nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒03‒22
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Markets with Technological Progress: Pricing Quality, and Novelty By Ludwig von Auer; Mark Trede
  2. Nature of competition and new technology adoption By Krishnendu Ghosh Dastidar
  3. PQ Strategies in Monopolistic Competition: Some Insights from the Lab By Tiziana Assenza; Jakob Grazzini; Cars Hommes; Domenico Massaro
  4. The strategic value of partial vertical integration By Fiocco, Raffaele
  5. Patents as quality signals? The implications for financing constraints on R&D By Czarnitzki, Dirk; Hall, Bronwyn H.; Hottenrott, Hanna
  6. Direct and indirect effects of R&D cooperation on the innovation of Italian firms By Otello Ardovino; Luca Pennacchio; Giuseppe Piroli
  7. Global Pharmaceutical Management: Building a Fair Pricing Policy By Rutger Daems; Edith Maes
  8. Market Power Indices and Wholesale Price Elasticity of Electricity Demand By Talat Genc
  9. Which factor dominates the industry evolution? A synergy analysis based on China's ICT industry By Yaya Li; Yongli Li; Yulin Zhao; Fang Wang
  10. Market Power and Collusion on Interconnection Phone Market in Tunisia : What Lessons from International Experiences By Sami Debbichi; Walid Hichri

  1. By: Ludwig von Auer; Mark Trede
    Abstract: New and old products differ in two respects: quality and newness. Whereas a higher quality of a new product always benefits consumers, the newness itself benefits some consumers, but not others, and for some, it is even a disadvantage. We capture these features in a Hotelling model of OverLapping Innovators (HOLI model), entailing a sequence of static Hotelling games of horizontal product dirrerentiation (newness), that we extend by vertical product differentiation (quality). In this model, the firms compete on quality and price. Using advanced dynamic hedonic regression methods, we empirically investigate the pricing policy of firms in the German laser printer market. We show that their pricing corresponds to our model with the entrant acting as the Stackelberg follower.
    Keywords: Hotelling, vertical product differentiation, hedonic regression, Stackelberg, laser printer
    JEL: L11 L63 C23
    Date: 2014–03
  2. By: Krishnendu Ghosh Dastidar
    Abstract: This paper analyses the incentives to adopt cost-reducing technology by firms in a horizontally differentiated industry. In our model there are several suppliers of a new technology. The extent of the cost reduction depends on the quality of the new technology. A firm has to buy the technology in a 'scoring auction'. This means that both the price and the quality (which affects marginal cost of production) of this new technology are no longer given but depend on the equilibrium outcome in the 'scoring auction'. We show that the nature of competition (Cournot or Bertrand) has no effect on the equilibrium decision of the firms to adopt the new technology when the quality of the new technology offered by the suppliers lies in the interior of the feasible range of qualities. In this case, both firms adopt new technology. However, when there is a corner solution, then it is possible to have equilibria where only one firm (or no firm) adopts the new technology. With corner solution the nature of competition (Cournot or Bertrand) makes a difference to the equilibrium outcomes.
    Date: 2014–03
  3. By: Tiziana Assenza (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore and CeNDEF, Amsterdam School of Economics, University of Amsterdam); Jakob Grazzini (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Cars Hommes (CeNDEF,Amsterdam School of Economics, University of Amsterdam and Tinbergen Institute); Domenico Massaro (CeNDEF, Amsterdam School of Economics, University of Amsterdam and Tinbergen)
    Abstract: We present results from 50-rounds experimental markets in which firms decide repeatedly both on price and quantity of a perishable good. The experiment is designed to study the price-quantity setting behavior of subjects acting as firms in monopolistic competition. In the implemented treatments subjects are asked to make both production and pricing decisions given different information sets. We investigate how subjects decide on prices and quantities in response to signals from the firms' internal conditions, i.e., individual profits, excess demand, and excess supply, and the market environment, i.e., aggregate price level. We find persistent heterogeneity in individual behavior, with about 46% of market followers, 28% profit-adjusters and 26% demand adjusters. Nevertheless, prices and quantities tend to converge to the monopolistically competitive equilibrium and we find that subjects' behavior is well described by learning heuristics.
