nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒08‒01
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Vertical integration and accommodation effects under Cournot competition By Christos Constantatos; Ioannis Pinopoulos
  2. Oligopoly Power in the Food Industries Revisited: A Stochastic Frontier Approach By Lopez, Rigoberto A.; Zheng, Hualu; Azzam, Azzeddine
  3. Substitution between Online and Offline Advertising: Evidence from the Carbonated Soft Drink Industry By He, Xi; Lopez, Rigoberto A.; Liu, Yizao

  1. By: Christos Constantatos (Department of Economics, University of Macedonia); Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: We consider a two-tier industry where a vertically integrated firm sells input to, and competes against a downstream rival. We show that when the upstream divi- sion of the integrated firm uses a two-part tari¤ contract, the downstream division will behave less agressively despite common presumption that Cournot conjectures preclude such behavior. By limiting its quantity, the downstream division increases rival's profits that can be recouped by the upstream division via a fixed fee. This ac- commodation e¤ect allows the integrated firm to achieve full decisions-coordination between its divisions, and Stackelberg-leader profits, even though downstream deci- sions are taken simultaneously.
    Keywords: Vertical integration, accommodation effect, two-part tariffs, product differentiation, Cournot competition.
    JEL: L4 L22
    Date: 2015–06
  2. By: Lopez, Rigoberto A.; Zheng, Hualu; Azzam, Azzeddine
    Abstract: Since the late 1980s, the analysis of market power in the food industries has shifted from analyzing market concentration (structure) towards empirically measuring how far a market diverges from perfect competition (conduct). The New Empirical Industrial Organization (NEIO; usually offspring of the work of Appelbaum, 1982, or Bresnahan, 1982) has dominated the food economics literature on market power in the past 25 years (see Kaiser and Suzuki, 2006, for a summary of NEIO applications to food industries) and continues to do so (Cakir and Balagtas, 2012; Hovhannisyan and Gould, 2012; Cleary and Lopez, 2014). NEIO studies, in general, find a significant degree of oligopoly power in the food industries (Bhuyan and Lopez, 1997; Lopez, Azzam and Liron, 2002; Sheldon and Sperling, 2003). This study estimates mark-ups and oligopoly power for U.S. food industries using a stochastic frontier (SF; Kumbhakar, Baardsen and Lien, 2012; Baraigi and Azzam, 2014) approach, where mark-ups are treated as systematic deviations from a marginal cost pricing frontier. We apply the analysis to 36 U.S. food industries using NBER-CES Manufacturing Industry Database (2014), which covers a span of 31 years from 1979 to 2009. Empirical results show that all the food industries in the sample exercise at least some degree of oligopoly power, but most in a moderate manner. The estimated mean Lerner index is approximately 0.06, generally much lower than obtained using the conventional NEIO approaches. The SF model used provides a novel and promising framework to test and measure the degree of market power in agricultural and food markets.
    Keywords: Market Power, Food Industry, NEIO, Stochastic Frontier Approach, Agricultural and Food Policy, Industrial Organization, D43, L13, L66, Q13,
    Date: 2015
  3. By: He, Xi; Lopez, Rigoberto A.; Liu, Yizao
    Abstract: As in previous studies on traditional media, previous work has assumed that online and offline advertising are substitutes. However, empirical evidence for this premise is lacking. This paper investigates the substitution between online advertising and offline advertising as well as the impact of the introduction of new media technology on the cost of advertising. Using a rich dataset of monthly observations for 52 carbonated soft drink brands between 2005 and 2011, we estimate a translog cost function that considers the mix of on/off line advertising and online advertising adoption at the brand level. As in previous work, we find that TV and print media are close substitutes. Surprisingly, however, we find that online advertising is a complement to rather than a substitute for both TV and print media advertising. This might be explained by online advertising’s targeting younger market segments and acting as a reinforcement of TV and print media advertising exposure. Further results show that the adoption of online advertising has lowered the cost of advertising for achieving a sales target but that its role as a complement rather than a substitute is weakening.
    Keywords: Online advertising, media substitution, translog cost function, CSDs, Agricultural and Food Policy, Marketing, L13, M37, D12,
    Date: 2015

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