Volume 17, Issue 2:

Steen, Frode and Salvanes, Kjell G.

"Testing for market power using a dynamic oligopoly model"

JEL codes: L13; C32; C22
Keywords: Dynamic oligopoly; Error correcting models; Separability tests; Multivariate cointegration; Salmon markets

Abstract: We propose a dynamic reformulation of the oligopoly model of Bresnahan (1982) and Lau (1982) in an error correcting framework. This reformulation addresses both statistical problems generated by short run dynamics in the data and incorporates important dynamic factors such as habit formation from the demand side and adjustment costs for the producer. We also propose a test for separability of the variables involved in the identification of the market power parameter. To illustrate the model, the French market for fresh salmon is analysed. The result suggest the salmon market to be competitive in the long run, but indicate that the largest producer, Norway, has some market power in the short run.

Elzinga, Kenneth G. and Mills, David E.

"Price wars triggered by entry"

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Abstract: To attract customers who incur set-up (or switching) costs, new firms offer below-market prices when entering a market. The incumbent responds with discounts, resulting in a price war. Once new entrants have "locked in" their customers, the price warfare stops and all firms raise their prices. During the price war, the incumbent's price is not as low as the entrants'. After the price war, the market price is lower and output is greater than the pre-entry price and output. Entrants attract new buyers to the market and depending on the size distribution of set-up costs, we show that some of the incumbent's customers switch to entrants. The model is shown to square with the price and output sequences observed in a price war that was the subject of a recent and prominent antitrust case in the cigarette market.

Cabral, Luis M. B., Salant, David J. and Woroch, Glenn A.

"Monopoly pricing with network externalities"

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Abstract: How should a monopolist price a durable good or a new technology that is subject to network externalities? In particular, should the monopolist set a low "introductory price" to attract a "critical mass" of adopters? In this paper, we provide intuition as to when and why introductory pricing might occur in the presence of network externalities. Incomplete information about demand or asymmetric information about costs is necessary for introductory pricing to occur in equilibrium when consumers are small.

Mamuneas, Theofanis P.

"Spillovers from publicly financed R&D capital in high-tech industries"

JEL codes: L6; O32
Keywords: Dynamic production model; Public R&D; Rate of returns

Abstract: This paper employs a dynamic production model to examine the short-run effects of publicly financed R&D capital on the cost structure of six high-tech US manufacturing industries. The results show that, given an industry's output, publicly financed R&D capital reduces the variable production cost in all industries. In addition an increase in publicly financed R&D causes output to increase implying that producers as well consumers are better off, despite the presence of strong monopoly power in some industries. A low bound for the "social" rate of return to publicly financed R&D is also calculated.

Prokop, Jacek

"Process of dominant-cartel formation"

JEL codes: L13
Keywords: cartel-formation process, dominant cartel, collusive price leadership

Abstract: This paper considers the process of cartel formation in the industries characterized by collusive price-leadership. In contrast to the preceding literature, the focus of the analysis is shifted from the problem of cartel stability towards the process of forming a stable cartel. Two models of the dominant-cartel-formation process are proposed: a sequential-, and simultaneous-moves game of firms. The sequential-moves game shows a possibility of creating a stable cartel when the firms have commitment power to refuse the cartel membership. However, when the firms have no commitment power to stay in the competitive fringe, the simultaneous-moves game suggests that it is impossible to form a stable dominant cartel.

Hamilton, Stephen F.

"Demand shifts and market structure in free-entry oligopoly equilibria"

JEL codes: L13; L60
Keywords: Oligopoly; Market power; Industry concentration

Abstract: This paper examines the structural implications of demand shifts in free-entry oligopoly equilibria. The model generalizes the conjectural variations framework to consider asymmetric firm conjectures, allows for the possibility of cost differences across firms, and endogenizes conditions of entry and exit in the industry. In non-competitive environments, changes in incumbent output and industry profitability are inversely-related to changes in the equilibrium price following a demand shift. In response to rotations of demand through the equilibrium point, changes in profitability are positively-related to changes in industry concentration and, when marginal costs are non-decreasing, inversely-related to changes in market power.

Reiffen, David

"On the equivalence of resale price maintenance and quantity restrictions"

JEL codes: L22; L42
Keywords: Vertical restraints; Resale price maintenance; Equivalence

Abstract: When demand is known with certainty, there is a clear mapping between a monopolist's pricing and output decisions. This suggests an equivalence between a monopolist manufacturer specifying a minimum (maximum) retail price, and imposing a maximum (minimum) quantity on its retailers. This paper shows that while the effect of maximum RPM can always be replicated by an appropriate quantity floor, the minimum RPM outcome cannot always be replicated by an appropriately-chosen quantity ceiling. As such, the analysis provides one reason that manufacturers will choose a price floor rather than quantity ceiling, even though a quantity ceiling would appear to lead to lower monitoring costs.

Matsumura, Toshihiro

"Quantity-setting oligopoly with endogenous sequencing"

JEL codes: C72, L13
Keywords: Cournot, Stackelberg, endogenous sequencing

Abstract: This paper investigates endogenous sequencing of quantity-setting oligopoly. We formulate an n-firm, m-period model where each firm chooses both how much to produce and when to produce it. We investigate two models: the first does not include any inventory costs and the second includes small inventory costs. We find that in both models at least n-1 firms simultaneously produce in the first period in every pure strategy equilibrium. As opposed to existing works emphasizing the advantage of the Stackelberg to the Cournot, this results shows that the Stackelberg-type outcome never appears in equilibrium except for duopoly.