Sequential Entry in a Vertically Differentiated Market

This paper considers a sequential entry game of homogeneous firms in a vertically differentiated market. A firm can choose any variety of products, with a fixed cost per product. Each product can be withdrawn afterwards without exit costs. Then each firm chooses one product at most in equilibrium because of a commitment problem. The first firm chooses the highest quality if the fixed cost is so large that subsequent entry is blockaded. It chooses middle quality to deter entry of a low–quality firm if the fixed cost decreases. Hence everyone becomes worse off as the entrant becomes more dangerous. JEL Classification Numbers: D43, L13.     

Vertical Product Differentiation When Quality is Scarce: The Case of n > 2 Firms

This paper describes a model of vertical product differentiation in which more than two firms compete in quality and price. Quality is of fixed supply, so firms participate in an auction to attain it. Firms then simultaneously choose prices. The paper determines equilibrium bids in the quality auction and the Bertrand equilibrium prices. In equilibrium one firm attains all the units of quality, but pays a price such that it, like the minimum-quality firms, earns zero profits. Aggregate welfare is computed, and is shown to decrease as competition increases.     

Pricing to Firm: an Analysis of Firm‐ and Product‐level Import Prices*

We use Hungarian Customs data on product‐level imports of manufacturing firms to document that the import price of a particular product varies substantially across buying firms. We relate the level of import prices to firm characteristics such as size, foreign ownership, and market power. We develop a theory of “pricing to firm” (PTF), where markups depend on the technology and competitive environment of the buyer. The predictions of the model are confirmed by the data: import prices are higher for firms with greater market power, and for more essential intermediate inputs (with a high share in material costs). We take account of the endogeneity of the buyer’s market power with respect to higher import prices and unobserved cost heterogeneity within product categories. The magnitude of PTF is big: the standard deviation of price predicted by PTF is 21.5%.     

Price competition and quality differentiation with multiproduct firms

This paper examines a two-stage competition where firms simultaneously choose the number of products and qualities in the first stage, and then compete in prices. It is shown that a monopolist must sell a single product. In addition, in any equilibrium of multiproduct duopoly, there are segmented patterns of quality differentiation. Entangled configurations never emerge because each firm has an incentive to reduce the number of products facing direct competition with its rival. This result contrasts sharply with the equilibrium of non-segmented quality differentiation when firms compete in quantities. Furthermore, we find that the high-quality firm never offers more products than the low-quality firm, and quality differentiation between firms is greater than that within a firm.     

Credence Goods,Misleading Labels,and Quality Differentiation

Due to differences in information disclosure mechanisms, consumer misinformation about the quality of many credence goods is more endemic at intermediate levels of the quality spectrum rather than at the extremes. Using an oligopoly model of vertical product differentiation, we examine how consumers’ overestimation of the quality of intermediate-quality products affects firms’ incentives to improve product quality. The firms non-cooperatively choose the quality of their product before choosing its price or quantity. Irrespective of the nature of second stage competition, Bertrand or Cournot, we find that quality overestimation by consumers increases profit of the intermediate-quality firm, and motivates it to raise its product’s quality. In response, the high-quality firm improves its product quality even further but ends up with lower profit. Overall, average quality of the vertically differentiated product improves, which raises consumer surplus. Social welfare increases when the firms compete in prices but falls when they compete in quantities.     

QUANTITY VERSUS PRICE IN A HOMOGENEOUS PRODUCT DUOPOLY*

In a simple homogeneous product setting, the paper looks at the debate on whether firms should choose quantity or price as their strategic variable. It examines a two-stage game between firms with symmetric costs in which the firms choose the strategic mode of operation in the first period and then, in the second period, price or output are chosen simultaneously according to the mode chosen in the first stage. In this game it is possible to have two Nash equilibria where either both play in quantities or both play in prices. One firm choosing price and the other quantity can never be a Nash equilibrium in the two-stage game. Both choosing quantity is always a Nash equilibrium. Both choosing prices may be a Nash equilibrium only in some situations: the structure of the cost functions decides this issue.     

Puzzles in the economic institutions of capitalism: production coordination, contracting and work organisation in the Irish linen trade, 1750-1850

Pre-Famine Ireland is a byword for market failure and path dependence.Production of flax yarn and linen cloth was highly regulatedand coordinated by the market rather than by firms. Contemporarypolitical economists suggested that these institutional featuresprovided evidence of organisational inefficiency. The historicalevidence suggests that they were a rational response to transactionand production costs. The Irish case provides a test of thehypotheses that firms emerge to reduce the cost of market transactions.It suggests that institutions other than the firm can modifytransaction costs, coordination of production can affect bothtransaction and production costs, and that agents choose betweenmarket and firm coordination given technology and factor prices.Finally, centralisation of production was driven by technology.     

