Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Monday, October 19, 2009

On production costs in vertical differentiation models

Posted by D. Daniel Sokol


Dorothée Brécard (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes) has a new working paper On production costs in vertical differentiation models.

ABSTRACT: In this paper, we analyse the effects of the introduction of a unit production cost beside a fixed cost of quality improvement in a duopoly model of vertical product differentiation. Thanks to an original methodology, we show that a low unit cost tends to reduce product differentiation and thus prices, whereas a high unit cost leads to widen product differentiation and to increase prices.

October 19, 2009 | Permalink | Comments (0) | TrackBack (0)

Price Discrimination under Customer Recognition and Mergers

Posted by D. Daniel Sokol


Rosa Branca Esteves (Universidade do Minho - NIPE) and Hélder Vasconcelos (Univ. Católica Portuguesa (CEGE) - CEPR) explain Price Discrimination under Customer Recognition and Mergers

ABSTRACT: This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no effect on the outsider firm's profitability, thereby eliminating the so called "free-riding problem". Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected and, therefore, suggesting that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.

October 19, 2009 | Permalink | Comments (0) | TrackBack (0)

Subsidizing Firm Entry in Open Economies

Posted by D. Daniel Sokol


Michael P. Pflüger (University of Passau) and Jens Suedekum (University of Duisburg-Essen) address Subsidizing Firm Entry in Open Economies.

ABSTRACT: Entrepreneurs who decide to enter an industry are faced with different levels of effective entry costs in different countries. These costs are heavily influenced by economic policy. What is not well understood is how international trade affects the government incentive to impact on entry costs, and how entry subsidies can be used strategically in open economies. We present a general equilibrium model of monopolistic competition with two (potentially) asymmetric countries and heterogeneous firms where government subsidizes entry of domestic entrepreneurs. Under autarky the entry subsidy indirectly corrects for the monopoly pricing distortion. In the autarky equilibrium these subsidies trigger entry, but they eventually do not lead to more but to better firms in the market. In the open economy there is another, strategic motive for entry subsidies as the tightening of domestic market selection also affects exporting decisi! ons for domestic and foreign firms. Our analysis shows that entry subsidies in the Nash-equilibrium are first increasing, then decreasing in the level of trade openness. This implies a U-shaped relationship between openness and effective entry costs. Merging cross-country data on entry costs with international trade openness indices we empirically confirm this theoretical prediction.

October 19, 2009 | Permalink | Comments (0) | TrackBack (0)

Technology, Competition and the Time of Entry: Diversification Patterns in the Development of New Drugs

Posted by D. Daniel Sokol


Tatiana Plotnikova (Friedrich-Schiller-University Jena) focuses a new working paper on Technology, Competition and the Time of Entry: Diversification Patterns in the Development of New Drugs.

ABSTRACT: This paper empirically investigates the determinants of R&D diversification strategies in the drug industry. It enriches the existing literature by proposing to look at diversification factors, which reflect market and technological proximity of an R&D project towards other projects within a firm's portfolio as well as R&D competition factors. Additionally, the characteristics of R&D in the market where a new potential product is developed affiect future product choice. The analysis is performed for products-in-development data, merged with firms' patents, which allows us to separate project proximity in market niches from technological proximity. The results of empirical estimation support an idea that R&D diversification is governed by the economies of scope as well as the escape competition motive. Moreover, it is found that competition rather than spillovers in the niche where an R&D project i! s developed defines firms' decisions to diversify.

October 19, 2009 | Permalink | Comments (0) | TrackBack (0)