nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒06‒14
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Monopoly Power and Endogenous Product Variety: Distortions and Remedies By Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
  2. Vertical Integration and Downstream Collusion By Sara Biancini; David Ettinger
  3. Tacit collusion and market concentration under network effects By Rupayan Pal; Marcella Scrimitore
  4. The effects of banning advertising in junk food markets By Dubois, Pierre; Griffith, Rachel; O'Connell, Martin

  1. By: Bilbiie, Florin Ovidiu; Ghironi, Fabio; Melitz, Marc J
    Abstract: The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static---the misalignment between consumers and producers regarding the value of a new variety; and one dynamic---time variation in markups. Quantitatively, the welfare costs of the former are potentially very large relative to the latter. For a calibrated version of our model with these distortions, their total cost amounts to 2 percent of consumption. Appropriate taxation schemes can implement the optimum amount of entry and variety. Elastic labor introduces a further distortion that should be corrected by subsidizing labor at a rate equal to the markup for goods, in order to preserve profit margins and hence entry incentives.
    Keywords: efficiency; Entry; Monopoly power; Optimal fiscal policy; Product creation; Variety; Welfare costs
    JEL: D42 D50 E60 H21 H32 L16
    Date: 2016–05
  2. By: Sara Biancini (Normandie Université, UNICAEN, CREM CNRS, France); David Ettinger (Paris Dauphine, PSL, LEDa and CEREMADE, France)
    Abstract: We investigate the effect of a vertical merger on downstream firms' ability to collude in a repeated game framework. We show that a vertical merger has two main effects. On the one hand, it increases the total collusive profits, increasing the stakes of collusion. On the other hand, it creates an asymmetry between the integrated firm and the unintegrated competitors. The integrated firm, accessing the input at marginal cost, faces higher profits in the deviation phase and in the non cooperative equilibrium, which potentially harms collusion. As we show, the optimal collusive profit-sharing agreement takes care of the increased incentive to deviate of the integrated firm, while optimal punishment erases the difficulty related to the asymmetries in the non cooperative state. As a result, vertical integration generally favors collusion.
    Keywords: Vertical Integration, Tacit Collusion
    JEL: D43 L13 L40 L42
    Date: 2016–05
  3. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Marcella Scrimitore (University of Salenta)
    Abstract: In an infnitely repeated Cournot game with trigger strategy punishment, we demonstrate that the relationship between market concentration and collusion sustainability depends on the strength of network externalities. The latter is shown to interact with the number of firms and to affect the profitability of cooperation vs. competition, which delivers the result, challenging conventional wisdom, that lower market concentration can make collusion more stable.
    Keywords: Collusion, market concentration, network ekects
    JEL: L13 L14 L41
    Date: 2016–04
  4. By: Dubois, Pierre; Griffith, Rachel; O'Connell, Martin
    Abstract: There are growing calls to restrict advertising of junk foods. Whether such a move will improve diet quality will depend on how advertising shifts consumer demands and how firms respond. We study an important and typical junk food market { the potato chips market. We exploit consumer level exposure to adverts to estimate demand, allowing advertising to potentially shift the weight consumers place on product healthiness, tilt demand curves, have dynamic effects and spillover effects across brands. We simulate the impact of a ban and show that the potential health benefits are partially offset by firms lowering prices and by consumer switching to other junk foods.
    Keywords: advertising, demand estimation, dynamic oligopoly, welfare
    JEL: L13 M37
    Date: 2016–05

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