nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒11‒20
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Identifying Price-Leadership Structures in Oligopoly By Paul W. Dobson; Sang-Hyun Kim; Hao Lan
  2. Vertical integration and upstream horizontal mergers By Ioannis Pinopoulos
  3. Price Discrimination with Loss Averse Consumers By Jong-Hee Hahn; Jinwoo Kim; Sang-Hyun Kim; Jihong Lee
  4. Price Competition in Product Variety Networks By Philip Ushchev; Yves Zenou
  5. You are judged by the company you keep : reputation leverage in vertically related markets By Choi, Jay Pil; Peitz, Martin
  6. The Strategic Use of Abatement by a Polluting Monopoly By Guiomar Martín-Herrán; Santiago J. Rubio
  7. A Leverage Theory of Tying in Two-Sided Markets By CHOI, Jay Pil; JEON, Doh-Shin
  8. Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets By Herr, Annika; Suppliet, Moritz
  9. Competition and bank stability By Goetz, Martin
  10. Ownership and exit behavior: evidence from the home health care market By Chiara Orsini

  1. By: Paul W. Dobson (University of East Anglia); Sang-Hyun Kim (University of East Anglia); Hao Lan (University of East Anglia)
    Abstract: Oligopoly can give rise to complex patterns of price interaction and price adjustment. While firms in oligopolistic markets may divide into price leaders and price followers, it is not inconceivable that some may take on dual roles, being a leader to one group but a follower to a different group. Thus who leads and who is led can be complicated and hierarchical. To help disentangle such pricing relationships, this paper develops a method to empirically identify price-leadership structures in n-firm oligopolistic markets by generalizing the duopoly method proposed by Seaton and Waterson (2013). Applying the method to UK food retailing industry, our analysis finds that it has a three-tier structure in which the two largest players (Tesco and Asda), tend to price-lead other retailers, while the other two of the Big 4 major chains (Sainsbury and Morrisons) play both follower (to the top two) and leader (to the smaller, premium/convenience positioned supermarket chains).
    Keywords: Price leadership, oligopolistic markets, UK food retailing industry
    JEL: D43 L13 L41 L81
    Date: 2016–11
  2. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: In this paper, we study upstream horizontal mergers in vertically related markets. A key aspect of our analysis is that one of the merging parties is a vertically integrated firm. We consider a two-tier market consisting of two competing vertical chains, with one upstream and one downstream firm in each chain. We assume that one vertical chain is vertically integrated whereas the other chain is vertically separated. We also assume that the vertically integrated chain is more cost-efficient in its downstream operations than the independent downstream firm. We show that a horizontal merger between the vertically integrated firm and the independent upstream supplier will increase the equilibrium input price and reduce both consumer and total welfare. When an upstream competitive fringe exists, however, the merger still decreases consumer surplus but it may increase total welfare. The latter finding is important since it implies that whether antitrust authorities favor a consumer or total welfare objective can lead to very different conclusions regarding the merger’s desirability.
    Keywords: Vertical relations; vertical integration; horizontal mergers; welfare.
    JEL: L11 L13 L41 L42
    Date: 2016–11
  3. By: Jong-Hee Hahn (Yonsei University); Jinwoo Kim (Seoul National University); Sang-Hyun Kim (University of East Anglia); Jihong Lee (Seoul National University)
    Abstract: This paper proposes a theory of price discrimination based on consumer loss aver- sion. A seller offers a menu of bundles before a consumer learns his willingness to pay, and the consumer experiences gain-loss utility with reference to his prior (rational) ex- pectations about contingent consumption. With binary consumer types, the seller fnds it optimal to abandon screening under an intermediate range of loss aversion if the low willingness-to-pay consumer is suffciently likely. We also identify suffcient conditions under which partial or full pooling dominates screening with a continuum of types. Our predictions are consistent with several observed practices of price discrimination.
    Keywords: Reference-dependent preferences, loss aversion, price discrimination, per- sonal equilibrium, preferred personal equilibrium.
    JEL: D03 D42 D82 D86 L11
    Date: 2016–11
  4. By: Philip Ushchev (NRU-Higher School of Economics); Yves Zenou (Monash University, Stockholm University, IFN and CEPR)
    Abstract: We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degrees of substitutability (edges). We also locate consumers into this network, so that the location of each consumer (node) corresponds to her “ideal” variety. We show that, even though prices need not to be strategic complements, there exists a unique Nash equilibrium in the price game among firms. Equilibrium prices are determined by both firms’ sign-alternating Bonacich centralities and the average willingness to pay across consumers. They both hinge on the network structure of the firm-product space. We also investigate how local product differentiation and the spatial discount factor affect the equilibrium prices. We show that these effects non-trivially depend on the network structure. In particular, we find that, in a star-shaped network, the firm located in the star node does not always enjoy higher monopoly power than the peripheral firms.
