nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒11‒07
sixteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do we see monopoly or duopoly? The influence of perception on entry deterrence By Edward John Dorrell Webb
  2. Choosing whether to compete: Price and format competition with consumer confusion By Crosetto, P.; Gaudeul, A.
  3. When Price Discrimination Fails - A Principal Agent Problem with Social Influence By Vlad Radoias
  4. Hotelling meets Holmes : the importance of returns to product differentiation and distribution economies for the firm's optimal location choice By Anett Erdmann
  5. Optimal Cartel Prices in Two-Sided Markets Access By Federico Boffa; Lapo Filistrucchi
  6. Detecting Collusion in Spatially Differentiated Markets By Matthias Firgo; Agnes Kügler
  7. Exclusive Dealing and Vertical Integration in Interlocking Relationships By Nocke, Volker; Rey, Patrick
  8. Vertical Integration as a Source of Hold-up By Allain, Marie-Laure; Rey, Patrick; Chambolle, Claire
  9. The hidden costs of R&D collaboration By Sara Amoroso Author-1-Name-First: Sara Author-1-Name-Last: Amoroso
  10. E-book Pricing and Vertical Restraints By Babur De los Santos; Matthijs Wildenbeest
  11. How Does Public IPR Protection Affect its Private Counterpart? Copyright and the Firms' Own IPR Protection in a Software Duopoly By Kresimir Zigic; Jiri Strelicky; Michael Kunin
  12. Ex Ante and Ex Post Investments in Cybersecurity By Lam, Wing Man Wynne
  13. Project Selection: Commitment and Competition By Vidya Atal; Talia Bar; Sidartha Gordon
  14. The competitiveness of U.S. manufacturing By Diez, Federico J.; Gopinath, Gita
  15. The European market for kitchen furniture By Sara Colautti
  16. When Helping the Small Hurts the Middle: Beer Excise Duties and Market Concentration By Loretz, Simon; Oberhofer, Harald

  1. By: Edward John Dorrell Webb (Department of Economics, Copenhagen University)
    Abstract: Consumers have bounded perception and treat similar goods as homogeneous. The interaction between this bias and the structure of firms is studied in a vertically differentiated duopoly with market entry. With fixed costs of quality, natural monopoly and entry deterrence occurs at lower entry costs and incumbent profit is higher. With marginal costs of quality, natural monopoly occurs at higher entry costs or not at all. Deterrence occurs at higher entry costs for mild perceptual limitations and at lower costs for severe limitations. Incumbent profit is generally lower, although for a narrow range of parameter values it may be higher. The incumbent may opt not to enter and no market is created.
    Keywords: perception, similarity, bounded rationality, vertical differentiation, entry deterrence, oligopoly
    JEL: D03 D42 D43
    Date: 2014–10–08
  2. By: Crosetto, P.; Gaudeul, A.
    Abstract: We run a market experiment where subjects take the role of firms and can choose not only their price but also whether to present comparable offers. Firms are faced with artificial demand whereby consumers make mistakes in assessing the net value of products on the market. Some of those consumers are however able to identify the best of the comparable offers if some offers are comparable, and favor that offer vs. non-comparable offers. We vary the portion of such consumers and the strength of their preferences for the best of the comparable offers. In treatments where firms observe the past decisions of their competitors, firms learn to collude in not presenting comparable offers. This occurs after initial periods with strong competition. Collusion lowers welfare for all consumers and is most frequent when many consumers prefer comparable offers. In treatments where firms cannot monitor competitors however, firms respond to the preference of a portion of consumers for comparable offers. This leads to an improvement in welfare for all consumers.
    JEL: C92 D18 D43 L13 L15
    Date: 2014
  3. By: Vlad Radoias (Department of Economics, Towson University)
    Abstract: I develop a theoretical model of price discrimination under social influence. I find that social influence gives sellers the incentive to artificially create and maintain excess demand on the market. The rationing occurs mainly at the low end of the market, and sometimes results in full rationing of the low end. Furthermore, the incidence of price discrimination under social influence is much lower than in the absence of it. Social influence lowers the profitability of price discrimination and incentivizes sellers to reduce product variety and to only target the high end of the market, a fact that is consistent with many empirical observations.
