nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒03‒02
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Quality and Price Personalization under Customer Recognition: a Dynamic Monopoly Model with Contrasting Equilibria By Laussel, Didier; Long, Ngo Van; Resende, Joana
  2. Pricing and Fees in Auction Platforms with Two-Sided Entry By Marleen Marra
  3. OPEX-risk as a source of CAPEX-bias in monopoly regulation By Gert Brunekreeft; Margarethe Rammerstorfer
  4. Pricing the Pharmaceuticals when the Ability to Pay Differs: Taking Vertical Equity Seriously. By Vesa Kanniainen; Juha Laine; Ismo Linnosmaa
  5. Estimating the Costs of Standardization: Evidence from the Movie Industry By El Hadi Caoui
  6. Quality Differentiation and Spatial Clustering among Restaurants By Mossay, Pascal; Shin, Jong Kook; Smrkolj, Grega

  1. By: Laussel, Didier; Long, Ngo Van; Resende, Joana
    Abstract: We present a model of market hyper-segmentation, where a monopolist acquires within a short time all information about the preferences of consumers who purchase its vertically differentiated products. The firm offers a new price/quality schedule after each commitment period. Lower consumer types may have an incentive to delay their purchases until next period to obtain a better introductory offer. The monopolist counters this incentive by offering higher informational rents. Considering the dynamic game played by the monopolist and its customers, we find that there is always a Markov perfect equilibrium (MPE) in which the firm immediately sells the good to all customers, offering the Mussa-Rosen static equilibrium schedule to first time customers (and getting full commitment profits). However, if the commitment period between two offers is long enough, there is another MPE with gradual market expansion. Contrary to the Coasian result for a durable-good monopoly, we find that in both equilibria the profit of the monopolist increases (and the aggregate consumers surplus decreases) as the interval of commitment shrinks.The model yields policy implications for regulations on collection and storage of customers information.
    Keywords: monopoly, product quality, customer information, intertemporal price discrimination
    JEL: L12 L15
    Date: 2020–02
  2. By: Marleen Marra (Département d'économie)
    Abstract: This paper presents, solves, and estimates the first structural auction model with seller selection. This allows me to quantify network effects arising from endogenous bidder and seller entry into auction platforms, facilitating the estimation of theoretically ambiguous fee impacts by tracing them through the game. Relevant model primitives are identified from variation in second-highest bids and reserve prices. My estimator builds off the discrete choice literature to address the double nested fixed point characterization of the entry equilibrium. Using new wine auction data, I estimate that this platform’s revenues increase up to 60% when introducing a bidder discount and simultaneously increasing seller fees. More bidders enter when the platform is populated with lower-reserve setting sellers, driving up prices. Moreover, I show that meaningful antitrust damages can be estimated in a platform setting despite this two-sidedness.
    Keywords: Auctions with entry; Two-sided markets; Nonparametric identification; Estimation; Nested fixed point
    JEL: D44 C52 C57 L81
    Date: 2019–12
  3. By: Gert Brunekreeft; Margarethe Rammerstorfer
    Abstract: This paper shows with a formal model that under monopoly regulation, OPEX-risk can be a source for a CAPEX-bias. If OPEX and CAPEX are substitutes, the regulated firm can reduce the risk of the firm and thereby reduce the true cost of capital by rebalancing OPEX and CAPEX. If the allowed rate-of-return on capital is not influenced by the firm’s actions, this creates a margin between the allowed rate-of-return and the true cost of capital. We examine two remedies: first, fixed-OPEX-CAPEX-share (FOCS) which is a variation of TOTEX-regulation and second, OPEX-mark-up. FOCS internalizes the CAPEX-bias and can be implemented easily. The OPEX-mark-up is effective, but it will be challenging to reach the optimum.
    Keywords: Capex-bias, Opex-risk, regulated monopoly
    JEL: K23 L12 L51 L9
    Date: 2020–02
  4. By: Vesa Kanniainen; Juha Laine; Ismo Linnosmaa
    Abstract: A non-trivial fraction of people cannot afford to buy pharmaceutical products at unregulated market prices. Therefore, the paper analyzes the public insurance of the pharmaceutical products in terms of price controls and the socially optimal third-degree price discrimination. It characterizes first the Ramsey pricing rule in the absence of insurance and in the case where the producer price has to cover the R&D sunk cost of the firm. Subsequently, conditions for a welfare increasing departure from Ramsey pricing are stated in terms of price regulation and insurance coverage. The resulting outcome is second best. Unlike the earlier views expressed, increased consumption of pharmaceutical products is shown to be welfare increasing in the second best world. As the optimal means-tested insurance, two alternative criteria for vertical equity are examined in the spirit of the Rawlsian view. In the first scheme, the regulator chooses a higher insurance coverage for individuals with their income below a threshold. In the second scheme, the society imputes a social value to low-income patients in terms of the value-added they produce after the treatment. Under both schemes, the threshold is determined endogenously.
    Keywords: pharmaceutical products, price regulation, public health insurance, third-degree price discrimination, equity criterion
    JEL: L10 L50
    Date: 2019
  5. By: El Hadi Caoui
    Abstract: This paper studies the decentralized adoption of a technology standard when network effects are present. If the new standard is incompatible with the current installed base, adoption may be inefficiently delayed. I quantify the magnitude of “excess inertia” in the switch of the movie distribution and exhibition industries from 35mm film to digital. I specify and estimate a dynamic game of digital hardware adoption by theaters and digital movies supply by distributors. Counterfactual simulations establish that excess inertia reduces surplus by 19% relative to the first-best adoption path; network externalities explain 29% of the surplus loss.
    Keywords: technology adoption, network effects, movie industry
    JEL: L82 L86 O33
    Date: 2019
  6. By: Mossay, Pascal; Shin, Jong Kook; Smrkolj, Grega
    Abstract: To explore the relationship between spatial location and quality differentiation, we build a dataset of over 30,000 restaurants rated by TripAdvisor, across large UK cities. Whereas top-rated restaurants tend to locate closer to other top restaurants, bottom-rated restaurants tend to locate away from each other and closer to top ones. Our theoretical model can explain the main features of the observed spatial patterns. We find that an increase in the population density in the city center reduces the spatial dispersion of both top and bottom restaurants but the reduction is larger in magnitude for top restaurants. A larger quality difference between top and bottom restaurants increases both the absolute and relative dispersion of top restaurants.
    Keywords: Spatial competition, Quality differentiation, Hotelling, Restaurant industry
    JEL: L13 L83 R32
    Date: 2020–02–18

This nep-ind issue is ©2020 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.