nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒05‒28
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Moral Hazard, Bertrand Competition, and Natural Monopoly By Guha, Brishti
  2. Excessive Competition for Headline Prices By Inderst, Roman; Obradovits, Martin
  3. The Welfare Eff ects of Vertical Integration in Multichannel Television Markets By Crawford, Gregory S.; Lee, Robin S.; Whinston, Michael; Yurukoglu, Ali

  1. By: Guha, Brishti
    Abstract: In the traditional model of Bertrand price competition among symmetric firms, there is no restriction on the number of firms that are active in equilibrium. A symmetric equilibrium exists with the different firms sharing the market. I show that this does not hold if we preserve the symmetry between firms but introduce moral hazard with a customer-sensitive probability of exposure; competition necessarily results in a natural monopoly with only one active firm. Sequential price announcements and early adoption are some equilibrium selection mechanisms that help to pin down the identity of the natural monopolist. If we modify the standard Bertrand assumptions to introduce decreasing returns to scale, a natural oligopoly will emerge instead of a natural monopoly. The insights of the basic model are robust to many extensions.
    Keywords: Bertrand competition, active firms, moral hazard, natural monopoly
    JEL: C73 D43 D82 L11
    Date: 2016–04–26
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:70966&r=ind
  2. By: Inderst, Roman; Obradovits, Martin
    Abstract: When firms' shrouding of charges, as in Gabaix and Laibson (2006), meets with consumers' salient thinking, as in Bordalo et al. (2013), this can have severe welfare implications. The ensuing excessive competition for headline prices tends to inefficiently bias consumers' choice towards low-quality products, which is compounded when firms react and reduce quality beyond what would be cost efficient. As more intense shopping leads to a greater pass through of shrouded charges into lower headline prices, which aggravates the problem, competition policy is no substitute for consumer protection policy. While in our model all consumers are potential victims of salient thinking and shrouded charges, salient thinking becomes effective only for those who are attentive to different offers. Attentive consumers are likely to show ex-post regret and they can be ex-ante worse off, even though their choice set is larger. The combination of shrouding and salient thinking can sufficiently disadvantage high-quality firms so as to make them willing to educate consumers and unshroud all charges. While there is no unshrouding on equilibrium, high-quality firms' threat of unshrouding may sufficiently discipline firms to make efficient product choices.
    Keywords: attention; hidden fees; price competition; salience; shopping; shrouded charges; unshrouding
    JEL: D11 D18 D21 D43 D60 L11 L13 L15
    Date: 2016–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:11284&r=ind
  3. By: Crawford, Gregory S.; Lee, Robin S.; Whinston, Michael; Yurukoglu, Ali
    Abstract: We investigate the welfare effects of vertical integration of regional sports networks (RSNs) with programming distributors in U.S. multichannel television markets. Vertical integration can enhance efficiency by reducing double marginalization and increasing carriage of channels, but can also harm welfare due to foreclosure and raising rivals' costs incentives. We estimate a structural model of viewership, subscription, distributor pricing, and affiliate fee bargaining using a rich dataset on the U.S. cable and satellite television industry (2000-2010). We use these estimates to analyze the impact of simulated vertical mergers and de-mergers of RSNs on competition and welfare, and examine the efficacy of regulatory policies introduced by the U.S. Federal Communications Commission to address competition concerns in this industry.
    Keywords: cable television; double marginalization; foreclosure; vertical integration
    JEL: L13 L42 L51 L82
    Date: 2016–03
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:11202&r=ind

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