nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒02‒26
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Multi-Product Firms and Product Quality By Kalina Manova; Zhihong Yu
  2. Spatial Price Discrimination and Privatization on Vertically Related Markets By Eleftheriou, Konstantinos; Michelacakis, Nickolas
  3. The Impact of Organization Costs when Firm-selection Matters By Lingens, Jörg; De Pinto, Marco; Bauer, Christian
  4. Offshoring and firm overlap By Capuano, Stella; Egger, Hartmut; Koch, Michael; Schmerer, Hans-Jörg
  5. Optimal Incentives for Patent Challenges in the Pharmaceutical Industry By Böhme, Enrico; Frank, Severin; Kerber, Wolfgang
  6. Markup and Product Differentiation in the German Brewing Sector. By Giannis Karagiannis; Magnus Kellermann; Simon Pröll; Klaus Salhofer
  7. Spatial pattern of Russia’s market integration By Gluschenko, Konstantin

  1. By: Kalina Manova; Zhihong Yu
    Abstract: We examine the global operations of multi-product firms. We present a flexible heterogeneous-firm trade model with either limited or strong scope for quality differentiation. Using customs data for China during 2002-2006, we empirically establish that firms allocate activity across products in line with a product hierarchy based on quality. Firms vary output quality across their products by using inputs of different quality levels. Their core competence is in varieties of superior quality that command higher prices but nevertheless generate higher sales. In markets where they offer fewer products, firms concentrate on their core varieties by dropping low-quality peripheral goods on the extensive margin and by shifting sales towards top-quality products on the intensive margin. The product quality ladder also governs firms' export dynamics, both in general and in response to the exogenous removal of MFA quotas on textiles and apparel. Our results inform the drivers and measurement of firm performance, the effects of trade reforms, and the design of development policies.
    Keywords: trade, trade reforms, multi-product firms, product quality, export prices
    JEL: D22 F10 F12 F14 L10 L11 L15
    Date: 2017–02
  2. By: Eleftheriou, Konstantinos; Michelacakis, Nickolas
    Abstract: We consider a vertically structured market with two retail firms of mixed ownership competing against each other exercising spatial price discrimination. We examine the strategic behavior of downstream rivals as well as the effect of privatization on the intensity of competition and welfare in two cases; when location decisions are taken sequentially and when location decisions are taken simultaneously. We show that production cost differentials are crucial in determining the Nash equilibrium locations (hence market shares) and the impact of the degree of privatization on the level of downstream competition. Privatization leads to stiffer competition when the mixed ownership firm has the cost advantage. However, it can be welfare enhancing only when decisions are taken sequentially with the follower being the semi-public firm having a moderate production cost advantage over the market leader. The results of our model generalize to capture the case of vertical mergers.
    Keywords: mergers; mixed oligopoly; privatization; spatial competition
    JEL: L13 L33 L42 R32
    Date: 2017–02–19
  3. By: Lingens, Jörg; De Pinto, Marco; Bauer, Christian
    Abstract: How does an increase in organization costs (i.e. costs which arise when labor unions organize firm's workforces) affect the industry struc-ture, wage inequality and welfare? In the present paper, we build a model with costly and endogenous unionization, heterogeneous firms as well as free market entry/exit. In such a setting, we show that the share of low-productive firms operating in the market decreases (in-creases) in organization costs if those costs are relatively low (high). If more low-productive firms are active in the market, consumption and hence welfare decline because prices are, on average, higher (vice versa). As such, an increase in organization costs and thus a decline in unionization rates could be welfare-reducing. In addition, we find a hump-shaped relationship between organization costs and wage in-equality. These results suggest that a policy aiming to reduce union-ization by an increase in organization costs can but not necessarily have to be an improvement of the economic performance.
    JEL: J51 L11 L16
    Date: 2016
  4. By: Capuano, Stella (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Egger, Hartmut; Koch, Michael; Schmerer, Hans-Jörg (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany])
    Abstract: "We set up a model of offshoring with heterogeneous producers that captures two empirical regularities of German offshoring firms. There is selection of larger, more productive firms into offshoring. However, the selection is not sharp, and offshoring and non-offshoring firms coexist over a wide range of the revenue distribution. An overlap of offshoring and nonoffshoring firms emerges in our model because, in contrast to textbook models of trade with heterogeneous producers, we allow firms to differ in two technology parameters thereby decoupling the offshoring status of a firm from its revenues. In an empirical analysis, we employ firm-level data from Germany to estimate key parameters of the model and show that ignoring the overlap lowers the estimated gains from offshoring by more than 50 percent and, at the same time, exaggerates substantially the importance of the extensive margin for explaining the evolution of German offshoring over the last 25 years." (Author's abstract, IAB-Doku) ((en))
    JEL: F12 F14 L11
    Date: 2017–02–21
  5. By: Böhme, Enrico; Frank, Severin; Kerber, Wolfgang
    Abstract: Patent settlements in the pharmaceutical industry between originator and generic firms have been scrutinized critically by competition authorities for delaying the market entry of generics and being therefore potentially anticompetitive. In this paper we present a model that analyzes the tradeoff between limiting the delaying of generic entry through patent settlements and giving generic firms more incentives for challenging weak patents of the originator firms. We can show that under general assumptions allowing patent settlements with a later market entry of generics than the expected market entry under patent litigation would increase consumer welfare. We introduce a policy parameter for determining the optimal additional period for collusion that would maximize consumer welfare and show that the size of this policy parameter depends on the size of the challenging costs, the intensity of competition, and the duration between the market entries of the first and second generic.
    JEL: L10 L40 O34
    Date: 2016
  6. By: Giannis Karagiannis (University of Macedonia, Department of Economics); Magnus Kellermann (The Bavarian State Research Center for Agriculture); Simon Pröll (University of Natural Resources and Life Sciences Vienna, Institute of Sustainable Economic Development); Klaus Salhofer (University of Natural Resources and Life Sciences Vienna, Institute of Sustainable Economic Development)
    Abstract: In this paper we provide a method to separate the markup from product differentiation from other sources of market power, i.e. collusive behavior or market intransparency, based on the estimation of a single reduced form equation. We apply this method to a sample of 118 German breweries, since beer is a differentiated product and at the same time the sector has repeatedly been subject to collusive behavior. Our empirical results show that the “general” markup goes beyond the markup from product differentiation, but the latter accounts for most of the deviation of prices from marginal costs. Moreover, typically for a market with monopolistic competition, we observe average costs above marginal costs and, hence, a high markup does not necessarily translate into a high a profit margin.
    Keywords: markup, product differentiation, monopolistic competition, Germany, brewing
    JEL: L13 L66
    Date: 2017–02
  7. By: Gluschenko, Konstantin
    Abstract: This paper studies integration of regional goods markets in Russia over 2001–2015 with the use of time series analysis, based on the law of one price as the criterion of market integration. The cost of a staples basket is used as a price representative. The analysis involves all pairs of country’s regions, thus providing a comprehensive pattern of market integration. The region pairs are classified as belonging to one of four groups: integrated, conditionally integrated, not integrated but tending towards integration, and neither integrated nor tending towards integration. The results suggest that only less than a quarter of region pairs fall into the fourth category.
    Keywords: regional goods markets, Russian regions, law of one price, price convergence
    JEL: L81 R15 R19
    Date: 2017–02–21

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