How does income inequality affect market outcomes in vertically differentiated markets?

The distribution of consumer incomes is a key factor in determining the structure of a vertically differentiated industry when consumer's willingness to pay depends on her income. This paper computes the Shaked and Sutton (1982) model for a lognormal distribution of consumer incomes to investigate the effect of inequality on firms' entry, product quality, and pricing decisions. The main findings are that greater inequality in consumer incomes leads to the entry of more firms and results in more intense quality competition among the entrants. More intense quality competition raises the average quality of products in the market as firms compete for the shrinking share of higher-income consumers. With zero costs of quality improvements and an upper bound on the top quality or when costs of quality are fixed and rise sufficiently fast, greater heterogeneity of consumer incomes also reduces firms' incentives to differentiate their products. Competition between more similar products tends to reduce their prices. However, when income inequality is very high, the top quality producer chooses to serve only the rich segment of the market and charges a higher price. The conclusion is that income inequality has important implications for the degree of product differentiation, price level, industry concentration, and consumer welfare.     

Product Diversity in Asymmetric Oligopoly: Is the Quality of Consumer Goods too Low?

We analyse an oligopoly model incorporating horizontal differentiation and quality differences. High quality goods are overpriced and underproduced. When the market is fairly well covered, low quality products may be profitable when their net social contribution is negative, implying excessive entry. In a relatively uncovered market, even low quality goods are underproduced and there may be underentry. When fixed costs are independent of quality, the market tends to select the right firms. Otherwise, the market may produce low quality products when it should produce high quality ones. The model is calibrated using market data for yoghurt.     

Indirect Taxation in Vertical Oligopoly

This paper analyzes the effects of specific and ad valorem taxation in an industry with downstream and upstream oligopoly and endogenous entry in both layers. We find that it is typically more efficient to levy an ad valorem tax downstream than upstream, while it is immaterial on which layer a specific tax is levied. We also show that tax revenues should be raised only through ad valorem taxes. Furthermore, we provide conditions under which the introduction of an indirect tax improves welfare. From a total surplus perspective, excise taxes tend to appear in a less favorable light when the full vertical supply chain is considered compared to a partial analysis which only takes into account market power at one layer. Finally, we demonstrate that a tax tends to be shifted to a larger extent into the final consumer price in vertical oligopoly than in standard oligopoly.     

Surviving the gales of creative destruction: the determinants of product turnover

Innovative industries are often characterized by rapid product turnover. Product longevity may be driven by both a product's position within a market as well as its position within a firm's larger product portfolio. However, we have little understanding of the relative importance of these factors in determining product turnover and how they interact as an industry evolves. Although researchers have invested substantial effort in analyzing firm survival and turnover, there are far fewer studies of the determinants of product survival and turnover. We use hazard rate models and count regression models to describe the behavior of firms and their products with a new and detailed database on the laser printer industry. We show, first, that competition and market structure variables have a large impact on both speeding product exit and delaying product entry. Second, there is some evidence that firms that have maintained a high market share for a number of years keep their products on the market longer than those with lower market share. Finally, firms with high innovative capacity tend to enter markets frequently, but withdraw their products at average rates. Firms with strong brands tend to introduce few products and withdraw their products slowly. With these findings, the paper links product entry and exit decisions to the broader literature on firm strategic and product management. Copyright © 2006 John Wiley & Sons, Ltd.     

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.     

DESIGNING A MARKET STRUCTURE WHEN FIRMS COMPETE FOR THE RIGHT TO SERVE THE MARKET*

In many industries, a regulator designs an auction to select ex‐ante the firms that compete ex‐post on the product market. This paper considers the optimal market structure when firms incur sunk costs before entering the market and when the government is not able to regulate firms in the market. We prove that a free entry equilibrium results in an excessive entry when the entry costs are private information. Then, we consider an auction mechanism selecting the firms allowed to serve the market and show that the optimal number of licences results in the socially optimal market structure. When all the potential candidates are actual bidders, the optimal number of firms in the market increases with the number of candidates and decreases with the social cost of public funds. When the market size is small, as the net profit in the market decreases with the number of selected firms, entry is endogenous. As increasing competition in the market reduces competition for the market, the optimal structure is more concentrated than in the previous case.     

A Note on Endogenous Market Structure under Heterogeneous Firms*

Industries, such as semiconductors and biotechnology, are characterized by heterogeneous research productivity and vertically differentiated products. In this note, I relax the assumption of symmetric R&D costs in Sutton [1998] and derive the lower bounds to market concentration when entry and R&D investments in product quality are jointly determined. I show that the lower bound to concentration depends on the degree of vertical differentiation, which is a function of market size and quality choices. My findings imply that empirical applications that fail to account for differences in quality will be biased towards the null hypothesis of exogenous entry costs otherwise.     

