nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒08‒28
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Bertrand and the long run By Roberto Burguet (Institute for Economic Analysis, CSIC, and Barcelona GSE) and József Sákovics (The University of Edinburgh)
  2. Entry-Deterring Nonlinear Pricing with Bounded Rationality By Meng, Dawen; Tian, Guoqiang
  3. What Drives the Market Share Changes? Price Versus Non-Price Factors By Konstantins Benkovskis; Julia Woerz
  4. Competition in the Cryptocurrency Market By Neil Gandal; Hanna Halaburda
  5. The competition assessment framework for the retail energy sector: some concerns about the proposed interpretation By Stephen Littlechild
  6. Issues and Options in the Economic Regulation of European Network Security By Tooraj Jamasb; Rabindra Nepal
  7. Institutional arrangements for the promotion of regional integration of electricity markets: International Experience By Musiliu O. Oseni; Michael Pollitt
  8. Effects of product and supplier criticality on resilience capabilities: An empirical analysis of a global supply chain By Sarker, Sudipa; Engwall, Mats; Trucco, Paolo; Feldmann, Andreas
  9. USO cost allocation rules and welfare By Haller Andreas; Christian Jaag; Urs Trinkner
  10. Determinants of self-reporting under the European corporate leniency program By Hoang, Cung Truong; Hüschelrath, Kai; Laitenberger, Ulrich; Smuda, Florian
  11. Asymmetric Price Transmission in Indonesia’s Wheat Flour Market By Varela, Gonzalo J.; Taniguchi, Kiyoshi

  1. By: Roberto Burguet (Institute for Economic Analysis, CSIC, and Barcelona GSE) and József Sákovics (The University of Edinburgh)
    Abstract: We propose a new model of simultaneous price competition, based on firms offer personalized prices to consumers. In a market for a homogeneous good and decreasing returns, the unique equilibrium leads to a uniform price equal to the marginal cost of each firm, at their share of the market clearing quantity. Using this result for the short-run competition, we then investigate the long-run investment decisions of the firms. While there is underinvestment, the overall outcome is more competitive than the Cournot model competition. Moreover, as the number of firms grows we approach the competitive long-run outcome.
    Keywords: price competition, personalized prices, marginal cost pricing
    JEL: D43 L13
    Date: 2014–08–12
  2. By: Meng, Dawen; Tian, Guoqiang
    Abstract: This paper considers an entry-deterring nonlinear pricing problem faced by an incumbent firm of a network good. The analysis recognizes that the installed user base/network of incumbent monopolist has preemptive power in deterring entry if the entrant’s good is incompatible with the incumbent’s network. This power is, however, dramatically weakened by the bounded rationality of consumers in the sense that it is vulnerable to small pessimistic forecasting error when the marginal cost of entrants falls in some medium range. These findings provide a formal analysis that helps reconcile two seemingly contrasting phenomena: on one hand, it is very difficult for a new, incompatible technology to gain a footing when the product is subject to network externalities; on the other hand, new technologies may frequently escape from inefficient lock-in and supersede the old technologies even in the absence of backward incompatibility. Our results therefore shed light on how the market makes transition between incompatible technology regimes.
    Keywords: Nonlinear pricing, Entry deterrence, Network Externalities, Bounded rationality
    JEL: D42 D62 D82
    Date: 2013–08
  3. By: Konstantins Benkovskis; Julia Woerz
    Abstract: The paper proposes a theoretical framework for explaining gains and losses in export market shares by considering both price and non-price determinants. Starting from a demand-side model a la Armington (1969), we relax several restrictive assumptions to evaluate the contribution of unobservable changes in taste and quality, taking into account differences in elasticities of substitution across product markets. Using highly disaggregated trade data from UN Comtrade, our empirical analysis for the major world exporters (G7 and BRIC countries) reveals the dominant role of non-price factors in explaining the competitive gains of BRIC countries and concurrent decline in the G7 share of world exports.
