nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒11‒07
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Centralized Bargaining with Pre-donation in a Vertically Related Industry By Saglam, Ismail
  2. Impact of Increasing Firms' Consumer Demand Perceptions on Market Outcomes By TANAKA Kenta; HIGASHIDA Keisaku; MANAGI Shunsuke
  3. Economic incentives for capacity reductions on interconnectors in the day-ahead market By E. Ruben van Beesten; Daan Hulshof

  1. By: Saglam, Ismail
    Abstract: This paper studies the incentives for, and the welfare effects of, pre-donation in a vertically related industry where two downstream firms that produce a homogenous good jointly bargain, using the generalized Nash rule, with an upstream firm over a linear input price before they engage in Cournot competition. We theoretically show that the downstream industry has no incentive to make any pre-donation and this is irrespective of its bargaining power. We also show computationally that (i) the upstream firm finds to make unilateral pre-donation optimal if and only if its bargaining power is sufficiently small and (ii) its optimal pre-donation (whenever positive) always yields Pareto welfare gains.
    Keywords: Vertically related industry; Nash bargaining; pre-donation.
    JEL: C78 L12 L13 L22
    Date: 2022–09
  2. By: TANAKA Kenta; HIGASHIDA Keisaku; MANAGI Shunsuke
    Abstract: The rapid evolution and spread of artificial intelligence (AI) and algorithms significantly improve companies’ recognition of consumer demands. AI and algorithmic big data analyses have been introduced into firms’ practical decision-making and marketing activities. However, there are insufficient empirical analyses available to determine the impact of improving a firm’s cognitive ability (via algorithmic data analyses) on actual market outcomes (price formation, each firm’s surplus, and social surplus). Using a laboratory experimental approach, this study examines the market outcomes, such as the degree of product differentiation and prices, when firms utilize an algorithmic demand-forecasting system in a duopoly. The results indicate that the forecasting system increases the cognitive abilities of the participants regarding their consumers’ preferences. Additionally, the introduction of the algorithmic demand-forecasting system increases the consumer surplus in the market.
    Date: 2022–09
  3. By: E. Ruben van Beesten; Daan Hulshof
    Abstract: We consider a zonal international power market and investigate potential economic incentives for short-term reductions of transmission capacities on existing interconnectors by the responsible transmission system operators (TSOs). We show that if a TSO aims to maximize domestic total welfare, it often has an incentive to reduce the capacity on the interconnectors to neighboring countries. In contrast with the (limited) literature on this subject, which focuses on incentives through the avoidance of future balancing costs, we show that incentives can exist even if one ignores balancing and focuses solely on welfare gains in the day-ahead market itself. Our analysis consists of two parts. In the first part, we develop an analytical framework that explains why these incentives exist. In particular, we distinguish two mechanisms: one based on price differences with neighboring countries and one based on the domestic electricity price. In the second part, we perform numerical experiments using a model of the Northern-European power system, focusing on the Danish TSO. In 97% of the historical hours tested, we indeed observe economic incentives for capacity reductions, leading to significant welfare gains for Denmark and welfare losses for the system as a whole. We show that the potential for welfare gains greatly depends on the ability of the TSO to adapt interconnector capacities to short-term market conditions. Finally, we explore the extent to which the recently introduced European "70%-rule" can mitigate the incentives for capacity reductions and their welfare effects.
    Date: 2022–10

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