Incumbent Monopolist Research Articles

The price of cost-effectiveness thresholds under therapeutic competition in pharmaceutical markets

Health systems around world are increasingly adopting cost-effectiveness (CE) analysis to inform decisions about access and reimbursement. We study how CE thresholds imposed by a health plan for granting reimbursement affect drug producers’ pricing incentives and patients’ access to new drugs. Analysing a sequential pricing game between an incumbent drug producer and a potential entrant with a new drug, we show that CE thresholds may have adverse effects for payers and patients. A stricter CE threshold may induce the incumbent to switch pricing strategy from entry accommodation to entry deterrence, limiting patients’ access to the new drug. Otherwise, irrespective of whether entry is deterred or accommodated, a stricter CE threshold is never pro-competitive and may in fact facilitate a collusive outcome with higher prices of both drugs. Compared to a laissez-faire policy, the use of CE thresholds when an incumbent monopolist is challenged by therapeutic substitutes can only increase the surplus of a health plan if it leads to entry deterrence. In this case the price reduction by the incumbent necessary to deter entry outweighs the health loss to patients who do not get access to the new drug.

수직적 차별화 시장에서 진입기업의 서비스 다양화와 품질전략

Firms often design product or service lines by segmenting their market on quality attribute. This paper examines the firms’ optimal quality choices in a duopoly model of vertical differentiation. In a two-stage game model studied here, there are two firms, entrant and incumbent, competing on price with three different quality services. The entrant offers two different quality services, one is superior to the incumbent monopolist’s service quality and the other is inferior one. They face consumers who prefer a higher quality service to a lower one, but differ in how much they are willing to pay for quality. The paper shows that the entrant engages in maximal services differentiation, i.e. selects both the highest and lowest technologically feasible quality services in order not to trigger a low price from the rival, and thus price competition is softened. Moreover, the incumbent tries to set the intermediate quality to the average of the entrant’s two extreme service qualities.

Upgrades and Compatibility in Network Goods Markets

I examine an incumbent monopolist's pricing strategy in a two-period durable goods market for complements with network effects, such as the Operating System and software applications, and its compatibility stance with a future competitor when the market for applications is characterised by quality growth. Consumers arrive in the market in the first period and the “threat” to exercise their option to postpone their purchase may lead the incumbent to charge a price for its Operating System lower than that of a static monopolist no matter what the compatibility regime. I also show that the incumbent may support compatibility regardless of the presence of switching costs. The welfare effects of mandatory compatibility are ambiguous.

Does an incumbent monopolist have an incentive to invite new entry through granting a free patent license?

We examine whether an incumbent monopolist has an incentive to invite a new entry. In particular, we demonstrate the condition of a profit-raising entry effect in the presence of network externalities. Here the incumbent monopolist grants a free patent license for a perfectly compatible product for a new firm when it can choose the level of compatibility.

Strategic corporate social responsibility, imperfect competition, and market concentration

We examine the strategic use of corporate social responsibility (CSR) in imperfectly competitive markets. Before firms decide upon supply, they choose a level of CSR which determines the weight they put on consumer surplus in their objective function. First, we consider Cournot competition and show that the endogenous level of CSR is positive for any given number of firms. However, positive CSR levels imply smaller equilibrium profits. Second, we find that an incumbent monopolist can use CSR as an entry deterrent. Both results indicate that CSR may increase market concentration. Finally, we show that CSR levels decrease as the degree of product heterogeneity increases in Cournot competition and are zero in Bertrand Competition.

Strategic Corporate Social Responsibility

We examine the strategic use of Corporate Social Responsibility (CSR) in imperfectly competitive markets. The level of CSR determines the weight a firm puts on consumer surplus in its objective function before it decides upon supply. First, we consider symmetric Cournot competition and show that the endogenous level of CSR is positive for any given number of firms. However, positive CSR levels imply smaller equilibrium profits. Second, we find that an incumbent monopolist can use CSR as an entry deterrent. Both results indicate that CSR may increase market concentration. Third, we consider heterogeneous firms and show that asymmetric costs imply asymmetric CSR levels.

