Oligopolistic Setting Research Articles

Choice of trade policy for international oligopoly with incomplete information

This paper studies the design of trade policies in an uncertain third market with incomplete information. Governments in each of the two countries select either direct quantity controls or export subsidies in an attempt to shift profits in favor of their firms in an international oligopolistic setting. It is shown that the country with firms having an information disadvantage tends to choose direct quantity control, while the country with well-informed firms would use export subsidy (export quota, respectively) when the degree of uncertainty is sufficiently high (low, respectively).

Network Effects and Multinetwork Sellers’ Dynamic Pricing in the U.S. Smartphone Market

Although the literature on network effects has focused on single-network firms, many industries feature multinetwork firms that play more complex dynamic pricing games. In this paper, we estimate the network effect at the smartphone operating system (OS) level and study multi-OS telecommunication carriers’ dynamic pricing strategies in an oligopolistic setting, using data on the U.S. smartphone industry. We find a positive OS network effect. Counterfactual analysis indicates that if the carriers were single-OS sellers, they would increase the phone prices of large OSs and lower the prices of small OSs, which reduces the consumer surplus by $6.99 billion. Further analyses show that the multi-OS carriers choose lower prices for large OSs than for small OSs because of their preference for OS concentration. This paper was accepted by Eric Anderson, marketing. Funding: This work was supported by the National Natural Science Foundation of China [Grants 72203217, 71803205, and 72192803] and the fund for building world-class universities (disciplines) of Renmin University of China. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4530 .

Optimal Eco‐Label Standards in an Oligopolistic Setting

The last couple of decades have seen the emergence of several labels, many of which certify a higher environmental quality to appeal to customers with environmentally friendly tastes. Existing eco‐labels present different standards and different levels of uptake. Often, there is a trade off between these two dimensions: the eco‐label sponsor anticipates that if a standard is too stringent, fewer producers are likely to adopt it. This article looks at the standard that is optimally chosen to solve this trade off, depending on whether the eco‐label sponsor is a non‐governmental organization that aims at reducing emissions, an industry association that wants to maximize total profits, or a government that cares about consumer surplus. In order to compute the eco‐label adoption rate in an oligopoly, we extend the classical model of vertical differentiation to a scenario with more than two producers. When optimally choosing their standard, the non‐governmental organization chooses the most ambitious one, the government chooses the least ambitious one, and the industry association chooses a standard in between.

Cooperation in a differentiated duopoly when information is dispersed: A beauty contest game with endogenous concern for coordination

The paper contribution is twofold. It introduces heterogeneous information in a strategic delegation game of a differentiated oligopoly with price competition and it thus provides a micro-founded illustration of a beauty contest, in which the relative weight put on the competition motive of the payoffs is not exogenous but may be manipulated by the players. The conflict between the competition and the fundamental motives, already present in an oligopolistic setting under perfect information, is exacerbated when information is dispersed. A conflict arises also in this case between the competition and the coordination motives, ending up in the undervalueing of public information. We show how firm owners ease these conflicts by opting for some cooperation, thus moderating the competitive toughness displayed by their managers. By doing so, they also enhance the managers’ concern for coordination and consequently heighten the weight put on public relative to private information.

Choice of Trade Policy with Incomplete Information

This paper studies the design of trade policies in an uncertain third market with incomplete information. Governments in each of the two countries select either direct quantity controls or subsidies in an attempt to shift profits in favour of their own firms in an oligopolistic setting. It is shown that the country with firms having information disadvantage tends to choose the direct quantity control, while the country with well-informed firms would use export subsidy (export quota) when the degree of uncertainty is sufficiently high (low).

HARMFUL SIGNALS: CARTEL PROHIBITION AND OLIGOPOLY THEORY IN THE AGE OF MACHINE LEARNING

Abstract The traditional legal approach for distinguishing between illicit collusion and legitimate oligopoly conduct is to rely on criteria that relate to the means and form of how rivals interact, such as elements of “practical cooperation”, or on the finding of an anticompetitive intent. These criteria ultimately refer to the inner sphere of natural persons and its emanations in communicative acts. Some authors therefore conclude that the cartel prohibition of Article 101 Treaty on the Functioning of the European Union (TFEU) or Section 1 of the U.S. Sherman Act is unable to capture collusion if it is achieved by autonomously acting computers relying on machine learning capabilities. It is instead suggested here to define collusion as parallel informational signals, which achieve a supracompetitive equilibrium, and to use the consumer welfare standard as a proxy for distinguishing between illicit collusion and legitimate oligopoly conduct. This approach is not tantamount to the idea of prohibiting tacit collusion as such. Rather, it is to check singular elements of communication, that is, “informational signals”, within an existing oligopolistic setting for their propensity to create consumer harm. This approach can help to close potential regulatory gaps currently associated with the surge of algorithmic pricing.

