nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒04‒04
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Monopoly VS Competition: Market Structure’s Impact on Product Innovation-with Endogenous Quality of New Product By Yang, Jinrui
  2. A Patent Race of Heterogeneous Firms and Its Application By Tetsugen Haruyama
  3. Competitive Price Targeting with Smartphone Coupons By Jean-Pierre H. Dubé; Zheng Fang; Nathan Fong; Xueming Luo
  4. The Price Effects of Cross-Market Hospital Mergers By Leemore Dafny; Kate Ho; Robin S. Lee
  5. Profit-maximizing Wages under Duopoly By Hattori, Keisuke

  1. By: Yang, Jinrui
    Abstract: This paper focuses on innovation for new product with exogenously determined horizontal difference from initial product which is provided either by a monopolist or by competitive firms. The innovator, no matter initially under monopoly or competition, will be unique producer of new product and need decide quality of new product which is correlated with investment for innovation. The paper through a model shows that for horizontally similar new product, competition is superior to monopoly to innovate. However, for typical horizontally differentiated product, a monopolist would choose higher quality and invest more than a competitive innovator does if innovation is complex, but brings about lower endogenous quality than the innovator initially under competition does if innovation is easy. Monopoly can support sales of new product with higher price of initial product, but also hamper product innovation to avoid erosion of initial profit. If it is presumed that complexity of innovation is always huge at the beginning, monopoly is more likely to generate innovation for horizontally different product while competition for similar product, respectively compared to each other.
    Keywords: product innovation; horizontal difference; monopoly; competition; complexity of innovation
    JEL: D8 L1 O3 O31
    Date: 2016–03–17
  2. By: Tetsugen Haruyama (Graduate School of Economics, Kobe University)
    Date: 2016–03
  3. By: Jean-Pierre H. Dubé; Zheng Fang; Nathan Fong; Xueming Luo
    Abstract: We conduct a large-scale field experiment to study competitive price discrimination in a duopoly market with two rival movie theaters. The firms use mobile targeting to offer different prices based on location and past consumer activity. A novel feature of our experiment is that we test a range of relative ticket prices from both firms to trace out their respective best-response functions and to assess equilibrium outcomes. We use our experimentally-generated data to estimate a demand model that can be used to predict the consumer choices and corresponding firm best-responses at price levels not included in the test. We find an empirically large return on investment when a single firm unilaterally targets its prices based on the geographic location or historical visit behavior of a mobile customer. However, these returns can be mitigated by competitive interactions whereby both firms simultaneously engage in targeting. In practice, firms typically test only their own prices and do not consider the competitive response of a rival. In our study of movie theaters, competition enhances the returns to behavioral targeting but reduces the returns to geo-targeting. Under geographic targeting, each theater offers a discount in the other rival's local market, toughening price competition. In contrast, under behavioral targeting, the strategic complementarity of prices coupled with the symmetric incentives of the two theaters to raise prices charged to high-recency customers softens price competition. Thus, managers need to consider how competition moderates the profitability of price targeting. Moreover, field experiments that hold the competitor's actions fixed may generate misleading conclusions if the permanent implementation of a tested action would likely elicit a competitive response.
    JEL: L1 L11 L13 M31
    Date: 2016–03
  4. By: Leemore Dafny; Kate Ho; Robin S. Lee
    Abstract: So-called "horizontal mergers" of hospitals in the same geographic market have garnered significant attention from researchers and regulators alike. However, much of the recent hospital industry consolidation spans multiple markets serving distinct patient populations. We show that such combinations can reduce competition among the merging providers for inclusion in insurers' networks of providers, leading to higher prices. The result derives from the presence of "common customers” (i.e. purchasers of insurance plans) who value both providers, as well as (one or more) "common insurers" with which price and network status is negotiated. We test our theoretical predictions using two samples of cross-market hospital mergers, focusing exclusively on hospitals that are bystanders rather than the likely drivers of the transactions in order to address concerns about the endogeneity of merger activity. We find that hospitals gaining system members in-state (but not in the same geographic market) experience price increases of 6-10 percent relative to control hospitals, while hospitals gaining system members out-of-state exhibit no statistically significant changes in price. The former group are likelier to share common customers and insurers. This effect remains sizeable even when the merging parties are located further than 90 minutes apart. The results suggest that cross-market, within-state hospital mergers appear to increase hospital systems' leverage when bargaining with insurers.
    JEL: I11 L10
    Date: 2016–03
  5. By: Hattori, Keisuke
    Abstract: Using a simple duopoly model with endogenous order of moves, this study provides a potential explanation for why firms might pay their employees a higher wage than rival firms or the market-clearing rate: Setting a higher wage can serve as a commitment to obtain the preferred order of moves in subsequent price competition. This holds even if the wage increase does not enhance worker productivity or efficiency. Simultaneous wage setting admits no pure strategy Nash equilibrium, as their best responses form a cycle wherein firms repeatedly overbid in wages to preempt the preferred position in price competition. Sequential wage setting leads to wage dispersion even among homogeneous workers and firms: the wage-setting leader offers a high wage such that the rival firm would not want to overbid in equilibrium. In contrast, in quantity competition, duopolists have no such incentives because, ceteris paribus, a firm that pays a wage higher than the competitor will be unsuccessful in obtaining first-mover advantages in subsequent quantity competition.
    Keywords: Endogenous timing; Price leadership; Wage setting; Heterogeneous duopoly; Wage commitment.
    JEL: C72 D43 J31 L13
    Date: 2016–03–25

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