Copyright protection and entry deterrence

Illegal copying of digital products has become an increasingly debated issue. I present a previously unmentioned possible effect of piracy, namely that it may benefit an incumbent producer by making entry less profitable. In a differentiated products setting I show that when entry costs or the consumer valuation of the product are high enough or when consumer heterogeneity is sufficiently low, an incumbent monopolist will prefer less than full protection and thus allow the piracy of its own product. When the consumer valuations for the good are high, then there is no market expansion effect of illegal copying and consumers might end up worse-off because of piracy.

Cliff Discounts by a Dominant Producer Threatened by Partial Entry

I analyze cliff discounts when an incumbent monopolist faces competition from a competitor that can compete for a portion (but not all) of the market, and compare them with both simple pricing and pricing formulas in which the incumbent can cut prices just in the competitive portion of the market. The optimal cliff discount does not require exclusivity by the buyer. By leaving a portion of the market to the competitor, the incumbent gives it the choice between accepting its allocated share at a high price and offering deep discounts for any increase in market share. The optimal contract allows the competitor to earn higher profits by charging a high price for its allocated share, which in turn allows the incumbent to charge a high price. Average prices are higher with the cliff discount than with pricing that targets price cuts to the competitive segment. The model can apply to bundled discounts for multiple products as well as all-units discounts on a single product.

The value of switching costs

We study a dynamic model with an incumbent monopolist and entry in every subsequent period. We first show that if all consumers have the same switching cost, then the intertemporal profits of the incumbent are the same as if there was only one period. We then study the consequences of heterogeneity of switching costs. We prove that even low switching cost customers have value for the incumbent: when there are more of them its profits increase as their presence hinders entrants who find it more costly to attract high switching cost customers.

Reputation and Imperfectly Observable Commitment: The Chain Store Paradox Revisited

In their seminal solution of the chain store paradox Kreps and Wilson assumed that the incumbent monopolist is predisposed, with a small probability, to ght entry. Milgrom and Roberts suggested to view this predisposition to ght as a result of precommitment to an aggressive course of action. However, they did not examine whether such an ability to make commitments is actually chosen by a rational incumbent monopolist. The present paper fills this gap. We assume that the monopolist has access to an appropriate commitment mechanism, with a small probability. Due to the possibility of misunderstanding or communication error, commitments are not perfectly observable. Otherwise, the assumptions of Kreps and Wilson are maintained. These plausible modifications have drastic implications: Precommitment becomes useless, and reputation effects break down; Selten's chain store paradox comes back in full force.

Strategic R&D in systems industry - a network externality-based theory

The existing literature suggests that an incumbent monopolist supplier of a system component can successfully deter entry by increasing its installed base, which plays a role similar to that of the commitment value of investment in capacity. In this paper, we consider a systems market with network externality, where the consumers’ utility not only depends on the network size but also on the technological quality of the product. We show that when the installed base of the incumbent fails to play its pre-emptive role to deter entry, the monopolist can deter entry by strategic R&D investment in upgrading its product. The result is independent of whether the R&D project is, ex-post, successful or not. Such entry deterrence is welfare reducing.

Are Entry Threats Always Credible?

Abstract This paper studies the efficacy of entry threats in a contestable environment using experiments. It is hypothesized here that the entrant firm’s home market profits influence the entrant’s competitive behavior even when entry is costless and completely reversible. In the experiment, entrants and incumbents tacitly collude when each has its own monopoly market. In contrast, an entrant from a competitive market practices hit-and-run entry whenever such opportunities exist, forcing the incumbent monopolist to price at average cost. The experiment results suggest that the usefulness of hit-and-run competitive threat in a contestable environment depends crucially on the relative profits in the entrant’s and the incumbent’s home and entry markets.

Entry deterrence and experimentation under demand uncertainty

We examine the effect of a threat of entry on experimentation about demand by an incumbent monopolist when there is a fixed cost of entry. We show that experimentation may itself be used as a tool for entry deterrence and derive conditions under which experimentation reduces the probability of entry. These conditions depend on the entry rule which in turn depends on entry costs. We show that if experimentation does not deter entry, the monopolist incumbent experiments less. We also characterize experimentation and entry in the linear-uniform example, and show that cost of entry and experimentation do not have a monotonic relationship.

Entry Deterrence and Experimentation under Demand Uncertainty

We examine the effect of a threat of entry on experimentation about demand by an incumbent monopolist when there is a fixed cost of entry. We also examine the impact of experimentation on the probability of entry into the market. We show that experimentation may itself be used as a tool for entry deterrence and derive conditions under which experimentation reduces the probability of entry. These conditions depend on the entry rule which in turn depends on entry costs. We show that if experimentation does not deter entry, the monopolist incumbent experiments less. We also characterize experimentation and entry in the linear-uniform example.

