Volume 17, Issue 3:

Nichols, Mark W. and Fournier, Gary M.

"Recovering from a bad reputation: changing beliefs about the quality of U.S. autos"

JEL codes: D83, L62
Keywords
: reputation, durable goods, automobiles, quality improvements

Abstract: Acquiring a reputation for high quality is especially urgent for producers in markets for durable goods with quality characteristics that remain uncertain over the product's life. Using data from the U.S. automobile industry, our empirical evidence shows that a poor reputation associated with U.S. autos during the early 1980s has persisted in reducing prices of more recent models, despite quality improvements. As of 1990, used cars in the U.S. were still discounted five percent on average relative to their Japanese counterparts. However, models with the strongest improvement in reported vehicle quality have bridged the gap somewhat in resale value.

Showalter, Dean

"Strategic debt: evidence in manufacturing"

JEL codes: L13; L60; G32
Keywords: Strategic debt; Manufacturing

Abstract: Despite a recent set of theoretical papers illustrating that debt can be effectively used to gain a strategic position in the output market, the use of strategic debt has received little empirical attention. In this paper, I show that manufacturing firms increase debt as demand uncertainty grows, and reduce debt as costs become less certain, supporting strategic debt-taking and price competition in manufacturing.

Barros, Pedro Pita

"Multimarket competition in banking (with an example from the Portuguese market)"

JEL codes: L13; G21
Keywords: multimarket compitition; market power; banking

Abstract: Banks typically have more than one branch and their activities usually span over several markets. This multilocational nature of banks equilibrium price dispersion. The paper proposes a spatial competition model to explain price differences across banks in the deposits market. The model allows one to separate two different sources of observed market power: collusion in the industry and product differentiation induced by location in local markets. An application to Portuguese commercial banking is reported as an illustration.

Asplund, Marcus and Sandin, Rickard

"Competition in interrelated markets: an empirical study"

JEL codes: C24, C31, D43, L13, L84, R32
Keywords: spatial competition, interrelated markets, oligopoly, driving schools

Abstract: This paper studies competition in small, concentrated, and interrelted markets. Our data set consists of price information from 486 driving schools in 235 local markets in Sweden, which gives a large sample to test hypotheses on how market structure influences competition. The results show that the price in a market is lower if prices in nearby markets are low and the distances to them are short, as suggested in models of spatial competition. Moreover, we find that prices in closely located markets are interdependent. It is also shown that prices are increasing in firm concentration within a market as most theories of oligopoly predict.

Banks, Jeffrey and Moorthy, Sridhar

"A model of price promotions with consumer search"

JEL codes: D43; D83
Keywords: Price discrimination; Search; Promotions; Coupons

Abstract: This paper presents a price discrimination model of price promotions. The distinguishing feature of our model is the explicit distinction between regular and promotional prices: Regular prices are chosen first, the promotional prices. Further, while regular prices are always available to everyone, promotional prices are only available when offered, and only to those who search for them. We show that even a monopolist will offer random promotions under these circumstances. Furthermore, as search costs increase, the frequency and depth of promotions increase. With competition for the promotion-oriented consumers, the seller becomes more aggressive in his promotional policies, even more so as search costs increase. The high reservation price consumers, however, end up worse off with competition.

Chen, Zhiqi and Ross, Thomas W.

"Refusals to deal and orders to supply in competitive markets"

JEL codes: L42; L41; K21
Keywords: Refusals to deal; Tying; Aftermarkets; Warranties

Abstract: A number of recent antitrust cases in North America and Europe have involved allegations that manufacturers of durable products have refused to supply parts to independent service organizations, apparently to monopolize the market for repairs of their products. This paper analyzes such refusals in a competitive market and connected aftermarket. In this model, the refusals helps to support higher prices for high intensity-high value users; however, these higher charges permit the recovery of higher costs incurred during an initial warranty period. Since full prices equal full marginal costs in equilibrium the refusals permit the attainment of a first-best outcome and an attempt by antitrust authorities to force supply will be welfare-reducing.

Wright, Donald T.

"Optimal patent breadth and length with costly imitation"

JEL codes: O34
Keywords: Patents; Imitation

Abstract: Patent breadth is defined using the number of potential entrants which enter an industry. It is shown that optimal patent design may be broad and short-lived or narrow and infinitely-lived depending in the market structure assumed and the properties of the demand function. In the presence of costly imitation and endogenous entry it is shown that optimal patent design may be either broad, narrow, or of intermediate breadth depending on the properties of the aggregate imitation cost function.

Waehrer, Keith

"Asymmetric private values auctions with application to joint bidding and mergers"

JEL codes: D44, L40
Keywords: auction, bidding, mergers

Abstract: Much of the theoretical auction literature assumes that there are no observable differences between the bidders of an auction. I present an asymmetric auction model where the distribution of a bidder's value depends on some commonly observed characteristics. The model is applied to joint bidding and mergers in auction markets. The results provide additional evidence that first-price auctions are less susceptible to the acquisition and exercise of market power than open auctions.