nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒07‒02
seventeen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On Prices' Cyclical Behaviour in Oligopolistic Markets By Luca Lambertini; Luigi Marattin
  2. Repeated Interaction in Standard Setting By Larouche, Pierre; Schütt, Florian
  3. The Upside-down Economics of Regulated and Otherwise Rigid Prices By Casey B. Mulligan; Kevin K. Tsui
  4. Quantity Competition under Resale Price Maintenance when Most Favored Customers are Strategic By Aviv, Yossi; Bazhanov, Andrei; Levin, Yuri; Nediak, Mikhail
  5. Competition, Innovation, and the Number of Firms By Pedro Bento
  6. Choosing Roles under Supply Function Competition By F. Delbono; L. Lambertini
  7. Specific Investment and Supplier Vulnerability: Theory and Evidence By Zhiqi Chen; Xiaoqiao Wang
  8. Invention Quality and Entrepreneurial Earnings: The Role of Prior Employment Variety By Astebro, Thomas B; Yong, Kevyn
  9. Thanks, but no thanks: Companies’ response to R&D tax credits By Daniel Neicu; Stijn Kelchtermans; Peter Teirlinck
  10. On the welfare cost of bank concentration By Sofía Bauducco; Alexandre Janiak
  11. Understanding Gasoline Price Dispersion By Demet Yilmazkuday; Hakan Yilmazkuday
  12. Electricity Market Mergers with Endogenous Forward Contracting By Brown, David P.; Eckert, Andrew
  13. Natural Gas Contract Decisions for Electric Power By Matthew Doyle; Ian Lange
  14. Does Competition from Private Surgical Centres Improve Public Hospitals' Performance? Evidence from the English National Health Service By Zack Cooper; Stephen Gibbons; Matthew Skellern
  15. Who is forked on GitHub? Collaboration among Open Source developers By Dorota Celińska
  16. A Structural Model of Advertising Signaling and Social Learning: The Case of the Motion Picture Industry By Haiyan Liu
  17. Markups and concentration in South African manufacturing sectors An analysis with administrative data By Johannes Fedderke; Nonso Obikili; Nicola Viegi

  1. By: Luca Lambertini (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy); Luigi Marattin (Department of Economics, University of Bologna, Italy)
    Abstract: We revisit the discussion about the relationship between price's cyclical features, implicit collusion and the demand level in an oligopoly supergame where a positive shock may hit demand and disrupt collusion. The novel feature of our model consists in characterising the post-shock noncooperative price and comparing it against the cartel price played in the last period of the collusive path, to single out the conditions for procyclicality to arise both in the short and in the long-run.
    Keywords: demand shocks, cyclical pricing, implicit collusion
    JEL: C73 E60 L13
    Date: 2016–06
  2. By: Larouche, Pierre (Tilburg University, TILEC); Schütt, Florian (Tilburg University, TILEC)
    Abstract: As part of the standard-setting process, certain patents become essential. This may allow the owners of these standard-essential patents to hold up implementers of the standard, who can no longer turn to substitute technologies. However, many real-world standards evolve over time, with several generations of standards succeeding each other. Thus, standard setting is a repeated game in which participants can condition future behavior on whether or not hold-up has occurred in the past. In the presence of complementarity between the different patents included in the standard, technology contributors have an incentive to discipline each other and keep royalties low, which can be achieved by threatening to exclude contributors who have engaged in hold-up from future rounds of the process. We show that repeated standard setting can sustain FRAND royalties provided the probability that another round of standard setting will occur is sufficiently high. We also examine how the decision-making rules of standard-setting organizations affect the sustainability of FRAND royalties.
    Keywords: standard setting; repeated interaction; FRAND royalties
    JEL: L94 L43 L11
    Date: 2016
  3. By: Casey B. Mulligan; Kevin K. Tsui
    Abstract: A version of the Becker-Lancaster characteristics model featuring quality-quantity tradeoffs reveals a number of surprising market behaviors that can result from price regulations that are imposed on competitive markets for products that have adjustable non-price attributes. Quality need not clear a competitive market in the same way that prices do, because quality can reduce the willingness to pay for quantity. Producers can benefit from price ceilings, at the expense of consumers. Price ceilings can result in quality-degradation “death spirals” that would not occur under quality regulation or excise taxation. The features of tastes and technology that lead to such outcomes are summarized with pairwise comparisons of (not necessarily constant) elasticities.
