Oligopolistic Industry Research Articles

Multi-Sector Model of Tradable Emission Permits

This paper presents a multi-sector model of tradable emission permits, which includes oligopolistic and perfectly competitive industries. The firms in oligopolistic industries are assumed to exercise market power in the tradable permit market as well as in the product market. Specifically, we examine the effects of the initial permit allocation on the equilibrium outcomes, focusing on the interaction among these product and permit markets. It is shown that raising the number of initial permits allocated to one firm in an oligopolistic industry increases the output produced by that firm. Under certain conditions, raising a “clean” (less-polluting) firm’s share of the initial permits can lead to reductions in both the product and permit prices. We discuss criteria for the socially optimal allocation of initial permits, considering the trade-off between production inefficiency and consumer benefit.

Internationalisation and political bargaining under oligopoly: International Harvester in Spain (c. 1900–1980)

This article explores the internationalisation process of the increasingly oligopolistic farm equipment industry. It does so by examining the case of International Harvester in Spain in the light of the changes that were taking place in world and host markets from the beginning of the twentieth century, when pioneering US firms began to operate abroad, until 1980, when economic depression forced a drastic reorganisation of the sector with which this multinational would not be able to cope. Although the case of International Harvester fits very well into gradual approaches of internationalisation, the study emphasises the influence exerted by the economic and political world and host contexts in that process, as well as the role played by local partners in increasing knowledge of and commitment to foreign markets. The study also provides empirical evidence about the bargaining process that usually preceded the entry of International Harvester and its competitors into promising protectionist markets throughout the 1960s.

The trade-offs from pattern bargaining with uncertain production costs

Pattern bargaining is a negotiating strategy that is often employed by industry-wide unions in oligopolistic industries to set wages. The conventional wisdom is that pattern bargaining “takes labor out of competition” and therefore softens bargaining between the union and firms, resulting in higher industry wide wages. However, this does not explain why firms agree to pattern bargaining. We introduce a model in which the agents face uncertainty about the relative product-market positions of the firms and compare the trade-offs involved in adopting different bargaining mechanisms. We show that with sufficient heterogeneity in non-labor costs, there are situations in which both the union and the firms prefer pattern bargaining. We also show that in such situations, the adoption of pattern bargaining harms consumers. This provides an explanation as to how pattern bargaining can arise in equilibrium and why there is often strong political opposition to it.

Computable Markov-perfect industry dynamics

We provide a general model of dynamic competition in an oligopolistic industry with investment, entry,andexit.ToensurethatthereexistsacomputationallytractableMarkov-perfectequilibrium, we introduce firm heterogeneity in the form of randomly drawn, privately known scrap values and setup costs into the model. Our game of incomplete information always has an equilibrium in cutoff entry/exit strategies. In contrast, the existence of an equilibrium in the Ericson and Pakes’ model of industry dynamics requires admissibility of mixed entry/exit strategies, contrary to the assertion in their article, that existing algorithms cannot cope with. In addition, we provide a condition on the model’s primitives that ensures that the equilibrium is in pure investment strategies. Building on this basic existence result, we first show that a symmetric equilibrium exists under appropriate assumptions on the model’s primitives. Second, we show that, as the distribution of the random scrap values/setup costs becomes degenerate, equilibria in cutoff entry/exit strategies converge to equilibria in mixed entry/exit strategies of the game of complete information.

Horizontal Mergers and Divestment Dynamics in a Sunset Industry

In oligopolistic industries, the amount of capital investment is likely to be excessive due to the presence of a business-stealing effect and fixed costs. Similarly, sunset industries with declining demand tend to be riddled with chronic excess capital. The reason is that firms will attempt to free-ride on the reduction of industry supply expected from someone else's divestment, hoping to steal their business. This paper highlights the potential of mergers to internalize this business-stealing effect and thereby promote divestment. Using the case of mergers in the Japanese cement industry, it examines whether such merger-induced divestment improve total welfare. A dynamic model of divestment based on the Markov-perfect equilibrium framework of Ericson and Pakes (1995) is estimated using recently developed econometric methods.Then, a counterfactual experiment is conducted to quantify the welfare impact of mergers.The findings suggests that merged firms indeed more actively closed facilities and that, as a result of these mergers, total welfare improved despite a reduction in the consumer surplus.

