nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒09‒17
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Mixed Duopoly: Differential Game Approach By Koichi Futagami; Toshihiro Matsumura; Kizuku Takao
  2. The Effect of Horizontal Mergers, when Firms Compete in Prices and Investments By Massimo Motta; Emanuele Tarantino
  3. Upstream horizontal mergers and vertical integration By Ioannis N. Pinopoulos
  4. Partial Cartels and Mergers with Heterogeneous Firms : Experimental Evidence By Gomez Martinez, Francisco
  5. Pricing when Customers Care about Fairness but Misinfer Markups By Erik Eyster; Kristof Madarasz; Pascal Michaillat
  6. The optimal choice of internal decision-making structures in a network industry By Tsuyoshi Toshimitsu
  7. The Value of Transparency in Dynamic Contracting with Entry By Gülen Karakoç; Marco Pagnozzi; Salvatore Piccolo
  8. Monopoly without a monopolist : An economic analysis of the bitcoin payment system By Huberman, Gur; Leshno, Jacob D.; Moallemi, Ciamac
  9. Stimulating youth entrepreneurship in the public sector's organizations By Tirziu, Andreea-Maria; Vrabie, Catalin
  10. Vertical Foreclosure with Product Choice and Allocation: Evidence from the Movie Industry By Jaedo Choi; Yun Jeong Choi; Minki Kim
  11. The Impact of Airline Mergers on Quality: Why Do Different Mergers Have Such Different Effects? By Daniel Rijken; Vincent (V.A.C.) van den Berg
  12. Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers By Calzolari, Giacomo; Felli, Leonardo; Koenen, Johannes; Spagnolo, Giancarlo; Stahl, Konrad
  13. Exporter Price Premia? By Ina C. Jäkel; Allan Sørensen
  14. Industrial Organization of China’s Steel Industry and the Restructuring of the Asia-Pacific Iron Ore Market By Xiaochun Huang; Akira Tanaka

  1. By: Koichi Futagami (Osaka University); Toshihiro Matsumura (The University of Tokyo; Osaka University); Kizuku Takao (Aomori Public University)
    Abstract: Previous studies in differential games reveal that intertemporal strategic behaviors have an important role for various economic problems. However, most of their analyses are limited to cases where objective functions are identical among agents. In this paper, we characterize the open-loop Nash equilibrium and the Markov perfect Nash equilibrium of a mixed duopoly game where a fully or partially state-owned firm and a fully private rm compete in the quantities of homogeneous goods with sticky prices. We show that in the Markov perfect Nash equilibrium, an increase in the governments' share-holdings of the state-owned firm has a non-monotonic effect on the price, and in a wide range of parameter spaces, it increases the price. These results are derived from the interaction of an asymmetric structure of agents' objectives and inter-temporal strategic behaviors, which are in sharp contrast with those in the open-loop Nash equilibrium. We provide new implications for privatization policies in the presence of dynamic interactions, against the static analyses.
    Keywords: Mixed Duopoly, Open-loop Nash equilibrium, Markov Perfect Nash equilibrium
    JEL: C73 D43 L32
    Date: 2017–04
  2. By: Massimo Motta; Emanuele Tarantino
    Abstract: It has been suggested that mergers, by increasing concentration, raise incentives to invest and hence are pro-competitive. To study the effects of mergers, we rewrite a game with simultaneous price and cost-reducing investment choices as one where firms only choose prices, and make use of aggregative game theory. We find no support for that claim: absent efficiency gains, the merger lowers total investments and consumer surplus. Only if it entails sufficient efficiency gains, will it be pro-competitive. We also show there exist classes of models for which the results obtained with cost-reducing investments are equivalent to those with quality-enhancing investments.
    Keywords: Horizontal mergers, innovation, investments, network-sharing agreements, competition
    JEL: K22 D43 L13 L41
    Date: 2017–08
  3. By: Ioannis N. Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: We study upstream horizontal mergers when one of the merging parties is a vertically integrated firm. Under upstream cost symmetry and observable contracting, we demonstrate that such type of horizontal mergers always harm consumers through a vertical partial foreclosure effect. Under observable contracting but upstream asymmetric costs, we show that overall consumer surplus may increase due to the merger even though input prices increase and some consumers are worse of. Under upstream cost symmetry but unobservable contracting, we find that consumers may be better off as a result of the merger even in the absence of exogenous cost-synergies between the merging firms. In all cases under consideration, the merger is always profitable for the merging parties.
    Keywords: Vertical relations; vertical integration; horizontal mergers; consumer surplus.
