Showing papers in "Journal of Industrial Economics in 1992"
TL;DR: In this article, the introduction of a new product in a market with network externalities is studied and the authors provide conditions under which equilibrium involves insufficient friction, i.e., a tendency to rush into new, incompatible technologies.
Abstract: The authors study the introduction of a new product in a market with network externalities. There is a common presumption that such markets exhibit excess inertia, i.e., that they are biased toward existing products. In contrast, the authors provide conditions under which equilibrium involves insufficient friction, i.e., a tendency to rush into new, incompatible technologies. They also analyze the firms' incentives to make their products compatible and they show that the firm introducing the new technology is biased against compatibility. Copyright 1992 by Blackwell Publishing Ltd.
644 citations
TL;DR: In this article, the authors analyze the competition and integration among complementary products that can be combined to create composite goods or systems and analyzes equilibrium prices for a variety of organizational and market structures.
Abstract: This article analyzes the competition and integration among complementary products that can be combined to create composite goods or systems. The model generalizes the Cournot duopoly complements model to the case in which there are multiple brands of compatible components. It analyzes equilibrium prices for a variety of organizational and market structures that differ in their degree of competition and integration. The model applies to a variety of product networks, including automatic teller machines, real estate multiple listing services, and airlines CRS, as well as to nonnetwork markets of compatible components such as computer CPUs and peripherals, hardware and software, and long distance and local telephone services. Copyright 1992 by Blackwell Publishing Ltd.
441 citations
TL;DR: The authors show how the provision decision by software firms determines whether multiple hardware technologies are supported in equilibrium or whether there is de facto standardization, with only one hardware technology supplied with software in equilibrium.
Abstract: In this paper we examine the software provision decision of software firms. The provision decision by software firms determines the value and hence the market share of competing hardware technologies. We show how the provision decision by software firms determines whether multiple hardware technologies are supported in equilibrium or whether there is de facto standardization, with only one hardware technology supplied with software in equilibrium. We show that when consumers place a high value on software variety, there is a suboptimal amount of standardization by the market.
411 citations
TL;DR: In this article, the authors present a simple model of compatibility and bundling in industries where consumers assemble several necessary components into a system that is close to their ideal, and show that, for a wide range of parameters, firms will choose to produce compatible components but will offer discounts to consumers who purchase all components from the same firm.
Abstract: This paper presents a simple model of compatibility and bundling in industries where consumers assemble several necessary components into a system that is close to their ideal. The authors show that, for a wide range of parameters, firms will choose to produce compatible components but will offer discounts to consumers who purchase all components from the same firm. However, firms would be better off if they could commit not to provide such discounts. Furthermore, the equilibrium tends to involve socially excessive bundling. Finally, mixed bundling strategies tend to increase the range of parameters over which socially excessive standardization occurs. Copyright 1992 by Blackwell Publishing Ltd.
340 citations
TL;DR: In this article, the existence of a symmetric equilibrium with multiproduct firms using a nested logit model of demand was proved using a model parameterized by two variables that characterize different dimensions of preference for variety, i.e., intragroup heterogeneity and intergroup heterogeneity.
Abstract: This paper proves the existence of a symmetric equilibrium with multiproduct firms using a nested logit model of demand. The demand model is parameterized by two variables that characterize different dimensions of preference for variety. These reflect intragroup heterogeneity and intergroup heterogeneity, a group (or nest) being the set of products produced by a firm. There are then two dimensions to market performance: the total number of firms and the range of products produced per firm. It is shown that the market equilibrium involves an excessive number of firms, but each firm provides too few products. Copyright 1992 by Blackwell Publishing Ltd.
234 citations
TL;DR: In a duopoly model with vertical differentiation, if the firms do not cover the market, the lower-quality firm chooses a quality level exactly 4/7 of that of the higher-quality firms and chooses a price that is 2/ 7 of the price of a higher quality firm as discussed by the authors.
Abstract: In a duopoly model with vertical differentiation, if the firms do not cover the market, the lower-quality firm chooses a quality level exactly 4/7 of that of the higher-quality firm and chooses a price that is 2/7 of the price of the higher-quality firm. Copyright 1992 by Blackwell Publishing Ltd.
