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Many research contributions have investigated the identity of the leader in oligopolistic markets. As a general rule, this literature points to the leader being either the most efficient, the largest or the best informed player. However, there tend to be exceptions to this rule and it is unclear who will become the leader when firms at the same time are different in size, efficiency of production and/or the quality of the information they have. The present paper reveals insights regarding this last question. As such, it points to the elements "that really matter" to explain for leadership when firms are different from each other in more than one respect. It turns out that the most efficient firm becomes the leader, regardless whether or not its rival has invested in more capacity. While this result tends to be in line with the previous findings regarding the identity of the leader being the relatively more efficient firm, it contradicts the "dominant firm" scenario regarding price leadership. This is the result of enlarging the strategy space of the players, by including a buyout option. As such, the paper provides the foundations and hence a theoretical justification for price leadership out of a collusive motive. Since a priori the model also does not exclude a barometric price leadership outcome, it is appropriate to conclude that the buyout option truly is a collusive device strong enough to suppress other reasons for price leadership. Therefore, the arrangements observed in reality aiming at the implementation of buyout possibilities have to be watched very closely from an antitrust perspective. [ABSTRACT FROM AUTHOR]

This paper describes how process and product innovations respond to cost and demand changes. In the present model firms simultaneously choose process and product innovations within a model of vertical differentiation and uncovered market. We show that the outcome is unique both in monopoly and in the duopoly. In these outcomes, a demand increase (decrease) enhances (depresses) both process and product innovation, while an increase (decrease) in production costs stimulates (depresses) process innovation but lowers (increases) product one. The insight for these results relies on the scale effect of innovation. Our result can be placed in the ongoing debate on complementarity and substitutability of process and product innovation. [ABSTRACT FROM AUTHOR]

This paper shows that the welfare dominance of ad valorem over unit taxes under imperfect competition, extends to a Dixit-Stiglitz-type monopolistic competition framework with differentiated products, increasing returns to scale, entry/exit and love of variety. This result is obtained, even though ad valorem taxation leads to increased firm exit compared to the equal-yield unit tax. Yet the smaller tax over-shift, occurring under ad valorem taxation, more than compensates this disadvantage. [ABSTRACT FROM AUTHOR]

This paper constructs a model of anticompetitive exclusive dealings with potential downstream competition. Unlike in previous studies, the incumbent can establish a direct retailer with some fixed payment and can offer an exclusive contract to a downstream buyer twice. We show that the existence of these two options helps the incumbent deter socially efficient entry and earn almost monopoly profits even in the absence of scale economies and downstream competition. [ABSTRACT FROM AUTHOR]

When there is not one obvious candidate technology, entrants to a new industry face a non-trivial choice between longer lead times in the setting up of production and a better chance that the technology could successfully deliver. This paper shows how this tradeoff may yield gradual diffusion. Diffusion is more protracted in industries where learning opportunities are more bountiful. The equilibrium minimizes the long-run equilibrium price, just as in the standard Marshallian model of a competitive industry. The market structure does not seem to affect the rate of diffusion with the monopoly choosing the same rate of diffusion that prevails in competition despite restricting output. [ABSTRACT FROM AUTHOR]

Under a general constant elasticity of substitution (CES) function, this paper generalizes the substitution of concurrent possession of a property right-from perfect substitutes to partial substitutes to perfect complements-in the context of commons/anticommons tragedies. We demonstrate that when the possibility of substitution between property rights is relatively low, inefficiency arises in the underusage of a common resource (i.e. anticommons tragedy). When the possibility of substitution between property rights is relatively high, inefficiency arises in the overusage of a common resource (i.e. commons tragedy). When the possibility of substitution between property rights is moderate, the two tragedies (commons and anticommons) are combined and may achieve efficient usage of a common resource, which is the notion of two negatives making a positive. [ABSTRACT FROM AUTHOR]

This paper studies how database advertising based on historical sales records affects the functioning of a horizontally-differentiated market under high versus low consumer loyalty. We show that direct advertising can fragment the market into local monopolies. Further, under high consumer loyalty, or under low loyalty and weak product differentiation, the use of the database yields perfect targeting, i.e. monopoly pricing does not generate quantity distortions and all informed consumers buy a product. By contrast, low consumer loyalty and high product differentiation yields imperfect targeting, i.e. there are quantity distortions and some informed consumers do not buy any product. We find that, compared to the case where firms can use only the mass media, when targeting is perfect, price competition yields an intertemporal transfer of market power and, although the impact of database advertising on profits and consumer surplus is ambiguous, it is always welfare improving. However, when targeting is imperfect, sellers charge lower intertemporal prices, which strongly benefit consumers, but the level of profits decreases, and we prove that the use of a more cost-efficient advertising technology can lead to a welfare loss. [ABSTRACT FROM AUTHOR]

