Homogeneous Goods Research Articles

Macroeconomic Dynamics in Korea During and after Global Financial Crisis: A Bayesian DSGE Approach

We estimate a medium-scale DSGE (dynamic stochastic general equilibrium) model, including a financial accelerator and the search and matching framework in labor markets, for the Korean economy using the Bayesian technique. The estimated model provides the following findings. The recent sluggishness in GDP growth can be explained by slow technology growth, while decline in CPI inflation is affected by falling markup in domestic homogenous goods production and negative intertemporal consumption preference. While wage, unemployment and total labor hours are influenced by various factors, households’ weak bargaining power causes slow wage recovery while pushing the unemployment rate down. There was a spillover from non-big-5 to big-5 firms during the financial crisis. Monetary and fiscal policy has been mostly conservative in the post-crisis period.

Preemptive Mergers in a Vertically Differentiated Unionized Oligopoly

In the context of an international unionized oligopoly with vertical differentiation, the pattern of mergers is investigated. We show that mergers between firms producing the same-quality good lead wages to the reservation level, as well as maximize industry profits. However, it turns out that most of the market structure equilibria are shaped by mergers between producers of differentiated and homogeneous goods. This is so because mergers increase the market share of participating firms at the expense of that of the outsiders, leading to a scenario of preemptive mergers, where the main driving force can be to preempt rival mergers. Finally, it is shown that if three-firm mergers are not allowed, the strategic behavior of firms is eliminated, mergers between same-quality producers occur and social welfare is maximized.

On the equivalence of quantity competition and supply function competition with sunk costs

This paper considers competition in supply functions in a homogeneous goods market in the absence of cost or demand uncertainty. In order to commit to a supply schedule, firms are required to build sufficient capacity to produce any quantity that may be prescribed by that schedule. When the cost of extra capacity (given the level of sales) is strictly positive, any Nash equilibrium outcome of supply function competition is also a Nash equilibrium outcome of the corresponding Cournot game, and vice-versa. Conversely, when the cost-savings from reducing output (given the capacity level) are sufficiently small, any outcome of iterated elimination of weakly dominated strategies in the supply function game is also an outcome of the same process in Cournot, and vice-versa.

Interfirm Bundled Discounts as a Collusive Device

This paper investigates whether and how firms competing in price with homogeneous goods (i.e., Bertrand competitors) can achieve supernormal profits using interfirm bundled discounts. By committing to offering price discounts conditional on the purchase of a specific brand of other differentiated good, the homogeneous good suppliers can separate consumers into distinct groups. Such brand‐specific discounts help the firms relax competition and attain a collusive outcome. Consumers become worse off due to higher effective prices. Our result shows that in oligopolies it is feasible to leverage other's market power without excluding rivals.

The impact of competition on prices with numerous firms

This paper describes a mechanism that sustains high markups, even in markets with homogenous goods and many competing firms. We show that random utility models with idiosyncratic taste shocks driven by standard noise distributions produce, in large markets, robustly high equilibrium markups that are insensitive to the degree of competition. For example, with Gaussian noise and n firms, markups are asymptotically proportional to 1/ln⁡n; consequently, a hundred-fold increase in n, from 10 to 1000 competing firms, only halves the equilibrium markup. The elasticity of the markup with respect to n asymptotically equals the distribution's tail exponent from extreme value theory. Only noise distributions with very thin tails have negative asymptotic markup elasticities.

An extended uniform-price auction mechanism of homogeneous divisible goods: supply optimisation and non-strategic bidding

In an extended uniform-price auction mechanism of homogeneous divisible goods, strategic buyers and non-strategic buyers are allowed to participate in the auction simultaneously, and the optimal supply to strategic buyers is determined by a seller after having observed the bids. For both nonlinear bids and linear bids given by symmetric buyers, pure strategy symmetric Nash equilibriums are analysed, and then the dominant relationship is discussed deeply between the two kinds of equilibrium bids. Some conclusions are drawn about this extended uniform-price auction mechanism, i.e. nonlinear equilibrium bids dominate linear ones, and the supply optimisation can effectively reduce the buyers’ market power and thus eliminate many underpricing equilibriums. Moreover, several suggestions are given on how to choose optimal bidding strategies for buyers and how to design an optimal mechanism for a seller.

