nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒07‒30
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The prisoner’s dilemma in Cournot models: when endogenizing the level of competition leads to competitive behaviors. By Ibrahim Abada; Andreas Ehrenmann
  2. Competitive Effects of Partial Control in an Input Supplier By Brito, Duarte; Cabral, Luís M B; Vasconcelos, Helder
  3. Innovation, Pricing and Targeting in Networks By Panebianco, Fabrizio; Verdier, Thierry; Zenou, Yves
  4. False Advertising By Rhodes, Andrew; Wilson, Chris M
  5. Consumers on a Leash: Advertised Sales and Intertemporal Price Discrimination By Aniko Ory
  6. The short-term impact of product market reforms: A cross-country firm-level analysis By Peter Gal; Alexander Hijzen
  7. Competition in Retail Electricity Markets : An Assessment of Ten Years Dutch Experience By Willems, Bert; Mulder, M.

  1. By: Ibrahim Abada; Andreas Ehrenmann
    Abstract: In resource based economies, regulating the production and export activities have always been an important challenge. Examples in oil and gas show that different behaviors have been adopted ranging from the export monopoly to the complete opening of the export market. This paper tries to explain this multitude of solutions via strategic interactions. When modeling imperfect competition, players are separated in two categories: those who exert market power and those who are competitive and propose the good at their marginal supply cost. Letting a player freely choose whether it wants to exert market power or not when it optimizes its utility is not discussed in the literature. This paper addresses this issue by letting the players choose the level of competition they want to exert in the market. To do so, we analyze the behavior of two countries competing to supply a market with a homogeneous good in an imperfect competition setting. Each country decides the number of firms it authorizes to sell in the market. The interaction between the firms is of a Nash-Cournot type, where each one exerts market power and is in competition with all other firms allowed to sell, whether they belong to the same country or not. Each country optimizes its utility, that is the sum of the profits of its firms. We have studied four kinds of interaction between the countries. The first calculates the closed loop Nash equilibrium of the game between the countries. The second setup analyzes the cartel when the countries collude. The third focuses on the open loop Nash equilibrium and the fourth models a bi-level Stackelberg interaction where one country plays before the other. We demonstrate that in the closed loop Nash equilibrium, our setting leads to the prisoner’s dilemma: the equilibrium occurs when both countries authorize all their firms to sell in the market. In other words, countries willingly chose not to exert market power. This result is at first sight similar to the Allaz & Vila (1993) result but is driven by a completely different economic reasoning. In the Stackelberg and coordinated solutions, the market is on the contrary very concentrated and the countries strongly reduce the number of firms that enter the market in order to fully exert market power and increase the price. The open loop result lies in between: the countries let all their firms sell but market power remains strong. These results suggest that the prisoner’s dilemma outcome is due to the conjectural inconsistency of the Nash equilibrium. Finally, in the Stackelberg setting, we give countries the choice of being leader or follower and demonstrate that the counter-intuitive competitive outcome is very unlikely to occur in the market.
    Keywords: Imperfect competition, export oligopoly, open and closed loop Nash equilibrium
    JEL: L13 L7
    Date: 2016–07–21
  2. By: Brito, Duarte; Cabral, Luís M B; Vasconcelos, Helder
    Abstract: Motivated by recent competition policy cases, we study an industry where downstream firms partially own a supplier. If ownership corresponds to control, then consumer surplus is higher and possibly non-monotonic with respect to the ownership share. We provide conditions such that consumers are better off when ownership of the upstream firm is shared by the downstream firms; and when ownership is partial (i.e., less than 100%). These results are based on two effects of partial ownership: first, a vertical-control effect, which effectively reduces the extent of double marginalization; and second, a tunneling effect, whereby the downstream firms use the wholesale price as a means to transfer value from independent upstream shareholders.
    Date: 2016–07
  3. By: Panebianco, Fabrizio; Verdier, Thierry; Zenou, Yves
    Abstract: Consider a network of firms where a firm T is given the opportunity to innovate a product (first-generation innovation). If successful, this firm can temporarily sell this innovation to her direct neighbors because this will give her access to a larger market. However, if her direct neighbors innovate themselves on top of firm T's innovation (second-generation innovations), then firm T loses the right to sell her initial innovation to the remaining firms in the market. We analyze this game where each firm (T and her direct neighbors) has to decide at which price they want to sell their innovation. We show that the optimal price policy of each firm depends on the level of property rights protection, the position of firm T in the network, her degree and the size of the market. We then analyze the welfare implications of our model where the planner that maximizes total welfare has to decide which firm to target. We show that it depends on the level of property rights protection and on the network structure in a non-trivial way.
    Keywords: diffusion centrality; innovation.; Networks; targets
    JEL: D85 L1 Z13
    Date: 2016–07
  4. By: Rhodes, Andrew; Wilson, Chris M
    Abstract: There is widespread evidence that some firms use false advertising to overstate the value of their products. We consider a model in which a policymaker is able to punish such false claims. We characterize an equilibrium where false advertising actively influences rational buyers, and analyze the effects of policy under different welfare objectives. We establish precise conditions where policy optimally permits a positive level of false advertising, and show how these conditions vary intuitively with demand and market parameters. We also consider the implications for product investment and industry self-regulation, and connect our results to the literature on demand curvature.