226 citations
TL;DR: In this paper, the authors examined the welfare implications of horizontal mergers in the context of the Cournot-Nash model of M. Perry and R. Porter (1985).
Abstract: The welfare implications of horizontal mergers are examined in the context of the Cournot-Nash model of M. Perry and R. Porter (1985). Horizontal mergers are more likely to be welfare enhancing the more concentrated is the ownership of the nonmerging firms. Mergers that create a new largest firm, or increase the size of the largest firm, reduce welfare. Copyright 1992 by Blackwell Publishing Ltd.
221 citations
TL;DR: In this article, the authors explore the relationship between dynamic oligopolistic competition and static conjectural variations equilibria using an infinite horizon adjustment cost model, and demonstrate that any steady state closed-loop (subgame-perfect) equilibrium coincides with a conjectureural variations equilibrium.
Abstract: This paper explores the relationship between dynamic oligopolistic competition and static conjectural variations equilibria. Using an infinite horizon adjustment cost model, the author demonstrates that any steady state closed-loop (subgame-perfect) equilibrium coincides with a conjectural variations equilibrium. In the case of linear demand and quadratic costs, the dynamic conjectures consistent with closed-loop steady state equilibria are negative, constant, symmetric, and vary continuously with the discount rate (and the adjustment cost parameter) in an interval between the static consistent conjectures and zero (Cournot). Copyright 1992 by Blackwell Publishing Ltd.
219 citations
TL;DR: In this article, the relationship between market structure and the Lerner index of monopoly constructed from price data on processed food products sold through grocery stores was investigated, and the results indicated that the three principal determinants of price-cost margin variation, in order of their impacts, are: advertising intensity, elasticity of demand and concentration.
Abstract: This paper estimates the relationships between market structure and the Lerner index of monopoly constructed from price data on processed food products sold through grocery stores. A theoretical model of a differentiated oligopoly specifies two determinants of price-cost margins: the Herfindahl-Hirschman index of seller concentration adjusted for the elasticity of demand and the industry advertising-to-sales ratio. The results indicate that the three principal determinants of price-cost margin variation, in order of their impacts, are: advertising intensity, elasticity of demand, and concentration. Previous structure-performance studies that did not incorporate the elasticity of demand were probably misspecified.
158 citations
133 citations
TL;DR: In this article, the authors adapt a variant of H. Varian's (1980) simultaneous price setting game to analyze price-leader equilibria and demonstrate that consumer loyalty may play an important role in establishing the existence and identity of a price leader.
Abstract: This paper analyzes a duopolistic price setting game in which firms have loyal consumer segments but cannot distinguish them from price-sensitive consumers. The authors adapt a variant of H. Varian's (1980) simultaneous price setting game to analyze price-leader equilibria. The properties of the price-leader equilibria with an exogenously specified leader motivate the construction of a game of timing in which the firm with the larger segment of loyal consumers becomes an endogenous price leader. This demonstrates that consumer loyalty may play an important role in establishing the existence and identity of a price leader. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this article, the authors examined the entry into local markets by the top twenty US supermarket chains using logit analysis and found that entry is related to potential entrants' proximity to the local market, market growth, concentration, the number of large chains that are incumbents in the local markets, and the competency of potential entrants as measured by their recent return on equity.
Abstract: De novo entry into local markets by the top twenty US supermarket chains is examined using logit analysis. We find that entry is related to potential entrants' proximity to the local market, market growth, concentration, the number of large chains that are incumbents in the local market, and the competency of potential entrants as measured by their recent return on equity. With regard to competing theories that relate strategic entry barriers to entry patterns, different components of the analysis provide support for different hypotheses. However, the most general model provides little support for the contestability or Chicago efficiency rent hypotheses.
TL;DR: In this article, the authors show that the volume of outbound and inbound calls is a function of originating-country price (own-price) and terminating-country prices (cross-price).
