nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒09‒10
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Monopsony Theory Revisited By Xavier Méra
  2. Tariffs, R&D, and Two Merger Policies By ARZANDEH, Mehdi; GUNAY, Hikmet
  3. Per Unit vs. Ad Valorem Royalty Licensing By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  4. Prominence, Complexity, and Pricing By Chioveanu, Ioana
  5. Quality Pricing-to-Market By Raphael Auer; Thomas Chaney; Philip Sauré
  6. On the Degree of Scale Economies when Firms Make Technology Choice By Shintaku, Koji
  7. Competitive Neutrality and the Cost and Quality of Welfare Services By Stennek, Johan
  8. Privacy and Platform Competition By Philipp Dimakopoulos; Slobodan Sudaric
  9. Intangible Assets and the Organization of Global Supply Chains By S. Bolatto; A. Naghavi; G. Ottaviano; K. Zajc Kejzar
  10. Market Power in the Capacity Market? The Case of Ireland By Teirila, J.

  1. By: Xavier Méra (Granem - Groupe de Recherche ANgevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)
    Abstract: Standard monopsony theory, old and new, lacks a realistic criterion to distinguish between monopsony and competitive prices. Consequently, prominent Austrian critics have by and large dismissed it. However, the idea that human action occurs in discrete steps, and consequently that the elasticity of the supply schedules for factors of production, as well as the elasticity of the demand schedules for their products, can be altered as a result of coercion, lead to a theory of "monopoly price-gap", with monopoly and monopsony prices as two features of the same phenomenon.
    Keywords: Monopsony, monopoly
    Date: 2017
  2. By: ARZANDEH, Mehdi; GUNAY, Hikmet
    Abstract: In an international Cournot oligopoly model, we compare two different merger policies when firms are merging endogenously and engage in research and development (R&D). In the benchmark model, countries set optimal tariff levels but do not have merger policy. If ex-ante identical firms merge internationally, they have an ex-post cost advantage over the outsiders due to tariff savings. This gives the merger an incentive to increase its R&D investment, which increases the cost dispersion further; therefore, the merger paradox, where each firm wants to be an outsider, disappears when R&D is efficient. As a result, we find different equilibrium market structures depending on the efficiency of R&D. In the second part, we compare two different merger policies, one that puts emphasis on welfare (roughly the Canadian merger policy) and another one that puts emphasis on consumer surplus (roughly the European Union’s merger policy). We show that under the “welfare-increasing” merger policy, monopoly is the equilibrium market structure when R&D is very efficient. This explains why a merger, which created a monopoly, was approved in Canada. As R&D becomes less efficient, the equilibrium market structures become less concentrated under the two different merger policies. Each merger policy can be global welfare maximizing depending on the efficiency of R&D; however, the “consumer-surplus-increasing” merger policy is optimal for a wider range of parameters.
    Keywords: Competition Policy, Merger Policy, R&D, Endogenous Mergers, Tariff, Trade, Policy, Cournot oligopoly, Merger Paradox
    Date: 2017–09
  3. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We consider the licensing of a non-drastic innovation by an innovator who interacts with a potential licensee in a downstream Cournot market. We compare two kinds of license contracts: per unit and ad valorem, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem royalty license contracts which they apply to per unit royalty license contracts, we show that per unit royalty licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem royalty licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.
    Keywords: Innovation, patent licensing, royalty contracts.
    JEL: D21 D43 D44 D45
    Date: 2017
  4. By: Chioveanu, Ioana
    Abstract: This paper analyzes prominence in a homogeneous product market where two firms simultaneously choose both prices and price complexity levels. Complexity limits competing offers' comparability and results in consumer confusion. Confused consumers are more likely to buy from the prominent firm. In equilibrium there is dispersion in both prices and price complexity. The nature of equilibrium depends on prominence. Compared to its rival, the prominent firm makes higher profit, associates a smaller price range with lowest complexity, puts lower probability on lowest complexity, and sets a higher average price. However, higher prominence may benefit consumers and, conditional on choosing lowest complexity, the prominent firm's average price is lower, which is consistent with confused consumers' bias.
    Keywords: oligopoly markets, consumer confusion, prominence, price complexity, price dispersion
    JEL: D03 D43 L13
    Date: 2017–08–31
  5. By: Raphael Auer; Thomas Chaney; Philip Sauré
    Abstract: This paper analyses firm's pricing-to-market decisions in vertically differentiated industries. We first present a model featuring firms that sell goods of heterogeneous quality levels to consumers who are heterogeneous in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the unique pricing game under costly international trade. The comparative statics highlight how firms' pricing-to-market decisions are shaped by the interaction of consumer income and good quality. We derive two testable predictions. First, the relative price of high qualities compared to low qualities increases with the income of the destination market. Second, the rate of cost pass-through into consumer prices falls with quality if destination market income is sufficiently high. We present evidence in support of these two predictions based on a dataset of prices, sales, and product attributes in the European car industry.
