Marius Schwartz

Parallel imports, demand dispersion, and international price discrimination

Parallel imports, goods imported by unauthorized resellers, are advocated worldwide for undermining international price discrimination. For a continuum of markets, we find that uniform pricing by a monopolist yields lower global welfare than third-degree discrimination if demand dispersion across markets is ‘large’: though uniform pricing avoids output misallocation, too many markets go unserved. Mixed systems, permitting discrimination across but not within designated groups of markets, yield significantly higher welfare than uniform pricing or unrestricted multimarket discrimination, and can Pareto dominate uniform pricing. Thus, while parallel imports might benefit some countries, our results weaken the (multilateral) case for allowing them.

Divisionalization and Entry Deterrence

This paper assumes that incumbent firms can create new independent divisions more cheaply than potential entrants, who must incur the additional overhead costs of new entry. The main theoretical result is that such divisionalization ability leads perfectly informed incumbents to preempt all rational entry into their industries. In contrast, existing models of entry deterrence imply that informed incumbents, even those with steadily decreasing average costs, will often allow rational entry. Our result may explain why successful, large-scale entry by firms with no informational advantage is extremely rare. The use of divisions to preempt entry may also explain why large firms in high-profit oligopolies often divisionalize, allowing their divisions to compete freely despite the negative pecuniary externality that each division imposes on others.

The non-existence of pairwise-proof equilibrium

Abstract Private bilateral contracting between a supplier and competing customers admits multiple equilibria. We show that requiring equilibrium to be ‘pairwise proof’ - immune to bilateral deviations by the supplier and any customer - can imply non-existence of equilibrium in ‘normal’ environments.

Product Innovation Incentives: Monopoly vs. Competition

In contrast to Arrows result for process innovations, we show that the gain from a product innovation can be larger to a secure monopolist than to a rivalrous firm that would face competition from independent sellers of the old product. A monopolist incurs profit diversion from its old good but may gain more than a rivalrous firm on the new good by coordinating the prices. In a Hotelling framework, we find simple conditions for the monopolists gain to be larger. We also explain why the ranking of innovation incentives differs under vertical product differentiation.

Entry-deterrence externalities and relative firm size

Most models of entry deterrence through preemptive investment consider either a monopolist or a cartel. This suppresses an important question: how does threat of entry affect capital choices of several noncolluding incumbents. There are two opposing forces. Expanding capital to deter entry generates a public good to other incumbents, but also increases the expanding firms share of market output. We address the trade off in a model of sequential entry with foresight, where in the first stage capital choices are made sequentially and in the second stage the output interaction is Cournot or competitive. Under competitive interaction, we prove that the first entrant either admits all other potential entrants or deters all - it never allows partial entry. Under Cournot, we find (using simultaneous) some rather surprising patterns: easier entry can make the first entrants capital larger or smaller; the first entrant can be smaller than the second but is never less profitable; the first entrants profit is always reduced by increased entry threat but profits of other entrants can be increased.

The Economic Logic for Conditioning Bell Entry into Long Distance on the Prior Opening of Local Markets

One of the most important and most contentious issues for regulation and competition raised by the 1996 Telecommunications Act is when to authorize the regional Bell companies to offer long-distance services. The Department of Justice (DOJ) adopted a standard requiring that a Bells local market must first be irreversibly open to competition. This paper analyzes the competitive benefits and costs of authorizing Bell entry, explains the DOJs standard, and argues that the incentives created by this standard will help achieve the Acts competitive goals more efficiently and rapidly than other standards, ultimately reducing the need for intrusive regulation.

Patent protection through discriminatory exclusion of imports

Section 337 of the U.S. Tariff Act empowers the ITC to order the exclusion of imported products found to infringe a U.S. intellectual property right. The EC and other countries have charged that section 337 and its procedures create discrimination, by offering stronger protection in the U.S. market against infringement by foreign products than by domestic. The ECs policy towards gray market imports has a similar discriminatory flavor. This paper analyzes the economic costs to the home country implicit in such discriminatory protection of intellectual property. Excluding infringing imports when their true costs are lower results in the domestic market being served by higher cost production. Moreover, tolerating infringement by domestic products dilutes the gains accruing to a patent holder when imports are excluded. The upshot is that for plausible assumptions about cost differences internationally and about the scope for domestic infringement, discriminatory exclusion of imports can be an expensive way to protect intellectual property. Other mechanisms can reward innovators in a more efficient manner.

Equity as a call option on assets: Some tests for failed banks

Abstract We report some preliminary evidence on the equity-call model — postulating that the stock market prices a firms equity like a call option on the firms assets — for a sample of failed banks. The model implies that these banks had positive net worth close to their failure dates, while subsequent FDIC estimates of resolution costs suggest large negative net worth figures.

Churn Versus Diversion in Antitrust: An Illustrative Model

An important question in horizontal merger analysis is what share of a firms lost output from a unilateral price increase will divert to its merger partner. This ‘diversion ratio’ is often estimated using data on customer switching from a firm to its rivals (‘churn’). We use a tractable oligopoly model to investigate the potential biases of such estimates, depending on what caused the churn: shifts in quality or marginal cost of the firm or of a rival; or demand‐side shifts due to changed circumstances or learning about product attributes. With demand‐side shifts, churn can be greater between more distant competitors.