nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒01‒31
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Microstructure of Non Fungible Tokens By Mayukh Mukhopadhyay; Kaushik Ghosh
  2. Dynamics of Cournot duopoly games with quadratic costs and distinct rationality degrees By Xiaoliang Li
  3. Modelling Cournot Games as Multi-agent Multi-armed Bandits By Kshitija Taywade; Brent Harrison; Adib Bagh
  4. Vertical Differentiation in Frictional Product Markets By James Albrecht; Guido Menzio; Susan Vroman
  5. Supply Contracts under Partial Forward Ownership By Hunold, Matthias; Schlütter, Frank
  6. Collusive Compensation Schemes Aided by Algorithms By Simon Martin; Wolfgang Benedikt Schmal

  1. By: Mayukh Mukhopadhyay; Kaushik Ghosh
    Abstract: Non Fungible Token (NFT) Industry has been witnessing multi-million dollar trade in recent times. With rapid innovation of the NFT market environment by technology, innovation, and decentralization, it is becoming hard to distinguish between genuine NFT from fads and scams. This article discuss the NFT market microstructure, with a focus on price formation, market structure, transparency, and applications to other financial areas. Market manipulation in NFT market with the context of wash-sale patterns has also been surveyed. The article concludes by providing pointers on due-diligence activity that can be adopted by investors to mitigate NFT trading risk.
    Date: 2021–10
  2. By: Xiaoliang Li
    Abstract: In this discussion draft, we explore different duopoly games of players with quadratic costs, where the market is supposed to have the isoelastic demand. Different from the usual approaches based on numerical computations, the methods used in the present work are built on symbolic computations, which can produce analytical and rigorous results. Our investigation shows that the stability regions are enlarged for the games considered in this work compared to their counterparts with linear costs.
    Date: 2021–12
  3. By: Kshitija Taywade; Brent Harrison; Adib Bagh
    Abstract: We investigate the use of a multi-agent multi-armed bandit (MA-MAB) setting for modeling repeated Cournot oligopoly games, where the firms acting as agents choose from the set of arms representing production quantity (a discrete value). Agents interact with separate and independent bandit problems. In this formulation, each agent makes sequential choices among arms to maximize its own reward. Agents do not have any information about the environment; they can only see their own rewards after taking an action. However, the market demand is a stationary function of total industry output, and random entry or exit from the market is not allowed. Given these assumptions, we found that an $\epsilon$-greedy approach offers a more viable learning mechanism than other traditional MAB approaches, as it does not require any additional knowledge of the system to operate. We also propose two novel approaches that take advantage of the ordered action space: $\epsilon$-greedy+HL and $\epsilon$-greedy+EL. These new approaches help firms to focus on more profitable actions by eliminating less profitable choices and hence are designed to optimize the exploration. We use computer simulations to study the emergence of various equilibria in the outcomes and do the empirical analysis of joint cumulative regrets.
    Date: 2022–01
  4. By: James Albrecht; Guido Menzio; Susan Vroman
    Abstract: We consider a version of the imperfect competition model of Butters (1977), Varian (1980) and Burdett and Judd (1983) in which sellers make an ex-ante investment in the quality of their variety of the product. Equilibrium exists, is unique and is efficient. In equilibrium, search frictions not only cause sellers to offer different surpluses to buyers but also cause sellers to choose different qualities for their varieties. That is, equilibrium involves endogenous vertical differentiation. As search frictions decline, the market becomes more and more unequal as a smaller and smaller fraction of sellers produces varieties of increasing quality, offers increasing surplus to their customers, and captures an increasing share of the market, while a growing fraction of sellers produces varieties of decreasing quality. Gains from trade and welfare grow. Under some conditions, the growth rate of gains from trade and welfare is constant.
    JEL: D43 D83 L13 O40
    Date: 2021–12
  5. By: Hunold, Matthias; Schlütter, Frank (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: With forward ownership, an upstream supplier internalizes the effect of its supply contracts on the downstream firms, which is so far understood to decrease prices. We show that instead downstream prices generally increase if firms use two-part tariffs. The price-increasing effect of forward ownership occurs with both observable and secret two-part tariffs, albeit for different economic reasons. The results arise under both quantity and price competition as well as for different belief refinements. Partial forward ownership can be more profitable and more harmful for consumers than a full vertical merger between an upstream and a downstream firm.
    Keywords: Vertical relations ; minority shareholding ; partial forward ownership
    JEL: L22 L40 L8
    Date: 2022–01–01
  6. By: Simon Martin; Wolfgang Benedikt Schmal
    Abstract: Sophisticated collusive compensation schemes such as assigning future market shares or direct transfers are frequently observed in detected cartels. We show formally why these schemes are useful for dampening deviation incentives when colluding firms are temporary asymmetric. The relative attractiveness of each of these schemes is shaped by firms’ ability to predict future market conditions, possibly aided by algorithms. Prices and profits are inverse u-shaped in prediction ability. Assigning future market shares is optimal when prediction ability is intermediate, and otherwise direct transfers are optimal. Competition authority's limited resources should be utilized to respond to these changing market conditions.
    Keywords: algorithmic collusion, market forecasting, prediction ability, firm asymmetry, compensation schemes
    JEL: D21 L41 L51
    Date: 2021

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