nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒06‒13
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Welfare Effects of Home Automation Technology with Dynamic Pricing By Bollinger, Bryan; Hartmann, Wesley R.
  2. Should Brand Firms Always Take Pioneering Position? By Cong Pan
  3. Subsidy or tax policy for new technology adoption in duopoly with quadratic and linear cost functions By Hattori, Masahiko; Tanaka, Yasuito
  4. Failing to Choose the Best Price: Theory, Evidence, and Policy By Michael D. Grubb
  5. Behavioral Consumers in Industrial Organization By Michael D. Grubb

  1. By: Bollinger, Bryan (Duke University); Hartmann, Wesley R. (Stanford University)
    Abstract: A fixed cost investment in home automation technology can eliminate consumers' marginal costs of responding to changing demand conditions. We estimate the welfare effects of a home automation technology using a field experiment run by a large electric utility that randomly assigned both a technology and price treatment. Average treatment effects reveal that the home automation technology reduces demand more than twice as much as an alternative technology that only informs consumers of price changes. Furthermore, the average demand reductions during critical price events provide sufficient supply-side welfare gains to fully offset the installation costs of the device. Finally, we estimate household-specific treatment effects by matching households on their pre-treatment policy functions. This demonstrates the additional surplus gained by the utility if it targeted these treatments to households with the largest estimated demand responses.
    Date: 2015–03
  2. By: Cong Pan
    Abstract: This paper discusses brand firms' endogenous timing problem when facing nonbrand firms under quantity competition. We study a market comprising brand and nonbrand products. There exist heterogeneous consumer groups-one group buys only brand products while the other one cares little about the brand. These two consumer groups constitute the high-@and low-end markets respectively. The brand firms' moving order is endogenized, whereas the nonbrand firms are restricted to move in a later period. We show that if the low-end market is of an intermediate size, the leader-follower equilibrium outcome occurs, and the follower obtains second mover advantage which diminishes when the number of nonbrand firms increases. These results follow from the fact that each brand firm's best response function has an upward jump if the rival's output exceeds a particular level. Thus, the leader's profit function has a downward jump at some particular point while the follower's profit does not.
    Date: 2015–06
  3. By: Hattori, Masahiko; Tanaka, Yasuito
    Abstract: We present an analysis about subsidy (or tax) policy for adoption of new technology in a duopoly with a homogeneous good. Technology itself is free. However, firms must expend fixed set-up costs for adoption of new technology, for example, education costs of their staffs. We assume linear demand function, and consider two types of cost functions of firms. Quadratic cost functions and linear cost functions. There are various cases of optimal policies depending on the level of the set-up cost and the forms of cost functions. In particular, under linear cost functions there is the following case. The social welfare is maximized when one firm adopts new technology, however, both firms adopt new technology without subsidy nor tax. Then, the government should impose taxes on one firm or both firms. Under quadratic cost functions there exists no taxation case. There are subsidization cases both under quadratic and linear cost functions.
    Keywords: subsidy or tax for new technology adoption, duopoly, quadratic cost, linear cost
    JEL: D43 L13
    Date: 2015–06–09
  4. By: Michael D. Grubb (Boston College)
    Abstract: Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons diffcult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers.
    Keywords: behavioral industrial organization; bounded rationality; search; obfuscation; switching; inertia
    JEL: D43 D83 L11 L13 L15
    Date: 2015–05–18
  5. By: Michael D. Grubb (Boston College)
    Abstract: This paper succinctly overviews three primary branches of the industrial organization literature with behavioral consumers. The literature is organized according to whether consumers: (1) have non-standard preferences, (2) are overconfident or otherwise biased such that they systematically misweight different dimensions of price and other product attributes, or (3) fail to choose the best price due to suboptimal search, confusion comparing prices, or excessive inertia. The importance of consumer heterogeneity and equilibrium effects are also highlighted along with recent empirical work.
    Keywords: behavioral industrial organization; bounded rationality; loss aversion; present bias; overconfidence; search; obfuscation; switching; inertia
    JEL: D41 D42 D43 D81 D82 D83 L11 L12 L13 L15
    Date: 2015–05–12

This nep-ind issue is ©2015 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.