nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒06‒14
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Corporate Leniency in a Dynamic Context: The Preemptive Push of an Uncertain Future By Gaertner, Dennis
  2. Downstream Subsidization and Upstream Privatization with a Vertically Integrated Foreign Firm By Zhang, Chuyuan; Lee, Sang-Ho

  1. By: Gaertner, Dennis
    Abstract: This paper investigates how leniency programs can induce collusive offenders to self report in a dynamic setting, where the risk of independent detection evolves stochastically over time. We show how this uncertainty about the future can push firms into preemptive application, and how these preemptive incentives may unravel to the point where firms apply long before the risk of independent detection is in any way imminent. The analysis sheds light on factors and policy instruments which favor such an unraveling effect. These include: little discontinuity in time and state, firms’ patience, and a relatively harsh treatment of firms which fail to preempt others. In contrast, the described effects do not necessarily require a very high absolute level of leniency reduction, or even rewards.
    Keywords: cartel, collusion, leniency program, preemption, dynamics
    JEL: D43 D84 K21 K42 L41
    Date: 2021–06
  2. By: Zhang, Chuyuan; Lee, Sang-Ho
    Abstract: This study constructs a model with a vertical structure in which a state-owned enterprise (SOE) in an upstream market and a private firm in a downstream market compete with a vertically integrated foreign firm (VIFF). Given a cost-inefficient SOE, we examine the strategic entry decision of a VIFF that can enter either the upstream, or the downstream market, or both, under downstream subsidization and upstream privatization policies. We find that when the government implements a subsidy policy, the VIFF enters only the downstream market if the cost inefficiency is low and enters both markets otherwise; however, the social welfare of the later is always higher than that of the former. We also find that reducing the cost inefficiency might cause welfare loss when ex-ante inefficiency is intermediate, below which the VIFF might change its entry decision. Finally, we show that an upstream privatization policy reduces welfare either when the cost inefficiency ex-post privatization decreases to a lesser degree or when the ex-ante inefficiency is relatively low.
    Keywords: Downstream Subsidization · Upstream Privatization · Vertically Integrated Foreign Firm · Cost Inefficiency · Entry Decision · Mixed Market
    JEL: D43 H21 L13
    Date: 2021–06

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