nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒03‒18
seventeen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Curse of Knowledge: Having Access to Customer Information Can Reduce Monopoly Profit By Didier Laussel; Ngo Van Long; Joana Resende
  2. Bertrand-Edgeworth duopoly with a socially concerned firm By Nagy, Balázs; Tasnádi, Attila
  3. Stackelberg Independence By Toomas Hinnosaar
  4. Price competition with uncertain quality and cost By Sander Heinsalu
  5. Coordination failure in capacity-then-price-setting games By Güth, Werner; Stadler, Manfred; Zaby, Alexandra
  6. Bargaining power and market power: approaches to separation for the purposes of antitrust policy By Morozov, Anton (Морозов, Антон Н.); Pavlova, Natalia (Павлова, Наталья С.)
  7. Market size, product differentiation and bidding for new varities By Jie Ma; Ian Wooton
  8. Advertising strategy in the presence of reviews: An empirical analysis By Hollenbeck, Brett; Moorthy, Sridhar; Proserpio, Davide
  9. Do Public Firms Respond to Industry Opportunities More Than Private Firms? The Impact of Initial Firm Quality By Vojislav Maksimovic; Gordon M. Phillips; Liu Yang
  10. Superstars in two-sided markets: exclusives or not? By Elias Carroni; Leonardo Madio; Shiva Shekhar
  11. Production efficiency of nodal and zonal pricing in imperfectly competitive electricity markets By Sarfati, M.; Hesamzadeh, M-R.; Holmberg, P.
  12. Pay What Your Dad Paid: Commitment and Price Rigidity in the Market for Life Insurance By Radoslaw Paluszynski; Pei Cheng
  13. Geography, Competition, and Optimal Multilateral Trade Policy By Antonella Nocco; Gianmarco I.P. Ottaviano; Matteo Salto
  14. Strengths and Weaknesses of the British Market Model By Newbery, D.
  15. Does deregulation drive innovation intensity? Lessons learned from the OECD telecommunications sector By Polemis, Michael; Tselekounius, Markos
  16. Market Power and Spatial Competition in Rural India By Chatterjee, S.
  17. International Buyers' Sourcing and Suppliers' Markups in Bangladeshi Garments By Grossi, Julia Cajal; Macchiavello, Rocco; Noguera, Guillermo

  1. By: Didier Laussel; Ngo Van Long; Joana Resende
    Abstract: We demonstrate the "curse of knowledge" when a monopolist can recognize different consumer groups through their purchase histories which are influenced by its dynamic pricing policies. Under the Markov-perfect equilibrium, after each commitment period, the firm offers a new introductory price so as to attract new customers. More and more market segments are added gradually. Eventually, the whole market is covered. Shortening the commitment period will result in a fall in profit. In contrast, a full-commitment monopolist would choose to stick to uniform pricing, achieving higher profit. Hence, the firm is better off by refraining from collecting customer information. Nous démontrons la "malédiction du savoir" lorsqu'un monopoleur peut reconnaître différents groupes de consommateurs à travers leurs historiques d'achat influencés par sa politique de prix dynamique. Sous l'équilibre de Markov-parfait, l'entreprise propose, après chaque période d'engagement, un nouveau prix de lancement afin d'attirer de nouveaux clients. De plus en plus de segments de marché sont ajoutés progressivement. Finalement, tout le marché est couvert. La réduction de la période d'engagement entraînera une baisse des bénéfices. En revanche, un monopoleur pleinement engagé choisirait de s'en tenir à un prix unique, réalisant des bénéfices plus élevés. Par conséquent, le monopoleur gagnerait plus de profit s’il pouvait s'engager de ne pas collecter des informations sur les clients.
    Keywords: Coasian Dynamics,Information Collection,Monopoly,Regulatory Policies, La dynamique coasienne,La collecte d’infomation,Monopole,Politiques réglementaires
    JEL: L12 L15
    Date: 2019–03–06
  2. By: Nagy, Balázs; Tasnádi, Attila
    Abstract: The government may regulate a market by obtaining partial ownership in a firm. This type of socially concerned firm behaves as a combined profit and social surplus maximizer. We investigate the presence of a socially concerned firm in the framework of a Bertrand-Edgeworth duopoly with capacity constraints. In particular, we determine the mixed-strategy equilibrium of this game and relate it to both the standard and the mixed versions of the Bertrand-Edgeworth game. In contrast to other results in the literature we find that full privatization is the socially best outcome, that is the optimal level of public ownership is equal to zero.
