Degree Of Product Differentiation Research Articles

Are Partial Ownership Arrangements Advantageous ?

Using a two-stage differentiated-product Cournot duopoly model with technological spillovers, this paper investigates the effect partial ownership arrangements (POAs) among rivals has on the market outcome when firms also compete in a non-production activity, RqD. Although POAs are found to be associated with lower profits, when the degree of product differentiation is small and technological spillovers are relatively large, they are found to result in higher RqD, output and social welfare levels.JEL Classification: D43, L13, L15

El papel de los rendimientos y la diferenciación de productos como determinantes de la estabilidad del cártel

We study cartel stability in a differentiated quantity-setting duopoly with decreasing returns to scale. We show that a cartel may be equally stable in the presence of lower differentiation, provided that the decreasing returns parameter is higher. Furthermore, we show that, above a given discount rate, a cartel may be stable for any degree of product differentiation.

Supplier-Buyer Proximity and Production to Order Choice

We study the determinants of the firm-level choice to produce following an order placed by a downstream firm (production to order) or to produce in advance. We rationalize this choice through a simple theoretical model and apply it to a firm-level empirical analysis. Relying on a large panel of Italian manufacturing firms, we show that two main variables affect this choice: the distance between the supplier and the buyer and the degree of product differentiation in downstream industries where products are sold. The impact of proximity on the choice of producing to order crucially depends on the degree of product differentiation in downstream markets. We find that, in industries where average product differentiation is high, production to order prevails if the supplier is located close to the buyer. On the contrary, proximity is associated to production in advance in homogeneous sectors. We also find that, if suppliers are located in a different country from that of the buyers, they will tend to produce to order if product differentiation in downstream industries is low, and produce in advance if product differentiation is high. We also narrow the scope of our analysis to analyze the determinants of production to order originating from the same province where the supplier is located.

Should civil servants be restricted in wage bargaining? A mixed-duopoly approach

Should civil servants (employees in the public sector) be allowed to bargain collectively? To answer this question, we construct a model of unionized mixed duopoly and examine the regulatory framework of public institutions, especially focusing on a wage regulation imposed on the public firm. The wage regulation turns out to yield critical welfare implications as it gives rise to two opposing strategic effects: the wage regulation intensifies downstream-market competition while it loosens upstream-market competition. The overall welfare effect is ambiguous, depending crucially on the degree of product differentiation between the firms. We also show that, in contrast to the popular belief, granting the right to bargain collectively to civil servants would not necessarily help them because they tend to demand excessively high wages when they are allowed to bargain collectively. Finally, we briefly discuss a new perspective on the role of profit motives in public institutions when the wages are determined endogenously.

POLITICAL ECONOMY OF STRATEGIC EXPORT POLICY IN A DIFFERENTIATED DUOPOLY

This paper investigates the effect of a home firm’s lobbying on a strategic export policy in a third market with a differentiated duopoly. We focus on its effect on domestic welfare under Bertrand and Cournot competition. Regardless of the mode of competition, the strategic export policy cannot improve domestic welfare in the presence of lobbying if the degree of product differentiation is high or the government is overly concerned with political contribution relative to domestic welfare. Moreover, for the same degree of product differentiation, the lobbying-induced export policy is more likely to deteriorate domestic welfare relative to free trade under Cournot competition.

Reciprocal Dumping With Product Differentiation

This paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that intra-industry trade, i.e. reciprocal dumping, can result in lower total surplus than autarky in a Cournot model for any degree of product differentiation. Moreover, trade can reduce welfare compared to autarky in a Bertrand model when the local markets are sufficiently competitive and products are sufficiently close substitutes. Otherwise it unambiguously increases welfare.

Reciprocal Dumping with Product Differentiation*

AbstractThis paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that intra‐industry trade, i.e. “reciprocal dumping,” can result in lower total surplus than autarky in a Cournot model for any degree of product differentiation. Moreover, trade can reduce welfare compared to autarky in a Bertrand model when the local markets are sufficiently competitive and products are sufficiently close substitutes. Otherwise it unambiguously increases welfare.

Market Access Asymmetry in Food Trade

Using a bilateral trade equation derived from a monopolistic competition model, we investigate market access reciprocity in food trade among the United States, Canada, the European Union and Japan. We explore country- and industry-specific market access asymmetry through a border effect approach. Our findings reveal marked asymmetries in reciprocal border effects, both across countries and industries. Trade policy measures, particularly non-tariff barriers (NTBs), the degree of product differentiation and a ‘home bias’ in preferences, are important factors in explaining levels in border effects. Asymmetries in border effects are mainly explained by trade policies.

A Model of Vertical Oligopolistic Competition

This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.

MARKET DIMENSIONALITY AND THE PROLIFERATION OF SMALL-SCALE FIRMS

We build an agent-based computational model to study how the changing number of active product variants in a two-dimensional product space affects the performance of different firm types (i.e. large-scale and small-scale enterprises). We use an alternative approach to measure product space dimensionality, considering that dimensions may be a fraction of the Euclidean measure. The results confirm that high dimensionality gives advantage to small-scale firms. Additionally, we find that large-scale firms may also benefit from initial increasing dimensionality, since it allows a small degree of product differentiation and price discrimination.