    Keywords: Misleading Advertising; Product Quality; Pass-through; Self-Regulation
    JEL: D83 L15 M37
    Date: 2016–07–18
  5. By: Aniko Ory (Cowles Foundation, Yale University)
    Abstract: The Internet allows sellers to track “window shoppers,” consumers who look but do not buy, and to lure them back later by targeting them with an advertised sale. This new technology thus facilitates intertemporal price discrimination, but simultaneously makes it too easy for a seller to undercut her regular price. Because buyers know they could be lured back, the seller is forced to set a lower regular price. Advertising costs can, therefore, serve as a form of commitment: a seller can actually benefit from higher costs of advertising. Based on this framework, the impact of commitment on prices, profits, and welfare are analyzed using a dynamic pricing model. Furthermore, it is demonstrated how buyers’ time preferences give rise to price fluctuation or an everyday-low-price in equilibrium.
    Keywords: Advertising, Coases conjecture, commitment, dynamic pricing, intertemporal price discrimination, online markets, everyday-low-pricing
    JEL: D11 D21 D42 D90 L11 L12
    Date: 2016–07
  6. By: Peter Gal; Alexander Hijzen
    Abstract: This paper analyses the effects of product market reforms in the short and medium term across 10 regulated industries and 18 advanced economies for the period 1998-2013 using internationally comparable firm-level data based on Orbis. It provides four key insights. First, product market reforms have positive effects on capital, output and employment and their effects increase over time. After two years, they raise capital by 4%, output by 3% and employment by 1.5%. Second, differences in production technology and the nature of product market regulations across sectors generate important differences in the mechanisms through which reforms operate. In network industries, reforms tend to benefit small firms, while the opposite is observed in retail trade. Product market reforms also promote firm entry, particularly those that reduce entry barriers. Third, credit constraints can play an important role in weakening the positive impact of product market reform on investment. Fourth, product market reforms also tend to have positive effects on firms in downstream sectors—both at home and abroad—that make intensive use of intermediate inputs from deregulated sectors. L'incidence à court terme des réformes des marchés de produits : Une analyse au niveau des entreprises de plusieurs pays Le présent document analyse les effets à court et moyen terme des réformes pratiquées sur les marchés de produits de dix secteurs réglementés dans dix-huit économies avancées sur la période de 1998 à 2013, à partir de données d'entreprises comparables au niveau international issues de la base Orbis. Cette analyse livre quatre grands enseignements. Premièrement, les réformes des marchés de produits ont, sur le capital, la production et l'emploi, des effets positifs qui s'accroissent avec le temps. Après deux ans, l'augmentation constatée est ainsi de 4 % pour le capital, 3 % pour la production et 1.5 % pour l'emploi. Deuxièmement, les différences dans les technologies de production et la nature de la réglementation des marchés de produits d'un secteur à l'autre engendrent d'importantes disparités dans les mécanismes par lesquels les réformes opèrent. Ainsi, dans les industries de réseau, les réformes ont tendance à profiter surtout aux petites entreprises, à l'inverse de ce que l'on observe dans le commerce de détail. Les réformes des marchés de produits favorisent aussi l'entrée d'entreprises sur le marché, en particulier lorsqu'elles ont pour effet de réduire les obstacles à l'entrée. Troisièmement, les restrictions du crédit peuvent jouer un rôle important en affaiblissant l'effet positif des réformes sur l'investissement. Enfin, quatrièmement, les réformes des marchés de produits tendent à avoir des effets positifs sur les entreprises des secteurs d'aval –tant nationaux qu'étrangers – faisant un usage intensif de ressources intermédiaires en provenance de secteurs déréglementés.
    Keywords: firm entry, structural reforms, Orbis, competition, credit constraints, Orbis, réforme structurelle, compétition, restrictions du crédit, entrée d'entreprises sur le marché
    JEL: D04 D22 L43 L51 L8 L9
    Date: 2016–07–26
  7. By: Willems, Bert (Tilburg University, Center For Economic Research); Mulder, M.
    Abstract: This paper examines a decade of retail competition in the Dutch electricity market and discusses market structure, regulation, and market performance. We find a proliferation of product variety, in particular by the introduction of quality-differentiated green-energy products. Product innovation could be a sign of a well-functioning market that caters to customer’s preferences, but it can also indicate a strategic product differentiation to soften price competition. Although slightly downward trending, gross retail margins remain relatively high, especially for green products. Price dispersion across retailers for identical products remains high, as also across products for a single retailer. We do not find evidence of asymmetric pass-through of wholesale costs. Overall, the retail market matured as evidenced by fewer consumer complaints and higher switching rates. A fairly intensive regulation of mature energy retail markets appears to be needed to create benefits for consumers.
    Keywords: retail electricity market; competition; regulation; ex-post assessment
    JEL: L94 L43 L11
    Date: 2016

This nep-ind issue is ©2016 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.