On the comparative statics of the dominant-firm model

This paper examines the effect of a change in demand upon a dominant firm's share of the market. The direction of change in market share is not readily determined in the general form of the model. It depends upon the values of a number of parameters. In the linear and log-linear forms of the model, however, the number of crucial parameters reduces to two. The market share of the dominant firm varies directly (inversely) with demand when the y-intercept of its marginal cost curve is greater (less) than the y-intercept of the supply curve of the fringe in the linear model and, in the log-linear model, when the elasticity of marginal cost with respect to output is less (greater) for the dominant firm than it is for the fringe.     

Horizontal concentration and anticompetitive behavior in the central Canadian cement industry: testing arbitrage cost hypotheses

Consider a market with a small number of firms attempting to collude. If they successfully act as a dominant firm, they will raise price. This in turn will expand output by any fringe firms and thus reduce the market share of the colluding group. Thus, higher prices will decrease concentration over time. Here we test this hypothesis, using a modification of Spiller and Huang (1986) and data from the post-1974 Toronto cement market. The weight of the evidence indicates that market price has a negative effect on concentration, implying that the firms in this market act, with significant though limited, success as a cartel.     

Dynamic limit pricing a refcmulation

This paper offers a new formulation of the well known dynamic limit pricing problem developed by Darius Gaskins. Criticisms of Gaskins' model center around the lack of a game theoretic formulation and the ad hoc fringe expansion equation. In this paper, the expansion equation is based on the importance of internal finance. In the differential game, the dominant firm control price, thereby determining the available internal finance, and the maximum rate of growth, of the fringe. While the results of this study differ from those of Gaskins in a number of ways, dynamic limit pricing is found to be a feasible strategy.     

The advantage of being first and competition between firms

It is frequently suggested that the first brand in a product market enjoys a price advantage over its imitators due to imperfect information about product quality. This article considers the effect of this advantage on prices and market shares in a dominant firm price leadership model. An established firm with a price advantage faces free entry by firms producing unbranded products (generics). In equilibrium, the first brand enjoys a market share advantage over entrants in entry and post entry periods. If the initial price disadvantage is large, entry will not occur.     

A note on dominant firm market share and economic performance

The hypothesis of a positive concentration-profits relationship has been one of the most thoroughly tested in economics. Market share has been used in a number of these studies as a measure of horizontal dominance by a firm in an industry. Although these studies have shown empirically that a positive relationship exists between market share and rates of return, little theoretical evidence for this relationship exists. The price leadership model can be used to show that a continuous, direct relationship exists between market share and competitive injury. From a simulation exercise based upon the price leadership model, a positive association is demonstrated between increasing market share of the dominant firm (or collusive leading firms) and increasing competitive injury (as evidenced by a greater divergence between the competitive versus price leadership price-output decisions). This exercise establishes market share as a fundamental structrual variable in describing the short run competitiveness within the industry. The results of this model imply that intra-industry cross section studies, utilizing a carefully defined price leader(s) and price followers dictomy, should yield better statistical fits. At the present stage of empirical testing, however, only the roughest approximations using rather arbitrary definitions of the price leader-follower dichotomy have been made.     

The Antitrust Implications of Capacity Reallocation by a Dominant Firm

When a firm acquires rival firms in one market, and moves their capacity to another market, should antitrust authorities be concerned? We address this question by studying a multi‐stage game. A dominant firm has the opportunity to acquire fringe firms that operate in the same market. Then, the dominant firm has the opportunity to move capacity from that market to a second market. The model is motivated by a series of acquisitions in the Specialized Mobile Radio industry aimed at establishing a new cellular carrier. We derive necessary and sufficient conditions for the dominant firm to acquire too little capacity relative to the social optimum. The results shed light on the Consent Decree negotiated in US v. Motorola Inc. and Nextel Communications Inc., 1994.     

How to Launch a New Durable Good: A Signaling Rationale for Hunger Marketing

We study the increasingly popular “hunger marketing” strategy (the combination of an artificially low price and a supply limit) adopted by many high-tech startups to launch their products. In a two-period model, a firm offers an artificially low introductory price and also imposes a limit on the quantity available for sale in the first period, which leads to a shortage in the equilibrium. We show that when effective word of mouth is present, such a strategy allows a firm to credibly convince the market of the premium quality of its product. We demonstrate that word of mouth plays a critical role in catalyzing the signaling mechanism. When word of mouth becomes more efficient, e.g., enabled by social media, shortage is larger in the equilibrium, and the introductory price falls further. Our study provides a rationale for hunger marketing.     

