Universidade de Évora

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1 CEFAGE UE Workshops Perspectivas da Investigação em Portugal Universidade de Évora

This one day workshop brings together several Portuguese economic researchers from different institutions with a common interest on Industrial Organization, with the purpose of discussing their work

2 This one day workshop brings together several Portuguese economic researchers from different institutions with a common interest on Industrial Organization, with the purpose of discussing their work in progress, strengthening ties between them, identifying common interests and promoting future cooperation. The workshop will be held in Évora in 22 October 2010 and is composed of 11 paper presentations of 30 minutes each divided by four sessions that include both theoretical and empirical work. Participants (presenters in boldface): António Brandão, Universidade do Porto Duarte Brito, Universidade Nova de Lisboa Luís Cabral, IESE Business School Maria Leonor da Silva Carvalho, Universidade de Évora Margarida Catalão Lopes, Instituto Superior Técnico Luís Coelho, Universidade de Évora João Correia da Silva, Universidade do Porto Vanessa Duarte, Universidade de Évora Rosa Branca Esteves, Universidade do Minho João Leão, Instituto Superior de Ciências do Trabalho e da Empresa Maria Raquel Lucas, Universidade de Évora Natércia Mira, Universidade de Évora Joana Pinho, Universidade do Porto Cesaltina Pires, Universidade de Évora Joana Resende, Universidade do Porto Ricardo Ribeiro, London School of Economics and Political Science Tiago Ribeiro, Indera Estudos Económicos Lda Carlos Santos, Universidade de Alicante António Miranda de Sousa, Universidade de Évora Rui Valente, Universidade de Évora João Vareda, Autoridade da Concorrência Hélder Vasconcelos, Universidade Católica Portuguesa Luís Vasconcelos, Universidade Nova de Lisboa Universidade de Évora 2/8

3 Program 10h00 10h30: Welcome Coffee 10h30 12h30: Session I Anti Competitive Practices Chair: António Brandão, Universidade do Porto THIRD DEGREE PRICE DISCRIMINATION, SIGNALING AND DUMPING Sílvia Jorge, Universidade de Aveiro Cesaltina Pires, Universidade de Évora This paper revisits the issue of dumping and signaling. Dumping is frequently considered an instance of third degree price discrimination. This suggests that if we consider a model where the foreign firm has private information, then both the foreign and the home market prices could be used as signals to deter the entry of potential competitors. In others words, the foreign firm may use multiple signals. The most reasonable perfect Bayesian equilibrium is either the least cost separating equilibrium or the pooling equilibrium where both types of incumbents set the low cost monopoly prices. An implication of our model for international trade policy is that a lower price in the foreign market is neither a necessary nor a sufficient condition for the existence of entry deterrence in the foreign market. WELFARE ENHANCING COLLUSION AND TRADE George Deltas, University of Illinois, U. C. Alberto Salvo, Northwestern University (KSM) Hélder Vasconcelos, Universidade Católica Portuguesa That collusion among sellers is detrimental to buyers is a central tenet in economics. In the context of trade, we provide an oligopoly model, using only standard ingredients, in which collusion is beneficial for society and can be beneficial for consumers. A differentiated product duopoly operates in two geographically separated markets. Each market is home to a single firm, but can import from the foreign firm. Since shipping across markets is costly, every firm has a cost advantage in its home market. Consumers treat the two goods as horizontally differentiated substitutes and their preferences are identical in both markets. Under oligopolistic competition, each firm has a smaller market share and Universidade de Évora 3/8

