nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒06‒24
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Social power as a solution to the Bertrand Paradox By Soeiro, Renato; Adrego Pinto, Alberto
  2. On the Impact of Trade in a Common Property Renewable Resource Oligopoly By Benchekroun, H.; Ray Chaudhuri, A.; Tasneem, Dina
  3. On individual incentives to bundle in oligopoly By Federico Innocenti; Domenico Menicucci
  4. Fair Producer Prices By Bronkhorst, Ruud
  5. Tariff Rate Pass-Through: Buyer Power and Product Differentiation Effects By Ralph Sonenshine
  6. Water pricing By Tsur, Yacov
  7. Mergers of Complements and Entry in Innovative Industries By Federico Etro
  8. A Note on Socially Insufficient Advertising in Tirole’s Duopoly Model By Creane, Anthony
  9. Segmentation versus Agglomeration: Competition between Platforms with Competitive Sellers By Heiko Karle; Martin Peitz; Markus Reisinger
  10. Advertising Regulations in Pharmaceutical Markets: Product Versus Enlightenment By Junichiro Ishida; Tsuyoshi Takahara
  11. Smart products: liability, timing of market introduction, and investments in product safety By Herbert Dawid; Gerd Muehlheusser
  12. Market power and innovation in the intangible economy By de Ridder, Maarten
  13. Happily ever after? Vertical and horizontal mergers in the U.S. media industry By Stöhr, Annika; Noskova, Victoriia; Kunz-Kaltenhäuser, Philipp; Gänßle, Sophia; Budzinski, Oliver

  1. By: Soeiro, Renato; Adrego Pinto, Alberto
    Abstract: We show that in a duopoly with homogeneous consumers, if these are negatively influenceable by each other behavior (e.g. congestion/ snob/ Veblen/ network effects), a pure price equilibrium with positive profits for both firms exists. Furthermore, even in the case products are undifferentiated, an equilibrium where firms charge different (positive) prices and have different profits exists. Thus, when firms engage in uniform price competition, heterogeneity, and in particular non-atomicity in the distribution of preferences, is neither a necessary condition to ensure existence, nor to achieve asymmetries. We further show that in the case products are differentiated, social differentiation overcomes the effect of standard differentiation in creating price asymmetries.
    Keywords: Social influence; Bertrand duopoly; Bertrand competition; network effects; product differentiation; homogeneous products; pure price equilibrium; linear demand.
    JEL: C72 D00 D01 D03 D40 D43 L00 L13
    Date: 2019–06–02
  2. By: Benchekroun, H.; Ray Chaudhuri, A. (Tilburg University, Center For Economic Research); Tasneem, Dina
    Abstract: We consider a common-pool renewable resource differential game. We show that within this dynamic oligopolistic framework, free trade may lead to a lower discounted sum of consumer surplus and of social welfare than autarky. Trade restrictions may be supported based on both resource conservation and efficiency motives. A priori, this fi…nding is not straightforward; a move from Autarky to Free Trade causes industry output to fi…rst increase and then decrease over time. While producers are shown to be always worse off under free trade than under autarky, consumers are better off in the short run and worse o¤ in the long run. We determine the conditions under which the long-run effects outweigh the short-run effects of trade, leading to a decrease in the discounted sum of not only consumer surplus, but also social welfare.
    Keywords: renewable resources; international trade; fisheries; common property
    JEL: F10 Q20 Q22 Q27
    Date: 2019
  3. By: Federico Innocenti; Domenico Menicucci
    Abstract: This paper examines competition in an oligopoly with multiproduct firms when some firms bundle but other firms sell their products separately, whereas the existing literature on competitive bundling focuses on the extreme cases of competition among bundles or among individual products. Our analysis reveals each firm’s individual incentive to bundle, and allows to study a two-stage game in which first each firm chooses its pricing strategy (bundling or independent pricing), then price competition occurs given the price regime each firm has selected at stage one. When firms are ex ante symmetric, we find that bundling is weakly dominated by independent pricing. In a setting in which a firm’s products have higher quality than its rivals’ products, individual incentives to bundle emerge (eventually for all firms) if the quality difference is large.
