nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒02‒22
eleven papers chosen by

  1. Reconciling Cournot and Bertrand Outcomes: A Review By Kirui, Benard Kipyegon
  2. Network Access and Market Power By Orlova, Ekaterina; Hubert, Franz
  3. Markets with Technological Progress: Pricing, Quality and Novelty By von Auer, Ludwig; Trede, Mark
  4. Organizational Decisions in Multistage Production Processes By Nowak, Verena
  5. Price disclosure rules and consumer price comparison By Stühmeier, Torben
  6. The Price of Distance: Pricing to market, producer heterogeneity, and geographic barriers By KANO Kazuko; KANO Takashi; TAKECHI Kazutaka
  7. Bundling information goods under 'breakeven' price By Kuroda, Toshifumi
  8. Bundling incentives in markets with product complementarities: The case of triple-play By Macieira, João; Pereira, Pedro; Vareda, João
  9. Air Ticket Sales as Bids from Airline Alliances By Ivaldi, Marc; Petrova, Milena; Urdanoz, Miguel
  10. How Can Proprietary Software Firms Take Advantage Over Open Source Communities? Another Story of Pro…fitable Piracy By Thomas Le Texier; Mourad Zeroukhi
  11. Competition and market strategies in the Swiss fixed telephony market By Balmer, Roberto E.

