nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒07‒02
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Collusive Agreements in Vertically Differentiated Markets By Marco A. Marini
  2. Capacity constraints, price discrimination, inefficient competition and subcontracting By Hunold, Matthias; Muthers, Johannes
  3. Direct welfare analysis of relative price regulation By John Vickers
  4. Strategic corporate social responsibility By Planer-Friedrich, Lisa; Sahm, Marco
  5. Evaluating Market Consolidation in Mobile Communications By Christos Genakos; Tommaso Valletti; Frank Verboven
  6. Airport, airline and departure time choice and substitution patterns: An empirical analysis By Escobari, Diego

  1. By: Marco A. Marini (University of Rome La Sapienza)
    Abstract: This paper introduces a number of game-theoretic tools to model collusive agreements among firms in vertically differentiated markets. I firstly review some classical literature on collusion between two firms producing goods of exogenous different qualities. I then extend the analysis to a n-firm vertically differentiated market to study the incentive to form either a whole market alliance or partial alliances made of subsets of consecutive firms in order to collude in prices. Within this framework I explore the price behaviour of groups of colluding firms and their incentive to either pruning or proliferating their products. It is shown that a selective pruning within the cartel always occurs. Moreover, by associating a partition function game to the n-firm vertically differentiated market, it can be shown that a sufficient condition for the cooperative (or coalitional) stability of the whole industry cartel is the equidistance of firms’ products along the quality spectrum. Without this property, and in presence of large quality differences, collusive agreements easily lose their stability. In addition, introducing a standard infinitely repeated-game approach, I show that an increase in the number of firms in the market may have contradictory effects on the incentive of firms to collude: it can make collusion easier for bottom and intermediate firms and harder for the top quality firm. Finally, by means of a three-firm example, I consider the case in which alliances can set endogenously qualities, prices and number of variants on sale. I show that, in every formed coalition, (i) market pruning dominates product proliferation and (ii) partial cartelisation always arises in equilibrium, with the bottom quality firm always belonging to the alliance.
    Keywords: Vertically Differentiated Market, Price Collusion, Product Pruning, Product Proliferation, Endogenous Qualities, Endogenous Alliance Formation, Coalition Structures, Grand Coalition, Coalition Stability, Core, Simultaneous and Sequential Game of Coalition Formation
    JEL: D42 D43 L1 L12 L13 L41
    Date: 2017–06
  2. By: Hunold, Matthias; Muthers, Johannes
    Abstract: We characterize mixed-strategy equilibria in a setting with capacity constrained suppliers which can charge location based prices to different customers. The equilibrium prices weakly increase in the transport distance between supplier and customer, whereas the margins decrease. Despite prices above costs and excess capacities, the competing suppliers exclusively serve their home markets in equilibrium. Competition yields volatile market shares and an inefficient allocation of more distant customers to firms. Even ex-post subcontracting may restore efficiency only partly. The suppliers sometimes do not cross-supply each other as this can intensify competition by relaxing the receiver's capacity constraint. We use our findings to discuss recent competition policy cases and provide hints for a more refined coordinated-effects analysis.
    Keywords: Bertrand-Edgeworth,capacity constraints,inefficient competition,spatial price discrimination,subcontracting,transport costs
    JEL: L11 L41 L61
    Date: 2017
  3. By: John Vickers
    Abstract: Abstract The paper synthesizes and develops the welfare analysis of regulating relative prices, for example price differences, of which banning price discrimination is a special case. Welfare results are derived directly by convexity arguments using functions of welfare levels. The method is also used to obtain results about e¤ects on consumer surplus.
    Keywords: Price discrimination
    JEL: D42 L12
    Date: 2017–06–27
  4. By: Planer-Friedrich, Lisa; Sahm, Marco
    Abstract: We examine the strategic use of Corporate Social Responsibility (CSR) in imperfectly competitive markets. The level of CSR determines the weight a firm puts on consumer surplus in its objective function before it decides upon supply. First, we consider symmetric Cournot competition and show that the endogenous level of CSR is positive for any given number of firms. However, positive CSR levels imply smaller equilibrium profits. Second, we find that an incumbent monopolist can use CSR as an entry deterrent. Both results indicate that CSR may increase market concentration. Third, we consider heterogeneous firms and show that asymmetric costs imply asymmetric CSR levels.
    Keywords: Corporate Social Responsibility,Market Concentration,Cournot Competition,Entry Deterrence,Strategic Delegation,Evolutionary Stability
    JEL: D42 D43 L12 L13 L21 L22
    Date: 2017
  5. By: Christos Genakos; Tommaso Valletti; Frank Verboven
    Abstract: We study the dual relationship between market structure and prices and between market structure and investment in mobile telecommunications. Using a uniquely constructed panel of mobile operators' prices and accounting information across 33 OECD countries between 2002 and 2014, we document that more concentrated markets lead to higher end user prices. Furthermore, they also lead to higher investment per mobile operator, though the impact on total investment is not conclusive. Our findings are not only relevant for the current consolidation wave in the telecommunications industry. More generally, they stress that competition and regulatory authorities should take seriously the potential trade-off between market power effects and efficiency gains stemming from agreements between firms.
    Keywords: mobile telecommunications, market structure, prices, investments, mergers
    JEL: K20 L10 L40 L96
    Date: 2017–06
  6. By: Escobari, Diego
    Abstract: This paper uses the random-coefficients logit methodology that controls for potential endogeneity of prices and allows for general substitution patterns to estimate various demand systems. The estimation takes advantage of an original ticket-level revealed preference data set on travels from the New York City area to Toronto that contains prices and characteristics of not only flight choices but also of all non-booked alternative flights. Consistent with having higher valuations, our results show that travelers buying closer to departure have a higher utility of flying. Moreover, consumers' heterogeneity decreases as the flight date nears. At the carrier level, we identify which carriers have more price-sensitive consumers and which carriers face greater competition. In addition, the results suggest that our multi-airport metropolitan area can be considered as a single market and that JFK and Newark are relatively closer substitutes. Overall, consumers are more willing to switch to alternative carriers than between airports or departure times.
    Keywords: Airline choice; Airport choice; Departure time choice; Substitution patterns; Airline demand; Elasticities
    JEL: C33 C36 D12 D40 L93 R41
    Date: 2017–06–12

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