nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒11‒17
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Bertrand and the Long Run By Roberto Burguet; József Sákovics
  2. Prices, Product Differentiation, and Heterogeneous Search Costs By Jos� L. Moraga-Gonz�lez; Zsolt S�ndor; Matthijs R. Wildenbeest
  3. Product differentiation and entry timing in a continuous time spatial competition model By Takeshi Ebina; Noriaki Matsushima; Daisuke Shimizu
  4. The Impact of Maximum Markup Regulation on Prices By Christos Genakos; Pantelis Koutroumpis; Mario Pagliero
  5. The collusion incentive constraint By Huric Larsen, Jesper Fredborg
  6. Penalizing Cartels: The Case for Basing Penalties on Price Overcharge By Yannis Katsoulacos; Evgenia Motchenkova; David Ulph
  7. The Role of Managerial Work in Market Performance: A Monopoly Model with Team Production By Hildenbrand, Andreas; Duran, Mihael
  8. Patent collateral investor commitment and the market for venture lending By Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
  9. Import competition, productivity and multi-product firms By Emmanuel Dhyne; Amil Petrin; Valerie Smeets; Frederic Warzynski
  10. Strategic trade policy for network goods oligopolies By Anomita Ghosh; Rupayan Pal

  1. By: Roberto Burguet; József Sákovics
    Abstract: We propose a new model of simultaneous price competition, based on firms offering 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
  2. By: Jos� L. Moraga-Gonz�lez (VU University Amsterdam, the Netherlands); Zsolt S�ndor (Sapientia University, Rumania); Matthijs R. Wildenbeest (Indiana University, United States)
    Abstract: We study price formation in the standard model of consumer search for differentiated products but allow for search cost heterogeneity. In doing so, we dispense with the usual assumption that all consumers search at least once in equilibrium. This allows us to analyze the manner in which prices affect the decision to search rather than to not search at all, which is an important but often neglected aspect of the price mechanism. Recognizing the role the equilibrium price plays in consumers' participation decisions turns out to be critical for understanding how search costs affect market power. This is because the two margins that determine prices|the intensive search margin, or search intensity, and the extensive search margin, or search participation|may be affected in opposing directions by a change in search costs. When search costs go up, fewer consumers decide to search, which modifies the search composition of demand such that demand can become more elastic. At the same time, the consumers who choose to search reduce their search intensity, which makes demand less elastic. Whether the effect on the extensive or the intensive search margin dominates depends on the range and shape of the search cost density. We identify conditions for higher search costs to result in higher, constant, or lower prices. Similar results are obtained when the marginal gains from search vary across consumers.
    Keywords: sequential search, search cost heterogeneity, differentiated products, existence and uniqueness of equilibrium
    JEL: D43 D83 L13
    Date: 2014–07–03
  3. By: Takeshi Ebina; Noriaki Matsushima; Daisuke Shimizu
    Abstract: We extend the well-known spatial competition model (d'Aspremont et al., 1979) to a continuous time model in which two firms compete in each instance. Our focus is on the entry timing decisions of firms and their optimal locations. We demonstrate that the leader has an incentive to locate closer to the centre to delay the follower's entry, leading to a non-maximum differentiation outcome. We also investigate how exogenous parameters affect the leader's location and firms' values and, in particular, numerically show that the profit of the leader changes non-monotonically with an increase in the transport cost parameter.
    Date: 2014–10
  4. By: Christos Genakos; Pantelis Koutroumpis; Mario Pagliero
    Abstract: We study the repeal of a regulation that imposed maximum wholesale and retail markups for all but five fresh fruits and vegetables. We compare the prices of products affected by regulation before and after the policy change and use the unregulated products as a control group. We find that abolishing regulation led to a significant decrease in both retail and wholesale prices. However, markup regulation affected wholesalers directly and retailers only indirectly. The results are consistent with markup ceilings providing a focal point for collusion among wholesalers.
    Keywords: Markups, markup regulation, policy evaluation
    JEL: L0 L1 L4 L5
    Date: 2014–10
  5. By: Huric Larsen, Jesper Fredborg
    Abstract: The collusion incentive constraint is an important economic measure of cartel stability. It weighs the profits of being in a cartel with those of cheating and punishment of the remaining cartel members. The constraint places no restrictions on firm cartel, cheating and punishment pricing, but is usually considered in a restricted competitive set up characterized by either Cournot or Bertrand competition. This paper examines the constraint under Bertrand competition and homogenous goods when assuming that cartel members have the same market power and then continues to examine if this is not so.
