Volume 17, Issue 5:

Borenstein, Severin and Netz, Janet

"Why do all the flights leave at 8 am?: Competition and departure-time differentiation in airline markets"

JEL codes: L1, D4
Keywords: monopoly, discrimination, vertical integration

Abstract: Theoretical models of spatial competition indicate that minimum and maximum differentiation are each possible equilibria, depending on the specific assumptions of the model. Firms face two opposing incentives: (1) locate close to one's competitors in order to "steal" customers, and (2) locate far from competitors in order to reduce the degree of price competition. Using data on U.S. airline departure times, we empirically test how the degree of competition affects the degree of differentiation. We analyze scheduling in 1986, when the U.S. airline industry was not regulated, and in 1975, when fares were set by the Civil Aeronautics Board. Controlling for factors that affect supply-side scheduling flexibility and demand-side distribution of preferred departure times, we find a negative relationship between competition and product differentiation. In the 1986 data, however, we also find that increased logistical flexibility in scheduling is associated with greater departure-time differentiation, implying that firms may be differentiating their products where possible to reduce price competition. The analysis of the 1975 data, when price is set exogenously by the CAB, also indicates that an increase in competition is significantly associated with less product differentiation. Furthermore, in the 1975 samples, a decrease of scheduling constraints does not appear to affect the degree of departure time crowding. Overall, it appears that the predictions of location models with exogenous prices are supported by the results form the 1975 data.

Gal-Or, Esther

"Vertical integration or separation of the sales function as implied by competitive forces"

JEL codes:
Keywords: vertical separation, asymmetric information, agency theory in oligopoly

Abstract: In the present paper, we link the decisions concerning the sales strategies that are made by competing firms. We demonstrate that when the demand schedules facing competing firms are moderately correlated, asymmetric equilibria may arise where only one firm decides to establish its own sales force while its competitor sells its product through an independent sales agency. When demand schedules are highly correlated, however, only symmetric equilibria can arise, since firms derive greater benefits from imitating rather than contradicting their rivals' choices. We demonstrate that vertical separation of its sales function is more likely than vertical integration when firms produce products that are highly substitutable.

Goddard. J. A. and Wilson, J. O. S.

"The persistence of profit: a new empirical interpretation"

JEL codes:
Keywords: Persistence of profit; Simulations

Abstract: Inferences are drawn about the true coefficients which correspond to sample estimates of a persistence of profit model fitted over a large number of firms. This is done by generating simulated sampling distributions for the estimators over various distributional assumptions. Profits seem to be stationary for all firms, with an average short run persistence coefficient of o,59, higher than most previous estimates. Long run profit rates differ between firms, although by less than is suggested by direct observation of variations in mean profit rates calculated over time. Short run persistence appears to be inversely related to unsystematic variation in profit.

Avila, Marcos and Ronen, Joshua

"Transfer-pricing mechanisms: An experimental investigation"

JEL codes: C91; C70; D82; D21; M40
Keywords: Transfer pricing; Communication games; Truth-telling mechanisms

Abstract: This study evaluates, in a laboratory setting, the performance of the Ronen and McKinney (1970) and the Ronen (1992) transfer-pricing schemes. Both mechanisms possess, in theory, the property of inducing efficient production and truth-telling, while decision-making autonomy is maintained. The Ronen/McKinney scheme, however, allows for multiple Nash equilibria and if the divisions' managers coordinate their messages they are expected to exploit the mechanism at the expense of the overall profitability of the firm. The Ronen (1992) scheme was designed to prevent this; towards this end, a penalty factor was incorporated into the original Ronen/McKinney scheme to make truth-telling and optimal production a unique equilibrium. The basic results are that under the Ronen/McKinney scheme and with coordination of messages being allowed, subjects collude and earn significantly higher profits than amounts implied by the overall optimal solution. Without the penalty factor, subjects seemed not to converge towards the efficient level of transacting at the end of the experiment. It is not clear whether with additional trials such conversion would have occurred. The inclusion of the penalty factor, however, eliminated the collusive behaviour. In fact, most of the pairs implementing the Ronen mechanism reached the efficiency predicted by the theory whether or not coordination of messages was allowed.

Rothschild, Robert

"Cartel stability when costs are heterogeneous"

JEL codes: D43
Keywords: cartel stability, trigger strategies, heterogeneous costs

Abstract: This paper addresses a neglected question in the literature of cartel stability and the use of trigger strategies to maintain such stability. We employ a model in which market demand is linear, and involving n firms, each operating subject to one of possibly n different inefficiency parameters. We show that the stability of the cartel depends crucially upon these parameters, and argue that in models of this type explicit attention must be given to the upper and lower limits on the set of firms marginal costs

Hinloopen, Jeroen and Van Marrewijk, Charles

"On the limits and possibilities of the principle of minimum differentiation"

JEL codes:
Keywords: Persistence of profit; Simulations

Abstract: Introducing a finite reservation price in Hotelling's spatial duopoly with linear transportatin costs shows that (i) there does not exist a pure strategy symmetric location equilibrium if the reservation price is 'high', (ii) there is a continuum of (monopolistic) equilibria if the reservation price is 'low', and (iii) there exists a unique pure strategy symmetric location equilibrium (in which the two firms compete with each other and cover the entire market) if the reservation price is 'intermediate'. The equilibrium distance between the two firms in the latter case is at least a quarter and at most half the length of the market.
Juan Carlos Bárcena-Ruiz and Maria Paz Espinosa

"Should multiproduct firms provide divisional or corporate incentives?"

JEL codes: L10; L13; L20; L22
Keywords: Internal organization of the firm; multiproduct firm; managerial incentives

Abstract:  This paper points out some of the implications of the internal organization of a multiproduct firm for its market conduct. In particular, we study the strategic use of organizational forms based on corporate incentives versus forms based on divisional incentives. In a model with full information, the equilibrium internal organization is determined. It is shown that firms provide corporate incentives when goods are substitutes and divisional incentives when goods are complements, and the result holds both in the case of quantity setting and price setting.