Vertical product differentiation and entry deterrence

I study how a potential entrant influences quality in a model of vertical product differentiation with quality-dependent production costs. With identical costs, the incumbent will always deter entry if possible, i.e., if fixed costs are high. Quality will be set at a level lower than or equal to the optimal quality under either duopoly or monopoly. Results are completely different when the entrant has substantially lower costs. They are explained by the relative location of the entrant's quality best response to the incumbent's optimal quality choice in monopoly. This sheds new light on the influence of industrial policy on market conduct.     

Pricing Access to a Monopoly Input

What price should downstream entrants pay a vertically integrated incumbent monopoly for use of its assets? Courts, legislators, and regulators have at times mandated that incumbent monopolies lease assets required for the production of a retail service to entrants in efforts to increase the competitiveness of retail markets. This paper compares two rules for pricing such monopoly inputs: marginal cost pricing (MCP) and generalized efficient component pricing rule (GECPR). The GECPR is not a fixed price, but is a rule that determines the input price to be paid by the entrant from the entrant's retail price. Comparing the retail market equilibrium under MCP and GECPR, the GECPR leads to lower equilibrium retail prices. If the incumbent is less efficient than the entrant, the GECPR also leads to lower production costs than does the MCP rule. If the incumbent is more efficient than the entrant, however, conditions may exist in which MCP leads to lower production costs than does the GECPR. The analysis is carried out assuming either Bertrand competition, quantity competition, or monopolistic competition between the incumbent and entrant in the downstream market.     

The welfare effects of entry: the role of the input market

In a successive Cournot oligopoly, we show the welfare effects of entry in the final goods market with no scale economies but with cost difference between the firms. If the input market is very concentrated, entry in the final goods market increases welfare. If the input market is not very concentrated, entry in the final goods market may reduce welfare if the entrant is moderately cost inefficient. Hence, entry in the final goods market is more desirable if (1) the input market is very concentrated or (2) the cost difference between the incumbents and the entrant is either very small or very large. It follows from our analysis that entry increases the profits of the incumbent final goods producers if their marginal costs are sufficiently lower than the entrant’s marginal cost.     

The effect of entry restrictions on price: evidence from the retail gasoline market

I exploit a change in Spanish regulations to test the effect of the relaxation of entry restrictions on the equilibrium retail price of diesel. In February 2013, a Central Government reform permitted gasoline stations to operate in industrial and commercial areas. Over the following 2-year period, this deregulation led to a high number of new market entrants in these newly designated free entry areas. By isolating markets exposed to entry and markets unaffected by new entrants, and adopting a difference-in-difference approach, results show that gasoline stations exposed to a new market entrant within a one-mile radius lower their prices by an average 1.04%. This result is significant, representing almost one fifth of the average retail margin. Additionally, the results show that the reduction in the equilibrium price is caused by the first market entrant and that the effect decreases over time.     

A NOTE ON MARKET COVERAGE IN VERTICAL DIFFERENTIATION MODELS WITH FIXED COSTS

With fixed costs of quality improvement, we find that a covered market outcome with an interior solution in the price stage is not a Nash equilibrium. When the degree of consumer heterogeneity is high (low) enough, an uncovered market outcome (a covered market outcome with a corner solution in the price stage) is the only Nash equilibrium. When the degree of consumer heterogeneity is moderate, both of the two market outcomes are Nash equilibria, but an uncovered market outcome yields higher social welfare than a covered market outcome with a corner solution in the price stage.     

Multiple equilibria in bargaining models of decentralized trade

Summary A market in which population size is endogenously determined is modeled. Buyers and sellers are randomly matched upon entering the market, whereupon they engage in non-cooperative bilateral bargaining. It is shown that general matching technologies and heterogeneity of buyer or seller populations often result in multiple market equilibria. Up to four equilibria can occur and the equilibria can always be ranked according to population size. Under some conditions all equilibria can also be Pareto ranked. The set of equilibria depends on the relative population sizes of different types of potential entrant, market entry costs, and the degree of differentiation between agents on the same side of the market.This paper evolved from a chapter in my dissertation. I am indebted to Leo Simon for many helpful conversations. Michael Hanemann, Jeff Perloff, Stefan Reichelstein, Jim Vercammen, Brian Wright, and participants in seminars at U.C. Berkeley, the University of Maryland, the University of British Columbia and the Australian National University also provided useful comments. Lastly, I benefited greatly from the thorough comments and corrections provided by an anonymous referee.     

