nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒09‒11
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Stackelberg Competition among Intermediaries in a Differentiated Duopoly with Product Innovation By Jochen Manegold
  2. Second-degree price discrimination by a two-sided monopoly platform By Jeon, Doh-Shin; Kim, Byung-Cheol; Menicucci, Domenico
  3. License or entry in oligopoly By Hattori, Masahiko; Tanaka, Yasuhito
  4. A Leverage Theory of Tying in Two-Sided Markets By Choi, Jay-Pil; Jeon, Doh-Shin
  5. Pricing of delivery services and the emergence of marketplace platforms By Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Lozachmeur, Jean-Marie
  6. Antitrust: Where Did It Come from and What Did It Mean? By Richard N. Langlois
  7. Compatibility Choices under Switching Costs By Jeon, Doh-Shin; Menicucci, Domenico; Nasr, Nikrooz
  8. The Value of Relational Adaptation in Outsourcing: Evidence from the 2008 shock to the US Airline Industry By GIL, Ricard; KIM, Myongjim; ZANARONE, Giorgio
  9. Merger and Acquisitions in South African Banking: A Network DEA Model By Peter Wanke; Andrew Maredza; Rangan Gupta

  1. By: Jochen Manegold (Paderborn University)
    Abstract: On an intermediate goods market we consider vertical and horizontal product differentiation and analyze the impact of simultaneous competition for resources and the demand of customers on the market outcome. Asymmetries between intermediaries may arise due to distinct product qualities as well as by reasons of different production technologies. The intermediaries compete on the output market by choosing production quantities sequentially and for the supplies of a monopolistic input supplier on the input market. It turns out that there exist differences in product quality and productivities such that an intermediary being the Stackelberg leader has no incentive to procure inputs, whereas in the role of the Stackelberg follower will participate in the market. Moreover, we find that given an intermediary is more competitive, his equilibrium output quantity is higher when being the leader than when being the follower. Interestingly, if the intermediary is less competitive and goods are complements, there may exist asymmetries such that an intermediary being in the position of the Stackelberg follower offers higher output quantities in equilibrium than when being in the position of the Stackelberg leader.
    Keywords: Input Market, Product Quality, Quantity Competition, Stackelberg Competition, Product Innovation
    JEL: L13 D43 C72
    Date: 2016–09
  2. By: Jeon, Doh-Shin; Kim, Byung-Cheol; Menicucci, Domenico
    Abstract: In this article we study second-degree price discrimination by a two-sided monopoly platform. We find novel distortions that arise due to the two-sidedness of the market. They make the standard result "no distortion at top and downward distortion at bottom" not holding. They generate a new type of non-responsiveness, different from the one found by Guesnerie and Laffont (1984). We also show that the platform may mitigate or remove non-responsiveness at one side by properly designing price discrimination on the other side. These findings help to address our central question, i.e., when price discrimination on one side substitutes for or complements price discrimination on the other side. As an application, we study the optimal mechanism design for an advertising platform mediating advertisers and consumers.
    Keywords: (second-degree) price discrimination; advertising; non-responsiveness; Two-sided markets; type reversal
    JEL: D4 D82 L5 M3
    Date: 2016–09
  3. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: We consider an incentive of a choice of options for an outside innovating firm to license its new cost reducing technology to incumbent firms, or to enter into the market with or without license in an oligopoly with three firms. We will show that under linear demand and cost functions the results depend on the size of the market. When the market size is large, license to two incumbent firms without entry strategy is the optimum strategy for the innovating firm. However, when the market size is not large, license to one incumbent firm with or without entry strategy may be optimum.
    Keywords: license, entry, oligopoly, innovating firm
    JEL: D43 L13
    Date: 2016–09–06
  4. By: Choi, Jay-Pil; Jeon, Doh-Shin
    Abstract: Partly motivated by the recent antitrust investigations concerning Google, we develop a leverage theory of tying in two-sided markets. We analyze incentives for a monopolist to tie its monopolized product with another product in a two-sided market. Tying provides a mechanism to circumvent the non-negative price constraint in the tied product market without inviting an aggressive response as the rival firm faces the non-negative price constraint. We identify conditions under which tying in two-sided markets is profitable and explore its welfare implications. Our mechanism can be more widely applied to any markets in which sales to consumers in one market can generate additional revenues that cannot be competed away due to non-negative price constraints.
    Keywords: Leverage of monopoly power; Non-negative pricing constraint; Two-sided markets; Tying; Zero pricing
    JEL: D4 L1 L5
    Date: 2016–09
  5. By: Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Lozachmeur, Jean-Marie
    Abstract: This paper studies the pricing of delivery services and its impact on the market structure in the-commerce sector. We focus on one of the ongoing trends, namely the development of marketplaces. A retailer may not just sell its own products; but also provide a marketplace for other sellers, offering a variety of services including delivery. Marketplaces create a "secondary" market which undermines the delivery operator's abilityto differentiate prices. We study the subgame perfect equilibrium of a sequential game with two operators where retailer 0 may potentially develop a marketplace. The delivery operator and retailer 0 bargain over the delivery rate. Then, retailer 0 chooses the per-unit rate and the fixed fee at which it is willing to sell its delivery service to the other retailer. Finally, retailer 1 chooses its delivery option: either it directly patronizes the independent delivery operator, or it uses the services o¤ered by the marketplace, and the corresponding subgame is played. Analytical results are completed by numerical simulations and lead to three main lessons. First the equilibrium nearly always implies a discount to the "leading" retailer, even when the profit maximizing operator has all the bargaining power. Second, the delivery operator cannot avoid the emergence of a marketplace even though this decreases its profits. Third, the market power of the delivery operator cannot be assessed solely by considering its market share.