    JEL: K2 L15 L51
    Date: 2016–06
  4. By: Aviv, Yossi; Bazhanov, Andrei; Levin, Yuri; Nediak, Mikhail
    Abstract: Legal studies usually treat a policy of a manufacturer or retailer as socially harmful if it reduces product output and increases the price. We consider a two-period model where the first-period price is fixed by resale price maintenance (RPM) and resellers endogenously decide to use another "collusion suspect," meet-the-competition clause with a most-favored-customer clause (MFC), to counteract strategic customer behavior. As a result of MFC, second-period (reduced) price increases, and resellers' inventories decrease. However, customer surplus may increase and aggregate welfare increases in the majority of market situations. MFC can not only decrease the losses in welfare and resellers' profits due to strategic customers but, under reseller competition, may even lead to higher levels of these values than with myopic customers, i.e., to gains from increased strategic behavior. MFC may create "MFC-traps" for resellers, where one of possible market outcomes yields a gain from increased strategic behavior while another results in a reseller profit less than the worst profit in any stable outcome without MFC. With growing competition, benefits or losses from MFC can be higher than losses from strategic customer behavior.
    Keywords: most favored customer, strategic customer behavior, quantity competition, limited-lifetime product
    JEL: D9 L13 L41 L42
    Date: 2016–06–11
  5. By: Pedro Bento (Texas A&M University, Department of Economics)
    Abstract: I look at manufacturing firms across countries and over time, and find that barriers to competition actually increase the number of firms. This finding contradicts a central feature of all current models of endogenous markups and free entry, that higher barriers should reduce competition and firm entry, thereby increasing markups. To rationalize this finding, I extend a standard model in two ways. First, I allow for multi-product firms. Second, I model barriers as increasing the cost of entering a product market, rather than the cost of forming a firm. Higher barriers to competition reduce the number of products per firm and per market, but increase markups and the total number of firms. Calibrating the model to U.S. data, I estimate cross-country differences in consumption as large as 3-fold due to observed differences in barriers to competition. In addition, increasing barriers generates either a negative or inverted-U relationship between firm-level innovation and markups. While higher markups encourage product-level innovation through the usual Schumpeterian mechanism, firm-level innovation (at least eventually) drops as firms reduce their number of products. I provide new evidence supporting these two novel implications of the model - that product-level innovation increases with barriers to competition, while the number of products per firm decreases.
    Keywords: product market regulation, entry costs, firm size, productivity, innovation, markups, competition, multi-product firms
    JEL: L1 L5 O1 O3 O4
    Date: 2016–06–08
  6. By: F. Delbono; L. Lambertini
    Abstract: We investigate an extended game with observable delay under duopolistic competition in affine supply functions. Firms use the intercepts of supply functions as their strategic variables. Best replies are downward (upward) sloping if the common slope of supply functions is sufficiently low (high). Accordingly, simultaneous (sequential) play is selected at the subgame perfect equilibrium when best replies are negatively (positively) sloped. There exists a unique value of the slope at which best replies are orthogonal and the choice between simultaneous and sequential play is immaterial.
    JEL: D43 L13
    Date: 2016–06
  7. By: Zhiqi Chen (Department of Economics, Carleton University); Xiaoqiao Wang (School of Business, Nanjing University)
    Abstract: Apart from the familiar holdup problem, we investigate another implication of specific investment that has not been examined systematically in the literature. That is, the presence of specific investment can make a supplier vulnerable to large negative shocks to its customer’s business. In a theoretical model, we demonstrate that this vulnerability causes the supplier to under-invest. A higher degree of specificity induces the supplier to invest more, and it leads to a lower mean and higher volatility in the supplier’s profit. Using panel data on over 5000 U.S. firms from 1990 to 2010, our empirical analysis shows the prevalence of the supplier vulnerability problem associated with specific investment.
