nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒01‒22
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The different effect of consumer learning on incentives to differentiate in Cournot and Bertrand competition By Conze, Maximilian; Kramm, Michael
  2. Patenting vs. Secrecy for Startups and the Trade of Patents as Negotiating Assets By Andreas Panagopoulos; In-Uck Park
  3. On the Determinants of Cloud Computing Adoption By Ohnemus, Jörg; Niebel, Thomas
  4. Optimal Market Structure in the Mobile Industry By Jeanjean, François; Houngbonon, Georges Vivien
  5. Defining the Relevant Product Market: An Application of Price Tests to the Beer Market in Barbados By Hippolyte, Rommell

  1. By: Conze, Maximilian; Kramm, Michael
    Abstract: We combine two extensions of the differentiated duopoly model of Dixit (1979), namely Caminal and Vives (1996) and Brander and Spencer (2015a,b), to analyze the effect of consumer learning on firms' incentives to differentiate their products in models of Cournot and Bertrand competition. Products are of different quality, consumers buy sequentially and are imperfectly informed about the quality of the goods. Before simultaneously competing in quantities, firms simultaneously choose their investment into differentiation. Late consumers can observe earlier consumers' decisions and extract information about the quality of the goods. This influences the firms' incentives to differentiate. If firms compete in quantities, they are more likely to invest in differentiation with consumer learning than without. This is in line with implications of the recommendation effect introduced in Conze and Kramm (2016) in a model of spatial differentiation. We also examine the case in which firms compete in prices. Here, the effect of consumer learning is reversed, so that differentiation is less likely with consumer learning. Thus, we find an information-based difference between Cournot and Bertrand competition: in the Bertrand setting consumer learning increases the competition, i.e. products are more likely to be substitutes, and it weakens it in the Cournot model.
    Keywords: principle of minimum differentiation,consumer learning,Bayesian observational learning
    JEL: L13 L15 D83
    Date: 2017
  2. By: Andreas Panagopoulos (Department of Economics, University of Crete, Greece); In-Uck Park
    Abstract: The term “patent paradox” refers to the increased use of patents, despite being perceived as having limited stand-alone value as incentives to innovate (Hall et al., 2012). This phenomenon can be attributed to the array of roles patents may play. One role particularly relevant in this context is their use as bargaining chips by firms who employ many patents bundled into patent portfolios to gain a better hand in licensing negotiations, especially in industries where technology is cumulative (Hall and Ziedonis, 2001). As argued by Lanjouw and Schankerman (2004), patent portfolios endow such uses because patents confer “enforcement spillovers” that allow firms to exploit economies of scale, making it less costly to protect a patent when it is part of a bundle, in which case small firms like startups, that hold few patents, are at a disadvantage. In fact, for startup firms patents may even be a “liability” as they can invite infringement allegations from dominant firms with a portfolio of patents. Fear of evoking such highly costly legal disputes is known to force startups to redirect their research (Lerner, 1995) and may well have contributed to the tendency of startups to prefer trade secrecy over patenting as found in some studies, e.g., Graham et al. (2009). In a world of dominant firms and patent portfolios, is there a role for patents as incentives to innovate for tech-startups, or should these innovative firms, which play an outsized role in US net job creation (Hathaway, 2013), prefer secrecy instead? This is an important question because patents, unlike trade secrets, promote welfare enhancing diffusion and knowledge spillovers. The use of patents as leverage in licensing negotiations stems from ownership contentions that arise due to the inherent difficulty (especially in cumulative innovation) of confining bordering technologies. Due to such contentions, when licensing or trading a patent whose ownership is potentially disputed by the prospective licensee, a startup may not be able to reap the full value of its patented technology because the negotiations take place in the shadow of infringement litigation (Shapiro, 2003). Nevertheless, we argue that trade secrecy may not be the best resort. Instead, we show that overt ownership of technology through patenting, together with appropriate channels for ownership trading, can work better to incentivize startups’ innovation activities. Specifically, we present an equilibrium analysis of a dynamic model that clarifies when and how patents may outperform trade secrets in promoting startup innovations. In the process, we also provide some policy implications. Our main thesis is that when trading a patent its owner is potentially selling more than a monopoly right. Specifically, insofar as patents’ enforcing capacity spills over as mentioned above, when a patent is added to a patent portfolio it enhances the portfolio’s muscle in enforcing the rights of any given patent in the bundle. Such additional leverage correspondingly increases the portfolio’s ability to favourably barter a future technology transfer agreement against potential infringers. Thus, a transfer of patent rights does not only convey monopoly profits on the technology embodied in the patents’ claims (as trade secrets do), but also extra surplus from the patents’ capacity to affect future technology transfer negotiations. Therefore, when an innovator transfers a patent, even though its transfer price may not be able to capture the full monopoly profits (because of the risk of infringement), it may merit a markup reflecting the prospect of such extra future surplus. When a sequence of startups are expected to patent and transfer their technology to an incumbent, gradually increasing its future bargaining power, the dynamic feedback effects on this markup can be large enough so that the patent’s transfer price exceeds the value of a trade secret. In short, since patent portfolios do not only engender the threat
    Keywords: Patents, trade secrets, startups, takeovers
    JEL: L22 L10 D43
    Date: 2016–09–24
  3. By: Ohnemus, Jörg; Niebel, Thomas
    Abstract: Cloud computing is widely seen as a new source of innovation as well as a driving factor of productivity improvements of firms. This paper analyses the determinants of cloud computing adoption in general as well as for specific deployment (Public vs. Private) and service models (SaaS, IaaS, PaaS). Our data set contains a representative sample of 2,970 German firms and refers to the years 2014 and 2015. The econometric analysis confirms our three main hypothesis regarding firms' decision to adopt cloud computing in general. The share of workers with mobile internet access, being a start-up, as well as the regional availability of high-speed fixed-line internet access increase the likelihood of a firm for using cloud computing services.
    Keywords: Adoption of ICT,Cloud Computing,Multivariate Probit
    JEL: L10 L86 O33
    Date: 2016
  4. By: Jeanjean, François; Houngbonon, Georges Vivien
    Abstract: The optimal market structure in the mobile industry is an important topic in the mobile industry. In this paper, we use two theoretical frameworks and a structural estimation approach to assess the effects of market structure on consumer surplus in symmetric mobile markets. When mobile services are viewed as homogeneous products under Cournot competition, we find that consumer surplus falls with the number of operators. However, when mobile services are considered as differentiated products under Salop competition, we find an inverted-U relationship between consumer surplus and the number of mobile operators. These findings call for a case-by-case analysis of the optimal market structure in the mobile industry.
    Keywords: Market structure,Investment,Mobile Telecommunications
    JEL: D21 D22 L13 L40
    Date: 2016
  5. By: Hippolyte, Rommell
    Abstract: This paper attempts to determine if beer is a separate relevant product market from rum and soft drinks. Three conventional statistical tests - Pearson’s correlation, unit root and Granger causality - are applied to average monthly retail price data from Barbados for the three categories of beverages for the period January 2012 to July 2015. The results of both the correlation and Granger causality tests suggest that beer is a distinct product market from rum and soft drinks, while the result of the unit root test was inconclusive. The results of the paper should interest practitioners of competition law in the Caribbean region as it shows that price tests could be used as quantitative proof on market boundaries to support the intuition and evidence the traditional Small but Significant Non-transitory Increase in Price (SSNIP) test provides.
    Keywords: price tests, relevant market, beverages, competition law, Barbados
    JEL: K21 L40
    Date: 2016–10–24

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