nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒01‒30
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Collusion Sustainability with a Capacity Constrained Firm By Leonardo Madio; Aldo Pignataro
  2. Identification and Estimation of Discrete Choice Demand Models when Observed and Unobserved Characteristics are Correlated By Mark Ponder; Amil Petrin; Boyoung Seo
  3. On the Effects of Income Heterogeneity in Monopolistically Competitive Markets By Sergei Kichko; Pierre M. Picard; Pierre Picard
  4. Complex dynamics of knowledgeable monopoly models with gradient mechanisms By Xiaoliang Li; Jiacheng Fu; Wei Niu
  5. The Economics of the Public Option: Evidence from Local Pharmaceutical Markets By Juan Pablo Atal; José Ignacio Cuesta; Felipe González; Cristóbal Otero
  6. Search Frictions and Product Design in the Municipal Bond Market By Giulia Brancaccio; Karam Kang

  1. By: Leonardo Madio; Aldo Pignataro
    Abstract: We study an infinitely repeated oligopoly game in which firms compete on quantity and one of them is capacity constrained. We show that collusion sustainability is non-monotonic in the size of the capacity constrained firm, which has little incentive to deviate from a cartel. We also present conditions for the emergence of a partial cartel, with the capacity constrained firm being excluded by the large firms or self-excluded. In the latter case, we show under which circumstances the small firm induces a partial conspiracy that is Pareto-dominant. Implications for cartel identification and enforcement are finally discussed.
    Keywords: antitrust, capacity constraints, collusion, partial cartel
    JEL: D21 L13 L41
    Date: 2022
  2. By: Mark Ponder; Amil Petrin; Boyoung Seo
    Abstract: The standard Berry, Levinsohn, and Pakes (1995) (BLP) approach to estimation of demand and supply parameters assumes that the product characteristic observed by consumers and producers but not the researcher is conditionally mean independent of observed characteristics. We extend BLP to allow all product characteristics to be endogenous, so the unobserved characteristic can be correlated with the observed characteristics. We derive moment conditions based on the assumption that firms choose product characteristics to maximize expected profits given their beliefs at that time about market conditions and that the “mistake” in the amount of the characteristic that is revealed once all products are on the market is conditionally mean independent of the firm's information set. Using the original BLP dataset we find that observed and unobserved product characteristics are highly positively correlated, biasing demand elasticities upward, as average estimated price elasticities double in absolute value and average markups fall by 50%.
    JEL: C25 L0
    Date: 2022–12
  3. By: Sergei Kichko; Pierre M. Picard; Pierre Picard
    Abstract: This paper studies the market and welfare effects of income heterogeneity in monopolistically competitive product markets in the context of nonhomothetic preferences. In a closed economy, where richer individuals’ expenditures are less sensitive to price change compared to poorer ones’, a mean-preserving contraction of income distribution entices firms to charge higher markups, reduce output, and fosters creation of new varieties. General equilibrium effects have a negative impact on poorer individuals and, in specific circumstances, on the whole population. In an open economy with free trade, lower income inequality in one country creates price divergence between trading countries. Lower inequality not only further decreases trade volumes and values but also creates a general equilibrium effect that may negatively affect poor individuals. Finally, general equilibrium effects are shown to be quantitatively nonnegligible.
    Keywords: monopolistic competition, nonhomothetic additive preferences, income inequality, pricing-to-markets, welfare, trade
    JEL: D43 L16 F12
    Date: 2022
  4. By: Xiaoliang Li; Jiacheng Fu; Wei Niu
    Abstract: In this paper, we explore the dynamics of two monopoly models with knowledgeable players. The first model was initially introduced by Naimzada and Ricchiuti, while the second one is simplified from a famous monopoly introduced by Puu. We employ several tools based on symbolic computations to analyze the local stability and bifurcations of the two models. To the best of our knowledge, the complete stability conditions of the second model are obtained for the first time. We also investigate periodic solutions as well as their stability. Most importantly, we discover that the topological structure of the parameter space of the second model is much more complex than that of the first one. Specifically, in the first model, the parameter region for the stability of any periodic orbit with a fixed order constitutes a connected set. In the second model, however, the stability regions for the 3-cycle, 4-cycle, and 5-cycle orbits are disconnected sets formed by many disjoint portions. Furthermore, we find that the basins of the two stable equilibria in the second model are disconnected and also have complicated topological structures. In addition, the existence of chaos in the sense of Li-Yorke is rigorously proved by finding snapback repellers and 3-cycle orbits in the two models, respectively.
    Date: 2023–01
  5. By: Juan Pablo Atal; José Ignacio Cuesta; Felipe González; Cristóbal Otero
    Abstract: We study the effects of competition by state-owned firms, leveraging the decentralized entry of public pharmacies to local markets in Chile. Public pharmacies sell the same drugs at a third of private pharmacy prices, because of stronger upstream bargaining and market power in the private sector, but are of lower quality. Public pharmacies induced market segmentation and price increases in the private sector, which benefited the switchers to the public option but harmed the stayers. The countrywide entry of public pharmacies would reduce yearly consumer drug expenditure by 1.5 percent.
    JEL: D72 H4 I18 L3
    Date: 2022–12
  6. By: Giulia Brancaccio; Karam Kang
    Abstract: This paper shows that product design shapes search frictions and that intermediaries leverage this channel to increase their rents in the context of the U.S. municipal bond market. The majority of bonds are designed via negotiations between a local government and its underwriter. They are then traded in a decentralized market, where the underwriter often also acts as an intermediary. Exploiting variations in state regulations that limit government officials’ conflicts of interest, we provide evidence that bond design from the government’s perspective involves a trade-off between flexibility and liquidity, but the underwriter benefits from designing and trading complex bonds. Motivated by these findings, we build and estimate a model of bond origination and trades to quantify market inefficiency driven by underwriters’ role in intermediating trades and discuss policy implications.
    JEL: L0 L12 L15 P0
    Date: 2022–12

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