nep-ind New Economics Papers
on Industrial Organization
Issue of 2017‒12‒11
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Power and Forward Prices By Ruddell, Keith; Downward, Tony; Philpott, Andy
  2. Self-Control in the Retailing Industry: Inducing Rejection of Loyalty Schemes By Foschi, Matteo
  3. Analysis of Merger Control in A Network Products Market By Tsuyoshi Toshimitsu
  4. Identifying the Degree of Collusion Under Proportional Reduction By Oleksandr Shcherbakov; Naoki Wakamori
  5. Zone Pricing in Retail Oligopoly By Brian Adams; Kevin R. Williams
  6. The Value of Online Scarcity Signals By Courty, Pascal; Ozel, Sinan
  7. Labor market imperfections, markups and productivity in multinationals and exporters By Sabien (S.) Dobbelaere; Kozo Kiyota
  8. Electricity (De)Regulation and Innovation. By Marianna Marino; Pierpaolo Parrotta; Giacomo Vallettaz
  9. Price-Linked Subsidies and Health Insurance Markups By Sonia Jaffe; Mark Shepard
  10. Sunk Cost Fallacy in Driving the World's Costliest Cars By Ho, Teck Hua; Png, Ivan P. L.; Reza, Sadat
  11. Cournot Competition in Wholesale Electricity Markets: The Nordic Power Exchange, Nord Pool By Lundin, Erik; Tangerås, Thomas

  1. By: Ruddell, Keith (Research Institute of Industrial Economics (IFN)); Downward, Tony (University of Auckland); Philpott, Andy (University of Auckland)
    Abstract: We construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. On the spot market, producers wield market power while purchasers are price takers. Producers with forward commitments have less incentive to raise prices on the spot market. Purchasers are thus willing to pay a premium to producers for forward contracts. We argue that this type of forward premium is not susceptible to arbitrage by speculators on the forward market, since purchasers prefer forward contracts backed by producers.
    Keywords: Forward pricing; Electricity markets; Market power; Arbitrage
    JEL: D43 G13 L12 L13 Q41
    Date: 2017–11–29
  2. By: Foschi, Matteo (European University Institute)
    Abstract: When consumers register with loyalty schemes, or open a `customer account', offered by large retailers, they allow retailers to study their purchasing behaviour over time. Via personalised offers and discounts, retailers can then use this information to price discriminate. I study the effect on consumer welfare of this discrimination, assuming several different levels of informativeness within the schemes. When schemes are uninformative about consumer preferences they are certain to hurt consumer surplus. When they are fully or partially informative, an increase in aggregate consumer surplus can take place under some conditions. Pareto Improvements are never possible. The model studies groceries and online industries where temptation and self-control are an issue.
    Keywords: Individual Pricing ; Consumer Tracking ; Price Discrimination ; Impulse Purchasing, Self-Control ; Loyalty Schemes ; Hard Evidence. JEL Classification numbers: D21 ; D42 ; D43 ; D82 ; D86 ; L11 ; L81
    Date: 2017
  3. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Using a horizontally differentiated three-firm model, we consider horizontal merger and antitrust policy in a network products market, where we observe network externalities and compatibilities (interconnectivities) between products and services. In particular, if the degree of network compatibilities in the case of a merger is sufficiently larger than that of product substitutability, consumer surplus is larger than in the premerger case. Thus, the proposed merger is allowed by antitrust authorities based on the positive effect on consumer surplus. In this case, the merger is Pareto improving.
    Keywords: horizontal merger; antitrust policy; network externality; compatibility; consumer surplus standard; horizontally differentiated Cournot competition
    JEL: D43 K21 L12 L15 L41
    Date: 2017–11
  4. By: Oleksandr Shcherbakov; Naoki Wakamori
    Abstract: Proportional reduction is a common cartel practice in which cartel members reduce their output proportionately. We develop a method to quantify this reduction relative to a benchmark market equilibrium scenario and relate the reduction to the traditional conduct parameter. Our measure is continuous, allowing us to have an intuitive interpretation as the “degree of collusion” and nesting the earlier models in the existing literature. Furthermore, our methodology addresses Corts’ (1999) critique by estimating time-varying degree of collusion from a short panel of firm-level observations, exploiting firms’ ex post heterogeneity. We illustrate the method using the Joint Executive Committee railroad cartel data.
    Keywords: Econometric and statistical methods, Market structure and pricing
    JEL: D22 L41 C36
    Date: 2017
  5. By: Brian Adams (Bureau of Labor Statistics); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel data covering the retail home improvement industry, we find that Home Depot would benefit from finer pricing but that Lowe’s would prefer coarser pricing. Zone pricing softens competition in markets where firms compete, but it shields consumers from higher prices in rural markets, where firms might otherwise exercise market power. Overall, zone pricing produces higher consumer surplus than finer price discrimination does.
    Keywords: Zone pricing, Market segmentation, Price discrimination in oligopoly, Micromarketing, Retailing
    JEL: C13 L67 L81
    Date: 2017–02
  6. By: Courty, Pascal; Ozel, Sinan
    Abstract: Online retailers use scarcity cues to increase sales. Many fear that these pressure tactics are meant to manipulate behavioral biases by creating a sense of urgency. At the same time, scarcity cues could also convey valuable information. We measure the value of the scarcity messages posted by Expedia to a Bayesian rational consumer. A signal reveals information on the number of seats available at the posted price. Consumers can use this information to optimally time when they purchase a ticket. The maximum increase in expected utility for a naive consumer, who does not use publicly available information, is 8 percent. For a sophisticated consumer, the increase is between 4-7 percent. Scarcity signals have a negligible impact on seller revenue and consumption.