Intra-industry trade with pollution concerned cooperation

The authors develop a two-country, two-firm intra-industry trade model. Each firm is operating at its home country and producing homogeneous goods to be consumed in both countries. Governments apply quantity restriction on pollution. Every individual country is affected from the pollution generated during the production process of its own firm. The model shows that efficiency in pollution abatement technology plays a crucial role on welfare maximizing effort of governments. A critical level of pollution abatement technology determines the preponderance of environmental misgivings in welfare maximizing behavior. The more efficient the firms in pollution abatement technology, the less stricter the governments will be in their policies to reduce negative environmental externalities

Dynamic capacity management with uncertain demand and dynamic price

Inspired from practices of Chinese real estate firms, we study dynamic capacity management problems for a firm that sells homogeneous goods over a finite or infinite selling horizon, provided that demand is uncertain, retail price is exogenous but changes according to an auto-regressive process, and there is holding cost for remaining inventory in each period. The capacity problems facing the firm include to determine an initial stock at the beginning of the selling season and to allocate the remaining quantity for the current and future sale in each period to maximize the firm׳s total expected discounted profit. By using Markov decision processes, we show the optimality of a so-called save-up-to level policy (i.e., it is optimal to allocate as much as the save-up-to level to future periods if possible in each period) and the existence of the optimal initial stock. Moreover, we characterize monotone properties of the optimal save-up-to level and the optimal initial stock. Numerical analysis shows that compared to the policy with zero save-up-to level (i.e., always allocating all the remaining inventory to the current period), the advantage of the policy proposed in the present paper is significant when price rising trend is large, holding cost is low, initial price is high, or demand variation is either high or low.

Procurement procedure, competition and final unit price: The case of commodities

We show how institutional and procedural characteristics affect the final price in public procurement. In order to obtain comparable unit prices, our analysis examined public procurement of homogeneous goods only. We examined two Czech commodity markets: electricity and natural gas, which enabled us to use a private market price as a benchmark metric. The regression analysis is based on the standard ordinary least squares method. On a dataset of 277 tenders, we found that the final unit price of the procurement is sensitive to movements in both commodity market price and price estimated ex ante by the procurer. Moreover, we identified that the final price is reduced when the procurer uses an open procedure, an electronic auction, or attracts more competitors.

Horizontal Mergers in Homogeneous Goods Industries: When Is Spare Capacity Sufficient to Offset Unilateral Effects?

The existence of spare capacity is traditionally an important element in the assessment of horizontal mergers in homogeneous goods industries. In principle, non-merging firms with spare capacity can react to a price increase by the merged entity and expand output. This output expansion could make such price increase unprofitable for the merged entity and ultimately offset it. But when do competitors have an incentive to expand output to such an extent as to avert anticompetitive effects? Conversely, when do they have an incentive to follow a price increase by the merged entity? In previous case practice, the European Commission (Commission) often focussed its assessment on the degree of spare capacity available to competitors, i.e., on competitors’ ability, rather than incentive, to expand output. In some of these cases, the mere existence of a large amount of spare capacity at industry level was considered as sufficient to eliminate the risk of unilateral price effects. In two recent important merger cases, the Commission carried out an in-depth analysis of spare capacity that was not only focussed on competitors’ ability to react, but also on their incentive to do so: Outokumpu/Inoxum and INEOS/Solvay/JV. As we explain in more detail in this article, these two cases show that normally competitors of a merged entity do not have an incentive to react to a post-merger price increase sufficiently to alleviate competition concerns. This approach is consistent with the Commission’s Horizontal Merger Guidelines, and supported by sound economic analysis and empirical insights.

Network effects, homogeneous goods and international currency choice: New evidence on oil markets from an older era

AbstractConventional wisdom has it that network effects are strong in markets for homogenous goods, leading to the dominance of one settlement currency in such markets. The dominance of the US dollar in global oil markets is said to epitomize this phenomenon. We question this presumption with evidence for earlier periods showing that several national currencies have simultaneously played substantial roles in global oil markets. European oil import payments before and after World War II were split between the dollar and non‐dollar currencies, mainly sterling. Differences in use of the dollar across countries were associated with trade linkages with the United States and the size of the importing country. That several national currencies could simultaneously play a role in international oil settlements suggests that a shift from the current dollar‐based system toward a multipolar system in the period ahead is not impossible.

