nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒01‒09
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Price Discrimination in Asymmetric Industries: Implications for Competition and Welfare By Hinnerk Gnutzmann
  2. Dynamic monopoly with demand delay By Akio Matsumoto; Keiko Nakayama
  3. Another brick in the wall? Technology leaders, patents, and the threat of market entry By Heger, Diana; Zaby, Alexandra K.
  4. Quality differentiation and entry choice between online and offline markets By Yijuan Chen; Xiangting Hu; Sanxi Li
  5. Horizontal mergers in the presence of vertical relationships. By Ghosh, Arghya; Morita, Hodaka; Wang, Chengsi
  6. Horizontal Mergers and Product Quality By Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
  7. Very Simple Markov-Perfect Industry Dynamics By Abbring, J.H.; Campbell, J.R.; Tilly, J.; Yang, N.
  8. Perfect Simulation for Models of Industry Dynamics By Takashi Kamihigashi; John Stachurski
  9. Price Dynamics with Customer Markets By Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
  10. Product Customization in the Spokes Model By Aoki, Reiko; Hillas, John; Kao, Tina
  11. Assessment of EU Postal Sector Policy during the Second Barroso Administration (2010-2014) By Christian Jaag; Urs Trinkner; Jeffrey Yusof
  12. R and D Spillovers Across the Supply Chain: Evidence from the Indian Automobile Industry By Madhuri Saripalle

  1. By: Hinnerk Gnutzmann (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: Price discrimination by consumer's purchase history is widely used in regulated industries, such as communication or utilities, both by incumbents and entrants. I show that such discrimination can have surprisingly negative welfare eects { even though prices and industry prots fall, so does consumer surplus. Earlier studies that did not allow entrants to discriminate or assumed symmetric rms yielded sharply dierent results, the pro{competitive eect of price discrimination are stronger in these settings. Imposing a pricing constraint on incumbent's discrimination leads the entrant to discriminate more heavily, but still improves both consumer and producer welfare.
    Keywords: History{based price discrimination, asymmetric price discrimination, switching cost
    JEL: L13 L41
    Date: 2014–11
  2. By: Akio Matsumoto; Keiko Nakayama
    Abstract: Implicit in the text-book monopoly is an assumption of complete and instantaneous information or knowledge available to economic agents at free of charge. Under such circumstances, knowing the certain price and cost functions, the monopolist can make an optimal decision of price and output to maximize its profit and realize it. As a result, the text-book monopoly model becomes static in nature. There are, however, many empirical works to indicate that such an assumption of rational economic agents goes too far. In reality the monopolist is boundedly rational and adjusts its price and output as a function of its limited knowledge and past experiences. To fill this gap, we propose, in this study, to relax this assumption and develop a dynamic monopoly model. In particular, we assume first that the monopolist has only partial information about the market condition and second that the monopolist obtains it with time delay. In natural consequence of these alternations, the monopolist cannot jump to the optimal point but searches for it with using the actual data obtained through the market. The modified model becomes dynamic in nature. This is the issue far outside the scope of the text book monopoly and it is what we will consider in this study. In the recent literature, various learning processes of the boundedly rational monopolist have been extensively studied. Puu [1995, CSF] constructs a discrete-time monopoly model in which price function is cubic and cost function is linear. It is shown that the gradient learning or search process based on locally obtained information might behave in an erratic way under the condition that the price function has an inflection point. Assuming that the monopolist uses a rule of thumb to determine quantity to produce, Naimzada and Ricchiute [2008, AMC] reconsider Puu's model with a linear cost function and a cubic price function without the inflection point. Their model is then generalized by Askar [2013, EM] who replaces the cubic function with higher-order polynomials. Matsumoto and Szidarovszky [2013] further generalize Asker's model by introducing the more general type of the cost function. Since those models are described by one dimensional difference equation, chaotic dynamics can arise via period-doubling bifurcation. In this study we reconsider a dynamic monopoly model from two different points of view. First, to detect the effect caused by non-instantaneous information, the dynamic process is constructed in continuous-time scales and a fixed time delay is introduced. Second, we discretize the continuous process to obtain a 'delay' discrete process and analyse the delay effect on discrete dynamics. In both models, local stability of a stationary state is analytically considered and global dynamics is numerically examined.