Abstract: International calls include consumption and financial externalities. Theoretical analysis predicts that the volume of outbound and inbound calls is a function of originating-country price ("own-price") and terminating-country price ("cross-price"). Analysis of annual data for minutes of calling between the U.S. and seventeen West European countries from 1979 to 1986 reveals negative own-price effects in both directions, with inbound calls more elastic. Cross-price effects are generally not statistically significant. The findings are consistent with arbitrage and call-externality motivation that cancel each other. Level of GDP, number of telephones, and telex prices are statistically significant. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this article, the effects of a change in cost on outputs and profits in an industry composed of firms with constant returns to scale are investigated. But the authors focus on the effect of cost changes on firms' profits.
Abstract: This paper considers cost changes affecting all firms in a constantreturns-to-scale Cournot oligopoly. Cost increases may paradoxically benefit some or even all firms. Whether a firm benefits or is harmed depends only on whether its market share exceeds a threshold level s*, on whether industry costs increase or decrease, on the number of firms, and on the elasticity of the demand curve's slope (or equivalently, the fraction of cost changes that are passed on). Conditions where industry structure alone determines the effect of cost changes on firms' profits, and conditions where cost increases necessarily harm some firms, are developed. THIS paper considers the effects of a change in cost on outputs and profits in an industry composed of firms with constant returns to scale. These effects are easy to see in the extreme cases of monopoly and perfect competition,' but
TL;DR: In this article, Matutes and Regibeau and Economides showed that in markets with network externalities, firms that are similar in size and in other competitive characteristics may prefer compatibility because the added benefits encourage each firm to set a higher price.
Abstract: VARIETY may be the spice of life, but the price of variety is high in markets where products and services need to be compatible to function properly. Standardization permits consumers to assemble desired systems from component parts, to drive automobiles with a modicum of safety, to transport data from one computer to another, to plug electrical appliances into different sockets, etc. The need for standardization is a constraint on product variety. In most situations, the tradeoff between variety and standardization is established by an unregulated market. The five papers that appear in this symposium address how successfully markets make this tradeoff. Matutes and Regibeau [1988] and Economides [1989] showed that in some circumstances the producers of alternative technologies have strong incentives to design their products to be compatible. When products function together as necessary parts in a system (i.e. they are complements), compatibility reduces the incentive of competing firms to set low prices for component parts because low prices increase the sales of a compatible rival. Despite higher prices, consumers can be better off because compatibility allows them to assemble systems that are closer to their ideal configurations. Compatible designs may emerge as the preferred choice by producers in markets with network externalities. Network externalities are a source of scale economies that arise from the demand side of the market (Rohlfs [1974]). A compatible technological design increases the value that consumers derive from a firm's product. Compatibility gives the consumer the benefits of other firms' networks. In markets with network externalities, firms that are similar in size and in other competitive characteristics may prefer compatibility because the added benefits encourage each firm to set a higher price. This parallels the incentives for compatibility in markets where (similar) firms produce complementary products. Unfortunately, coincidence between the compatibility choice that is best for producers and the choice that is best for total economic performance is not likely to hold in many real situations. In the papers by Matutes and Regibeau [1988] and Economides [1989], similarity of competing firms reinforces a desire for compatibility. Katz and Shapiro [1985] showed that in a market with network externalities, the sponsors of technologies that differ in the size of the installed base may have different preferences for compatibility. For example, a dominant firm might prefer a technological design that is
TL;DR: In this paper, three distinct patterns of market shares emerge as an equilibrium outcome, reflecting three distinct strategies in respect of timing of the introduction of new products, and the main novelty, relative to the existing literature on vertical product differentiation, lies in the incorporation of "learning by doing."
Abstract: In a firm model of vertical product differentiation, three distinct patterns of market shares emerge as an equilibrium outcome, reflecting three distinct strategies in respect of timing of the introduction of new products. The main novelty, relative to the existing literature on vertical product differentiation, lies in the incorporation of "learning by doing." This assumption generates stability of market share patterns over a sequence of product innovations. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this article, the authors examine first mover advantages in a new product market with sequential entry and consider the intertemporal pricing strategy of the first entrant who anticipates the late entry of a rival firm.
