Volume 17, Issue 6:

Somma, Ernesto

"The effect of incomplete information about future technological opportunities on pre-emption"

JEL codes: D24; L13

Abstract: In this paper we model the strategic choice of investment by an incumbent firm facing competition from a potential entrant and the uncertain prospect of technological development. The model presented extends the basic Dixit model into two directions: it allows for production over two periods and introduces uncertainty about the technology available in the second. We show that the incumbent does not necessarily prefer to pre-commit. Irreversibility of investment creates, in fact, an option value of retaining flexibility and the strategic gains from pre-commitment must be compared with the option value of strategic investment to be chosen. The strategic use of investment can also explain the observed inertia of incumbent firms in adoption of new technologies compared to new entrant firms.

Schultz, Christian

"Limit pricing when incumbents have conflicting interests"

JEL codes: D43; D82
Keywords: Entry; Incomplete information; Oligopoly

Abstract: This paper considers entry into a market with two incumbents where one prefers entry and one dislikes it. Unlike the entrant, incumbents know market demand. In separating equilibria incumbents play full information Nash-equilibrium strategies. When beliefs are unprejudiced, separating equilibria only exist if entry is relatively unimportant for an incumbent. In growing markets this condition will tend to be violated so that only pooling equilibria may exists.

Denicoḷ, Vincenzo

"The optimal life of a patent when the timing of innovation is stochastic"

JEL codes:

Abstract: I re-examine the problem of optimal patent life within a model where the timing of innovations is stochastic. It is assumed that innovations occur according to a Poisson stochastic process where the hazard function is linear in R&D effort. Firms performing R&D have to pay a fixed cost, and there is free entry in the R&D industry. Among the comparative statics results, I show that small innovations should be protected more than large ones. Also, when the patent life is set optimally, there is under-investment in R&D.

Ghemawat, Pankaj and Kennedy, Robert E.

"Competitive shocks and industrial structure: the case of Polish manufacturing"

JEL codes: L16, L6, O12
Keywords: Eastern Europe, Poland, transition, industry structure

Abstract: A large number of countries have recently experienced competitive shocks: sudden increases in the role that market forces play in determining the evolution of various industries. In this paper, we study the implications of Poland's competitive shock for three elements of the structure of that country's manufacturing sector: entry, concentration, and foreign presence. Our analysis underlines the importance of explicitly identifying the specific distortions built into initial (pre-shock) industrial structure and lags in their adjustment to more competitive conditions.

Barros, Fátima and Modesto, Leonor

"Portuguese banking sector: a mixed oligopoly?"

JEL codes: D21; L13; L32
Keywords: Mixed oligopoly; Public enterprise; Banking sector

Abstract: In this paper we investigate whether we can find evidence of a regulatory intervention in the Portuguese banking sector. We develop and estimate using panel data a simple oligopoly model where one public bank competes in prices with several private banks. We assume that private banks maximize profits and that the public bank is instructed to maximize an objective function that depends on the profits of the public bank and on the public bank's revenues from deposits and loans, evaluated at their respective opportunity costs. Empirically we find evidence supporting the existence of a regulatory intervention in the loans market, which aimed at reducing the equilibrium interest rates paid on loans. However in the deposits markets our empirical results do not support the hypothesis of the existence of internal regulatory devices.

Krepps, Matthew B.

"Facilitation practices and the path-dependence of collusion"

JEL codes: L11; L41; L43
Keywords: Facilitating practices; Collusion; Path-dependence; Antitrust

Abstract: This paper exploits major shifts in American antitrust policy during the 1930s to investigate the impact of facilitating practices on industrial profitability. While the National Industrial Recovery Act effectively legalized collusion in many industries, this paper suggest only industries that adopted certain trade practices were able to overcome cartel enforcement problems. Consistent with previous theories of the path-dependence of collusion, the effects on price-cost margins are found to have persisted after the act's repeal. The government's pattern of granting facilitating practices is also investigated and is found to contravene the political rhetoric of the day. Antitrust policy implications are discussed.

Economides, Nicholas

"Quality Choice and Vertical Integration"

JEL codes: L1, D4

Abstract: We show that, despite coordination in the quality level of the components that they provide, independent vertically-related (disintegrated) monopolists will provide products of lower quality level than a sole integrated monopolist. Further, the integrated monopolist achieves higher market coverage, higher consumer surplus, and higher profits. We establish these results for any distribution of preferences in the standard model of quality differentiation. Despite the lower quality, we also show that, for a wide class of cost functions, price will be higher in a market of independent vertically-related monopolists. All results are the effects of the interaction of double-marginalization, occurring in the market of independent monopolists, with the choice of quality.