    Keywords: Networks, Product Variety, Monopolistic Competition, Spatial Competition
    JEL: D43 L11 L13
    Date: 2016–09
  5. By: Choi, Jay Pil; Peitz, Martin
    Abstract: This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier`s adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality vis-à-vis the supplier. The supplier may enter the market by initially renting the downstream firm`s reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs.
    Keywords: Adverse Selection , Certification Intermediaries , Incumbency Advantage , Experience Goods , Outsourcing , Branding , Barriers to Entry
    JEL: D4 L12 L4 L43 L51 L52
    Date: 2016
  6. By: Guiomar Martín-Herrán (Department of Applied Economics and IMUVa, University of Valladolid); Santiago J. Rubio (Department of Economic Analysis and ERI-CES, University of Valencia)
    Abstract: This paper evaluates the effects of the lack of regulatory commitment on emission tax applied by the regulator, abatement effort made by the monopoly and social welfare comparing two alternative policy games. The first game assumes that the regulator commits to an ex-ante level of the emission tax. In the second one, in a first stage the regulator and the monopolist simultaneously choose the emission tax and abatement respectively, and in a second stage the monopolist selects the output level. We find that the lack of commitment leads to lower taxation and abatement that yield larger emissions and, consequently, a larger steady-state pollution stock. Moreover, the increase of environmental damages because of the increase in the pollution stock more than compensates the increase in consumer surplus and the decrease in abatement costs resulting in a reduction of social welfare. Thus, our analysis indicates that the lack of commitment has a negative impact of welfare although this detrimental effect decreases with abatement costs.
    Keywords: Monopoly, Commitment, Emission Tax, Abatement, Stock Pollutant
    JEL: H23 L12 L51 Q52 Q55
    Date: 2016–09
  7. By: CHOI, Jay Pil; JEON, Doh-Shin
    Abstract: Motivated by the recent antitrust investigations concerning Google, we develop a leverage theory of tying in two-sided markets. In a setting where the "one monopoly profit result" holds otherwise, we uncover a new channel through which tying allows a monopolistic firm in one market to credibly leverage its monopoly power to another competing market if the latter is two-sided. In the presence of the nonnegative price constraint, tying provides a mechanism to circumvent the constraint in the tied product market without inviting an aggressive response by the rival firm. We identify conditions under which tying in two-sided markets is promotable and explore its welfare implications. In addition, we show that our model can be applied more widely 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: Tying, Leverage of monopoly power, Two-sided markets, Zero pricing,, Non-negative pricing constraint
    JEL: D4 L1 L5
    Date: 2016–11
  8. By: Herr, Annika; Suppliet, Moritz
    Abstract: Health insurances curb price insensitive behavior and moral hazard of insureds through different types of cost-sharing, such as tiered co-payments or reference pricing. This paper evaluates the effect of newly introduced price limits below which drugs are exempt from co-payments on the pricing strategies of drug manufacturers in reference price markets. We exploit quarterly data on all prescription drugs under reference pricing available in Germany from 2007 to 2010. To identify causal effects, we use instruments that proxy regulation intensity. A difference-in-differences approach exploits the fact that the exemption policy was introduced successively during this period. Our main results first show that the new policy led generic firms to decrease prices by 5 percent on average, while brand-name firms increase prices by 7 percent after the introduction. Second, sales increased for exempt products. Third, we find evidence that differentiated health insurance coverage (public versus private) explains the identifed market segmentation.
    Keywords: pharmaceutical prices; cost-sharing; co-payments; reference pricing; regulation; firm behavior; health insurance
    JEL: I1 L11
    Date: 2016
  9. By: Goetz, Martin
    Abstract: Does an increase in competition increase or decrease bank stability? I exploit how the state-specific process of interstate banking deregulation lowered barriers to entry into urban banking markets and find that greater competition significantly increases bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as merger and acquisitions or diversification. Moreover, I find that greater competition reduces banks' nonperforming loans and increases bank profitability. These findings suggest that competition increases stability as it improves bank profitability and asset quality.
    Keywords: Risk,Stability,Competition,Contestability,Entry,Bank Deregulation,Lending
    JEL: G21 G28 G32
    Date: 2016
  10. By: Chiara Orsini
    Abstract: In the US health care system a high fraction of suppliers are not-for-profit companies. Some argue that non-profits are “for-profits in disguise” and I test this proposition in a quasi-experimental way by examining the exit behavior of home health care firms after a legislative change considerably reduced reimbursed visits per patient. The change allows me to construct a cross provider measure of restriction in reimbursement and to use this measure and time-series variation due to the passage of the law in my estimates. I find that exits among for-profit firms are higher than those of not-for-profit firms, rejecting the null that these sectors responded to the legislation in similar ways. In addition, my results expand the view that “not-for-profit” firms are a form of “trapped capital.” There is little capital investment in the home health care market, so the higher exit rates of for-profit firms after the law change indicate the possible role of labor inputs in generating differences in exit behavior across sectors.
    Keywords: long-term care; government restriction in financing; not-for-profit
    JEL: H32 I11 L31
    Date: 2016–01

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