Beyond the need to boast: Cost concealment incentives and exit in Cournot oligopoly

This paper studies the incentives for production cost disclosure in an asymmetric Cournot oligopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitors from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firms is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit.     

Oligopoly and the redistribution of market share under commodity taxation

This paper examines the effect of ad valorem and specific commodity taxation on firm market share in a duopoly where firms have different costs. Two reasons suggested for these cost asymmetries are inter-firm differences in efficiency and differences in product quality. When cost differences are efficiency-based, then specific and ad valorem commodity taxation increases the market share of the lower-cost firm and decreases the market share of the higher-cost firm. If the cost difference results from differing product quality, the specific tax increases the market share of the high quality (higher-cost) firm and decreases the market share of the low quality (lower-cost) firm, whereas, the ad valorem tax has just the opposite effect.     

When should firms choose a risky new technology? An oligopolistic analysis

How to choose technology type in a competitive environment is an important and challenging problem, which has received little attention from scholars. To fill this gap, this paper builds a game-theoretic model to examine whether a firm should choose to adopt a risky new technology or to adopt a safe new technology to reduce its marginal cost. I find that the result that each firm should always choose the risky technology in a duopoly may be invalid when more firms enter the market. In this scenario, some firms should adopt the safe technology for relatively high product substitutability because the advantage of employing the risky technology is threatened by the business stealing externality, finally forming heterogeneous equilibria in which both types of technologies are present. Furthermore, I show that the heterogeneous technology choice equilibria are more likely to arise when increasing number of firms enter the market, and that in these equilibria more firms always choose the risky technology than the safe technology. This study conveys relevant economic insights for competitive firms confronted with a dilemma between taking risks in pursuit of greater technology rewards and taking no risks for conservative technology returns.     

Price Competition and Product Differentiation When Consumers Care for the Environment

Increasing environmental awareness may affect the pleasure of consuming a good for which an environment friendly substitute is available. In this paper, we investigate the market implication of product differentiation when customers are concerned about environmental aspects of the good. We use the spatial duopoly model to determine how environmental concern affects prices, product characteristics and market shares of the competing firms. Our analysis is based on a two-stage game, where at the first stage each firm chooses the characteristic of its product. At the second stage, each firm chooses its price. Equilibrium prices and market shares are affected by consumer awareness of the environment and by the higher costs for producing those goods. As for the Nash equilibria in the characteristics, we find three equilibria depending on the parameter constellation. In order to find out whether the market functions in an optimal way, we determine the choice of environmental characteristics by a welfare maximizing authority. The objective of the paper is to understand the environmental quality choices facing firms and to provide policies that would align private choices with the social optimum.JEL classifications: L11, Q38, H23     

Can a decline in search cost increase prices?

This paper provides a new explanation of why a decline in consumers’ price search cost may not lead to lower prices. In a duopoly with price competition, I show that when some consumers are captive to one firm, there may be a non‐monotonic relationship between search cost and market power; firms may charge high prices with higher probability and the average price charged may be higher when consumers’ price search cost falls below a critical level. Furthermore, when firms have asymmetric captive segments, expected prices charged by each firm may move in opposite directions as search cost declines.     

Market structure in congestible markets

This paper analyses market structure of industries that are subject to both positive and negative network effects. The size of a firm determines the quality of its product: when network effects are positive, a larger firm is of higher quality; when the effects are negative, a larger firm's product is of lower quality. Consumers have heterogeneous preferences towards quality (firm size), and firms compete in prices. Equilibria are characterised: for example, in any asymmetric equilibrium, it must be that congestion is not too severe. One consequence of this feature is that an increase in the number of firms in the industry can raise individual firms’ profits. Two factors can bound the number of firms in a free-entry equilibrium without fixed costs: expectations, and the ‘finiteness’ property (Shaked and Sutton, Review of Economic Studies 49 (1982) 3–13, Econometrica 51(5) (1983) 1469–1483) of price competition.     

PRICE AND QUANTITY COMPETITION WITH ASYMMETRIC COSTS IN A MIXED DUOPOLY: A TECHNICAL NOTE

We consider a mixed duopoly in which private and public firms can choose to strategically set prices or quantities when the public firm is less efficient than the private firm. Thus, even with cost asymmetry, we obtain exactly the same result (i.e., Bertrand competition) of Matsumura and Ogawa (2012) if Singh and Vives’ (1984) assumption of positive primary outputs holds. However, compared to endogenous determination of the type of contract without cost asymmetry, our main finding is that in the wider range of cost asymmetry, different type(s) of equilibrium related to or not related to the limit‐pricing strategy of the private firm can be sustained. Thus, when considering an implication on privatization, we may overestimate the welfare gain of privatization because Cournot competition takes place after privatization even though cost asymmetry exists between firms. While the result of Matsumura and Ogawa (2012) holds true if the goods are complements, we find the novel results in the case of substitutes.     

