nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒05‒14
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Of course Collusion Should be Prosecuted. But Maybe... Or (The case for international antitrust agreements) By Filomena Garcia; Jose Manuel Paz y Minõ; Gustavo Torrens
  2. The Effects of Process R&D in an Asymmetric Duopoly under Cournot and Supply Function Competitions By Saglam, Ismail
  3. Measuring the Welfare of Intermediation in Vertical Markets By Javier D. Donna; Pedro Pereira; Tiago Pires; André Trindade
  4. Bargaining over managerial contracts: a note By Stamatopoulos, Giorgos
  5. Competition effect on innovation and productivity - The Portuguese case By Anabela Santos; Michele Cincera; Paulo Neto; Maria Manuel Serrano
  6. How Hard Is It to Maximise Profit? Evidence from a 19-th Century Italian State Monopoly By Carlo Ciccarelli; Gianni De Fraja; Silvia Tiezzi

  1. By: Filomena Garcia (Indiana University, & UECE); Jose Manuel Paz y Minõ (Indiana University); Gustavo Torrens (Indiana University)
    Abstract: We study the incentives of competition authorities to prosecute collusive practices of domestic and foreign firms. For that purpose, we develop a model of multi-market contact between two firms that can engage in collusion in two countries. In each country, there is a competition authority with a mandate to maximize national welfare. Each competition authority decides its prosecution policy at the beginning of time and commits to it. In equilibrium, the ownership distribution of the firms (domestic versus foreign) affects prosecution policies. The country that does not own the firms prosecutes them as soon as information of collusion becomes available. On the contrary, the country that owns the firms has an incentive to protect their profits in foreign markets delaying prosecution. This strategic delay is valuable because it contains the information spreading that could trigger prosecution in the foreign country. Prosecution delays, however, are not optimal from the point of view of global welfare, something that could be solved through the integration of the competition authorities. The country of origin of the firms would nevertheless oppose integration. Finally, in a multi-industry setting, both countries delay prosecuting domestic firms, which again is not optimal from the point of view of global welfare. Moreover, in a multi-industry setting, both countries can be better off under integration.
    Keywords: Multi-market Collusion, Antitrust Policy, Strategic Prosecution, International Antitrust Agreements
    JEL: F23 F53 L41 K21
    Date: 2018–05
  2. By: Saglam, Ismail
    Abstract: In this paper we attempt to explore the welfare effects of (process) R&D in an asymmetric duopoly with a homogeneous product under Cournot and supply function competitions. To this aim, we consider a two-stage perfect-information game where the duopolists compete in stage one in R&D investments and in stage two either in quantities or in supply functions. Calculating the (subgame-perfect Nash) equilibrium of this game numerically for a wide range of initial cost parameters and comparing it to the equilibrium with no R&D, we show that R&D has a positive effect on the welfares of consumers and the society as a whole. While its effect on the profits of the duopolists is also positive under the Cournot competition, it becomes negative under the supply function competition. This latter negative effect is caused by the duopolists' more aggressively investing in R&D under the supply function competition, increasing the industry output, and consequently decreasing the product price, to a harmful level for themselves. Moreover, we show that R&D always widens up the efficiency gap between the duopolists under the supply function competition, while narrowing it down under the Cournot competition.
    Keywords: Duopoly; Cournot competition; supply function competition; process R&D
    JEL: D43 L13
    Date: 2018–04–26
  3. By: Javier D. Donna (The Ohio State University); Pedro Pereira; Tiago Pires (Department of Economics, University of North Carolina); André Trindade (FGV EPGE Brazilian School of Economics and Finance)
    Abstract: We empirically investigate the welfare implications of intermediaries in oligopolistic markets, where intermediaries offer additional services to differentiate their products from the ones of the manufacturers. Our identification strategy exploits the unique circumstance that, in the outdoors advertising industry, there are two distribution channels: consumers can purchase the product either directly from manufacturers, or through intermediaries. We specify a differentiated products’ equilibrium model, and estimate it using product-level data for the whole industry. On the demand side, the model includes consumers who engage in costly search with preferences that are specific to the distribution channel. On the supply side, the model includes two competing distribution channels. One features two layers of activity, where manufacturers and intermediaries bargain over wholesale prices, and intermediaries compete on final prices to consumers. The other is vertically integrated. The estimated model is sed to simulate counterfactual scenarios, where intermediaries do not offer additional services. We find that the presence of intermediaries increases welfare because the value of their services outweighs the additional margin charged.
