Transparency on the consumer side and tacit collusion

This paper investigates the effects on tacit collusion of increased market transparency on the consumer side of a market in a differentiated Hotelling duopoly. Increasing market transparency increases the benefits to a firm from undercutting the collusive price. It also decreases the punishment profit. The net effect is that collusion becomes harder to sustain. In the limiting homogeneous market, the effect vanishes. Here market transparency does not affect the possibilities for tacit collusion.     

The folk theorem for repeated games with observation costs

The folk theorem literature has been relaxing the assumption on how much players know about each other's past action. Here we consider a general model where players can “buy” precise information. Every period, each player decides whether to pay a cost to accurately observe the actions chosen by other players in the previous period. When a player does not pay the cost, he obtains only imperfect private signals. Observational decisions are unobservable to others. Known strategies such as trigger strategies do not work since they fail to motivate players to pay for information. This paper shows that the folk theorem holds for any level of observation costs. Unlike existing folk theorems with private monitoring, ours imposes virtually no restriction on the nature of costless imperfect signals. The theorem does not use explicit or costless communication, thereby having implications on antitrust laws that rely on evidence of explicit communication. The main message is that accurate observation alone, however costly, enables efficient cooperation in general repeated games.     

On the paradoxical case of a consumer-based environmental subsidy policy

We apply an environmentally differentiated duopoly model to the analysis of environmental policy involving consumer subsidies based on the emission levels of the products consumers purchase. More specifically, we consider the environmental and welfare effects of subsidizing consumers who purchase environmentally friendly goods in the case of a partially covered market with a Cournot duopoly. We show that, paradoxically, the subsidy policy degrades the environment, and that the optimal policy depends on the degree of marginal social valuation of environmental damage. That is, if the marginal social valuation of environmental damage is larger than a certain value, a consumer-based environmental subsidy policy is not socially optimal.     

Maximum likelihood estimation of search costs

In a recent paper Hong and Shum [2006. Using price distributions to estimate search costs. Rand Journal of Economics 37, 257-275] present a structural method to estimate search cost distributions. We extend their approach to the case of oligopoly and present a new maximum likelihood method to estimate search costs. We apply our method to a data set of online prices for different computer memory chips. The estimates suggest that the consumer population can be roughly split into two groups which either have quite high or quite low search costs. Search frictions confer a significant amount of market power to the firms: Despite more than 20 firms operating in each of the markets, we estimate price-cost margins to be around 25%. The paper also illustrates how the structural method can be employed to simulate the effects of the introduction of a sales tax.     

Innovation,licensing, and price vs. quantity competition

In this paper, we develop a differentiated duopoly model with endogenous cost-reducing R&D and review the argument on welfare effect of price and quantity competition in the presence of technology licensing. We show that, with licensing, the standard conclusion on duopoly (Singh and Vives, 1984) is completely reversed. Cournot competition induces lower R&D investment than Bertrand competition does. Moreover, Cournot competition leads to lower prices, lower industry profit, higher consumer surplus and higher social welfare than Bertrand competition.     

Tariffs, licensing and market structure

This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113-124].     

Tacit collusion in repeated auctions

This paper considers the question of tacit collusion in repeated auctions with independent private values and with limited public monitoring. McAfee and McMillan show that the extent of collusion is tied to the availability of transfers. Monetary transfers allow cartels to extract full surplus. A folk theorem proved by Fudenberg et al. (Econometrica 62 (1994) 997-1039) shows that transfers of future payoffs are almost as good if players are patient and communicate before auctions. We ask how the scope of collusion is affected if players dispense with explicit communication and their monitoring is limited. Collusion better than bid rotation is still feasible, but full surplus cannot be extracted. This constraint becomes less severe with more players and large cartels can become asymptotically efficient even with very limited monitoring.     

Price discrimination of buyers with identical preferences and collusion in a model of advertising

A model of advertising and price distributions is investigated whereby each seller can contact different buyers, whose preferences are identical, with different probabilities. The model features a continuum of equilibria parametrized by the ratio of the buyers contacted by one seller—differing across “market segments”—and by the other sellers. In general, the sellers practice price discrimination across segments. More asymmetric equilibria correspond to higher volumes of transactions and higher expected transaction prices. This results in a lower expected utility for the buyers and higher expected profits; thus, identifying areas of influence can help the sellers to support collusion.     

Vertical integration and investor protection in developing countries

The industrial organization of developing countries is characterized by the pervasive use of subcontracting arrangements among small, financially constrained firms. This paper asks whether vertical integration relaxes those financial constraints. It shows that vertical integration trades off the benefits of joint liability against the costs of rendering the supply chain more opaque to external investors. In contrast to the commonly held view that pervasive input and capital market imperfections are conducive to vertical integration, the model predicts that the motives for vertical integration are not necessarily higher in developing countries. In particular, vertical integration is more likely to arise at intermediate levels of investor protection and better contract enforcement with suppliers reduces vertical integration only if financial markets are sufficiently developed. Evidence supporting both predictions is discussed.     