    Keywords: Collusion, firm incentives, market power
    JEL: C71 L2 L4
    Date: 2014–03
  6. By: Yannis Katsoulacos (Athens University of Economics and Business, Greece); Evgenia Motchenkova (VU University Amsterdam); David Ulph (University of St Andrews, United Kingdom)
    Abstract: In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than tho se based on profit)while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.
    Keywords: Antitrust Enforcement, Antitrust Law, Cartel, Oligopoly, Repeated Games
    JEL: D43 C73
    Date: 2014–09–26
  7. By: Hildenbrand, Andreas; Duran, Mihael
    Abstract: A monopolist is treated as a nexus of contracts with team production. It has one owner-manager who is the employer of two employees. A team production problem is present if the employer is a “managerial lemon.†If the team production problem is solved, the employer is a “managerial hotshot.†Both managerial hotshot and managerial lemon are found to make profit. Therefore, managerial slack can exist in our monopoly market. Whereas the employer has the incentive to improve management capability in principle, the employees have the incentive to keep management capability low. Moreover, the cost of improving management capability may be prohibitively high. Consequently, managerial slack can persist. The predicted behavior of the monopolist contradicts the neoclassical prediction of market performance in both cases.
    Keywords: firm organization; market structure; property rights
    JEL: C7 D2 D4 L1 L2
    Date: 2014–09–15
  8. By: Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
    Abstract: The use of debt to finance risky entrepreneurial-firm projects is rife with informational and contracting problems. Nonetheless, we document widespread lending to startups in three innovation-intensive sectors and in early stages of development. At odds with claims that the secondary patent market is too illiquid to shape debt financing, we find that intensified patent trading increases the annual rate of startup lending, particularly for startups with more redeployable (less firm-specific) patent assets. Exploiting differences in venture capital (VC) fundraising cycles and a negative capital-supply shock in early 2000, we also find that the credibility of VC commitments to refinance and grow fledgling companies is vital for such lending. Our study illuminates friction-reducing mechanisms in the market for venture lending, a surprisingly active but opaque arena for innovation financing, and tests central tenets of contract theory.
    Keywords: Entrepreneurial Finance, Financial Intermediation, Market for Patents, Venture Capital, Venture Lending
    JEL: L14 L26 G24 O16 O3
    Date: 2014–10
  9. By: Emmanuel Dhyne (NBB, UMons); Amil Petrin (U. Minnesota); Valerie Smeets (Aarhus U.); Frederic Warzynski (Aarhus U.)
    Abstract: Using detailed firm-product level quarterly data, we develop an estimation framework of a Multi-Product Production Function (MPPF) and analyse firm-product level TFP estimations at various levels (industries, products). After documenting our estimation results, we relate productivity estimates with import competition, using firm and product level measures of import competition. We find that if productivity at the firm level tends to positively react to increased import competition, the multi-product firms response varies according to the relative importance of the product that faces stronger import competition in the firm’s product portfolio. When import competition associated to the main product of a firm increases, the firm tend to increase its efficiency in producing that core product, in which it has a productivity advantage. However, when the degree of foreign competition increases for non core products of a firm, it tends to lower its efficiency in producing those goods.
    Keywords: multi-product production function, productivity, import competition
    JEL: D24 L22 L25
    Date: 2014–10
  10. By: Anomita Ghosh (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: We analyze strategic trade policy for differentiated network goods oligopolies under alternative scenarios, when there is export rivalry between two countries. We show that, under price competition without managerial delegation, it is optimal to tax (subsidize) exports, if network externalities are weak (strong). But, the oppos ite is true under price competition with relative performance based managerial delegation in firms. In contrast, under quantity competition, the optimal trade policy always involves subsidization of exports. Nonetheless, the optimal rate of export subsidy under quantity competition is always higher than that under price competition. We also show that, under quantity (price) competition without managerial delegation, trade policy interventions in the presence of sufficiently strong (weak or very strong) network externalities lead to higher social welfare of each exporting country compared to that under free trade. However, under quantity (price) competition with managerial delegation, trade policy interventions result in Pareto inferior outcomes always (unless network externalities are strong).
    Keywords: Strategic trade policy, network goods, relative performance based managerial delegation, price competition, quantity competition
    JEL: F12 F13 L13 L22 D21
    Date: 2014–09

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