This paper provides an analysis of whether the original Cournot and Bertrand models of oligopoly competition provide a satisfactory basis for assessing the extent to which real-world markets are effectively competitive. It agrees that Cournot and Bertrand offer a biased explanation of the real world, as each are constrained by rigid assumptions which limit their application to reality. However, learning about them is vital as they allow us to develop more complex models, and more importantly they aid competition authorities in assessing whether there are competition concerns that need to be investigated.
{"title":"The Value of Theoretical Models for Real-World Market Analysis","authors":"Maryam Khan","doi":"10.2139/ssrn.2656451","DOIUrl":"https://doi.org/10.2139/ssrn.2656451","url":null,"abstract":"This paper provides an analysis of whether the original Cournot and Bertrand models of oligopoly competition provide a satisfactory basis for assessing the extent to which real-world markets are effectively competitive. It agrees that Cournot and Bertrand offer a biased explanation of the real world, as each are constrained by rigid assumptions which limit their application to reality. However, learning about them is vital as they allow us to develop more complex models, and more importantly they aid competition authorities in assessing whether there are competition concerns that need to be investigated.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"119 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-03-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116345093","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper proves that the Stackelberg extension has turned the Cournot duopoly model into a perfectly competitive one. The reason for this killing lies with the homogenous goods produced by the duopolists. They are not truly duopolists. Stackelberg helps destroy the traditional duopoly or oligopoly model.
{"title":"The Destructive Stackelberg Competition Model","authors":"Hak Choi","doi":"10.2139/ssrn.2559541","DOIUrl":"https://doi.org/10.2139/ssrn.2559541","url":null,"abstract":"This paper proves that the Stackelberg extension has turned the Cournot duopoly model into a perfectly competitive one. The reason for this killing lies with the homogenous goods produced by the duopolists. They are not truly duopolists. Stackelberg helps destroy the traditional duopoly or oligopoly model.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-02-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114753717","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper provides a new and simple model of endogenous horizontal product differentiation based on a standard demand structure derived from quadratic utility. One objective of the paper is to explain the “empirical Bertrand paradox” – the failure to observe homogeneous product Bertrand oligopoly, while homogeneous product Cournot oligopoly has significant empirical relevance. In our model firms invest in product differentiation if differentiation investments are sufficiently effective (i.e. if differentiation is not too costly). The threshold level of differentiation effectiveness needed to induce such investments is an order of magnitude less for Bertrand firms than for Cournot firms. Thus there is a wide range over which Bertrand firms differentiate their products but Cournot firms do not. If Cournot firms do choose to differentiate their products, corresponding Bertrand firms always differentiate more. We also establish the important insight that if product differentiation is endogenous Bertrand firms may charge higher prices and earn higher profits than corresponding Cournot firms, in contrast to the general presumption that Bertrand behavior is more competitive than Cournot behavior. Interestingly, consumer surplus increases with differentiation in the Cournot model but, due to sharply increasing prices, decreases with differentiation in the Bertrand model.
{"title":"Endogenous Horizontal Product Differentiation Under Bertrand and Cournot Competition: Revisiting the Bertrand Paradox","authors":"James A. Brander, Barbara J. Spencer","doi":"10.3386/w20966","DOIUrl":"https://doi.org/10.3386/w20966","url":null,"abstract":"This paper provides a new and simple model of endogenous horizontal product differentiation based on a standard demand structure derived from quadratic utility. One objective of the paper is to explain the “empirical Bertrand paradox” – the failure to observe homogeneous product Bertrand oligopoly, while homogeneous product Cournot oligopoly has significant empirical relevance. In our model firms invest in product differentiation if differentiation investments are sufficiently effective (i.e. if differentiation is not too costly). The threshold level of differentiation effectiveness needed to induce such investments is an order of magnitude less for Bertrand firms than for Cournot firms. Thus there is a wide range over which Bertrand firms differentiate their products but Cournot firms do not. If Cournot firms do choose to differentiate their products, corresponding Bertrand firms always differentiate more. We also establish the important insight that if product differentiation is endogenous Bertrand firms may charge higher prices and earn higher profits than corresponding Cournot firms, in contrast to the general presumption that Bertrand behavior is more competitive than Cournot behavior. Interestingly, consumer surplus increases with differentiation in the Cournot model but, due to sharply increasing prices, decreases with differentiation in the Bertrand model.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129467806","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Inconvenient truths prevent econometric merger retrospective studies from substantially altering our understanding of competitive effects from horizontal mergers. Econometrics cannot definitively determine the effects of particular mergers, and if they could, econometric merger retrospectives could not provide enough evidence to ground merger assessments in data on actual merger effects rather than in economic theory and legal presumptions. If merger retrospectives are to have some prospect of recalibrating merger enforcement, they must be transformed from econometric exercises into case studies examining the details of the relevant agency’s assessment, but inconvenient truths likely prevent much from being learned through even such studies.