History-based price discrimination and entry in markets with switching costs: A welfare analysis

We analyze history-based price discrimination in an asymmetric industry, where an incumbent, protected by switching costs, faces an entrant who does not have access to information about consumers’ purchase histories. We demonstrate that consumer surplus is higher with uniform pricing than with history-based price discrimination. We find that the entry decision is invariant to whether the incumbent implements history-based pricing or uniform pricing. This implies that the potential abuse of market dominance imposed by history-based price discrimination is exploitation, not exclusion. Finally, we establish that the profit gain to the incumbent from history-based pricing exceeds the associated loss to consumers.     

Entry and espionage with noisy signals

We analyze the effect of industrial espionage on entry deterrence. We consider a monopoly incumbent who may expand capacity to deter entry, and a potential entrant who owns an Intelligence System. The Intelligence System (IS) generates a noisy signal based on the incumbentʼs actions. The potential entrant uses this signal to decide whether or not to enter the market. The incumbent may signal-jam to manipulate the likelihood of the noisy signals and hence affect the entrantʼs decisions. If the precision of the IS is commonly known, the incumbent benefits from his rivalʼs espionage. Actually, he benefits more the higher is the precision of the IS while the spying entrant is worse off with an IS of relatively high quality. When the IS quality is private information of the entrant, the incumbent is better off with an IS of high expected precision while the entrant benefits from one of high quality. In this case espionage makes the market more competitive.     

Competition with asymmetric regulation of mobile termination charges

The aim of this paper is to explore the effectiveness of asymmetric regulation, which allows a new mobile network operator to set higher termination rates than the incumbent operator. We assume that there are two market segments: one in which operators compete on equal terms, with a new technology, and the other in which the entrant is at a disadvantage since the technology it offers is inferior to the incumbent??s. Results show that asymmetric regulation can create favorable conditions that allow the entrant to strengthen its market positioning, and enhance consumer net utilities and social welfare. This highlights the importance of the degree of network asymmetry and the ways in which consumers are split between the two market segments. Lastly, we show that asymmetric regulation can create greater investment incentives for the entrant which could effectively enhance social welfare. These findings can provide useful insights for regulatory policy.     

Pricing schemes and market efficiency in private retirement systems

We study the effects of different pricing schemes on the overall surplus in a privately managed retirement system with multiple service providers and switching costs. We develop a theoretical model based on the Chilean retirement system and consider a repeated auction for monopoly rights over new enrollees. We consider a dynamic model solved by pension fund administrators and by consumers. We compare three different pricing schemes: (a) fees on contributions, (b) fees on returns, and (c) a two‐part tariff including an auction over a guaranteed rate of return and allowing the firm to keep a portion of returns generated above this guaranteed rate. We also consider heterogeneity across individuals where agents earn high or low wages and high‐wage customers have proportionally lower switching costs due to more cost‐effective access to financial planning services. We find that auction participants subsidize consumers. We also treat savings as a durable good. In this case, pricing over returns worsens the switching related inefficiencies just described relative to pricing over contributions, despite the better incentives it provides. These inefficiencies can be resolved by allowing firms to price discriminate.     

Separation costs, job heterogeneity and labor market volatility in the matching model

This paper extends the standard matching model by introducing a gap in separation costs between entrant and incumbent workers. We show that when this gap is omitted from the model, these costs do not improve the labor market volatility without introducing unrealistic unemployment responses to unemployment benefits.     

转换成本视角下互联网企业的创新竞争策略

在转换成本和网络效应存在下互联网产业通过产品创新活动争夺市场份额。某些“创新”的主要目的为排除竞争。互联网产业一个典型的发展过程是：企业依靠外部融资支撑的策略性创新，降低消费者向其产品转换的成本，争夺市场份额，并在投资约束的限制下走向合并，最终抬高了市场集中度。特别的，转换成本的存在让企业有动力通过事前控制转换成本的创新，争夺事后的市场势力，并且“收割”事后锁定的用户。     

COMPETITION,REGULATION AND WELFARE IN THE PRESENCE OF NETWORK EXTERNALITIES*

In this paper we consider a simple model of an industry with network externalities, where a benefit to each consumer from network services depends on the size of the network. We first consider a single network and cover the cases with and without fixed cost of entry. We then turn to the two‐network industry, where the incumbent network and a new entrant network compete for the market and may differ both in their marginal costs and demand structures. In addition, we identify several situations where public policy may play a crucial role in sustaining socially advantageous network service provision.     

QUALITY CHOICE AND MARKET STRUCTURE: A DYNAMIC ANALYSIS OF NURSING HOME OLIGOPOLIES

This article develops a dynamic model of entry and exit to analyze quality choice and oligopoly market structure in the nursing home industry. I find significant heterogeneity in the competitive effects across market structures: Firms of similar quality levels compete more strongly than dissimilar firms. Sunken entry costs are extremely large, and quality adjustment behavior is governed by significant fixed adjustment costs. A proposal to eliminate low‐quality nursing homes is found to cause a large supply‐side shortage, and another proposal to lower entry costs has offered a perverse incentive to provide low quality of care.     