    Keywords: export market share decomposition, non-price competitiveness, real effective exchange rate
    JEL: C43 F12 F14 L15
    Date: 2014–08–13
  4. By: Neil Gandal; Hanna Halaburda
    Abstract: We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining the changes over time in exchange rate data among cryptocurrencies. Specifically, we look at two aspects: (1) competition among different currencies, and (2) competition among exchanges where those currencies are traded. Our data suggest that the winner-take-all effect is dominant early in the market. During this period, when Bitcoin becomes more valuable against the U.S. dollar, it also becomes more valuable against other cryptocurrencies. This trend is reversed in the later period. The data in the later period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with “winner-take-all” dynamics. For exchanges, we find little if any evidence of arbitrage opportunities. With no arbitrage opportunities, it is possible for multiple exchanges to coexist in equilibrium despite two-sided network effects.
    Keywords: E-Money
    JEL: L1
    Date: 2014
  5. By: Stephen Littlechild
    Abstract: The framework proposed by Ofgem, OFT and CMA invokes a well-functioning market, but the Competition Commission has not always used such a concept, and when it has done so it has been problematic. Here, the well-functioning market is Ofgem’s vision of a successful market, not anchored in any actual market. Ofgem’s indicators of a competitive market have changed since 2002: tariff variety and products tailored to different customer groups are now a harmful complexity rather than a potential benefit of competition. The proposed “theories of harm” ignore regulatory policy and coordinated conduct facilitated by regulation. The analysis of weak customer response fails to distinguish between competition as an equilibrium state and as the Competition Commission's rivalrous discovery process over time. The framework thus reflects Ofgem’s perspective, but the assessment needs to be independent because regulation is at issue, and because Ofgem is no longer capable of a competition assessment.
    Keywords: Well-functioning market, competition assessment, retail competition
    JEL: L97 L51
    Date: 2014–08–04
  6. By: Tooraj Jamasb; Rabindra Nepal
    Abstract: Incentive regulation needs to adapt to the emerging changes in the operating environment of the electricity networks and take into account the security of these. This paper assesses the current issues and options in economic regulation of network security across the European electricity systems. An output oriented incentive regulatory approach combines the efficiency promoting mechanisms in a revenue cap framework with output based incentives such as better provision of network security. Thus, incentive regulation is destined to move from pursuing the optimal to being more practical. The RIIO regulatory framework in the UK and the service quality regulation in Italy provide good examples of application of output-based regulation. We also propose an output-based approach for regulation of network security, which accounts for the risks from natural, accidental and malicious threats. We conclude that regulation for network security may also involve looking beyond economic network regulation and focus on the wider security policy and regulation interface considering the risks facing the electricity networks.
    Keywords: network security, exceptional events, incentive regulation, output-based
    JEL: L51 L94 L98
    Date: 2014–08–04
  7. By: Musiliu O. Oseni; Michael Pollitt
    Abstract: This paper focuses on the institutional arrangements for facilitating electricity regional cooperation. We begin by discussing the theory of international trade cooperation in electricity, with a view to discussing what preconditions might be important in facilitating wide area trading across national borders. We then discuss two sets of case studies. The first set of case studies focuses on three regional developing country power pools – the Southern African Power pool (SAPP), West African Power pool (WAPP) and the Central American Power Market (SIEPAC). The second set focuses on three regional power pools in more developed countries – PJM in the United States, the Single Electricity Market (SEM) in Ireland and the South East Europe market (ECSEE). These cases highlight both the potential and difficulty of having cross jurisdictional power pools. In the light of the theory and evidence we present, we draw key lessons in the areas of: preconditions for trading; necessary institutional arrangements; practicalities of timetabling; reasons to be hopeful about future prospects; and suggestions for future research.
