nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒04‒23
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Profitable Horizontal Mergers Without Efficiencies Can Increase Consumer Surplus By Charles J. Thomas
  2. Firm-to-Firm Relationships and Price Rigidity Theory and Evidence By Sebastian Heise
  3. Regulating 'platform power' By Orla Lynskey
  4. How Antitrust Enforcement Can Spur Innovation By Watzinger, Martin; Fackler, Thomas A.; Nagler, Markus
  5. Emission taxation, green innovations and inverted-U aggregate R&D efforts in a linear state oligopoly game By D. Dragone; L. Lambertini; A. Palestini

  1. By: Charles J. Thomas (Economic Science Institute & Argyros School of Business and Economics Chapman University)
    Abstract: In a simple model I show consumer surplus can increase after competing sellers consummate a profitable merger that generates no cost savings. This finding contrasts sharply with the conventional wisdom that horizontal mergers without efficiencies must enhance sellers’ market power to be profitable, thereby harming buyers. The model fits industries in which individual buyers conduct distinct procurement contests for which sellers incur costs to participate, say to assess their product’s fit with the buyer’s preferences. Mergers benefit buyers by inducing stronger contest-level entry, echoing common claims from merging parties that their merger is beneficial because it creates a stronger competitor.
    Keywords: mergers, efficiencies, consumer surplus, antitrust
    JEL: D4 D44 L1 L4
    Date: 2017
  2. By: Sebastian Heise
    Abstract: Economists have long suspected that firm-to-firm relationships might increase price rigidity due to the use of explicit or implicit fixed-price contracts. Using transaction-level import data from the U.S. Census, I study the responsiveness of prices to exchange rate changes and show that prices are in fact substantially more responsive to these cost shocks in older versus newly formed relationships. Based on additional stylized facts about a relationship's life cycle and interviews I conducted with purchasing managers, I develop a model in which a buyer-seller pair subject to persistent, stochastic shocks to production costs shares profit risk under limited commitment. Once structurally estimated, the model replicates the empirical correlation between relationship age and the responsiveness of prices to shocks. My results suggest that changes to the average length of relationships in the economy -e.g., in a recession, when the share of young relationships declines- can influence price flexibility and hence the effectiveness of monetary policy.
    Date: 2017–01
  3. By: Orla Lynskey
    Abstract: Increasing regulatory and doctrinal attention has recently focused on the problem of ‘platform power’. Yet calls for regulation of online platforms fail to identify the problems such regulation would target, and as a result appear to lack merit. In this paper, two claims are advanced. First, that the concept of ‘platform power’ is both an under and over-inclusive regulatory target and, as such, should be replaced by the broader concept of a ‘digital gatekeeper’. Second, that existing legal mechanisms do not adequately reflect the power over information flows and individual behaviour that gatekeepers can exercise. In particular, this gatekeeper power can have implications for individual rights that competition law and economic regulation are not designed to capture. Moreover, the technological design, and complexity, of digital gatekeepers renders their operations impervious to scrutiny by individual users, thereby exacerbating these potential implications.
    JEL: L81
    Date: 2017–02–21
  4. By: Watzinger, Martin (University of Munich); Fackler, Thomas A. (University of Munich); Nagler, Markus (University of Munich)
    Abstract: We study the 1956 consent decree against the Bell System to investigate whether patents held by a dominant firm are harmful for innovation and if so, whether compulsory licensing can provide an effective remedy. The consent decree settled an antitrust lawsuit that charged Bell with having foreclosed the market for telecommunications equipment. The terms of the decree allowed Bell to remain a vertically integrated monopolist in the telecommunications industry, but as a remedy, Bell had to license all its existing patents royalty-free. Thus, the path-breaking technologies developed by the Bell Laboratories became freely available to all US companies. We show that in the first five years compulsory licensing increased follow-on innovation building on Bell patents by 17%. This effect is driven mainly by young and small companies. Yet, innovation increased only outside the telecommunications equipment industry. The lack of a positive innovation effect in the telecommunications industry suggests that market foreclosure impedes innovation and that compulsory licensing without structural remedies is ineffective in ending it. The increase of follow-on innovation by small and young companies is in line with the hypothesis that patents held by a dominant firm act as a barrier to entry for start-ups. We show that the removal of this barrier increased long-run U.S. innovation, corroborating historical accounts.
    Keywords: ;
    JEL: O30 O33 O34 K21 L40
    Date: 2017–03–25
  5. By: D. Dragone; L. Lambertini; A. Palestini
    Abstract: We revisit the well known differential Cournot game with polluting emissions dating back to Benchekroun and Long (1998), proposing a version of the model in which environmental taxation is levied on emissions rather than the environmental damage. This allows to attain strong time consistency under open-loop information, and yields two main results which can be summarized as follows: (i) to attain a fully green technology in steady state, the regulator may equivalently adopt an appropriate tax rate (for any given number of firms) or regulate market access (for any given tax rate); (ii) if the environmental damage depends on emissions only (i.e., not on industry output) then the aggregate green R&D effort takes an inverted-U shape, in accordance with Aghion et al. (2005), and the industry structure maximising aggregate green innovation also minimises individual and aggregate emissions.
    JEL: C73 H23 L13 O31 Q52
    Date: 2017–04

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