Market Access Asymmetry in Food Trade

Using a bilateral trade equation derived from a monopolistic competition model, we investigated market access reciprocity in food trade among the US, Canada, the EU and Japan. We explore country and industry-specific market access asymmetry through the border effect approach, re-challenging the underlying main explanations. Our findings reveal marked asymmetry in reciprocal trade openness; indeed, access to the food markets of the US and Japan appears significantly easier than reciprocal access to both Canada and, especially, the EU. Policy trade barriers, firstly in the forms of NTBs, the degree of product differentiation and 'home bias' in preferences, are all important factors in explaining border effects. Moreover, several stylized facts suggest that border effect interpretation should also be based on political economy arguments.

Two tales on resale

In some markets vertically integrated firms sell directly to final customers but also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard “retail minus X regulation” may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.

Profit reducing international outsourcing

Recent empirical evidence shows a negative relationship between international outsourcing and profitability. This paper provides a theoretical explanation for this phenomenon. We show that, in an oligopolistic market, firms earn lower profits in the outsourcing equilibrium compared to the situation where neither firm does outsourcing, and this holds irrespective of the intensity of competition. We show that whether international outsourcing is likely to reduce profit under more intense competition (measured by the degree of product differentiation, number of firms and the type of product market competition, namely, Cournot and Bertrand competition) is ambiguous. We further show that international outsourcing may be socially ‘excessive’ for the sourced country and for the world.

Bertrand and Price-Taking Equilibria in Markets with Product Differentiation

In this paper we show that a homogeneous-product market with multiple Bertrand equilibria becomes a market with a single Bertrand equilibrium when we introduce a small degree of product differentiation. When differentiation tends to zero, that Bertrand equilibrium converges to the unique price-taking equilibrium of the homogeneous-product market, which is in turn one of the multiple Bertrand equilibria for that market.

Two Tales on Resale

In some markets vertically integrated firms sell directly to final customers but also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard retail minus X regulation may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.

The number of firms, international product differentiation and an import tariff

By using an n-firm Cournot model, this article examines the relationships among the number of domestic and foreign firms, the product differentiation between the domestic and foreign firms and an import tariff. It is shown that the relative number of domestic and foreign firms as well as the degree of product differentiation between the domestic and foreign firms indeed affects the level of the tariff on imports. Furthermore, whether or not an increase in product differentiation between the domestic and foreign firms reduces the level of the import tariff is dependent on the relative number of domestic and foreign firms.

Economies of scale and market structure in international grain trade

AbstractA large body of literature has examined international grain trade in imperfectly competitive models. The article develops a two‐stage duopoly model that considers a private trader and a State Trading Enterprise (STE) competing on a foreign market. The key difference between the private trader and the STE is their international organization; while the STE makes use of external agents to export, the private firm may choose to internalize international transactions. The game is solved for different modes of competition and under both assumptions of homogeneous and differentiated products, in order to assess how these assumptions affect the outcome of the game. The results of the game are examined by using numerical examples. The analysis shows that external shocks on export markets may result in a change of market structure and, consequently, of market shares. These effects depend on the initial market structure. Furthermore, the degree of product differentiation and the assumed mode of competition significantly affect the relative values of transaction and fixed costs at which the market structure changes.

Increasing Returns, Imperfect Competition and Factor Prices

We show how, in general equilibrium models featuring increasing returns, imperfect competition and endogenous markups, changes in the scale of economic activity affect income distribution across factors. Whenever final goods are gross-substitutes (gross-complements), a scale expansion raises (lowers) the relative reward of the scarce factor or the factor used intensively in the sector characterized by a higher degree of product differentiation and higher fixed costs. Under very reasonable hypothesis, our theory suggests that scale is skill-biased. This result provides a microfoundation for the secular increase in the relative demand for skilled labor. Moreover, it constitutes an important link among major explanations for the rise in wage inequality: skill-biased technical change, capital-skill complementarities and international trade. We provide new evidence on the mechanism underlying the skill bias of scale.

Airline alliances and entry deterrence

This paper investigates the role of code-sharing alliances on entry deterrence. One major carrier operates a network with one hub that links n cities. It competes with another foreign carrier on one international spoke, while the other spokes are domestic and monopolized. There exists a potential entrant on one of the domestic spokes. We demonstrate that entry may increase or decrease the major carrier’s profits, depending on the network size and the degree of product differentiation. When entry decreases the profits, an alliance between incumbents can be used as a credible threat to deter entrants with no significant cost advantage.

HOTELLING'S BEACH WITH LINEAR AND QUADRATIC TRANSPORTATION COSTS: EXISTENCE OF PURE STRATEGY EQUILIBRIA*

In Hotelling type models consumers have the same transportation cost function. We deviate from this assumption and introduce two consumer types. Some consumers have linear transportation costs, while the others have quadratic transportation costs. If at most half the consumers have linear transportation costs, a subgame perfect equilibrium in pure strategies exists for all symmetric locations. Furthermore, no general principle of differentiation holds. With two consumer types, the equilibrium pattern ranges from maximum to intermediate differentiation. The degree of product differentiation depends on the fraction of consumer types.