    Keywords: Laboratory Experiments, Price-Quantity Competition, Monopolistically Competitive markets.
    Date: 2014–03
  4. By: Fiocco, Raffaele
    Abstract: We investigate the incentive for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when the retailers are privately informed about their production costs and engage in differentiated good price competition. Partial vertical integration entails an “information vertical effectâ€: the partial misalignment of pro.t objectives within a partially integrated manufacturer-retailer hierarchy involves costs from asymmetric information that reduce the hierarchy’s profitability. This translates into an opposite “competition horizontal effectâ€: the partially integrated hierarchy commits to a higher retail price than under full integration, which strategically relaxes competition. The equilibrium degree of vertical integration trades o¤ the benefits of softer competition against the informational costs.
    Keywords: asymmetric information; partial vertical integration; product differentiation; vertical mergers; vertical restraints
    JEL: D82 L13 L42
    Date: 2014–03–09
  5. By: Czarnitzki, Dirk; Hall, Bronwyn H.; Hottenrott, Hanna
    Abstract: Information about the success of a new technology is usually held asymmetrically between the research and development (R&D)-performing firm and potential lenders and investors. This raises the cost of capital for financing R&D externally, resulting in financing constraints on R&D especially for firms with limited internal resources. Previous literature provided evidence for start-up firms on the role of patents as signals to investors, in particular to Venture Capitalists. This study adds to previous insights by studying the effects of firms' patenting activity on the degree of financing constraints on R&D for a panel of established firms. The results show that patents do indeed attenuate financing constraints for small firms where information asymmetries may be particularly high and collateral value is low. Larger firms are not only less subject to financing constraints, but also do not seem to benefit from a patent quality signal. --
    Keywords: Patents,Quality Signal,Research and Development,Financial Constraints,Innovation Policy
    JEL: O31 O32 O38
    Date: 2014
  6. By: Otello Ardovino; Luca Pennacchio; Giuseppe Piroli
    Abstract: Firm innovation capacity depends not only on internal capabilities, but also on external expertise and knowledge acquired through cooperation. This paper analyzes direct and indirect effect of R&D cooperation on the innovation of Italian firms. Using a multivariate probit model to account for the complementarity of four different types of innovation activity and the heterogeneity in the choice of cooperation partners, we find strong and positive direct effects of collaborations with some non-competitive partners (suppliers, clients, private research institutes and consultants). Also R&D cooperation with competitors shows a relevant direct effect on firm innovation. On the contrary, collaborations with university have weaker effects; this could perhaps be due to the short-term perspective adopted in the study. These findings suggest that it is important to look at the specific type of R&D collaborations because they have a different impact on the success of innovative activities. On the other hand, indirect effects are scant and restricted to cooperation with some non-competitive partners. Such a result suggests that absorptive capacity of firms and R&D spillovers are quite weak in Italian context. Lastly, firm size and sector-specific features also affect innovation propensity.
    Keywords: R&D collaboration, absorptive capacity, moderating variable, innovation, equation probit model, community innovation survey.
    JEL: L13 O30 O32
    Date: 2014–03–03
  7. By: Rutger Daems (Planet Strategy Group); Edith Maes (Maastricht School of Management, Endepolsdomein 150, 6229 EP Maastricht, The Netherlands;
    Abstract: Improving access to healthcare globally represents a pressing societal challenge requiring a comprehensive approach. Stakeholders will need to work together in their quest to finding sustainable solutions that promote universal access to care. In addition, there is a need to better define the distinctive roles of the different stakeholders in the area of global access to pharmaceuticals. While the main task of innovation-driven pharmaceutical companies is to develop high quality, innovative medicines that address unmet needs, they can through their pricing policies influence the affordability of these medicines. Given this responsibility and the impact this will have on society and public health, companies have to be conscious about designing affordable pricing strategies. Since pricing is an important factor in the mix of activities to enhance access, the role of industry in the wider public domain is to be a trustworthy partner. Yet, industry cannot be held solely responsible for securing ‘health for all’ which is considered the prerogative of government. To maximize industry’s contribution, we recommend using a differentiated, equitable pricing policy aimed at enhancing access. We developed a number of pricing scenarios to establish an optimal balance that would allow stimulating both innovation and access.
