nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒03‒13
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Cournot Games with Uncertainty: Coalitions, Competition, and Efficiency By Baosen Zhang; Ramesh Johari; Ram Rajagopal
  2. Intra-Industry Trade with Bertrand and Cournot Oligopoly: The Role of Endogenous Horizontal Product Differentiation By James A. Brander; Barbara J. Spencer
  3. Firms entry, oligopolistic competition and labor market dynamics By Andrea Colciago; Lorenza Rossi
  4. Antitrust versus industrial policies, entry and welfare By Guy Meunier; Jean-Pierre Ponssard; Francisco Ruiz-Aliseda
  5. Power Market Design beyond 2020: Time to Revisit Key Elements? By Karsten Neuhoff; Sophia Ruester; Sebastian Schwenen

  1. By: Baosen Zhang; Ramesh Johari; Ram Rajagopal
    Abstract: We investigate the impact of group formations on the efficiency of Cournot games where producers face uncertainties. In particular, we study a market model where producers must determine their output before an uncertainty production capacity is realized. In contrast to standard Cournot models, we show that the game is not efficient when there are many small producers. Instead, producers tend to act conservatively to hedge against their risks. We show that in the presence of uncertainty, the game becomes efficient when producers are allowed to take advantage of diversity to form groups of certain sizes. We characterize the trade-off between market power and uncertainty reduction as a function of group size. Namely, we show that when there are N producers present, competition between groups of size square root of N results in equilibria that are socially optimal.
    Date: 2015–03
  2. By: James A. Brander; Barbara J. Spencer
    Abstract: This paper investigates the effect of endogenous horizontal product differentiation on trade patterns and the gains from trade under Bertrand and Cournot oligopoly. Firms differentiate their products to mitigate competition, but only if the investment required is not too high. Investment in product differentiation takes place in a much wider range of cases and results in a greater difference between products under Bertrand than Cournot competition. In our model, trade in homogeneous products never takes place under Bertrand competition: Bertrand firms export only if they differentiate their products. Cournot firms may trade in either homogeneous or differentiated products. If there is trade, consumers tend to be better off with Bertrand than Cournot competition due to greater product differentiation and more aggressive pricing, but higher levels of investment can raise Bertrand profit above Cournot profit and also above the monopoly profit at autarky when investment costs are sufficiently low.
    JEL: F12 L1 L13
    Date: 2015–03
  3. By: Andrea Colciago; Lorenza Rossi
    Abstract: Using U.S. quarterly data we provide VAR evidence showing that a positive productivity shock leads to a persistent decrease in the unemployment rate and in the price markup, together with an increase in aggregate profits. In response to the shock the labor share of income decreases on impact and overshoots its long run trend before reverting to equilibrium. To address these facts, we propose a model where Cournot competition and firms' entry in the goods market interact with search and matching frictions in the labor market. The price markup countercyclicality delivered by our model is a key factor to jointly account for the empirical facts we documented.
    Keywords: Firms' Entry; Oligopolistic competition
    JEL: L11 E32
    Date: 2015–03
  4. By: Guy Meunier (INRA-UR1303 ALISS); Jean-Pierre Ponssard (CNRS); Francisco Ruiz-Aliseda (Ecole Polytechnique)
    Abstract: In industries with large sunk costs, the investment strategy of firms depends on the regulatory context. We consider ex-ante industrial policies in which the sunk cost may be either taxed or subsidized, and antitrust policies which could either be pro-competitive (leading to divestiture in case of high ex-post profitability) or lenient (allowing mergers in case of low ex-post profitability). Through a simple entry game we completely characterize the impact of these policies and examine their associated dynamic trade-offs between the timing of the investment, the ex-post benefits for the consumers, and the possible duplication of fixed costs. We find that merger policies are dominated by ex-ante industrial policies, whereas the latter are dominated by divestiture policies only under very special circumstances.
    Keywords: entry, industry dynamic, antitrust policy, divestiture
    JEL: L1 L4 L5
    Date: 2015–03
  5. By: Karsten Neuhoff; Sophia Ruester; Sebastian Schwenen
    Abstract: We revisit key elements of European power market design with respect to both short term operation and longer-term investment and re-investment choices. For short term markets, the European policy debate focuses on the definition of common interfaces, like for example gate closure time. We argue that that this is insufficient if the market design is to accommodate for the different needs of renewable and conventional generation assets and different flexibility options. The market design needs to ensure resources are pooled over larger geographic areas, the full flexibility of different assets can be realized with complex bids and scarce network resources are efficiently used. For investment and re-investment choices we argue that different technology groups like wind and solar versus fossil fuel based generation may warrant different treatment – reflecting different level of publicly accessible information, requirements for grid infrastructure, types of strategic choices relevant for the sector and share of capital cost in overall generation costs. We discuss opportunities for such a differentiated treatment and implications for electricity consumers.
    Keywords: Power market design, regulation, investment framework
    JEL: L11 L94 G32
    Date: 2015

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