nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒03‒12
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Differentiated Durable Goods Monopoly: A Robust Coase Conjecture By Nava, Francesco; Schiraldi, Pasquale
  2. Horizontal Mergers and Innovation By Jullien, Bruno; Lefouili, Yassine
  3. Does the Potential to Merge Reduce Competition? By Hackbarth, Dirk; Taub, Bart
  4. Collusion in Two-Sided Markets By Lefouili, Yassine; Pinho, Joana
  5. Multimarket Linkages, Cartel Discipline and Trade Costs By Delina Agnosteva; Constantinos Syropoulos; Yoto V. Yotov
  6. Patent Protection and Threat of Litigation in Oligopoly By Capuano, Carlo; Grassi, Iacopo
  7. A Primer on Capacity Mechanisms By Fabra, N.
  8. Public Communication and Collusion in the Airline Industry By Aryal, Gaurab; Ciliberto, Federico; Leyden, Benjamin

  1. By: Nava, Francesco; Schiraldi, Pasquale
    Abstract: The paper analyzes a durable good monopoly problem in which multiple varieties can be produced and sold. A robust Coase conjecture establishes that the market eventually clears, that profits exceed static optimal market-clearing profits, and that profits converge to this lower bound in all stationary equilibria when prices can be revised instantaneously. In contrast to the one-variety case though, equilibrium pricing is neither efficient nor minimal (that is, equal to the maximum between marginal cost an the minimal value). Conclusions apply even when products can be scrapped albeit at possibly smaller mark-ups. If so, a novel motive for selling high cost products naturally emerges. Moreover, with positive marginal costs, cross-subsidization arises as a result of equilibrium pricing. The online appendix delivers insights on product design.
    Date: 2018–02
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:12708&r=ind
  2. By: Jullien, Bruno; Lefouili, Yassine
    Abstract: This paper discusses the effects of horizontal mergers on innovation. We rely on the existing academic literature and our own research work to present the various positive and negative effects of mergers on innovation. Our analysis shows that, even in the absence of technological spillovers and R&D complementarities, the overall impact of a merger on innovation may be positive. We derive a number of policy implications regarding the way innovation effects should be handled by competition authorities in merger control and highlight the differences with the analysis of price effects.
    Keywords: Merger Policy; Innovation; R&D Investments
    JEL: K21 L13 L40
    Date: 2018–02
    URL: http://d.repec.org/n?u=RePEc:tse:wpaper:32480&r=ind
  3. By: Hackbarth, Dirk; Taub, Bart
    Abstract: We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three results. First, mergers are optimal when collusion fails (i.e., firms sufficiently deviate from a collusive regime). Second, long periods of collusion are likely, because colluding is dynamically stable. Therefore, mergers are rare. Third, mergers (and, in particular, lower merger costs) decrease pre-merger collusion, as punishments by price wars are weakened. Thus, although anti-competitive mergers harm competition ex-post, barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.
    Keywords: Competition; Horizontal mergers; imperfect information; Industry Structure; market power
    JEL: D43 G34 L12 L13
    Date: 2018–02
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:12732&r=ind
  4. By: Lefouili, Yassine; Pinho, Joana
    Abstract: This paper explores the incentives for, and the effects of, collusion in prices between two-sided platforms. We characterize the most profitable sustainable agreement when platforms collude on both sides of the market and when they collude on a single side of the market. Under two-sided collusion, prices on both sides are higher than competitive prices, implying that agents on both sides become worse off as compared to the competitive outcome. An increase in cross-group externalities makes two-sided collusion harder to sustain, and reduces the harm from collusion suffered by the agents on a given side as long as the collusive price on that side is lower than the monopoly price. When platforms collude on a single side of the market, the price on the collusive side is lower (higher) than the competitive price if the magnitude of the cross-group externalities exerted on that side is sufficiently large (small). As a result, one-sided collusion may benefit the agents on the collusive side and harm the agents on the competitive side.
