nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒07‒21
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On the Optimality of Pure Bundling for a Monopolist By Domenico Menicucci; Sjaak Hurkens; Doh-Shin Jeon
  2. Optimal firm' mix in oligopoly with twofold environmental externality By F. Delbono; L. Lambertini
  3. Patent Expiration and Competition: A dynamic limit price model By Anastasios Papanastasiou
  4. Targeted advertising, platform competition and privacy By Henk Kox; Bas Straathof; Gijsbert Zwart
  5. Hotelling Under Pressure By Soren T. Anderson; Ryan Kellogg; Stephen W. Salant
  6. Do "Reverse Payment" Settlements of Brand-Generic Patent Disputes in the Pharmaceutical Industry Constitute an Anticompetitive Pay for Delay? By Keith M. Drake; Martha A. Starr; Thomas McGuire

  1. By: Domenico Menicucci; Sjaak Hurkens; Doh-Shin Jeon
    Abstract: This paper considers a monopolist selling two objects to a single buyer with privately observed valuations. We prove that if each buyer’s type has a non-negative virtual valuation for each object, then the optimal price schedule is such that the objects are sold only in a bundle; weaker conditions suffice if valuations are independently and identically distributed. Under somewhat stronger conditions, pure bundling is the optimal sale mechanism among all individually rational and incentive compatible mechanisms.
    Keywords: monopoly pricing, price discrimination, multi-dimensional mechanism design, pure bundling
    JEL: D42 D82 L11
    Date: 2014–07
  2. By: F. Delbono; L. Lambertini
    Abstract: We charaterise the socially optimal mix of firms in an oligopoly with both profit-seeking and labour-managed firms. The policy maker faces a twofold externality: (i) production entails the exploitation of a common pool natural resource and (ii) production/consumption pollutes the environment. We study the relationship between firms' mix and social welfare in the Cournot-Nash equilibrium of the industry and the resulting policy implications.
    JEL: L13 H23 P13 Q50
    Date: 2014–07
  3. By: Anastasios Papanastasiou
    Abstract: We develop a dynamic model to explore the optimal pricing strategy of a monopolist that faces potential market entry at a given point in time. By engaging in promotional activities, the dominant firm may increase future demand for the product, while by charging below a limit price it can prevent competition from entering the market. Our analysis suggests that the optimal path for price and advertisement depends on the price elasticity of demand and the duration of monopoly life. Relating our model to the market for pharmaceuticals, we establish conditions that would give rise to a Generics Competition Paradox (GCP) and discuss how these conditions are linked to the existing theories that attempt to explain the GCP.
    Keywords: Monopoly, generic competition, brand-name drugs, limit price, price elasticity of demand
    JEL: D21 D42 I11 L12 C61
    Date: 2014–05
  4. By: Henk Kox; Bas Straathof; Gijsbert Zwart
    Abstract: Targeted advertising can benefit consumers through lower prices for access to websites. Yet, if consumers dislike that websites collect their personal information, their welfare may go down. We study competition for consumers between websites that can show targeted advertisements. We find that more targeting increases competition and reduces the websites' profits, but yet in equilibrium websites choose maximum targeting as they cannot credibly commit to low targeting. A privacy protection policy can be beneficial for both consumers and websites. If consumers are heterogeneous in their concerns for privacy, a policy that allows choice between two levels of privacy will be better. Optimal privacy protection takes into account that the more intense competition on the high-targeting market segment also benefits consumers on the less competitive segment. Consumer surplus is maximized by allowing them a choice between a high targeting regime and a low targeting regime which affords more privacy.
    JEL: D43 L13 L82 M38
    Date: 2014–07
  5. By: Soren T. Anderson; Ryan Kellogg; Stephen W. Salant
    Abstract: We show that oil production from existing wells in Texas does not respond to price incentives. Drilling activity and costs, however, do respond strongly to prices. To explain these facts, we reformulate Hotelling's (1931) classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The model implies a modified Hotelling rule for drilling revenues net of costs and explains why production is typically constrained. It also rationalizes regional production peaks and observed patterns of price expectations following demand shocks.
    JEL: E22 L71 Q3 Q4
    Date: 2014–07
  6. By: Keith M. Drake; Martha A. Starr; Thomas McGuire
    Abstract: Brand and generic drug manufacturers frequently settle patent litigation on terms that include a payment to the generic manufacturer along with a specified date at which the generic would enter the market. The Federal Trade Commission contends that these agreements extend the brand’s market exclusivity and amount to anticompetitive divisions of the market. The parties involved defend the settlements as normal business agreements that reduce business risk associated with litigation. The anticompetitive hypothesis implies brand stock prices should rise with announcement of the settlement. We classify 68 brand-generic settlements from 1993 to the present into those with and without an indication of a “reverse payment” from the brand to the generic, and conduct an event study of the announcement of the patent settlements on the stock price of the brand. For settlements with an indication of a reverse payment, brand stock prices rise on average 6% at the announcement. A “control group” of brand-generic settlements without indication of a reverse payment had no significant effect on the brands’ stock prices. Our results support the hypothesis that settlements with a reverse payment increase the expected profits of the brand manufacturer and are anticompetitive.
    JEL: I11 L41 L65
    Date: 2014–07

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