nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒08‒31
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Bertrand-Edgeworth oligopoly: Characterization of mixed strategy equilibria when some firms are large and the others are small By Salvadori, Neri; De Francesco, Massimo A.
  2. Partitioned Pricing and Consumer Welfare By Kevin Ducbao Tran
  3. On the Profitability of Cross-Ownership in Cournot Oligopolies: Stock Sizes Matter By Hassan Benchekroun; Miao Dai; Ngo Van Long
  4. Free Licensing in a Differentiated Duopoly By Kabiraj, Tarun; Chatterjee, Rittwik; Chattopadhyay, Srobonti
  5. Partial Vertical Ownership with Asymmetric Information By Ricardo Gonçalves; Peyman Khezr; Flavio Menezes
  6. Cost Pass-through in Commercial Aviation: Theory and Evidence By Gayle, Philip; Lin, Ying
  7. Competition for Flexible Distribution Resources in a ’Smart’ Electricity Distribution Network By Tangerås, Thomas
  8. Airbnb, Hotels, and Localized Competition By Maximilian Schäfer; Kevin Ducbao Tran

  1. By: Salvadori, Neri; De Francesco, Massimo A.
    Abstract: This paper studies Bertrand-Edgeworth competition among firms producing a homogeneous commodity under efficient rationing and constant (andidentical across firms) marginal cost until full capacity utilization is reached. Our focus is on a subset of the no pure-strategy equilibrium region of the capacity space in which, in a well-defined sense, some firms are large and the others are small. We characterize equilibria for such subset. For each firm, the payoffs are the same at any equilibrium and, for each type of firm, they are proportional to capacity. While there is a single profile of equilibrium distributions for the large firms, there is a continuum of equilibrium distributions for the small firms: what is uniquely determined, for the latter, is the capacity-weighted sum of their equilibrium distributions and hence the union of the supports of their equilibrium strategies.
    Keywords: Bertrand-Edgeworth oligopoly; mixed strategy equilibrium; large and small firms
    JEL: C72 D43 L13
    Date: 2020–08–05
  2. By: Kevin Ducbao Tran
    Abstract: In online commerce, obfuscation strategies by sellers are hypothesized to mislead consumers to their detriment and to the profit of sellers. One such obfuscation strategy is partitioned pricing in which the price is split into a base price and add-on fees. While empirical evidence suggests that partitioned pricing affects consumer decisions through salience effects, its consumer welfare consequences are largely unexplored. Therefore, I provide a quantification of the welfare impact of the behavioral response to partitioned pricing. To do so, I derive a discrete choice model that jointly allows for differences in the reaction to marginal changes in add-on fees and the base price as well as a discontinuous effect of a zero fee. The model is based on a framework on limited attention and I estimate it using web scraped data of posted price transactions on eBay Germany. My results suggest under-reaction to marginal changes in the shipping fee, consistent with previous results in the literature. However, I also document a discontinuous positive effect of free shipping on consumer demand, which is novel to the literature. The combined impact of these effects on consumer welfare is less than six percent of consumer surplus. The welfare impact is attenuated because the maximum shipping fee on eBay is capped and the free shipping effect partly counteracts the under-reaction to shipping fees in expectation.