On the role of demand and strategic uncertainty in capacity investment and disinvestment dynamics

Even mature industries seldom settle down into a long-run steady state. Fluctuations in demand disrupt the status quo and call for firms to adjust their capacities on an ongoing basis. We construct a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment decisions. In addition to uncertainty about the evolution of demand, a firm faces strategic uncertainty concerning the decisions of its rivals. We numerically solve the model for its Markov-perfect equilibria. For one set of parameter values, three equilibria exist, and while all of them have simple, intuitive structures, they exhibit widely varying patterns of response to demand shocks. At one extreme, one firm dominates the industry almost as a monopolist and changes its capacity to accommodate demand. At the other extreme, the larger firm keeps its capacity nearly constant while the smaller firm acts as the swing producer.

Advertising Subsidy and International Oligopolistic Competition

This paper examines the strategic role of advertising subsidies in a third-country trade model in which two firms located in different countries export their products to a third country (Brander and Spencer (1985)). We first develop a basic model of advertising in oligopolistic industries in which firms decide how much to invest in either predatory or cooperative advertising and then engage in product market competition either as Cournot competitors or Bertrand competitors. We show that firms invest in only one form of advertising; which form they invest in depends on the relative effectiveness of the two types of advertising, the degree of product differentiation and the form of product market competition. We then study strategic industrial policy and show that an advertising subsidy is the optimal strategic policy irrespective of the form of product market competition and the form of advertising in which firms invest.

Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms

In oligopolistic industries that are unionised and may be affected by offshoring, falling offshoring costs have a moderating effect on trade unions. They will accept lower sector wages in order to discourage mobile forms from leaving the country. Since such wages are independent of the workers' domestic outside opportunities, wage moderation - induced by deeper economic integration - creates leeway for the government to engage in redistributive policies even if this improves the workers' domestic outside options. Only if the latter become sufficiently attractive will redistribution induce some offshoring, and it is only at that level that further economic integration will lead to both wage moderation and offshoring activities. Therefore, our analysis suggests that rather than provoking a downsizing of the welfare state, offshoring defines an upper limit for the generosity of the welfare state below which redistribution becomes less instead of more distortive.

Environmental and Trade Policies for Oligopolistic Industry in the Presence of Consumption Externalities

We explore the effects of environmental and trade policies with negative consumption externalities when a domestic firm and a foreign rival produce imperfect substitutes and compete in the domestic market. Consumption of the foreign product generates more emissions than that of the domestic product. Emission taxes reduce emissions, harm the foreign firm, but may benefit the domestic firm. Tariffs could mitigate externalities more “effectively” than emission taxes. Consumption subsidies provided to the domestic product may raise emissions and worsen domestic welfare. Stringent environmental policies may induce the foreign firm to produce an environmentally friendly good, though environmental damages may increase.

Long-term contract auctions and market power in regulated power industries

A number of countries with oligopolistic power industries have used marginal cost pricing to set the price of energy for small customers. This course of action, however, does not necessarily ensure an efficient outcome when competition is imperfect. The purpose of this paper is to study how the auction of long-term contracts could reduce market power. We do so in a two-firm, two-technology, linear-cost, static model where demand is summarized by a price inelastic load curve. In this context we show that the larger the proportion of total demand auctioned in advance, the lower are both the contract and the average spot price of energy.

Competition for firms in an oligopolistic industry: The impact of economic integration

We set up a model of generalised oligopoly where two countries of different size compete for an exogenous, but variable, number of identical firms. The model combines a desire by national governments to attract internationally mobile firms with the existence of location rents that arise even in a symmetric equilibrium where firms are dispersed. As economic integration proceeds, equilibrium taxes initially decline, but then rise again as trade costs fall even further. A range of trade costs is identified where economic integration raises the welfare of the small country, but lowers welfare in the large country.