    Keywords: Price Discrimination, Social Influence, Excess Demand.
    JEL: D4 L15 M31
    Date: 2014–10
  4. By: Anett Erdmann
    Abstract: Inspired by the empirical work of Holmes (2011), which suggests the economic importance of distribution costs in the firm's optimal location decision, this paper introduces endogenous distribution costs in the model of Hotelling (1929). The proposed model shows an interesting trade-off between demand and cost considerations when a firm plays a hybrid location strategy. Given the location of local distribution centers and agents' displacement cost parameters, it is shown that, under certain conditions, the optimal location of the firms are in the interior of the Hotelling line rather than at the edges of the line. The supply cost effect which drives this result diminishes with the distance of the distribution center from the market so that the scale of the distribution area becomes also determinant for an optimal location strategy. The theoretical results are complemented with an empirical analysis for distribution intensive grocery retailers using location data for the two main conventional supermarket chains in the U.S. The data suggest that the firms consider distribution costs when differentiating from the competitor.
    Keywords: Firm strategy , product differentiation , distribution costs , price competition , location choice , retail competition
    JEL: L13 L22 L81 D43 R10 R30
    Date: 2014–10
  5. By: Federico Boffa (Free University of Bolzano, Faculty of Economics and Management, Piazzetta dell’Università 1, I-39031 Brunico, Italy); Lapo Filistrucchi (University of Florence, Department of Economics and Management, Via delle Pandette 9, I - 50127 Firenze, Italy)
    Abstract: We study optimal cartel prices in a two-sided market. We present a simple model showing that prices above the two-sided monopoly price may prevail on one side of a two-sided market as a means to enhance the sustainability of the cartel. We prove that in such a case a higher benefit from the network effect may compensate customers on that side of the market for the higher prices they are charged. We then provide both sufficient and necessary conditions for these results to hold in more complex models of two-sided markets. Our analysis extends to cartels in two-sided markets a result previously known for cartels selling complementary products, despite the fact that products in a two-sided market are not complements for customers, since customers typically buy only one of the two products (e.g. in the case of newspapers, advertisers buy advertising slots while readers buy content) and products on each side are substitutes (e.g. newspapers publishers compete for readers and for advertisers).
    Keywords: two-sided markets, indirect network effects, collusion, cartel, platform, TV, newspapers, media
    JEL: L12 L41 L81 L82 L86
    Date: 2014–10
  6. By: Matthias Firgo (WIFO); Agnes Kügler
    Abstract: The empirical literature on mergers, market power and collusion in differentiated markets has mainly focused on methods relying on output and/or panel data. In contrast to this literature we suggest a novel approach that allows for the detection of collusive behaviour among a group of firms making use of information on the spatial structure of horizontally differentiated products. By estimating best response functions using a spatial econometrics approach, we focus on differences in the strategic interaction in pricing between different groups of firms as well as on differences in price levels. We apply our method to the market for ski lift tickets using a unique data set on ticket prices and detailed resort-specific characteristics covering all ski resorts in Austria. We show that prices of ski resorts forming alliances are higher and increase with the size and towards the spatial center of an alliance. Strategic interaction in pricing is higher within than outside alliances. All results are in line with the findings of theoretical models on collusion in horizontally differentiated markets.
    Keywords: tacit collusion, strategic alliances, spatial differentiation, ski lift ticket prices
    Date: 2014–10–17
  7. By: Nocke, Volker; Rey, Patrick
    Abstract: We develop a model of interlocking bilateral relationships between upstream manufacturers that produce differentiated goods and downstream retailers that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, at the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.
    Keywords: vertical relations, exclusive dealing, vertical merger, foreclosure, bilateral contracting
    JEL: D43 L13 L42
    Date: 2014–07
  8. By: Allain, Marie-Laure; Rey, Patrick; Chambolle, Claire
    Abstract: While vertical integration is traditionally seen as a solution to the hold-up problem, this paper highlights instead that it can generate hold-up problems — for rivals. We first consider a successive duopoly where competition among suppliers eliminates any risk of hold-up; downstreamfirms thus obtain the full return from their investments. We then show that vertical integration creates hold-up concerns for the downstream rival, by affecting the integrated supplier’s incentives from both ex ante and ex post standpoints. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.
