nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒09‒05
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Analysis of mergers in first-price auctions By Gugler, Klaus Peter; Weichselbaumer, Michael; Zulehner, Christine
  2. Churn vs. Diversion: An Illustrative Model By Yongmin Chen; Marius Schwartz
  3. Competition and Product Innovation of Intermediaries in a Differentiated Duopoly By Sonja Brangewitz; Jochen Manegold
  4. Competition and Product Choice in Option Demand Markets By Gilad Sorek
  5. Complementarities in Consumption and the Consumer Demand for Advertising By Tuchman, Anna E.; Nair, Harikesh S.; Gardete, Pedro M.
  6. Add-On Pricing: Theory and Evidence From the Cruise Industry By Marco Savioli; Lorenzo Zirulia
  7. Multiregional Firms and Region Switching in the US Manufacturing Sector By Antoine Gervais
  8. The Welfare Effects of Endogenous Quality Choice in Cable Television Markets By Crawford, Gregory S.; Shcherbakov, Oleksandr; Shum, Matthew
  9. Power to the People: Does Ownership Type Influence Electricity Service? By Boylan, Richard T.
  10. An Airline Merger and its Remedies: JAL-JAS of 2002 By DOI Naoshi; OHASHI Hiroshi
  11. Efficiency of regulation in slovak natural gas industry By Peter Silanic; Alzbeta Siskovicova

  1. By: Gugler, Klaus Peter; Weichselbaumer, Michael; Zulehner, Christine
    Abstract: In this paper, we analyze mergers in bidding markets. We utilize data from procurement auctions in the Austrian construction sector and estimate models of first-price sealed-bid auctions. Based on estimated cost and markups, we run merger simulations and disentangle the market power effects from potential cost efficiencies. We analyze static and dynamic models of first price auctions, and compare the outcomes of the merger simulations with the actual effects of observed mergers. Our results show that market power and efficiency effects are present post merger, leading to increased markups, but leaving the winning bid essentially unaffected by the merger. We find a good correspondence of predicted and actual effects for full mergers, but not for majority acquisitions.
    Keywords: construction procurement; evaluation of mergers; first-price auctions; independent private values; merger simulation
    JEL: D44 L10 L13
    Date: 2015–08
  2. By: Yongmin Chen (Department of Economics, University of Colorado, Boulder); Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: An important question in merger analysis is how much of a firm's lost output after a unilateral price increase will shift to the merger partner. To estimate this diversion ratio, antitrust agencies sometimes use data on consumer switching ("churn"), potentially caused by various reasons. This paper uses a tractable model of oligopoly competition to investigate the relation between churn and diversion, depending on what caused the churn. If the cause is an exogenous decrease in a firm's product quality and all prices remain constant, or an increase in its marginal cost that induces a price increase only by that firm, then churn ratios will equal the corresponding diversion ratios; for the same quality or cost shocks, if churn is observed after all prices adjust to the new equilibrium, churn ratios will generally differ from diversion ratios, but nevertheless will still track the ranking of diversion ratios across the firm's competitors. If the exogenous shock is an increase in a rival's product quality, or a decrease in its cost that leads to a price decrease, the churn ratio to that rival will always overstate the diversion ratio. We also consider churn caused by shifts in consumer preferences, broadly interpreted to include changed circumstances or learning about product attributes. Plausibly, churn ratios can then suggest a wrong ranking of how intensely the firm competes with various rivals.
    Keywords: churn ratio, diversion ratio, merger, unilateral price effects, antitrust
    JEL: L4 D43
    Date: 2015–08–11
  3. By: Sonja Brangewitz (University of Paderborn); Jochen Manegold (University of Paderborn)
    Abstract: On an intermediate goods market we allow for vertical and horizontal product differentiation and analyze the influence of simultaneous competition for resources and customers on the market outcome. Asymmetries between intermediaries cannot arise just from distinct product qualities, but also from different production technologies. The intermediaries face either price or quantity competition on the output market and a monopolistic input supplier on the input market. We find that there exist quality and productivity differences such that for quantity competition only one intermediary is willing to procure inputs from the input supplier, while for price competition both intermediaries are willing to purchase inputs. Considering product innovation for symmetric productivities we derive equilibrium conditions on the investment costs and compare price and quantity competition. It turns out that on the one hand there exist product qualities and degrees of horizontal product differentiation for complements such that asymmetric investment equilibria fail to exist. On the other hand we find that there also exist product qualities and degrees of horizontal product differentiation for substitutes such that existence can be guaranteed if the investment costs are chosen accordingly.