The Impact of Price Variability on US Imports of Homogeneous Inputs

In this paper, I quantify the impact of price variability on homogeneous intermediate goods imports. In product-level data, I find a country's share of US imports is decreasing in the level and the variance of its unit price. This finding is consistent with a model of sourcing decisions in which risk averse final-goods firms choose the optimal distribution of intermediate inputs demand across suppliers.

Efectos de integraciones de firmas en mercados de bienes homogéneos

This article models the potential effects of firm mergers on the price of a market for homogenous goods. The analysis is carried out according to two scenarios: a) firms have similar levels of technology at their disposal and b) a degree of heterogeneity is assumed between groups of firms. It is found that even when mechanisms are in place to favor efficiency in product supply, there is a risk that prices will increase.

An experimental study of corporate social responsibility through charitable giving in Bertrand markets

We experimentally investigate a Bertrand market with homogenous goods in which sellers can announce the donation of a share of their profits to an existing non-profit organization. In a 2×2 design, we vary the credibility of announcements and the efficiency of the contributions to the public fund. We find that sellers’ donations are strictly positive independently of the credibility of the announcements, and their donations are higher if announcements are credible and efficiency is high. However, market outcomes in terms of prices and profits do not differ significantly in any treatment that allows for contributions to a public fund. Analysis of buyer decisions reveals that prices are the main driver of purchase decisions while higher donations only affect purchase decisions when they are credible and price differences are negligible. Our results indicate that under intense competition the possibility of attracting customers through corporate social responsibility activities is limited, although the constant positive level of contributions suggests that norms lead to a certain minimum level of corporate social responsibility.

Hybrid Bottom-up/Top-down Energy and Economy Outlooks: A Review of IMACLIM-S Experiments

In this paper we survey the research undertaken at the Centre International de Recherche sur l’Environnement et le Developpement (CIRED) on the combination of the IMACLIM-S macroeconomic model with ‘bottom-up’ energy modeling, with a view to associate the strengths and circumvent the limitations of both approaches to energy-economy-environment (E3) prospective modeling. We start by presenting the two methodological avenues of coupling IMACLIM-S with detailed energy systems models pursued at CIRED since the late 1990s’: (1) the calibration of the behavioral functions of IMACLIM-S that represent the producers’ and consumers’ trade-offs between inputs or consumptions, on a large set of bottom-up modeling results; (2) the coupling of IMACLIM-S to some bottom-up model through the iterative exchange of some of each model’s outputs as the other model’s inputs until convergence of the exchanged data, comprising the main macroeconomic drivers and energy systems variables. In the following section, we turn to numerical application and address the prerequisite of harmonizing national accounts, energy balance and energy price data to produce consistent hybrid input-output matrices as a basis of scenario exploration. We highlight how this data treatment step reveals the discrepancies and biases induced by sticking to the conventional modeling usage of uniform pricing of homogeneous goods. IMACLIM-S rather calibrates agent-specific margins, which we introduce and comment upon. In a further section we sum up the results of 4 IMACLIM-S experiments, insisting upon the value-added of hybrid modeling. These varied experiments regard international climate policy burden sharing; the more general numerical consequences of shifting from a biased standard CGE model perspective to the hybrid IMACLIM approach; the macroeconomic consequences of a strong development of electric mobility in the European Union; and the resilience of public debts to energy shocks. In a last section we offer some conclusions and thoughts on a continued research agenda.

Product Differentiation and the Effects of Trade Networks Over Time

Understanding the determinants of bilateral trade has long been a primary interest in international trade. Much research has been undertaken showing that network effects such as distance, shared borders, common languages, and colonial ties influence the volume of trade flowing between trading partners. It has been further demonstrated that these effects differ depending on the type of good being traded. The trade of differentiated goods is more heavily influenced by network effects than the trade of homogeneous goods, suggesting that differentiated goods face higher trade barriers. The work in this paper furthers these findings by showing that the influence of network effects is not constant but rather differs over the length of time a product has traded. Furthermore, the differences between differentiated and homogeneous goods are significant for newly trading goods but diminish as they trade for longer periods of time. A theoretical search model is proposed that makes two predictions. The first is variation in the effect of network relationships over time and a general reduction in these effects as products trade for longer. The second is a relatively higher reliance on network effects for differentiated goods in the short term but convergence towards that of homogeneous goods in the long term. Strong support for these predictions are found using gravity model estimations and bilateral trade data. By controlling for the length of time a product has traded, evidence of variation in the impact of network effects across product lifespans as well as convergence in estimated coefficients across differentiated and homogeneous goods is observed. Given these findings, it is clear that the length of time a product has traded has a significant impact on trade determinants.

