nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒10‒17
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Horizontal Mergers in the Presence of Capacity Constraints By Zhiqi Chen; Gang Li
  2. An Empirical Analysis of Search Costs and Price Dispersion By Avi Weiss; Joshua Sherman
  3. Quality Provision in the Presence of a Biased Intermediary By Alexandre de Cornière; Greg Taylor

  1. By: Zhiqi Chen (Department of Economics, Carleton University); Gang Li (School of Economics, Nanjing University)
    Abstract: We analyze the effects of a merger between two competitors in a Bertrand-Edgeworth model. The merger has no effect on equilibrium prices if a pure strategy equilibrium prevails both before and after the merger. Otherwise, the merger leads to higher prices. In the case where a mixed strategy equilibrium prevails before and after the merger, for example, the support of the price distributions shifts rightward after the merger and the post-merger price distribution of each firm stochastically dominates its pre-merger counterpart. The pre-merger capacity level of each firm plays a crucial role in determining the effects of the merger.
    Keywords: Merger, capacity constraints, Bertrand-Edgeworth model
    JEL: L13 L40
  2. By: Avi Weiss (Bar-Ilan University); Joshua Sherman
    Abstract: We exploit cross-sectional and temporal differences in search intensity in order to examine the relationship between search costs and price dispersion using a hand-collected panel data set from Jerusalem’s Shuk Mahane Yehuda outdoor market. We present empirical evidence that price dispersion increases with the cost of search using several different measures of price dispersion, however, our interpretation of this finding is sensitive to the search proxy in question. We also address several acute difficulties facing empiricists seeking to test theoretical price-dispersion models in which consumers are heterogeneous in their search behavior.
    JEL: L11 L13
    Date: 2014–09
  3. By: Alexandre de Cornière (Department of Economics and Nuffield College, University of Oxford, 1 New Road, Oxford OX1 1NF); Greg Taylor (Oxford Internet Institute, University of Oxford, 1 St Giles, Oxford OX1 3JS)
    Abstract: In many industries, consumers rely on recommendations by an intermediary when choosing between competing products. In this paper, we look at how the existence of contracts between firms and intermediaries affects the quality of the advice received by consumers, and firms' incentives to invest in improving the quality of their products. We consider a model with one intermediary and two firms who decide how much to invest. Under a variety of contractual environments (vertical integration, ex post endorsement) we show that, even though the intermediary tends to endorse the best firm, contractual endorsement distorts firms' incentives to invest. Quality can then decrease or increase compared to an objective benchmark. We contrast our approach to a setup with fixed qualities and endogenous prices, under which contractual endorsement hurts consumers.
    Keywords: intermediary, quality, bias
    JEL: L1 L4 L86
    Date: 2014–09

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