    Keywords: specific investment, holdup problem, supplier vulnerability, profit volatility
    JEL: L14 L24 G32
    Date: 2016–04
  8. By: Astebro, Thomas B; Yong, Kevyn
    Abstract: We use creativity theory to analyze the effects of occupational job variety and industry variety on invention quality and entrepreneurial earnings. We test our ideas with survey data from 770 inventor-entrepreneurs who commercialized their own inventions. Results suggest that occupational and industry variety substitute for each other in positively affecting invention quality whereas a lack of industry variety is associated with greater entrepreneurial earnings. Results are consistent with the idea that high levels of both occupational and industry variety enables the generation and discovery of inventions, but these ideas are usually not technically feasible or financially viable.
    Keywords: Creativity; Prior Employment Variety; Jack-of-all-Trades; Invention Quality; Entrepreneurial Earnings
    JEL: L26
    Date: 2015–12–31
  9. By: Daniel Neicu; Stijn Kelchtermans; Peter Teirlinck
    Abstract: This paper starts from the observation that the majority of firms in Belgium that were eligible for a newly introduced R&D tax credit system does not use it, or is slow to adopt, despite significant potential cost savings. We hypothesize that the R&D support landscape is complex for firms to navigate and that they may cope by relying on their peers’ behaviour to inform their own adoption decisions. We identify endogenous peer effects in industry- and location-based peer groups by exploiting the intransitivity in firms’ peer group networks as well the variation in peer group sizes. The results show that firms’ decisions to use R&D tax credits are indeed influenced by the choices of their peers, primarily in the time window following the introduction. Our analysis complements the literature on peer effects in firm decision making and suggests improvements for the communication of new public support measures for business R&D.
    Keywords: R&D tax credits, peer effects, information diffusion, social interactions
    Date: 2016–06
  10. By: Sofía Bauducco; Alexandre Janiak
    Abstract: We build a model of bank concentration. Banks and entrepreneurs meet in a credit market characterized by search frictions and negotiate repayment rates à la Nash. Banks are large in the sense that they allocate credit to more than one entrepreneur through branches and there is bank heterogeneity in terms of their cost structure. Banks have incentives to overlend, generating a scale inefficiency and overconcentration of banks. We find that this friction also generates too much concentration on the goods market, lowering aggregate output and welfare. We calibrate the model with data on the distribution of branches across banks in the US and available estimates on X-efficiency in the banking sector to assess the quantitative importance of this effect. We find that aggregate output would increase by 2.4% had the scale inefficiency been absent, while loan rates would decrease by 1.2%. JEL classiffications: E44; G21; G28. Key words: Keywords: Bank concentration; Bargaining; Search; Scale inefficiency; X-efficiency.
    Date: 2015
  11. By: Demet Yilmazkuday (Department of Economics, Florida International University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper models and estimates the gasoline price dispersion across time and space by using a unique data set at the gas-station level within the U.S.. Nationwide effects (measured by time Â…fixed effects or crude oil prices) explain up to about 51% of the gasoline price dispersion across stations. RefiÂ…nery-specific costs, which have been ignored in the literature due to using local data sets within the U.S., contribute up to another 33% to the price dispersion. While state taxes explain about 12% of the price dispersion, spatial factors such as local agglomeration externalities, land prices, distribution costs of gasoline explain up to about 4%. The contribution of brand-specifiÂ…c factors is relatively minor.
    Keywords: Gasoline Prices, Gas-Station Level Analysis, Nighttime Lights, Land Prices, the United States
    JEL: L11 L81 R32 R41
    Date: 2016–06
  12. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics)
    Abstract: We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta's wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms' pre-existing forward commitments. We illustrate that ignoring the endogenous nature of firms' forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.
    Keywords: Electricity; Mergers; Forward Contracts; Market Power; Regulation
    JEL: D43 L40 L51 L94 Q40
    Date: 2016–06–07
  13. By: Matthew Doyle (Division of Economics and Business, Colorado School of Mines); Ian Lange (Division of Economics and Business, Colorado School of Mines)
    Abstract: Natural gas power plants can further specify their procurement contracts with pipeline distributors using a firm contract option that guarantees delivery at an additional cost. Using transaction level data from 2008-2012 we empirically test what characteristics lead to use of firm contracts and how the premium for firm contracts changes with these characteristics. Using variation in power plants technology type (combined vs. simple cycle) and electricity market structure (restructured vs. regulated), we generally find support for transaction cost theory in the data. Smaller plants, plants located in states with more variance in electricity demand, and plants in states with more inflow pipeline capacity are statistically less likely to use a firm contract. Firm contracts are on average 2.5% (14 cents per Mcf) more expensive and this premium increases as the weather is colder and the state a plant is located in has less inflow capacity.