Bertrand Competition with an Asymmetric No‐discrimination Constraint

Regulators and competition authorities often prevent firms with significant market power, or dominant firms, from practicing price discrimination. The goal of such an asymmetric no‐discrimination constraint is to encourage entry and serve consumers' interests. This constraint prohibits the firm with significant market power from practicing both behaviour‐based price discrimination within the competitive segment and third‐degree price discrimination across the monopolistic and competitive segments. We find that this constraint hinders entry and reduces welfare when the monopolistic segment is small.     

Predatory intent under uncertainty

Current analyses of predatory behavior neglect uncertainty. Its presence complicates a firm's evaluation of profits and risks associated with various pricing strategies. Using a price leadership model (with the supply of the competitive fringe not known in advance), we show that a risk averse dominant firm will price lower than the price which maximizes expected profits. Such behavior could be misconstrued as being predatory if marginal and average variable cost rules are used for establishing the proof of predation.     

Identifying Participants in a Price-fixing Conspiracy: Output & Market Share Tests Reexamined

If there is a cartel agreement among a subset of firms in an industry, it should be predicted that all firms in that industry will increase prices. Nevertheless, industry prices alone should not indicate that a particular firm is guilty of that conspiracy. According to the output test and its market share variant – proposed by Blair and Romano – if the output or the market share of the firm that claims to be innocent in the collusive activity rises in response to the price increase, that firm's claim should be accepted as true. Using a collusive variant of the dominant firm model, this paper shows that these are not robust tests to reveal either innocence or guilt, and characterizes cases where they may pardon a guilty firm (Type I error) or indict an innocent firm (Type II error). This paper also shows that a market share test can not be used to prove a dominant firm's intent for predatory pricing.     

OPEN VERSUS CLOSED FIRMS AND THE DYNAMICS OF INDUSTRY EVOLUTION*

We develop a model of industry evolution in which firms choose proprietary standards (closed firm) or adopt a common standard (open firm). A closed entrant can capture multiple profits whereas an open entrant faces lower entry barriers: The odds of closed entry (relative to open entry) decrease with price and eventually open entry becomes more likely. While initially closed firms have better survival because they can offset losses in one component with profits from another, the situation is reversed when prices fall below a threshold. These entry and exit dynamics can lead the industry away from its long run equilibrium.     

Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination

Rey and Tirole [Handbook of Industrial Organization. Amsterdam: Elsevier (2005)] considered a model in which a monopolist sells to downstream firms using nonlinear contracts. They showed that banning price discrimination fully restores the supplier’s ability to leverage its monopoly power by enabling it to commit not to offer side discounts. I show that the situation changes when the supplier competes against a fringe of less efficient rivals rather than being a monopolist. Then banning price discrimination may cause per-unit prices to fall and welfare to increase. The dominant supplier can take advantage of a strategic bargaining effect: reducing the per-unit price makes the outside option of buying from the fringe less profitable, allowing the dominant supplier to extract more bargaining surplus through the fixed fee.     

When Is a Disruptive Innovation Disruptive?*

A disruptive innovation (i.e., one that dramatically disrupts the current market) is not necessarily a disruptive innovation (as Clayton Christensen defines this term). To aid in understanding why some innovations are more (or less) disruptive to the long‐term health of incumbents, this article offers terminology and a framework complementary to Christensen's work, focusing on the diffusion pattern of the new product. The framework and model presented herein suggest that when an innovation diffuses from the low end upward toward the high end, a pattern called low‐end encroachment, the incumbent may be tempted to overlook its potential impact. Three possible types of low‐end encroachment are illustrated: the fringe‐market, detached‐market, and immediate scenarios. Conversely, when the pattern is one of high‐end encroachment, the impact on the current market is immediate and striking. A three‐step framework is identified to assess the potential diffusion pattern and impact of an innovation, thereby helping a firm determine the threat or opportunity that an innovation represents.     

资本市场压力与企业策略性专利行为:卖空机制的视角

创新是一种不确定性高且周期长的投资活动,需要风险偏好更大、对失败容忍更高的市场环境,而资本市场具有筛选和发现创新型企业、有效分散创新风险的功能,因而对创新活动起着关键作用。然而,中国资本市场短期投资者比例高,融券交易成本高且交易不活跃,加上专利评价体系对不同质量的专利区分度较低,导致资本市场压力对创新活动没有发挥出信息机制和治理机制两种效应。相反,资本市场压力带来的负面信息表达渠道和管理层短期业绩压力,造成了中国专利申请中存在“重数量、轻质量”“重申请、轻维护”的企业策略性专利行为所衍生的“专利泡沫”问题。本文采用中国融资融券制度作为准自然实验,考察卖空机制对企业创新的影响效应和作用机理。研究发现,企业面临卖空压力时会更加积极地申请专利,但专利的申请质量有所下降,表现为专利授权率降低;专利结构有所恶化,最终授权数增加的主要是容易研发、授权快的实用新型专利和外观设计专利;专利得到授权后,企业放弃缴纳维持费用以终止专利权。这些策略性专利行为在短期内可以减少企业的卖空交易量,推高企业市值,但长期看对企业的业绩没有积极影响,是一种“创新假象”。卖空机制主要通过施压机制来影响企业创新,管理层业绩压力、外部监督压力、股价信息传递压力越大的企业,在面临卖空威慑时更有动力进行策略性专利行为。为促进企业创新向高质量发展,需要进一步完善融资融券制度和专利评价体系。     

