2013-09-28 papers

on Industrial Organization

Issue of 2013‒09‒28
two papers chosen by

Cartel Formation With Endogenous Capacity and Demand Uncertainty By Johannes Paha
Relationship-specific Investment as a Barrier to Entry By Hiroshi Kitamura; Akira Miyaoka; Misato Sato

Cartel Formation With Endogenous Capacity and Demand Uncertainty

By:	Johannes Paha (University of Giessen)
Abstract:	This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can facilitate cartel formation despite lowering collusive profits. This is because lower demand reduces capacity utilization and makes competition more intense especially when capacities are durable and when demand falls much within a short time. The model also shows that firms with a low discount rate strive for a dominant position in the market which results in asymmetric capacity distributions. These obstruct collusive strategies. This is interesting because a low discount rate is usually considered a facilitating factor for collusion.
Keywords:	Asymmetric firms, capacity investments, cartel formation, demand shocks, excess capacity
JEL:	D21 D43 L11 L13 L41
Date:	2013
URL:	http://d.repec.org/n?u=RePEc:mar:magkse:201343&r=ind

Relationship-specific Investment as a Barrier to Entry

By:	Hiroshi Kitamura (Faculty of Economics, Kyoto Sangyo University); Akira Miyaoka (Graduate School of Economics, Osaka University); Misato Sato (Department of Economics, The George Washington University)
Abstract:	In this paper, we construct an interregional trade model that has en- dogenous fertility rates in the manner of Helpman and Krugman (1985). The presented model shows that fertility rates in a large region become lower than those in a small region because of the agglomeration of man- ufacturing firms in the former. The agglomeration of firms in a region lowers the relative price of manufactured goods to child rearing costs, which raises the fertility rates. We also find that a decline in transportation costs results in the ag- glomeration of manufacturing firms, which lowers fertility rates in both large and small regions. Finally, we extend our two-region model to a multi-region model and find that the number of manufacturing firms in larger regions is always greater than that in smaller regions, meaning that fertility rates in the former are always lower than those in the latter.
Keywords:	Vertical Relation; Entry Deterrence; Relationship-Specific Investment; Switch- ing Costs
JEL:	L12 L41 L42
Date:	2013–09
URL:	http://d.repec.org/n?u=RePEc:osk:wpaper:1324&r=ind

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