nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒09‒24
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Markets for Information: An Introduction By Bergemann, Dirk; Bonatti, Alessandro
  2. Competitive Differential Pricing By Yongmin Chen; Jianpei Li; Marius Schwartz
  3. Prices under Innovation: Evidence from Manufacturing Firms By Jaumandreu, Jordi; Lin, Shuheng
  4. Price discrimination and the modes of failure in deregulated retail electricity markets By Simshauser, P
  5. Merger Policy in a Quantitative Model of International Trade By Holger Breinlichy; Volker Nockez; Nicolas Schutzx
  6. You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets By Jay Pil Choi; Martin Peitz
  7. Market Size and Entry in International Trade: Product Versus Firm Fixed Costs By Walter Steingress

  1. By: Bergemann, Dirk; Bonatti, Alessandro
    Abstract: We survey a recent and growing literature on markets for information. We offer a comprehensive view of information markets through an integrated model of consumers, information intermediaries, and firms. The model embeds a large set of applications ranging from sponsored search advertising to credit scores to information sharing among competitors. We then review a mechanism design approach to selling information in greater detail. We distinguish between ex ante sales of information (the buyer acquires an information structure) and ex post sales (the buyer pays for specific realizations). We relate this distinction to the different products that brokers, advertisers, and publishers use to trade consumer information online. We discuss the endogenous limits to the trade of information that derive from its potential adverse use for consumers. Finally we revisit the role of recommender systems and artificial intelligence systems as markets for indirect information.
    Keywords: information design; information markets; intermediaries; mechanism design; predictions; ratings
    JEL: D42 D82 D83
    Date: 2018–08
  2. By: Yongmin Chen (Department of Economics, University of Colorado Boulder, USA); Jianpei Li (School of International Trade and Economics, University of International Business and Economics, China); Marius Schwartz (Department of Economics, Georgetown University, USA)
    Abstract: This paper analyzes welfare under differential versus uniform pricing across oligopoly makes that differ in costs of service. We establish necessary and sufficient conditions on demand properties—cross/own elasticities and curvature—for differential pricing by symmetric firms to raise aggregate consumer surplus, profit, and total welfare. The analysis reveals intuitively why differential pricing is generally beneficial though not always—including why profit can fall, unlike for monopoly—and why it is more beneficial than oligopoly third-degree price discrimination. When firms have asymmetric costs, however, differential pricing can reduce profit or consumer surplus even with ‘simple’ demands such as linear.
    Keywords: Differential Pricing, Price Discrimination, Demand Curvature, Cross-Price Elasticity, Pass-Through, Oligopoly
    JEL: D43 L13 L10
    Date: 2018–09–11
  3. By: Jaumandreu, Jordi; Lin, Shuheng
    Abstract: We study how firms' innovations impact prices with endogenous productivity and markup, under imperfect competition and dynamic pricing. Absent innovation, productivity plus markup changes curb price growth to half of variable inputs cost growth. Innovation's additional impact on costs is negatively correlated with markup changes. We detect two prevalent strategies. When marginal cost goes down, firms cash-in innovation by increasing the markups to enlarge profits. When marginal cost goes u firms practice countervailing pricing by decreasing markups. With no innovation aggregate manufacturing price growth had multiplied by 1.4, but innovation without cash-in strategies had multiplied it by 0.8.
    Keywords: Innovation; marginal cost; markup; price indices
    JEL: D43 L11 L16 O31
    Date: 2018–08
  4. By: Simshauser, P
    Abstract: In Australia, as with Great Britain, governments have shown rising concern with the health of competitive residential electricity markets. A core concern is the practice of price discrimination and the rising dispersion of prices. The State of Queensland implemented Full Retail Contestability in 2007, but held a regulated price cap in place until 2016, when it finally deregulated its residential electricity market. Almost simultaneously, the two jurisdictions that pioneered retail price deregulation, Great Britain and Victoria, were questioning their prior policy decision. Queensland makes for a fascinating case study because Southeast Queensland comprises a fully deregulated retail market while Regional Queensland is a regulated monopoly – with common input costs across both zones. Consequently, a regulated monopoly with a uniform tariff and 640,000 customers forms a very large control group, which can be directly compared to the competitive market of more than 1.3 million customers – making such analysis globally unique. Analysis of Queensland market conditions concludes the policy is welfare enhancing. To be clear, rising electricity prices are a problem, but price discrimination is not. The deregulated competitive market is, perhaps unsurprisingly, better at regulating the overall average tariff and consumer welfare has been enhanced by $184 million per annum – with some consumer segments very materially better off. However, certain modes of failure remain, viz. an inter-consumer misallocation problem and lack of transparency vis-à-vis the anchoring of discounts – known as the “discounts off what?” problem. Resolving the inter-consumer misallocation problem is relatively straight forward via ensuring energy retailers (voluntarily) move vulnerable customers onto a Benchmark-equivalent or suitably discounted tariff. Due to the non-linearity of tariffs and the rising mix of discrete metered loads, the latter can be best solved by producing a weighted average of Standing Offers, and using this as the benchmark.
    Keywords: Price discrimination, electricity prices, jawboning
    JEL: D4 L5 L9 Q4
    Date: 2018–09–10
  5. By: Holger Breinlichy (University of Surrey, CEP and CEPR); Volker Nockez (University of Mannheim, NBER and CEPR); Nicolas Schutzx (University of Mannheim and CEPR)
    Abstract: In a two-country international trade model with oligopolistic competition, we study the conditions on market structure and trade costs under which a merger policy designed to bene t domestic consumers is too tough or too lenient from the viewpoint of the foreign country. We calibrate the model to match industry-level data in the U.S. and Canada. Our results suggest that at present levels of trade costs, merger policy is too tough in the vast majority of sectors. We also quantify the resulting externalities and study the impact of di erent regimes of coordinating merger policies at varying levels of trade costs.
    JEL: F12 F13 L13 L44
    Date: 2018–08
  6. By: Jay Pil Choi; Martin Peitz
    Abstract: This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier’s adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality with the supplier. The supplier may enter the market by initially renting the downstream firm’s reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs–this constitutes a novel theory of downstream barriers to entry.
    Keywords: Adverse Selection, Certification Intermediary, Incumbency Advantage, Barriers to Entry, Outsourcing, Branding
    JEL: D4 L12 L4 L43 L51 L52
    Date: 2018–09
  7. By: Walter Steingress
    Abstract: This paper develops a theoretical framework to infer the nature of fixed costs from the relationship between entry patterns in international markets and destination market size. If fixed costs are at the firm level, firms take advantage of an intrafirm spillover by expanding firm-level product range (scope). Few firms enter with many products and dominate international trade. If fixed costs are at the product level, an interfirm spillover reduces the fixed costs to export for all firms producing the product. Using cross-country data on firm and product, I find empirical evidence consistent with product-level costs. More firms than products enter in larger markets, offering their consumers lower prices and a greater variety of goods within the product category.
    Keywords: Firm dynamics, International topics, Trade Integration
    JEL: F12 F14 F23
    Date: 2018

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