nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒01‒03
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Toward a theory of monopolistic competition By Philip Ushchev; Mathieu Parenti; Jacques-Francois Thisse
  2. Downstream Market Power and the Lerner Index By Ioannis Pinopoulos
  3. Quality Pricing-to-Market By Auer, Raphael; Chaney, Thomas; Sauré, Philip
  4. Spatial Competition in Quality By Auer, Raphael; Sauré, Philip
  5. Spatial Competition and Flexible Manufacturing with Spatially Discriminatory Pricing By Wen-Jung Liang; Kuang-Cheng Wang; Hong-Ren Din
  6. Dynamic Spatial Competition Between Multi-Store Firms By Aguirregabiria, Victor; Vicentini, Gustavo
  7. The policy dilemma of the unitary patent By Jérôme Danguy; Bruno van Pottelsberghe
  8. Quality Competition among Platforms: a Media Market Case By Serena Marianna Drufuca; Maria Rosa Battaggion
  9. Market Failures and Public Policy By Tirole, Jean
  10. On the economics of labels: how their introduction affects the functioning of markets and the welfare of all participants By Olivier Bonroy; Christos Constantatos
  11. Market Size, Competition, and the Product Mix of Exporters By Thierry Mayer; Marc J. Melitz; Gianmarco Ottaviano
  12. The effects of disclosure policy on risk management incentives and market entry By Hoang, Daniel; Ruckes, Martin
  13. University research alliances, absorptive capacity, and the contribution of startups to employment growths By Toole, Andrew A.; Czarnitzki, Dirk; Rammer, Christian
  14. “Cooperation in R&D, firm size and type of partnership: Evidence for the Spanish automotive industry” By Erika Raquel Badillo; Francisco Llorente; Rosina Moreno

  1. By: Philip Ushchev; Mathieu Parenti; Jacques-Francois Thisse
    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. Using the concept of Frechet differentiability, we determine a general demand system. 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. Our model is able to mimic oligopolistic behavior and to replicate partial equilibrium results within a general equilibrium framework. For example, an increase in per capita income or in population size shifts prices (outputs) downwards (upwards). When firms face the same productivity shock, they adopt an incomplete pass-through policy, except when preferences are homothetic. 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: monopolistic competition; general equilibrium; additive preferences; homothetic preferences
    JEL: D43 L11 L13
    Date: 2014–11
  2. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia, Greece)
    Abstract: A well-known result in oligopoly theory regarding one-tier industries is that the equilibrium mark-up and the Lerner index decreases with the number of firms. In other words, market power is diminished when more firms are present in the market. In the present paper, we consider a two-tier industry and focus on the behaviour of the equilibrium mark-up and Lerner index in the downstream market with respect to a change in the number of downstream ?rms. In a very general setting, without specific demand functions for final goods and vertical relations between upstream and downstream firms, we derive conditions under which the equilibrium downstream mark-up and Lerner index may increase with the number of downstream firms. Moreover, we show that, in contrast to the case of one-tier industries, the equilibrium mark-up and Lerner index in the downstream market can move to opposite directions as a result of an increase in the number of downstream firms. We also provide a specific example by considering a successive Cournot oligopoly model where firms freely enter into the upstream market.
    Keywords: Vertically related markets, Market power, Lerner index.
    JEL: L4 L22
    Date: 2014–11
  3. By: Auer, Raphael; Chaney, Thomas; Sauré, Philip
    Abstract: We examine firm's pricing-to-market decisions in vertically differentiated industries featuring a large number of firms that compete monopolistically in the quality space. Firms sell goods of heterogeneous quality to consumers with non-homothetic preferences that differ in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the pricing game under costly international trade, thus establishing existence and uniqueness. We then examine how the interaction of good quality and market demand for quality affects firms' pricing-to-market decisions. The relative price of high quality goods compared to that of low quality goods is an increasing function of the income in the destination market. When relative costs change, the rate of exchange rate pass-through is decreasing in quality in high income countries, yet increasing in quality in low-income countries. We then document that these predictions receive empirical support in a dataset of prices and quality in the European car industry.
    Keywords: exchange rate pass-through; intra-industry trade; monopolistic competition; pricing-to-market; vertical differentiation
    JEL: E3 E41 F12 F4 L13
    Date: 2014–07
  4. By: Auer, Raphael; Sauré, Philip
    Abstract: We develop a model of vertical innovation in which firms incur a market entry cost and position themselves in the quality space. Once established, firms compete monopolistically, selling to consumers with heterogeneous tastes for quality. We establish existence and uniqueness of the pricing game in such vertically differentiated markets with a potentially large number of active firms. Turning to firms' entry decisions, exogenously growing productivities induce firms to enter the market sequentially at the top end of the quality spectrum. We spell out the conditions under which the entry problem is replicated over time so that each new entrant improves incumbent qualities in fixed proportions. Sequential market entry overcomes the asymmetry of the location problem, which unavoidably arises in the quality spectrum because of its top and bottom ends. Our main technical contribution lies in handling this asymmetry, a feature absent in Salop (1979) and other circular representations of Hotelling (1929) and Lancaster (1966).