MONOPOLY, POTENTIAL COMPETITION AND PRIVATE STOCK INFORMATION IN EXHAUSTIBLE RESOURCE MARKETS

ABSTRACT. This paper develops an exhaustible resource model with an incumbent monopolist that faces future potential entry of a single rival or backstop technology. The model is characterized by private stock information in the sense that firms do not know with certainty the size and/or quality of their rival's reserve stock. Results indicate that if such information is private, the strategic response of the monopolist to an entry threat is to extract reserves in the pre-entry era at a rate faster than would a pure monopolist in an uncontested market, and thus could lead to an improvement in economic welfare relative to the situation where entry is restricted.

UPSTREAM MARKET FORECLOSURE

ABSTRACTThis paper investigates how an incumbent monopolist can weaken potential rivals or deter entry in the output market by manipulating the access of these rivals in the input market. We analyse two polar cases. In the first one, the input market is assumed to be competitive with the input being supplied inelastically. We show that this situation opens the door to entry deterrence. Then, we assume that the input is supplied by a single seller who chooses the input price. In this case, we show that entry deterrence can be reached only through merger with the seller of the input.

CARTEL PROHIBITION MAY INCREASE PRICES*

In this paper, we show that a policy that forbids cartels may benefit dominant firms, and hurt consumers. When cartels are prohibited, an incumbent monopolist can commit not to form a cartel should a new entrant enter the market. This reduces the entry threat, which implies that entry occurs less often, and the incumbent monopolist is less likely to set a limit price.

The Arrow Effect under Competitive R&D

This paper shows that standard Schumpeterian theory does not imply that the incumbent monopolist has too little incentive to carry out R&D aimed at displacing its own product. If the patent holder is rational as is any other R&D investor, she will know that in equilibrium her patent’s obsolescence shall not be affected by her own R&D investment, because all the R&D firms operate under perfect competition and constant returns to scale at the private level. This reconciles Schumpeterian theory with the empirical evidence on innovation by incumbents. It is proved that the usual macroeconomic implications maintain their validity.

First-Degree Discrimination by a Duopoly: Pricing and Quality Choice

The paper examines under what conditions vertically differentiated duopolists engage in first-degree price discrimination. Each firm decides on a pricing regime at a first stage and sets prices at a second stage. The paper shows that when unit cost is an increasing and convex function of quality, the discriminatory regime is the unique subgame-perfect equilibrium of such two-stage game. In contrast to the case of horizontal differentiation, the discriminatory equilibrium is not necessarily Pareto-dominated by a bilateral commitment to uniform pricing. Also, the quality choices of perfectly discriminating duopolists are welfare maximizing. The paper explains why a threat of entry may elicit price discrimination by an incumbent monopolist.

The Oligopolistic Pricing Problem: A Suggested Price Freeze Remedy

The problem of oligopoly pricing has long challenged both economic and antitrust theory. While economic theory attempts to explain how firms set their prices in oligopoly markets, antitrust theory seeks to construct an effective remedy for what is believed to be a predominant problem of monopolistic pricing. So far these attempts have been only partially successful. Although economic scholarship has made significant advances in recent years, especially in development models based on modern game theory learning, we still do not hold conclusive or definite answers on oligopoly pricing. Antitrust theory, for its part, is still struggling in its quest for effective remedies. [This] Article set[s] forth an antitrust remedy for the oligopolistic pricing problem, build[ing] on previous work concerning price and quantity freezes, mainly in the context of monopolization by predation. This work, primarily by Williamson and more recently by Edlin, basically suggests that new entry to a monopolistic market would freeze the pre-entry price output production level or the pre-entry price of the incumbent monopolist. This would, arguably, encourage new entries by firms as well as more pre-entry output or lower pre-entry prices. [This Article] propose[s] the implementation of a price freeze scheme in oligopoly markets by which an oligopolist that significantly lowers its price would freeze its rivals’ prices at their previously higher oligopoly level for a defined period of time. This price scheme would drive prices downward and create an incentive for oligopolists, in most cases, to set ex ante lower prices without an actual activation of the price freeze.