nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒05‒21
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Vertical Differentiation With Consumers Misperceptions And Information Disparities By Alberto Cavaliere; Giovanni Crea
  2. Market fragmentation in Video-on-Demand Services in the EU28 By Georgios Alaveras; Estrella Gomez Herrera; Bertin Martens
  3. The War on Drugs: An Analysis of the Effects of Supply Disruption on Prices and Purity By Rose, Christiern
  4. Market Power and Duration of R&D Investment in a Panel of Italian Firms By M. E. Bontempi; L. Lambertini; E. Medeossi

  1. By: Alberto Cavaliere (Department of Economics and Management, University of Pavia); Giovanni Crea (Department of Economics and Management, University of Pavia)
    Abstract: We consider vertical differentiation with quality uncertainty and information disparities, in a duopoly where firms supply a product with credence attributes. Consumers choice is affected by misperceptions, but equilibrium prices and qualities depend also on the behavior and the share of informed consumers. With optimistic misperceptions uninformed consumers are cheated in equilibrium as we observe less price competition and minimum differentiation. Alternatively some product differentiation is provided when informed consumers buy high quality goods and the incentive to increase quality is positively affected by optimistic misperceptions. With more informed consumers we find more price competition but less incentive to product differentiation. In most cases the share of informed consumers asymmetrically affects equilibrium prices, to the detriment of the high quality firm. Pessimistic misperceptions prevent more product differentiation and adverse selection arises, but it can be eliminated if the share of informed consumers is high enough. However with pessimistic consumers, information disparities can also lead to inelastic demands and market segmentation, such that externalities
    Keywords: Asymmetric information, Brand premium, Quality uncertainty
    JEL: L15 L13 D82
    Date: 2016–04
  2. By: Georgios Alaveras (European Commission – JRC - IPTS); Estrella Gomez Herrera (European Commission – JRC - IPTS); Bertin Martens (European Commission – JRC - IPTS)
    Abstract: The main objective of the present study is to measure the extent of market segmentation for video-on-demand (VoD) services in the EU. We examine access to VoD catalogues in other countries and compare the content of film catalogue available across countries. Using various sources of data on VoD services we find that cross-border access to VoD services in the EU28 is extremely limited at 1.9% of available VoD services in the EU. Cross-border availability of film titles reaches 16.8%. Netflix performs better with 31% cross-border availability. Cross-border availability in VoD catalogues remains far below the 40% availability observed in digital film downloads, 80% in digital music downloads and 93% in e-books catalogues. Even within EU Member States, the VoD market is very fragmented with catalogue overlaps between local VoD providers in the order of 30-50% only. Consumers incur high switching costs to access a wider variety of products in this segmented market.
    Keywords: video on demand, geographical market fragmentation, copyright, digital media, language barriers, online film
    JEL: F15
    Date: 2015–12
  3. By: Rose, Christiern
    Abstract: Retail prices of illicit drugs have fallen despite rising supply disruption. This article presents and empirically tests a model which may explain the price puzzle. Supply disruption increases the cost of purity. Illicit drugs are experience goods, with demand depending on the seller’s purity reputation. There is an equilibrium in which seizures decrease purity, reducing future demand and prices. These predictions are tested using monthly data for crack cocaine in Washington DC. Persistence of the series is exploited to handle endogeneity resulting from seizures mirroring supply. A 10% increase in seizures reduces purity by 4.7% and future prices by 2.3%.
    Keywords: Illicit drugs, seizures, seller reputation
    JEL: K14 L11 L14
    Date: 2016–04
  4. By: M. E. Bontempi; L. Lambertini; E. Medeossi
    Abstract: Studies about innovation find evidence of a positive relationship between technological advancement and firm performance, in particular when the innovative effort is continuous. This paper aims to further the analysis on the duration of R&D investment at the firm level. The contribution of this study is threefold: first, we extend Máñez et al. [2014], Triguero et al. [2014] analysis for Spain to the Italian case: we use a panel of manufacturing and service companies, thus enlarging the view of R&D duration within the European countries. Secondly, from a methodological point of view, we employ both discrete- and continuous-time duration models, in order to test the Proportional Hazards (PH) assumption, i.e. the assumption that the hazard rate is equivalent over time across groups. Last, but not least, we assess whether a firm’s likelihood of continuing investment in R&D depends on the market power of companies. We test alternative measures for market power: the classical price-cost margin and a new proxy for the firm demand elasticity, obtained from a specific survey question. Results are in line with the hypothesis that R&D presents considerable temporal spill overs and strong persistence, even once unobserved heterogeneity is controlled for. Also, we argue that the appropriate proxy for market power is the firm demand elasticity, and we find support for the Schumpeterian hypothesis.
    JEL: C23 C41 D22 G32 L10 O30
    Date: 2016–02

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