nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒04‒12
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Concentration, Privatization Policies, and Heterogeneity among Private Firms in Mixed Oligopolies By Haraguchi, Junichi; Matsumura, Toshihiro
  2. Horizontal contracts in a dominant firm-competitive fringe model By Antelo, Manel; Bru, Lluís
  3. Imperfect Competition with Costly Disposal By Severin Lenhard
  4. Cartel Stability in Times of Low Interest Rates By Severin Lenhard
  5. The Pricing Strategies of Online Grocery Retailers By Diego Aparicio; Zachary Metzman; Roberto Rigobon
  6. Price Discrimination in International Airline Markets By Gaurab Aryal; Charles Murry; Jonathan W. Williams

  1. By: Haraguchi, Junichi; Matsumura, Toshihiro
    Abstract: Mixed oligopolies are characterized by the coexistence of private and public enterprises. The literature on mixed oligopolies indicates that, assuming all private firms are identical, the optimal degree of privatization increases with the number of private firms. In other words, the more concentrated the market is, the more the government should privatize public firms. We revisit this problem by introducing cost-heterogeneity among private firms. We show that under the assumption of constant marginal costs, a new entry by a private firm will not reduce the optimal degree of privatization, regardless of the cost differences among private firms. However, under the assumption of increasing marginal costs, we show that a new entry will reduce the optimal degree of privatization when the new entrant is significantly less efficient than the private firms already present. Our results imply that the relationship between competition and privatization policies are more complicated than the literature suggests, and they depend on the cost structure of private firms.
    Keywords: privatization and competition policies, market concentration index, partial privatization, new entry, production substitution
    JEL: D43 H44 L33
    Date: 2021–04–03
  2. By: Antelo, Manel; Bru, Lluís
    Abstract: This paper offers a rationale for production subcontracting by a market power firm from smaller firms despite the latter’s ability to sell the good for themselves. Particularly, in a dominant firm (DF) model in which the good can be sold through linear pricing or through nonlinear two-part tariff (2PT) contracts, we demonstrate that the DF finds it optimal, whenever it sells its own production plus outsourced production, to subcontract production from fringe firms by setting nonlinear 2PT contracts.
    Keywords: Dominant firm model, linear prices, nonlinear 2PT contracts, horizontal subcontracting, welfare
    JEL: L11 L14
    Date: 2021
  3. By: Severin Lenhard
    Abstract: This paper studies the disposal costs’ effect on consumer surplus and firms’ profits. The costlier disposal, the less is disposed of, firms’ competition for market shares increases, thereby benefiting consumers. Yet firms decrease their produc- tion to mitigate costs, affecting consumer surplus negatively. We present a model with ex ante homogeneous firms producing inventories either early at low cost and with little information about demand, or later with more information yet at higher costs. Unsold products are disposed of. In equilibrium, firms may be asymmetric. Disposal goes down with costs but so do inventories. In our set-up, the negative effect on the trade volume dominates decreasing consumer surplus and firms’ profits. We show, however, that low disposal costs substitute infor- mation about demand. Increasing disposal costs improve a firm’s information advantage and may increase its profits.
    Keywords: Disposal, Inventory, Uncertain Demand, Market Structure
    JEL: D43 L11 L13 L50
    Date: 2021–04
  4. By: Severin Lenhard
    Abstract: We study the interest rate’s effect on the stability of cartels. A low interest rate implies a high discount factor and thus increases cartel stability. If firms access the capital market, an additional effect comes into play: a low interest rate lowers investment costs, resulting in more profitable deviations from the collusive agreement. We propose a new measure for a cartel’s stability regarding the two opposing effects. Stability is U-shaped in the interest rate. We test our theory using a dataset of 615 firms and find supporting evidence. We conclude that the current unusually low interest rate facilitates collusion.
    Keywords: Collusion, Interest Rate, Repeated Game, Survival Analysis
    JEL: C41 D43 K21 L40
    Date: 2021–03
  5. By: Diego Aparicio; Zachary Metzman; Roberto Rigobon
    Abstract: Matched product data is collected from the leading online grocers in the U.S. The same exact products are identified in scanner data. The paper documents pricing strategies within and across online (and offline) retailers. First, online retailers exhibit substantially less uniform pricing than offline retailers. Second, online price differentiation across competing chains in narrow geographies is higher than offline retailers. Third, variation in offline elasticities, shipping distance, pricing frequency, and local demo- graphics are utilized to explain price differentiation. Surprisingly, pricing technology (across time) magnifies price differentiation (across locations). This evidence motivates a high-frequency study to unpack the patterns of algorithmic pricing. The data shows that algorithms: personalize prices at the delivery zipcode level, update prices very frequently and in tiny magnitudes, reduce price synchronization, exhibit lower menu costs, constantly explore the price grid, and often match competitors’ prices.
    JEL: D9 L1 L2 M31 O33
    Date: 2021–04
  6. By: Gaurab Aryal; Charles Murry; Jonathan W. Williams
    Abstract: We develop a model of inter-temporal and intra-temporal price discrimination by monopoly airlines to study the ability of different discriminatory pricing mechanisms to increase efficiency and the associated distributional implications. To estimate the model, we use unique data from international airline markets with flight-level variation in prices across time, cabins, and markets, as well as information on passengers' reasons for travel and time of purchase. We find that the ability to screen passengers across cabins every period increases total surplus by 35% relative to choosing only one price per period, with both the airline and passengers benefiting. However, further discrimination based on passenger's reason to traveling improve airline surplus at the expense of total efficiency. We also find that the current pricing practice yields approximately 89% of the first-best welfare. The source of this inefficiency arises mostly from dynamic uncertainty about demand, not private information about passenger valuations.
    Date: 2021–02

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