Lynne Pepall

Generic Product Advertising, Spillovers, and Market Concentration

We examine the decision to advertise a homogenous good. We show that the likelihood of inefficiently low advertising rests heavily on how one models the mechanism by which advertising affects demand. Regardless of this mechanism, however, there is always a lower bound of concentration below which no advertising occurs even when welfare-enhancing. In such cases, mandatory programs will raise welfare if they induce entry, although producer surplus may decline. Our model also provides an explanation for the stylized fact that advertising intensity first rises and then falls as concentration increases. Copyright 2008, Oxford University Press.

Imitative Competition and Product Innovation in a Duopoly Model

This paper investigates imitative competition in a two-stage game of strategic product choice in a vertically differentiated market. The innovator chooses its product strategy anticipating the subsequent entry of a rival firm. The rival firm chooses the degree to which it is profitable to differentiate its product from the innovator. It has the second mover advantage that its costs are lower the more closely it copies the innovators product. But against this advantage is the drawback that the more similar the two products are, the more intense is the price competition between the two firms. The trade-off between imitation and differentiation is affected by the degree of consumer heterogeneity in the market. Consumers differ by income. The relationship between the incentive to imitate and the distribution of income is important, particularly in evaluating the welfare effects of two different policy responses, patent policy and cooperative alliances. Copyright 1997 by The London School of Economics and Political Science

Profitable Mergers in a Cournot Model of Spatial Competition

This paper investigates the profitability and locational effects of mergers when Cournot firms compete in spatially differentiated markets. A two-firm merger is generally profitable because the merged partners can coordinate their location decisions. The merged firm locates its plants outside the market quartiles with distance from the market center being an increasing function of the number of nonmerged firms remaining at the market center. Profitable two-firm mergers reduce competitive pressure, leading to higher prices and reduced consumer surplus. The merger increases total surplus by increased locational efficiency and the increased profits of the merged and nonmerged firms.

Product Differentiation, Cost-Reducing Mergers, and Consumer Welfare

Cost synergies are an explicitly recognized justification for a two-firm merger, and empirical techniques are now widely used to assess the impact of cost-reducing mergers on prices and welfare in the post-merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre-merger empirical estimates. Indeed, we further show that in such markets, two-firm mergers will typically lead to higher prices regardless of the mergers cost savings.

Pricing Coordination Failures and Health Care Provider Integration

Abstract The rise of managed healthcare organizations (MCOs) and the associated increased integration among providers has transformed US healthcare and at the same time raised antitrust concern. This paper examines how competition among MCOs affects the efficiency gains of improved price coordination achieved through integration. MCOs offer differentiated services and contract with specialized and complementary upstream providers to supply these services. We identify strategic pricing equilibria under three different market structures: overlapping upstream physician-hospital alliances, upstream-downstream arrangements such as Preferred Provider Organizations, and vertically integrated Health Maintenance Organizations. The efficiency gains achieved depend not only on organizational form but also on the toughness of premium competition. We show that, contrary to popular thinking, providers and insurers do not earn maximum net revenue when they are monopolies or monopsonies, but rather at an intermediate level of market power. Furthermore, closer integration of upstream and downstream providers does not necessarily increase net revenues.

The profitability of Canadian defence contractors

Abstract In this paper we employ a simultaneous equations approach to test the hypothesis that firm profitability is affected by (or affects) the degree to which a firm is involved in defence contracting. We find no evidence of any link between corporate profitability and defence-contracting activity in Canada. Moreover, our data do not support the hypothesis that a positive effect of defence contracting is offset by the government pursuing a ‘bailout’ contract award strategy. Based on the nature of the Canadian defence procurement system we argue that our results indicate that the government has used its monopsony powers to restrict the rate-of-return earned on defence contracts to equal that earned in commercial operations. Thus, firms which earn excess profits in commercial markets will also earn excess profits in defence markets.

The Informational Role of Spanning in Competitive Product Selection

This paper analyzes (1) the information required by competitive firms to solve price conjectures for differentiated goods that are not currently produced and (2) the feasibility of competitive firms acquiring this information. Products are differentiated according to the Gorman-Lancasterian characteristic approach. The assumption of a linear additive characteristics goods technology simplifies the calculation of price conjectures and facilitates the acquisition of information about consumer demand for new goods. In particular, it enables the firm to use product spanning to work out price conjectures. The paper demonstrates that the true role of spanning in these models is informational.