Volume 18, Issue 5:

Barla, Philippe

"Firm size inequality and market power"

JEL codes: L13; L93

Abstract: In this paper, we reexamine the relationship between performance and concentration in the light of modern oligopoly theory. More specifically, we examine the link that exists between firm size inequality (FSI) and market power. Traditional theory predicts that market power should be higher in markets where FSI is high. Using a model with capacity constraints and endogenous conduct, we show that the market power-FSI relationship is in fact more complex. We show that two effects are at play leading to a non-monotonic U-shaped relationship between market power and FSI. Another implication of this model is that prices should be more stable in markets where firms are symmetric in size. In the second part of this paper, we test these predictions on data for the U.S. airline industry. We estimate a fare equation for a panel of 400 routes. We first show that using traditional measures of market concentration such as the Herfindahl is restrictive. We then show that there is indeed a non-monotonic U-shaped relationship between FSI and prices holding costs constant and that prices are more stable in markets where FSI is low.

Moresi, Serge

"Information acquisition and research differentiation prior to an open-bid auction"

JEL codes: D82, D44
Keywords: Information acquisition, research differentiation, open auction

Abstract:  This paper develops a model of information acquisition prior to an open auction. The common value ("quality") of the item for sale has two distinct components. Each of the two bidders must first acquire expertise and specialize in one component, then decide how much research to conduct, and finally decide how much to bid. The model provides a rationale for bidders to differentiate themselves by conducting different lines of research. Further it shows that research differentiation can lead to both inefficiently higher research efforts and a less efficient allocation of the item, so that the seller's expected revenue and social welfare are lower than if bidders do not differentiate their research.

María del Carmen García-Alonso

"The role of technology security in a model of trade with horizontal differentiation"

JEL codes: F12; O31
Keywords: Strategic trade; Export controls; Arms trade

Abstract: The security concerns of exporters of products which might be used for military purposes have motivated different security regimes that limit the quality of the products exported by home firms. At the same time however, home governments want to ensure the competitiveness of their home companies. We analyze the optimal policy of a government facing such a trade off. We present a multistage model in which the government has the ability to commit to R&D subsidies but cannot credibly set its quality restrictions until the outcome of the R&D process is known. We show that, depending on whether some or all governments want to restrict the quality exported by the home firms, the optimal policy involves R&D subsidies or taxes together with ex post security restrictions.

Thomas Andersson and Torbjörn Fredriksson

"Distinction between intermediate and finished products in intra-firm trade"

JEL codes: F23, L22, L23
Keywords: multinational firms, intra-firm trade, vertical and horizontal integration

Abstract: Although intra-firm trade has been viewed as associated with vertical integration, which exploits opportunities for exchange between inherently dissimilar economies, it is more common between developed countries where horizontal integration is expeced to dominate. Using unique data from 1974 to 1990 on Swedish firms, application of a Tobit model explains variations in majority-owned manufacturing affiliates' internal imports of intermediate and finished goods on the basis of firms' international organization of production. Effects which are unobservable in aggregate figures show up only when finished and intermediate goods are separated.

Gary Fethke and Raj Jagannathan

"Why would a durable good monopolist also produce a cost-inefficient nondurable good?"

JEL codes: D42
Keywords: dynamic monopoly, durable good pricing, Coase conjecture, multiple product pricing

Abstract: We develop both commitment and time-consistent stationary policies for a monoolist who produces a mixture of goods distinguished by production costs and degree of durability. Under commitment, only the cost-efficient durable good is produced and the monopoly output is realized each period. For the time-consistent stationary case, there is an interval for the degree of durability where only the durable good is produced and a higher, non-overlapping interval where both the cost-efficient durable and the cost-inefficient nondurable good are produced. For any period length, when the degree of durability is such that both durable and nondurable goods are provided, combined output is less than the competitive output and decreases in the degree of durability, approaching the single-period monopoly output. When both goods are produced, the Coase conjecture does not hold.

Gyu Ho Wang

"Regulating an oligopoly with unknown costs"

JEL codes:
Keywords: unknown costs, regulation

Abstract: We examine the problem of a planner who is regulating an oligopoly with unknown costs. We provide a complete chracterization of the optimal mechanism which takes the following simple form: firm(s) which report low costs produce together the first best output corresponding to this low cost and firm(s) which report high costs produce nothing. When all firms report high costs, only the ex-ante efficient firm produces the entire output and all the other firms produce nothing. We show that under mild conditions, as the number of firms increases, the planner attains the same welfare level as if he had complete informaiton of low cost.

Claycombe, Richard J.

"The effects of market structure on prices of clothing and household furnishings "

JEL codes:

Abstract: In this paper prices of clothing and household furnishings are explained using commuting variables and market concentration of department stores. The concentration variable has a strong effect on prices of both product types. The commuting variables only affect furnishings prices, a result that is in keeping with expectations.