Harmful Signals - Article 101 TFEU and Oligopoly Theory in the Age of Machine Learning

The classical legal approach for distinguishing between illicit collusion and legitimate oligopoly conduct is to rely on proxies, such as elements of “practical cooperation”, on “plus factors”, or on the finding of an anticompetitive intent among rival firms. These criteria ultimately relate to the inner sphere of natural persons and its emanations in communicative acts. Some authors therefore conclude that the cartel prohibition of Article 101 TFEU or Section 1 of the U.S. Sherman Act are unable to capture collusion if it is achieved by autonomously acting computers relying on machine learning capabilities. It is instead suggested here to define collusion as parallel informational signals, which achieve a supracompetitive equilibrium, and to use the consumer welfare standard as a proxy for distinguishing between illicit collusion and legitimate oligopoly conduct. This approach is not tantamount to the idea of prohibiting tacit collusion as such. Rather, it is to check singular elements of communication, i.e. “informational signals”, within an existing oligopolistic setting for their propensity to create a consumer harm. This approach can help to close potential regulatory gaps currently associated with the surge of algorithmic pricing.

Outsourcing to convert fixed costs into variable costs: A competitive analysis

Outsourcing of production, services, and various economic activities is a pervasive phenomenon across industries. One of the key economic benefits of this popular practice, as mentioned by its sellers and buyers, is that it allows the outsourcing firm to reduce its fixed costs such as expenditures on equipment, information technology, fixed salaries of employees, etc., and convert those into a variable cost in the form of the purchase price that the outsourcing firm then pays the outside industry. This paper examines the strategic implications of this role of outsourcing in an oligopolistic setting. We show how these strategic considerations imply that, even absent any cost savings from outsourcing, competing firms can find it profitable to outsource. Furthermore, in such a setting, one firm may outsource while the ex-ante similar competing firm may not outsource. We also examine how consumer and social welfare are adversely affected when outsourcing plays this fixed-cost-to-variable-cost conversion role in an oligopolistic setting.

Green Technology and Optimal Emissions Taxation

AbstractUnless an active environmental policy exists, firms have no incentive to engage in abatement or environmental R&D so policy design is of paramount importance. This design heavily depends on the way R&D spillovers operate. There are two distinct types of R&D spillover: output spillover and input spillover. An input spillover operates on the expenditure toward pollution reduction, whereas an output spillover manifests as the achieved abatement. Under optimal emissions taxation, significant differences arise due to this distinction, in particular, when the spillover operates on R&D inputs. In an oligopolistic setting, the result is higher R&D expenditure, but also higher aggregate emissions and, consequently, higher emissions taxes. By contrast, when spillovers occur in R&D output, there is a U‐shaped relationship between the optimal tax and the spillover, showing a trade‐off between the optimal tax rate and spillovers when these are low. In terms of the relative effectiveness of different R&D organization setups, combining emissions taxes with R&D cooperation, this paper shows that under low levels of R&D spillover R&D cooperation gives higher emissions reductions, whereas when spillovers are high this is not the case.

Negotiation over Intellectual Property Rights Protection in a Mixed Market

AbstractThis article models a North–South negotiation under a mixed oligopolistic setting where a public firm in the South and a private firm from the North compete in the southern market. The southern firm is a public one whose objective is a weighted sum of the South's social welfare and its own profit, whereas the northern firm is a pure profit maximizer. The North provides a quid pro quo in exchange for the strengthening of the enforcement of intellectual property rights (IPR) protection in the South. We show that when the northern and southern firms engage in quantity competition in the southern market, the southern government's optimal choice is either complete protection or complete violation. We show this to depend on the southern government's valuation of the quid pro quo. Moreover, strengthening IPR protection will deepen the privatization process in the South, though it brings about a social welfare loss to the South.

