nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒10‒30
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The strategic value of partial vertical integration By Fiocco, Raffaele
  2. Competitiveness and subsidy or tax policy for new technology adoption in duopoly By Hattori, Masahiko; Tanaka, Yasuhito
  3. Strategic grouping and search for quality journalism, online versus offline By Matthew Ellman; Tomás Rodríguez Barraquer
  4. Pricing policies when patients are heterogeneous: a welfare analysis By Rosella Levaggi; Paolo Pertile
  5. Effects of Stricter Environmental Regulations on Resource Development By Ian Lange; Michael Redlinger
  6. Strategic Technology Adoption and Entry Deterrence in the US Local Broadband Markets By Tedi Skiti
  7. Market Power and Heterogeneous Pass-through in German Electricity Retail By Tomaso Duso; Florian Szücs
  8. Acquisitions, markups, efficiency, and product quality: Evidence from India By Stiebale, Joel; Vencappa, Dev

  1. By: Fiocco, Raffaele
    Abstract: We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in differentiated good price competition. The partial misalignment between the profit objectives within a partially integrated manufacturer-retailer hierarchy entails a higher retail price than under full integration. This `information vertical effect' translates into an opposite `competition horizontal effect': the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions. Keywords: asymmetric information, partial vertical integration, vertical mergers, vertical restraints. JEL Classification: D82, L13, L42.
    Keywords: Informació -- Aspectes econòmics, Competència econòmica, 33 - Economia,
    Date: 2016
  2. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: We consider a problem of subsidy or tax policy for new technology adoption by duopolistic firms. The technology is developed in and transferred by a foreign country to the domestic country. It is free but each firm must expend some fixed set-up cost for education of its staff to adopt and use it. Assuming that each firm maximizes the weighted average of absolute and relative profits, we examine the relationship between competitiveness and subsidy or tax policies for technology adoption, and show that when firm behavior is not competitive (the weight on the relative profit is small), the optimal policy of the government may be taxation; when firm behavior is competitive (the weight on the relative profit is large), the optimal policy is subsidization or inaction and not taxation. However, if firm behavior is extremely competitive (close to perfect competition), taxation case re-emerges.
    Keywords: new technology adoption, duopoly, subsidy, tax
    JEL: D43 L13
    Date: 2016–10–21
  3. By: Matthew Ellman (IAE-CSIC, BGSE); Tomás Rodríguez Barraquer (MOVE-UAB, BGSE)
    Abstract: This paper investigates how supply-side factors influence the search for quality content in online and offline environments. We show that lower fixed costs of online publishing reduce the incentives to bundle content, as compared to offline journalism. In the presence of asymmetric information over journalistic quality, bundling of content by journalists who publish as a group generates positive informational externalities for users. Journalists group assortatively, better journalists having better partners. Then a consumer who discovers one quality journalist, has found several. The online environment, by reducing the pressure to group up, can lower welfare in our baseline model. We establish conditions for this result and investigate a number of countervailing forces.
    Keywords: Media economics, quality, search, links, matching
    JEL: L13 L82
    Date: 2016–10
  4. By: Rosella Levaggi (University of Brescia); Paolo Pertile (Department of Economics (University of Verona))
    Abstract: We use a simple theoretical model to compare alternative regulation regimes for the reimbursement of medical innovations when responses to a new treatment (effectiveness) are heterogeneous within the eligible population. We study two dimensions: i) efficiency in selecting sub-groups of patients for which the new technology is reimbursed, ii) distribution of the rent between firm and payer. We show that, when rational behaviour of profit maximizing firms is taken into account, stratified cost-effectiveness analysis and marginal value-based prices lead to the same equilibrium, which is efficient only if the population is sufficiently homogeneous. Inefficiency arises because some patients that should be treated are not. On the other hand, prices based on the average value may allow for an efficient solution even when heterogeneity is large. With this pricing policy, efficiency may be achieved even when part of the rent is retained by the payer, provided that the degree of heterogeneity is sufficiently small.
