nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒12‒09
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Consumer Information and the Limits to Competition By Mark Armstrong; Jidong Zhou
  2. Product Liability, Multidimensional R&D and Innovation By Lin, Ping; Zhang, Tianle
  3. Vertically Differentiated Cournot Oligopoly : Effects of Market Expansion and Trade Liberalization on Relative Markup and Product Quality By Long, Ngo Van; Miao, Zhuang
  4. Productivity Dynamics: The Role of Competition in a Service Industry By Breda, Thomas; Bryson, Alex; Forth, John

  1. By: Mark Armstrong; Jidong Zhou
    Abstract: This paper studies competition between firms when consumers observe a pri-vate signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relax¬ing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens dif¬ferentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by con¬sumers can be designed flexibly.
    Keywords: Information design, Bertrand competition, product differentiation, online platforms
    JEL: D43 D47 D83 L13 L15
    Date: 2019–11–28
    URL: http://d.repec.org/n?u=RePEc:oxf:wpaper:888&r=all
  2. By: Lin, Ping; Zhang, Tianle
    Abstract: We study the effect of product liability on the incentives of product and safety innovation. We first develop a monopoly model in which a firm chooses both product novelty and safety in an innovation stage followed by a production stage. A greater product liability directly increases the marginal benefit of producing a safer product and thus increases product safety. However, as product liability increases, product novelty may increase or decrease, depending on the relative strengths of demand-shifting and cross-R&D effects identified in the model. Consequently, a greater product liability may decrease consumer welfare and thus total welfare. We extend the results to an oligopoly model with differentiated products and study the effects of competition measured by the number of firms and the degree of product substitutability. We find that equilibrium product novelty and safety decrease with the number of firms but exhibit non-monotonic relationships with the degree of product substitutability.
    Keywords: Product Liability, Safety, Novelty, Innovation Incentive
    JEL: D4 K13 L13
    Date: 2019–11
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:97078&r=all
  3. By: Long, Ngo Van; Miao, Zhuang
    Abstract: We model an oligopoly where firms are allowed to freely enter and exit the market and choose the quality level of their products by incurring different set-up costs. Using this framework, we study the mix of firms in the long-run Cournot-Nash equilibrium under different cost structures and the effects of market size on market outcomes. Specifically, we consider two alternative specifications of cost structure. In the first specification, quality upgrading requires a large increment in the set-up cost or R&D investment. Under this cost structure, we show that in the Nash equilibrium, each firm specializes in a single quality level, and an increase in the market size leads to (i) an increase in the fraction of firms that specialize in the high quality product, (ii) an increase in the market share of the high quality product, and (iii) a reduction in firms'markups and in markup dispersion. Under the second type of cost structure where quality upgrading only requires higher marginal cost, we find that all firms will produce both types of product, and the value share of the high-quality product increases as the market expands, but in quantity terms, the market share of the high quality product does not change. Finally, we find that trade liberalization has broadly similar effects to that of a market expansion, but the supply of the high-quality product from the smaller economy may decrease.
    Keywords: Multiproduct firms, Cournot competition, Vertical product differentiation, Cost structure, Market size, Trade liberalization
    JEL: L1 L2 F15
    Date: 2019–11
    URL: http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-91&r=all
  4. By: Breda, Thomas (Paris School of Economics); Bryson, Alex (University College London); Forth, John (Cass Business School)
    Abstract: Using panel data for nearly all service providers in a single industry sector, we examine productivity responses to changes in competition in the United States. The sector offers workplace employee representation through trade union branches which compete with one another for union members whose subscriptions they depend on to cover costs. As such, they have an interest in maximising productivity. Ours is the first study to measure service industry productivity using both price and quantity metrics. Consistent with manufacturing studies, we find market entrants have lower prices and higher Total Factor Productivity (TFP) than incumbents. Increased competition from new entrants leads incumbents to reduce the price of union membership; exit rates then rise among incumbents with the lowest prices who are constrained in adjusting their prices downwards. Those with higher TFP have higher survival probabilities. However, increased competition does not induce incumbents to raise their TFP. These findings are consistent with a market in which incumbents learn about market conditions but face high switching costs limiting their ability to invest in the new techniques that underpin the higher TFP of new entrants.
    Keywords: competition, productivity, TFP, trade unions, survival
    JEL: J5 L1 L2 L3
    Date: 2019–11
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp12809&r=all

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