nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒02‒05
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Distorted monopolistic competition By Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Suedekum, Jens
  2. The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents By Gerard Llobet; Jorge Padilla
  3. Consumer taste uncertainty in the context of store brand and national brand competition By Arcan Nalca,; Tamer Boyaci,; Saibal Ray
  4. Platform price parity clauses with direct sales By Johansen, Bjørn Olav; Vergé, Thibaud
  5. End of 9-Endings and Price Perceptions By Haipeng (Allan) Chen; Daniel Levy; Avichai Snir
  6. Will Ad Blocking Break the Internet? By Ben Shiller; Joel Waldfogel; Johnny Ryan
  7. When Hotelling meets Vickrey: Service timing and spatial asymmetry in the airline industry By André de Palma; Carlos Ordás Criado; Laingo M. Randrianarisoa
  8. An Analysis of Retail Fluid Milk Pricing in the Eastern United States By Bolotova, Yuliya V.

  1. By: Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Suedekum, 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: monopolistic competition,welfare distortion,intersectoral distortions,intrasectoral distortions
    JEL: D43 D50 L13
    Date: 2016
  2. By: Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros); Jorge Padilla (Compass Lexecon)
    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 royaltystacking 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 e ect. 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, standard setting organizations, patent licensing, R&D investment, patent pools.
    JEL: L15 L24 O31 O34
    Date: 2016–11
  3. By: Arcan Nalca, (Smith School of Business, Queen's University); Tamer Boyaci, (ESMT European School of Management and Technology); Saibal Ray (Desautels Faculty of Management, McGill University)
    Abstract: In this paper, we focus on the uncertainty in consumer taste and study how a retailer can benefit from acquiring that taste information in the presence of competition between the retailer's store brand and a manufacturer's national brand. In this context, we also identify the optimal information sharing strategy of the retailer with the manufacturer as well as the equilibrium product positioning and pricing of the two brands. We model a competitive setting in which there is ex-ante uncertainty about consumer preferences for different product features and the retailer has a distinct advantage in terms of resolving this uncertainty, given his close proximity to the consumers. We identify two important effects of retailer's information acquisition and sharing decisions about consumer taste. The direct effect is that having taste information allows the retailer to make better SB introduction and positioning decisions. The indirect effect is that information sharing enables the manufacturer to make better NB positioning decisions - which in return may benefit or hurt the retailer. Furthermore, we show that these effects interact with each other and the nature of their interaction depends on three external factors: relative popularity of different product features, the vertical differentiation between the two brands, and the cost of store brand introduction. This interaction is most striking when the store brand introduction is not very costly. In this case, if one of the features is quite popular, then the retailer voluntarily shares information with the manufacturer because the indirect effect augments the value of the direct effect - even though this increases the competition between the brands. Otherwise, the retailer refrains from information sharing because the indirect effect then diminishes the value of the direct effect. We also generate managerial insights as to when it is most valuable for the retailer to acquire taste information as well its worth for the manufacturer.
    Keywords: uncertain consumer taste, product introduction, store brands, national brands, information acquisition, information sharing, vertical differentiation, horizontal differentiation
    Date: 2017–01–25
  4. By: Johansen, Bjørn Olav (Department of Economics, University of Bergen, Norway); Vergé, Thibaud (CREST, ENSAE, Université Paris-Saclay and Norwegian School of Economics)
    Abstract: In the context of vertical contractual relationships, where competing sellers distribute their products directly as well as through competing intermediation platforms, we analyze the welfare effects of price parity clauses. These contractual clauses prevent a seller from offering its product at a lower price on other platforms or through its own direct sales channel. Recently, they have been the subject of several antitrust investigations. Contrary to the theories of harm developed by competition agencies and in some of the recent literature, we show that when we account for the sellers’ participation constraints, price parity clauses do not always lead to higher commissions and final prices. Instead, we find that they may simultaneously bene.t all the actors (platforms, sellers and consumers), even in the absence of traditional efficiency arguments.
    Keywords: Vertical contracts; price parity clauses; platforms; endogenous participation
    JEL: L13 L42
    Date: 2017–01–27
  5. By: Haipeng (Allan) Chen (Mays Business School, Texas A&M University, USA); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; The Rimini Centre for Economic Analysis, Italy); Avichai Snir (Department of Banking and Finance, Netanya Academic College, Israel)
    Abstract: We take advantage of a natural experiment to document an emergence of a new price ending that has the same effects as 9-endings. In January 2014, the Israeli parliament has passed a law prohibiting the use of non 0-ending prices. We find that one year after 9-ending prices have disappeared, 90-ending prices acquired the same status as 9-ending prices had before the law was passed. 90-ending prices became the new psychological price points. The retailers and the shoppers both reacted to the regulatory intervention optimally, which has eliminated the regulation's intended effect.