4 margin in the away market. The asymmetric margin leads to a market distortion, with more consumers than is socially optimal purchasing the imported variety. Collusion between the two firms (which in this framework is equivalent to a merger to monopoly) partially mitigates this distortion by reducing cross hauling, raising not only total welfare but also, for sufficiently high trade costs, consumer surplus. "Anti dumping" regulation induces the socially optimal allocation. ENTRY DETERRENCE UNDER SCOPE ECONOMIES Margarida Catalão Lopes, Instituto Superior Técnico Cesaltina Pires, Universidade de Évora In this paper we develop a model where the incumbent may expand to a second market so as to signal the existence of scope economies and deter potential entry. We show that the incumbent only expands to another market when scope economies are large enough. Thus expansion is indeed a signal of larger economies of scope and for certain parameter values it leads to entry deterrence. We characterize the unique PBE for the various parameter values and show that the PBE may involve accommodation, entry deterrence or a mixed strategy equilibrium. SPATIAL COMPETITION BETWEEN SHOPPING CENTERS Joana Pinho, Faculdade de Economia da Universidade do Porto António Brandão, Faculdade de Economia da Universidade do Porto João Correia da Silva, Faculdade de Economia da Universidade do Porto We introduce asymmetric information about consumers' transportation costs (i.e. the degree of product differentiation) in the model of Hotelling (1929). When the transportation costs are high, both firms have lower profits than in the case of perfect information. Contrarily, both firms may prefer the asymmetric information case if the transportation costs are low (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information sharing is ex ante advantageous for the firms, but ex post damaging in the case of low transportation costs. If the information is not verifiable, the informed firm always tends to announce that the transportation cost is high. To induce truthful revelation: (i) the uninformed firm must pay for the informed firm to confess that the transportation costs are low; and (ii) the informed firm must make a payment (to the uninformed firm or to a third party) for the uninformed firm to believe that the transportation costs are high. 12h30 14h00: Lunch Universidade de Évora 4/8

5 14h00 14h30: Session II Chair: Cesaltina Pires, Universidade de Évora GOOD CHURN AND BAD CHURN: ENTRY BARRIERS, SURVIVAL BARRIERS, AND INDUSTRY PRODUCTIVITY Luís Cabral, IESE Business School 14h30 16h00: Session III Empirical Work Chair: Carlos Santos, Universidade de Alicante COMPETITION IN THE CREDIT CARDS INDUSTRY Steffen Hoernig, Universidade Nova de Lisboa Pedro Pereira, Autoridade da Concorrência Tiago Ribeiro, Indera Estudos Económicos Lda. We analyze the exercise of market power in the credit card industry. We develop a structural model of the credit card industry, which takes into account the two sides of the market and portrays demand and supply on both sides. The model was estimated for a panel of firm level Portuguese data. We test several market equilibrium conditions. Issuers set annual card fees consistent with Nash equilibrium, while interest rates are higher than they would be in Nash equilibrium. The monopoly acquirer, which is owned by the issuing banks, sets merchant fees lower than a myopic monopolist or even a forward looking monopolist. CONSUMER DEMAND FOR VARIETY: INTERTEMPORAL EFFECTS OF CONSUMPTION, PRODUCT SWITCHING AND PRICING POLICIES Ricardo Ribeiro, London School of Economics and Political Science The concept of diminishing marginal utility is a cornerstone of economic theory. The consumption of a good typically creates satiation that diminishes the marginal utility of consuming more. Temporal satiation induces consumers to increase their stimulation level by seeking variety and therefore substitute towards other goods Universidade de Évora 5/8

6 (substitutability across time) or other differentiated versions (products) of the good (substitutability across products). The literature on variety seeking has developed along two strands, each focusing on only one type of substitutability. I specify a demand model that attempts to link these two strands of the literature. This issue is economically relevant because both types of substitutability are important for retailers and manufacturers in designing intertemporal price discrimination strategies. The consumer demand model specified allows consumption to have an enduring effect and the marginal utility of the different products to vary over consumption occasions. Consumers are assumed to make rational purchase decisions by taking into account, not only current and future satiation levels, but also prices and product choices. I then use the model to evaluate the demand implications of a major pricing policy change from hi low pricing to an everyday low pricing strategy. I find evidence that consumption has a lasting effect on utility that induces substitutability across time and that the median consumer has a taste for variety in her product decisions. Consumers are found to be forward looking with respect to the duration since the last purchase, to price expectations and product choices. Pricing policy simulations suggest that retailers may increase revenue by reducing the variance of prices, but that lowering the everyday level of prices may be unprofitable. SUNK COSTS OF R&D, TRADE AND PRODUCTIVITY: THE MOULDS INDUSTRY CASE Carlos Santos, Universidade de Alicante Evidence suggests that trade improves industry productivity via (i) selection of the best firms and (ii) within firm productivity growth. While the selection effect has been well explained by the literature, the productivity growth is not accounted for in standard models. Trade liberalization creates economies of scale in the R&D process that can explain the observed growth. I estimate a model of industry dynamics with endogenous productivity, capital accumulation and aggregate uncertainty. I use data from the Portuguese moulds industry which experienced an exogenous trade shock in 1993 (establishment of the Common Market) and a significant increase in foreign demand afterwards. Firms exploited the increase in demand from other European countries to increase R&D spending. The final results confirm the trade induced innovation effect. 16h00 16h30: Coffee Break Universidade de Évora 6/8

