nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒05‒14
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competition, Regulation and Institutional Quality By Raul V. Fabella
  2. Private Information and Insurance Rejections: A Comment By Andrea Attar; Thomas Mariotti; François Salanié
  3. Pricing with Cookies: Behavior-Based Price Discrimination and Spatial Competition By Chongwoo Choe; Stephen King; Noriaki Matsushima
  4. Market Power and Price Discrimination in the U.S. Market for Higher Education By Dennis Epple; Richard Romano; Sinan Sarpça; Holger Sieg; Melanie Zaber
  5. Are Trends in Patenting Reflective of Innovative Activity in Canada? By Jacob Greenspon & Erika Rodigues
  6. Royalty and license fee under vertical differentiation in oligopoly with or without entry of innovator: Two-step auction By Hattori, Masahiko; Tanaka, Yasuhito
  7. License and entry strategies for an outside innovator in duopoly with combination of royalty and fixed fee under vertical differentiation By Hattori, Masahiko; Tanaka, Yasuhito
  8. Robustness of subsidy in licensing under vertical differentiation: General distribution and cost functions By Hattori, Masahiko; Tanaka, Yasuhito

  1. By: Raul V. Fabella (School of Economics, University of the Philippines Diliman; National Academy of Science and Technology)
    Abstract: Regulation and competition policy are two alternative modalities by which the state intervenes in the market. In order for either to deliver welfare gains, there must first be a pre-existing market failure. We first present different varieties of market failures and identify those for which regulation is best address (cooperation failures such as The Fishing Game and the Public Goods Game, scale economies-based failures such as a Natural Monopoly and Meta-Market Failures) and those where competition policy works better (market power-based failures such as an artificial monopoly or cartel). We also discuss those market failures which cannot be remedied by an imperfect state. We show graphically the welfare outcomes of various industrial organizations (monopoly, duopoly, Walrasian limit) under the symmetric Cournot competition. We also deal with the welfare implications of imperfect substitutability. We then discuss some welfare implications of the Bertrand competition, its effect on innovation and on the formation of "trusts". We present reasons why competition policy is better than regulation in jurisdictions where institutions are weak. The reasons are: information intensity and asymmetry being greater with regulation, the greater ease of capture of the organs of regulation and, finally, the presence of private players who serve as allies of the competition agency and help monitor abuse of market power.
    Keywords: competition policy; regulation; weak institutions; market failures; Cournot competition; Bertrand competition
    JEL: K21 L51 L41 L44
    Date: 2017–03
  2. By: Andrea Attar (DEF and CEIS, Università di Roma "Tor Vergata" and Toulouse School of Economics); Thomas Mariotti (Toulouse School of Economics, CNRS); François Salanié (Toulouse School of Economics, INRA)
    Abstract: We show that a necessary and sufficient condition for entry to be unprofitable in markets with adverse selection is that that no buyer type be willing to trade at a price above the expected unit cost of serving those types who are weakly more eager to trade than her. We provide two applications of this result. First, we characterize cases in which market breakdown occurs, thereby generalizing the main result of Hendren (2013). Second, we characterize entry-proof tariffs on nonexclusive active markets, thereby generalizing the main result of Glosten (1994). Our analysis paves the way to new tests of adverse selection, notably besides the case of inactive markets studied by Hendren (2013).
    Keywords: Adverse Selection, Entry Proofness, Market Breakdown, Nonexclusivity
    JEL: D43 D82 D86
    Date: 2017–05–03
  3. By: Chongwoo Choe; Stephen King; Noriaki Matsushima
    Abstract: We study a two-period model of spatial competition with two symmetric firms where firms learn customers’ preferences from the first-period purchase, which they use for personalized pricing in the second period. With product choice exogenously fixed with maximal differentiation, we show that there exist two asymmetric equilibria and customer switching is only from one firm to the other unless firms discount future too much. Firms are worse off with such personalized pricing than when they use pricing at higher levels of aggregation. When product choice is also made optimally, there continue to exist two asymmetric equilibria given sufficiently small discounting, none of which features maximal differentiation. More customer information hurts firms, and more so when they make both product choice and pricing decisions.
