Apparent collusion and conjectural variations in differentiated oligopoly

The conjectural variations model has become the standard exposition of oligopoly theory, although rivals' assumed behaviour is not profit-maximising. One response has been models with consistent conjectures, developed from rational expectations concepts. This paper adopts another approach, based on Stigler's famous (1964) paper. Collusion is enforced by the threat of retaliating to price cuts, but is imperfect because of their imperfect knowledge, which limits the probability of retaliation, or retaliation lags. Three models of imperfect collusion incorporating these features, separately and in combination, demonstrate the formal equivalence between the results of imperfectly policed collusion and proportional conjectural variations.     

Price reaction functions and conjectural variations

Price conjectural variations are estimated to measure the degree of price competition in a product differentiated oligopoly. The empirical model is a simultaneous equation system of product demand and price reaction functions. Own and cross price demand elasticities are estimated in conjunction with the price conjectural variations and price reaction function elasticities. The conjectural variations are estimated for pairs of ready-to-eat breakfast cereal products using brand price and quantity data. The empirical results reject competitive brand pricing behavior in favor of independent or collusive pricing. Further, the hypothesis of a unique consistent conjecture is rejected.     

Dynamic oligopoly pricing: Evidence from the airline industry

We explore how pricing dynamics in the European airline industry vary with the competitive environment and with customer heterogeneity. We document three main findings. First, the rate at which prices increase towards the scheduled departure date is significantly reduced in more competitive markets. Second, the sensitivity of the intertemporal slope to competition increases in the heterogeneity of the customer base. Third, ex-ante predictable advance purchase discounts account for 83 percent of within-flight dispersion in prices and for 17 percent of cross-market variation in pricing dynamics.     

Multiproduct activity in an experimental differentiated oligopoly

In a symmetric differentiated experimental oligopoly with multiproduct firms we test the predictive power of the corresponding Bertrand-Nash equilibria. Subjects are not informed on the specification of the underlying demand model. In the presence of intense multiproduct activity, and provided that a parallel pricing rule is imposed to multiproduct firms, strategies tend to confirm the non-cooperative multiproduct solution.     

Rationalizability and efficiency in an asymmetric Cournot oligopoly

This paper studies rationalizability in a linear asymmetric Cournot oligopoly with a unique Nash equilibrium. It shows that mergers favor uniqueness of the rationalizable outcome. When one requires uniqueness of the rationalizable outcome maximization of consumers' surplus may involve a symmetric oligopoly with few firms. We interpret uniqueness of the rationalizable outcome as favoring a dampening of strategic ‘coordination’ uncertainty. An illustration to the merger between Delta Air Lines and Northwest shows that a reallocation of 1% of market share from a small carrier to a larger one has implied a lower production volatility over time, yielding a 1.5% decrease in the coefficient of variation of number of passengers.     

The incentives for takeover in oligopoly

We present a model of takeover where the target optimally sets its reserve price. Under relatively standard symmetry restrictions, we obtain a unique equilibrium. The probability of takeover is only a function of the number of firms and of the insiders' share of total industry gains due to the increase in concentration. Our main application is to the linear Cournot and Bertrand models. A takeover is more likely under Bertrand competition if goods are substitutes, and more likely under Cournot competition if goods are complements.     

The emerging oligopoly of pay-TV in the USA

The pay-television industry in the USA has been developing very rapidly in the past five years and is providing network quality alternatives to the mass taste programming of commercial television. However, the industry has been developing along lines very similar to the early history of radio in the USA with the emergence of strong distributor networks, restrictive affiliation contracts, and wide-spread vertical integration across all stages of production. History and economic efficiencies suggest that the result will be a strong oligopoly market structure. The proper public policy, then, is to insure that the unavoidable degree of concentration is not greater than that needed for efficiency reasons.     

