Industrial Organization Literature Research Articles

When do Airlines Price Match? A Review of Factors Affecting Parallel Pricing


 
 
 Parallel pricing refers to the practice of firms making independent pricing decisions to match each other’ prices. This paper provides plausible economic intuitions about the market characteristics that affect the emergence and persistence of airline parallel pricing behavior by reviewing and synthesizing the relevant factors identified in the industrial organization literature as influencing cooperative outcomes or tacit collusion. One of the key findings of this paper is that the combination of high price transparency, quick price response, and repeated interactions among competing airlines can make parallel pricing as a self-evident outcome, even in the presence of information asymmetries, cost discrepancies, variations in capacity and service quality, as well as fierce market competition. Another finding is that as personalized pricing becomes more prevalent, the likelihood of success of parallel pricing may decrease. It remains unclear what other forms of cooperative outcomes will emerge as the industry continues to adapt to changing technological and market landscapes. With these findings, this paper contributes to the groundwork for developing a comprehensive model of parallel pricing in the airline industry.
 
 

Productive efficiency analysis with unobserved inputs: An application to endogenous automation in railway traffic management

Productive efficiency analytics are commonly used in managerial decision making, but are vulnerable to an omitted variable bias issue when there is incomplete information on the used production factors. In this paper, we relax the standard assumption in productive efficiency analysis that all input quantities are observed, and we propose a nonparametric methodology for cost inefficiency measurement that accounts for the presence of unobserved inputs. Our main contribution is that we bridge the nonparametric OR/MS and the economic Industrial Organization literature by addressing the general critique of Stigler (1976) on the concept of inefficiency (Leibenstein, 1966), which states that found inefficiencies reflect unobserved inputs rather than waste. Our methodology explicitly differentiates between cost inefficiency (i.e., waste; deviations from optimizing behavior) and unobserved input usage (i.e., optimally chosen input factors that are unobserved to the empirical analyst). We apply our novel method to a purpose-built dataset on Belgian railway traffic management control rooms. Our findings show the existence of meaningful inefficiencies that cannot be attributed to use of unobserved inputs or environmental factors. In addition, we document how the omitted variable bias impacts cost efficiencies of individual observations in a dissimilar way in case the use of unobserved inputs is not controlled for.

How bad is the merger paradox?

The merger paradox is a classic, counter-intuitive result from the literature of Industrial Organization saying that merging firms typically experience a decline in their overall profit compared to their total pre-merger profit. This phenomenon is more striking in small oligopolistic markets, where mergers increase market concentration and may hence trigger a substantial increase in prices. In this paper, we investigate the severity of the merger paradox in Cournot oligopoly markets. Namely, we study the worst-case magnitude of this profit loss in quantity-setting market games. We consider convex, asymmetric production costs for the firms, and we show that the profit loss can be substantial even in small markets. That is, two merging firms can lose half of their pre-merger profit, but no more than half in markets with concave demand functions. On the positive side, we show that in markets with affine demand two firms can never lose more than 1/9 of their profit when merging, and this bound is tight. We also study the asymptotic loss in larger markets, where it is easy to show that the profit loss can be arbitrarily large when multiple firms merge; we give bounds that characterize the profit loss from a merger as a function of the market size and the number of merging firms.

Framing Political Issues in Food System Transformative Changes

The paper addresses political issues related to policy interventions for food system sustainability. It presents the results of a literature review, which explores how the concept of power has been used so far by scholars of food system dynamics. Articles numbering 116 were subjected to an in-depth qualitative analysis, which allowed the identification of three main strands of the literature with respect to food and power issues: (1) marketing and industrial organisation literature, dealing with the economic power exercised by economic actors in contexts of noncompetitive market structures; (2) articles addressing the power issue from a political economy perspective and by using an interdisciplinary approach; (3) heterogenous studies. The results of the review witness a growing interest for the analysis of food systems, political issues, and the need of a wider use of analytical tools and concepts offered by social sciences for the study of power in sustainability policy design.

Mixed competition and technology licensing in a supply chain.