    Keywords: Vertical Integration, Hold-up, Incomplete contracts, Vertical foreclosure.
    JEL: L13 L41 L42
    Date: 2014–09
  9. By: Sara Amoroso Author-1-Name-First: Sara Author-1-Name-Last: Amoroso (European Commission JRC-IPTS)
    Abstract: The paper investigates the barriers to collaboration in terms of hidden transaction costs, by deriving the distribution of the operating costs and sunk costs associated with firms’ investment choices in R&D and innovation activities with or without a research partner. To retrieve both fixed and sunk costs of R&D and innovation activities with or without a research partner, we develop and estimate a structural dynamic monopoly model to quantify the linkages between R&D spending, innovation and cooperation investment choices, and endogenous productivity. We find that the sunk costs of innovations are smaller when collaborating with a research partner; the probability to spend in R&D or to innovate increases with the level of productivity, when collaborating in R&D and innovation; finally, we find that the sunk costs of innovation are 1.5 to 3 times smaller than the sunk costs of R&D. Additionally, the suggested structural framework of firm heterogeneity in cost functions offers a straightforward extension to policy impact evaluation.
    Keywords: R&D cooperation, transaction costs, dynamic structural model.
    JEL: D22 D23 L14 L60 O32
    Date: 2014
  10. By: Babur De los Santos (Indiana University, Kelley School of Business, 1309 E 10th St, Bloomington, IN 47405, USA); Matthijs Wildenbeest (Indiana University, Kelley School of Business, 1309 E 10th St, Bloomington, IN 47405, USA)
    Abstract: This paper empirically analyzes how the use of vertical price restraints has impacted retail prices in the market for e-books. In 2010 five of the six largest publishers simultaneously adopted the agency model of book sales, allowing them to directly set retail prices. This led the Department of Justice to file suit against the publishers in 2012, the settlement of which prevents the publishers from interfering with retailers' ability to set e-book prices. Using a unique dataset of daily e-book prices for a large sample of books across major online retailers, we exploit cross-publisher variation in the timing of the return to the wholesale model to estimate its effect on retail prices. We find that e-book prices for titles that were previously sold using the agency model decreased by 18 percent at Amazon and 8 percent at Barnes & Noble. Our results are robust to different specifications, placebo tests, and synthetic control groups. Our findings illustrate a case where upstream firms prefer to set higher retail prices than retailers and help to clarify conflicting theoretical predictions on agency versus wholesale models.
    Keywords: e-books, agency, vertical restraints, most favored nation, media economics, resale price maintenance, Amazon
    JEL: D43 D83 L13 L41 L42
    Date: 2014–09
  11. By: Kresimir Zigic; Jiri Strelicky; Michael Kunin
    Abstract: We study how the strength of public intellectual property rights (IPR) protection against software piracy (copyright protection) affects private IPR protection (that software developers may themselves undertake to protect their IPR). There are two software developers that offer a product variety of differing (exogenously given) quality and compete in prices for heterogeneous users, who make a choice whether to buy a legal version, use an illegal copy (if they can), or not use a product at all. Using an illegal version violates IPR and is thus punishable when disclosed. If a developer considers the level of piracy as high, he can introduce a form of physical protection for his software or digital product. The main aim of our analysis is to study how the level and the change of public IPR protection affect the pricing and IPR protection strategies of software developers. In particular, we are interested in establishing when the two forms of IPR protection (public and private) are complements to each other, when are they substitutes and when a change in public IPR has no impact on private IPR protection.
    Keywords: vertically differentiated duopoly; software piracy; Bertrand competition; copyright protection; private and public intellectual property rights protection;
    JEL: D43 L11 L21 O25 O34
    Date: 2014–10
  12. By: Lam, Wing Man Wynne
    Abstract: This paper develops a theory of sequential investments in cybersecurity in which the software vendor can invest ex ante and ex post. The regulator can use safety standards and liability rules as means of increasing security. A standard is a minimum level of safety, and a liability rule states the amount of damage each party is liable for. I show that the joint use of an optimal standard and a full liability rule leads to underinvestment ex ante and overinvestment ex post because the software vendor does not suffer the full costs of the society in case of security failure. Instead, switching to a partial liability rule can correct the inefficiencies. This suggests that to improve security, the regulator should encourage not only the firms, but also the enterprises to invest in security. I also discuss the effect of network externality and explain why firms engage in "vaporware".