Failing to Choose the Best Price: Theory, Evidence, and Policy

Both the “law of one price” and Bertrand’s (J Savants 67:499–508, 1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and/or show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include: simplifying the choice environment, for instance by restricting price to be a scalar; advising consumers of their expected costs under each option; or choosing on behalf of consumers.

Tying and Bundled Discounts: An Equilibrium Analysis of Antitrust Liability Tests

Courts have struggled with determining when bundled discounts constitute unlawfully anticompetitive behavior. The current circuit split reflects an absence of consensus. This lack of legal guidance creates uncertainty in the market, with firms being given inconsistent – and sometimes contradictory standards on how to avoid antitrust liability. For the most part, we consider a standard paradigm for analyzing bundled discounts. Suppose that there are two firms. Firm 1 produces a monopoly product, A, and also another product, B, which competes with another version of B produced by Firm 2. The concern is the extent to which the price paid for A is linked to the purchase of B from Firm 1: has the bundling resulted in anticompetitive conduct in violation of Section 2 of the Sherman Act? We analyze three main approaches: the discount attribution test, the Elhauge proposal, and the Profit Sacrifice Test. Each of these has received much recent discussion, but very little of the debate takes into account the effects of bundled discounts where all firms are setting prices that maximize profits, i.e. in equilibrium. . With homogeneous goods in the B market, the attribution test should be failed is all firms are maximizing profits. The Elhauge proposal makes sense with equilibrium prices in some types of markets, but not others. The profit sacrifice test turns out to be vacuous when applied to bundled discounts, since in equilibrium there turns out to be no profit sacrifice. i. We explore related issues with tying arrangements. * The John Michael Stuart Centennial Professor of Economics at the University of Texas at Austin. Ph.D. (Economics) Yale University; B.A. (Economics) Stanford University. The author thanks Keith Hylton, Padmanbhan Srinagesh, David Radlauer, Michael Doane and, especially, Einer Elhauge and Patrick Greenlee for helpful discussions on the issues herein and, most particularly, his wife for assistance and patience over many years. ** Competition Economics, LLC. B.S.E.E. Tufts University. *** Professor & Chair, Department of Business Law, California State University, Northridge. J.D., Boston University; B.A., University of California.

Trade liberalization and export diversification

The paper examines the implications of tariff reductions for diversification of export basket across and within industries measured in terms of larger sets of homogeneous goods and horizontally-differentiated varieties in two country world. In a synthesis of analytical structures of Dornbusch, Fisher and Samuelson (1977) and Krugman (1979) we establish that unilateral tariff reduction may make the liberalizing country's exports diversified both across and within sectors whereas the trading partner may experience across-sector diversification. Under bilateral tariff reduction exports of larger number of differentiated varieties may be realized only for the country in whose favour the ratio of national wages moves.

Theft under Stalin: a property rights analysis

Recent work on dictatorship has focused on how repression is used by dictators to eradicate political opposition. This article examines evidence from one of the most important dictatorships of the twentieth century to suggest that this may tell only half the story. As Stalin's dictatorship progressed, repression was increasingly administered neither by the secret police nor the military—as in most dictatorships—but through the ordinary courts. The article proposes an explanation, one broadly consistent with Olson's hypothesis that Stalin was a ‘proprietary dictator’, an autocrat with a long time horizon who made major investments in public goods. Stalin's new form of property—‘socialist property'—was one such public good. To legitimize the new form of ownership, Stalin ruled that it should be enforced through the ordinary justice system, albeit initially with high levels of repression. The article also makes two further contributions. It shows, first, how Stalin's theft campaigns are a striking historical example of what happens when an unpopular law clashes with social norms, and of how it might backfire. Second, it demonstrates how, as property rights theorists would predict, the main objects of theft legislation are generic or homogeneous goods with few property attributes.