The Research on Business Concentration in Lithuanian Economy

The trend of growing business concentration has become common for the process of developing of Lithuanian economy nowadays; besides, high concentration in certain industries could be related to the former state monopoly privatization. A market or an industry, dominated by several producers or sellers, is considered to be oligopoly. The economists of the neo-classical school, accompanied by the scholars of modern microeconomics and industrial organization, associate oligopoly with a threat of cartels or other agreements on coordination of behaviour, improper use of the dominating position, consumer ineffective equilibrium even in case of fair competition. The article presents the complex research on business concentration in the main sectors of Lithuanian industry, trade and services in an attempt to identify oligopolistic industries and evaluate their weight in the economy of the state. The evaluation of concentration is quantitative: the calculations are made by applying the concentration and the Herfindahl-Hirschman ratios – the ones that are most commonly used in similar researches. The 4-digit (detailed) classification of economic activities, approved by the Department of Statistics to the Government of the Republic of Lithuania, is used to distinguish between industries. Published economic activity level statistics for the calendar year 2006 together with the data on the sales of the largest enterprises in potentially concentrated industries are involved in the research. Article in Lithuanian. Verslo koncentracijos Lietuvos ekonomikoje tyrimas Santrauka. Šiuolaikinei Lietuvos ekonomikai būdingos verslo koncentracijos augimo tendencijos, be to, atskirose ūkio šakose aukšta verslo koncentracija susidarė privatizuojant valstybės monopoliui priskirtinų ūkinių veiklų įmones. Rinkoje arba ūkio šakoje  dominuojant  keliems  gamintojams  (pardavėjams),  ji  laikytina  oligopoline. oligopolija  neoklasikinių  ekonomistų,  taip pat šiuolaikinių mikroekonomikos ir industrinės organizacijos mokslininkų siejama su kartelinių susitarimų ar kitokio veiksmų derinimo grėsme, piktnaudžiavimu dominuojančia padėtimi, vartotojų atžvilgiu neefektyvia pusiausvyra net ir vykstant sąžiningai konkurencijai. Straipsnyje atliekamas verslo koncentracijos pagrindiniuose Lietuvos pramonės, prekybos ir paslaugų sektoriuose kompleksinis tyrimas išskiriant oligopolines ūkio šakas ir nustatant jų dalį šalies ekonomikoje. Koncentracijos lygis nustatomas kiekybiškai,  pasitelkus  tokio  pobūdžio  tyrimams  plačiausiai  naudojamus  koncentracijos  ir  Herfindahl-Hirschman  indeksus, juos pritaikant Statistikos departamento prie Lietuvos Respublikos Vyriausybės ekonominės veiklos rūšių klasifikatoriaus 4-ių ženklų lygioms (detaliosioms) ekonominės veiklos rūšims. Tyrime naudojami minėtos institucijos viešai skelbiami 2006 metų ekonominės veiklos rūšių suvestiniai statistiniai duomenys, taip pat vykdant tyrimą atrinktų potencialiai koncentruotų ūkio šakų stambiausių įmonių pardavimo pajamų duomenys. Reikšminiai  žodžiai:  rinkos  struktūra,  oligopolija,  ūkio  šaka,  koncentracija,  koncentracijos  laipsnis,  Herfindahl-Hirschman indeksas. First published online: 22 Sep 2009

Unionized Oligopoly and Outsourcing

The interaction between labor unions and international competition has received a lot of attention. In the first decade of the 21st century, increasing number of companies in unionized oligopolistic industries has shifted production abroad. However, the issue of outsourcing in the context of a unionized duopoly has received little attention. In this paper, I model the option to outsource in the context of unionized labor markets in exporting industries. I show that if the inverse demand function is convex, then an increase in the foreign wage increases the utility of a wage neutral union. I find that if the domestic firm can credibly threaten to shift production abroad, then an increase in the outsourcing country’s wage may increase domestic profits if the union is labor-oriented.

Entry, Exit, and the Determinants of Market Structure

Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist firm’s long-run profits by the same amount as if the firm operated in a duopoly.

Oligopolistic Competition as a Common Agency Game

In applying the common agency framework to the context of an oligopolistic industry, we want to go beyond the classical dichotomy between Cournot and Bertrand competition. We define two games, the oligopolistic game and the corresponding concept of oligopolistic equilibrium, and an associated auxiliary game that can be interpreted as a common agency game and that has the same set of equilibria. The parameterization of the set of (potential) equilibria in terms of competitive toughness is derived from the first order conditions of this auxiliary game. The enforceability of monopolistic competition, of price and quantity competition, and of collusion is examined in this framework. We then describe the (reduced) set of equilibria one would obtain, first in the nonintrinsic case and then in the case where a global approach would be adopted instead of partial equilibrium approach. Finally, we illustrate the use of the concept of oligopolistic equilibrium and of the corresponding parameterization by referring to the standard case of symmetric quadratic utility.

