nep-ind New Economics Papers
on Industrial Organization
Issue of 2014‒12‒29
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. From Bertrand to Cournot via Kreps and Scheinkman: a hazardous journey By WAUTHY, Xavier Y.; ,
  2. Toward a theory of monopolistic competition By Parenti, Mathieu; Thisse, Jacques-François; Ushchev, Philip
  3. Licensing to vertically related markets By SCHOLZ, Eva-Maria
  4. Research and Development of an Optimally Regulated Monopolist with Unknown Costs By SAGLAM, ISMAIL
  5. Optimal Leniency Programs when Firms Have Cumulative and Asymmetric Evidence By Blatter, Marc; Emons, Winand; Sticher, Silvio
  6. Pricing a Package of Services - When (not) to bundle By Ketelaar, Felix; Szalay, Dezsö
  7. Prescribing Behavior of General Practitioners : Competition Matters! By Schaumans, C.B.C.
  8. Consumer Price Search and Platform Design in Internet Commerce By Michael Dinerstein; Liran Einav; Jonathan Levin; Neel Sundaresan
  9. Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity By Snir, Avichai; Levy, Daniel; Gotler, Alex; Chen, Haipeng (Allan)
  10. The impact of piracy on prominent and non-prominent software developers By Rasch, Alexander; Wenzel, Tobias

  1. By: WAUTHY, Xavier Y. (CEREC, Université Saint-Louis, B-1000 Brussels, Belgium; Université catholique de Louvain, CORE, Belgium); ,
    Abstract: The mininal core of strategic decisions a firm has to make is three-fold: What to produce? At which scale? At what price? A full-fledged theory of oligopolistic competition should be able to embrace these three dimensions jointly. Starting from the Cournot-Bertrand dispute and the stream of research it gave birth to, this survey shows that we are far from having such a theory at our disposal today. Many papers cover two dimensions out of three and display insightful results but no paper satisfactorily addresses the complete picture. I discuss the limitations of the different approaches that have been undertaken. This discussion sets a clear agenda for further theoretical research on the oligopoly front.
    Keywords: Bertrand, Cournot, Edgeworth, product differentiation, capacity constraints
    JEL: L13
    Date: 2014–07–03
  2. By: Parenti, Mathieu; Thisse, Jacques-François; Ushchev, Philip
    Abstract: We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shock are characterized through necessary and sufficient conditions. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous firms and consumers.
    Keywords: additive preferences; general equilibrium; homothetic preferences; monopolistic competition
    JEL: D43 L11 L13
    Date: 2014–06
  3. By: SCHOLZ, Eva-Maria (Université catholique de Louvain, CORE, Belgium)
    Abstract: We analyse the problem of a non-producing patentee who licenses an essential process innovation to a vertical Cournot oligopoly. The vertical oligopoly is composed of an upstream and a downstream sector which may differ in their efficiency or, in other words, in the benefit they derive from the innovation. In this framework we characterise the optimal licensing contract in terms of the licensing revenue maximising policy (fixed-fee or per-unit royalty) and sector (upstream and/or downstream sector). First, it is shown that under a fixed-fee contract licensing to the less efficient industry sector may be the patentee’s licensing revenue maximising strategy. Here, licensing to a less efficient downstream market is all the time optimal in terms of consumer surplus and aggregate economic welfare. Conversely, licensing to a less or equally efficient upstream industry is potentially inefficient. Second, our findings reveal that the optimal licensing policy is sector dependent. A per-unit royalty contract may dominate a fixed-fee policy on the downstream market in terms of licensing revenues, while offering a per-unit royalty contract to the upstream industry is never optimal. As a third and final point we address the case of licensing to both industry sectors. Here we also identify conditions under which two-sector licensing of both sectors is less profitable than one-sector licensing of a single industry (and vice versa).
    Keywords: licensing contracts, fixed-fee, royalties, vertical Cournot oligopoly
    JEL: D43 L13 O31 O34
    Date: 2014–06–11
    Abstract: This paper studies whether a monopolist with private marginal cost information has incentives to make cost-reducing innovations through research and development (R&D) when its output and price are regulated according to the incentive-compatible mechanism of Baron and Myerson (1982). Under several assumptions concerning the cost of R&D and the regulator's beliefs about the marginal cost, we characterize the optimal level of R&D activities for the regulated monopolist when these activities are observed by the regulator as well as when they are not. We show that the regulated monopolist always chooses a higher level of R&D activities when its activities are unobserved. In situations where the social welfare attaches a sufficiently high weight to the monopolist welfare, the monopolist's R&D activities in the unobservable case even realize at a higher level than its activities when its output and price are not regulated. Moreover, whenever R&D activities increase productive efficiency, a less efficient monopolist would choose a higher level of R&D activities than a more efficient monopolist, irrespective of the observability of R&D.
    Keywords: Monopoly; Regulation; Research and Development.