  1. By: Kirui, Benard Kipyegon
    Abstract: This paper reconciles the Cournot and Bertrand Models of oligopolistic competition, highlighting its weaknesses and giving an opinion thereafter. The pertinent question in this paper is why Cournot (1838) ignored the price and Bertrand (1883) ignored the quantity? From the review, the main conclusion of this paper is that oligopoly competition is guided in the long run by production capacity competition, as advocated by Cournot, equilibrated through price competition in the short run, as advocated by Bertrand.
    Keywords: Cournot Competition,Bertrand Competition,Oligopoly,equilibrium
    JEL: D43 L13
    Date: 2013–04
  2. By: Orlova, Ekaterina; Hubert, Franz
    Abstract: We study the impact of the liberalization of EU natural gas markets on the balance of power between `local champions', customers, and outside producers. We distinguish between two steps of the reform: 1. opening access to transit pipes and 2. opening access to distribution systems, hence customers. Using the Shapley value as a power index, we find a modest and rather heterogeneous impact from the first step. The impact of the second step is much larger and yields a clear pattern: all local champions lose, while all customers and all outside players gain. As one third of the losses of champions within EU leaks to players abroad, current reforms might enhance the dominance of already powerful outside producers. This effect, however, completely vanishes, when network power is assessed with the nucleolus.
    JEL: L51 L95 C71
    Date: 2014
  3. By: von Auer, Ludwig; Trede, Mark
    Abstract: New and old products differ in two respects: quality and newness. Whereas a higher quality of a new product always benefits consumers, the newness itself benefits some consumers, but not others, and for some, it is even a disadvantage. We capture these features in a Hotelling model of Over- Lapping Innovators (HOLI model), entailing a sequence of static Hotelling games of horizontal product differentiation (newness), that we extend by vertical product differentiation (quality). In this model the firms compete on quality and price. Using advanced dynamic hedonic regression methods, we empirically investigate the actual pricing of firms in the German laser printer market. We show that their pricing corresponds to our model with the entrant acting as the Stackelberg follower.
    JEL: L11 L63 C23
    Date: 2014
  4. By: Nowak, Verena
    Abstract: To explain organizational decisions in multistage production processes we assume a production process with one producer and two suppliers of which one is the firm's direct supplier and the other one is the supplier of the supplier. The firm decides only on the organizational form of her direct supplier who in turn decides on the organizational form of his supplier. Analyzing a scenario of simultaneous production, we find that the decision of the supplier - whether to integrate or outsource his own supplier - is independent from the organizational decision of the producer with respect to her supplier. However, once the production decisions of the firm and the suppliers are made sequentially, the supplier's organizational decisions is no longer independent from that of the producer. More precisely, the supplier's decision to integrate or outsource his own supplier additionally depends on the elasticity of demand and on the importance of the producer for the production process.
    JEL: D23 L22 L14
    Date: 2014
  5. By: Stühmeier, Torben
    Abstract: Search frictions are classified as a main impediment to active competition in many markets. In some markets, such as in financial and retail gasoline markets, governments and consumer protection agencies call for a compulsory price reporting. Consumers should then more easily compare the firms' offers. We show that for a given level of price comparison, a mandatory price reporting indeed widely benefits consumers. The regulation, however, feeds back into firms' strategies, resulting in lower equilibrium levels of price comparison. This effect may dominate and the regulation may lead to higher expected market prices.
    JEL: D83 L13 L51
    Date: 2014
  6. By: KANO Kazuko; KANO Takashi; TAKECHI Kazutaka
    Abstract: Transport costs are generally attributable to price differentials across geographically separated regions. However, when using price differential data, the identification of distance-elastic transport costs depends on how producers handle transport costs and set prices in remote markets. To address this problem, we adopt a nonhomothetic preference framework with heterogeneous producers. We show that the presence of nonhomothetic preferences is important in causing producer heterogeneity to alter individual pricing behavior depending on market conditions, a property absent in the constant elasticity of substitution heterogeneity framework. This also exhibits the property that producers do not fully pass on the increase in transport costs. By not accounting for these features, the distance elasticity of transport costs is underestimated. However, by incorporating these features in our model and using empirical analysis and microlevel data, we reveal that the distance effect is significantly large, suggesting that the price of geographic barriers for regional transportation is high.
    Date: 2015–02
  7. By: Kuroda, Toshifumi
    Abstract: Bundling under monopoly tends to increase demand and market efficiency, but likely at the expense of transferring consumers' surplus to firms. Public utilities can use this increase in demand to reduce the monthly fee per consumer. To demonstrate it, I conduct a numerical analysis of the effects of bundling under breakeven price regulation for the Japan Broadcasting Corporation. I estimate the willingness-to-pay for broadcasting services and simulate consumer choices under pure bundling and a-la-carte pricing with breakeven price regulation. Comparing pure bundling and a-la-carte pricing of terrestrial television and satellite television, the increase in demand caused by bundling is very slight due to the strong positive correlation of WTPs. However, compared with a-la-carte pricing, consumer welfare increases by 1.7% with bundling of channels and by 28.2% with bundling of genres.
    Keywords: Bundling,Public utilities,Policy analysis
    JEL: L82 L30 D49
    Date: 2014
  8. By: Macieira, João; Pereira, Pedro; Vareda, João
    Abstract: We analyze …firms incentives to bundle and tie in the telecommunications industry. As a fi…rst step, we develop a discrete-choice demand model where fi…rms sell products that may combine several services in bundles, and consumers choose assortments of different types of products available from various vendors. Our approach extends standard discrete-choice demand models of differentiated product to allow for both flexible substitution patterns and to map demand for each choice alternative onto the demand for each service or bundle that a fi…rm may sell. We exploit these properties to examine bundling behavior when fi…rms choose: (i) prices, and (ii) which products to sell. Using consumer-level data and survey data from the Portuguese telecommunications industry, we estimate our demand model and identify fi…rm incentives to bundle and tie in this industry. We use the model to perform several policy related conterfactuals and evaluate their impact on prices and product provision.
    Keywords: Bundles,Discrete-Choice Model,Equilibrium Simulation,Differentiated Product,Consumer Level Data
    JEL: D43 K21 L44 L96
    Date: 2014
  9. By: Ivaldi, Marc; Petrova, Milena; Urdanoz, Miguel
    Abstract: Motivated by the higher price sensitivity and service homogenisation in the airline industry in recent years, we propose a new methodology to deal with transaction prices and to estimate the effect of alliances in the US domestic market. The assumption that airlines compete on price allows us to take advantage of the observational equivalence between Bertrand competition and the reverse English auction. We then apply an MLE method, developed by Paarsch (1997) for estimating auctions, to recover the distributional characteristics of air fares using a sample of airline tickets from the US domestic market. This procedure allows us to benefit from the heterogeneity of individual prices while most studies have used average prices, which would have involved a loss of information and a potential bias. We find that an alliance operating in a market is associated with prices on average 18.9 percent higher. Additionally, we find the standard deviation of ticket prices to be 4.3 percent higher, which is likely related to more effcient revenue management practice by alliance partners operating together in the same market.
    Keywords: airfares; airlines; alliances
    JEL: L40 L93 R48
    Date: 2015–02
  10. By: Thomas Le Texier (CREM UMR CNRS 6211, University of Rennes 1, France); Mourad Zeroukhi (Foundation of the University of Rennes 1, CREM CNRS UMR 6211 and IDEC)
    Abstract: This paper analyzes the impact on a proprietary software (PS) firm's profit of the activities of an open source software (OSS) community and a piracy channel, as well as on welfare. We develop a model in which the PS firm competes by price with both producers and also selects its compatibility strategy towards the OSS solution and its protection strategy towards the software copy (PPS). We show that the existence of the piracy channel incumbent enables the PS firm to reach out higher profit than when piracy is prevented. A key mechanism at stake is that the PS monopolist can define its compatibility strategy so as to level price competition down while extending its market share at the same time. Although it has to provide some protection efforts towards the piracy channel to do so, the extra revenues it generates always overcome such latter costs. From a regulatory point of view, our results stress that welfare is higher when piracy is prevented while the PS firmsets compatibility towards the OSS solution.
    Keywords: Anti-copy Protection; Compatibility; Externalities; Open Source Software; Piracy; Proprietary Software
    JEL: L11 L82 L86
    Date: 2015–01
  11. By: Balmer, Roberto E.
    Abstract: Fixed telephony has long been a fundamentally important market for European telecommunications operators. The liberalisation and the introduction of regulation in the end of the 1990s, however, allowed new entrants to compete with incumbents at the retail level. A rapid price decline and a decline in revenues followed. Increased retail competition eventually led a number of national regulators to deregulate this market. In 2013, however, many European countries (including Switzerland) continued to have partially binding retail price regulation in this market. More than a decade after liberalisation and the introduction of wholesale and retail price regulation, sufficient data is available to empirically measure the success of regulation and assess its continued necessity. This paper develops a market model based on a generalised version of the traditional dominant firm - competitive fringe model allowing for the incumbent a more competitive conduct than that of a dominant firm. A system of simultaneous equations is developed and direct estimation of the incumbent's residual demand function is performed by instrumenting the market price by incumbent-specific cost shifting variables as well as other variables. Unlike earlier papers that assess market power in this market, this paper also adjusts the market model to ensure a sufficient level of cointegration and avoid spurious regression results. This necessitates the introduction of intertemporal effects. While the incumbent's conduct cannot be directly estimated using this framework, the concrete estimates show that its residual demand is inelastic (long run price elasticity of residual demand of -0.12). Such a level of elasticity is shown to be only compatible with a profit maximising incumbent in the case of largely competitive conduct (conduct parameter below 0.12 and therefore close to zero). It is consequently found that the Swiss incumbent acted rather competitively in the fixed telephony retail market in the period under review (2004-2012) and that the (partial) retail price caps in place can no longer be justified on the basis of a lack of competition.
    Keywords: residual demand estimation,competition,conduct,time series,dynamic residual demand estimation,fixed voice,fixed telephony,retail market,telecommunications
    Date: 2014

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