    JEL: L11 L13 L41 L42
    Date: 2017–08
  4. By: Gomez Martinez, Francisco
    Abstract: A usual assumption in the theory of collusion is that cartels are all-inclusive. In contrast, most real- world collusive agreements do not include all firms that are active in the relevant industry. This paper studies both theoretically and experimentally the formation and behavior of partial cartels. The theoretical model is a variation of Bos and Harrington's (2010) model where firms are heterogeneous in terms of production capacities and where individual cartel participation is endogenized. The experimental study has two main objectives. The first goal is examine whether partial cartels emerge in the lab at all, and if so, which firms are part of it. The second aim of the experiment is to study the coordinated effects of a merger when partial cartels are likely to operate. The experimental results can be summarized as follows. We find that cartels are typically not all-inclusive and that various types of partial cartels emerge. We observe that market prices decrease by 20% on average after a merger. Our findings suggest that merger analysis that is based on the assumption that only full cartels forms produces misleading results. Our analysis also illustrates how merger simulations in the lab can be seen as a useful tool for competition authorities to back up merger decisions.
    Keywords: Experiments; Mergers; Cartels; Bertrand oligopoly
    JEL: G34 L44 L41 L13 C92
    Date: 2017–08–01
  5. By: Erik Eyster; Kristof Madarasz; Pascal Michaillat
    Abstract: This paper proposes a theory of price rigidity consistent with survey evidence that firms stabilize prices out of fairness to their consumers. The theory relies on two psychological assumptions. First, customers care about the fairness of prices: fixing the price of a good, consumers enjoy it more at a low markup than at a high markup. Second, customers underinfer marginal costs from prices: when prices rise due to an increase in marginal costs, customers underappreciate the increase in marginal costs and partially misattribute higher prices to higher markups. Firms anticipate customers’ reaction and trim their price increases. Hence, the passthrough of marginal costs into prices falls short of one—prices are somewhat rigid. Embedded in a simple macroeconomic model, our pricing theory produces nonneutral monetary policy, a short-run Phillips curve that involves both past and future inflation rates, a hump-shaped impulse response of output to monetary policy, and a nonvertical long-run Phillips curve.
    JEL: D21 D42 E52 L11
    Date: 2017–09
  6. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Focusing on the role of compatibility between products, we consider the choice of internal decision-making structures—i.e., centralization and decentralization—and its effect on welfare in a network industry where there are horizontally differentiated products associated with network externalities. We demonstrate that if the degree of a network externality is sufficiently large, it is socially optimal to choose decentralization. Furthermore, in the case of consumer ex post expectations, it is optimal for the firm’s owners to choose centralization. However, it is socially preferable given a particular condition.
    Keywords: internal decision-making; centralization; decentralization; network externality; compatibility; multiproduct monopoly
    JEL: D43 D62 L14 L15 L41
    Date: 2017–09
  7. By: Gülen Karakoç (Università di Milano Bicocca); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Bergamo and CSEF)
    Abstract: A manufacturer designs a dynamic contract with a retailer who is privately informed about demand and faces competition by an integrated entrant in a second period. Since the entrant only observes demand after entry and demand is correlated across periods, information about past demand affects the entrant’s production. We analyze the incentives of the incumbent players to share information with the entrant and show that the retailer benefits from transparency, but the manufacturer does not. Contrary to what intuition suggests, transparency with an integrated entrant harms consumers. When the entrant is not an integrated firm, whether transparency benefits consumers depends on the degree of demand persistency.
    Keywords: Dynamic Adverse Selection, Entry, Information Sharing, Transparency, Vertical Contracting
    JEL: D40 D82 D83 L11
    Date: 2017–09–02
  8. By: Huberman, Gur; Leshno, Jacob D.; Moallemi, Ciamac
    Abstract: Owned by nobody and controlled by an almost immutable protocol the Bitcoin payment system is a platform with two main constituencies: users and profit seeking miners who maintain the system's infrastructure. The paper seeks to understand the economics of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed? What are the implications of changing parameters in the protocol? A simplified economic model that captures the system's properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system's limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.
    JEL: D40 D20 L10 L50
    Date: 2017–09–05
  9. By: Tirziu, Andreea-Maria; Vrabie, Catalin
    Abstract: An entrepreneurial education and work culture brings changes in the relation between the public sector’s organizations and its interested parties. More precisely, it is a question of changing managerial and organizational education practices towards self-direction, innovativeness, flexibility and responsibility. Understanding how public sector’s organizations operate in an entrepreneurial manner is also helpful for supporting growth within the business community. This article aims at presenting a framework on young people’s possibilities of becoming successful entrepreneurs within the public sector’s organizations, showing a literature review that concentrates on the entrepreneurship subject, with focus on youth and the public sector’s field. The results are the research made by using studies on this subject, thus leading to a proper use of entrepreneurial means, knowledge and start-up activities that allow an evolved education, self-responsibility and autonomy. We will see that the entrepreneurship concept has been expanded and a strong tendency is in favor of placing entrepreneurship in the center of attention, being regarded as natural in more contexts than the economic one. The wide understanding aims at developing abilities – power of initiative, energy, creativity, cooperation and responsibility, whereas the narrow understanding is more aimed at students obtaining business and self-engaging knowledge regarding personal growth activities.