    Keywords: Input Market, Product Quality, Quantity Competition, Price Competition, Product Innovation
    JEL: L13 D43 C72
    Date: 2015–04
  4. By: Gilad Sorek
    Abstract: This paper provides first analysis of horizontal product differentiation in health care markets with option demand. I show that differentiation choices in option demand market differ from those obtained in spot markets analyzes. This is because option demand induces competition over inclusion under insurance coverage, whereas in spot markets providers are competing over the marginal consumers. In addition providers that are perceived as substitutes in the spot market - after exact medical needs reveal, may be perceived as complements in option market - before actual medical needs emerged. I show that in the model option demand market competition in simultaneous moves yields efficient horizontal differentiation and excessive investment in quality. Moreover I show that sequential moves result in asymmetric equilibrium with first mover-gains to the leading provider, too little horizontal differentiation and yet higher expected utility for consumers (compared with simultaneous moves).
    Keywords: Health Insurance; Option Demand; Product Differentiation
    JEL: I11 I13 L1
    Date: 2015–08
  5. By: Tuchman, Anna E. (Stanford University); Nair, Harikesh S. (Stanford University); Gardete, Pedro M. (Stanford University)
    Abstract: The standard paradigm in the empirical literature is to treat consumers as passive recipients of advertising, with the level of ad exposure determined by firms' targeting technology and the intensity of advertising supplied in the market. This paradigm ignores the fact that consumers may actively choose their consumption of advertising. Endogenous consumption of advertising is common. Consumers can easily choose to change channels to avoid TV ads, click away from paid online video ads, or discard direct mail without reading advertised details. Becker and Murphy (1993) recognized this aspect of demand for advertising and argued that advertising should be treated as a good in consumers' utility functions, thereby effectively creating a role for consumer choice over advertising consumption. They argued that in many cases demand for advertising and demand for products may be linked by complementarities in joint consumption. We leverage access to an unusually rich dataset that links the TV ad consumption behavior of a panel of consumers with their product choice behavior over a long time horizon to measure the co-determination of demand for products and ads. The data suggests an active role for consumer choice of ads, and for complementarities in joint demand. To interpret the patterns in the data, we fit a structural model for both products and advertising consumption that allows for such complementarities. We explain how complementarities are identified. Interpreting the data through the lens of the model enables a precise characterization of the treatment effect of advertising under such endogenous non-compliance, and assessments of the value of targeting advertising. To illustrate the value of the model, we compare advertising, prices and consumer welfare to a series of counterfactual scenarios motivated by the "addressable" future of TV ad-markets in which targeting advertising and prices on the basis of ad-viewing and product purchase behavior is possible. We find that both profits and net consumer welfare may increase, suggesting that it may be possible that both firms and consumers become better off in the new addressable TV environments. We believe our analysis holds implications for interpreting ad-effects in empirical work generally, and for the assessment of ad-effectiveness in many market settings.
    Date: 2015–06
  6. By: Marco Savioli (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy); Lorenzo Zirulia (Department of Economics, University of Bologna, Italy; CRIOS, Bocconi University, Italy; The Rimini Centre for Economic Analysis, Italy)
    Abstract: In many industries, firms give the opportunity to add (at a price) optional goods and services to a baseline product. The aim of our paper is to provide a theoretical model of add-on pricing in competitive environments with two new distinctive features. First, we discuss the choice of offering the add-on, assuming that this entails a fixed cost. Second, we allow firms to have a varying degree of market power on the add-on, associated with the ability to capture the value that consumers obtain from such additional good/service. Our model shows that the conventional wisdom, for which offering the add-on should unambiguously lower the price of the baseline product, is not always supported. In asymmetric equilibria, in which only one firm offers the add-on, baseline prices are higher if the firm’s market power on the add-on is limited. The predictions of the model are confirmed via a hedonic price function on a dataset of cruises offered worldwide, an idea setting to test our predictions because cruises are a highly controlled environment.