The effects of the business cycle on oligopoly coordination: Evidence from the U.S. rayon industry

Recent game-theoretic studies of the effects of the business cycle on oligopoly coordination predict that coordination is weakest when demand is high and expected future profit is lower. An empirical model that uses a conjectural elasticity term to measure the degree of coordination is developed to test for these two effects. The rayon industry of the 1930s is one that exhibited significantly non-competitive conduct that appears to have varied, in degree, with fluctuations in demand. Application of the empirical model to data from this industry produces results that support the predictions of recent theoretical models.     

Collusion in a price-quantity oligopoly

In the context of an infinitely repeated oligopoly game, we study collusion among firms that simultaneously choose prices and quantities. We compare a price cartel with a price-quota cartel and analyze when and why firms prefer the latter to the former. Output quota may be required to solve coordination and incentive problems when market demand is sufficiently elastic. If market demand is sufficiently inelastic, then the cartel faces a trade-off between increasing prices and the amount of costly overproduction. We find that a price cartel prices consistently below the monopoly price to mitigate excessive production. In this case, a quota arrangement allows firms to avoid overproduction and to sustain the monopoly price. From a policy perspective, our findings suggest that an overall price increase in conjunction with more stable prices and market shares is indicative of collusion in industries where production precedes sales and outputs are imperfectly observable.     

Price behavior in tight oligopoly

The study examines price behavior in tight oligopoly. The investigation proceeds from the premise that tacit cooperation is the rational response of firms comprising tight oligopoly. The study’s thesis is that cooperative conduct in tight oligopoly will reflect one of two general pricing patterns: (1) shared monopoly pricing, or (2) mark-up pricing. A unique empirical test of this dual price hypotheses is developed. The test focuses on the nature of price responses to cost and demand changes as reflected in a price equation that is estimated for each of fifty four-digit SIC industries. The study’s results indicate infrequent, but still notable, instances of shared monopoly pricing. More common is evidence of mark-up pricing, a general category within which demand proved to be significant in roughly half of the industries examined. Theoretical implications of these findings are discussed.     

The maintenance of macro-vocabularies in an industry: The case of the France's recorded music industry

Different studies have proved the importance of language and vocabularies in structuring shared perceptions among stakeholders within an industry. Little is known about the discursive work involved in the evolution of these vocabularies. The use of corpus linguistics provides insights in the process through which an industry stabilises itself and how incumbents engage in discursive work to maintain their interests. We explore the jolt the Internet provoked in the French recorded music industry between 1988 and 2008. We argue that one major explanation for the industry inertia is that the technology of the Internet and the new distribution channels it opened up were framed by discourses, characterized by a relatively stable vocabulary which repeated established words such as right and artistic work. The discursive work of incumbent actors supports the stabilization of this vocabulary. When new words appeared, they were incorporated into existing vocabulary. This dual process of repetition and incorporation was facilitated by the fact that many of the words central to the debate were relatively empty and ambiguous floating signifiers. This paper represents a promising avenue to better account for the place of words in the institutional work and more specifically institutional maintenance.     

The competition effects of industry-wide vertical price fixing in bilateral oligopoly

This paper examines the competition and welfare effects of vertical price fixing through industry-wide resale price maintenance (RPM) arrangements, such as those benefiting from exemption from a general prohibition against RPM. A bilateral oligopoly framework is employed incorporating differentiation between manufacturer products and between retailer services. Transactions between the stages involve prices being determined through bargaining. We do not find RPM to be universally undesirable. However where retailer power is strong, the social effects of RPM are likely to be adverse, since the practice can assist in coordinating final price levels and prevent socially desirable countervailing power arising.     

Rational conjectures in the theory of oligopoly

The paper employs the notion of rational conjectural equilibrium to remove the arbitrary nature of conjectures about rivals' reactions which characterises the traditional non-cooperative theory of oligopoly. A general definition of these equilibria is given, and the concept is then applied to a simple duopoly model. The standard models of perfect competition, monopoly, limit-price dominant firms are shown to emerge as special cases of rational conjectural equilibria.     

