nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒01‒06
five papers chosen by

  1. Endogenous Quality and Firm Entry By Rui Faustino
  2. The ignorant monopolist redux By Roger Koenker
  3. Cartel Formation with Quality Differentiation By Bos, Iwan; Marini, Marco A.; Saulle, Riccardo
  4. Collusion through market sharing agreements: Evidence from Quebec's road paving market By de Leverano, Adriano
  5. Compatible Mergers: Assets, ServiceAreas, and Market Power By Tetsuji OKAZAKI; Ken ONISHI; Naoki WAKAMORI

  1. By: Rui Faustino
    Abstract: During economic expansions the net product creation and average product quality increase as firms introduce new products with higher quality.The introduction of new products with higher quality producesa quality bias in price level measures. In this paper I develop a firm-entry model with endogenous qualityof consumer goods. Following a TFP shock, the price level increases not only due to a larger number of varieties but also due to a higher average quality.Simultaneously, the channel of endogenous quality actsas a propagation mechanism to other variables in the economy, amplifying their response to shocks. This channel can also be either contractionary or shut down, depending on how consumers derive utility from quality.
    Keywords: Firm-entry, business cycle, quality, prices.
    JEL: E32 E20 L11
    Date: 2019–12
  2. By: Roger Koenker (Institute for Fiscal Studies and UCL)
    Abstract: The classical problem of the monopolist faced with an unknown demand curve is considered in a simple stochastic setting. Sequential pricing strategies designed to maximize discounted pro?ts are shown to converge su?ciently rapidly that they leave the monopolist ignorant about all but the most local features of demand. The failure of the monopolist to “learn” his demand curve would seem to call into question some standard assumptions about agents’ grasp of their economic environment.
    Date: 2019–10–30
  3. By: Bos, Iwan; Marini, Marco A.; Saulle, Riccardo
    Abstract: Research on collusion in vertically differentiated markets is conducted under one or two potentially restrictive assumptions. Either there is a single industry-wide cartel or costs are assumed to be independent of quality or quantity. We explore the extent to which these assumptions are indeed restrictive by relaxing both. For a wide range of coalition structures, profit-maximizing cartels of any size price most of their lower quality products out of the market as long as production costs do not increase too much with quality. If these costs rise sufficiently, however, then market share is maintained for all product variants. All cartel sizes may emerge in equilibrium when exclusively considering individual deviations, but the industry-wide cartel is the only one immune to deviations by coalitions of members. Overall, our findings suggest that firms have a strong incentive to coordinate prices when the products involved are vertically differentiated.
    Keywords: Cartel Formation, Collusion, Vertical Differentiation, Endogenous Coalition Formation, Industry-wide Cartel, Partial Cartels.
    JEL: C70 C71 C72 D0 D01 D02 D04 D4 D42 D43
    Date: 2019–12–23
  4. By: de Leverano, Adriano
    Abstract: I study a case of market sharing agreements to provide evidence of coordination between colluding firms on the degree to which they compete against each other (henceforth referred to as head-to-head competition) and their bidding behavior. I also quantify the impact that coordinating head-to-head competition has on procurement costs. My focus is on the two largest rms bidding in provincial road paving procurement auctions in Quebec between 2007 and 2015. I use the police investigation into collusion and corruption in the Quebec construction industry launched in October 2009 to capture the end of this cartel. I find that after this date, the two suspected firms i) were more likely to bid in the same auction and ii) submitted significantly lower bids when they competed in the same auction. A structural model of entry and bidding shows that if the firms had kept competing head-to-head at the same rate as in the collusive period but had stopped colluding on bids, bids would have increased by about 3.86% with respect to the competitive scenario observed after the police investigation began. This finding suggests that there were additional procurement costs associated with firms coordinating on the degree of head-to-head competition.
    Keywords: Auction,Bidding ring,Collusion,Public procurement
    JEL: D44 H57 L22 L74
    Date: 2019
  5. By: Tetsuji OKAZAKI; Ken ONISHI; Naoki WAKAMORI
    Abstract: This paper empirically examines the discrepancy between the incentive of firms to merge and the social value of mergers using detailed data on merger waves in the pre-WWII Japanese electricity industry when a competition authority did not yet exist. We find that firms could enjoy cost synergies when merging with firms with greater differences in production asset composition and/or reachable customers. Such mergers resulted in increases in capital utilization and total output. However, the sources of these cost synergies did not affect the merger decision of firms; instead, geographical proximity increased the likelihood of mergers. These results imply that the merger incentive may not align with social welfare and thus policy intervention to allow selective mergers for particular combinations of firms may help increase social welfare.
    Date: 2019–12

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