nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒12‒19
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Effects of Leniency on Cartel Pricing By Harold Houba; Evgenia Motchenkova; Quan Wen
  2. Raising rivals' costs through buyer power By Dertwinkel-Kalt, Markus; Haucap, Justus; Wey, Christian
  3. Explaining Price Dispersion and Dynamics in Laboratory Bertrand Markets By Ralph-C. Bayer
  4. Bargaining in vertical relationships and suppliers' R&D profitability By Köhler, Christian
  5. Mergers and Market Power in the US Nitrogen Fertilizer Industry By Humber, Jacob
  6. Determinants of the duration of European appellate court proceedings in cartel cases By Smuda, Florian; Bougette, Patrice; Hüschelrath, Kai

  1. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (University of Chicago, United States)
    Abstract: We analyze how leniency affects cartel pricing in an infinitely-repeated oligopoly model where the fine rates are linked to illegal gains and detection probabilities depend on the degree of collusion. A novel aspect of this study is that we focus on the worst possible outcome. We investigate the maximal cartel price, the largest price for which the conditions for sustainability hold. We analyze how the maximal cartel price supported by different cartel strategies adjusts in response to the introduction of (ex-ante and ex-post) leniency programs. We disentangle the effects of traditional antitrust enforcement, leniency, and cartel strategies on the maximal cartel price. Ex-ante leniency cannot reduce the maximal cartel price below the price under antitrust without leniency. On the other hand, for ex-post leniency, improvement is possible and granting full immunity to single-reporting firms achieves the largest reduction in the maximal cartel price. To reduce adverse effects under both leniency programs, fine reductions to multiple-reporting firms should be moderate or absent. Finally, ex-post leniency should provide less generous fine reductions to multiple-reporting firms, which is supported by the current practice in the US and the EU.
    Keywords: Cartel, Antitrust, Competition Policy, Leniency Program, Self-reporting, Repeated Game
    JEL: L41 K21 C72
    Date: 2014–11–10
  2. By: Dertwinkel-Kalt, Markus; Haucap, Justus; Wey, Christian
    Abstract: We re-examine the view that a ban on price discrimination in input markets is particularly desirable in the presence of buyer power. This argument crucially depends on an inverse relationship between downstream firms' profits and the uniform input price. Assuming different input efficiencies among downstream firms, we derive a necessary and sufficient condition such that a higher input price benefits a subset of relatively efficient downstream firms. In such instances, consumers may be better off if discriminatory pricing is feasible.
    Keywords: Price discrimination,Buyer Power,Raising Rivals,Costs
    JEL: L13 D43 K31
    Date: 2014
  3. By: Ralph-C. Bayer (School of Economics, University of Adelaide)
    Abstract: This paper develops a quantal-response adaptive learning model which combines sellers’ bounded rationality with adaptive belief learning in order to explain price dispersion and dynamics in laboratory Bertrand markets with perfect information. In the model, sellers hold beliefs about their opponents’ strategies and play quantal best responses to these beliefs. After each period, sellers update their beliefs based on the information learned from previous play. Maximum likelihood estimation suggests that when sellers have full past price information, the learning model explains price dispersion within periods and the dynamics across periods. The fit is particularly good if one allows for sellers being risk averse. In contrast, Quantal Response Equilibrium does not organize the data well.
    Keywords: Price dispersion, Adaptive Learning, Bounded rationality, Quantal Response Equilibrium.
    JEL: C73 C91 D83 L13
    Date: 2013–10
  4. By: Köhler, Christian
    Abstract: This paper explores the effect of bargaining in vertical relationships on the profitability of suppliers' R&D investments. Studies on the relationship between R&D and firm profitability mostly concentrate on the impact of horizontal market structure and neglect vertical interac-tions. Building on theoretical and empirical evidence about the effects of bargaining in vertical relationships, the crucial determinants of a supplier's bargaining power are identified as the market position and the degree of concentration in the buyer portfolio. With respect to R&D profitability the latter is expected to diminish returns from R&D, while the former is expected to increase it. The hypotheses are tested using a sample of 472 German manufactur-ing firms. The empirical findings support all hypotheses and highlight the importance of tak-ing a supplier's bargaining power into account when estimating R&D profitability. The esti-mated effects are considerable: for an average R&D performing supplier an increase of R&D intensity in 2010 by a percentage point would reduce profits by about 14 % in 2012 given the supplier depends completely on the largest three buyers and does hold an average market share. Contrastingly, a monopolist R&D performing supplier with average buyer concentra-tion would experience a profit increase by 10 % in 2012.
    Keywords: Bargaining,Firm performance,Vertical relationships
    JEL: D22 L22 O32
    Date: 2014
  5. By: Humber, Jacob
    Abstract: Nitrogenous fertilizer prices spiked in early 2010 despite the fact that natural gas prices, nitrogen fertilizer’s main production cost, have dramatically fallen during this time period. We hypothesize that a merger which occurred between CF and Terra industries in 2010 exacerbated market power in an already concentrated industry, causing nitrogen fertilizer prices to increase. To test this hypothesis, we propose a structural vector autoregressive (SVAR) model. By including corn futures, natural gas and nitrogen fertilizer prices within an SVAR model we control for demand and supply shocks which affect the nitrogen fertilizer market. The remaining variation in fertilizer prices at 2010 not explained by the model is attributed to the merger. If we set this residual to zero, we can then use the SVAR model to forecast a counterfactual fertilizer price series which represents the price of nitrogen fertilizer in the absencebsence of the merger. Applying this technique to the data suggests that the merger raised prices by roughly 75%. This approach presents a middle-ground between the current methodologies used in the retrospective merger analysis literature. It is more transparent than structural approaches such as Nevo (2000) which make strong assumptions on demand and market conduct. Conversely, this time series approach is more applicable than the reduced form approaches such as Hastings (2004) that employ a difference in difference method and consequently rely on the existence of a credible control group.
    Keywords: Industrial Organization, Production Economics,
    Date: 2014–05–28
  6. By: Smuda, Florian; Bougette, Patrice; Hüschelrath, Kai
    Abstract: The duration of appellate court proceedings is an important determinant of the efficiency of a court system. We use data of 234 firm groups that participated in 63 cartels convicted by the European Commission between 2000 and 2012 to investigate the determinants of the duration of the subsequent one- or two-stage appeals process. We find that while the speed of the firststage appellate court decision depends on the court's appeals-related workload, the complexity of the case, the degree of cooperation by the firms involved and the clarity of the applied rules and regulations, the second-stage appellate court proceedings appear to be largely unaffected by those drivers. We take our empirical results to derive conclusions for both firms that plan to file an appeal as well as public policy makers.
    Keywords: Law and economics,antitrust policy,cartels,appeals,European Union
    JEL: K21 K41 K42 L41
    Date: 2014

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