Technology licensing as a vital part of business behavior in many industries has drawn a fair amount of attention in industrial organization literature. Most existing literature on licensing decisions assumes that all firms engage in Cournot or Bertrand competition, while the type of mixed competition may affect the choice of the licensor. In this context, what decision will the licensor make faced with different mixed competitions? This paper studies the optimal technology licensing contract of a licensor firm engaging in different mixed competitions (Cournot-Bertrand or Bertrand-Cournot) with a potential licensee in a differentiated duopoly market considering one upstream firm (supplier) that provides key inputs. We find that if either the royalty or fixed-fee licensing is applied, the licensor favors royalty licensing under Bertrand-Cournot competition when the degree of substitution is small and prefers the fixed-fee licensing no matter under what kind of mixed competition as the degree of substitution increases. In the case of fixed-fee licensing, the result shows that the profits of licensors are the same under different types of mixed competition. Besides, fixed-fee licensing is not always the optimal choice for consumers, and they would prefer royalty licensing when the degree of substitution is very small.

Cultivating Positivity to Achieve a Resilient Society: A Critical Narrative Review from Psychological Perspectives

With the rapid speed of globalization and technological breakthroughs, current social issues have become more complex than in past decades. As many issues such as pandemics, terrorism, and interracial conflict are realistically unpredictable, the idea of resilience offers an intuitively plausible and attainable strategy to deal with these potential adversities. The current narrative review explores the cultivation of positive emotions and traits as a plausible way to achieve a resilient society. Based on research in the social and industrial organizational psychology literature, we reviewed the role of positive emotions and traits on resilience. Lastly, we highlight important experiences and interventions that have been shown to be effective in cultivating positivity and discuss several potential considerations and boundary conditions.

Agriculture, food and global value chains: issues, methods and challenges

Agriculture, food and global value chains: issues, methods and challenges

Nursing Homes: Affiliation to Large Chains, Quality and Public-Private Collaboration.

The objective of this paper was to estimate the influence of being affiliated with an NH chain on perceived consumer quality, and whether this relationship is affected by maintaining a collaboration agreement with public administrations. We used a combination of theoretical foundations: (1) From the consumer perspective, we focussed on online reviews of the quality of nursing homes (NHs); (2) from the industrial organisation literature, we proposed arguments regarding the advantages and disadvantages of belonging to a chain; (3) the theory of transaction costs was used to explain public–private collaboration. The study was carried out on a sample of 642 chain-affiliated Spanish NHs, with data from quality scores downloaded from the website topMayores.es. We distinguished between the six largest chains and the rest. We applied linear regression models. The results show that NHs affiliated with one of the largest NH chains obtained worse quality scores in the assessment made by users, although quality scores improved for the largest chains of NHs involved in an agreement with the public administration.

Measuring mercantile concentration in eighteenth-century British America: Charleston, 1735–1775

In this article, the authors attempt to advance discussions of mercantile concentration in British North America in the eighteenth century by employing two measurement tools common in the field of industrial organization-concentration ratios and the Hirschman-Herfindahl Index (HHI)—to measure and analyze concentration levels in Charleston, South Carolina between 1735 and 1775. These tools allow for the creation of standardized measures, easing comparisons with other mercantile groups across space and time. The principal results suggest that mercantile concentration levels in Charleston were not high by modern standards, and that concentration may even have declined a bit over the course of this 41-year period. The authors draw on insights from the literature in industrial organization and the new institutional history to explain their findings. In so doing, they suggest that the relatively low levels of concentration were related to and reflected the “open-access order” characteristic of British North America, even in eighteenth-century South Carolina.

Business Models and Incentives: For an Effects-Based Approach of Self-Preferencing?

Self-preferencing can be defined as an envelopment strategy in which ‘the enveloper might enter the target market and, at the same time, bend the origin platform’s rules to provide a better outcome for its own products or services’.1 The relevance of the concept of self-preferencing is particularly controversial in competition law and economics. Although not referred to in the Google Shopping judgment,2 the notion of self-preferencing appears to play a significant role in the ruling, which justifies examining it in the light of Industrial Organisation (IO) literature. Conceived as a theory of competitive damage, self-preferencing may be emphasised in many cases related to the digital sector. These are ones of EU Commission Google Shopping3 and Google Android4 decisions, the proceedings against Amazon,5 the ones initiated against Apple,6 the decision of the Italian competition authority against the same company in...

