nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒01‒09
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Oligopoly Pricing: The Role of Firm Size and Number By Iwan Bos; Marco A. Marini
  2. Collusion and Predation Under Cournot Competition By Emilie Dargaud; Maxime Menuet; Petros G. Sekeris
  3. Bundling with Resale By Drew Vollmer
  4. Formation of trade networks by economies of scale and product differentiation By Chengyuan Han; Malte Schr\"oder; Dirk Witthaut; Philipp C. B\"ottcher
  5. By Object or by Effect? The Collusive Potential of First Refusal Contracts By Patrick Van Cayseele; Andreas Bovin
  6. Competition between Generic and Brand Name Drugs: New Evidence from the U.S. Pharmaceutical Market By Alberto Cavaliere; Ashin Moayedizadeh

  1. By: Iwan Bos (Department of Organisation, Strategy and Entrepreneurship, Maastricht University); Marco A. Marini (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: This paper examines a homogeneous-good Bertrand-Edgeworth oligopoly model to explore the role of firm size and number in pricing. We consider the price impact of merger, breakup, investment, divestment, entry, and exit. A merger leads to higher prices only when it increases the size of the largest seller and industry capacity is neither too big nor too small post-merger. Similarly, breaking-up a firm only leads to lower prices when it concerns the biggest producer and aggregate capacity is within an intermediate range. Investment and entry (weakly) reduce prices, whereas divestment and exit yield (weakly) higher prices. Taken together, these findings suggest that size matters more than number in the determination of oligopoly prices.
    Keywords: Bertrand-Edgeworth Competition; Edgeworth Price Cycle; Firm Size Distribution; Oligopoly Pricing; Price Dispersion.
    JEL: D43 L11 L13
    Date: 2022–12
  2. By: Emilie Dargaud (Univ Lyon, Université Lumière Lyon 2, GATE, UMR 5824, F-69130 Ecully, France); Maxime Menuet (LEO, University of Orleans, Orleans, France. e-mail:; Petros G. Sekeris (Corresponding author: TBS Business School, 1 Place A. Jourdain, 31000 Toulouse, France)
    Abstract: This paper studies how predation strategies can affect the sustainability of collusion. We demonstrate that in the presence of few competitors collusion may be sustained at equilibrium for intermediate discount factors. In such instances predation implies that punishment strategies will yield low subgame perfect payoffs, thereby making collusion easier to sustain. For low discount factors collusion is not sustainable because of the high incentives to deviate to Cournot-Nash strategies. Moreover, for high discount factors it is always optimal to predate colluding firms, thus contrasting with much of the earlier literature showing that collusion is only achievable by sufficiently patient firms.
    Keywords: Collusion, Predation, Cournot competition
    JEL: D43 L13 L41
    Date: 2022
  3. By: Drew Vollmer (U.S. Department of Justice)
    Abstract: How does resale affect multiproduct bundling? I investigate using a model of monopoly bundling with costly resale. Consumers purchase in the primary market while anticipating resale, then participate in a resale market with market-clearing prices. Resale forces the monopolist to balance the additional profit from a discounted bundle against the opportunity for consumer arbitrage. In equilibrium, the monopolist may still other a discounted bundle, but resale reduces the returns to bundling and has an ambiguous effect on consumer and total welfare. When consumers have heterogeneous costs of resale, it is possible for consumers to resell in equilibrium.
    Date: 2022–12
  4. By: Chengyuan Han; Malte Schr\"oder; Dirk Witthaut; Philipp C. B\"ottcher
    Abstract: Understanding the structure and formation of networks is a central topic in complexity science. Economic networks are formed by decisions of individual agents and thus not properly described by established random graph models. In this article, we establish a model for the emergence of trade networks that is based on rational decisions of individual agents. The model incorporates key drivers for the emergence of trade, comparative advantage and economic scale effects, but also the heterogeneity of agents and the transportation or transaction costs. Numerical simulations show three macroscopically different regimes of the emerging trade networks. Depending on the specific transportation costs and the heterogeneity of individual preferences, we find centralized production with a star-like trade network, distributed production with all-to-all trading or local production and no trade. Using methods from statistical mechanics, we provide an analytic theory of the transitions between these regimes and estimates for critical parameters values.
    Date: 2022–12
  5. By: Patrick Van Cayseele; Andreas Bovin
    Abstract: This article examines the collusive potential of first refusal contracts, which are contracts that grant one party, the buyer, a right of first refusal on the output of another party, the seller. When two parties enter into this type of contract, the seller is obligated to offer any output she wishes to sell to the buyer first. It is only after a 'first refusal' by the buyer that output can be offered to third parties. We compare the outcomes which arise under first refusal contracts with those resulting from explicit cooperation. Our findings suggest that these contracts can result in an identical distortion of competition, while remaining under the radar of antitrust authorities.
    Keywords: Right of first refusal, contract, theory of harm, abuse of bargaining power
    JEL: L4 L40 L41 L42
    Date: 2022
  6. By: Alberto Cavaliere (University of Pavia); Ashin Moayedizadeh (University of Pavia)
    Abstract: This paper explores different aspects of competition in the U.S. pharmaceutical industry in order to broaden our insight into price competition in the pharmaceutical market. The main focus is on the effects of patent expiry and generic entry on the brand and generic name drug prices. Using an unbalanced panel dataset of 19 branded and corresponding generic drugs, which faced their first generic entry between 2010 and 2014, we discovered that the Generic Competition Paradox does not arise according to the results obtained with our dataset. Though prices of brand-name drugs are continuously rising, each new generic entrant is associated with an average 2.6 percent decrease in the brand-name drug price. Moreover, the empirical findings in this study fully support the idea of market segmentation based on insurance coverage. We can state that after generic entry, the originator firms appear to demand higher prices in order to exercise price discrimination and exploit the market segment that is less price sensitive.
    Keywords: Pharmaceutical industry, Generic entry, Brand drug price, Generic Competition Paradox, Market segmentation theory
    JEL: I11 L11 L65 D4
    Date: 2022–12

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