{"title":"Inconvenient Truths on Merger Retrospective Studies","authors":"G. Werden","doi":"10.2139/ssrn.2545343","DOIUrl":"https://doi.org/10.2139/ssrn.2545343","url":null,"abstract":"Inconvenient truths prevent econometric merger retrospective studies from substantially altering our understanding of competitive effects from horizontal mergers. Econometrics cannot definitively determine the effects of particular mergers, and if they could, econometric merger retrospectives could not provide enough evidence to ground merger assessments in data on actual merger effects rather than in economic theory and legal presumptions. If merger retrospectives are to have some prospect of recalibrating merger enforcement, they must be transformed from econometric exercises into case studies examining the details of the relevant agency’s assessment, but inconvenient truths likely prevent much from being learned through even such studies.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-01-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132247278","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A land monopoly is a theoretical “impossibility” which, nonetheless, allows for a spatial empirical approach. We specify spatial tests of land monopoly, understood as a pricing strategy where land prices can be ‘over and above’ the ones determined by city-wide location and market regulation. We use the city of Barranquilla (Colombia) as a case study. This city offers ideal conditions to investigate theories of land monopoly given extreme land concentration in its highly regulated elite northern fringe. We found no evidence of land monopoly pricing by using different specifications of the spatial tests, which conformed to standard urban economic expectations.
{"title":"An Empirical Approach to Land Monopoly: The Case of Barranquilla, Colombia","authors":"Nestor Garza, C. Lizieri","doi":"10.2139/ssrn.2807024","DOIUrl":"https://doi.org/10.2139/ssrn.2807024","url":null,"abstract":"A land monopoly is a theoretical “impossibility” which, nonetheless, allows for a spatial empirical approach. We specify spatial tests of land monopoly, understood as a pricing strategy where land prices can be ‘over and above’ the ones determined by city-wide location and market regulation. We use the city of Barranquilla (Colombia) as a case study. This city offers ideal conditions to investigate theories of land monopoly given extreme land concentration in its highly regulated elite northern fringe. We found no evidence of land monopoly pricing by using different specifications of the spatial tests, which conformed to standard urban economic expectations.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"158 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116110975","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A manufacturer contracting secretly with several downstream competitors faces an opportunism problem, preventing it from exerting its market power. In an infinitely repeated game, the opportunism problem can be relaxed. We show that the upstream firm's market power can be restored even further if the upstream firm chooses a mixed distribution system in which it makes use of an intermediary to distribute the good to a subset of the retailers and delivers directly only to the remaining downstream firms.
{"title":"Collusive Effects of a Monopolist's Use of an Intermediary to Deliver to Retailers","authors":"I. Teichmann, Vanessa von Schlippenbach","doi":"10.2139/ssrn.2553165","DOIUrl":"https://doi.org/10.2139/ssrn.2553165","url":null,"abstract":"A manufacturer contracting secretly with several downstream competitors faces an opportunism problem, preventing it from exerting its market power. In an infinitely repeated game, the opportunism problem can be relaxed. We show that the upstream firm's market power can be restored even further if the upstream firm chooses a mixed distribution system in which it makes use of an intermediary to distribute the good to a subset of the retailers and delivers directly only to the remaining downstream firms.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132474271","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I extend Shy and Wang's (2011) model and study the problem of successive monopoly when complementarity is imperfect. In my model, consumers value the good no matter they pay in cash or by card. However, they are willing to pay a higher price if they can enjoy additional card service. Since merchants can sell at a lower price without providing card service, their outside option imposes a participation constraint on the card network's maximization. I show that double marginalization does not arise as long as the constraint is binding, and the constraint is binding if and only if the degree of complementarity is smaller than a critical value. If double marginalization does not arise, the effects of proportional fees found in the S-W model become ambiguous.