    Keywords: exchange rate pass-through, intra-industry trade, monopolistic competition, pricing-to-market, vertical differentiation
    JEL: E3 E41 F12 F4 L13
    Date: 2017–08
  6. By: Shintaku, Koji
    Abstract: We construct a simple model to demonstrate how the firm-level degree of scale economies (D-SE) is determined when firms make technology choice. In particular, we illustrate the importance of external factors that affect the efficiency of firms' technology choice, such as public knowledge stock, when determining D-SE. A change in public knowledge stock affects D-SE both directly and indirectly through a change in the firm's output. When output is endogenized in a monopolistic competition model with a variable mark-up rate, an increase in public knowledge stock raises D-SE through technology choice if the mark-up rate is increasing in output.
    Keywords: Degree of scale economies; Technology choice; Public knowledge stock; Variable mark-up rate.
    JEL: D21 D24 F10 F12 L11 L16
    Date: 2017–09–06
  7. By: Stennek, Johan (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Competition between private and public firms can increase service quality and reduce public costs in markets for tax-financed welfare services with non-contractible quality. Synergies arise from combining high-powered incentives for quality provision (emanating from private firms) with low rents (public firms). However, sometimes, the optimal regulation requires the government to provide public firms with better funding than private competitors, e.g. by paying them higher prices or covering their deficits. This additional compensation is not tied to any additional verifiable quality obligations and may therefore violate competitive neutrality rules incorporated to various areas of legislation.
    Keywords: public-private competition; competitive neutrality; mixed markets; public option; ownership; competition; incomplete contracts; strategic ambiguity; merit goods; SGEI
    JEL: H44 L33 L44
    Date: 2017–08
  8. By: Philipp Dimakopoulos (Humboldt-Universität zu Berlin); Slobodan Sudaric (Humboldt-Universität zu Berlin)
    Abstract: We analyze platform competition where user data is collected to improve adtargeting. Considering that users incur privacy costs, we show that the equilibrium level of data provision is distorted and can be inefficiently high or low: if overall competition is weak or if targeting benefits are low, too much private data is collected, and vice-versa. Further, we find that softer competition on either market side leads to more data collection, which implies substitutability between competition policy effects on both market sides. Moreover, if platforms engage in two-sided pricing, data provision would be efficient.
    Keywords: platform competition, user data, nuisance costs, ad targeting, privacy
    JEL: D43 L13 L40 L86
    Date: 2017–08–07
  9. By: S. Bolatto; A. Naghavi; G. Ottaviano; K. Zajc Kejzar
    Abstract: This paper introduces the concept of intangible assets in sequential supply chains and the importance of their appropriability in the organizational decision of firms. We focus on the quality of intellectual property rights (IPR) institutions, which on top of the hold-up problem between a supplier and the final producer entails an additional risk of imitation as technology may leak to competing producers in the market. The level of IPR enforcement in the location of a supplier can therefore play a crucial role in determining the decision of a final good producer whether to outsource or integrate a particular stage of production. The analysis is performed with Antràs and Chor (2013) in the background, where the position of the input along the supply chain, i.e. its upstreamness, and the degree of sequential complementarity of stage-specific inputs influence the organizational strategy of firms through the incentive structure of supplier investments. Our findings show that introducing intangible assets in sequential supply chain may have the opposite effect of contractibility on outsourcing decision, where only tangible property rights are considered. We argue therefore that the risk of imitation is a relevant feature that needs to be accounted for in the incomplete contract literature. Our theoretical predictions are validated on Slovenian firm-level data.
    JEL: F12 F14 F21 F23 D23 L22 L23 L24 O34
    Date: 2017–08
  10. By: Teirila, J.
    Abstract: An electricity market coupled with a capacity market is modelled as a two-stage game that allows for strategic behaviour both in the electricity market and in the capacity market. The model is applied to the Irish electricity market, where a capacity market based on reliability options is established by the end of 2017. As Ireland has one dominant firm in the electricity market, there have been concerns that the new market design provides it an opportunity to abuse market power in these two markets. Using Ireland as an example this article examines the kinds of strategic behaviours that can be expected if a capacity market is implemented in an imperfectly competitive market. It is found that the potential for the abuse of market power in the capacity market is significant for the dominant firm in Ireland and that there is no simple way to mitigate it. The relative amount of procured capacity, the amount and characteristics of potential entrants, and the competitiveness of the electricity market are the main determinants of the possibilities and incentives for abusing market power in the capacity market.
    Keywords: capacity market, strategic behaviour, competitive benchmark analysis, procurement auction
    JEL: D43 D44 H57 L13 L94
    Date: 2017–06–30

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