Access to natural gas storage facilities: Strategic and regulation issues

In this paper, we analyze the strategic function of gas storage focusing on how gas storage decisions impact competition between gas companies on both spot and downstream markets. Using a two-tier oligopolistic structure, we first show that gas storage is actually used strategically even in a symmetric oligopolistic setting along the gas value chain. Storage is then a way to intensify competition on the spot market. Second, we analyze the setting where a company has favored access to storage, for example due to a historical monopolistic position, and we analyze this as a leadership situation in the context of TPA regulation. We then show that this setting compels the leader to adopt a strategic storage decision. This strategy consists of levels of gas stored being greater than supplies available in the downstream market. Such a leader decision is part of a strategy to raise a rival's costs. Furthermore, one can think that optimal regulation of the access to storage facilities would prevent such a behavior. However, especially when storage is not too costly, we show that preventing a storage strategy for the leader is not optimal, since the strategy helps to reduce the spot market price.

Trade and industrial structure with large firms and heterogeneity

We develop a model of trade and firm heterogeneity in an oligopolistic setting. This setting generates key differences in terms of modelling setup, modelling predictions and welfare implications with respect to the existing literature on trade and firm heterogeneity. In terms of modelling setup our approach allows us to explore interaction between potentially large heterogeneous firms, in contrast to recent trade literature with heterogeneity and atomistic firms. As a result variables like market price and total sales vary endogenously as different firms enter the market. We offer a solution for the integer problem inherent in small group models, based on stochastic dominance. The model generates testable predictions deviating from the benchmark firm heterogeneity model of Melitz (2003) in terms of the effect of trade liberalisation on markups, market shares, the market price. We also derive predictions on the effect of distance and market size on the probability of zero trade flows and export prices. Our model features the possibility that welfare declines as a result of trade liberalisation. The result in Brander and Krugman (1983), the benchmark model for trade under oligopoly, that welfare unambiguously rises with free entry and might decline without free entry due to increased cross-hauling is reversed. In a setting with heterogeneous instead of homogeneous firms, welfare might decline with free entry. A negative welfare effect without free entry can be ruled out if the firm size distribution is sufficiently dispersed.

Collusion Through Joint R&D: An Empirical Assessment

This paper tests whether upstream R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the US National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors – created through firms being members in several RJVs at the same time – are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.

The Long-Term Impact of Wind Power on Electricity Prices and Generating Power

This paper uses a market equilibrium model to calculate how the mix of generating capacity would change if large amounts of intermittent renewables are built in Great Britain, and what this means for operating patterns and the distribution of prices over time. If generators bid their marginal costs, we find that the changes to the capacity mix are much greater than the changes to the pattern of prices. Thermal capacity falls only slightly in response to the extra wind capacity, and there is a shift towards power stations with higher variable costs (but lower fixed costs). The changes to the pattern of prices, once capacity has adjusted, are relatively small. In an oligopolistic setting, strategic generators will choose lower levels of capacity. If wind output does not receive the market price, then mark-ups on thermal generation will be lower in a system with large amounts of wind power.

Collusion Through Joint R&D: An Empirical Assessment

This paper tests whether upstream R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the US National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors - created through firms being members in several RJVs at the same time - are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.

Supply chain network design under profit maximization and oligopolistic competition

In this paper, we model the supply chain network design problem with oligopolistic firms who are involved in the competitive production, storage, and distribution of a homogeneous product to multiple demand markets. The profit-maximizing firms select both the capacities associated with the various supply chain network activities as well as the product quantities. We formulate the governing Nash–Cournot equilibrium conditions as a variational inequality problem and identify several special cases of the model, notably, a generalization of a spatial oligopoly and a classical oligopoly problem to include design capacity variables. The proposed computational approach, which is based on projected dynamical systems, fully exploits the network structure of the problems and yields closed form solutions at each iteration. In order to illustrate the modeling framework and the algorithm, we also provide solutions to a spectrum of numerical supply chain network oligopoly design examples. This paper makes a contribution to game theoretic modeling of competitive supply chain network design problems in an oligopolistic setting.