    Keywords: Partitioned pricing, limited attention, consumer welfare, shipping fees, eBay
    JEL: D12 D60 D83 L11
    Date: 2020
  3. By: Hassan Benchekroun; Miao Dai; Ngo Van Long
    Abstract: We examine the profitability of cross-ownership in an oligopolistic industry where firms compete as Cournot rivals. We consider a symmetric cross-ownership structure in which a subset of k firms engage in cross-shareholding and each firm has an equal silent financial interest in the other firms, while the remaining (n – k) firms stay independent. We show that a symmetric cross-ownership is never profitable for any levels of non-controlling minority shareholdings if the participation ratio (k/n) is less than or equal to (n+1)/(2n), while there exists a large range of cross-ownership for which it can be profitable beyond that participation ratio. This result may be called a cross-ownership paradox, analogous to the merger paradox. With the presence of stock constraints, however, we find some of the results from the cross-ownership paradox do not carry over to the case of non-renewable resource industries. The profitability of a symmetric cross-ownership can be positive even when the participation ratio (k/n) is less than or equal to (n+1)/(2n) and is always positive when the participation ratio (k/n) is greater than (n+1)/(2n), provided that the initial resource stock owned by each firm is small enough. We also highlight that cross-ownership can be preferable to a horizontal merger under Cournot competition. Not only is it more profitable to do so, more importantly, it constitutes a shrewd strategy to avoid possible legal challenges. Nous examinons la rentabilité de la propriété croisée dans une industrie oligopolistique où les entreprises se font concurrence en tant que rivales de Cournot. Nous considérons une structure de propriété croisée symétrique dans laquelle un sous-ensemble de k entreprises s'engagent dans des participations croisées, chaque entreprise ayant un intérêt financier silencieux égal dans les autres (k-1) entreprises du sous-ensemble, alors que (n - k) entreprises restent indépendantes. Nous montrons qu'une participation croisée symétrique n'est jamais rentable si le ratio de participation (k /n) est inférieur ou égal à (n + 1) / (2n), alors qu’il existe un large domaine de valeurs de k/n au-delà de (n+1)/(2n) pour lesquelles la participation croisée est rentable. Ce résultat peut être qualifié de paradoxe de la propriété croisée, analogue au paradoxe de la fusion. Cependant, dans le cas des industries de ressources non-renouvelables, avec la présence de contraintes de stock, nous constatons que certains des résultats du paradoxe de la propriété croisée ne se répercutent pas. La rentabilité d'une propriété croisée symétrique peut être positive même lorsque le taux de participation (k / n) est inférieur ou égal à (n + 1) / (2n) et est toujours positive lorsque le taux de participation (k / n) est supérieur à (n +1) / (2n), à condition que le stock initial de ressources détenu par chaque entreprise soit suffisamment petit. Nous soulignons également que la propriété croisée peut être préférable à une fusion horizontale sous la concurrence de Cournot. Non seulement il est plus rentable de le faire, mais surtout, cela constitue une stratégie astucieuse pour éviter d'éventuelles contestations judiciaires.
    Keywords: Cross-ownership,Profitability,Oligopoly,Non-renewable Resources,Resource Stock,Horizontal Merger,Competition Policy,Antitrust Laws, Propriété croisée,Rentabilité,Oligopole,Ressources non-renouvelables,Stock de ressources,Fusion horizontale,Politique de la concurrence,Lois antitrust
    JEL: L13 L41 Q3
    Date: 2020–08–11
  4. By: Kabiraj, Tarun; Chatterjee, Rittwik; Chattopadhyay, Srobonti
    Abstract: The present paper discusses the possibility of free licensing in a model of differentiated duopoly. We have shown that given the market size, the degree of product differentiation and the unit cost of input production, free licensing will occur if the transferred technology is not much superior and the market price of input is sufficiently large. If, however, any of market size, input cost or product substitution goes up, the possibility of free licensing will fall. Our result has an important implication in the context of transboundary pollution. The overall welfare under free licensing will be higher unambiguously.
    Keywords: Transferred technology, free licensing, product differentiation, input price, cross-border pollution.
    JEL: D43 D45 L13 L24
    Date: 2020–06–30
  5. By: Ricardo Gonçalves (Católica Porto Business School, Universidade Catolica Portuguesa); Peyman Khezr (School of Economics, Finance and Marketing, RMIT University, Australia.); Flavio Menezes (School of Economics, University of Queensland, Brisbane, Australia)
    Abstract: We examine the role of asymmetric information about costs on the impact of partial (non-controlling) vertical integration on competition. We show that Greenlee and Raskovich (2006)’s invariance result that total downstream quantity (and, therefore, competition) is not impacted by such acquisitions holds in the case of privately known marginal costs and symmetric ownership shares. This invariance result provides a possible explanation for why partial acquisitions where downstream firms own equal shares in an upstream firm with market power are so uncommon.
