeared in spite of several privatization waves in the last three decades. This paper offers some trends and possible rationales for their resilience. In a sample of the Forbes 2000 top corporations, as reviewed by OECD economists (Kowalski et al. 2013), we show that the around ten per cent of state-owned enterprises perform better in financial terms than their private counterparts. The Great Recession has also shown that governments had to take over failing major private enterprises, including particularly banks. In several countries, particularly in Western Europe, there is municipalization of electricity and water distribution. In the EU/15, there is also evidence that in electricity and gas, government owned incumbents offer fairer prices to households than private competitors. Recent research on mergers and acquisitions confirms that in the last ten years there has been an increase of publicization relative to privatization, including through trans-border deals.
    Keywords: Public enterprise; privatization
    JEL: H44 L32 L33
    Date: 2014–02–02
  7. By: Antonio Vezzani (JRC-IPTS); Fabio Montobbio (Università degli Studi di Torino ? Dipartimento di Economia e Statistica "Cognetti de Martiis"); Sandro Montresor (University of Bologna); Gianluca Tarasconi (CRIOS - Center for Research in Innovation, Organization and Strategy, Bocconi University)
    Abstract: The present note contains an explorative and introductory analysis of the patenting activity exhibited by the top 100 companies of the IRI Scoreboard, and intends to identify strengths and weaknesses for its possible future extension to the whole Scoreboard. With respect to these companies, patent data are drawn from Patstat, on the basis of which patent families are built up, and crossed with other data on their R&D investments. Both the R&D and the patent applications of the investigated sample of companies increase over time. At the same time, important sector specificities in the R&D-patent relationship have been found. The analysis of the technological competences of the overall sample yields promising results. A first examination of the IPC classes of the patent applications suggests a certain concentration in the kind of technological knowledge that companies master. The analysis of the knowledge base and, more specifically, the companies' involvement in the creation of key enabling technologies (KETs) also highlights that important sector specificities go along with firm specific factors. All-in-all “augmenting” the Scoreboard data with company level patent information appears to be an interesting extension to be pursued.
    Keywords: patents, technological profile, KETS, R&D, IRI Scoreboard companies
    JEL: O30 O31 O32
    Date: 2014–01
  8. By: Andrei Y. Shastitko (National Research University Higher School of Economics); Svetlana V. Golovanova (National Research University Higher School of Economics)
    Abstract: This paper demonstrates that even established and verified facts of agreements among producers are not a sufficient condition for cartel identification and, as a consequence, prosecution of agreement participants. Such requires looking at institutional details and the wider context of these and similar appearances or occurrences of documents and actions when qualifying the actions of market participants and their effects. This paper discusses a recent antitrust case brought against Russian manufacturers of large diameter pipes (LDPs) that examined supposedly abusive practices by these firms that were contrary to the law on the Protection of Competition, which prohibits market division. The case under consideration illustrates the importance of investigating institutional details when qualifying the actions of market participants and their effects. An analysis of the materials in this case using modern economic theory indicates that the presence of collusion is inconsistent with the active participation of the main consumer of LDPs in that agreement. The chosen format for the cooperation between pipe manufacturing companies and OJSC Gazprom, namely indicative planning, may be explained from the perspective of reducing contract risk in an environment characterized by large-scale private investments.
    Keywords: collusion, antitrust policy, credible commitments, indicative planning, contract risk
    JEL: K21 B52
    Date: 2014

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