    Keywords: Natural Gas, Procurement Contracts, Pipelines, Electricity
    JEL: Q40 L94 L95 L14
    Date: 2016–06
  14. By: Zack Cooper; Stephen Gibbons; Matthew Skellern
    Abstract: This paper examines the impact of competition from government-facilitated entry of private, specialty surgical centres on the efficiency and case mix of incumbent public hospitals within the English NHS. We exploit the fact that the government chose the location of these surgical centres (Independent Sector Treatment Centres or ISTCs) based on nearby public hospitals' waiting times - not length of stay or clinical quality - to construct treatment and control groups that are comparable with respect to key outcome variables of interest. Using a difference-in-difference estimation strategy, we find that ISTC entry led to greater efficiency - measured by pre-surgery length of stay for hip and knee replacements - at nearby public hospitals. However, these new entrants took on healthier patients and left incumbent hospitals treating patients who were sicker, and who stayed in hospital longer after surgery.
    Keywords: Hospital Competition, Public-Private Competition, Market Entry, Market Structure, Outsourcing, Hospital Efficiency, Risk Selection, Cherry Picking
    JEL: C23 H57 I11 L1 L33 R12
    Date: 2016–06
  15. By: Dorota Celińska (Faculty of Economic Sciences, University of Warsaw)
    Abstract: In this article we investigate which characteristics of the developers involved in the creation of Open Source software favor innovation in the Open Source community. We utilize a unique database, obtained by web-scrapping GitHub from January to March, 2016. The results of the analysis show that higher reputation in the community improves up to a certain degree the probability of gaining collaborators, but developers are also driven by reciprocity, which is consistent with the concept of gift economy. There exists also a statistically significant network effect emerging from the standarization -- developers using the most popular programming languages in the service are likely to have more collaborators. Providing additional contact information improves the chance of having coworkers. The obtained results can be generalized for the population of mature users of GitHub.
    Keywords: Open Source, GitHub, fork, collaboration, innovations, reputation, gift economy, network externality, standarization, reciprocity
    JEL: L15 L86 L17 L14 D85
    Date: 2016
  16. By: Haiyan Liu (Department of Economics, University of South Florida)
    Abstract: This paper empirically studies how social learning among consumers shapes ?firms' ?optimal strategies of using advertising to signal product quality. I present an equilibrium model that describes both consumers? and fi?rms' ?learning and decision-making under quality uncertainty. My model allows me to distinguish between two roles of informative advertising ?reaching consumers and signaling product quality. I apply the model to the U.S. motion picture theatrical market where advertising and social learning are two main factors for a new movie?'s success. The structural estimates imply that movie studios? signaling advertising only helps to reduce consumers'? uncertainty by less than 10 percent. Word-of-mouth is a much more efficient learning channel for consumers, reducing their uncertainty by more than 90 percent. I also ?find that around 27 percent of advertising spending for movies in my sample is used for signaling product quality, while 73 percent is used for reaching consumers. Studios? tendency to advertise more during the pre-release rather than the post-release weeks is explained to a large extent by the signaling purpose.
    Keywords: Advertising, Signaling, Social Learning, Information, Motion Picture Industry
    JEL: D22 D82 D83 L15 L82 M37
    Date: 2016–02
  17. By: Johannes Fedderke; Nonso Obikili; Nicola Viegi
    Abstract: This paper uses newly available firm-level tax data to evaluate the market structure in South African manufacturing sectors in the period 2010.12. To describe the market structure we compute markups for South African manufacturing firms and concentration indexes for 4-digit manufacturing sectors. We find both significant markups and significant concentration across most sectors.We compare computed markups and concentration with early estimates in South Africa and with other international benchmark countries. We then examine the market structure based on the concentration, firms. size, and entry and exit dynamics to rule out some potential explanations for relatively high markups. We find that the relationships are not monotonic and point to the importance of specific barriers to entry in explaining the relationship between these three characteristics.
    Keywords: Business, Manufacturing industries, Pricing
    Date: 2016

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