Quality differentiation and firms’ choices between online and physical markets

We study firms’ choices between online and physical markets with respect to product quality and competition, and examine consequences of transparency policies on price competition and market structure. We investigate two contrasting forces. First, since consumers cannot fully inspect an online product’s quality prior to purchase, conventional wisdom and some of the literature suggest that this attracts low-quality products to the online market (a pooling effect). On the other hand, the literature on vertical product differentiation indicates that a firm with a lower-quality product may prefer to reveal its product quality in the physical market because quality differentiation helps alleviate price competition (a differentiation effect). We show that an entrant firm with product quality lower than that of the offline incumbent may choose the physical market, whereas the entrant with a quality higher than the incumbent’s may sell online. More generally the two contrasting forces can give rise to a wide range of product quality—from low-end to high-end—in both markets.     

Entry and Exit Behavior in the Absence of Sunk Costs: Evidence from a Price Comparison Site

This paper explores entry and exit at a price comparison site (PCS) where the sunk costs of participation are effectively zero. We first use an unbalanced panel of 295 products on NexTag.com to estimate an error correction model of net entry. Although the results support our characterization of the PCS as a zero sunk cost market in which potential sellers behave as Kirznerian entrepreneurs in responding to opportunities, it is clear the net entry flow involves participants with widely differing behavior. This is investigated by examining exit and re-entry decisions at the seller level, which reveal that size and reputation determine individual responses to market opportunities.     

Does competition increase quality? Evidence from the US airline industry

This paper studies the impact of competition on quality provision in the US airline industry exploiting a novel source of exogenous variation in competition. While mergers among market incumbents may stifle competition, a merger may increase the probability of entry if the merging airlines were not operating prior to merger in the market but each of them had presence at different route endpoints. We find non-merging incumbent airlines increase their flight frequency upon entry threat and accommodate entry of the newly merged airline by lowering flight frequency upon entry. While non-merging incumbents reduced arrival delays only upon entry of the newly merged airline, we find that incumbents decrease their cancelation rates and departure delays both upon merger announcement and entry of the newly merged airline. Our evidence suggests an increase in competition may increase consumer surplus, because non-merging incumbents increase quality and convenience, while keeping their prices unchanged.     

Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities

We analyze the potential entry of a new product into a vertically differentiated market. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” The model assumes quality-dependent marginal production costs and considers sequential quality choices by an incumbent and an entrant. Entry-quality decisions and the entry-deterrence strategies are related to the fixed cost necessary for entry and to the degree of consumers’ taste for quality. We detail the conditions under which the incumbent increases its quality level to deter entry. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well. Welfare is not necessarily improved when entry is encouraged rather than deterred.     

Market structure,opportunity costs,and tax avoidance

There have been several studies examining the relationship between an industry's market structure and its ability to affect political outcomes. These studies have assumed that political outcomes are likely to be influenced by a variety of traditional market structure characteristics, but these studies have ignored the impact of differences in the opportunity cost of lobbying that undoubtedly exist across industries. A model is developed that directly incorporates the opportunity cost of lobbying for tax breaks. Using data on tax avoidance rates in 1963, it is then suggested that in industries with high opportunity costs of lobbying, fewer tax benefits were received.     

Competition network structure and product market entry

This study proposes and tests a theory of the effects of competition network structure on product market entry. Competition networks are defined as the patterns of interdependence between rivals that emerge from direct competition. Studying networks based on competitive interdependence allows us to extend social network theory to new territory and to enhance our understanding of product market entry. We propose that the size, interconnectedness and diversity of competition networks influence subsequent product market entry in a systemic way. We test our hypotheses in a unique dataset drawn from the aircraft modification industry. Copyright © 2014 John Wiley & Sons, Ltd.     

Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?

This paper investigates the effects of buyer power on entry into an atomistic upstream market and economic welfare. Under reasonable market conditions, we show that industries with a few buyers induce more upstream entry than industries with a larger number of firms. In particular, monopsony can be more conducive to entry and lead to higher social welfare than more fragmented industry structures. This seeming paradox arises because a single buyer better internalizes the positive effects of entry on later-periods’ supply conditions than a collection of firms. This result is relevant in a number of market settings, including markets for specialized labor and processing markets for agricultural products.     

Launch Strategy and New Product Performance: An Empirical Examination in The Netherlands

Although previous research has investigated the concept and contents of new product performance, there is still no consensus about the managerial decisions that constitute a launch strategy and how such decisions impact new product performance. The research objective for the present investigation is to assess the impact of launch strategy and market characteristics on new product performance and to test the stability of this impact across consumer and industrial products. Data were collected on 272 consumer and industrial new products in The Netherlands through a mail questionnaire approach. We based our definition of a launch strategy on an extensive literature review and interviews with managers. Our conceptualization of new product performance represented two dimensions, namely, market acceptance and product performance. The market acceptance dimension reflects the new product's market position and sales levels. The product performance dimension refers to the quality and technical performance level of the new product. This richer specification of the dependent variable provides a better view on which launch decisions impact which dimensions of new product performance. The impact of launch strategy was higher for market acceptance than for product performance, overall and for both consumer and industrial subsamples separately. In line with results from recent studies, overall, market acceptance is influenced by the product's innovativeness, timing of market entry, breadth of assortment, branding, pricing, the objective of increasing market penetration, and competitor reactions. Product performance is influenced by the product's innovativeness, breadth of assortment, and by the objective of using an existing market. Analyzing the consumer and industrial products separately showed that the general picture of launch decisions and their impact on the dependent variables was comparable across the total sample and both subsamples, indicating that heterogeneous samples in new product launch research may not cause major interpretation problems. Second, the analyses revealed that some launch decisions are more important in attaining new product success for consumer products than for industrial products, and vice versa. While these decisions do not lead to contradicting results in the samples, they show that some decisions may be especially relevant for only consumer or industrial products. We discuss research and managerial implications of the results.     

