nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒10‒09
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Multiproduct-Firm Oligopoly: An Aggregative Games Approach By Nocke, Volker; Schutz, Nicolas
  2. Evolutionary Cournot competition with endogenous technology choice: (in)stability and optimal policy By Lamantia, F.; Negriu, A.; Tuinstra, J.
  3. Pricing Cloud Computing Services By Nicola Dimitri; Ramona Apostol
  4. "Multiproduct Oligopoly and Trade Between Asymmetric Countries" By Yi-Ling Cheng; Akihiko Takahashi
  5. Price dispersion and consumer inattention: evidence from the market of bank accounts By Nicola Branzoli
  6. Vertical Probabilistic Selling under Competition: the Role of Consumer Anticipated Regret By Yong Chao; Lin Liu; Dongyuan Zhan
  7. Advertising and Competition for Market Share Between a New Good Producer and a Remanufacturer By Batabyal, Amitrajeet; Beladi, Hamid
  8. Persistent and Transient Efficiency of International Airlines By Heshmati, Almas; C. Kumbhakar, Subal; Kim, Jungsuk
  9. Broadband Mergers and Dynamic Bargaining: An Application to Netflix By Daniel Goetz
  10. Substitution and Complementarity between Fixed-line and Mobile Access By Chengsi Wang; Julian Wright
  11. The impact of advertising length caps on TV: Evidence from the French broadcast TV industry By Jiekai ZHANG
  12. Competition and vested interests in taxis in Ireland: a tale of two statutory instruments By Gorecki, Paul

  1. By: Nocke, Volker; Schutz, Nicolas
    Abstract: We develop an aggregative games approach to study oligopolistic price competition with multiproduct firms. We introduce a new class of demand systems, derived from discrete/continuous choice, and nesting CES and logit demand systems. The associated pricing game with multiproduct firms is aggregative and a firm's optimal price vector can be summarized by a uni-dimensional sufficient statistic, the iota-markup. We prove existence of equilibrium using a nested fixed-point argument, and provide conditions for equilibrium uniqueness. In equilibrium, firms may choose not to offer some products. We analyze the pricing distortions and provide monotone comparative statics. Under CES and logit demands, another aggregation property obtains: All relevant information for determining a firm's performance and competitive impact is contained in that firm's uni-dimensional type. Finally, we re-visit classic questions in static and dynamic merger analysis, and study the impact of a trade liberalization on the inter- and intra-firm size distributions, productivity and welfare.
    Keywords: Aggregative Game; Discrete/Continuous Choice; Firm Scope; Horizontal Merger; Multiproduct Firms; Oligopoly Pricing; trade liberalization
    JEL: D43 F15 L13
    Date: 2016–09
  2. By: Lamantia, F. (University of Amsterdam); Negriu, A. (University of Amsterdam); Tuinstra, J. (University of Amsterdam)
    Abstract: We study a dynamic oligopoly market model where quantity setting firms can choose one of two production technologies. We find that boundedly rationality in production (best-reply dynamics) and technology choice (evolutionary selection of better performing technologies) as sources of market dynamics, can generate endogenous instability and complicated dynamics, including chaotic fluctuations and co-existing attractors with fractal basins of attraction. By studying successively more complex versions of our model we analyze these two different sources of instability separately and also investigate their interaction. We find that boundedly rational production decisions amplify technological instability whereas boundedly rational technology decisions do not contribute to the production-driven destabilization of the Nash equilibrium. In any case, whenever the two types of decisions interfere in an endogenously unstable market, fluctuations follow a visibly different pattern compared to the fluctuations of a market with only one source of instability. Finally, we show that an innovation policy that aims to alter the market equilibrium without taking into account off-equilibrium dynamics may, in an intrinsically dynamic world, generate welfare losses by destabilizing a stable equilibrium and/or by raising the amplitude of market fluctuations.
    Date: 2016
  3. By: Nicola Dimitri (Professor of Economics, Department of Political Economy and Statistics University of Siena, Siena-Italy. Chair in Innovation Procurement, Maastricht School of Management Maastricht-NL; Life Member, Clare Hall College,Cambridge-UK); Ramona Apostol (PhD Law, Corvers Services)
    Abstract: The economics of cloud computing has recently attracted increasing attention. In particular, a subject which is currently under debate is how prices charged to customers for cloud use are formed, as alternative pricing rules could be considered. Based on the three pricing schemes used by Amazon, the main global cloud service provider, in the paper we tackle two main issues. First we present a methodology for the relevant parameters of the pricing rules to be determined in an optimal way, that ius maximising the provider revenue. Then, based on this analysis we discuss reasons for co-existence of three, rather than fewer pricing rules for accessing the cloud. Our findings seem to suggest that this is due to a larger coverage of potential demand for service, as well as to the possibility for the provider to infer useful information on the customers willingness to pay for cloud services.