    Keywords: electricity trade; power pools; regional electricity markets
    JEL: F13 L94
    Date: 2014–08–04
  8. By: Sarker, Sudipa (KTH Royal Institute of Technology, & Politecnico di Milano); Engwall, Mats (Department of Industrial Economics and Management, Royal Institute of Technology, Stockholm); Trucco, Paolo (Politecnico di Milano); Feldmann, Andreas (Department of Industrial Economics and Management, Royal Institute of Technology, Stockholm)
    Abstract: From resilience perspective, it is important for supply chains to have multiple suppliers in order to maintain a high level of operational performance. On the contrary, keeping multiple suppliers are expensive from purchasing perspective, because, large amount of internal resources are required to maintain numerous suppliers. Moreover, some products may only have a sole source of supply. Against the backdrop, it is important for supply chains to understand, how, different products and supplier compositions affect different resilience capabilities. Hence, drawing from the literature of supply chain resilience, first, conceptual linkages among product criticality, supplier criticality and resilience capabilities are derived. Second, data from four plants of a global manufacturing organization with different supplier and product compositions are collected. Finally, hypothesized relationships are tested by using parametric statistical tests. The empirical data indicate that product and supplier criticality affect different capabilities of supply chain resilience. Theoretical contribution of this research is the conceptual model that is derived from synthesizing the existing literature of supply chain resilience. Practical contribution is the enhanced understanding of the effects of product and supply criticality on different resilience capabilities.
    Keywords: Supply Chain Resilience; Supply Disruption; Business Impact; Time to Recovery; Empirical Study
    JEL: L14 L23
    Date: 2014–08–06
  9. By: Haller Andreas; Christian Jaag; Urs Trinkner
    Abstract: Universal service providers (USP) are increasingly active in business segments other than the segment consisting of their Universal Service Obligation (USO). Price regulation of USO services is usually cost-oriented and differentiated between USO- and non-USO-products. Hence, regulatory rules on cost allocation impact regulated prices and overall welfare. In this paper we analyse the effect of various cost allocation rules on the financing of USO, assuming a profit regulation in place. We use a stylized model with a set of products characterized by different price elasticities perceived by the USP. The model is calibrated for a scenario representing the postal market in industrialized countries. As a benchmark, we derive a welfare optimal allocation of costs based on Ramsey prices such that the incumbent USP breaks even. We then compare this result to cost allocation rules applied in practice: Fully distributed cost based on activities (ABC), and cost allocated according to a net cost rebalancing (NCR) mechanism. Under NCR, a regulated USP is allowed to reallocate the net cost of the USO through internal transfer payment. We find that cost allocation rules strongly affect prices and welfare under price control. NCR increases welfare clearly as compared to ABC.
    Keywords: USO, cost allocation, net cost rebalancing, ramsey pricing, ABC
    JEL: L51
    Date: 2014–08
  10. By: Hoang, Cung Truong; Hüschelrath, Kai; Laitenberger, Ulrich; Smuda, Florian
    Abstract: We empirically investigate the determinants of self-reporting under the European corporate leniency program. Applying a data set consisting of 442 firm groups that participated in 76 cartels decided by the European Commission between 2000 and 2011, we find that the probability of a firm becoming the chief witness increases with its character as repeat offender, the size of the expected basic fine, the number of countries active in one group as well as the size of the firm's share in the cartelized market. Our results have important implications for an effective prosecution of anti-cartel law infringers. --
    Keywords: Competition policy,cartels,leniency,European Union
    JEL: L41 K21
    Date: 2014
  11. By: Varela, Gonzalo J. (World Bank); Taniguchi, Kiyoshi (Asian Development Bank)
    Abstract: Data indicate that its domestic price in Indonesia has been increasing regardless of movements in the international price of wheat. A test for asymmetric price transmission from international wheat to domestic wheat flour markets is conducted using an error correction model and find the presence of asymmetric price transmission. The upward adjustment in the domestic price of wheat flour is much faster than its adjustment downward when it deviates from long-run equilibrium. Our results are robust to use of disaggregated data as well as to inclusion of additional of control variables such as prices of other inputs. We argue that asymmetric transmission occurs due to market concentration of wheat flour milling. We offer some policy suggestions for correcting these.
    Keywords: spatial integration; asymmetric price transmission; monopolistic competition; commodity prices; agricultural market; wheat flour
    JEL: F12 L11 Q11 Q13 Q17
    Date: 2014–03–01

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