On optimal scarcity prices

This article contributes to the debate of missing money (compare Joskow(2007a)). This debate has seriously questioned the desirability of limiting scarcity prices in markets with fluctuating demand by emphasizing their potentially negative impact on firms' investment decisions in the long run. A prominent example are recently liberalized electricity markets, where competition authorities have imposed price caps³ or adopted other measures to mitigate high scarcity prices.The impact of reduced scarcity prices in the long run still is only incompletely explored. We thus analyze investment of firms in base load and peak load technologies in a market with fluctuating demand under imperfect competition. We show that an appropriately chosen limitation of scarcity prices is not only beneficial in the short run but also in the long run. It leads to a strict increase of investment in peak load technologies, leaving investment in base load technologies unchanged. Furthermore, we characterize the optimal limit on scarcity prices.     

Entry under Asymmetric Regulation

In recent years, the local telephone industry has evolved from a traditionally regulated structure of natural monopoly to one characterized as having a dominant firm and competitive fringe. Yet, legacy regulation from the monopoly era still remains in this new environment, and is often applied solely to the dominant firm. Economic theory suggests that asymmetric regulation of this sort will induce competitive entry. We find support for this theory by demonstrating that the amount of entry into local telephone markets is significantly higher when asymmetric quality-of-service standards are present.     

On two-part tariff competition in a homogeneous product duopoly

We explore aspects of two-part tariff competition between duopolists providing a homogeneous service when consumers differ with respect to their usage levels. Competition in only one price component (the fee or the rate) may allow both firms to enjoy positive profits if the other price component has been set at levels different enough between firms. Fixing one price component alters the nature of competition, indirectly introducing an element of product differentiation. Endogenous market segmentation emerges, with the heavier users choosing the lower rate firm and the lighter users choosing the lower fee firm. When no price component can be negative, competition becomes softer, profits tend to be higher but there is also a disadvantage for the firm that starts with a higher fee than that of its rival.     

Corporate Growth and Profitability

This paper argues that current period corporate growth rates reflect changes in current expectations about the long run profitability of a firm. This means that growth rates are likely to vary randomly over time. Using data from 271 large, quoted UK firms over the period 1976–1982, we report the existence of a positive, statistically significant and robust correlation between current period growth rates and a natural measure of changes in current expectations about long run profitability, namely changes in the stock market valuation of the firm. Nevertheless, we find that variations in corporate growth rates are difficult to predict.     

Behavior based price personalization under vertical product differentiation

We study price personalization in a two period duopoly with vertically differentiated products. In the second period, a firm not only knows the purchase history of all customers, as in standard Behavior Based Price Discrimination models, but it also collects detailed information on its old customers, using it to engage in price personalization. The analysis reveals that there exists a natural market for each firm, defined as the set of customers that cannot be poached by the rival in the second period. The equilibrium is unique, except when firms are ex-ante almost identical. In equilibrium, only the firm with the largest natural market poaches customers from the rival. This firm has highest profits but not necessarily the largest market share. Aggregate profits are lower than under uniform pricing. All consumers gain, total welfare is higher herein than under uniform pricing if firms’ natural markets are sufficiently asymmetric. The low quality firm chooses the minimal quality level and a quality differential arises, though the exact choice for the high quality depends upon the cost specification.     

国际油价冲击与中国的经济增长——基于非对称关系视角的分析

本文基于季度数据，引入非对称协整模型，考察国际油价与中国经济增长的动态关系，并鉴于油价波动对不发达经济体可能的冲击，还测度了油价的不确定性并探析其对经济增长的影响，结果表明：（1）从短期来看，国际油价变化是国内经济增长的单向Granger原因，“中国因素”对全球油价变化的影响尚不明显；（2）从长期来看，国际油价和经济增长具有非对称协整关系，油价上涨对经济的影响明显大于油价下跌所产生的效应；（3）国际石油市场存在正反馈交易行为，导致油价波动在油价上涨时表现更加明显。油价不确定性在短期内对经济增长存在负面影响，长期中则不会显著影响经济增长。以上结果意味着必须高度重视石油安全问题，加强油价波动预警与风险管理系统。