{"title":"Payment Card Fees and Merchants' Outside Options","authors":"B. Chung","doi":"10.2139/ssrn.2320330","DOIUrl":"https://doi.org/10.2139/ssrn.2320330","url":null,"abstract":"I extend Shy and Wang's (2011) model and study the problem of successive monopoly when complementarity is imperfect. In my model, consumers value the good no matter they pay in cash or by card. However, they are willing to pay a higher price if they can enjoy additional card service. Since merchants can sell at a lower price without providing card service, their outside option imposes a participation constraint on the card network's maximization. I show that double marginalization does not arise as long as the constraint is binding, and the constraint is binding if and only if the degree of complementarity is smaller than a critical value. If double marginalization does not arise, the effects of proportional fees found in the S-W model become ambiguous.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-11-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123747678","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper proves that the so-called marginal cost curve in the traditional monopoly model is a false image built on some wasteful experimental average cost curve. This paper then reveals the ugly but true picture of monopolists, and proves that they will not be satisfied with such limited economic rent, but rather they plunder for unlimited monopolist profit. This paper concludes with the comment of how the false rent concepts have been abused to kill people and confiscate their properties.
{"title":"The False Economic Rent Theory","authors":"Hak Choi","doi":"10.2139/ssrn.2512725","DOIUrl":"https://doi.org/10.2139/ssrn.2512725","url":null,"abstract":"This paper proves that the so-called marginal cost curve in the traditional monopoly model is a false image built on some wasteful experimental average cost curve. This paper then reveals the ugly but true picture of monopolists, and proves that they will not be satisfied with such limited economic rent, but rather they plunder for unlimited monopolist profit. This paper concludes with the comment of how the false rent concepts have been abused to kill people and confiscate their properties.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-10-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134298148","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Shimer (2005) argues that a search and matching model of the labor market in which wage is determined by Nash bargaining cannot generate the observed volatility in unemployment and vacancy in response to reasonable labor productivity shocks. This paper examines how incorporating monopolistically competitive firms with a working capital requirement (in which firms borrow funds to pay their wage bills) improves the ability of the search models to match the empirical fluctuations in unemployment and vacancy without resorting to an alternative wage setting mechanism. The monetary authority follows an interest rate rule in the model. A positive labor productivity shock lowers the real marginal cost of production and lowers inflation. In response to the fall in price level, the monetary authority reduces the nominal interest rate. A lower interest rate reduces the cost of financing and partially offsets the increase in labor cost from a higher productivity. A reduced labor cost implies the firms retain a greater portion of the gain from a productivity shock, which gives them a greater incentive to create vacancies. Simulations show that a working capital requirement does indeed improve the ability of the search models to generate fluctuations in key labor market variables to better match the U.S. data.
{"title":"Working Capital Requirement and the Unemployment Volatility Puzzle","authors":"Tsu-ting Tim Lin","doi":"10.2139/ssrn.3084153","DOIUrl":"https://doi.org/10.2139/ssrn.3084153","url":null,"abstract":"Shimer (2005) argues that a search and matching model of the labor market in which wage is determined by Nash bargaining cannot generate the observed volatility in unemployment and vacancy in response to reasonable labor productivity shocks. This paper examines how incorporating monopolistically competitive firms with a working capital requirement (in which firms borrow funds to pay their wage bills) improves the ability of the search models to match the empirical fluctuations in unemployment and vacancy without resorting to an alternative wage setting mechanism. The monetary authority follows an interest rate rule in the model. A positive labor productivity shock lowers the real marginal cost of production and lowers inflation. In response to the fall in price level, the monetary authority reduces the nominal interest rate. A lower interest rate reduces the cost of financing and partially offsets the increase in labor cost from a higher productivity. A reduced labor cost implies the firms retain a greater portion of the gain from a productivity shock, which gives them a greater incentive to create vacancies. Simulations show that a working capital requirement does indeed improve the ability of the search models to generate fluctuations in key labor market variables to better match the U.S. data.","PeriodicalId":142139,"journal":{"name":"ERN: Monopoly","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-10-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133726864","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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