nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒01‒29
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do Merger Efficiencies Always Mitigate Price Increases? By Zhiqi Chen; Gang Li
  2. License and entry strategies for outside innovator in duopoly By Hattori, Masahiko; Tanaka, Yasuhito
  3. Exit, Tweets and Loyalty By Joshua S. Gans; Avi Goldfarb; Mara Lederman
  4. Ownership Concentration and Strategic Supply Reduction By Ulrich Doraszelski; Katja Seim; Michael Sinkinson; Peichun Wang
  5. Subsidizing Fuel Efficient Cars: Evidence from China's Automobile Industry By Chia-Wen Chen; Wei-Min Hu; Christopher R. Knittel

  1. By: Zhiqi Chen (Department of Economics, Carleton University); Gang Li (School of Economics, Nanjing University)
    Abstract: In a Cournot model with differentiated products, we demonstrate that merger efficiencies in the form of lower marginal costs for the merging firms (the insiders) lead to higher post- merger prices under certain conditions. Specifically, when the degree of substitutability is low between the products offered by the two insiders but high between those by an insider and an outsider, increased merger efficiencies may exert upward rather than downward pressure on the prices of the merging firms. Our results suggest that in cases where firms engage in quantity competition, antitrust authorities should not presume that merger efficiencies will necessarily mitigate the anticompetitive effects of the merger. Prices can go up because of large efficiencies.
    Keywords: Merger efficiencies, Cournot model, Product differentiation
    JEL: L13 L40
    Date: 2017–01–09
  2. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: In Proposition 4 of Kamien and Tauman(1986), assuming linear demand and cost functions with fixed fee licensing it was argued that for the outside innovating firm under oligopoly when the number of firms is small (or very large), strategy to enter the market with license of its cost-reducing technology to the incumbent firm (entry with license strategy) is more profitable than strategy to license its technology to the incumbent firm without entering the market (license without entry strategy). However, their result depends on their definition of license fee, and it is inappropriate if the innovating firm can enter the market. If we adopt an alternative more appropriate definition based on the threat by entry of the innovating firm, license without entry strategy is more profitable in the case of linear demand and cost functions. Also we investigate the problem in the case of quadratic cost functions in which entry with license strategy may be optimal. Further we will show that the optimal strategies for the innovating firm when license fees are determined under the assumption that the licensor takes all benefit of new technology and its optimal strategies when license fees are determined according to Nash bargaining solution are the same.
    Keywords: entry, license, duopoly, cost-reducing innovation, innovating firm, incumbent firm
    JEL: D43 L13
    Date: 2017–01–27
  3. By: Joshua S. Gans; Avi Goldfarb; Mara Lederman
    Abstract: Hirschman’s Exit, Voice, and Loyalty highlights the role of “voice” in disciplining firms for low quality. We develop a formal model of voice as a relational contact between firms and consumers and show that voice is more likely to emerge in concentrated markets. We test this model using data on tweets to major U.S. airlines. We find that tweet volume increases when quality – measured by on-time performance – deteriorates, especially when the airline operates a large share of the flights in a market. We also find that airlines are more likely to respond to tweets from consumers in such markets.
    JEL: L13 L14 L93
    Date: 2017–01
  4. By: Ulrich Doraszelski; Katja Seim; Michael Sinkinson; Peichun Wang
    Abstract: We explore the sensitivity of the U.S. government's ongoing incentive auction to multi-license ownership by broadcasters. We document significant broadcast TV license purchases by private equity firms prior to the auction and perform a prospective analysis of the effect of ownership concentration on auction outcomes. We find that multi-license holders are able to raise spectrum acquisition costs by 22% by strategically withholding some of their licenses to increase the price for their remaining licenses. We analyze a potential rule change that reduces the distortion in payouts to license holders by up to 80%, but find that lower participation could greatly increase payouts and exacerbate strategic effects.
    JEL: L10
    Date: 2017–01
  5. By: Chia-Wen Chen; Wei-Min Hu; Christopher R. Knittel
    Abstract: The Chinese automobile market is the largest in the world with annual sales exceeding 20 million vehicles. The tremendous growth in sales---over 200 percent from 2008 to 2015---and concerns over local air quality have prompted China's policy makers to incentivize the adoption of more fuel efficient vehicles. We examine the response of vehicle purchase behavior to China's largest national subsidy program for fuel efficient vehicles during 2010 and 2011. Using variation from the program's eligibility cutoffs, we find that the program boosted sales for subsidized vehicle models, but that the program also created a substitution effect within highly fuel efficient vehicles and most subsidies went to inframarginal consumers. This substitution effect greatly reduces the cost effectiveness of the program. We calculate that the average cost per ton of carbon dioxide saved is over 82 USD, well above the social cost of carbon used in U.S. regulatory filings. Using the framework in Boomhower and Davis (2014) and accounting for local pollution benefits, we show that ignoring the substitution effect would lead one to conclude that the program is welfare enhancing, whereas in fact the marginal cost of the program exceeds the marginal benefit by almost as much as 300 percent. We also show that the program was not well-targeted; the effect of the subsidy on sales of fuel efficient vehicles was smaller in areas where consumers were more likely to purchase fuel inefficient models or were lower educated.
    JEL: L5 L91 Q4 Q5
    Date: 2017–01

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