Privatization, strategic foreign direct investment and host-country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatizing their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). We show that there is a two-way causality between privatization and greenfield FDI. Privatization increases the incentive for FDI, which, in turn, increases the incentive for privatization compared to the situation of no FDI. The optimal degree of privatization depends on the cost difference of the firms, and on the foreign firm's mode of entry.     

Interfirm Bundling and Vertical Product Differentiation

In this paper, we study the competitive effects of bundled discounts offered by pairs of independent firms. In a setting with vertically differentiated goods, where firms decide whether to participate in a discounting scheme before prices are set, it is shown that, in equilibrium, all pairs of firms producing goods of the same quality level offer bundled discounts. Relative to the no‐bundling benchmark, we find that (i) all headline prices rise, (ii) all bundle prices, net of the respective discount, decrease, and (iii) only high‐quality sellers will obtain higher profits. Furthermore, this equilibrium corresponds to the worst scenario in terms of consumer welfare, and it and decreases social welfare.     

The effect of leniency programs on endogenous collusion

The objective of a leniency program is to reduce sanctions against collusion if a participant voluntarily confesses his behavior or cooperates with the public authority’s investigation. Constructing a model in which the detection probability varies over time, Harrington (2008) pointed out that there are three channels through which the leniency program can affect the collusion amount; furthermore, he presented a sufficient condition under which the maximum leniency is optimal. After extending the model by endogenizing the degree of collusion as well as equilibrium selection in the self-reporting stage, we revealed that the Race to the Courthouse effect disappears and that the maximum reduction is always optimal.     

A Review of Heinrich von Stackelberg's Book: ‘Market Structure and Equilibrium’

In this note, we review the recent translation in English by Bazin et al. of Stackelberg's book ‘Marktform und Gleichgewicht’ (1934).     

R&D competition between public and private sectors

We investigate a mixed market where a welfare-maximizing public research institute competes against profit-maximizing private firms. We investigate R&D competition by using a standard model of patent races where each firm chooses both its innovation size and R&D expenditure. We find that the innovation size (R&D expenditure) chosen by the public institute is too small (too large) from the viewpoint of social welfare, respectively, and so the government should control the public institute appropriately. We also discuss the welfare implications of privatization of public research institutes.     

QUALITY DIFFERENTIATION,WELFARE, AND THE MODE OF COMPETITION IN A VERTICALLY DIFFERENTIATED PRODUCT MARKET: A NOTE*

We analyse the implications of quality differences in a vertically differentiated product market for social welfare by employing an endogenous quality choice model. We find that in of Bertrand and Cournot duopolies, the degree of quality differentiation at equilibrium in an unregulated market is larger or smaller, respectively, than that of the socially second‐best optimum. This implies that a reduction in quality difference, respectively, increases or decreases social welfare in the case of Bertrand or Cournot duopolies.     

Efficiency and surplus bounds in Cournot competition

We derive bounds on the ratios of deadweight loss and consumer surplus to producer surplus under Cournot competition. To do so, we introduce a parameterization of the degree of curvature of market demand using the parallel concepts of ρ-concavity and ρ-convexity. The “more concave” is demand, the larger the share of producer surplus in overall surplus, the smaller is consumer surplus relative to producer surplus, and the lower the ratio of deadweight loss to producer surplus. Deadweight loss over total potential surplus is at first increasing with demand concavity, then eventually decreasing.     

Entry, exit, and imperfect competition in the long run

An infinite-horizon, stochastic model of entry and exit with sunk costs and imperfect competition is constructed. A subgame perfect Nash equilibrium for the general dynamic stochastic game is shown to exist as a limit of finite-horizon equilibria. This equilibrium has a relatively simple structure characterized by two numbers per finite history. Under very general conditions, it tends to exhibit excessive entry and insufficient exit relative to a social optimum.     

The determinants of retail petrol prices in Greece

The purpose of this article is to examine the relationship between retail prices of petrol, international oil prices and tax rates in Greece. We examine not only the hypothesis that retail prices act asymmetrically to crude oil price changes and the pass-through rates of tax increases, but also use the cross-sectional dimension of the data to explore whether the existence or otherwise of market power affects retail prices. Our results provide little evidence for asymmetric behaviour. However, the degree to which prices overreact to tax changes and the significance of market power across the different regions suggests that the market for petrol/diesel is not very competitive.     

Market thickness,sunk costs,productivity, and the outsourcing decision: an empirical analysis of manufacturing firms in France

Abstract This paper presents an empirical analysis of outsourcing behaviour by French manufacturing industries. It focuses on the effects of market thickness, sunk costs, and the productivity of firms on the outsourcing decision. I estimate a dynamic probit model where outsourcing decision is linked to past outsourcing behaviour. The results show that outsourcing is a persistent strategy adopted by large firms and suggest the presence of significant sunk costs associated with outsourcing. The results also show that market thickness reduces search costs and enhances the establishment of outsourcing relationships.