    Keywords: Dynamic monopoly; bounded rational; time delay; nonlinea dnamics
    JEL: C62 C63 D42
    Date: 2014–11
  3. By: Heger, Diana; Zaby, Alexandra K.
    Abstract: Technology leaders protecting a technological headstart with a patent are provided with a powerful legal measure to restrict market entry. We analyze the impact of knowledge spillover on the decision to patent and the effect of varying patent breadth on the threat of market entry. An empirical test of our theoretical results suggests that (i) a large technological lead is protected by a patent only in industries with high knowledge spillover, and that (ii) patent breadth can mitigate the market entry threat.
    Keywords: patenting decision,disclosure requirement,patent breadth,market entry threat,IPC codes
    JEL: L13 O33 O34
    Date: 2014
  4. By: Yijuan Chen; Xiangting Hu; Sanxi Li
    Abstract: We study a model where an entrant chooses between online and offline markets to compete with an offline-market incumbent. When consumers buy a product from the online market, they cannot inspect the product's quality prior to purchase. Conventional wisdom and some literature suggest that this feature drives low-quality products to hide themselves in the online market. However, the literature on vertical product differentiation indicates that a firm may prefer to reveal its product quality in the offline market, because quality differentiation helps alleviate price competition. We show that under fairly general conditions the entrant will choose the offline market for not only the highest qualities but also the lowest ones, and choose the online market for intermediate qualities. While the average quality of the online good is lower than the incumbent's quality, the actual quality of the online good may be higher than that.
    JEL: L13
    Date: 2014–11
  5. By: Ghosh, Arghya; Morita, Hodaka; Wang, Chengsi
    Abstract: We study welfare effects of horizontal mergers under a successive oligopoly model and find that downstream mergers can increase welfare if they reduce input prices. The lower input price shifts some input production from cost-inefficient upstream firms to cost-efficient ones. Also, the lower input price makes upstream entry less attractive, reduces the number of upstream entrants, and decreases their average costs in the presence of fixed entry costs. We identity necessary and sufficient conditions for a reduction in input prices and welfare-improving horizontal mergers under a general demand function. Qualitative nature of our findings remains unchanged for upstream mergers.
    Keywords: merger, successive oligopoly, welfare, reallocation, rationalization.
    JEL: L1 L4 L5
    Date: 2014–11–27
  6. By: Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
    Abstract: Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.
    Keywords: horizontal mergers; quality; spatial competition
    JEL: L13 L15 L41
    Date: 2014–09
  7. By: Abbring, J.H. (Tilburg University, Center For Economic Research); Campbell, J.R.; Tilly, J.; Yang, N. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper develops an econometric model of industry dynamics for concentrated markets that can be estimated very quickly from market-level data on demand shifters and the number of producers. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be calculated from the xed points of low-dimensional contraction mappings. We characterize the model's identi cation and extend Rust's (1987) nested xed point estimator to account for the observable implications of mixed strategies on survival. We illustrate the model's application with ten years of County Business Patterns data from Motion Picture Theaters in 573 Micropolitan Statistical Areas.
    Keywords: demand uncertainty; dynamic oligopoly; rm entry and exit; Markov-perfect equilibrium; nested xed point estimator; sunk costs; toughness of competition
    JEL: L13 C25 C73
    Date: 2014
  8. By: Takashi Kamihigashi (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); John Stachurski (Research School of Economics, Australian National University, Australia)
    Abstract: In this paper we introduce a technique for perfect simulation from the stationary distribution of a standard model of industry dynamics. The method can be adapted to other, possibly non-monotone, regenerative processes found in industrial organization and other fields of economics. The algorithm we propose is a version of coupling from the past. It is straightforward to implement and exploits the regenerative property of the process in order to achieve rapid coupling. Keywords: Regeneration, simulation, coupling from the past, perfect sampling.