This paper studies cartel stability under the assumption that member firms can choose intermediate degrees of collusion as well as the joint-profit-maximizing solution in determining the quota to be produced by each firm. After showing that firms can increase the number of participants by decreasing the degree of collusion, I prove that individual members' profits are maximized when firms choose a (possibly low) degree of collusion such that all firms in the industry want to take part in the cartel. More precisely, if the number of firms in the industry is four or less, then all of them want to take part in the cartel even if the maximum degree of collusion is chosen (i.e., the monopoly output is produced); if the number of firms is greater than four, firms will still create an industry-wide cartel but they will produce a higher quantity than the monopoly output. [ABSTRACT FROM AUTHOR]

This paper focuses on a model of monopolistic behavior that explains the pricing policies of the Organization of Petroleum Exporting Countries (OPEC). It can be shown that monopolistic supply of the resource together with sluggish demand reactions can produce a U-shaped price profile. There are some objections that can be raised against the basic assumptions of the model. However, despite these shortcomings, it is suggestive how a model of monopolistic behavior in a world of sluggish demand reactions can explain important economic aspects of OPEC pricing policy. In order to quantify the impact of different parameters, econometric models of the world petroleum market are needed that determine prices endogenously. The simple model presented here provides a theoretical framework for such empirical analyses.

Should we expect to see patterns in the privatization of a public bilateral monopoly? To address this question, the paper analyzes the welfare implications of privatization and examines the interplay of firm location in the vertical stream, differential priorities on private and public profit in welfare and cost asymmetries in a mixed bilateral monopoly. We conclude that merely comparing cost savings from privatization upstream/downstream, is inadequate. If public profit is relatively insignificant in welfare, then only relative cost savings matter. However, if public profit is sufficiently important, then privatization downstream will maximize welfare if it is as (or more) cost effective compared to privatization upstream. We find that downstream privatization can be better than upstream privatization even when the latter is more cost effective than the former. [ABSTRACT FROM AUTHOR]

If consumers wholly or partially control a firm with market power they will charge less than the profit maximizing price. Starting at the usual monopoly price, a small price reduction will have a second order effect on profits but a first order effect on consumer surplus. Despite this desirable static result, it has been argued that cooperatives are vulnerable to take-over by outsiders who will run them as for-profit businesses. This paper studies takeovers of cooperatives. We argue that there will not be excessive takeovers of cooperatives due to the Grossman-Hart problem of free riding during takeovers. [ABSTRACT FROM AUTHOR]

This paper analyzes the effects of end-user piracy on a monopolized software industry with network effects in which consumers have heterogeneous income and limited liability. Limited liability produces a piracy cost which increases with income. The monopolist thus may be able to exploit the network effect brought about by the piracy of low-income consumers to charge a higher price to high-income consumers thereby earn a higher profit, especially when the monopolist can prevent the network effect from spilling over to the high-income consumers. If intellectual property rights policies are severe enough, then the monopolist can avoid the spillover. Otherwise it may become a case where each high-income buyer benefits from the piracy but the monopolist is hurt. However, a severe policy may bring about a high piracy rate since it invites the monopolist to raise the price. [ABSTRACT FROM AUTHOR]

Privatisation is driven by the belief that public ownership is cost inefficient, in particular under monopoly. However, some theoretical and empirical studies have questioned whether privatisation will necessarily lead to efficiency gains. This paper focuses on the impact of ownership when owners can be either active or passive. Active owners decide on output, whereas passive owners delegate this decision to a risk-averse manager. It turns out that managerial slack as reflected in the marginal costs will actually be the same or higher in a private monopoly than under public ownership. The impact of entry is theoretically ambiguous, but an increased number of firms in an oligopoly may lead to lower efficiency. [ABSTRACT FROM AUTHOR]

We analyze equilibrium locations of downstream retailers assuming transport cost from a monopoly input supplier. When the upstream transport costs equal those of retailers, a downstream monopoly may locate efficiently and two downstream firms never locate inefficiently. Even with discriminatory pricing upstream, two downstream firms locate efficiently. When assuming downstream transport costs are greater than upstream costs, routinely inefficient locations reemerge in keeping with previous literature. [ABSTRACT FROM AUTHOR]