    Keywords: Bertrand-Edgeworth, mixed duopoly, semi-public firm, mixedstrategy equilibrium
    JEL: D43 L13
    Date: 2019–02–28
  3. By: Toomas Hinnosaar
    Abstract: The standard model of sequential capacity choices is the Stackelberg quantity leadership model with linear demand. I show that under the standard assumptions, leaders' actions are informative about market conditions and independent of leaders' beliefs about the arrivals of followers. However, this Stackelberg independence property relies on all standard assumptions being satisfied. It fails to hold whenever the demand function is non-linear, marginal cost is not constant, goods are differentiated, firms are non-identical, or there are any externalities. I show that small deviations from the linear demand assumption may make the leaders' choices completely uninformative.
    Date: 2019–03
  4. By: Sander Heinsalu
    Abstract: Consumers in many markets are uncertain about firms' qualities and costs, so buy based on both the price and the quality inferred from it. Optimal pricing depends on consumer heterogeneity only when firms with higher quality have higher costs, regardless of whether costs and qualities are private or public. If better quality firms have lower costs, then good quality is sold cheaper than bad under private costs and qualities, but not under public. However, if higher quality is costlier, then price weakly increases in quality under both informational environments, but with asymmetric information, full separation cannot occur.
    Date: 2019–03
  5. By: Güth, Werner; Stadler, Manfred; Zaby, Alexandra
    Abstract: In capacity-then-price-setting games, soft capacity constraints are planned sales amounts where producing above capacity is possible but more costly. While the subgame perfect equilibrium predicts equal prices, experimental evidence often reveals price discrepancies. This failure to coordinate on equal prices can imply losses, especially when serving demand is obligatory. We compare coordination failure with efficient rationing as well as with compulsory serving of demand, and additionally allow for simultaneous and sequential capacity choices. These treatments lead to a varying severity of the threat of losses. Our experimental results show that (possible) coordination failure affects behavior through two channels: via anticipating as well as via reacting to a loss. While capacities increase in anticipation of losses, prices increase when anticipating losses but decrease after experiencing losses. Coordination failures are more probable after subjects experienced a loss.
    Keywords: capacity-then-price competition,loss avoidance,path dependence,sequentiality of decisions,intra-play communication
    JEL: C72 C91
    Date: 2019
  6. By: Morozov, Anton (Морозов, Антон Н.) (The Russian Presidential Academy of National Economy and Public Administration); Pavlova, Natalia (Павлова, Наталья С.) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: At first glance, the effects of market power on one side of the market are similar to the effects of asymmetric distribution of bargaining power. This is the source of their mistaken confusion. These effects include both distributional and coordination. However, some of the effects may be related to the distribution of winnings, for example, in favor of sellers, but not related to restricting competition (the so-called exclusionary practices). The prevailing approaches to law enforcement in Russia, based primarily on the concepts of market power, dominant position and abuse of dominance, give rise to the question of the need to find a new balance between the categories of restriction of competition and the effects of bargaining power.
    Keywords: bargaining power, bargaining power, buyer power, balancing power, dominant position
    JEL: K21 L12
    Date: 2019–03
  7. By: Jie Ma (University of Business and Economics); Ian Wooton (Department of Economics, University of Strathclyde)
    Abstract: We analyse a firm's investment in a regional economy composed of two countries. The firm already manufactures a horizontally differentiated good in the region and we determine the firm's equilibrium location choice for the new good and the welfare consequences of fiscal competition between the two countries. We find that the firm's location decision is efficient. Fiscal competition does not affect the location of production but redistributes rents between the firm and the taxpayers of the host country. The implications of endogenous product differentiation and the new good being produced by a competing firm are also considered. As far as we know the tax competition literature has not previously addressed the issue of product differentiation.