Access regulation with asymmetric termination costs

In many telecommunications markets incumbent providers enjoy a demand-side advantage over any entrant. However, market entrants may enjoy a supply-side advantage over the incumbent, since they are more efficient or operate on innovative technologies. Considering both a supply-side and a demand-side asymmetry, the present model analyzes the effect of two regulatory regimes: an access markup for a low cost network and reciprocal charges below the costs of a high cost network. Both regimes may have adverse effects on subscribers, market shares, and profits. It can be shown that an access markup is not generally beneficial and an access deficit not generally detrimental for the respective networks.     

Rapid evolution under inertia

This paper demonstrates that inertia driven by switching costs leads to more rapid evolution in a class of games that includes m×m pure coordination games. Under the best-response dynamic and a fixed rate of mutation, the expected waiting time to reach long-run equilibrium is of lower order in the presence of switching costs, due to the creation of new absorbing states that allow Ellison's [Ellison, G., 2000. Basins of attraction, long-run stochastic stability, and the speed of step-by-step evolution. Rev. Econ. Stud. 67, 17–45] “step-by-step” evolution to occur.     

市场分割与资源错配*——基于生产率分布视角的理论与实证分析

资源错配已成为新常态下制约经济增长的重要因素。现有文献主要从要素市场扭曲视角分析了资源错配问题,而对市场分割与资源错配的研究相对缺乏。本文试图从这方面进行探讨。理论部分将市场分割引致的制度性交易成本加入企业利润函数,分别讨论企业在省内和省外市场的生产行为和定价策略,通过垄断竞争局部均衡模型分析市场分割对资源错配的影响机制。实证部分利用中国工业企业数据库的大样本微观数据对上述机制进行计量检验,以各省市之间的运输成本作为市场分割的工具变量避免估计结果的内生性问题。本文研究发现,国内市场分割指数减少一个百分点可以使资源错配程度降低394%。因此,减少市场分割所引致的制度性交易成本对于深化供给侧结构性改革、提升资源配置效率具有重要政策含义。     

Level of access and infrastructure investment in network industries

In this paper, we study how the terms of access to an incumbent’s infrastructure (i.e., the level of access and price) affect an entrant’s incentives to build its own infrastructure. Setting a high level of access (e.g., a resale arrangement), which requires relatively small up-front investment for entry, accelerates market entry, but at the same time delays the deployment of the entrant’s infrastructure. This is also true for a lower access price. We show that the socially optimal access price can vary non-monotonically with the level of access. We also study the case where access is provided at two different levels, and show that access provision at multiple levels can delay infrastructure building. Finally, we modify our baseline model to allow for experience and/or market share acquisition via access-based entry, and show that high levels of access may accelerate facility-based entry.     

Evaluating mobile number portability policy in the Thai mobile telecommunications market

Mobile number portability (MNP), which allows consumers to retain their mobile numbers when switching service providers, is expected to promote competition by lowering switching costs. This paper estimates switching costs and switching costs reduction from the MNP policy in Thailand using the mixed logit model with preference heterogeneity on a nationwide survey of mobile telecommunications service usages. The estimation result shows that the MNP policy reduces switching costs by 37% on average and that this benefit is heterogeneous across consumers. The considerable and persistent switching costs call for additional measures to facilitate switching.     

Welfare effects of unbundling under different regulatory regimes in natural gas markets

In this paper, we develop a theoretical model that enriches the literature on the pros and cons of ownership unbundling vis-à-vis lighter unbundling frameworks in the natural gas markets. For each regulatory framework, we compute equilibrium outcomes when an incumbent firm and a new entrant compete à la Cournot in the final gas market. We find that the entrant’s contracting conditions in the upstream market and the transmission tariff are key determinants of the market structure in the downstream gas market (both with ownership and with legal unbundling). We also study how the regulator must optimally set transmission tariffs in each of the two unbundling regimes. We conclude that welfare maximizing tariffs often require free access to the transmission network (in both regulatoy regimes). However, when the regulator aims at promoting the break-even of the regulated transmission system operator, the first-best tariff is unfeasible in both regimes. Hence, we study a more realistic set-up, in which the regulator’s action is constrained by the break-even of the regulated firm (the transmission system operator). In this set-up, we find that, for a given transmission tariff, final prices in the downstream market are always higher with ownership unbundling than with legal unbundling.