nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒11‒22
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price Competition on Graphs By Pim Heijnen; Adriaan Soetevent
  2. Third-degree Price Discrimination in the Presence of Congestion Externality By Achim I. Czerny; Anming Zhang
  3. Innovation and imitation incentives in dynamic duopoly By Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
  4. Strategic outsourcing with technology transfer under price competition By Kabiraj, Tarun; Sinha, Uday Bhanu
  5. Selection Effects in Producer-Price Setting By Carlsson, Mikael
  6. Merger control on two-sided markets: is there need for an efficiency defense? By Edmond Baranes; Thomas Cortade; Andreea Cosnita-Langlais
  7. Antitrust, Legal Standards and Investment By Giovanni Immordino; Michele Polo
  8. Tariff Regulation with Energy Efficiency Goals By Laura Abrardi; Carlo Cambini
  9. Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in US Large Air Markets By Hideki Murakami
  10. Detailed Data and Changes in Market Structure: The Move to Unmanned Gasoline Service Stations By Tadas Bruzikas; Adriaan R. Soetevent

  1. By: Pim Heijnen (University of Groningen); Adriaan Soetevent (University of Groningen)
    Abstract: This paper extends Hotelling's model of price competition with quadratic transportation costs from a line to graphs. We derive an algorithm to calculate firm-level demand for any given graph, conditional on prices and firm locations. These graph models of price competition may lead to spatial discontinuities in firm-level demand. We show that the existence result of D'Aspremont et al. (1979) does not extend to simple star graphs and conjecture that this non-existence result holds more generally for all graph models with two or more firms that cannot be reduced to a line or circle.
    Keywords: spatial competition, Hotelling, graphs
    JEL: D43 L10 R12
    Date: 2014–10–02
  2. By: Achim I. Czerny (VU University Amsterdam, the Netherlands); Anming Zhang (The University of British Columbia, Canada)
    Abstract: This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.
    Keywords: Price discrimination, congestion, time valuation, monopoly, airline
    JEL: D42 L93
    Date: 2014–10–23
  3. By: Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
    Abstract: We study entry in a growing market by ex-ante symmetric duopolists when sunk costs differ for the innovating and imitating firm. Strategic competition takes the form either of a preemption race or of a war of attrition, the latter being likelier when demand uncertainty is high. Industry value is maximized when firms seek neither to race nor to delay investment. Free imitation is socially costly, and if the consumer surplus resulting from imitation is not too large the socially optimal imitation cost, as may be induced by patent protection, involves preemption. Finally, we discuss endogenous entry barriers and contractual alternatives that increase the likelihood of preemption regimes, with differing implications for imitator entry. When the cost of imitation is low for instance, innovators are shown to rely more heavily on trade secrecy and patents. Welfare-enhancing takeovers and licensing are also shown to occur.
    Keywords: Dynamic oligopoly; Knowledge spillover; Real options
    JEL: G31 L13 O33
    Date: 2014
  4. By: Kabiraj, Tarun; Sinha, Uday Bhanu
    Abstract: We construct a model to show that outsourcing of a crucial input can occur even though it can be produced in-house at a lower cost. There are two firms producing differentiated goods and competing in prices, and only one of them possesses input production technology which is superior to that of an independent input supplier. We show that if the degree of product differentiation is small or the technological gap between two input producing firms is small, strategic outsourcing will occur. Technology transfer in the form of patent sale will act as a commitment that the firm will outsource. While the outsourcing firm gains, consumers’ welfare as well as social welfare goes down. Interestingly, sometimes rival firm’s profit might increase. The paper brings into focus some competition policy concerns.
    Keywords: Outsourcing; patent transfer; price competition; welfare; competition policy.
    JEL: D43 L22 L23 L24
    Date: 2014–04–15
  5. By: Carlsson, Mikael (Department of Economics)
    Abstract: We use micro data on product prices linked to information on the firms that set them to test for selection effects (state dependence) in micro-level producer pricing. In contrast to using synthetic data from a canonical menu-cost model, we fi…nd very weak, if any, micro-level selection effects when running price change probability regressions on actual data. Moreover, when fi…tting a model that nests both time- and state-dependent elements (the CalvoPlus model of Nakamura and Steinsson,2010) to the data, the resulting parameters mimic the standard Calvo (1983) model. Thus, upstream in the supply chain, price-setting is best characterized as time- dependent.