    Keywords: Collusion; Two-sided markets; Cross-group externalities
    JEL: D43 L41
    Date: 2018–02
    URL: http://d.repec.org/n?u=RePEc:tse:wpaper:32485&r=ind
  5. By: Delina Agnosteva; Constantinos Syropoulos; Yoto V. Yotov
    Abstract: We build a model of tacit collusion between firms that operate in multiple markets to study the effects of trade costs. A key feature of the model is that cartel discipline is endogenous. Thus, markets that appear segmented are strategically linked via the incentive compatibility constraint. Importantly, trade costs affect cartel shipments and welfare not only directly but also indirectly through discipline. Using extensive data on international cartels, we find that trade costs exert a negative and significant effect on cartel discipline. In turn, cartel discipline has a negative and significant impact on trade flows, in line with the model.
    Keywords: endogenous cartel discipline, competitiveness, multimarket contact, welfare, trade flows, trade costs, trade policy, gravity
    JEL: D43 F10 F12 F13 F15 F42 L12 L13 L41
    Date: 2017
    URL: http://d.repec.org/n?u=RePEc:ces:ceswps:_6829&r=ind
  6. By: Capuano, Carlo; Grassi, Iacopo
    Abstract: In recent years, the increasing awarding of patents has captured the attention of scholars operating in different fields. The economic literature has studied the causes of this proliferation; we propose an entry game focusing on one of the consequences, showing how an incumbent may create a patent portfolio in order to control market entry and to collude. The incumbent fixes the level of patent protection and the threat of denunciation reduces the entrant's expected profits; moreover, if the entrant deviates from collusion, the incumbent can strengthen punishment suing the competitor for patent infringement, reducing her incentive to deviate. Our analysis suggests that antitrust authorities should pay attention to the level of patent protection implemented by the incumbent and note whether the holder of a patent reacts to entry by either suing or not suing the competitor. In the model, we use completely general functional forms in analyzing the issues, and this allows us to obtain general results not depending on the assumptions about the kind of oligopolistic competition.
    Keywords: patents,litigation,collusion,entry game
    JEL: D43 K21 L13
    Date: 2018
    URL: http://d.repec.org/n?u=RePEc:zbw:esprep:175243&r=ind
  7. By: Fabra, N.
    Abstract: A simple model is built up to capture the key drivers of investment and pricing incentives in electricity markets. The focus is put on the interaction between market power and investment incentives, and the trade-o_ it introduces when designing the optimal regulatory instruments. In contrast to the energy-only market paradigm that assumes perfect competition, our model demonstrates that in the presence of market power scarcity prices do not promote efficient investments, even among risk-neutral investors. Combining price caps and capacity payments allows to disentangle the two-fold objective of inducing the right investment incentives while mitigating market power. Bundling capacity payments with financial obligations further mitigates market power as long as strike prices are set sufficiently close to marginal costs.
    Keywords: scarcity pricing, market power, capacity markets, reliability options
    JEL: L13 L51 L94
    Date: 2018–02–13
    URL: http://d.repec.org/n?u=RePEc:cam:camdae:1814&r=ind
  8. By: Aryal, Gaurab; Ciliberto, Federico; Leyden, Benjamin
    Abstract: We investigate whether the top management of all legacy U.S. airlines used their quarterly earnings calls as a mode of communication with other airlines to coordinate output reduction (fewer passenger seats) on competitive routes. We build an original and novel dataset on the public communication content from the earnings calls, and use Natural Language Processing techniques from computational linguistics to parse and code the text from earnings calls by airline executives to measure communication. Then we determine if mentioning terms associated with ``capacity discipline'' is a way to sustain collusion on capacity. The estimates show that when all legacy carriers in a market communicate ``capacity discipline,'' it leads to a substantial reduction in the number of seats offered in the market. We find that the effect is driven entirely by legacy carriers, and also that the reduction is larger in smaller markets. Finally, we leverage our high-dimensional text data to develop novel approaches to implement falsification tests and check conditional exogeneity, and confirm that our finding ---legacy airlines use public communication regarding capacity discipline to collude ---is not spurious.
    Keywords: Airlines; Capacity Discipline; Collusion; communication; Text Data
    JEL: D22 L12 L41 L68
    Date: 2018–02
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:12730&r=ind

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