    Keywords: FDI, import substitution, market size, MNEs, product differentiation
    JEL: F21 F23 L22
    Date: 2019–03
  8. By: Hollenbeck, Brett; Moorthy, Sridhar; Proserpio, Davide
    Abstract: We study the relationship between online reviews and advertising spending in the hotel industry. Combining a dataset of TripAdvisor reviews with other datasets describing these hotels’ advertising expenditures, we show, first, that online ratings have a causal demand-side effect on ad spending. Second, this effect is negative: hotels with higher ratings spend less on advertising than hotels with lower ratings. This suggests that hotels treat TripAdvisor ratings and advertising spending as substitutes, not complements. Third, the relationship is stronger for independent hotels than for chains, and stronger in less differentiated markets than in more differentiated markets. The former suggests that a strong brand name continues to provide some immunity to reviews and the latter that the advertising response is stronger when ratings are more likely to be pivotal. Finally, we show that the relationship between online ratings and advertising has strengthened over time, just as TripAdvisor has become more popular, implying that firms respond to online reviews if and only if consumers respond to them.
    Keywords: Online reviews, advertising, regression discontinuity
    JEL: L1 L15 L20 M31 M37
    Date: 2019–03–14
  9. By: Vojislav Maksimovic; Gordon M. Phillips; Liu Yang
    Abstract: We track firms at birth and compare the growth pattern of IPO firms and their birth-matched counterparts. Firms that are larger at birth with faster initial growth are more likely to attain a larger size later in life and go public. Firms in the top percentile of predicted propensity to go public grow 29 times larger fifteen years later than matched firms if they actually become public, and 14 times larger if they stay private, showing a large selection effect. We show that public firms, and especially those public firms backed by venture capital, respond more to demand shocks post-IPO.
    JEL: G20 G24 G3 G32 L1 L22 L23 L25 L26
    Date: 2019–03
  10. By: Elias Carroni; Leonardo Madio; Shiva Shekhar
    Abstract: This article studies incentives for a premium provider (Superstar) to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. When platform competition is intense, more consumers subscribe to the platform hosting the Superstar exclusively. This mechanism is self-reinforcing as firms follow consumer decisions and (some) join exclusively the platform with the Superstar. Exclusivity always benefits firms and may benefit consumers. Moreover, when the Superstar is integrated with a platform, non-exclusivity becomes more likely than if the Superstar was independent. This analysis provides several implications for managers and policy makers operating in digital and traditional markets.
    Keywords: exclusive contracts, platforms, two-sided markets, ripple effect, content providers, market power
    JEL: L13 L22 L86
    Date: 2019
  11. By: Sarfati, M.; Hesamzadeh, M-R.; Holmberg, P.
    Abstract: Electricity markets employ different congestion management methods to handle the limited transmission capacity of the power system. This paper compares production efficiency and other aspects of nodal and zonal pricing. We consider two types of zonal pricing: zonal pricing with Available Transmission Capacity (ATC) and zonal pricing with Flow-Based Market Coupling (FBMC).We develop a mathematical model to study the imperfect competition under zonal pricing with FBMC. Zonal pricing with FBMC is employed in two stages, a day-ahead market stage and a re-dispatch stage. We show that the optimality conditions and market clearing conditions can be reformulated as a mixed integer linear program (MILP), which is straightforward to implement. Zonal pricing with ATC and nodal pricing is used as our benchmarks. The imperfect competition under zonal pricing with ATC and nodal pricing are also formulated as MILP models. All MILP models are demonstrated on 6-node and the modified IEEE 24-node systems. Our numerical results show that the zonal pricing with ATC results in large production inefficiencies due to the incdec-game. Improving the representation of the transmission network as in the zonal pricing with FBMC mitigates the inc-dec game.
    Keywords: Congestion management, Zonal pricing, Flow-based market coupling
    JEL: C61 C72 D43 L13 L94
    Date: 2019–02–27
  12. By: Radoslaw Paluszynski (University of Houston); Pei Cheng (UNSW Business School)
    Abstract: Life insurance premiums display significant rigidity in the data, on average adjusting once every 3 years by more than 10%. This contrasts with the underlying marginal cost which exhibits considerable volatility due to the movements in interest and mortality rates. We build and calibrate a model where policyholders are held-up by long-term insurance contracts, resulting in a time inconsistency problem for the firms. The optimal contract takes the form of a simple cutoff rule: premiums are rigid for cost realizations smaller than the threshold, while adjustments must be large and are only possible when cost realizations exceed it.
    Keywords: Life insurance, Time inconsistency, Hold-up problem, Commitment, Flexibility
    JEL: G22 L11 L14
    Date: 2019–02
  13. By: Antonella Nocco (Università del Salento); Gianmarco I.P. Ottaviano (Bocconi University); Matteo Salto (European Commission)
    Abstract: How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use 'disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.