    Keywords: E-commerce, parcel delivery, marketplace, pricing and market structure,price discrimination
    JEL: L1 L5 L81
    Date: 2016–08
  6. By: Richard N. Langlois (University of Connecticut)
    Abstract: This paper is a draft chapter from an ongoing book project I am calling The Corporation and the Twentieth Century. In The Visible Hand, Alfred Chandler explained the rise of the large vertically integrated corporation in the United States mostly in terms of forces of technology and economic geography. Institutions, including government policy, played a quite minor role. In my own attempt to explain the decline of the vertically integrated form in the late twentieth century, I stayed true to Chandler’s largely institution-free approach. This book will be an exercise in bringing institutions back in. It will argue that institutions, notably various forms of non-market controls imposed by the federal government, are a critical piece of the explanation of the rise and decline of the multi-unit enterprise in the U. S. Indeed, non-market controls, including those imposed in response to the dramatic events of the century, account in significant measure for the dominance of the Chandlerian corporation in the middle of the twentieth century. One important form of non-market control – though by no means the only form – has been antitrust policy. This chapter traces the history of antitrust and argues that, far from being a coherent attempt to address an actual economic problem of monopoly, the Sherman Antitrust Act emerged from the distributional political economy of the nineteenth century. More importantly, the chapter argues that the form in which antitrust emerged would prove significant for the corporation, as the Sherman Act and its successors outlawed virtually all types of inter-firm coordinating mechanisms, thus effectively evacuating the space between anonymous market transactions and full integration.
    Date: 2016–09
  7. By: Jeon, Doh-Shin; Menicucci, Domenico; Nasr, Nikrooz
    Abstract: e study firms’ compatibility choices in the presence of consumers’ switching costs. We analyze both a model of once-and-for-all compatibility choices and that of dynamic choices. Contrary to what happens in a static setting in which firms embrace compatibility to soften the current competition (Matutes and Régibeau, 1988), when consumer lock-in arises due to a significant switching cost, firms make their products incompatible in order to soften future competition, regardless of the model we consider. This reduces consumer surplus and social welfare.
    Keywords: Compatibility, Incompatibility, Switching Cost, Lock-in
    JEL: D43 L13 L41
    Date: 2016–09
  8. By: GIL, Ricard; KIM, Myongjim; ZANARONE, Giorgio
    Abstract: In the airline industry, ex-post adaptation of flight schedules is necessary in the presence of bad weather conditions. When major carriers contract with independent regionals, conflicts over these adaptation decisions typically arise. Moreover, the celerity of needed adjustments requires that adaptation be informal, and hence enforced relationally. In this paper, we theoretically analyze, and empirically test for, the importance of relational adaptation in the airline industry. Our model shows that for relational contracts to be selfenforcing, the long-term value of the relationship between a major and a regional airline must be at least as large as the regional's cost of adapting flight schedules across joint routes. Thus, when facing a shock that forces it to terminate some routes, the major is more likely to preserve routes outsourced to regional airlines that have higher adaptation costs, as the value of the major's relationship with those regionals is larger. We analyze the evolution of U.S. airline networks around the 2008 financial crisis, and we find that consistent with our theoretical predictions, regional routes belonging to networks with worse average weather, and hence higher adaptation costs, were more likely to survive after the shock.
    Keywords: Relational contracting, adaptation, natural experiment, airlines, outsourcing
    JEL: L14 L22 L24 L93
    Date: 2016–09
  9. By: Peter Wanke (COPPEAD Graduate Business School, Federal University of Rio de Janeiro, Rio de Janeiro); Andrew Maredza (School of Economics and Decision Science, North West University, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria)
    Abstract: Banking in South Africa is known for its small number of companies that operate as an oligopoly. This paper presents a strategic fit assessment of mergers and acquisitions (M&A) in South African banks. A network DEA (Data Envelopment Analysis) approach is adopted to compute the impact of contextual variables on several types of efficiency scores of the resulting virtual merged banks: global (merger), technical (learning), harmony (scope), and scale (size) efficiencies. The impact of contextual variables related to the origin of the bank and its type is tested by means of a set of several robust regressions to handle dependent variables bounded in 0 and 1: Tobit, Simplex, and Beta. The results reveal that bank type and origin impact virtual efficiency levels. However, the findings also show that harmony and scale effects are negligible due to the oligopolistic structure of banking in South Africa
    Keywords: Banks, South Africa, Merger and Acquisitions, Network, DEA, Robust Regression Analysis
    JEL: C6 G21
    Date: 2016–09

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