nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒11‒27
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Distorted monopolistic competition By Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Südekum, Jens
  2. Why Mixed Qualities May Not Survive at Equilibrium: The Case of Vertical Product Differentiation By Georgi Burlakov
  3. Do vertical relations matter to fund flows under oligopolistic market structures? By Kang Baek
  4. The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents By Llobet, Gerard; Padilla, Atilano Jorge
  5. Extending Industry Specialization through Cross-Border Acquisitions By Laurent Frésard; Ulrich Hege; Gordon Phillips
  6. Product Variety, Across-Market Demand Heterogeneity, and the Value of Online Retail By Thomas W. Quan; Kevin R. Williams
  7. Hospital Competition, Quality, and Expenditures in the U.S. Medicare Population By Carrie Colla; Julie Bynum; Andrea Austin; Jonathan Skinner

  1. By: Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Südekum, Jens
    Abstract: We characterize the equilibrium and optimal resource allocations in a general equilibrium model of monopolistic competition with multiple asymmetric sectors and heterogeneous firms. We first derive general results for additively separable preferences and general productivity distributions, and then analyze specific examples that allow for closed-form solutions and a simple quantification procedure. Using data for France and the United Kingdom, we find that the aggregate welfare distortion - due to inefficient labor allocation and firm entry between sectors and inefficient selection and output within sectors - is equivalent to the contribution of 6-8% of the total labor input.
    Keywords: intersectoral distortions; intrasectoral distortions; monopolistic competition; welfare distortion
    JEL: D43 D50 L13
    Date: 2016–11
  2. By: Georgi Burlakov
    Abstract: In the classical literature on vertical differentiation, goods are assumed to be single products each offered by a different firm and consumed separately one from another. This paper departs from the standard setup and explores the price competition in a vertically differentiated market where a firm's product is consumed not separately but in fixed one-to-one ratio with another complementary type of good supplied by a different producer. An optimal solution for market setting with two entrants of a type is proposed, to show that there could be an equilibrium at which the so-called "mixed-quality combinations", consisting of one high-quality good and one low-quality good each, remain unsold. For such an equilibrium to exist, it is suffcient the mixed-quality combinations to be at least as di erentiated from the best as from the worst combination which retains its positive market share. Thus, the mixed-quality exclusionary outcome appears as a further form in which the well-known maximum- differentiation principle could be implemented in a multi-market setting. It provides a new explanation of the self-selection bias in consumption observed in some industries for complementary goods.
    Keywords: complementary goods; vertical product differentiation; market foreclosure;
    JEL: L11 L13 L15
    Date: 2016–08
  3. By: Kang Baek (Hanbat National University)
    Abstract: Uninformed investors preferentially select distribution companies to purchase funds that suit their investment objectives, because they cannot evaluate each product themselves. Thus, the investment decision depends significantly on their chosen fund distributor’s recommendation. It may lead to conflicts of interest between fund distributors and their customers because distribution professionals and their affiliated financial companies have an incentive to prioritize their profits over investors under oligopolistic market structures. This study demonstrates that money flows into a fund, fund management company and fund distributor have significantly different patterns according to distribution channels, and this distinction is affected by vertical relations among financial companies. Money flows from affiliated distribution channels are less sensitive to the determinants of investment decision compared with non-affiliated ones. This result contributes by providing the insight that changes in the incentive structure of distribution channels result in different outcomes in terms of investor protection and market competition under oligopolistic distribution structures.
    Keywords: Fund Flow; Distribution Channel; Investor Protection; Oligopolistic Market Structure; Vertical Relation.
    JEL: G20 G28 L40
  4. By: Llobet, Gerard; Padilla, Atilano Jorge
    Abstract: It has been commonly argued that the decision of a large number of inventors to license complementary patents necessary for the development of a product leads to excessively large royalties. This well-known Cournot-complements or royalty-stacking effect would hurt efficiency and downstream competition. In this paper we show that when we consider patent litigation and introduce heterogeneity in the portfolio of different firms these results change substantially due to what we denote the Inverse Cournot effect. We show that the lower the total royalty that a downstream producer pays, the lower the royalty that patent holders restricted by the threat of litigation of downstream producers will charge. This effect generates a moderation force in the royalty that unconstrained large patent holders will charge that may overturn some of the standard predictions in the literature. Interestingly, though, this effect can be less relevant when all patent portfolios are weak making royalty stacking more important.
    Keywords: Intellectual Property; Patent Licensing; Patent Pools; R&D Investment; Standard Setting Organizations
    JEL: L15 L24 O31 O34
    Date: 2016–11
  5. By: Laurent Frésard; Ulrich Hege; Gordon Phillips
    Abstract: We investigate the role of industry specialization in horizontal cross-border mergers and acquisitions. We find that acquirers from more specialized industries in a country are more likely to buy foreign targets in countries that are less specialized in these same industries. The role of industry specialization in foreign acquisitions is more prevalent when contracting inefficiencies and exporting costs limit arms' length relationships. The economic gains in cross-border deals are larger when specialized acquirers purchase assets in less specialized industries. These results are consistent with an internalization motive for foreign acquisitions, through which acquirers can apply localized intangibles on foreign assets.
    JEL: D22 D4 D53 G34 L1 L11
    Date: 2016–11
  6. By: Thomas W. Quan (University of Georgia); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data - sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 30% lower than previous studies.
    Keywords: Product Variety, Demand Estimation, Long Tail, Online Retail
    JEL: C13 L67 L81
    Date: 2016–11
  7. By: Carrie Colla; Julie Bynum; Andrea Austin; Jonathan Skinner
    Abstract: Theoretical models of competition with fixed prices suggest that hospitals should compete by increasing quality of care for diseases with the greatest profitability and demand elasticity. Most empirical evidence regarding hospital competition is limited to heart attacks, which in the U.S. generate positive profit margins but exhibit very low demand elasticity – ambulances usually take patients to the closest (or affiliated) hospital. In this paper, we derive a theoretically appropriate measure of market concentration in a fixed-price model, and use differential travel-time to hospitals in each of the 306 U.S. regional hospital markets to instrument for market concentration. We then estimate the model using risk-adjusted Medicare data for several different population cohorts: heart attacks (low demand elasticity), hip and knee replacements (high demand elasticity) and dementia patients (low demand elasticity, low or negative profitability). First, we find little correlation within hospitals across quality measures. And second, while we replicate the standard result that greater competition leads to higher quality in some (but not all) measures of heart attack quality, we find essentially no association between competition and quality for what should be the most competitive markets – elective hip and knee replacements. Consistent with the model, competition is associated with lower quality care among dementia patients, suggesting that competition could induce hospitals to discourage unprofitable patients.
    JEL: I11 L31 L4
    Date: 2016–11

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