In location-based models of price competition, traditional sufficient conditions for existence and uniqueness of an equilibrium (Caplin and Nalebuff in Econometrica 59(1):25–59) are not robust for the firm that serves the right-tail of the consumers' distribution. Interestingly, as we relax these conditions, we observe only two new alternative cases. Moreover, we identify a novel, easily testable condition for uniqueness that is weaker than log-concavity and that can also apply to Mechanism Design. Thanks to this general framework, we can solve the equilibrium of general vertical differentiation models numerically and show that inequality has a U-shaped effect on profits and prices of a high-quality firm. Moreover, we prove that extreme levels of concentration can dissolve natural monopolies and restore competition, contrary to the Uniform case. [ABSTRACT FROM AUTHOR]

Relative to single-product firms, a multiproduct monopolist can internalize the negative externalities of its R&D investments (the ``cannibalization effect'') in two ways: (1) To lower R&D investment for each product; and (2) To delete some of its product lines so as to enlarge the market size for the remaining lines. It is shown that line deletion is profitable if products are close substitutes. If products are not close substitutes, the multiproduct monopolist keeps all product lines and invests less in cost-reducing R&D than single-product firms engaging in Cournot competition with product differentiation. However, it invests more in R&D than single-product firms if there are significant economies of scope in R&D, or if the oligopolistic firms can cooperate in their R&D decisions. [ABSTRACT FROM AUTHOR]

When a monopolist randomly sorts customers, price discrimination “concavifies” the revenue function of the firm, so that it may be optimal for a monopolist to divide customers into groups that have the same demand function and charge them different prices. It is impossible to rule out this type of result whenever the revenue function is somewhere convex in the “economically relevant” set of quantities, because there always exists a non-decreasing cost function that leads to that conclusion. It is also impossible to rule out the case where, with respect to monopoly, the firm raises or lowers price to all classes and, accordingly, the case where the social welfare decreases or increases. [ABSTRACT FROM AUTHOR]

In a framework with an upstream monopoly and a downstream duopoly, we analyze the impact of convex costs at the downstream level. In contrast to the case of constant marginal costs, vertical integration does not imply complete market foreclosure. While the nonintegrated downstream firm receives a strictly positive amount of the intermediate good, the downstream allocation is inefficient. However, a parametrized example indicates that competition at the downstream level may increase aggregate welfare. [ABSTRACT FROM AUTHOR]

The standard efficient contract involving a monopolistic firm and a union has always been derived under the assumption that the firm operates efficiently, i.e., it fully uses its labor force. However, nothing constrains the firm Co do so and production with underutilization of labor may occur. The implications of ignoring that possibility and the conditions under which underutilization effectively occurs are studied in this paper. [ABSTRACT FROM AUTHOR]

In a model with continuous entry and exit to the labor market, it is shown that workers exploit their monopoly power by adopting a seniority system implying youth unemployment or an age determined insider-outsider distinction. The incentives of young outsiders to underbid are curtailed by their expectation of becoming insiders in the future. In a model with continuous entry and exit to the labor market, it is shown that workers exploit their monopoly power by adopting a seniority system implying youth unemployment or an age determined insider-outsider distinction. The incentives of young outsiders to underbid are curtailed by their expectation of becoming insiders in the future. [ABSTRACT FROM AUTHOR]

Under a particular class of utility functions, intertemporal price discrimination (IPD) is not feasible. That is, customers cannot be made to pay different prices for a durable good at different points in time. Other factors such as falling costs, and differing discount rates between buyers and sellers have been found to make intertemporal pricing schemes feasible, or even profitable. None of these factors, however, were fundamental demand differences which give rise to static price discriminations. In this paper we argue that IPD is indeed feasible and sometimes profitable, if only we allow for a nondurable good in the utility function. A simple additively separable utility is examined first, which is then extended to a nonseparable utility function which allows richer substitution/complementary relations between the durable and the nondurable goods. This may help us to better understand the similarities between static and intertemporal price discriminations. [ABSTRACT FROM AUTHOR]

In the presence of a non-constant marginal cost and demand uncertainty, we show that an output increase is no longer a necessary condition for welfare to increase following the introduction of third-degree price discrimination. We thus highlight the existence of an effect that might offset the well known output and misallocation effects of price discrimination. We propose a specific example where this is indeed the case. [ABSTRACT FROM AUTHOR]

We show that if the product market is not very much concentrated, open shop union, where the union density is less than one, may not be a justification for a positive relationship between product market competition and unionized wage, irrespective of the union density, bargaining power of the union and the union's preference for wage and employment. [ABSTRACT FROM AUTHOR]