    Keywords: 9-ending prices, psychological price points, sticky prices, rigid prices, price recall, price control, price regulation, integer constraint
    JEL: E31 L16 K20
    Date: 2017–01
  6. By: Ben Shiller; Joel Waldfogel; Johnny Ryan
    Abstract: Ad blockers allow Internet users to obtain information without generating ad revenue for site owners; and by 2016 they were used by roughly a quarter of site visitors. Given the ad-supported nature of much of the web, ad blocking poses a threat to site revenue and, if revenue losses undermine investment, a possible threat to consumers' access to appealing content. Using unique, proprietary, and site-specific data on the share of site visitors using ad blockers at a few thousand sites, along with Alexa traffic data, we explore the impact of ad blocker usage on site quality, as inferred from traffic ranks, 2013-2016. We find that each additional percentage point of site visitors using ad blockers raises (worsens) its traffic rank by about 0.6 percent over a 35 month period, with stronger effects at initially worse-ranked sites. We provide additional evidence of causality by showing that the relationship between traffic trends and eventual ad blocking does not predate ad blocking. Plausible instruments for ad blocking also deliver consistent results. Effects of ad blocking on revenue are compounded by the fact that ad blocking reduces visits, while also generating less revenue from remaining visitors employing ad blockers. We conclude that ad blocking poses a substantial threat to the ad-supported web.
    JEL: L81 L82
    Date: 2017–01
  7. By: André de Palma; Carlos Ordás Criado; Laingo M. Randrianarisoa
    Abstract: This paper analyzes rivalry between transport facilities in a model that includes two sources of horizontal differentiation: geographical space and departure time. We explore how both sources influence facility fees and the price of the service offered by downstream carriers. Travellers’ costs include a fare, a transportation cost to the facility and a schedule delay cost, which captures the monetary cost of departing earlier or later than desired. One carrier operates at each facility and schedules a single departure time. The interactions in the facility-carrier model are represented as a sequential three-stage game in fees, times and fares with simultaneous choices at each stage. We find that duopolistic competition leads to an identical departure time across carriers when their operational cost does not vary with the time of day, but generally leads to distinct service times when this cost is time dependent. When a facility possesses a location advantage, it can set a higher fee and its downstream carrier can charge a higher fare. Departure time differentiation allows the facilities and their carrier to compete along an additional differentiation dimension that can reduce or strengthen the advantage in location. By incorporating the downstream carriers into the analysis, we also find that a higher per passenger commercial revenue at one facility induces a lower fee charged by both facilities to their carrier and a lower fare charged by both carriers at their departure facility, while a lower marginal operational cost for one carrier implies a higher fee at its departure facility, a lower fee at the other facility served by the rival carrier and a lower fare at both facilities.
    Keywords: Airline and facility competition, Horizontal differentiation, Location model, Spatial asymmetry, Service timing.
    JEL: D43 L13 L22 L93 R4
    Date: 2017
  8. By: Bolotova, Yuliya V.
    Abstract: In 2008 and 2009 dairy farmers in the U.S. Southeast and Northeast regions filed class action antitrust lawsuits, in which they alleged that Dean Foods, the largest fluid milk processor in the country, and Dairy Farmers of America, the largest dairy cooperative in the country, engaged in anticompetitive conduct, which restricted competition in the fluid milk market in these regions. This research analyzes the performance of fluid milk channel during the period affected by the alleged anticompetitive conduct and the period of antitrust actions in eight cities located in the affected regions. The empirical analysis reveals differences in the behavior of retail fluid whole milk prices, farm milk prices (Class I milk prices) and farm-to-retail margins during the two analyzed periods. There is empirical evidence indicating that increases in farm milk prices (Class I milk prices) are much higher in magnitude than increases in retail fluid whole milk prices, and farm-to-retail margins are lower in the antitrust action period. Furthermore, the vertical price transmission process (cost pass-through) and retail fluid milk pricing practices are different in the two analyzed periods in seven out of eight cities.
    Keywords: antitrust, fluid milk, cartels, cost pass-through, regulated pricing., Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, Marketing, L1, L2, L4, L5, Q1,
    Date: 2017–01

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