The Danish tax on saturated fat – Short run effects on consumption,substitution patterns and consumer prices of fats

Denmark introduced a tax on saturated fat in food products with effect from October 2011. The objective of this paper is to make an effect assessment of this tax for some of the product categories most significantly affected by the new tax, namely fats such as butter, butter-blends, margarine and oils. This assessment is done by conducting an econometric analysis on weekly food purchase data from a large household panel dataset (GfK Panel Services Denmark), spanning the period from January 2008 until July 2012.The econometric analysis suggest that the introduction of the tax on saturated fat in food products has had some effects on the market for the considered products, in that the level of consumption of fats dropped by 10–15%. Furthermore, the analysis points at shifts in demand from high price supermarkets towards low-price discount stores – at least for some types of oils and fats, a shift that seems to have been utilised by discount chains to raise the prices of butter and margarine by more than the pure tax increase. Due to the relatively short data period with the tax being active, interpretation of these findings from a long-run perspective should be done with considerable care. It is thus recommended to repeat – and broaden – the analysis at a later stage, when data are available for a longer period after the introduction of the fat tax.     

Estimating Differential Dynamic Merger Effects on Market Structure and Entry in Related Markets

The U.S. and EU merger guidelines emphasize “ease of entry” arguments but little is known about the dynamic impact of realized mergers on market structure. This study provides insights on this topic with the use of detailed firm-level data on the memory chip market. Our estimation results provide evidence for differential merger effects on market structure. These effects depend on whether the mergers are dominated by market-power or efficiency gains. While efficiency-dominated mergers cause exit, market-power-dominated mergers attract entrants, and these effects are increasing over time. We also find that market-power mergers have a larger effect on entry than efficiency mergers have on exit. Our results show that mergers can reduce the number of potential entrants into related product markets and serve as an instrument to “reduce the likelihood of entry”.

     

The significance of network resources in the race to enter emerging product markets: the convergence of telephony communications and computer networking, 1989–2001

This paper focuses on the role of network resources and examines the associated mechanisms that affect the timing of entry into an emerging product market. Linking network theory to market entry research, I analyze the pattern in the structure, relation, and composition of 517 firms' strategic alliances as the firms face the decision of whether and when to enter the networking switches market over a 13‐year period from 1989 to 2001. The context for empirical testing is the voice/data convergence between telephony communications and computer networking technologies during which the industry boundary blurs. Firms that have access to information of high quality, large quantity, and compositional heterogeneity are likely to enter the newly developed market more quickly. However, network configuration lock‐in and network costs may counterbalance the benefits derived from network resources. I discuss the implications of these findings for research on social networks and the timing of market entry. Copyright © 2007 John Wiley & Sons, Ltd.     

Determinants of Entry and Profits in Local Banking Markets

This paper estimates a two equation model of market entry and profits, utilizing data on entry into over 2,000 banking markets over the period 1977--88. The entry equations measure whether entry depends on incumbent firms' profits and other market attributes that reflect the long-term attractiveness of markets for entry. Market profits, assumed to follow a partial-adjustment process, are affected by entry directly and indirectly through market structure. The model also corrects for an unavoidable source of error in market-level profits for the banking industry. The estimates suggest that a competitive process is at work in banking markets that limits the ability of supra-normal profits to persist. Entry is more likely in markets that have high profits, consistent with previous empirical results that market structure adjusts more quickly when profits are supra-normal. Population and population growth are also strong determinants of entry. Entry, in turn, reduces profits in rural markets.     

The development of private fresh produce safety standards: implications for developing Mediterranean exporting countries

Integration into global markets offers the potential for more rapid growth and poverty reduction for poorer countries. However, market barriers within advanced economies to agricultural imports have made it harder for developing countries to take full advantage of this opportunity. This article examines the impact of increasing demands for food safety and quality by European food retailers, and how the fundamental structure and culture of supplier organisations required by European retail chains are a major entry barrier for developing Mediterranean fresh produce exporting countries, and for developing countries in general. The long-term solution for such countries to sustain an international demand for their products lies in structural, strategic and procedural initiatives that build up the trust and confidence of importers/retailers in the quality and safety assurance mechanisms for their produce.