    Keywords: Vertical integration; partial acquisition; asymmetric information.
    JEL: D4 L1 L2 L4
    Date: 2020–08–18
  6. By: Gayle, Philip; Lin, Ying
    Abstract: The significant worldwide decline in crude oil price beginning in mid-2014 through to 2015, which resulted in substantial fuel expense reductions for airlines, but no apparent commensurate reductions in industry average airfares has caused much public debate. This paper examines the market mechanisms through which crude oil price may influence airfare, which facilitates identifying the possible market and airline-specific characteristics that influence the extent to which crude oil price changes affect airfare. Interestingly, and new, our analysis reveals that the crude oil-airfare pass-through relationship can be either positive or negative, depending on various market and airline-specific characteristics. We find evidence that airline-specific jet fuel hedging strategy and market origin-destination distance contribute significantly to pass-through rates being negative. Specifically, the value of pass-through rate decreases with airline fuel hedging ratios and with market origin-destination distance, but increases with competition in origin-destination markets. Even when the pass-through relationship is positive, suggesting that a portion of airlines’ fuel cost savings is passed on to consumers via lower airfares, this research reveals the market and airline-specific factors that limit the size of these savings passed on to consumers via lower airfares.
    Keywords: Crude oil price-Airfare Cost Pass-through; Jet fuel hedging
    JEL: L13 L93
    Date: 2020
  7. By: Tangerås, Thomas (Research Institute of Industrial Economics (IFN))
    Abstract: In a ’smart’ electricity distribution network, flexible distribution resources (FDRs) can be coordinated to improve efficiency. But coordination enables whoever controls such resources to exercise market power. The paper establishes the following efficiency rankings of market structures: Aggregators competing for FDRs are more efficient than a distribution system operator (DSO) controlling resources, which is more efficient than no FDR market. A no- market solution is more efficient than an FDR market featuring either (i) both DSO and aggregators; or (ii) a monopoly aggregator also supplying generation to the real-time market. The paper also characterizes a regulation that implements the efficient outcome.
    Keywords: Aggregator; Distribution system operator; Market power; Real-time market; Regulation; Smart grid
    JEL: H41 L12 L51 L94
    Date: 2020–08–20
  8. By: Maximilian Schäfer; Kevin Ducbao Tran
    Abstract: The rise of online platforms has disrupted numerous traditional industries. A prime example is the short-term accommodation platform Airbnb and how it affects the hotel industry. On the one hand, consumers can profit from Airbnb due to an increased number of choices and lower prices. On the other hand, critics of the platform argue that it allows professional hosts to operate de facto hotels while being subject to much laxer regulation. Understanding the nature of competition between Airbnb and hotels as well as quantifying consumer welfare gains from Airbnb is important to inform the debate on necessary platform regulation. In this paper, we analyze competition between hotels and Airbnb listings as well as the effect of Airbnb on consumer welfare. For this purpose, we use granular daily-level data from Paris for the year 2017. We estimate a nested logit model of demand that allows for consumer segmentation along accommodation types and the different districts within the city. We extend prior research by accounting for the localized nature of competition within districts of the city. Our results suggest that demand is segmented by district as well as accommodation type. Based on the parameter estimates, we calibrate a supply-side model to assess how Airbnb affects hotel revenues and consumer welfare. Our simulations imply that Airbnb increases average consumer surplus by 4.3 million euro per night and reduces average hotel revenues by 1.8 million euro. Furthermore, we find that 28 percent of Airbnb travelers would choose hotels if Airbnb did not exist.
    Keywords: Hotel industry, short-term rentals, localized competition, consumer welfare, sharing economy, peer-to-peer markets, Airbnb
    JEL: D4 D6 L1 Z38
    Date: 2020

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