nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒10‒07
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Non-linear revenue evaluation in oligopoly By Alex Dickson; Ian A. MacKenzie; Petros G. Sekeris
  2. An evolutionary Cournot oligopoly model with imitators and perfect foresight best responders By Lorenzo, Cerboni Baiardi; Ahmad, Naimzada
  3. Collusion, price dispersion, and fringe competition By de Roos, Nicolas; Smirnov, Vladimir
  4. Price Competition Online: Platforms vs. Branded Websites By Oksana Loginova
  5. Exclusive Data, Price Manipulation and Market Leadership By Yiquan Gu; Leonardo Madio; Carlo Reggiani
  6. The effects of R&D subsidies and publicly performed R&D on business R&D: A survey By Ziesemer, Thomas
  7. Experimental Innovation Policy By Albert Bravo-Biosca
  8. Misleading Advertising in Mixed Markets: Consumer-orientation and welfare outcomes By Sharma, Ajay
  9. Four Facts Concerning Competition in U.S. Generic Prescription Drug Markets By Rena M. Conti; Ernst R. Berndt

  1. By: Alex Dickson (Department of Economics, University of Strathclyde, Glasgow, UK, G4 0QU); Ian A. MacKenzie (School of Economics, The University of Queensland); Petros G. Sekeris (Montpellier Business School, Montpellier, 34080, France)
    Abstract: In this article we investigate oligopolies where firm decision makers have multiple objectives. We focus on cases where the decision maker is incentivized by profit, and by revenue. Our innovation—motivated by the internal scrutiny that is often placed on revenue—is that managers derive utility from revenue in a potentially non-linear fashion. This allows for incremental changes in revenue to have different incentive effects when it comes to production choice, depending on the amount of revenue generated by the firm. We show that this intuitively appealing extension to the revenue maximisation model reverses some conventional results of that model: we derive conditions where decision makers may actually increase output in the presence of demand contractions. Whether a decision maker increases or decreases output in the presence of a demand shock depends on the concavity of their utility function with respect to revenue. Our findings help us in understanding cases of output growth in the presence of negative demand shocks.
    Keywords: Oligopoly; non-profit maximization; delegation
    JEL: L13 L21
    Date: 2019–09–24
  2. By: Lorenzo, Cerboni Baiardi; Ahmad, Naimzada
    Abstract: We consider the competition among quantity setting players in a linear evolutionary environment. To set their outputs, players adopt, alternatively, the best response rule having perfect foresight or an imitative rule. Players are allowed to change their behavior through an evolutionary mechanism according to which the rule with better performance will attract more followers. The relevant stationary state of the model describes a scenario where players produce at the Cournot-Nash level. Due to the presence of imitative behavior, we find that the number of players and implementation costs, needed to the best response exploitation, have an ambiguous role in determining the stability properties of the equilibrium and double stability thresholds can be observed. Differently, the role of the intensity of choice, representing the evolutionary propensity to switch to the most profitable rule, has a destabilizing role, in line with the common occurrence in evolutionary models. The global analysis of the model reveals that increasing values of the intensity of choice parameter determine increasing dynamic complexities for the internal attractor representing a population where both decision mechanisms coexist.
    Keywords: Imitation, heterogeneity, evolutionary game, replicator dynamics, dynamic instability, dynamical systems
    Date: 2019–05
  3. By: de Roos, Nicolas; Smirnov, Vladimir
    Abstract: We study the optimal behaviour of a cartel faced with fringe competition and imperfectly attentive consumers. Intertemporal price dispersion obfuscates consumer price comparison which aids the cartel through two channels: it reduces the effectiveness of free riding by the fringe; and it relaxes the cartel’s internal incentive constraints. Our theory explains the survival of a price-setting cartel in a homogeneous product market, provides a collusive rationale for sales and Edgeworth cycles, and characterises the cartel’s manipulation of its fringe rival through a double cut-off rule.
    Keywords: Collusion, fringe competition, obfuscation, price dispersion
    Date: 2019–09
  4. By: Oksana Loginova (Department of Economics, University of Missouri)
    Abstract: The focus of this theoretical study is price competition when some firms operate their own branded websites while others sell their products through an online platform, such as Amazon Marketplace. On one hand, selling through Amazon expands a firm's reach to more customers, but on the other, starting a website can help the firm to increase the perceived value of its product, that is, to build brand equity. In the short run the composition of firms is fixed, whereas in the long run each firm chooses between Amazon and its own website. I derive the equilibrium prices and profits, analyze the firms' behavior in the long run, and compare the equilibrium outcome with the social optimum. Comparative statics analysis reveals some interesting results. For example, I find that the number of firms that choose Amazon may go down in response to an increase in the total number of firms. A pure-strategy Nash equilibrium may not exist; I show that price dispersion among the firms of the same type is more likely in less concentrated markets and/or when the increase in the perceived value of the product is relatively small.