    Keywords: value-based prices, cost-effectiveness analysis, static and dynamic efficiency, personalized medicine
    JEL: L51 I18
    Date: 2016–10
  5. By: Ian Lange (Division of Economics and Business, Colorado School of Mines); Michael Redlinger (Department of Natural Resources, State of Alaska)
    Abstract: As technology and our ability to alter the natural world expand, it may lead to change in the level or type of externalities that economic activity places on society. This may prompt changes in the laws and regulations governing activity to limit the new externalities. While new regulations will change the distribution of rents around, welfare is impacted if the regulations alter the pace of economic activity. This analysis seeks to understand whether changes in oil and gas regulation brought about by the shale revolution have restricted the pace of drilling and production. This hypothesis is tested using data on North Dakota and Montana both before and after North Dakota increased the level of bonding required to operate in the state as well as stricter rules on waste disposal. Using regression discontinuity and difference-in-differences methods, results generally find that the new regulations had no statistical impact on the pace of drilling and production. While the average impact of the regulations on production was statistically indistinguishable from zero, it is found that smaller operators reduced their production and larger operators increased theirs. These results are instructive for policymakers who weigh the loss of economic welfare against improved environmental quality when deciding on new regulations.
    Keywords: Oil and Gas Regulation, Shale Oil, Drilling, Firm Exit
    JEL: L51 L71 Q35 Q53
    Date: 2016–10
  6. By: Tedi Skiti (Department of Economics, Duke University)
    Abstract: How does strategic investment affect entry of new technologies and market structure? This article investigates the role of competition in firms’ technology adoption decisions in the U.S. wireline broadband industry. I present a model of strategic entry deterrence and study how internet service providers’ interactions affect their technology deployment at local markets. The goal is to capture an important trade-off: cable firms adopt a new cable system to provide higher speeds, but the adoption has a preemptive effect on fiber firms’ entry. I collect and combine unique firm-level data on broadband technology deployment and markets under entry threat for New York State. I provide evidence of strategic investment by cable incumbents to deter fiber entry. Counterfactual scenarios suggest that the industry has experienced 16% excessive investment in cable adoption and 12% underinvestment in fiber entry both of which are explained by these deterrence strategies. In addition, subsidies to cable incumbents in small markets reduce fiber entry rate by 50%. I also find that policies that promote statewide entry mitigate the effects from these deterrence strategies and increase fiber entry rate by 30%. These results have wide implications for technology diffusion, quality provision and optimal subsidy policy in markets with strategic technology adoption and entry threat.
    Keywords: Broadband, Strategic Investment, Technology Adoption, Entry Threat, Deterrence
    JEL: L13 L41 L96
    Date: 2016–09
  7. By: Tomaso Duso; Florian Szücs
    Abstract: We analyze the pass-through of cost changes to retail tariffs in the German electricity market over the 2007 to 2014 period. We find an average pass-through rate of around 60%, which significantly varies with demand factors: while the pass-through rate to baseline tariffs, where firms have higher market power, is only 50%, it increases to 70% in the competitive segment of the market. Although the pass-through rate of independent firms is significantly higher than that of other firms in the competitive market segment, the extent of supply-side heterogeneity is limited. Thus, the firms’ ability to exercise market power appears to be constrained by competition and largely determined by demand side factors. Finally, we find that the pass-through rate in the competitive market segment has been approaching unity over the past years, indicating a rise in competitive pressure.
    Keywords: Electricity retail, pass-through, Germany
    JEL: C23 D22 D43 L13 L94 Q41
    Date: 2016
  8. By: Stiebale, Joel; Vencappa, Dev
    Abstract: This paper uses a rich panel data set of Indian manufacturing firms to analyze the effects of domestic and international acquisitions on various outcomes at target firm and product level. We apply recent methodological advances in the estimation of production functions together with information on prices and quantities to estimate physical productivity, markups, marginal costs and proxies for product quality. Using a propensity score reweighting estimator, we find that acquisitions are associated with increases in quantities and markups and lower marginal costs on average. These changes are most pronounced if acquirers are located in technologically advanced countries. We also provide evidence that the quality of products increases while quality-adjusted prices fall upon acquisitions.
    Keywords: Foreign Direct Investment,Foreign Ownership,Mergers and Acquisitions,Multi-Product Firms,Productivity
    JEL: F61 F23 G34 L25 D22 D24
    Date: 2016

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