    Keywords: 15/6
    JEL: D4 L11 L13
    Date: 2014–06
  5. By: Wen-Jung Liang; Kuang-Cheng Wang; Hong-Ren Din
    Abstract: Spatial Competition and Flexible Manufacturing with Spatially Discriminatory Pricing Abstract This paper develops a two-dimensional spatial framework to explore the firms¡¦ optimal locations and optimal attributes of basic products under linear transportation costs, in which firms have the technique of flexible manufacturing and engage in spatially discriminatory pricing. We can observe in the real world that the technique of flexible manufacturing has been widely adopted by most major manufacturing industries. As indicated by Eaton and Schmitt (1994), the key feature of flexible manufacturing is economies of scope, which can be represented by the production of an array of differentiated products extended by a basic product using the same manufacturing process. The production of the basic product incurs a sunk cost of product development, whose feature can be described by a point on Hotelling¡¦s attribute line. This basic product can be modified to produce extended variant products by incurring additional costs. The additional cost of producing an extended variant product is denoted by a per-unit modification cost that is proportional to the distance of the attribute line between the attribute addresses of the basic product and the extended variant product. The game in question is a three-stage game. Firms simultaneously select their equilibrium locations in the first stage. Then, they simultaneously choose the optimal attributes of the basic products in the second stage. Finally, firms engage in spatially discriminatory pricing in the third stage. The main findings of the paper are as follows. First of all, we show that the two firms will agglomerate at the center of the location line and the optimal attributes of the two basic products will be located at the first and third quartiles of the attribute line, respectively, when the ratio of the marginal modification rate to the transport rate is high. Secondly, the two firms will locate separately on the location line and the optimal attributes of the two basic products will remain at the first and third quartiles when this ratio is moderate. Moreover, the two firms will locate at the first and third quartiles of the location line, respectively, and the optimal attributes of the basic products will agglomerate at the center of the attribute line when this ratio is low. JEL Classification: R32, L22 Keywords: Spatial Agglomeration; Flexible Manufacturing; Spatially Discriminatory Pricing
    Keywords: Spatial Agglomeration; Flexible Manufacturing; Spatially Discriminatory Pricing;
    JEL: R32 L22
    Date: 2014–11
  6. By: Aguirregabiria, Victor; Vicentini, Gustavo
    Abstract: We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store retailers. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We develop an algorithm to approximate a Markov Perfect Equilibrium in our model, and propose a procedure for the estimation of the parameters of the model using panel data on number of stores, prices, and quantities at multiple geographic locations within a city. We also present numerical examples to illustrate the model and algorithm.
    Keywords: cannibalization; industry dynamics; spatial competition; spatial preemption; store location; sunk costs
    JEL: C73 L13 L81 R10 R30
    Date: 2014–11
  7. By: Jérôme Danguy; Bruno van Pottelsberghe
    Abstract: This paper provides new evidence about the budgetary consequences â?? for patent offices â?? of the coexistence of the forthcoming Unitary Patent (UP) with the current European Patent (EP). Simulation results illustrate a dilemma between (1) high UP renewal fees to ensure enough financial income for all national patent offices (NPOs) and (2) low UP renewal fees to make the UP system affordable, with very few NPOs losing on financial revenues. The simulations help to understand the positions of several patent offices, and underline an alternative way to proceed with the negotiations while reducing financial risks for the whole system.
    Date: 2014–11
  8. By: Serena Marianna Drufuca; Maria Rosa Battaggion
    Abstract: We provide a two-sided model in a vertical di§erentiation context. We solve the model and we calculate the equilibrium in terms of advertising levels, subscription fees and qualities provision, both in duopoly - two platforms of different quality - and in monopoly case. We would like to investigate how competition among platforms and the entry deterrence behavior might a§ect the equilibrium, with particular focus on quality provision.
    Keywords: two-sided market, media; quality
    JEL: D42 D43 L15 L82
    Date: 2014
  9. By: Tirole, Jean (Toulouse 1 Capitole University)
    Abstract: Jean Tirole delivered his Prize Lecture on 8 December 2014 at the Aula Magna, Stockholm University.
