nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒07‒08
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Vertical Mergers: Ex Post Evidence and Ex Ante Evaluation Methods By Slade, Margaret E.
  2. Price Discrimination and Salient Thinking By Nana Adrian
  3. Beating Coase at Monopoly By Lluis Bru; Daniel Cardona; Jozef Sakovics
  4. Markups and Inequality By Corina Boar; Virgiliu Midrigan
  5. Cooperating in R&D and Advertising By Parisa Pourkarmi; Gamal Atallah
  6. Bundling in a Distribution Channel with Retail Competition By Joachim Heinzel
  7. Welfare-enhancing trade unions in an oligopoly with excessive entry By Marco de Pinto; Laszlo Goerke
  8. Net neutrality regulation: Much ado about nothing? By Vogelsang, Ingo
  9. Entry games for the airline industry By Christian Bontemps; Bezerra Sampaio
  10. Pricing Patterns in Wholesale Electricity Markets: Unilateral Market Power or Coordinated Behavior? By Brown, David P.; Eckert, Andrew
  11. Consumer myopia in vehicle purchases: evidence from a natural experiment By Kenneth Gillingham; Sébastien Houde; Arthur A. van Benthem

  1. By: Slade, Margaret E.
    Abstract: This article assesses recent empirical evidence on efficiencies and competitive harm that are associated with vertical mergers. It evaluates both ex post or retrospective empirical studies that rely on post merger data and ex ante or forecasting techniques that use premerger data. It develops the idea that, although there is a need for vertical merger screening tools, there are a number of problems that are associated with attempts to adapt horizontal screens to the vertical context. Mergers in the technology, media, and telecom sectors are emphasized because they tend to dominate contested vertical mergers.
    JEL: D22 K21 L11
    Date: 2019–06–25
  2. By: Nana Adrian
    Abstract: This paper generalizes the price discrimination framework of Mussa and Rosen (1978) by considering salience-driven consumer preferences in the sense of Bordalo et al. (2013b). Consumers with salience-driven preferences give a higher weight to attributes that vary more. This reduces the monopolist's propensity to treat different types of consumers differently. The paper's main result characterizes the conditions under which the monopolist induces consumers to focus on price rather than on quality.
    Keywords: Salience, price discrimination, monopolist
    JEL: D11 D42 D91 L11
    Date: 2019–06
  3. By: Lluis Bru; Daniel Cardona; Jozef Sakovics
    Abstract: We study how a buyer unable to price discriminate should satisfy his demand in the presence of diseconomies of scale in production. Defying the Coase Conjecture, we show that auctioning contracts for lots (block sourcing) followed by setting a price to realize (part of) the residual gains from trade a ways leads to higher buyer surplus than simply setting a price.
    Keywords: block sourcing, lot auction, monopoly, procurement, residual market, split awards
    JEL: D42 D44 L12
    Date: 2019–06
  4. By: Corina Boar; Virgiliu Midrigan
    Abstract: We study the aggregate and distributional impact of product market interventions and profit taxes using a model of firm dynamics, credit constraints and incomplete markets. A key ingredient of our model is that markups are endogenous so that the markup a producer charges depends on the amount of competition it faces. We show that size-dependent subsidies that remove the distortions due to markup dispersion lead to sizable welfare gains and reduce inequality, even though they increase firm concentration and long-run misallocation. In contrast, policies that reduce concentration lead to large output, TFP and welfare losses and increase inequality. A tax on profits greatly depresses the incentives to create new firms, reducing labor demand, after-tax wages and welfare.
    JEL: D4 E2 L1
    Date: 2019–06
  5. By: Parisa Pourkarmi (Department of Economics, Carleton University, Ottawa, ON); Gamal Atallah (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper studies the impact of cooperative R&D and advertising on innovation and welfare in a duopolistic industry. The model incorporates two symmetric firms producing differentiated products. Firms invest in R&D and advertising in the presence of R&D spillovers and advertising spillovers. Advertising spillovers may be positive or negative. Four cooperative structures are studied: no cooperation, R&D cooperation, advertising cooperation, R&D and advertising cooperation. R&D spillovers and advertising spillovers always increase innovation and welfare if products are highly differentiated and/or spillovers are sufficiently high. The ranking of cooperation settings in terms of R&D, profits and welfare depends on product differentiation, R&D spillovers and advertising externalities. Firms always prefer cooperation on both dimensions, which is socially beneficial only when advertising and R&D spillovers are sufficiently high.
    Keywords: R&D, Advertising, Cooperation, Spillovers, Product differentiation, Innovation, Marketing.