This note explores the determinants of intra-industry trade by extending the standard Chamberlinian-Ricardian monopolistic competition trade model (e.g., Krugman, 1979) to have a continuum of industries (e.g., Dornbusch et al., 1977). It shows that the degree of cross-country technical differences among industries plays an important role as a determinant of trade within each industry. [ABSTRACT FROM AUTHOR]

We show that Rohlfs’s (1974) model is a special case of a spatial monopoly model á la Hotelling (1929) with uniform consumer distribution and quadratic transportation costs, where location is exogenous and the good yields no intrinsic utility. By relaxing these assumptions, we prove that the coordination problem typically thought to affect markets for network goods may not arise in general. Endogenizing location makes it easier for the monopolist to extract consumer surplus but also to cover the entire market. We also show that the main conclusions remain qualitatively unmodified if consumer distribution is triangular. [ABSTRACT FROM AUTHOR]

Under uniform pricing a monopolist cannot make a positive profit in equilibrium. I analyze how differential pricing can be exploited by a natural monopolist to deter entry when entry is costless. In a two-stage game with price competition before quantity competition I show that the incumbent firm can deter entry and make a positive profit in equilibrium. The incumbent sets two different prices, the low price to deter entry and the high price to generate profit. Entry is not possible because of scale effects. If dumping is allowed for all firms no positive profits are realizable, but welfare is reduced. I show that for some parameter values the incumbent is forced to engage in a stunt (i.e., set a negative low price) to keep entrants out. [ABSTRACT FROM AUTHOR]

This article examines the optimal patent term for both monopoly and competitive invention market structure by considering uncertainty in the magnitude of cost reduction resulting from an invention. It is concluded that with a monopoly in the invention market, the optimal patent term is shorter under uncertainty and risk-neutrality than under certainty, while with competition in the invention market the optimal patent term is longer under uncertainty and risk-neutrality than under certainty.

This article examines a hybrid institution of regulation by participation where the public enters into production but not as a monopoly. When the unregulated operation of private industry is unsatisfactory, two alternative forms of public intervention seem to have been traditional to consider. One alternative is for the public to appoint an economic commissar, often called a regulatory authority , in charge of the industry, and the other is for the public itself to produce the output provided otherwise by the private sector. Thus, the participation of the public in productive activity has a regulatory effect on others, as well as direct consequences in the form of output, cost, and others, associated with the public sector. A public enterprise is to be judged, therefore, not in terms of its own efficiency alone, but also in terms of its effect on the efficiency of the industry as a whole. The usual theory of regulation and of public enterprise is cast essentially within the paradigm of a monopoly. A public firm may improve resource allocation by announcing and implementing an output reaction to private sector output so as to equate industry marginal cost to price, making up for any private supply shortage at this price which it thus enforces.

This article investigates the relationship between equilibrium prices for the output-adjusting labor-managed Cournot oligopoly with product differentiation and those for the price-adjusting labor-managed Bertrand oligopoly. In the literature on labor-managed firms, competitive or monopolistic or oligopolistic firms are assumed to produce only one homogeneous good. Therefore, the firms try to maximize the surplus per worker net of the competitively determined wage by adjusting output levels, and the sum of the firms' equilibrium outputs determines uniquely the equilibrium market price of the product through the market demand function. If product differentiation exists as is universally observed in modern economies, the labor-managed oligopolistic firms can maximize the surplus per worker by optimally adjusting either output levels or prices of their pro-ducts. In the profit maximizing oligopoly with product differentiation, different sets of equilibrium prices emerge depending on whether firms choose outputs or prices as their strategic variables. The result was derived by taking into account the global stability condition for the Bertrand equilibrium prices for the adjustment process described as a system of nonlinear difference equations.

This article analyzes implications of using inventories in the behavioral modes of monopolistic strategy. In the theory of the firm under demand uncertainty, two main types of specification of optimal strategy have been followed. One is the ranking of three alternative strategies or modes of behavior, for example, price, quantity or, quantity-cum-price. Thus, before the true demand conditions are revealed, the firm could either decide on price, or the quantity or, quantity-cum-price. The second approach considers the optimal strategy choice problem of a monopolist in terms of two kinds of price adjustment, a continuous adjustment in response to random variations and a constrained or truncated adjustment. In terms of a linear demand function with an additive stochastic error and a constant or increasing marginal cost, the optimal price adjustment which would maximize expected profits would depend on two types of costs, for example, adjustment costs incurred in making changes in price and also the costs of being out-of-equilibrium. The latter costs are due to markets not satisfying demand-supply equilibrium. Both these approaches are essentially static, since only one-period profits are considered.