    Keywords: Airline Ticket.; Online Recommendations; Persuasion; price discrimination; Scarcity
    JEL: L1
    Date: 2017–12
  7. By: Sabien (S.) Dobbelaere (Vrije Universiteit Amsterdam, The Netherlands; Tinbergen Institute, The Netherlands; Institute of Labor Economics (IZA), Germany; Tinbergen Institute, The Netherlands); Kozo Kiyota (Keio University, Japan; Research Institute of Economy, Trade and Industry (RIETI), Japan)
    Abstract: This paper examines the links between the internationalization mode of firms and market imperfections in product and labor markets. We develop a framework for modelling heterogeneity across firms in terms of (i) product market power (price-cost markups), (ii) labor market imperfections (workers' bargaining power during worker-firm negotiations or firm's degree of wage-setting power) and (iii) revenue productivity. We apply this framework to analyze whether the pricing behavior of firms in product and labor markets differs across firms that engage in different forms of internationalization. Engagement in international activities is found to matter for determining not only the type of imperfections in product and labor markets but also the degree of imperfections. Clear differences in behavior between firms that serve the foreign market either through exporting or through FDI are observed. Being an exporter introduces allocative inefficiencies in product as well as labor markets as we find export status to be positively correlated with both product market power (markups) and market power consolidated on the labor supply side (workers' bargaining power). But exporting firms where search frictions are inducing wages to vary with revenue are less able to exploit wage-setting power. Firms with foreign subsidiaries, on the other hand, seem to reduce price distortions in product and labor markets. In addition, we observe heterogeneous returns to being an exporter/MNE within an industry and also discern cross-industry differences.
    Keywords: Rent sharing; monopsony; price-cost mark-ups; productivity; exporting; multinational firms; panel data
    JEL: C23 D24 F14 F16 J50 L13
    Date: 2017–12–01
  8. By: Marianna Marino; Pierpaolo Parrotta; Giacomo Vallettaz
    Abstract: In this paper we study the effect of deregulation on innovation in the electricity sector using a sample composed of 31 OECD countries. Exploiting sharp reductions in the level of product market regulation, explicitly linked to changes in the legal framework, we perform a difference-in-difference analysis by matching data retrieved from the OECD International Regulation, OECD Patent Grants, and UN World Development Indicators databases. Our main findings suggest that a decrease in regulation intensity following a significant reform has a negative impact on patents (granted by the European Patent Office), and that this impact is mainly due to the degree of market contestability. Consistent with the results of Aghion et al. [1], we also find evidence of an inverted U-shaped relationship between regulation and innovation. This may imply that the effect of deregulation on innovation depends on the strength of the deregulatory process.
    Keywords: Regulation, patents, innovation, electricity.
    JEL: K23 L51 L94 O31
    Date: 2017
  9. By: Sonia Jaffe (Becker Friedman Institute For Research in Economics); Mark Shepard (Harvard University)
    Abstract: Subsidies in many health insurance programs depend on prices set by competing insurers – as prices rise, so do subsidies. We study the economics of these “price-linked” subsidies compared to “fixed” subsidies set independently of market prices. We show that price-linked subsidies weaken competition, leading to higher markups and raising costs for the government or consumers. However, price-linked subsidies have advantages when insurance costs are uncertain and optimal subsidies increase as costs rise. We evaluate this tradeoff empirically using a model estimated with administrative data from Massachusetts’ health insurance exchange. Relative to fixed subsidies, price-linking increases prices by up to 6% in a market with four competitors, and about twice as much when we simulate markets with two insurers. For levels of cost uncertainty reasonable in a mature market, we find that the losses from higher markups outweigh the benefits of price-linking.
    Keywords: health insurance, health care pricing
    JEL: I11 I13 L11
    Date: 2017–11
  10. By: Ho, Teck Hua; Png, Ivan P. L.; Reza, Sadat
    Abstract: We develop a behavioral model of durable good usage with mental accounting for sunk costs. It predicts higher-than-rational usage that attenuates at a rate that increases with sunk costs. Singapore government policy varied the sunk cost of buying a new car. Using Singapore data, we estimate the elasticity of driving with respect to sunk costs to be 0.048, which implies that government policy between 2009 and 2013 was associated with 86 kilometers per month, or 5.6%, more driving. The results are robust to specifying sunk costs as relative to buyer income and estimation with Hong Kong data. We believe this to be the first field evidence of the sunk cost fallacy in usage of a major durable good.
    Keywords: sunk costs, mental accounting, behavioral economics, durable goods, consumer choice
    JEL: D4
    Date: 2017–03–02
  11. By: Lundin, Erik (Research Institute of Industrial Economics (IFN)); Tangerås, Thomas (Research Institute of Industrial Economics (IFN))
    Abstract: Horizontal shifts in bid curves observed in wholesale electricity markets are consistent with Cournot competition. Quantity competition reduces the informational requirements associated with evaluating market performance because the markups of all producers then depend on the same inverse residual demand curve instead of one for each firm. We apply the model to the day-ahead market of the Nordic power exchange, Nord Pool, for the years 2011–2013. Results suggest that mark-ups were 8–11 percent. We find some support for the hypothesis that the division of Sweden into price areas in 2011 increased the exercise of market power.
    Keywords: Cournot competition; Market design; Market performance; Nord Pool; Walrasian auction; Wholesale electricity market
    JEL: D22 D40 D43 D44
    Date: 2017–11–21

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