On the Economics of Network Interconnections and its Impact on Net Neutrality

The Internet of symmetric traffic flows between networks and a hierarchical topology, has long given way to one with significantly asymmetric traffic flows and a flatter topology. The Internet topology of today may be characterized as having three key types of networks—content providers, user access providers, and transit providers. In this Internet, best-effort routing of centrally stored content using distributed protocols has been seen to be inadequate to provide a suitably reliable transport service with the requisite quality of service to the end user. Two important developments that mitigate this gap in the capability of the traditional Internet and the needs of modern content are (i) direct peering arrangements between content networks and ISPs, and (ii) widespread use of content distribution networks (CDNs), who also peer with ISPs. In this paper we first analyze the economics of such peering arrangements. Using microeconomic models from the industrial organization literature, we first develop the conditions for a content provider to connect directly to a service provider, possibly via a peering link. Further, when such a direct link is indeed sought, we analyze the quality of the link vis-a-vis the default option of using a transit service. We then extend our results to the case of CDN, and analyze the content provider market coverage by CDNs. Finally, we discuss the implications of these results on the objectives sought by net neutrality regimes.

Is there a firm size‐wage gap after economic transition? – An examination of for‐profit and not‐for‐profit firms in Estonia

AbstractThe labor economics and industrial organization literature is replete with studies showing a positive relationship between firm size and employees’ wages. However, no work to date has examined, particularly with regard to the inverse probability weighting approach taken in this study, whether this effect is present in a post‐communist country shortly after economic transition. This study fills that void by testing for a firm size‐wage effect in Estonia after it declared independence from the Soviet Union. In doing so, we employ a large micro‐dataset from the Estonian Labor Force Survey and find that, holding several job, industry, and city characteristics constant, a statistically significant firm size‐wage gap exists across workers employed by all types of firms, and separately for those employed across both for‐profit and not‐for‐profit firms in Estonia after its economic transition.

Estimating the degree of market power in the vegetable market in Japan

AbstractTo adequately capture the market structure of vegetables in Japan, it is necessary to develop an oligopolistic model due to the potential market power of producers vs. retailers. We first estimate the market power between producers and retailers by extending the bilateral oligopoly model. Next, we evaluate the role of the wholesale market and its effect on economic welfare. Our results indicate that the wholesale market benefits both producers and consumers through a reduction in retail margins. This study contributes to the industrial organization literature by developing a bilateral oligopoly model and empirically measuring the wholesale market system in Japan.

Distributing Attorney Fees in Multidistrict Litigation

AbstractAs consolidated multidistrict litigation has come to dominate the federal civil docket, the problem of how to divide attorney fees among participating firms has become the source of frequent and protracted litigation. For example, in the National Football League (NFL) Concussion Litigation, the judge awarded the plaintiff attorneys over $100 million in fees, but the division of those fees among the twenty-six firms involved sparked two additional years of litigation. We explore solutions to this fee division problem, drawing insights from the economics, game theory, and industrial organization literatures. Ultimately, we propose a novel division method based on peer reports. Participating firms assess the relative contribution of other firms to the litigation, and then optimization or Bayesian techniques arrive at a consensus or compromise fee allocation. Our methods are intuitively easy to understand, enable broad participation, and are resistant to collusion or other strategic behavior, making them likely to be accepted by the firms involved. We thus provide courts with an important mediation tool or decision rule for these fee division disputes.

Smart Contracts, Real-Virtual World Convergence and Economic Implications

Smart Contracts (SCs) are usually defined as contracts that are instantiated in computer-executable code that automatically executes all or parts of an agreement with the assistance of block-chain’s distributed trust technology. This is principally a technical description and results in an overly narrow focus. The goal of this paper is to provide an overview of the rapidly evolving multidisciplinary literature on Smart Contracts to provide a synthesis perspective on the economic implications of smart contracts. This necessitates casting a wider-net that ties SCs to the literature on the economics of AI and the earlier Industrial Organization literature to support speculation about the role of SCs in the evolution of AI and the organization of economic activity. Accomplishing this goal builds on a repurposing of the Internet hourglass model that puts SCs at the narrow waist between the real (non-digital) and virtual (digital) realms, serving as the connecting glue or portal by which AIs may play a larger role in controlling the organization of economic activity.