    Keywords: social innovation; public sector; youth; entrepreneurship education
    JEL: L31
    Date: 2017–09–10
  10. By: Jaedo Choi (University of Michigan, Ann Arbor); Yun Jeong Choi (Yonsei University); Minki Kim (University of California, San Diego)
    Abstract: We investigate a vertically integrated theater's contract and screen allocation decisions in the movie industry characterized by quality unpredictability, price uni- formity, and revenue-sharing contracts. Based on a simple theoretical model that describes the decisions of theaters and movie distributors, we derive two mecha- nisms of foreclosure behaviors: selection and allocation foreclosure. Our empirical results suggest that integrated theaters not only impose a higher quality standard for movies from independent distributors at contracts but also screen their aliated movies more even after contract. Vertically integrated theaters' favoritism toward its aliated movies are more pronounced at company-owned theaters than franchised theaters. Further, we also nd integrated theaters' favorable treats for their rival movies compared to independent movies as well as non-linearity of the foreclosure e ects across movie quality and seasonality.
    Keywords: Endogenous Product Characteristics, Movie Industry, Quality Unpre- dictability, Revenue-Sharing Contract, Vertical Integration
    JEL: L13 L22 L40 L82
    Date: 2017–09
  11. By: Daniel Rijken (VU Amsterdam, The Netherlands); Vincent (V.A.C.) van den Berg (VU Amsterdam, The Netherlands; Tinbergen Institute, The Netherlands)
    Abstract: We investigate the impacts of five airline mergers on one quality dimension, namely route frequency. We use monthly data on routes between the largest 64 US cities from 1999 to 2016. On average, the mergers decrease the frequency, but there are large differences between the five mergers. We hypothesize that these differences resulted from differences in the market and network structures. Our estimations indicate that, if a destination has more connecting flights of the merging airlines, the merger is less detrimental to the frequency, possibly because the merger removes serial marginalization in the quality and price setting. For the market structure effect, we use two distinct set-ups. In the first set-up, the effects of mergers depend on a lagged variable measuring the current market structure. On routes with stronger competition, mergers decrease the frequency more, possibly due to a larger effect on the market structure. When the merging airlines control all the flights, mergers have almost no impact on the frequency. The second set-up uses the market structure before the merger. When one of the merging partners controlled all the flights between two airports, the merger does not directly affect the market structure and seems to have little to no impact on the frequency. Surprisingly, if both partners were flying between two airports before the merger, this merger does not seem to be more harmful to the frequency than when only one partner was operating on the route.
    Keywords: Mergers; quality; airlines; schedule delay; frequency
    JEL: D22 L13 L93 R40
    Date: 2017–09–05
  12. By: Calzolari, Giacomo; Felli, Leonardo; Koenen, Johannes; Spagnolo, Giancarlo; Stahl, Konrad
    Abstract: Using unique data from buyer-supplier relationships in the German automotive industry, we unveil a puzzle by which more trust in a relationship is associated with higher idiosyncratic investment, but also more competition. We develop a theoretical model of repeated procurement with non-contractible, buyer-specifi c investments rationalizing both observations. Against the idea that competition erodes rents needed to build trust and sustain relationships, we infer that trust and competition tend to go hand in hand. In our setting trust and rents from reduced supplier competition behave like substitutes, rather than complements as typically understood.
    Keywords: Competition; Hold-up Problem; Innovation; Management Practices; Procurement; Relational Contracts; Specific Investment; Supply Chains; Trust
    JEL: D22 D86 L22 L62
    Date: 2017–09
  13. By: Ina C. Jäkel (Department of Economics and Business Economics, Aarhus University, Denmark); Allan Sørensen (Department of Economics and Business Economics, Aarhus University, Denmark)
    Abstract: This paper provides new evidence on manufacturing firms' output prices: in Denmark, on average, exported varieties are sold at a lower price (i.e. a negative exporter price premium) relative to only domestically sold varieties. This finding stands in sharp contrast to previous studies, which have found positive exporter price premia. We also document that the exporter price premium varies substantially across products (both in terms of sign and magnitude). We show that in a standard heterogeneous firms model with heterogeneity in quality as well as production efficiency there is indeed no clear-cut prediction on the sign of the exporter price premium. However, the model unambiguously predicts a negative exporter price premium in terms of quality-adjusted prices, i.e. prices per unit of quality. This prediction is broadly borne out in the Danish data: while the magnitude of the premium varies across products, its sign is (nearly) always negative.
    Keywords: Exporters, Pricing, Exporter price premia, Firm-level data
    JEL: F12 F14 L15
    Date: 2017–09–07
  14. By: Xiaochun Huang; Akira Tanaka
    Abstract: The iron ore trading system underwent a transformation in 2010. Until then,long-term contracts dominated the trade and the FOB price was determinedthroughnegotiationsbetween supplierand buyer, with the agreed price applied the following year. This system was changed in 2010 to aquarterly index-linked pricingin which the CFR price was applied. Some studies have suggested that the intervention of the Chinese government was the reason for this change, but this study concludesthat it was thebargaining betweensuppliersand purchasers thatresulted in this transformation.
    Keywords: Long-term contract, spot trading, iron ore price index, the Big Three, China Iron and Steel Association(CISA), dispersed industrial organization, state intervention
    Date: 2017–08

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