7 16h30 18h00: Session IV Pricing Chair: João Leão, ISCTE IUL COMPETITIVE TARGET ADVERTISING WITH PRICE DISCRIMINATION Joana Resende, Faculdade de Economia da Universidade do Porto Rosa Branca Esteves, Universidade do Minho This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market where the distribution of consumers' preferences is discrete and where advertising plays two major roles. It is used by firms as a way to transmit relevant information to otherwise uninformed consumers, and it is used as a price discrimination device. We compare the firms' optimal marketing mix (advertising and pricing) when they adopt mass advertising/non discrimination strategies and targeted advertising/price discrimination strategies. If firms are able to adopt targeted advertising strategies, we find that the symmetric price equilibrium is in mixed strategies, while the advertising is chosen deterministically. Our results also unveil that as long as we allow for imperfect substitutability between the goods, firms do not necessarily target more ads to their own market. In particular, firms' optimal marketing mix leads to higher advertising reach in the rival's market than in the firms' own market, provided that advertising costs are sufficiently low in relation to the consumer's reservation value. The comparison of the optimal marketing mix under mass advertising strategies and targeted advertising strategies reveals that targeted advertising might constitute a tool to dampen price competition. In particular, if advertising costs are sufficiently low in relation to the value of the goods, we obtain that average prices with non discrimination (mass advertising) are below those with price discrimination and targeted advertising (regardless of the market segment). Accordingly, when (i) goods are imperfect substitutes, (ii) advertising is not too expensive, and (iii) targeted advertising constitutes an effective price discrimination tool, price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry profits at the expense of consumer surplus. PLATFORM PRICING STRUCTURE AND MORAL HAZARD Luís Vasconcelos, Universidade Nova de Lisboa Guillaume Roger, UNSW We study pricing by a monopoly platform that matches buyers and sellers in an envi ronment with cross market externalities. Said platform has no private information, does not set the commodity's price and can only charge trading parties for the match. Our innovation consists in introducing moral hazard on the sellers' side and an equilibrium notion of platform reputation in an infinite horizon model. Universidade de Évora 7/8

8 With linear fees the platform can mitigate, but not eliminate, the loss of reputation induced by moral hazard. If lump sum fees (registration fees) can be levied, moral hazard can be overcome. The upfront payment determines the participation threshold of sellers and extracts them, while (lower) transactions fees provide incentives for good behaviour. This breaks the equivalence of lump sum payments and linear fees (Rochet and Tirole (2006)). We draw implications for the role of subsidies (Caillaud and Jullien (2003)). THE MARKET FOR SURPRISES: SELLING SUBSTITUTE GOODS THROUGH LOTTERIES Filippo Balestrieri, HP labs João Leão, Instituto Superior de Ciências do Trabalho The online travel market has recently been affected by the appearance of new firms, such as hotwire.com and priceline.com, which sell hotel rooms, airplane tickets and car rentals through innovative lottery like mechanisms. In this paper we examine the use of lotteries over substitute goods under different market structures. We first show that a multiproduct monopolist uses lotteries over substitute goods to price discriminate among the consumers. We characterize the monopolist's optimal selling mechanism and we show how the probability distributions of the lotteries depend on the buyers' preferences. Then, we examine the case in which each substitute good is produced by an independent firm. Each firm is offered the possibility of selling its good also through lotteries over different firms' goods. Lotteries are sold by third party intermediaries whenever more than one firm participates. In a market with two firms, lotteries are sold if and only if both firms are made better off. With more than two firms this is no longer true: there are equilibria in which firms sell their goods through lotteries even though they end up worse off. In this case, the sale of lotteries can shift surplus from firms to consumers. Universidade de Évora 8/8

Industrial. Organization. Markets and Strategies. 2nd edition. Paul Belleflamme Universite Catholique de Louvain. Martin Peitz University of Mannheim

Industrial. Organization. Markets and Strategies. 2nd edition. Paul Belleflamme Universite Catholique de Louvain. Martin Peitz University of Mannheim Industrial Organization Markets and Strategies 2nd edition Paul Belleflamme Universite Catholique de Louvain Martin Peitz University of Mannheim CAMBRIDGE UNIVERSITY PRESS Contents List offigures xiii