    Keywords: pricing, competition, platforms, online marketplace, Amazon, brand equity
    JEL: C72 D43 L11 L13 M31
    Date: 2019–09–20
  5. By: Yiquan Gu; Leonardo Madio; Carlo Reggiani
    Abstract: The unprecedented access of firms to consumer level data not only facilitates more precisely targeted individual pricing but also alters firms’ strategic incentives. We show that exclusive access to a list of consumers can provide incentives for a firm to endogenously assume the price leader’s role, and so to strategically manipulate its rival’s price. Prices and profits are non-monotonic in the length of the consumer list. For an intermediate size, price leadership entails a semi-collusive outcome, characterized by supra-competitive prices and low consumer surplus. In contrast, for short or long lists of consumers, exclusive data availability intensifies market competition.
    Keywords: exclusive data, price leadership, personalized pricing, price discrimination
    JEL: D43 K21 L11 L13 L41 L86 M21 M31
    Date: 2019
  6. By: Ziesemer, Thomas (UNU-MERIT, and SBE, Maastricht University)
    Abstract: This literature review shows that a majority of studies finds complementarity of R&D subsidies and tax credits with private R&D expenditures. A non-negligible minority finds incomplete crowding out. Full crowding out is found only for small parts of the respective samples or small sub-sectors of the economy under consideration. Education R&D and publicly performed R&D stimulate private R&D according to a small literature. We focus on the exceptions from these dominant results. The controversies concern firm size, interaction of policy instruments, and effectiveness of parts of publicly performed R&D. There are important suggestions for future research derived from our literature review: (i) use of dynamic models with adequate time lags, (ii) explaining effects of country and firm heterogeneity.
    Keywords: Research & development, business R&D, subsidies, public R&D
    JEL: H25 O38
    Date: 2019–09–24
  7. By: Albert Bravo-Biosca
    Abstract: Experimental approaches are increasingly being adopted across many policy fields, but innovation policy has been lagging. This paper reviews the case for policy experimentation in this field, describes the different types of experiments that can be undertaken, discusses some of the unique challenges to the use of experimental approaches in innovation policy, and summarizes some of the emerging lessons, with a focus on randomized trials. The paper concludes describing how at the Innovation Growth Lab we have been working with governments across the OECD to help them overcome the barriers to policy experimentation in order to make their policies more impactful.
    JEL: C93 L26 O25 O38
    Date: 2019–09
  8. By: Sharma, Ajay
    Abstract: In this paper, we analyse misleading advertising competition between private firms (profit oriented) and consumer-oriented firms (concerned about consumer welfare) in the context of mixed markets. The nature of advertising in this paper is assumed to be non-rival in nature and is beneficial to all the firms in the market. We find that, both private and consumer-oriented firms incur positive expenditure on misleading advertising. Further, the profit of consumer-oriented firms is higher than that of private firms. Moreover, irrespective of whether firms are concerned about consumer welfare or not, the level of misleading advertising is socially excessive.
    Keywords: Misleading advertising, Non-rival advertising, Consumer-oriented firm, Mixed markets, Cournot competition
    JEL: D21 L1 L2 L3
    Date: 2019–09–24
  9. By: Rena M. Conti; Ernst R. Berndt
    Abstract: We establish four facts concerning competition among U.S. generic drug suppliers, using IQVIA’s National Sales Perspective™ 2004Q4 – 2016Q3 data. We define a unique product market (“molform”), consisting of the combination of a molecule active ingredient and a route of administration formulation, aggregated over different dosages and strengths. We find: (i) supply exhibits substantial churning in entrants and exits; (ii) volume-weighted use concentrates in older generic molform cohorts; (iii) the extent of competition is greatest for the oldest molform cohorts and is smallest for the youngest molform cohorts. With a median of one competitor, the extent of competition in the youngest molform cohort is very limited; and (iv) supplier-molform annual revenues are typically small, are largest for relatively young drugs, but are heavily right skewed. These four facts provide an empirical platform on which to construct and empirically evaluate hypotheses regarding generic drug market structure, performance, and possible policy reforms.
    JEL: I10 L10 L65
    Date: 2019–08

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