Volume 17, Issue 4:

Slade, Margaret

"Sticky prices in a dynamic duopoly: an investigation of (s,S) thresholds"

JEL codes: L13, L81, D43
: sticky prices, menu costs,(s,S) models, price competition, strategic complements, differential games, feedback equilibria, Markov perfection, panel data

Abstract: The strategic implications of costly price adjustment are investigated empirically. I assume that managers are engaged in a state-space game and ask if the dynamic considerations that arise when they condition their choices on the state cause prices to be more or less rigid than when players use more myopic pricing rules. The micro-panel data used to investigate this issue consist of weekly prices, sales, costs and promotional activity for three brands of saltine crackers sold by four chains of grocery stores in a small U.S. town. I find that, in this market, strategic behavior exacerbates price rigidity. The thresholds are wider and the time between changes is longer than would be observed in a more myopic setting.

Elberfeld, Walter and Wolfstetter, Elmar

"A dynamic model of Bertrand competition with entry"

JEL codes: D43; D44; L13
Keywords: Theoretical industrial organization; Bertrand competition; Entry dynamics

Abstract: This paper analyzes a simple, repeated game of simultaneous entry and pricing. We report a surprising property of the symmetric equilibrium solution: If the number of potential competitors is increased above two, the market breaks down with higher probability, and the competitive outcome becomes less likely. More potential competition lowers welfare - another Bertrand paradox. The model can also be applied to auctions to explore whether a revenue maximizing auctioneer should restrict the number of bidders if bidder participation is costly.

Thomas, Louis A.

"Incumbent firms' response to entry: price, advertising, and new product introduction"

JEL codes: L11

Abstract: Theoretical research shows that one of the more important determinants of entry is the anticipated response of incumbent firms. Incumbents can use price, advertising, or new products to limit or deter entry. Most empirical research however finds little support for these models. Using data from the ready to eat cereal industry I find weak evidence that incumbents lower their prices in response to entry. I find much stronger evidence that they respond to entry by raising the advertising investment and introducing new products. I also find that incumbents are more likely to respond when the scale of entry is greater.

Bloch, Francis and Manceau, Delphine

"Persuasive advertising in Hotelling's model of product differentiation"

JEL codes: D43; M37

Abstract: This paper analyzes the effect of persuasive advertising in a model where consumers differ in their tastes for two competing products. Advertising is viewed as a means by which a firm can shift the distribution of consumer tastes towards one of the products. When both products are sold by the same firm, advertising leads to an increase in the price of the advertised product and a decrease in the price of the other product. The monopolist's profit is higher when the distribution is concentrated around of the other products, so that advertising is profitable only if the original distribution of consumer tastes is not too biased towards one of the products. When the two products are sold by different firms, advertising may induce a decrease in the price of the advertised product, showing that a firm does not necessarily have an incentive to engage in advertising.

Maurer, Boris

"Innovation and investment under financial constraints and product market competition"

JEL codes: D82; L12; O31
Keywords: innovation, optimal financial contracts, predation, strategic complementarities

Abstract: The present paper extends previous work on predatory behvior against financially constrained firms (e.g. Bolton and Scharfstein (1990) to include innovation and product market competition. I show that the pattern of strategic interaction between competing firms determines behavioral changes coming from financial constraints. Both leveraged and unleveraged firms react to financial constraints. The theory is used to explain recent empirical findings concerning the interaction of captial market imperfections and market structure.
Leyden, Dennis Patrick and Link, Albert N.

"Federal laboratories as research partners"

JEL codes: O31; O38; O32
Keywords: Research joint venture; Collaborative research; Federal laboratory

Abstract: Since the passage of the National Cooperative Research Act (NCRA) in 1984, nearly 600 formal research joint ventures (RJVs) have been filed with the U.S. Attorney General and the Federal Trade Commission. Researchers have documented this trend and have examined, both theoretically and empirically, various aspects of collaborative research behavior. However, the composition of the membership of RJVs has yet to be explored. In this paper we present a theoretical explanation consistent with the empirical observation that Federal laboratories are most prevalent as research partners when the membership of the RJV is large.
Maher, Maria E.

"Access costs and entry in the local telecommunciations network: a case for de-averaged rates"

JEL codes: C21; L96; L51
Keywords: Telecommunications; translog cost function estimation; access costs; pricing; universal sservice; competition

Abstract: The telecommunications bill passed by Congress in February 1996 means that the present method of covering the cost of customer access to the local telecommunications network through non-cost based access changes cannot be sustained over the long run. However, there is a belief that cost-based rates at the local level would be prohibitively high and would threaten universal service objectives. Major tasks facing the Federal Communications Commission and state regulators will be determining what the terms and charges for interconnection should be, and who will bear the costs associated with universal service. This work estimates a generalized translog cost function of access costs at the local level in order to address these issues. The results of this study are that there are economies of scale in the provision of access to the local network and that these costs differ by geographical location. One of the important findings of this study is that, contrary to popular belief, cost-based rates at the local level would not be prohibitively high and would not threaten universal service objectives. However, given the existence of economies of scale, procompetitive regulatory controls will be required that will restrain dominant carriers from abusing their market power and network owners from squeezing out new entrants.