Abstract: We examine first mover advantages in a new product market with sequential entry Effort is necessary to learn how to use new products, and consumers are assumed to differ in their ability to expend such effort We consider the intertemporal pricing strategy of the first entrant who anticipates the late entry of a rival firm The first entrant's optimal strategy is to set a low introductory price This builds up a customer base, which remains loyal despite the later entry of a lower-priced rival, and weakens price competition between the two firms Thus, brand loyalty makes entry into the market easier
TL;DR: In this paper, the authors present a Cournot-Nash model of horizontal mergers between firms that engage in spatial price discrimination, which extends the analysis of such mergers as presented in the U.S. Department of Justice's Merger Guidelines.
Abstract: The authors present a Cournot-Nash model of horizontal mergers between firms that engage in spatial price discrimination. The model extends the analysis of such mergers as presented in the U.S. Department of Justice's Merger Guidelines. Rather than conclude the evaluation of such a merger with an estimate of the postmerger Hirschman-Herfindahl Index, as is done in the Merger Guidelines, the authors' model yields an estimate of the increases in the equilibrium, postmerger delivered.prices caused by the merger. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: The incentive of firms to adopt a new process need not coincide with maximum expected consumer surplus or social welfare if there is uncertainty before the process is adopted and if the only loss from failure is a fixed cost.
Abstract: The incentives of firms to adopt a new process need not coincide with maximum expected consumer surplus or social welfare if there is uncertainty before the process is adopted and if the only loss from failure is a fixed cost. In some cases, no firm will adopt an innovation likely to fail, although expected welfare is maximized if one adopts. In other cases, both firms will adopt an innovation likely to succeed, although expected welfare is maximized if one firm adopts. This occurs because rivalry between firms leads them to adopt together when total expected profits are higher if one firm adopts. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this article, the effects of production joint ventures on their parents' profits and total industry output were analyzed using a conjectural variations model, and it was shown that the profits of parents in the same industry are more likely to increase under conditions of cooperative as opposed to rivalrous behavior.
Abstract: The effects of production joint ventures on their parents' profits and total industry output are analyzed. Using a conjectural variations model, joint ventures that represent new producing entities are shown to be more likely--because the profits of parents in the same industry are more likely to increase--under conditions of cooperative as opposed to rivalrous behavior. Under the same circumstances, industry output increases, although a modest rise in cooperation among firms suffices to reverse these effects. The precise results are shown also to depend upon the degree of coordination of the output decisions of the joint venture and its parents. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this paper, the authors used data on the store brands contained in planned shopping centers in Edmonton and Calgary, Alberta to carry out nonparametric tests of five hypotheses regarding shopping center similarity.
Abstract: This paper uses data on the store brands contained in planned shopping centers in Edmonton and Calgary, Alberta, to carry out nonparametric tests of five hypotheses regarding shopping center similarity. The results yield evidence of (1) shopping center similarity (in store brands) across geographic markets for certain store types, (2) store brand proliferation within shopping centers by multichain firms that operate stores catering to comparison shoppers, (3) greater similarity between malls in store types that are dominated by multichain firms, and (4) greater similarity (in store brands) of malls owned by the same firm than of malls owned by different firms. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this article, the impact of industry structural attributes on the cost of capital to constituent firms is examined within the framework of the Capital Asset Pricing Model (CAPM), and the relationship between industry structure and systematic risk which the CAPM posits as the sole determinant of security returns is investigated using regression methodology.
Abstract: The impact of the structural attributes of industries on the cost of capital to constituent firms is examined within the framework of the Capital Asset Pricing Model (CAPM). The relationship between industry structure and systematic risk which the CAPM posits as the sole determinant of security returns is investigated using regression methodology. The results show that industry characteristics such as capital intensity, capital to labour ratio and entry barriers such as advertising have a significant influence on systematic risk and, hence, on the cost of capital to firms. RECENT US studies (e.g. Sullivan [1982]) have investigated the relationship between market power and the stock market return on equity using the Capital Asset Pricing Model (CAPM). Within the CAPM framework, investor required return is a linear function of systematic risk. The impact of industry structure on expected return is, therefore, likely to be transmitted through investors' perceptions of the relationship between the structural variables and firm systematic risk. Some recent theoretical studies have attempted to model such a relationship. This paper reports an empirical examination of the predictions resulting from these and other related models for a sample of UK firms. Our results show that industry structural characteristics e.g. capital intensity have a significant influence on systematic risk and hence cost of capital of firms, although the predictions of the extant theoretical models are only partly confirmed. The next section identifies a number of microeconomic determinants of corporate systematic risk. Section III discusses the methodology employed in the study. Section IV describes the sampling procedure and explanatory variables. Results are discussed in Section V. The final section provides a summary and the conclusions.