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Merging with a buyer group member

AbstractWe examine a merger between a national retailer and a local retailer who is a member of a buyer group. While the traditional literature on mergers assumes an oligopolistic industry (where the merger takes place) supplied by a perfectly competitive one, we assume here that retailers obtain their input from a supplier that can offer quantity discounts. In this setting, a merger can be profitable for insiders (solving the merger paradox) and can also be more profitable for insiders than for outsiders (solving the free‐riding problem). This result holds even if the merged firm ends‐up with a small share of the market. However, welfare decreases post‐merger. Copyright © 2009 John Wiley & Sons, Ltd.

Location, collocation and R&D alliances in the European ICT industry

This paper argues that spatial proximity plays a role in determining the propensity of firms to engage in R&D alliances. Drawing from economic geography, network theory and innovation theory, we discuss how prior collocation can affect the propensity to engage in R&D alliances, arguing that alliances can act both as a substitute and as a complement to collocation. Using a novel dataset matching alliances and patent data for the European ICT industry, we show that alliances are complementary to prior collocation (at both national and sub-national regional level) of firm’s R&D labs. In such an intra-industry, oligopolistic scenario, firms strategically use R&D alliances as a means to limit knowledge flows and protect competences, rather than to promote knowledge flows. Furthermore, while a common institutional context is important to promote collaboration, because of the high level of R&D internationalisation as well as the complex social networks within an oligopolistic industry, national institutional contexts are less relevant.

Lietuvos socialinio draudimo pensijų dalinio privatizavimo tikslai ir rezultatai

Šiame straipsnyje analizuojama prieš penkerius metus pradėta Lietuvos socialinio draudimo senatvės pensijų struktūrinė reforma, kurios metu dalis socialinio draudimo įmokų pervedama į gyventojų pasirinktus privačius pensijų fondus. Šio straipsnio tikslas - apžvelgti reformos pradžioje jai keltus tikslus, įvertinti jų pagrįstumą socialinės apsaugos ekonomikos teorijos požiūriu, išanalizuoti pradinius pensijų reformos rezultatus. Siekiant šio tikslo išanalizuotas pensijų reformų regione pobūdis, socialinio draudimo pensijų dalinio privatizavimo Lietuvoje ypatybės, kelti privatizavimo tikslai ir besiformuojanti privačių pensijų rinką Lietuvoje. Straipsnyje remiamasi pasaulyje gerai žinomų pensijų ekonomikos tyrėjų publikacijomis, pensijų reformą reglamentuojančiais Lietuvos Respublikos įstatymais, Lietuvos valstybės institucijų skelbiama ekonomine ir socialine statistika.Autoriaus atlikta analizė rodo, kad privačių pensijų fondų klientų asmeninėse kaupiamosiose pensijų sąskaitose kaupiamo turto investicijų grąža nepadengia nuostolių, kuriuos jie patirs dėl dalinio pasitraukimo iš socialinio draudimo pensijų sistemos. Straipsnyje taip pat parodyta minėtos pensijų reformos našta, kuri tenka dabartiniams pensininkams. Pagrindinė straipsnio išvada - reformos tikslai buvo per daug ideologizuoti, o pirminiai rezultatai nepalankūs nei dabartiniams, nei būsimiems pensininkams. Lietuvoje 2004 metais įvykdytos pensijų reformos analizė akademinėje literatūroje pateikiama pirmą kartą.

Imperfect Competition and Corporate Governance

AbstractThis paper studies the objective function of the firm in imperfectly competitive industries. If those involved in decisions are also consumers the usual monopoly distortion is reduced. In oligopolistic industries, this may give the firm a strategic advantage and hence, in the right circumstances, will increase profit. If the firm cannot commit not to change its constitution, we find a Coase‐like result where all market power is lost in the limit. This enables us to endogenise the objective function of the firm. Finally we present a more abstract model of governance in the presence of market distortions.