    Keywords: Market Power;
    JEL: D40
    Date: 2014–12–08
  10. By: Olivier Bonroy (Economie Appliquée de Grenoble, INRA); Christos Constantatos (Department of Economics, University of Macedonia)
    Abstract: Are labels good or bad for consumers and firms? The answer may seem straightforward since labels improve information, yet economic theory reveals situations where their introduction reduces the welfare of at least some market participants. This essay reviews the theoretical literature on labels in order to identify and explain the main reasons that may cause labeling to produce undesirable side-effects. In contrast to earlier reviews that either concentrate on narrow topics or treat the subject in a more or less informal way, we bring together the main results from all the relevant topics by presenting and discussing the assumptions and model-building techniques that underpin them. The advantage of this approach is that it identifies the origin of the differences between results, thus allowing the synthesis of results that sometimes appear even to be contradictory. We focus on “quality labels†and examine the impact of labeling on market structure, the side-effects of costly certification, issues related to the label's trustworthiness, the rationale for mandatory vs. voluntary labeling, the level at which the label's standard is set according to the agency that selects it, the political economy of labels, that is, pro- or anti-label lobbying, lobbying to affect the label's standard, and lobbying in favor or against the label's mandatory imposition. These topics cover a wide range of applications, including Genetically Modified Organism (GMOs), organic produce, geographic indicators, controlled origin, eco-labels, etc. We conclude by identifying topics that require further research.
    Keywords: asymmetric information, certification, credence good, labeling, market power, political economy, regulation, vertical product differentiation, welfare, label, réglementation, économie politique, analyse des marchésétiquetagelabel de qualitédifférenciation verticalethéorie économique
    JEL: L1 L5 Q1
    Date: 2014
  11. By: Thierry Mayer (Département d'économie); Marc J. Melitz (Department of Economics); Gianmarco Ottaviano (Università di Bologna)
    Abstract: We build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales toward its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Theoretically, this within-firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large.
    JEL: D21 D24 F13 F14 F41 L11
    Date: 2014–02
  12. By: Hoang, Daniel; Ruckes, Martin
    Abstract: This paper studies the effects of hedge disclosure requirements on corporate risk management and product market competition. The analysis is based on a simple model of market entry and shows that incumbent firms engage in risk management when these activities remain unobserved by outsiders. The resulting equilibrium is desirable from a social standpoint. Financial markets are well informed and entry is efficient. However, potential attempts for more transparency by additional disclosure requirements introduce a commitment device that provides firms with incentives to distort risk management activities thereby influencing entrant beliefs. In equililibrium, firms engage in significant risk-taking. This behavior limits entry and adversely affects the nature of competition in industries. Our findings thus suggest that more disclosure on risk management may change risk management in socially undesirable ways.
    Keywords: Risk Management,Hedge Disclosures,Market Entry,Signal Jamming
    JEL: D82 G3 L1 M4
    Date: 2014
  13. By: Toole, Andrew A.; Czarnitzki, Dirk; Rammer, Christian
    Abstract: This paper examines how university research alliances and other cooperative links with universities contribute to startup employment growth. We argue that 'scientific absorptive capacity' at the startup is critical for reaping the benefits from university research alliances, but not necessarily for other university connections. We also estimate the aggregate employment contribution from startup firms and attribute those employment gains to university research alliances and other university connections. We find significant contributions to employment growth from university research alliances and other university connections, but scientific absorptive capacity is critical for university research alliances. Only 7% of the startup population maintained a university research alliance, but among these firms, 3.4% of their total jobs created were attributable to their alliances. These results suggest university connections are quite important for job growth and university research alliances contributed substantially to job creation for those firms that had such alliances.
    Keywords: Academic Entrepreneurship,Startups,Firm performance,Technology Transfer,University Spinoff Policy,Human Capital
    JEL: L25 L26 J24
    Date: 2014
  14. By: Erika Raquel Badillo (Department of Econometrics. University of Barcelona); Francisco Llorente (Department of Econometrics. University of Barcelona); Rosina Moreno (Department of Econometrics. University of Barcelona)
    Abstract: This paper aims to analyse cooperation in R&D in the automobile industry in Spain. It first examines to what extent firms cooperate with external actors in the field of technological innovation, and if so, with what type of cooperation partner, paying special attention to the differentiation according to the size of the firms. Second, it aims to study how the firm’s size may affect not only the decision of cooperating but also with which type of partner, while controlling for other determinants that have been considered in the literature as main drivers of collaborative activities in R&D. We use data provided by the Technological Innovation Panel in the 2006-2008 period for firms in the automotive sector. We estimate a bivariate probit model that takes into account the two types of cooperation mostly present in the automotive industry, vertical and institutional, explicitly considering the interdependencies that may arise in the simultaneous choice of both.
    Keywords: Innovation, Cooperation in R&D, Partnership, Firm size, Automotive Industry JEL classification: D22, O32, L24, L62
    Date: 2014–10

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