TL;DR: The authors investigated the effects of profit sharing on wages and employment by comparing the labour market behaviour of the John Lewis Partnership with that of four main competitors in the British retail sector and found some evidence that profit-sharing enhances employment but does not significantly affect the level of remuneration.
Abstract: This paper investigates the effects of profit-sharing on wages and employment by comparing the labour market behaviour of the John Lewis Partnership with that of four main competitors. The John Lewis Partnership employs around 30000 workers, who since 1970 have been paid between 13 and 24 per cent of workers' income in the form of a profit-related bonus. The empirical works suggests that profit-sharing in the John Lewis Partnership may be associated with greater levels of employment but does not significantly affect the level of remuneration. IN RECENT years, a growing proportion of employment contracts in Britain have linked pay with the fortunes of the firm, see for example Blanchflower and Oswald [1988]. This trend has been stimulated by the British government's introduction of tax relief for profit related pay (PRP), first in 1987 and extended in 1991. Weitzman [1984] argues that profit-sharing will stabilize employment, reduce unemployment and increase wage flexibility. The possibility of these externalities from profit-sharing on wider economic performance has been used to justify policy interventions. This paper reports empirical tests of wage determination and employment creation effects, based on a comparison of the labour market behaviour of the John Lewis Partnership with that of four important competitors in the British retail sector. We find some evidence that profit-sharing enhances employment
TL;DR: In this article, it is shown that a welfare gain is made by restricting the relative rather than absolute prices that a monopolist can charge for a range of products, and the nature of this class of restrictions is considered.
Abstract: In a model with linear demands and constant variable costs, it is shown that a welfare gain is made by restricting the relative rather than absolute prices that a monopolist can charge for a range of products. The nature of this class of restrictions is considered. One application might occur if cost levels are unknown to the regulatory authority but costs are known to be linear functions of product characteristics. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this paper, the authors consider the implications of game-theoretic models for the competitive or collusive nature of basing point pricing (BPP) in one-shot games, and show that equilibrium price schedules do not generally conform to BPP with unrestricted price competition.
Abstract: We consider the implications of game-theoretic models for the competitive or collusive nature of basing point pricing (BPP). In one-shot games, equilibrium price schedules do not generally conform to BPP with unrestricted price competition. Nevertheless BPP can emerge in dynamic contexts. Define modified FOB price policy as using FOB in one's natural market and matching the rival's delivered price whenever profitable. A configuration where both firms do this is a subgame perfect equilibrium of a two-stage game where firms choose first price policies and then compete in the marketplace. Further,with repeated competition BPP can be used as punishment device.
TL;DR: Roller and Tombak as mentioned in this paper developed a two-stage game in which firms choose between a flexible technology and a dedicated technology in the first stage and subsequently choose output, and extended the analysis by allowing for mixed strategies and complementary products.
Abstract: In a recent article, Roller and Tombak (1990) analyze the strategic choice of modern flexible production technologies. They develop a two-stage game in which firms choose between a flexible technology and a dedicated technology in the first stage and subsequently choose output. This note corrects an error in one of the graphs in that paper, provides an interpretation of the new graph, and extends the analysis by allowing for mixed strategies and complementary products. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this paper, the authors use a two-stage game and assume that if mergers are legal then in the second stage firms will play a cooperative game that determines the division of monopoly profits.