    Keywords: International trade policy, monopolistic competition, firm heterogeneity, pricing to market, multilateralism.
    JEL: D4 D6 F1 L0 L1
    Date: 2019–03–12
  14. By: Newbery, D.
    Abstract: The UK privatized the electricity supply industry from 1989 in the expectation that private ownership and incentive regulation would invest and operate sufficiently more efficiently to offset the higher cost of private finance. This was achieved in the first two decades, assisted by spare capacity, contract-based entry of new efficient and cheap CCGTs, and regulatory pressure on transmission and distribution companies. The climate change imperative to decarbonize requires massive durable and very capital-intensive investment that casts doubt on the liberalised financing model. In the past 30 years, much has been learned about mitigating market power, the failings of an energy-only market, and the potential distortions of poorly designed prices for renewables and tariffs for networks. Innovation has been successfully stimulated though competitions. Efficiency, falling renewable costs and the carbon tax have almost completely driven coal out of the system.
    Keywords: British electricity supply, reforms, financing, renewables, tariffs, nuclear
    JEL: D43 H23 L94 Q48 Q54
    Date: 2019–02–27
  15. By: Polemis, Michael; Tselekounius, Markos
    Abstract: The channel between innovation and industry regulation constitutes a non-lasting debate among the economists and researchers within the recent years. Despite the significant contributions on this field, mostly made from the empirical standpoint, the existing literature is still incomplete. This might be attributed to the fact that existing studies fail to combine a strong theoretical framework with the empirical scrutiny in order to exemplify and decompose the relationship between regulation intensity and innovation activity. We attempt to shed light on this limitation by theoretically modeling the telecommunications sector, in which access regulation impacts the non-separable activity in process and product innovation. We then empirically test our model by deploying an efficient panel threshold technique along the lines of Hansen (1999). Our balanced panel dataset comprises of 32 OECD countries over the period 1995-2012. The empirical results unveil a non-monotonic relationship of an “inverted V-shaped” form between regulation and innovation. We argue that beyond certain thresholds increasing the regulatory stringency further results in decreasing sector innovation. Our findings survive robustness checks after the inclusion of two alternative threshold variables (market structure and entry regulation) incurring significant implications for the policy makers and government officials.
    Keywords: Innovation; Regulation; Telecommunications, Market structure; Panel threshold model.
    JEL: C24 D43 L51 L80 L96
    Date: 2019–03–15
  16. By: Chatterjee, S.
    Abstract: In this paper, I argue that market power of intermediaries plays an important role in contributing to low incomes of farmers in India. I study the role of spatial competition between intermediaries in determining the prices that farmers receive in India by focusing on a law that restricts farmers to selling their goods to intermediaries in their own state. I show that the discontinuities in market power generated by the law translate into discontinuities in prices. Increasing spatial competition by one standard deviation causes prices received by farmers to increase by 6.4%. To shed light on spatial and aggregate implications, I propose and estimate a quantitative spatial model of bargaining and trade. Using this structural model, I estimate that the removal of the interstate trade restriction in India would increase competition between intermediaries substantially, thereby increasing the prices farmers receive and their output. Estimates suggest that average farmer prices and output would increase by at least 11% and 7% respectively. The value of the national crop output would therefore increase by at least 18%.
    JEL: D43 F12 L13 L81 O13 Q13 R12
    Date: 2019–03–06
  17. By: Grossi, Julia Cajal (Graduate Institute, Geneva); Macchiavello, Rocco (London School of Economics and CEPR); Noguera, Guillermo (Yale University and CAGE)
    Abstract: Large international buyers play a key role in global value chains. We exploit detailed transaction-level data on the usage of material inputs to study how Bangladeshi garment suppliers’ markups vary across international buyers. We find substantial dispersion in markups across export orders of a given seller for the same product. Buyer effects explain a significant share of this variation, while destination effects do not. Buyers adopting relational sourcing strategies pay higher markups than non-relational buyers. This pattern holds within seller-product-year combinations, is robust to controlling for the buyer’s size, traded volumes, and quality, and, together with larger volumes, implies higher profits for suppliers dealing with relational buyers.
    Keywords: Markups, Sourcing Strategies, Global Buyers, Buyer-Driven Value Chains JEL Classification: L11, L14, D23, F63
    Date: 2019

This nep-ind issue is ©2019 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.