nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒07‒16
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Hotelling-Bertrand duopoly competition under firrm-specific network e effects By Marco Tolotti; Jorge Yepez
  2. A Model of Heterogeneous Firm Matches in Cross-Border Mergers & Acquisitions By Steven Brakman; Harry Garretsen; Michiel Gerritse; Charles van Marrewijk
  3. Competitive pricing despite search costs if lower price signals quality By Sander Heinsalu
  4. Consumer Scores and Price Discrimination By Bonatti, Alessandro; Cisternas, Gonzalo
  5. Selling Strategic Information in Digital Competitive Markets By David Bounie; Antoine Dubus; Patrick Waelbroeck

  1. By: Marco Tolotti (Dept. of Management, Università Ca' Foscari Venice); Jorge Yepez (Dept. of Economics, Università Ca' Foscari Venice)
    Abstract: When dealing with consumer choices, social pressure plays a crucial role; also in the context of market competition, the impact of network/social effects has been largely recognized. However, the effects of firm-specifc social recognition on market equilibria has never been addressed so far. In this paper, we consider a duopoly where competing firms are differentiated solely by the level of social (or network) externality they induce on consumers' perceived utility. We fully characterize the subgame perfect Nash equilibria in locations, prices and market shares. Under a scenario of weak social externality, the firms opt for maximal differentiation and the one with the highest social recognition has a relative advantage in terms of profits. Surprisingly, this outcome is not persistent; excessive social recognition may lead to adverse coordination of consumers: the strongest firm can eventually be thrown out of the market with positive probability. This scenario is related to a Pareto inefficient trap of no differentiation.
    Keywords: Consumer choice game, Duopoly price competition, Hotelling Location model, Network Externalities, Large Games, Social interaction
    JEL: L13 C72 C63 D71
    Date: 2018–06
  2. By: Steven Brakman; Harry Garretsen; Michiel Gerritse; Charles van Marrewijk
    Abstract: In contrast to empirical evidence, recent theories of cross-border mergers and acquisitions (M&As) assume perfect knowledge transfers – from high to low productivity firms – between acquirer and target. Using the Melitz (2003) model of heterogeneous firms, we develop a matching model of cross-border M&As which allows for both perfect and imperfect knowledge transfers, where the latter leads to assortative matching on productivity for firms in cross-border M&As. This is in line with stylized facts (because M&As frequently occur between firms of similar productivity) and in contrast to the proximity-concentration trade-off (in which only the most productive firms have a physical presence in foreign markets). Allowing for M&As raises the firm viability cut-off level, average productivity and welfare in our model. The welfare benefits are weaker for more imperfect knowledge transfers.
    Keywords: cross-border merger & acquisitions, knowledge transfers, productivity differences
    JEL: F20 L10
    Date: 2018
  3. By: Sander Heinsalu
    Abstract: I show that firms price almost competitively and consumers can infer product quality from prices in markets where firms differ in quality and production cost, and learning prices is costly. Bankruptcy risk or regulation links higher quality to lower cost. If high-quality firms have lower cost, then they can signal quality by cutting prices. Then the low-quality firms must cut prices to retain customers. This price-cutting race to the bottom ends in a separating equilibrium in which the low-quality firms charge their competitive price and the high-quality firms charge slightly less.
    Date: 2018–06
  4. By: Bonatti, Alessandro; Cisternas, Gonzalo
    Abstract: A long-lived consumer interacts with a sequence of firms in a stationary Gaussian setting. Each firm relies on the consumer's current score--an aggregate measure of past quantity signals discounted exponentially--to learn about her preferences and to set prices. In the unique stationary linear Markov equilibrium, the consumer reduces her demand to drive average prices below the no-information benchmark. The firms' learning is maximized by persistent scores, i.e., scores that overweigh past information relative to Bayes' rule when observing disaggregated data. Hidden scores--those only observed by firms--reduce demand sensitivity, increase expected prices, and reduce expected quantities.
    Keywords: Consumer Scores; information design; Persistence; price discrimination; Ratchet Effect; signaling; transparency
    JEL: C73 D82 D83
    Date: 2018–06
  5. By: David Bounie; Antoine Dubus; Patrick Waelbroeck
    Abstract: This paper investigates the strategies of a data broker in selling information to one or to two competing firms that can price-discriminate consumers. The data broker can strategically choose any segment of the consumer demand (information structure) to sell to firms that implement third-degree price-discrimination. We show that the equilibrium profits of the data broker are maximized when (1) information identifies the consumers with the highest willingness to pay; (2) consumers with a low willingness to pay remain unidentified; (3) the data broker sells two symmetrical information structures. The data broker therefore strategically sells partial information on consumers in order to soften competition between firms. Extending the baseline model, we prove that these results hold under first-degree price-discrimination.
    Keywords: data broker, information structure, price-discrimination
    JEL: D40 D80 L50 D43
    Date: 2018

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