Abstract: If capital lowers marginal cost and a firm with more capital gets a bigger share of the surplus in merger bargaining, then the equilibrium price with a merger may be lower than without a merger. If entry is restricted the level of industry profits minus investment costs may be higher if mergers are prohibited. Thus, a regulatory climate that permits mergers may harm firms and benefit consumers. LEGAL restrictions against mergers are intended to protect consumers against monopolistic pricing; to the extent that the restrictions are successful, they are expected to benefit consumers and reduce industry profits. However, antimerger laws can have exactly the opposite effect: they can increase profits and reduce consumer welfare. This paper demonstrates and explains these apparently paradoxical results. We use a two stage model and assume that if mergers are legal then in the second stage firms will play a cooperative game that determines the division of monopoly profits; we model the second stage game in reduced form, using sharing rules. If mergers are not allowed, firms play a non-cooperative NashCournot game in the second stage. In either case, investment, which reduces marginal cost, is chosen non-cooperatively in the first stage of the game. Since marginal-cost-reducing investment shifts out a firm's best-response function (in a non-cooperative Nash-Cournot game) and leads to a reduction in the rival's equilibrium output, it provides a strategic benefit (Brander and Spencer [1983]). Under reasonable conditions investment also confers a strategic benefit in the cooperative (merger) game. The magnitude of the strategic benefits of investment can be quite different in the two second stage games. If the benefit is sufficiently powerful in the case where merger is expected, the equilibrium level of investment can be higher than in the situation where no merger occurs. This effect can be sufficiently large that the total level of profits for the industry, i.e. the variable profits obtained in the second stage minus investment costs incurred in the first, are lower in the merger equilibrium than in the no-merger equilibrium. This is the sense in
TL;DR: In this paper, the authors examine the effects of exclusionary practices on the process of technological change, modeled as a sequence of innovations, and show that the possibility of exclusion can change the equilibrium time pattern of investments in research from that of the case of no exclusion.
Abstract: This paper examines the effects of exclusionary practices on the process of technological change, modeled as a sequence of innovations. The winner of an early innovation may be able to take (possibly costly) actions that effectively exclude its rivals from competition for subsequent innovations. The possibility of exclusion can change the equilibrium time pattern of investments in research from that of the case of no exclusion. Conditions that make such a change most likely are also conditions under which such a change is most likely to reduce the efficiency of the allocation of resources to technological change. Many people believe that the possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry a stimulant to industrial progress. -Judge Learned Hand in the Alcoa decision. In analyzing such business strategy ex visu a given point in time, the economist sees (restrictions) which seem to him synonymous with loss of opportunities to produce. He does not see that restrictions of this type are, in the conditions of the perennial gale (of creative destruction), often unavoidable incidents, of a long-run process of expansion which they protect, rather than impede.
TL;DR: In this article, the authors consider assumptions on consumer heterogeneity that can generate bidirectional distortion in a model of quality discrimination and show that the profit-maximizing strategy can involve the simultaneous degradation of quality at the low end of the spectrum, while quality enhancement occurs at the high end.
Abstract: This paper considers assumptions on consumer heterogeneity that can generate bidirectional distortion in a model of quality discrimination. It is shown that the profit-maximizing strategy can involve the simultaneous degradation of quality at the low end of the spectrum, while quality enhancement occurs at the high end. The implications of this result for optimal income taxes and incentive regulation are drawn out. It is argued that the welfare losses of quality distortion are likely to be lower under bidirectional distortion than under the unidirectional distortion derived in the literature. Copyright 1992 by Blackwell Publishing Ltd.
TL;DR: In this article, the authors apply hindsight review to contracts for variable factors in a regime with profit regulation, and the firm increases its capital stock and relies more heavily on spot market purchases for its variable inputs, but welfare effects on consumers are ambiguous.
Abstract: Regulators sometimes review a regulated firm's input decisions in retrospect (i.e., with "20-20 hindsight") and punish bad outcomes rather than bad decisions. When such practices are applied consistently to contracts for variable factors in a regime with profit regulation, the firm increases its capital stock and relies more heavily on spot market purchases for its variable inputs; the firm's profits are reduced, but welfare effects on consumers are ambiguous. If applied as a type of "stochastic price cap" regulation, however, hindsight review can induce variable input choices that minimize expected costs. Copyright 1992 by Blackwell Publishing Ltd.