nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒12‒20
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competitive Bundling By Zhou, Jidong
  2. Endogenous Mergers in Vertically Differentiated Markets By Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
  3. Mixed Oligopoly and Privatization in General Equilibrium By Kenji Fujiwara
  4. Profits, R&D and labour: Breaking the law of diminishing returns to labour By Sara Amoroso
  5. Monoposony Exploitation in Professional Sport: Evidence from Major League Baseball Position Players, 2000-2011 By Brad R. Humphreys; Hyunwoong Pyun

  1. By: Zhou, Jidong
    Abstract: This paper proposes a model of competitive bundling with an arbitrary number of firms. In the regime of pure bundling, we find that relative to separate sales pure bundling tends to raise market prices, benefit firms, and harm consumers when the number of firms is above a threshold. This is in contrast to the findings in the duopoly case on which the existing literature often focuses. Our analysis also sheds new light on how consumer valuation dispersion affects price competition more generally. In the regime of mixed bundling, having more than two firms raises new challenges in solving the model. We derive the equilibrium pricing conditions and show that when the number of firms is large, the equilibrium prices have simple approximations and mixed bundling is generally pro-competitive relative to separate sales. Firms' incentives to bundle are also investigated.
    Keywords: bundling, multiproduct pricing, product compatibility, oligopoly
    JEL: D43 L13 L15
    Date: 2015–12–12
  2. By: Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
    Abstract: This paper studies the incentives for firms competing in vertically differentiated markets to sign binding collusive agreements, as in the case of mergers and alliances. Empirical investigations show that firms involved in mergers and acquisitions revise prices and qualities as to maximize their joint profits. In a few cases merging firms are also observed shutting down some lines of activities (so called market pruning). In this paper we attempt to test these predictions by modelling a three-stage game in which, at the first stage, three firms selling goods independently in a vertically differentiated market can commit to sign either a full or a partial voluntary agreement (with a subset of firms) via a sequential game of coalition formation while, at the second and third stage they can optimally revise their qualities and prices, respectively. In such a setting we study whether some binding agreements (as full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game. Moreover, we analyse the final effects of different coalition structures on equilibrium qualities, prices and profits accruing to firms. We obtain the following results: (i) initial firms' heterogeneity appears a crucial factor for mergers to arise; (ii) although profitable, the grand coalition of firms (i.e. the whole market merger) is not the outcome of the finite-horizon negotiation, where only partial mergers arise; (iii) all stable mergers comprehends the firm producing the bottom quality good; (iv) all stable mergers reduce the number of variants on sale (market pruning); (v) stable mergers always increase the quality gap among variants. All model findings seem compatible with the existing empirical observations.
    Keywords: Vertically Differentiated Markets, Mergers, Merger Policies, Cannibalization, Market Pruning, Endogenous Coalition Formation, Price Collusion, Grand Coalition, Coalition Stability, Core, Sequential Game of Coalition Formation.
    JEL: D2 D4 D42 D43 L1
    Date: 2015–12–10
  3. By: Kenji Fujiwara (School of Economics, Kwansei Gakuin University)
    Abstract: Making use of a general oligopolistic equilibrium model with private and public firms, this paper examines the welfare effects of privatization. We show that in an exogenous market structure privatizing the public firm necessarily reduces welfare, which contrasts with the existing result that some degree of privatization is optimal. In contrast, we find that privatization has no effect on welfare in an endogenous market structure with free entry of private firms.
    Keywords: Partial privatization, General oligopolistic equilibrium, Exogenous market structure, Endogenous market structure
    JEL: L13 L32 L33
    Date: 2015–12
  4. By: Sara Amoroso (European Commission – JRC - IPTS)
    Abstract: A basic assumption in the economic literature is the one of diminishing marginal returns to labour. However, theoretical studies on knowledge and labour specialization assume that an increase in the knowledge investment embodied in the human capital of workers raises the marginal product of labour. In this paper, we propose a structural approach to test the hypothesis of non-diminishing returns to labour for a panel data set of R&D investing companies, and we explore how the marginal returns to labour vary with their level of knowledge capital (R&D) intensity. Our econometric analysis provides a number of results. First, we find that more knowledge intensive firms have non-diminishing returns to labour, while less knowledge intensive companies exhibit diminishing returns. Second, independently from the knowledge capital intensity, returns to labour increase with size. Relatively smaller firms have diminishing returns, while larger companies have non-diminishing to increasing returns to labour. However, we show that more knowledge intensive firms can attain the threshold of non-diminishing returns faster than their counterparts.
    Keywords: size, specialization, profitability, profit function
    JEL: J24 L10 L25 O30
    Date: 2015–12
  5. By: Brad R. Humphreys (West Virginia University, Department of Economics); Hyunwoong Pyun (West Virginia University, Department of Economics)
    Abstract: Some professional athletes still face monoposony power in labor markets, underscoring the importance of estimating players' marginal revenue product (MRP) to assess its effects. We introduce two new empirical approaches, spline revenue functions and fixed-effects stochastic production functions, into the standard Scully (1974) approach to MRP estimation, and calculate Monoposony Exploitation Ratios (MERs) for position players in Major League Baseball over the 2001-2011 seasons. Estimates indicate that MERs are about 0.89 for rookie players, 0.75 for arbitration eligible players, and 0.21 for free agents. Recent collective bargaining agreements have reduced MERs for free agents, but had no effect on MERs for other players.
    Keywords: monoposony salary exploitation, Major League Baseball, marginal revenue product
    JEL: J24 J42 J52 L13 L40
    Date: 2015–10

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