    Keywords: Oligopoly, Pure bundling, Independent Pricing, Competitive bundling
    JEL: D43 L13
    Date: 2019
  4. By: Bronkhorst, Ruud
    Abstract: In order to ensure that peasants as well receive just remuneration for their work as described in the Universal Declaration of Human Rights, a paradigm change in thinking about producer prices is needed: from market prices to ‘fair’ prices. After an overview of how economists have dealt with the concept fair, this paper continues with a methodology, the ‘Living Income / Fair Price’ approach, that describes how to calculate producer prices that are not only based on production costs, but on the concepts ‘living wages’ and ‘living income’ as well. These prices are called ‘fair prices’. These fair prices can be calculated for each agricultural product separately, based on the assumption of full employment on the specific crop.
    Keywords: Agricultural and Food Policy, Demand and Price Analysis
    Date: 2019–04–15
  5. By: Ralph Sonenshine
    Abstract: The recent increase in trade tensions between the US and its primary trading partners has resulted in the imposition of tariffs and retaliatory tariffs. Economic theory would suggest the imposition of tariffs would result in price inflation and lower import volumes. However, there are a variety of other factors, such as product differentiation and imperfect competition that influence tariff rate pass-through levels. This study sheds light on the factors impacting tariff rate pass through by assessing the tariff rate elasticity of imports from 1996 to 2015 in two key manufacturing segments, electrical machinery and passenger vehicles. We find tariff rate pass-through rates are lower in more concentrated domestic product-markets as monopsony power enables buyers to lower the tariff pass-through rate or to push the burden of the tariff onto foreign suppliers. In addition, lower tariff rate pass-through rates prevail in more differentiated domestic product-markets, as quality variations reduce the likelihood that foreign sellers can fully pass along the tariff in terms of higher prices.
    Keywords: tariff, market power, product differentiation
    JEL: G02 G12 G18 G34
  6. By: Tsur, Yacov
    Abstract: The water prices that implement the optimal water policy are derived. These prices contain the supply cost components and two shadow price terms: one reflecting the in situ value of natural water and the other representing the scarcity of recycled water. The former accounts for the scarcity, extraction cost and instream value of natural water, and has a pronounced effect on the onset and extent of desalination along the optimal policy. The latter accounts for the scarcity of recycled water, stemming from the limit imposed on its supply by the sewage discharge, and acts as a tax on users of recycled water and as a subsidy for domestic and industrial users that contribute to the supply of recycled water (via the sewage they discharge). Special attention is given to implications of the public good role of environmental water allocation. An example based on Israel’s water economy is presented.
    Keywords: Demand and Price Analysis, Resource /Energy Economics and Policy
    Date: 2019–02–14
  7. By: Federico Etro
    Abstract: I study a merger between producers of complement inputs facing potential entry, with investment by the incumbents in deterministic cost reduction and by the entrants in probabilistic innovation, and then competition in prices. The merger solves Cournot complementarity problems in investment and pricing, which is what makes it profitable but also potentially anti-competitive. When the demand is inelastic the merger harms consumers by reducing R&D of the entrants if the incumbents are efficient enough (always when bundling is adopted). Instead, with a demand elastic enough, the merger increases consumer surplus (even with bundling).
    Keywords: Mergers, R&D, Cournot complementarity, bundling, antitrustin high-tech industries.
    JEL: L1 L4
    Date: 2019
  8. By: Creane, Anthony
    Abstract: In his textbook Tirole (1988, pp. 291-294) presents a model of advertising with Hotelling duopolists. It has been inferred (e.g., Bagwell, 2007) that in the competitive equilibrium derived, there can be socially too little advertising. It is shown that given the assumptions in Tirole (1988), there cannot be socially too little advertising for this equilibrium.
    Keywords: informative advertising, existence, welfare
    JEL: D83 L13
    Date: 2019–06
  9. By: Heiko Karle; Martin Peitz; Markus Reisinger
    Abstract: For many products, platforms enable sellers to transact with buyers. We show that the competitive conditions among sellers shape the market structure in plat form industries. If product market competition is tough, sellers avoid competitors by joining different platforms. This allows platforms to sustain high fees and ex plains why, for example, in some online markets, several homogeneous platforms segment the market. Instead, if product market competition is soft, agglomeration on a single platform emerges, and platforms fight for the dominant position. These insights give rise to novel predictions. For instance, market concentration and fees are negatively correlated in platform industries, which inverts the standard logic of competition.