    Date: 2016–10
  4. By: Yi-Ling Cheng (Department of Economics, Tunghai University and Academia Sinica); Akihiko Takahashi (Faculty of Economics, The University of Tokyo)
    Abstract: This paper develops a general equilibrium model of oligopolistic multiproduct Â…firms conducting trade between asymmetric countries, in which heterogeneous Â…firms entrants choose their product ranges and outputs. We show that there are fewer exporters in the larger country, and each produces a wider range of products but exports fewer varieties. We also show that while trade liberalization increases the total number of consumed varieties, it decreases the total number of Â…rms and may reduce the product range of each Â…firm.
    Date: 2016–09
  5. By: Nicola Branzoli (Banca d'Italia)
    Abstract: This paper analyzes consumer inattention in the market of checking accounts. I examine the behavior of consumers who keep account tariffs that are dominated, i.e. that charge higher costs for any amount of bank services consumed through the account, by tariffs available at the same bank and introduced after the account was opened. I show that the probability of observing an inattentive consumer decreases with the dispersion of prices across tariffs of her bank. Moreover, consumers using services with the most dispersed prices across tariffs of their bank are less likely to be inattentive, while consumers using only services with the least dispersed prices are more likely to be inattentive. These results are consistent with decision-theoretic models in which consumers focus their attention on attributes which differ more across options and can be useful to improve consumer choice in this market.
    Keywords: dominated tariffs, consumer inattention, price dispersion
    JEL: D4 D8 D12 L11
    Date: 2016–09
  6. By: Yong Chao (College of Business, University of Louisville, Louisville, KY USA 40292); Lin Liu (College of Business Administration, University of Central Florida, Orlando, FL USA 32816); Dongyuan Zhan (School of Management, University College London, London, UK E14 5AA)
    Abstract: This paper studies probabilistic selling with vertically differentiated products when firms compete and consumers anticipate the potential post-purchase regret raised by possibly obtaining the inferior products. Intuitively, anticipated regret hurts the attractiveness of probabilistic selling. However, we find that probabilistic selling can be more profitable, and more likely to arise with anticipated regret than without it. This is due to the ¡°reverse quality discrimination¡± (perceived quality of the random product becomes decreasing in consumer type at the competition margin), which increases the perceived differentiation, and may still maintain sufficient attractiveness of the random product for infra-marginal consumers. Meanwhile, it may hurt the competitor.
    Keywords: reverse quality discrimination, probabilistic selling, vertical differentiation, anticipated regret, competition
    JEL: L13 L15 M31 D03 D43
    Date: 2016–09
  7. By: Batabyal, Amitrajeet; Beladi, Hamid
    Abstract: We study the strategic interaction between a new good producer and a remanufacturer who use advertising campaigns to compete for a dominant share of the market for a certain good. Each firm chooses one of three possible strategies for running its advertising campaign. The two rival firms care only about capturing a dominant share of the relevant market. Hence, if a firm expects to capture dominant market share with probability p ∈ [0,1] then its payoff in the game we study is also p. Our analysis leads to four results. First, we provide the normal form representation of the game between the new good producer and the remanufacturer. Second, we specify the game in matrix form. Third, we indicate what happens at each stage of the elimination of strictly dominated strategies. Finally, we show that the iterated elimination of strictly dominated strategies yields a clear and unique prediction about the outcome of the advertising game.
    Keywords: Advertising, Duopoly, New Good Producer, Remanufacturer, Dominated Strategy
    JEL: D21 L21 M37
    Date: 2016–04–26
  8. By: Heshmati, Almas (CESIS - Centre of Excellence for Science and Innovation Studies, & Department of Economics, Sogang University); C. Kumbhakar, Subal (Department of Economics, Binghamton University); Kim, Jungsuk (Institute of International and Area Studies)
    Abstract: This paper examines the efficiency of international airlines for the period 1998-2012 by using stochastic frontier panel data models. It estimates a four-component random error cost model for multi-output airline services, separating passenger and goods transportation at the national and international levels. The model distinguishes between firm heterogeneity, time-invariant persistent inefficiency, as well as transient (time-variant) inefficiency and random error components. This model is compared with two other models in which one of the four components is missing. All the models are estimated by using the maximum likelihood method. The models produce persistent, transient and overall efficiency for each airline and time period. The outcomes indicate that the four-component model has an advantage over the traditional panel data approach of separating airline heterogeneity and time-invariant inefficiency effects. The mean and dispersion of cost efficiency amongst airlines differ by model specifications and according to their geographical area of operations. The performance difference may be a consequence of different market structures and deregulation processes, and of specific competitive conditions such as resource availability and strategic alliances with competitors. The results confirm that in general the airlines are not able to achieve full cost efficiency. We find that carriers based in the Asia region are more efficient than carriers based in the European and North American regions. The bigger airlines are unable to take advantage of economies of scale and are not more efficient than their smaller counterparts.
