nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒05‒09
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Hotelling Games on Networks: Efficiency of Equilibria By Gaëtan Fournier; Marco Scarsini
  2. Price leadership and unequal market sharing: Collusion in experimental markets By Dijkstra, P.T.
  3. Procurement Auctions for Differentiated Goods By Jason Shachat; J.Todd Swarthout
  4. A note on consumer flexibility, data quality and collusion By Hasnas, Irina
  5. The impact of R&D subsidies on firm innovation By Raffaello Bronzini; Paolo Piselli
  6. Uncertain Costs and Vertical Differentiation in an Insurance Duopoly By Radoslav S. Raykov
  7. Measuring bank competition in China: A comparison of new versus conventional approaches applied to loan markets By Bing Xu; Adrian van Rixtel; Michiel van Leuvensteijn

  1. By: Gaëtan Fournier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne); Marco Scarsini (Engineering and System Design Pillar - Singapore University of Technology and Design)
    Abstract: We consider a Hotelling game where a finite number of retailers choose a location, given that their potential customers are distributed on a network. Retailers do not compete on price but only on location, therefore each consumer shops at the closest store. We show that when the number of retailers is large enough, the game admits a pure Nash equilibrium and we construct it. We then compare the equilibrium cost bore by the consumers with the cost that could be achieved if the retailers followed the dictate of a benevolent planner. We perform this comparison in term of the induced price of anarchy, i.e., the ratio of the worst equilibrium cost and the optimal cost, and the induced price of stability, i.e., the ratio of the best equilibrium cost and the optimal cost. We show that, asymptotically in the number of retailers, these ratios are two and one, respectively.
    Keywords: Induced price of anarchy; induced price of stability; location games on networks; pure equilibria; large games
    Date: 2014–04
  2. By: Dijkstra, P.T. (Groningen University)
    Abstract: We consider experimental markets of repeated homogeneous pricesetting duopolies. We investigate the effect on collusion of sequential versus simultaneous price setting. We also examine the effect on collusion of changes in the size of each subject's market share in case both subjects set the same price. Our results show that sequential price setting compared with simultaneous price setting facilitates collusion, if subjects have equal market shares or if the follower has the larger market share. With sequential price setting, we find more collusion if subjects have equal market shares rather than unequal market shares. We observe more collusion if the follower has the larger market share than if the follower has the smaller market share.
    Date: 2014
  3. By: Jason Shachat; J.Todd Swarthout
    Abstract: We consider two mechanisms to procure differentiated goods:a sealed-bid buyer-determined auction and a dynamic-bid price-based auction with bidding credits. The sealed-bid buyer-determined auction is analogous to the ââ¬Årequest for quoteâ⬠procedure commonly used by procurement agencies, and has each seller submit a price and the inherent quality of his good. Then the buyer selects the seller who offers the greatest difference in quality and price. In the dynamic-bid price-based auction with bidding credits, the buyer assigns a bidding credit to each seller conditional upon the quality of the sellerââ¬â¢s good. Then the sellers compete in an English auction, with the winner receiving the auction price and his bidding credit. Game-theoretic models predict the sealed-bid buyer-determined auction is socially efficient but the dynamic-bid price-based auction with bidding credits is not. The optimal bidding credit assignment undercompensates for quality advantages, creating a market distortion in which the buyer captures surplus at the expense of the sellerââ¬â¢s profit and social efficiency. In our experiment, the sealed-bid buyer-determined auction is less efficient than the dynamic-bid price-based auction with bidding credits. Moreover, both the buyer and seller receive more surplus in the dynamic-bid price-based auction with bidding credits.
    Keywords: procurement; auction; product differentiation; experiment
    Date: 2013–10–14
  4. By: Hasnas, Irina
    Abstract: In this note we analyze the sustainability of collusion in a game of repeated interaction where firms can price discriminate among consumers based on two types of customer data. This work is related to Liu and Serfes (2007) and Sapi and Suleymanova (2013). Following Sapi and Suleymanova we assume that consumers are differentiated both with respect to their addresses and transportation cost parameters (flexibility). While firms have perfect data on consumer addresses, data on their flexibility is imperfect. We use three collusive schemes to analyze the impact of the improvement in the quality of customer flexibility data on the incentives to collude. In contrast to Liu and Serfes in our model it is the customer flexibility data which is imperfect and not the data on consumer addresses. However, our results support their findings that with the improvement in data quality it is more difficult to sustain collusion. --
    Keywords: Price Discrimination,Customer Data,Collusion
    JEL: D43 L13 L15 O30
    Date: 2014
  5. By: Raffaello Bronzini (Bank of Italy); Paolo Piselli (Bank of Italy)
    Abstract: This paper evaluates the impact of an R&D subsidy program implemented in a region of northern Italy on innovation by beneficiary firms. In order to verify whether the subsidies enabled firms to increase patenting activity, we exploit the mechanism used to allot the funds. Since only projects that scored above a certain threshold received the subsidy, we use a sharp regression discontinuity design to compare the number of patent applications, and the probability of submitting one, of subsidized firms with those of unsubsidized firms close to the cut-off. We find that the program had a significant impact on the number of patents, more markedly in the case of smaller firms. Our results show that the program was also successful in increasing the probability of applying for a patent, but only in the case of smaller firms.
    Keywords: research and development, investment incentives, regression discontinuity design, patents
    JEL: R0 H2 L10
    Date: 2014–04
  6. By: Radoslav S. Raykov
    Abstract: Classical oligopoly models predict that firms differentiate vertically as a way of softening price competition, but some metrics suggest very little quality differentiation in the U.S. auto insurance market. I explain this phenomenon using the fact that risk-averse insurance companies with uncertain costs face incentives to converge to a homogeneous quality. Quality changes are capable of boosting as well as reducing profits, since quality differentiation softens price competition, but also undermines the lower-end firm’s ability to charge the markup commanded by risk aversion. This can make differentiation suboptimal, leading to a homogeneous quality; the outcome depends on consumers’ quality tastes and on how costly quality is. Additional trade-offs between quality costs, profits and profit variances compound this effect, resulting in equilibria at very low quality levels. I argue that this provides one explanation of how insurer competition drove quality down in the nineteenth-century U.S. market for fire insurance.
    Keywords: Market structure and pricing; Economic models
    JEL: G22 D43 L22 D81
    Date: 2014
  7. By: Bing Xu (Universidad Carlos III); Adrian van Rixtel (Bank for international settlements); Michiel van Leuvensteijn (All pensions group)
    Abstract: Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar- Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not evidence these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996-2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these, firstly, are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumed.
    Keywords: competition, banking industry, China, lending markets, marginal costs, regulation, deregulation
    JEL: D4 G21 L1
    Date: 2014–03

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