    Keywords: Intermediaries, vertical markets, search frictions, bargaining, outdoor advertising
    JEL: L81 L42 D83 M37
    Date: 2018–05
  4. By: Stamatopoulos, Giorgos
    Abstract: The theory of strategic managerial delegation has recently been extended by incorporating bargaining over managerial contracts (van Witteloostuijn 2007, etc). Assuming that bargaining involves only the incentive rates of managers, this line of research has shown that market outcomes (profits and social welfare) depend crucially on the intra-firm allocation of bargaining powers. In the current paper we revisit the bargaining framework assuming that negotiations involve all contractual terms (incentive rates and transfers). We show that contrary to the earlier results, the market equilibrium is independent of bargaining powers, the latter determining only the transfers. Hence the outcome of our model is identical to the outcome of the delegation model with no bargaining.
    Keywords: Strategic delegation; oligopoly; Nash bargaining; equivalence
    JEL: L13 L21
    Date: 2018–04–12
  5. By: Anabela Santos (Université Libre de Bruxelles, iCite); Michele Cincera (Université Libre de Bruxelles, iCite and ECARES); Paulo Neto (Universidade de Évora – Departamento de Economia, UMPP, CEFAGE-UÉ and CIEO-UALG); Maria Manuel Serrano (Universidade de Évora – Departamento de Sociologia, UMPP and SOCIUS-CSG/ISEG-UL)
    Abstract: The aim of the present paper is to assess the effect of competition on innovation (patent applications) and on productivity (Total Factor Productivity and Labour Productivity), using data from 654 Portuguese firms, according to 208 NACE 4-digits sectors, and over the period 2007 to 2015. For this purpose, two different methodological approaches were used, a Poisson regression model for the patent function and a log-log fixed effect model for the productivity function. The results reveal that, on average, competition has a negative, U-shaped form effect on innovation in the short term, and a positive effect in the medium-long term. Nevertheless, the model focusing only on manufacturing sectors shows some differences from the model considering all economic activities, namely a linear positive effect of competition on innovation. Concerning the effect of competition on productivity, a positive effect on Total Factor Productivity emerged from the analysis, while for labour productivity a negative one prevails.
    Keywords: Competition, Innovation, Productivity.
    JEL: L10 O31 D24
    Date: 2018–05
  6. By: Carlo Ciccarelli (DEF & CEIS,University of Rome "Tor Vergata"); Gianni De Fraja (DEF & CEIS,University of Rome "Tor Vergata", Nottingham School of Economics, CEPR); Silvia Tiezzi (Università di Siena)
    Abstract: In this paper we study the ability of the 19-th century Italian government to choose profit maximising prices for a multiproduct monopolist. We use very detailed historical data on the tobacco consumption in 62 Italian provinces from 1871 to 1888 to estimate a differentiated product demand system. The demand conditions and the legal environment of the period made this market as close to a textbook monopoly as is practically possible. The government’s stated aim for this industry was profit maximisation: since at the time tobacco revenues constituted between 10 and 15 percent of the revenues for the cash-strapped government, the stated aim was very likely the true one. Cost data for the nine products suggest that the government was not wide off the mark: the tobacco prices were “not far” from those dictated by the standard monopoly formulae for profit maximisation with interdependent demand functions.
    Keywords: Demand for Tobacco, Multiproduct monopoly profit maximisation, 19-th century Italy, QAI demand system, Habit formation
    JEL: L12 L66 I18 N33
    Date: 2018–05–08

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