Private Port Pricing and Public Investment in Port and Hinterland Capacity

This paper examines pricing and investment actions in a setting similar to that of European ports such as Rotterdam, Antwerp, and Le Havre. Key features of the scenario are that the ports are congestion prone, and that they serve a hinterland that they are connected to by congested transport networks. The ports compete for traffic in an oligopolistic setting. The analysis emphasizes the interaction between the duopolistic port market and hinterland congestion. Two aspects of shipments are focused on: the costs of using port services and the cost of hinterland transport toward those final destinations. The framework of the analysis is a two-stage game in capacities and prices. The governance structure is such that decisions about capacity are public, but pricing is private. Main results show that ports charge users for congestion at the port and also for the share of hinterland congestion they impose on other customers of the port. This “partial internalization” means that ports with heavily congested hinterlands will charge higher prices. A second finding is that extra investment in one port reduces congestion at both ports, but raises hinterland congestion where the port is located. Along similar lines, investment in the hinterland will lead to more congestion at the port that it serves and resulting higher port charges. A third finding is that local governments that invest to maximize welfare will invest in the local port, but the induced increase in hinterland congestion is an important factor in those actions. The results suggest that duopolistic port pricing induces public entities to invest less in port capacity. Finally, private ports do not necessarily charge higher port prices. In fact, if the country governments directly control prices of the port within their jurisdiction, they may charge even higher prices than private operators.

Corporate Disclosure in a Competitive Environment—The Quest for a European Framework on Mandatory Disclosure

European Company Law requires both closely held and listed companies to disclose their financial situation (annual accounts) to the general public. The European Court of Justice has recently decided that competitors of a company are also in a position to enforce this obligation. This gives rise to the question how the effects of disclosure in the capital market (towards investors and creditors) and the effects of disclosure in the product market can be aligned. In order to give a full account of the framework, both the legal rules on disclosure under EC law and the basic economic concepts on the interaction of product and capital markets are laid out. A decisive role is played by “competitive costs”, ie the costs resulting from a disadvantage in the product market. The harmful effect of these competitive costs also has a major impact on the financial market because it prevents companies from deliberately disclosing sensitive data to existing and potential investors and creditors. Taking a closer look, one finds that three basic situations exist where the efficiency aims in the product market and in the financial market clash: the access of competitors, suppliers or customers to “innovative” data; the abuse of a dominant market position in the course of “predatory pricing”; and the mutual exchange of sensitive data in an oligopolistic setting. An economic analysis of the interaction between the product and financial markets leads to several policy proposals: a first insight would be not to extend mandatory disclosure to non-incorporated market participants; a second step would be to dismantle full mandatory disclosure for closely held companies; and a third would be to provide specific rules for the above-mentioned cases of “innovative” data, “predatory pricing” and “mutual information”.

Corporate Disclosure in a Competitive Environment - the Ecj's Axel Springer Case and the Quest for a European Framework for Mandatory Disclosure

European Company Law requires both closely-held and listed companies to disclose their financial situation (annual accounts) to the general public. The European Court of Justice has recently decided that also competitors of a company are in the position to enforce this obligation. This gives rise to the question how the effects of disclosure in the capital market (towards investors and creditors) and the effects of disclosure in the product market can be aligned. In order to give a full account of the framework, both the legal rules on disclosure under EC law and the basic economic concepts on the interaction of product and capital markets are laid out. A decisive role is played by costs, i.e. the costs resulting from a disadvantage in the product market. The harmful effect of these competitive costs has also a major impact on the financial market because it prevents companies from deliberately disclosing sensitive data to existing and potential investors and creditors. Taking a closer look one finds out that there exist three basic situations where the efficiency aims in the product market and in the financial market clash: The access of competitors, suppliers or customers to innovative data, the abuse of a dominant market position in the course of predatory pricing and the exchange of sensitive data in an oligopolistic setting. An economic analysis of the interaction between product and financial markets leads several policy proposals: a first insight would be not to extend mandatory disclosure to non-incorporated market participants; a second step should be to dismantle full mandatory disclosure for closely-held companies, and a third step should be to provide specific rules for the above mentioned cases of innovative data, predatory pricing and mutual information.

Non-price strategic behavior: the case of bank branches

We perform an empirical study of banks’ branching decisions as a strategic non-price variable in an oligopolistic setting. Using panel data of banks from Norway, we find clear evidence that banks act strategically in their branching decisions, taking into consideration the future response from rival banks. The analysis is applied to a unique data set which covers the entire banking sector during both pre- and post-banking crisis periods, where very different types of conduct are found in each of these periods both for banks and borrowers. Moreover, we find that a bank specific branch-network does not confer externality on other banks. As a result branch network affects only market shares but not market size.