    Keywords: globalization, pharmaceuticals, access to medicine, pricing, equity.
    Date: 2014–03
  8. By: Talat Genc (Department of Economics and Finance, University of Guelph)
    Abstract: We investigate price responsiveness of wholesale electricity customers in the hourly Ontario wholesale electricity market. We use detailed generator and market level data to calculate market power measures such as the Lerner Index, Residual Supplier Index, and Pivotal Supplier Index which are combined with the competition model to structurally estimate price elasticity of demand in peak hours of summer and winter seasons. We find that the hourly price elasticities are small and change over the peak hours of seasons and years. For instance, in 2008 the elasticity estimates are in the interval of (0.019, 0.083). Comparing high demand winter hours to summer hours indicates that consumers’ price responsiveness is lower in summer than in winter. We also employ these indices along with the estimated price elasticities to project the likely impacts of interconnection capacity expansions on market prices. Our calibrations show that even small amount of transmission investments (and hence trade activities) can result in substantial market price reductions.
    Keywords: Price elasticity of demand; market power measures; electricity market
    JEL: D22 D24 L13 L94 Q41
    Date: 2014
  9. By: Yaya Li; Yongli Li; Yulin Zhao; Fang Wang
    Abstract: Industry evolution caused by various reasons, among which technology progress driving industry development has been approved, but with the new trend of industry convergence, inter-industry convergence also plays an increasing important role. This paper plans to probe the industry synergetic evolution mechanism based on industry convergence and technology progress. Firstly, we use self-organization method and Haken Model to establish synergetic evolution equations, select technology progress and industry convergence as the key variables of industry evolution system; then use patent licensing data of china's listed ICT companies to measure industry convergence rate and apply DEA Malmquist index method to calculate technology progress level; furthermore apply simultaneous equation estimation method to investigate the synergetic industry evolution process. From 2002 to 2012, China's ICT industry develops rapidly; it has the most obvious convergence and powerful technology progress compared with other industries. We choose china's listed ICT industry to make empirical analysis. Our main findings are: a) technology progress is the order parameter which dominates industry system evolution. Moreover, industry convergence is the control parameter which is influenced by technology progress; b) Development of technology progress is the core factor for causing evolution of industry system, and industry convergence is the outcome of technology progress; c) Especially, it is important that the dominated role of technology progress will be sustained, even though in the environment of convergence, companies also need focus on self-innovation, rather than only adapt to the new industry evolution trend.
    Date: 2014–03
  10. By: Sami Debbichi (AEDD - Analyse Economique et Développement Durable - Université de Tunis El Manar); Walid Hichri (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)
    Abstract: We try in this paper to characterize the state of mobile phone market in Tunisia. Our study is based on a survey of foreign experience (Europe) in detecting collusive behavior and a comparison of the critical threshold of collusion between operators in developing countries like Tunisia. The market power is estimated based on the work of Parker Roller (1997) and the assumption of "Balanced Calling Pattern". We use then the model of Friedman (1971) to compare the critical threshold of collusion. We show that the "conduct parameter" measuring the intensity of competition is not null during the period 1993-2011. Results show also that collusion is easier on the Tunisian market that on the Algerian, Jordanian, or Moroccan one.
    Keywords: Termination rate; Market power; Competition; Mobile phone Market
    Date: 2014

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