    Keywords: International airlines; firm heterogeneity; persistent inefficiency
    JEL: C23 C51 D24 L25 L93 N70
    Date: 2016–09–30
  9. By: Daniel Goetz (Princeton University, Department of Economics, Fisher Hall, Princeton, NJ, 08540)
    Abstract: I measure how mergers in the market for broadband internet service affect short-run welfare. Mergers between internet service providers (ISPs) with non-overlapping markets may decrease welfare by increasing ISP bargaining leverage against content providers. However, study of this welfare channel has been stymied by a lack of data on interconnection fees between content and internet service providers. I estimate an industry model of demand, plan choice, pricing and interconnection bargaining using data on plan prices, consumer choice sets and bargaining delays between major U.S ISPs and the leading purveyor of streaming video content, Netflix. Intuitively, if delaying agreement over interconnection degrades quality of service to subscribers, then the opportunity cost of lost subscriptions identifies the fee. To map disagreement times and ISP competition into interconnection fees, I develop a multilateral dynamic bargaining model with asymmetric information. ISPs make take-it-or-leave it offers to learn about Netflix's benefit from interconnection, while simultaneously competing for subscribers who value Netflix quality of service. I structurally estimate the model and recover fixed interconnection fees ranging from 44 to 69 million USD. I find that a proposed merger between TimeWarner and Comcast that was challenged by the Federal Communications Commission would have slightly raised interconnection fees and bargaining length, reducing consumer welfare by 1.9 percent.
    Keywords: mergers; streaming video; dynamic games of incomplete information; two-sided markets;
    JEL: C7 L41 L96
    Date: 2016–09
  10. By: Chengsi Wang (Department of Economics, University of Mannheim, L7 3-5, Mannheim, 68131, Germany); Julian Wright (Department of Economics, National University of Singapore, 10 Kent Ridge Crescent, 119260, Singapore)
    Abstract: Platforms use price parity clauses to prevent sellers charging lower prices when selling through other channels. Platforms justify these restraints by noting they are needed to prevent free-riding, which would undermine their incentives to invest in their platform. In this paper, we study the effect of price parity clauses on three different types of platform investment, and evaluate these restraints taking into account these investment effects. We find, that wide price parity clauses lead to excessive platform investment while without such price parity clauses there is insufficient platform investment. Even taking these investment effects into account, wide price parity clauses always lower consumer surplus and often lowers total welfare.
    Keywords: search, vertical restraints, intermediation, investment
    JEL: D40 L11 L14 L42
    Date: 2016–10
  11. By: Jiekai ZHANG (INSEE-CREST, 150 Boulevard Gabriel Péri, 92245 MALAKOFF, France)
    Abstract: The quantities of advertising on TV are regulated in France, as in many other developed countries. This paper aims at understanding the welfare implication of such regulation. It is the first paper which investigates this issue with a structural econometric model in two-sided market framework. I construct an unique database of per hour data on 12 main broadcast TV stations in France during one year (2014) to estimate structurally the demand and supply in the French broadcast television industry. I identify the shadow prices of regulation caps on advertising quantities, using the difference in estimated marginal costs between the binding and non-binding regulation constraints. A counterfactual experiment is carried out to quantify the exact impact of regulation. The results suggest that the TV channels advertise more without regulation but the overall impact of the current regulatory regime is small. The welfare analysis suggests that the current regulation framework is unnecessary, since it constrained the profit of TV channels without improving significantly the welfare of TV viewers.
    Keywords: Advertising, regulation, media, TV, two-sided market, structural estimation, shadow prices, welfare
    JEL: C35 D22 D62 H44 L13 L22 L51 L82 L88
    Date: 2016–09
  12. By: Gorecki, Paul
    Abstract: This paper addresses, for the taxi market in Ireland, whether judicial, legislative and regulatory processes promote taxi users’ welfare or taxi license holders’ welfare. It is argued that the 2000 decision to remove quantitative restrictions on taxi numbers favoured taxi users; the 2010 decision to re impose such restrictions, with the exception of wheelchair accessible taxis) had the effect of favouring taxi license holders, while doing little to meet its declared object to increase the number of wheelchair accessible taxis and the ready availability of such vehicles for wheelchair customers. Whether the late 2000s/early 2020s will be a rerun of the late 1990s, with increasing waiting times for taxi users, is a moot point. An applicant refused a taxi license might, as in 2000, successfully bring a High Court case contesting the legal basis for the present quantitative restrictions. The Competition and Consumer Protection Commission might spark debate on taxi regulatory policy, while the Minister for Transport, Tourism and Sport might issue a policy direction to the National Transport Authority, the taxi regulator, requiring it to clarify the objectives and benchmarks for success of its existing prohibition on taxi licenses and to consider how best to create incentives for those with wheelchair accessible taxis to use them to service wheelchair users.
    Keywords: regulation; taxi; wheelchair accessible
    JEL: L5
    Date: 2016–10–01

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