    Keywords: cybersecurity, sequential investment, standards, liability
    JEL: L1 L8
    Date: 2014–08
  13. By: Vidya Atal (Monclair State University); Talia Bar (University of Connecticut); Sidartha Gordon (Sciences Po)
    Abstract: We examine project selection decisions of …rms constrained in the number of projects they can handle at once. Taking on a project requires a commitment of uncertain duration, restricting the …rm from selecting another project in subsequent periods. Due to the capacity constraints and need for commitment, some positive return projects are rejected. In a sequential move dynamic game, we fi…nd that the …first mover strategically rejects some projects that are then selected by the second mover, even when both fi…rms are symmetric and equally informed. We study the effects of competition on project selection, and compare the jointly optimal selection decision to the behavior of strategic non-cooperative …firms.
    Keywords: project selection, search, commitment, Markov perfect equilibrium
    JEL: L10 L13 D21
    Date: 2014–07
  14. By: Diez, Federico J. (Federal Reserve Bank of Boston); Gopinath, Gita (Harvard University)
    Abstract: We study the competitiveness of U.S. manufacturing. For the period 1999–2012 we find little support for a significant offshoring reversal. We show that the share of domestic demand that is met by imports and the terms of trade show no signs of reversal, even in sectors dominated by imports from China. We do, however, find some evidence consistent with the U.S. shale-gas energy revolution raising the competiveness of U.S. energy-intensive sectors.
    Keywords: competitiveness; U.S. manufacturing; reshoring; onshoring
    JEL: F41 L60
    Date: 2014–06–01
  15. By: Sara Colautti (CSIL Centre for Industrial Studies)
    Abstract: The 24th edition of the report The European market for kitchen furniture offers an accurate comprehensive picture of the kitchen furniture industry in 17 Western European countries, providing 2008-2013 trends (in value and in volume) in kitchen furniture production and consumption, imports and exports. Marketing policies, distribution channels and the value and weight of the built-in appliances on kitchen furniture supply is further considered. A forecast on kitchen furniture consumption in 2014 and 2015 is provided. Supply structure: data on employment, information on kitchen prices in a sample of companies and data on productive concentration are also included. Production is broken down by cabinet door material (solid wood, veneer, laminated, decorative papers, thermoplastic foils, lacquered, melamine/paper, aluminium, glass), by cabinet door style (classic, modern, design), by cabinet door colour (white, bright colours, neutral colours), by cabinet door type (high gloss, opaque) and by worktop material (solid surface materials, engineered and natural stone, laminated, tiles, steel, wood, glass). The competitive system analyses the kitchen furniture sales of the top European kitchen furniture manufacturers. Values are broken down by market segment (luxury, upper-end, middle, middle-low, low-end) and by country. Market shares are included. Short profiles of the main players in the kitchen furniture industry are also available. The analysis of kitchen furniture distribution channels covers: direct sales, contract/ building trade; kitchen specialists, DIY stores, furniture retailers, large furniture chains, mail order/e-commerce. Addresses of around 300 European kitchen furniture manufacturers are also included.
    JEL: L11 L22 L68
    Date: 2014–07
  16. By: Loretz, Simon (Institute for Advanced Studies, Vienna, Austria); Oberhofer, Harald (University of Salzburg)
    Abstract: The beer market has undergone a dramatic change over the last decades and there are growing concerns of too much market concentration. Among other reasons we identify the role of beer excise taxes in the determination of the market structure. In particular the introduction of a minimum excise tax for beer in the European Union with the provision for a asymmetric reduction for small breweries can create incentives for small breweries. While we find evidence that high beer excise taxes increase the likelihood to be target of an international takeover, the overall role of beer taxes on the market structure is ambiguous. While the reduced beer excise for small breweries fosters new entries, they potentially squeeze out mid-sized breweries resulting in an even more concentration market.
    Keywords: Market concentration; Beer excise duties; beer market; mergers and acquisitions
    JEL: G34 H25 L11 L22
    Date: 2014–10–15

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