nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒06‒25
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices By Montez, João; Schutz, Nicolas
  2. An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly By Volker Nocke; Nicolas Schutz
  3. Common ownership and market entry: Evidence from the pharmaceutical industry By Melisa Newham; Jo Seldeslachts; Albert Banal-Estañol

  1. By: Montez, João; Schutz, Nicolas
    Abstract: We study a class of games where stores source unobservable inventories in advance, and then simultaneously set prices. Our framework allows for firm asymmetries, heterogeneity in consumer tastes, endogenous consumer information through advertising, and salvage values for unsold units. The payoff structure relates to a complete-information all-pay contest with outside options, non-monotonic winning and losing functions, and conditional investments. In the generically unique equilibrium, stores randomize their price choice and, conditional on that choice, serve all their targeted demand---thus, some inventories may remain unsold. As inventory costs become fully recoverable, the equilibrium price distribution converges to an equilibrium of the associated Bertrand game (where firms first choose prices and then produce to order). This suggests that with production in advance, the choice between a Cournot analysis and a Bertrand-type analysis, as properly generalized in this paper, should depend on whether or not stores observe rivals' inventories before setting prices.
    Keywords: all-pay contests; Bertrand convergence.; inventories; oligopoly; production in advance
    JEL: L13
    Date: 2018–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:12963&r=ind
  2. By: Volker Nocke; Nicolas Schutz
    Abstract: Using an aggregative games approach, we analyze horizontal mergers in a model of multiproduct-firm price competition with nested CES or nested logit demands. We show that the Herfindahl index provides an adequate measure of the welfare distortions introduced by market power, and that the induced change in the naively-computed Herfindahl index is a good approximation for the market power effect of a merger. We also provide conditions under which a merger raises consumer surplus, and conditions under which a myopic, consumer-surplus-based merger approval policy is dynamically optimal. Finally, we study the aggregate surplus and external effects of a merger.
    Date: 2018–06
    URL: http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_024_2018&r=ind
  3. By: Melisa Newham; Jo Seldeslachts; Albert Banal-Estañol
    Abstract: Common ownership - where two firms are at least partially owned by the same investor - and its impact on product market outcomes has recently drawn a lot of attention from scholars and practitioners alike. Theoretical and empirical research suggests that common ownership can lead to higher prices. This paper focuses on implications for market entry. To estimate the effect of common ownership on entry decisions, we focus on the pharmaceutical industry. In particular, we consider the entry decisions of generic pharmaceutical firms into drug markets opened up by the end of regulatory protection in the US. We first provide a theoretical framework that shows that a higher level of common ownership between the brand firm (incumbent) and potential generic entrant reduces the generic's incentives to entry. We provide robust evidence for this prediction. The effect is large: a one-standard-deviation increase in common ownership decreases the probability of generic entry by 9-13%. We extend our basic theoretical framework and allow for multiple entrants. Our model shows that for sufficiently high levels of common ownership, the classical idea of entry decisions being strategic substitutes can be reversed into being strategic complements. Our empirical results provide some support for these predictions.
    Keywords: Market Entry, Ownership Structure, Pharma
    JEL: G23 K21 L11 L41 L65
    Date: 2018–05
    URL: http://d.repec.org/n?u=RePEc:upf:upfgen:1612&r=ind

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