    Keywords: Price-setting; Business Cycles; Micro Data
    JEL: D40 E30 L16
    Date: 2014–08–19
  6. By: Edmond Baranes; Thomas Cortade; Andreea Cosnita-Langlais
    Abstract: We study horizontal mergers on two-sided markets between horizontally differentiated platforms. We provide a theoretical analysis of the merger's price effect based on the amount of cost savings it generates, the behavior of outsider platforms, and the size of cross-group network effects. We point out differences as compared with the standard, one-sided merger analysis, and also discuss the merger control policy implications.
    Date: 2014–11
  7. By: Giovanni Immordino; Michele Polo
    Abstract: We study the interaction of a firm that invests in research and, if successful, undertakes a practice to exploit the innovation, and an enforcer that sets legal standards, fines and accuracy. In this setting deterrence on actions interacts with deterrence on research. When the practice increases expected welfare the enforcer commits not to intervene by choosing a more rigid per-se legality rule to boost investment, moving to a more flexible discriminating rule combined with type-I accuracy for higher probabilities of social harm. Patent and antitrust policies act as substitutes in our setting; additional room for per-se (illegality) rules emerges when fines are bounded. Our results on optimal legal standards extend from the case of (uncertain) investment in research to the case of (deterministic) investment in physical assets.
    Keywords: legal standards, accuracy, antitrust, innovative activity, enforcement.
    JEL: D73 K21 K42 L51
    Date: 2013
  8. By: Laura Abrardi; Carlo Cambini
    Abstract: We study the optimal tariff structure that could induce a regulated utility to adopt energy efficiency activities given that it is privately informed about the effectiveness of its effort on demand reduction. The regulator should optimally offer a menu of incentive compatible two-part tariffs. If the firm's energy efficiency activities have a high impact on demand reduction, the consumer should pay a high fixed fee but a low per unit price, approximating the tariff structure to a decoupling policy, which strenghtens the firm's incentives to pursue energy conservation. Instead, if the firm's effort to adopt energy efficiency actions is scarcely effective, the tariff is characterized by a low fixed fee but a high price per unit of energy consumed, thus shifting the incentives for energy conservation on consumers. The optimal tariff structure also depends on the cost of the consumer's effort (in case the consumer can also adopt energy efficiency measures) and on the degree of substitutability between the consumer's and the firm's efforts.
    Keywords: Energy efficiency, demand-side regulation, decoupling, price-cap
    JEL: L51
    Date: 2014
  9. By: Hideki Murakami (Graduate School of Business Administration, Kobe University)
    Abstract: This paper empirically analyses the patterns of inter-firm rivalry between low-cost and full service carriers by carrier and airport bases, and demonstrate welfare implication of LCC, using 1163 US cross-sectional data of 1998 when LCCs were purely no-frilled carriers. Our main findings are: (1) that both LCC and full service carriers keep higher price-cost margins when LCCs enter in the secondary airport, while especially full service carriers suffer from low price-cost margin when LCCs enter the same markets, (2) that total gains of welfare are 25.5 million USD for our dataset, and 90% of welfare gains come from the gain in consumer' s surplus. LCCs' cumulative profit is 4.45 million USD, but full service carriers lost 1.92 million USD in total due to the competition by LCCs, (3) that LCCs sometimes provide unreasonably small (i.e, less-than-monopoly) capacities instead of profit-maximizing ones when they have no information about own demand curves.
    Keywords: low-cost carrier, inter-firm rivalry, social welfare
  10. By: Tadas Bruzikas (University of Groningen); Adriaan R. Soetevent (University of Groningen, the Netherlands)
    Abstract: We illustrate the impact of detailed data in empirical economic research by considering how the increased data availability has changed the scope and focus of studies on retail gasoline pricing. We show how high-volume, high-frequency price data help to identify and explain long-term trends using original data for the Dutch retail gasoline market. We find that 22% of the observed increase in the highway/off-highway price gap can be explained by the trend towards more unmanned stations; another 13% can be explained by major-to-non-major re-brandings. In one of the first applications of event study analysis to non-financial price data, we show that the adjustment to the new, lower price level is almost immediate in case of manned-to-unmanned conversions but takes one to two months in case of major-to-non-major re-brandings. The impact of both events is asymmetric with no measurable price impact of changes in the opposite direction.
    Keywords: retail gasoline pricing, big data, competitive spillovers, event study analysis
    JEL: L13 L81
    Date: 2014–09–16

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