    Date: 2015–07
  7. By: Antoine Gervais
    Abstract: This paper uses data on US manufacturing firms to study a new extensive margin, the reallocation of resources that takes place within surviving firms as they open and close establishments in different regions. To motivate the empirical analysis, I extend existing models of industry dynamics to include production-location decisions within firms. The empirical results provide support for the mechanisms emphasized by the theoretical model. In the data, only about 3 percent of firms make the same product in more than one region, but these multiregional firms are more productive on average compared to single-region firms, and they account for about two-thirds of output. The results also show that "region-switching" is pervasive among multiregional firms, is correlated with changes in firm characteristics, and leads to a more efficient allocation of resources within firms.
    Keywords: Multiregional firms, firm heterogeneity, industry dynamics, monopolistic competition, proximity-concentration tradeoff.
    JEL: L2
    Date: 2015–01
  8. By: Crawford, Gregory S.; Shcherbakov, Oleksandr; Shum, Matthew
    Abstract: We measure the welfare consequences of endogenous quality choice in imperfectly competitive markets. We introduce the concept of a "quality markup" and measure the relative welfare consequences of market power over price and quality. For U.S. paid-television markets during 1997-2006, we find that not only are cable monopolists' prices 33% to 74% higher than marginal costs, but qualities are also 23% to 55% higher than socially optimal and the welfare costs of each are similar in magnitude. Such evidence for "quality inflation" by monopolists is at odds with classic results in the literature.
    Keywords: cable television; endogenous quality; imperfect competition; industrial organization; monopoly; pay television; quality markup; welfare
    JEL: C51 L13 L15 L82 L96
    Date: 2015–08
  9. By: Boylan, Richard T. (Rice University)
    Abstract: Since the 1990s, American states have deregulated electricity markets. However, there has been little effort to privatize municipal utilities. Rather, after storm related power outages, the press has relayed calls for municipalizing investor owned utilities, and claimed that profit-making utilities do not have enough of an incentive to prepare for storms. Most storm preparedness discussions have focused on regularly cutting tree branches near power lines and burying power lines underground. We provide empirical evidence that municipal utilities spend more on maintenance of their distribution network (e.g., cutting trees), but bury a smaller percent of their lines underground, compared to investor owned utilities. In order to find the overall effect of ownership type on outages, we examine a stratified random sample of 241 investor owned, 96 cooperative, and 94 municipal utilities in the United States between 1999 and 2012. We find that storms disrupt electricity sales for municipal utilities; specifically, storm damages that equal 1% of personal income lead to a 1.85% decrease in residential electricity sales by municipal utilities. However, storms do not significantly affect residential electricity sales by investor owned utilities. These results are consistent with international experience with privatization. Specifically, countries that have privatized distribution have not seen an increase in disruptions to electricity service.
    JEL: D70 L33 L94
    Date: 2014–08
  10. By: DOI Naoshi; OHASHI Hiroshi
    Abstract: This paper investigates the economic impacts of the merger between Japan Airlines (JAL) and Japan Air System (JAS) in October 2002 and its remedial measures. This paper performs simulation analyses using an estimated structural model in which airlines set both fares and flight frequencies on each route in the domestic market. By comparing supply models, the hypothesis that the merger caused a collusion among airlines is rejected. The marginal-cost estimates for the merging airlines significantly declined primarily through the expansion of its domestic network. The simulation estimates suggest that, although the merger increased the total social surplus for all domestic routes by 6.8%, it increased fares and decreased consumer surplus on the JAL-JAS duopoly routes. This paper also evaluates remedial measures associated with the merger.
    Date: 2015–08
  11. By: Peter Silanic (Department of Economic Policy, University of Economics in Bratislava); Alzbeta Siskovicova
    Abstract: The paper is focused on the questions of regulation and natural monopolies. We intend to explain basic problems in this area of study, address different methods of regulation and describe their advantages and disadvantages. Furthermore the paper will focus on the sector of the Slovak economy which is subject to this form of regulation – the gas industry. We will explain the method of regulation used in this industry and describe its vertical structure and the development of different levels of the vertical chain. The final chapter will attempt to evaluate the effectiveness of the functioning of the regulation in the gas sector in Slovakia.
    Keywords: regulation, efficiency, natural monopolies, gas industry
    JEL: L51 L52
    Date: 2014–12–28

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