    Keywords: Spatial competition, behavior-based price discrimination, personalized pricing, endogenous product choice
    JEL: D43 L13
    Date: 2017–04
  4. By: Dennis Epple (Carnegie Mellon University); Richard Romano (University of Florida); Sinan Sarpça (Koç University); Holger Sieg (University of Pennsylvania); Melanie Zaber (Carnegie Mellon University)
    Abstract: The main purpose of this paper is to estimate an equilibrium model of private and public school competition that can generate realistic pricing patterns for private universities in the U.S. We show that the parameters of the model are identified and can be estimated using a semi-parametric estimator given data from the NPSAS. We find substantial price discrimination within colleges. We estimate that a $10,000 increase in family income increases tuition at private schools by on average $210 to $510. A one standard deviation increase in ability decreases tuition by approximately $920 to $1,960 depending on the selectivity of the college. Discounts for minority students range between $110 and $5,750.
    Keywords: equilibrium model, competition, price discrimination, NPSAS, pricing patterns
    JEL: H52 I20 L30
    Date: 2017–05
  5. By: Jacob Greenspon & Erika Rodigues
    Abstract: This report sheds light on trends in Canadian innovation as indicated through patenting. Central to these recent trends is an apparent paradox: the number of patents granted to Canadians, an output indicator of innovative activity, has increased substantially between 2000 and 2014 despite decreased business sector expenditures on research and development, a crucial input to innovation, in the same period. This report examines this issue an provides several potential explanations as to why this is the case, the strongest being that the divergence between trends in patenting and R&D expenditures is caused by greater efficiency of research processes and an increase in strategic filings of patents. Furthermore, this report documents recent trends in patenting activity in Canada from several sources and compares trends across different technologies. Patenting trends are also used to give a regional perspective on innovation by tracking the level of innovative activity occurring in provinces and census metropolitan areas.
    Keywords: Productivity, Patenting, Research and Development, Innovation, Trends, Technology, Measurement, Canada,
    JEL: O31 O32 Q55 D70
    Date: 2017–04
  6. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: When an outside innovating firm has a technology to produce a higher quality good than the good produced at present, it can sell licenses of its technology to incumbent firms, or enter the market and at the same time sell licenses, or enter the market without license. We examine the definitions of license fee in such a situation in an oligopoly with three firms under vertical product differentiation, one outside innovating firm and two incumbent firms, considering threat by entry of the innovating firm using a two-step auction. We also present an example of the optimal strategy for the innovating firm under the assumption of uniform distribution of consumers' taste parameter and zero cost. Also we suppose that the innovating firm sells its licenses using a combination of royalty per output and a fixed license fee.
    Keywords: royalty, license fee; entry; oligopoly; vertical differentiation; two-step auction
    JEL: D43 L13
    Date: 2017–05–01
  7. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: We consider a choice of options for an innovating firm in duopoly under vertical differentiation to enter the market with or without licensing its technology for producing a higher quality good to the incumbent firm using a combination of a royalty per output and a fixed license fee, or to license its technology without entry. With general distribution function of consumers' taste parameter and cost function we will show that when the innovating firm licenses its technology to the incumbent firm without entry, the optimal royalty rate per output is zero with negative fixed fee, and when the innovating firm enters the market with a license to the incumbent firm, its optimal royalty rate is positive with positive or negative fixed fee. Also we show that when cost function is concave, the optimal royalty rate is one such that the incumbent firm drops out of the market; and when cost function is strictly convex, there is an internal solution of the optimal royalty rate under duopoly.
    Keywords: duopoly, royalty, fixed license fee, vertical differentiation
    JEL: D43 L13
    Date: 2017–05
  8. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: We extend the analysis of a possibility of negative royalty in licensing under oligopoly with an outside or an incumbent innovator by Liao and Sen (2005) to a case of oligopoly with vertical product differentiation under general distribution function of consumer' taste parameter and general cost functions. We consider both outside innovator case and incumbent innovator case. When the non-licensee does not drop out of the market; in the outside innovator case, if the goods of the firms are strategic substitutes (or complements), the optimal royalty rate is negative (or may be negative or positive); in the incumbent innovator case, if the goods are strategic substitutes (or complements), the optimal royalty rate may be negative or positive (is positive). When the non-licensee drops out of the market with negative royalty; in both cases, 1) If the goods are strategic substitutes, the optimal royalty rate is negative, 2) If the goods are strategic complements, the optimal royalty rate is positive.
    Keywords: negative royalty, vertical differentiation, general distribution and cost functions
    JEL: D43 L13
    Date: 2017–05–01

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