Price Transparency in Healthcare: Apply with Caution

There’s a widespread perception that transparent pricing would push healthcare prices downward. While this may be true in certain markets, in many others, it would have little price impact or could even push prices upward via tacit collusion. Under perfect competition, prices are universally known and vary little across buyers and sellers. Such conditions are absent in many or most American healthcare markets. The industrial organization and antitrust literatures suggest that when the number of sellers in a market is small and barriers to entry for new sellers are high—as is true of most healthcare services—public knowledge of prices can lead to tacit collusion. In such cases, sellers act on price information as though they are conspiring to restrict supply and raise prices, without any actual conspiracy, while consumers cannot or do not use prices to change their behavior. Aside from tacit collusion, providers have better information on health and care than patients do. Emergency patients can’t price-shop. Third-party payers, not patients, reap most of the benefits of price-shopping. Even when patients are provided with price-shopping tools, they fail to compare prices. These cautions do not imply a blanket condemnation of price transparency, but they do suggest that policymakers should be highly selective in issuing transparency mandates.

School Psychological Capital: Instrument Development, Validation, and Prediction

Psychological capital (psycap) pertains to the psychological resources of hope, efficacy, resilience, and optimism. It has received much attention in the industrial-organizational literature and is related to a wide range of adaptive job-related outcomes. However, most of these studies have been conducted on adult populations and the role of psycap in the school context has not been given enough attention. The current study aimed to develop a measure of psycap for the school context and examined how it was associated with academic-related (e.g., motivation, engagement, achievement) and well-being (e.g., life satisfaction, affect) outcomes among school-aged populations. Study 1 (N = 1159) demonstrated that the School Psychological Capital Questionnaire developed in this study had excellent psychometric properties. School psycap positively predicted optimal motivation and engagement. Study 2, a cross-sectional study conducted among high school students (N = 246), revealed that school psycap was associated with optimal academic and well-being outcomes. Theoretical and practical implications are discussed.

Profit Persistence in the U.S. Audit Market

This paper investigates the competitiveness of the U.S. audit market and the effects of competition on audit quality. Using a proprietary database of auditor realization rates, we provide the first empirical assessment of abnormal profit persistence in the U.S. audit market following methodology from the industrial organization literature. We find consistent evidence that abnormal profits persist over time and are not quickly driven back to competitive returns by market forces. Our tests suggest that audit market concentration is a key determinant of persistence and that audit offices that achieve greater profit persistence are less likely to lose clients. Interestingly, we fail to find any evidence that profit persistence is associated with lower quality; rather, we document that it is negatively related to instances of financial restatements and discretionary accruals. Our results have significant policy implications and contribute to the longstanding debate in the academic literature on the consequences of high concentration. Although our findings support critics’ claims that audit markets lack sufficient competition, they are inconsistent with the notion that entrenchment leads to lower audit quality. In fact, our findings imply that auditors may use market power to constrain aggressive financial reporting decisions.

Modeling the effect of competition on US manufacturing sectors’ efficiency: an order-m frontier analysis

The study applies the probabilistic framework of nonparametric frontier estimation to model the effect of competitive conditions on sectors’ production efficiency levels. We utilize conditional order-m robust frontiers to model the dynamic effects of competition on a sample of U.S. manufacturing sectors over the period 1958–2009. Contrary to the existing studies, we apply for the first time in the Industrial Organization literature the latest advances of robust nonparametric frontier analysis to disentagle the dynamic effects alongside the effects of competition on sectors’ productive efficiency levels. The results derived from the time-dependent robust conditional estimators unveil a non-linear relationship between product market competition and productive efficiency. Our findings suggest that for higher competition levels the effect is positive up to a certain threshold after which the effect becomes negative.

Exit Decisions in the Canadian Grain Elevator Industry

Grain elevators play a central role in the movement of grain to market and to rural economies in terms of employment and investment. Over the last three decades, the grain elevator industry in Canada has experienced a major decline in the number of elevators as older and technologically obsolete elevators have been replaced by larger and more technologically advanced elevators. We develop a model of exit in the Canadian grain elevation industry using data from 1999 to 2016 collected at the individual elevator level. Our specification explains elevator exit based on traditional variables used in the industrial organization literature such as capacity, multi-plant ownership, and vintage. But, we also include a measure of vertical linkage in the industry (i.e., elevator linkage to the freight transport sector) as well as spatial measures to account for local demand, supply and competition. The results provide strong evidence that exit in this key agricultural and trade industry is affected by whether an elevator is a recent entrant (vintage), its size, vertical linkages, local demand and supply conditions, and spatial competition.