    Keywords: intermediation, two-sided markets, market structure, price competition, endogenous segmentation
    JEL: L13 D43
  10. By: Junichiro Ishida; Tsuyoshi Takahara
    Abstract: This paper analyzes the optimal content regulation of direct-to-consumer advertisement (DTCA) in a pharmaceutical market, with particular focus on the distinction between product and enlightenment advertisement. Firms are allowed to freely promote their own specific products under product DTCA, whereas they can only advertise the presence of a disease and its typical subjective symptoms under enlightenment DTCA. The content regulation changes the nature of market competition and the incentive to invest in advertisement, thereby yielding substantial welfare and policy implications. The overall welfare impact of the content regulation is ambiguous and depends, among other things, on the cost effectiveness of advertisement and the market-size distortion induced by product DTCA. We also analyze the effect of free market pricing and argue that a less stringent advertisement regulation, i.e., product DTCA, is often complementary to a less stringent price regulation.
    Date: 2019–06
  11. By: Herbert Dawid; Gerd Muehlheusser
    Abstract: This paper addresses the role of product liability for the emergence and development of smart products such as autonomous vehicles (AVs). We analyze how the liability regime affects innovative activities, as well as the timing of market introduction and market penetration of such smart products. We develop a dynamic model in which at each point in time, a potential (monopolistic) innovator decides on how much to invest in the safety stock of the smart product and on the product price, once it has been launched. Calibrating the model to the U.S. car market, our analysis reveals policy-relevant trade-offs when shifting more liability on the producers of AVs. First, while this improves the safety of AVs in the long run, the safety stock is accumulated more slowly. Second, it delays the market introduction of AVs, and also slows down market penetration, which hampers the innovator’s incentives for safety investments in the short- and intermediate term. As a result, the safety level of AVs at a given point in time decreases as the liability regime becomes more stringent. Furthermore, there is a threshold for the innovator’s burden of liability beyond which she forgoes to develop the AV altogether. Finally, we find that direct AV safety regulation is welfare-superior compared to a stringent liability regime, as it induces higher levels of AV safety in the short and intermediate term.
    Keywords: product innovation, liability, digital economy, autonomous vehicles, smart products, optimal investment dynamics
    JEL: O31 K13 L11 L62
    Date: 2019
  12. By: de Ridder, Maarten
    Abstract: Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles cause a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs and endogenously raise fixed costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits.
    Keywords: Business Dynamism; Growth; Intangibles; Productivity; Market Power
    JEL: J1
    Date: 2019–03–29
  13. By: Stöhr, Annika; Noskova, Victoriia; Kunz-Kaltenhäuser, Philipp; Gänßle, Sophia; Budzinski, Oliver
    Abstract: This paper provides an economic analysis of recent vertical and horizontal mergers in the U.S. industry for audiovisual media content, including the AT&T-Time Warner and the Disney-Fox mergers. Using a theory-driven approach, we examine economic effects of these types of mergers on market competition, focusing on digital media content distribution. In doing so, we address three research questions: (i) Is the current development of analyzing industry with its recent merger activity concerning? (ii) Would vertical or horizontal integration be more preferable for overall welfare and competition in this industry? (iii) What are implications for antitrust policy? We conclude from our analysis that in the already highly horizontally concentrated U.S. market for audiovisual content the process of further vertical integration creates concerns from a competition policy perspective. Moreover, even though horizontal concentration on some of the market stages may be anticompetitive as well, vertical integration is likely to be more harmful. As a consequence, we recommend a stricter approach to vertical merger control in this industry, as well as a more active abuse control against already vertically-integrated media companies.
    Keywords: competition policy,antitrust,industrial economics,digitization,media economics,institutional economics,industrial organization,mergers,vertical integration,horizontal integration
    JEL: L42 L41 K21 K23 L82 L86 L13 D43 L51 L96
    Date: 2019

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