    Date: 2014–11
  9. By: Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
    Abstract: We study a model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price set by firms, describes the behavior of optimal prices in the presence of customer retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit micro data on purchases from a large U.S. retailer by a panel of households to quantify the model and compare it to the counterfactual benchmark of the monopolistic competition setting. We show that our model with customer markets has markedly dierent implications in terms of the equilibrium price distribution, and better fits the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to policy relevant shocks is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of firms' demand to these shocks.
    Keywords: customer markets; price setting; product market frictions
    JEL: E12 E30 L16
    Date: 2014–10
  10. By: Aoki, Reiko; Hillas, John; Kao, Tina
    Abstract: We use a spokes model to analyze ?ms?customization incentives when facing the choices of standard and niche products. Products at or near the end of the spokes are customized products, while products near the origin are more standardized products that cater to the taste of many consumers. Our results indicate that although monopolist always offers the standard product, if a ?m anticipates entry, it may choose to stake claim to a customized product. For low transportation costs, the early entrant chooses the standard product. But this equilibrium is characterized by aggressive pricing behavior.
    Keywords: product differentiation, product customization, entry, spatial oligopoly
    JEL: L11 L13
    Date: 2014–11
  11. By: Christian Jaag; Urs Trinkner; Jeffrey Yusof
    Abstract: This paper assesses the EU postal sector policy of the second Barroso Commission from 2010 to 2014. The main goal of the Commission is to achieve a single European market for postal services. The paper distinguishes between the following three objectives, whose implementation should lead to the achievement of an internal postal market: implementation of the Third Postal Directive; fostering e-commerce and parcel delivery; and enforce its State aid framework in the postal sector. The analysis shows that almost all Member States have transposed the Directive into national law and fully liberalized their markets, but nevertheless competition in all Member States has only developed to a limited extent. While there is strong growth of the e-commerce sector, a consistent alignment of State Aid policy with USO and full market opening is still under development. The current design of the USO and its financing may not be appropriate in times of fast changing technology and consumer needs. Therefore, the paper presents new approaches, suggesting to include new technologies or even proposing to establish an intermodal USO for postal and telecommunication services.
    Keywords: Barroso Commission, Postal Sector, Universal Service Obligation, State Aid, E-Commerce
    JEL: L43 L51
    Date: 2014–12
  12. By: Madhuri Saripalle (Madras School of Economics)
    Abstract: This study attempts to capture the impact of vertical and horizontal R and D spillovers across the supply chain. Empirical studies have captured vertical spillovers while finding the role of horizontal spillovers in R and D to be negligible, as the pool of accessible knowledge is the same for a cross section of firms within an industry. However, from a supply chain perspective, though firms may be suppliers to an industry, they belong to different industries themselves; and different tiers of the supply chain. The automobile industry is a good case in point: though auto component firms supply to the automobile sector, they come under diverse industrial classification schemes like rubber, electronics and engineering. The present study attempts to measure the horizontal spillovers within Indian Indian auto components Industry as well as spillovers coming vertically from the original equipment manufacturers (OEM) from a flow and a stock perspective. The trend in R and D expenditures undertaken by various component types suggests that most of the R and D occurs in the engine, suspension and tyre category indicating the adaptive nature of R and D, given India’s infrastructure. The study finds spillovers from within the component group are a substitute for firm’s own in-house R and D, while spillovers coming from outside the component group act as complements, thus indicating the integral nature of automobile design, requiring collaborative R and D effort. Among the OEMs, spillovers vary based on vehicle category suggesting that nature of OEM-supplier collaboration differs by vehicle types.
    Keywords: Industry studies, Research and Development, Country studies, Industrial Organization, Supply chain
    JEL: L6 L22 O33 R D
    Date: 2013–11

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