nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒06‒07
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Non-Price Competition in a Modular Economy By Bin-Tzong Chie; Shu-Heng Chen
  2. Hospital Mergers with Regulated Prices By Kurt R. Brekke; Luigi Siciliani; Odd Rune Straume

  1. By: Bin-Tzong Chie; Shu-Heng Chen
    Abstract: While it has been well acknowledged by economists for a long time that competition is not just about price, the conventional quantity-based economic models have difficulties integrating price competition and quality competition into a coherent framework. In this paper, motivated by Herbert Simon’s view of near decomposability or modularity, we propose a quality-based economic model called the modular economy. In this modular economy, quality is manifested by the evolutionary design of more sophisticated and customized products that can satisfy consumers’ satisfaction to a higher degree. Two essential features of the modular economy are founded through the agent-based simulation of a duopolistic competition. First, market competition tends to be self-annihilating; the competition will eventually end up with a dominant or a monopoly firm (conglomerate). Second, the high-markup firm has a better chance to be the only survivor than its low-markup competitor. We analyze these features through the complex cyclical dynamics of prices, profits, dividends, investment, working capital, and quality.
    Keywords: Modularity, Near Decomposability, Modular Economy, Nonprice Competition, Co-Evolving, Agent-Based Modeling
    Date: 2014
    URL: http://d.repec.org/n?u=RePEc:trn:utwpas:1401&r=ind
  2. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics); Luigi Siciliani (Department of Economics and Related Studies; and Centre for Health Economics, University of York); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: We study the effects of a hospital merger using a spatial competition framework with semialtruistic hospitals that invest in quality and expend cost-containment effort facing regulated prices. We find that the merging hospitals always reduce quality, whereas non-merging hospitals respond by increasing (reducing) quality if qualities are strategic substitutes (complements). A merger leads to higher average treatment cost efficiency and, if qualities are strategic substitutes, might also increase average quality in the market. If a merger leads to hospital closure, the resulting effect on quality is positive (negative) for all hospitals in the market if qualities are strategic substitutes (complements). Whether qualities are strategic substitutes or complements depends on the degree of altruism, the effectiveness of cost-containment effort, and the degree of cost substitutability between quality and treatment volume.
    Keywords: Hospital mergers; Quality competition; Cost efficiency; Antitrust
    JEL: I11 I18 L13 L44
    Date: 2014
    URL: http://d.repec.org/n?u=RePEc:nip:nipewp:10/2014&r=ind

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