The welfare effects of cooperative R&D in oligopoly with spillovers

This paper provides a more complete characterization of the welfare effects of cooperative cost-reducing R&D investments in Cournot oligopoly with spillovers. I show that R&D cooperation reduces both R&D spending and social surplus when the spillover rate in R&D is neither sufficiently high nor sufficiently low. As the elasticity of the slope of the inverse demand function increases, however, the set of spillover rates over which cooperative R&D reduces social welfare shrinks, and in the limit, cooperative R&D is socially beneficial for all spillover rates.     

Network information services: The emergence of an industry

The authors discuss the characteristics and benefits of network information services (NIS), which are developing into an important new industry likely to have profound effects on society. Many of the services and possible applications are described. Three scenarios are analysed, in which the future of the industry may be directed by technology, the market, and policy issues. It is concluded that consumers and small businesses are unlikely to be able to achieve sufficient economies through NIS by the end of the century to make much use of the services provided. Large and medium companies, however, will be served by a diversified, multi-network marketplace. The issue of equality of access to information will become of significant public concern.     

An oligopoly model of ocean liner shipping

In this paper I develop a simultaneous equations oligopoly model of the regulated international ocean liner shipping industry. The firms act as a cartel to determine price jointly and then set their own quality levels to maximize individual profits. The cartel does not attain monopoly profits, because each conference member myopically determines quality without regard for overall cartel profits. The results indicate that an increase in the number of firms in the cartel will increase both cartel price and quality level. An increase in price will also lead to an increase in quality level.I would like to thank Professors Alamarin Phillips, Robert Summers, and Bruce Allen for their helpful comments on earlier research for my dissertation in the Economics Department of the University of Pennsylvania on which this work is based. I am especially grateful to Professor Lawrence J. White for his encouragement and valuable suggestions at various stages of my work.     

Distributional assumptions in the theory of oligopoly information exchange

We analyze the profitability of information sharing among Cournot oligopolists receiving private information about random demand. In this setting, previous authors showed information exchange to be unprofitable when firms' marginal costs are constant and outputs are perfect substitutes. We introduce a measure of the increase in the accuracy of firms' demand forecasts when information is shared. We provide two examples showing when this measure is large, information exchange is profitable, even though firms' marginal costs are constant and outputs are perfect substitutes. Moreover, we show that in the linear-conditional-expectations framework, which has been standard in the literature, this measure reveals these accuracy gains to be severely limited.     

On the design of performance measurement plans in the telecommunications industry

This paper analyzes the design of performance measurement and remedy plans that have been implemented in the telecommunications industry to ensure competitive local exchange carriers are afforded a meaningful opportunity to compete in the provision of local exchange services. It demonstrates that the plans can impose penalties on incumbent local exchange carriers even when the incumbents provide the same or higher level of wholesale service quality to their competitors than they provide to themselves. Simulations are employed to illustrate the magnitude of these penalties.     

The ineffectiveness of R&D subsidies—An oligopoly theoretic insight

In several European countries, governments subsidise private firms in their product development. Existing empirical literature indicates that these subsidies do not have much impact on firms' R&D efforts. It is suggested that this inefficiency may reflect strategic, oligopolistic behaviour: not to apply for subsidies is a strategic commitment to non-aggressive behaviour. Firms may be willing to apply for subsidies mainly when they know they are not going to affect their R&D efforts significantly.     

Divisionalization and strategic managerial incentives in oligopoly under uncertainty

This paper argues that divisionalization and incentive contracting are complementary rent shifting tools in the presence of demand uncertainty. The role for divisionalization arises if managers know the state of demand prior to making output decisions and if incentive contracts are linear and non-state contingent. In this context incentive contracts achieve expected Stackelberg outcomes but have no impact on the firm's responsiveness to demand shocks. Divisionalization, on the other hand has the strategically beneficial effect of making the firm more responsive to demand shocks.