Multinationals,Information Update,and Product Adaptation *

This paper develops a dynamic model of decision making by multinational firms. The firm chooses between exporting and producing abroad when it expands the market. Bayes learning is incorporated into this model in addition to fixed cost and transport cost Production in a foreign country gives the firm new information about the demand function. This information is applied to adjust the firm's expectation as well as output choice in the future. This process not only reduces the risk encountered by a firm in a foreign market, but also increases acceptance of the product which the firm manufactures. This paper concludes even if producing abroad loses money in the first period, the firm may still choose to set up plants in foreign countries rather than exporting, due to the dynamic information advantage associated with going multinational. [F23,F21]     

STRATEGIC TRADE AND DELEGATED COMPETITION WITH ENDOGENOUS QUALITY CHOICE: IS EXPORT POLICY NEEDED?

This paper introduces the relative‐performance contract into a vertically differentiated product market and examines how the optimal trade policy and quality choice respond to the incentive mechanism. We find that the high quality firm makes better use of the delegation than the low quality firm in a cross‐border decentralized model. The main difference between the present paper and the strategic trade theory literature is that in this paper the optimal policy is free trade, which does not depend on whether firms compete by prices or quantities, and on whether the goods are substitutes or full complements.     

Technology Strategy And Product Diversity

This paper considers a three-stage game of a differentiated oligopoly: firms first make their entry decisions, then they choose production technologies and in the third stage of the game they decide product prices. The technology choice can be understood as selecting one from a pool of those recently available as well as developing a new technology through innovative activities. The resulting market equilibrium is then compared with the social optimum. The main conclusions are that a monopolistically competitive market will typically undersupply both product variety and production scale. R&D competition in a free entry differentiated oligopoly will lead to insufficient R&D investment at firm and industry levels.     

企业社会责任标准国际化背景下企业进入策略研究*

本文通过构建博弈模型，对企业社会责任（CSR）标准国际化背景下企业进入策略进行研究。本文发现，企业最优进入策略受到进入成本影响，当进入成本较低时所有企业都适合选择进入高CSR标准市场，当进入成本较高时所有企业都不适合选择进入，当成本介于两者之间时适合部分企业选择进入。在对社会福利的分析中还发现，当进入是企业最优策略时，无论是部分进入还是全部进入，企业承担更高的社会责任能同时提升企业利润和社会福利水平。     

Nonminimal product differentiation as a bargaining outcome

It is well known that in a duopoly model of product choice with quadratic transportation cost, the firms locate at the extreme endpoints of the market. Jehiel (1992, Int. J. Ind. Organ, 10, 633–641) has examined this model in an infinite horizon setting where in the initial period the firms choose location and in subsequent periods charge the Nash bargaining solution prices. Then, in the unique equilibrium both firms locate at the center of the market. This paper examines the case when the firms instead charge the prices determined by either the egalitarian bargaining solution or the Kalai–Smorodinski bargaining solution. It is shown that central agglomeration is an equilibrium. Furthermore, there is a continuum of symmetric equilibria in addition where the firms locate apart from each other. So the products are not necessarily minimally differentiated. Thus different bargaining solutions provide quite different outcomes.     

INTERNATIONALIZATION STRATEGIES IN OLIGOPOLY WITH HETEROGENEOUS FIRMS

This paper examines the foreign direct investment (FDI) versus exports decision of foreign oligopolistic firms under cost heterogeneity. An additional motivation for firms to invest abroad is the technological sourcing via spillovers, which flow from the host more efficient firm to foreign less advantaged firms. For intermediate values of the set‐up costs associated with FDI entry, it is shown that foreign firms choose opposite entry strategies. An equilibrium where the less efficient foreign firm exports whereas the more efficient invests is more likely to happen when foreign firms become more heterogeneous, the larger the trade costs and not too big oligopolistic profitability. Interestingly, the opposite may also be an equilibrium thus finding that the more efficient firm does not choose to invest, a result that emphasizes the relevance of the strategic setting under consideration. The latter result identifies a market failure since welfare in the host market is higher when both firms undertake FDI; a finding that calls attention to how appropriate are host government policies towards internationalization strategies.