nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒03‒23
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Vertical Differentiation, Uncertainty, Product R&D and Policy Instruments in a North-South Duopoly By Julien Berthoumieu; Viola Lamani
  2. Bertrand-Edgeworth games under triopoly: the equilibrium strategies when the payoffs of the two smallest firms are proportional to their capacities By De Francesco, Massimo A.; Salvadori, Neri
  3. Brand Loyalty and Generic Competition By WAN, Yunyun
  4. Net Neutrality: A Fast Lane to Understanding the Trade-offs By Shane Greenstein; Martin Peitz; Tommaso Valletti
  5. R&D Competitions and Firms'International Expansions By Maria Luisa Petit; Francesca Sanna-Randaccio
  6. Replacing Workers: Is It a Boon or a Bane for Firm Productivity? By Elena Grinza

  1. By: Julien Berthoumieu (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4); Viola Lamani (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Abstract: This paper analyzes the impact of several trade policy instruments on product Research and Development (R&D) investment in a North-South duopoly where a Northern firm competes in prices with a Southern firm on both markets. The Northern firm invests in product R&D owing to a competitive disadvantage compared to the Southern firm which benefits from a lower labor cost. The outcome of the R&D activity is uncertain. If successful, vertical differentiation occurs in both markets. The Northern country’s government is the only one policy active and may implement the following trade policy instruments: an import tariff, a production subsidy, an R&D subsidy, a standard of quality, a minimum-price, and an import quota. The results show that the Northern firm’s R&D expenditures increase with each policy instrument except for the import quota. The paper also provides a welfare analysis in order to verify whether or not the Northern government is encouraged to implement these policy instruments.
    Keywords: Trade Policy Instruments, Product Research and Development, North-South Duopoly, Vertical Differentiation.
    Date: 2016
  2. By: De Francesco, Massimo A.; Salvadori, Neri
    Abstract: The paper is the second part of a trilogy in which we extend the analysis of price competition among capacity-constrained sellers beyond duopoly to triopoly. In the first part of the trilogy we provided some general results, highlighting features of a duopolistic mixed strategy equilibrium that generalize to triopoly and provided a first partition concerning the pure strategy equilibrium regions and the mixed strategies equilibrium region and then the partition of this region in a part in which the payoffs of the two smallest firm are proportional to their capacities and another in which the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. In this paper we provide a complete characterization of the set of mixed strategy equilibria in the part in which the payoffs of the two smallest firms are proportional to their capacities. This part is partitioned according to equilibrium features and in each part it is determined whether equilibria are uniquely determined or not and in the latter case it is proved that the equilibria constitute a continuum. Further we determine the circustances in which supports of an equilibrium strategy may be disconnected and show how gaps are then determined. We also prove that the union of supports is indeed connected, a property which cannot be extended to the case in which the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. The third part of the trilogy will be devoted to a complete characterization of the mixed strategy equilibria when the smallest firm obtains a payoff proportinally higher than that of the middle sized firm. This will allow also to determine the payoff of the smallest firm.
    Keywords: Bertrand-Edgeworth; Price game; Oligopoly; Triopoly; Mixed strategy equilibrium
    JEL: C72 D43 L13
    Date: 2016–03–07
  3. By: WAN, Yunyun
    Abstract: Facing generic competition, a brand-name drug company sometimes launches its own generic called an "authorized generic" (AG) through a third-party entity. If an authorized party transfers a substantial part of its profits to the brand-name drug company, the latter's total profit increases as a result and every branded drug that comes off the patent should have its AG version. However, in actual fact only a small proportion of branded drugs have AGs. To explain this puzzle, I develop a model that features switching costs due to the customer base a brand-name drug develops prior to generic entry. The model predicts that AGs are launched when switching costs to the generics are sufficiently low. I test this hypothess using prescription drug data and find strong support for it.
    Keywords: brand loyalty, authorized generics, generic entry, customer base, switching cost
    JEL: L13 L20 I11
    Date: 2016–01
  4. By: Shane Greenstein; Martin Peitz; Tommaso Valletti
    Abstract: The “net neutrality” principle has triggered a heated debate and advocates have proposed policy interventions. In this paper, we provide perspective by framing issues in terms of the positive economic factors at work. We stress the incentives of market participants, and highlight the economic conflicts behind the arguments put forward by the different parties. We also identify several key open questions.
    JEL: K2 L86 L88 L96
    Date: 2016–01
  5. By: Maria Luisa Petit (La Sapienza University of Rome); Francesca Sanna-Randaccio (Sapienza University of Rome)
    Abstract: This paper examines the impact of the firms'mode of foreign expansion on the incentive to innovate as well as the effects of R&D activities and technological spillovers on the firms' international strategy. We consider a two country imperfect competition model where the firms' face three different type of decisions: how to expand abroad, how much to spend in R&D and how much to sell in each market Market structure is therefore endogenously determined as the equilibrium solution of a three stage game. It is shown that the firm that invests more in research is the one which is a MNE while the rival is an exporter, whereas the firm that invests less is the one that exports while the rival is a MNE. The results indicate that there is a positive relationship between multinational expansion and R&D investment and that, in turn, investment in research leads oligopolistic firms'towards multinational expansion. The value of the spillover parameter too can be an important determinant of firms'international strategy.
    Keywords: Multinational firm. export, direct investment, R&D, innovation, intellectual property rights.
    JEL: F12 F23 L10
  6. By: Elena Grinza (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: Using a uniquely rich longitudinal matched employer-employee data set, this paper is the first to investigate the impact of replacing workers, as measured by excess worker turnover, on firm productivity. Using a modified version of the method proposed by Ackerberg et al. (2006), that allows to take into account unobserved heterogeneity, an augmented production function with excess worker turnover entering as the regressor of interest is estimated. The main result is that replacing workers is beneficial to firm productivity. A 1 standard deviation increase in the excess worker turnover rate is estimated to increase productivity by 0.81%. The possibility of finding more suitable employer-employee matches and the presence of knowledge spillover effects are seen as the main determinants of the impact. Robustness checks indicate that the impact has an inverted U-shape, suggesting that, beyond a certain point, replacing workers ends up being harmful. However, since about 90% of firms lie before this point, increases in excess worker turnover are beneficial for the vast majority of them. They also suggest that the effect is diversified across different categories of firms. High-tech firms and firms belonging to industrial districts benefit the most from excess worker turnover. On the contrary, young and very small firms seem to even suffer from it.
    Keywords: Workers’ replacement, excess worker turnover, job-matching, knowledge spillovers, firm-specific human capital, semiparametric estimation methods, ACF-FE.
    JEL: L23 L25 L60
    Date: 2016–01

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