    JEL: D43 L13 O32
    Date: 2019
  6. By: Joachim Heinzel (Paderborn University)
    Abstract: We analyze the incentives for retail bundling and the welfare effects of retail bundling in a decentralized distribution channel with two retailers and two monopolistic manufacturers. One manufacturer exclusively sells his good to one retailer, whereas the other manufacturer sells his good to both retailers. Thus, one retailer is a monopolist for one product but competes with the other retailer in the second product market. The two-product retailer has the option to bundle his goods or to sell them separately. We find that bundling aggravates the double marginalization problem for the bundling retailer. Nevertheless, when the retailers compete in prices, bundling can be more profitable than separate selling for the retailer as bundling softens the retail competition. The ultimate outcome depends on the manufacturers’ marginal costs. Given retail quantity competition, however, bundling is in no case the retailer’s best strategy. Furthermore, we show that profitable bundling reduces consumer and producer surplus in the equilibrium.
    Keywords: retail bundling, leverage theory, double marginalization
    JEL: L11 L13 L41 M31
    Date: 2019–06
  7. By: Marco de Pinto; Laszlo Goerke
    Abstract: Trade unions are often argued to cause allocative inefficiencies and to lower welfare. We analyze whether this evaluation is also justified in a Cournot-oligopoly with free but costly entry. If input markets are competitive and output per firm declines with the number of firms (business stealing), there is excessive entry into such oligopoly. If trade unions raise wages above the competitive level, output and profits per firm decline, which could deter entry and thus improve welfare. We find that an increase in the union's bargaining power raises welfare if the (inverse) demand curve is (sufficiently) concave. We also show that collective bargaining loosens the linkage between business stealing and excessive entry.
    Keywords: endogenous entry, oligopoly, trade union, welfare
    JEL: D43 J51 L13
    Date: 2019
  8. By: Vogelsang, Ingo
    Abstract: The economics literature on Net Neutrality (NN) has been largely critical of NN regulation on the basis of theoretical findings that NN violations can be both welfare improving and welfare deteriorating, depending on the circumstances of the case in question. Thus, an ex post competition policy approach would be preferable to a strict ex ante prohibition of NN violations. In contrast, the current paper argues that NN regulation is largely ineffective, in particular, when it comes to the prohibition of fast lanes and other quality of service (QoS) differentiations, and to a lesser extent, when it comes to the zero price rule. NN regulation is effective only in preventing the blocking of specific content and in preventing the favoring of ISP owned content and in preventing some price discriminations. These are also areas where NN regulations are more likely to be welfare-enhancing. Where they are ineffective, NN regulations are likely to create inefficiencies through the cost and allocative inefficiencies caused by NN bypass. The paper ends with a call for theoretical and empirical economic analyses of NN circumvention techniques.
    Keywords: net neutrality (NN),quality of service (QoS),price discrimination,content delivery network (CDN),zero-rating,throttling
    JEL: L50 L96
    Date: 2019
  9. By: Christian Bontemps (ENAC - Ecole Nationale de l'Aviation Civile); Bezerra Sampaio
    Abstract: In this paper we review the literature on static entry games and show how they can be used to estimate the market structure of the airline industry. The econometrics challenges are presented, in particular the problem of multiple equilibria and some solutions used in the literature are exposed. We also show how these models, either in the complete information setting or in the incomplete information one, can be estimated from i.i.d. data on market presence and market characteristics. We illustrate it by estimating a static entry game with heterogeneous firms by Simulated Maximum Likelihood on European data for the year 2015.
    Keywords: multiple equilibria,airlines,estimation,industrial organization,entry
    Date: 2019–05–22
  10. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics)
    Abstract: We examine allegations that firms in Alberta's electricity industry manipulated public information to coordinate in the wholesale market. We investigate whether bids by firms who employed unique pricing patterns were consistent with unilateral expected profit maximization. Our results suggest that these firms could have increased expected profits through unilateral deviations. For one firm, the potential to increase profits is greater on days when certain offer patterns are observed, providing support for the claim that such patterns may have assisted coordination on high-priced outcomes. These results suggest that regulators should exercise caution when designing information disclosure policies in concentrated electricity markets.
    Keywords: Electricity; Market Power; Information; Regulation; Antitrust
    JEL: D43 L40 L51 L94 Q48
    Date: 2019–06–26
  11. By: Kenneth Gillingham; Sébastien Houde; Arthur A. van Benthem
    Abstract: A central question in the analysis of fuel-economy policy is whether consumers are myopic with regards to future fuel costs. We provide the first evidence on consumer valuation of fuel economy from a natural experiment. We examine the short-run equilibrium effects of an exogenous restatement of fuel-economy ratings that affected 1.6 million vehicles. Using the implied changes in willingness-to-pay, we find that consumers act myopically: consumers are indifferent between $1 in discounted fuel costs and 15-38 cents in the vehicle purchase price when discounting at 4%. This myopia persists under a wide range of assumptions.
    Keywords: fuel economy, vehicles, myopia, undervaluation, regulation
    JEL: D12 H25 L11 L62 L71 Q40
    Date: 2019

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