    JEL: D82 L51 O32
    Date: 2014–11–27
  5. By: Blatter, Marc; Emons, Winand; Sticher, Silvio
    Abstract: An antitrust authority deters collusion using fines and a leniency program. Unlike in most of the earlier literature, our firms have imperfect cumulative evidence of the collusion. That is, cartel conviction is not automatic if one firm reports: reporting makes conviction only more likely, the more so, the more firms report. Furthermore, the evidence is distributed asymmetrically among firms. Asymmetry of the evidence can increase the cost of deterrence if the high-evidence firm chooses to remain silent. Minimum-evidence standards may counteract this effect. Under a marker system only one firm reports; this may increase the cost of deterrence.
    Keywords: antitrust; cartels; deterrence; evidence; leniency
    JEL: D43 K21 K42 L40
    Date: 2014–08
  6. By: Ketelaar, Felix; Szalay, Dezsö
    Abstract: We study a tractable two-dimensional model of price discrimination. Consumers combine a rigid with a more flexible choice, such as choosing the location of a house and its quality or size. We show that the optimal pricing scheme involves no bundling if consumer types are affiliated. Conversely, if consumer types are negatively affiliated over some portion of types then some bundling occurs.
    Keywords: Price discrimination; Bundling; Monopoly; Multidimensional screening
    JEL: D42 D82 D86
    Date: 2014–12
  7. By: Schaumans, C.B.C. (Tilburg University, TILEC)
    Abstract: Background: General Practitioners have limited means to compete. As quality is hard to observe by patients, GPs have incentives to signal quality by using instruments patients perceive as quality. Objectives: We investigate whether GPs exhibit different prescribing behavior (volume and value of prescriptions) when confronted with more competition. As there is no monetary benefit in doing so, this type of (perceived) quality competition originates from GPs satisfying patients’ expectations. Method: We look at market level data on per capita and per contact number of items prescribed by GPs and the value of prescriptions for the Belgian market of General Practitioners. We test to which extent different types of variables explain the observed variation. We consider patient characteristics, GP characteristics, number and type of GP contacts and the level of competition. The level of competition is measured by GP density, after controlling for the number of GPs and a HHI. Results: We find that a higher number of GPs per capita results in a higher number of units prescribed by GPs, both per capita and per contact. We argue that this is consistent with quality competition in the GP market. Our findings reject alternative explanations of GP scarcity, availability effect in GP care consumption and GP dispersing prescription in time due to competition.
    Keywords: Competition; General Practitioners; Prescription; Drugs; Quality
    JEL: D22 I10 I11 L11 L15
    Date: 2014
  8. By: Michael Dinerstein (Stanford University); Liran Einav (Stanford University); Jonathan Levin (Stanford University); Neel Sundaresan (eBay Inc)
    Abstract: Search frictions can explain why the "law of one price" fails in retail markets and why even firms selling commodity products have pricing power. In online commerce, physical search costs are low, yet price dispersion is common. We use browsing data from eBay to estimate a model of consumer search and price competition when retailers offer homogeneous goods. We find that retail margins are on the order of 10%, and use the model to analyze the design of search rankings. Our model explains most of the effects of a major re-design of eBay's product search, and allows us to identify conditions where narrowing consumer choice sets can be pro-competitive. Finally, we examine a subsequent A/B experiment run by eBay that illustrates the greater difficulties in designing search algorithms for differentiated products, where price is only one of the relevant product attributes.
    Date: 2014–08
  9. By: Snir, Avichai; Levy, Daniel; Gotler, Alex; Chen, Haipeng (Allan)
    Abstract: Using data from three sources (a laboratory experiment, a field study, and a large US supermarket chain), we document a surprising asymmetric behavior of 9-ending prices: they are more rigid upward, but not downward, in comparison to non 9-ending prices. The data from the lab experiment and the field study suggest that shoppers are less likely to notice higher prices when they end with 9, or price increases when the new prices end with 9, in comparison to other endings. The consumers' misperception seems to be caused by their use of 9-endings as a signal for low prices, which interferes with price information processing. The supermarket data suggest that retail price setters respond strategically to the consumer misperception by setting 9-ending prices more often after price increases than after price decreases. 9-ending prices, therefore, usually increase only if the new prices are also 9-ending. Consequently, 9-ending prices exhibit asymmetric rigidity: they are more rigid than non 9-ending prices upward but not downward.
    Keywords: Price Points,Price Recall,Sticky Prices,Rigid Prices,Price Rigidity,Price Adjustment,9-Ending Prices,Psychological Prices,Asymmetric Price Adjustment
    JEL: E31 L16 C91 C93 D03 D80 M31
    Date: 2014–11–05
  10. By: Rasch, Alexander; Wenzel, Tobias
    Abstract: This paper studies the impact of software piracy on prominent and non-prominent software developers in markets based on a two-sided platform business. Consumer behavior is imperfect and, when adopting a platform, consumers only take prominent software into account. We show that prominent software exhibits higher piracy rates than non-prominent software. However, contrary to intuition, this does not necessarily mean that prominent software developers benefit more from increased software protection. Indeed, we show that prominent developers may lose out whereas non-prominent developers may gain from better software protection.
    Keywords: Piracy,Platform,Software,Two-sided market
    JEL: L11 L86
    Date: 2014

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