Özlem Bedre-Defolie

ESMT Working Paper

Contracts as a barrier to entry in markets with non-pivotal buyers

ESMT Working Paper
Accepted at American Economic Review
Özlem Bedre-Defolie, Gary Biglaiser (2016)
Abstract:
Subject(s): Economics, politics and business environment

Considering markets with non-pivotal buyers we analyze the anti-competitive effects of breakup fees used by an incumbent facing a more efficient entrant in the future. Buyers differ in their intrinsic switching costs. Breakup fees are profitably used to foreclose entry, regardless of the entrant’s efficiency advantage or level of switching costs. Banning breakup fees is beneficial to consumers and enhances the total welfare unless the entrant’s efficiency is close to the incumbent’s. Inefficient foreclosure arises not because of rent shifting from the entrant, but because the incumbent uses the long-term contract to manipulate consumers’ expected surplus from not signing it.

Pages 38

ESMT Working Paper

LeChatelier-Samuelson principle in games and pass-through of shocks

ESMT Working Paper
Accepted at Journal of Economic Theory
Alexei Alexandrov, Özlem Bedre-Defolie (2016)
Abstract:
Subject(s): Economics, politics and business environment
Keyword(s): LeChatelier-Samuelson principle, cost passthrough, multiproduct firms

The LeChatelier-Samuelson principle states that as a reaction to a shock, an agent's short-run adjustment of an action is smaller than the long-run adjustment of that action when the other related actions can also be adjusted. We extend the principle to strategic environments and define long run as an adjustment that also includes other players adjusting their strategies. We show that the principle holds for both idiosyncratic shocks (affecting only one player's action directly) and common shocks in supermodular games, only for idiosyncratic shocks in submodular games if the players' payoffs depend only on their own strategies and the sum of the rivals' strategies (for example, homogeneous Cournot oligopoly), and only for idiosyncratic shocks in other games of strategic substitutes or heterogeneity satisfying Morishima Conditions. We argue that the principle might also explain the empirical findings of overshifting of cost and unit tax by multiproduct firms.

Pages 46

Working Paper

Economics of payment cards

Konkurrensverket Working Paper Series
Özlem Bedre-Defolie, Linda Gratz (2015)
Abstract:
Subject(s): Economics, politics and business environment
Keyword(s): Payment card networks, interchange fees, two-sided markets
JEL Code(s): L11, G21, L42, L51, K21
Pages 34

ESMT Working Paper

The equivalence of bundling and advance sales

ESMT Working Paper
Alexei Alexandrov, Özlem Bedre-Defolie (2013)
Abstract:
Subject(s): Economics, politics and business environment
Keyword(s): Advance selling, bundling, price discrimination
JEL Code(s): L11, D42

We show that a monopolist's problem of optimal advance selling strategy can be mathematically transformed into a problem of optimal bundling strategy if four conditions hold: i. consumers and the firm agree on the probability of the states occurring, ii. the firm pre-commits to the spot prices to be charged in the advance selling stage, iii. consumers are risk-neutral, and iv. consumers and the firm do not have time preferences or when they do have time preferences, they discount future at the same rate. The result allows both researchers and practitioners to apply the insights from the well-developed vast literature on bundling to advance selling problems. In particular, we show that advance selling is more profitable than spot selling when consumer valuations across the states are independent or negatively dependent or positively dependent up to a point. We furthermore illustrate the effect of advance selling on the spot prices and consumer welfare: When the firm offers advance selling discounts, it sets higher spot prices, so consumers who do not buy in advance are worse off due to the firm offering advance selling discounts. We extend our analysis to the cases of more than two states and competition only in one of the states. We also show how advance selling can be used as an entry deterrence strategy.

Pages 40

ESMT Working Paper

Vertical coordination through renegotiation

ESMT Working Paper
Abstract:
Subject(s): Economics, politics and business environment
Keyword(s): Vertical contracts, rent shifting, renegotiation, buyer power

This paper analyzes the strategic use of bilateral supply contracts in sequential negotiations between one manufacturer and two differentiated retailers. Allowing for general contracts and retail bargaining power, I show that the first contracting parties have incentives to manipulate their contract to shift rent from the second contracting retailer and these incentives distort the industry profit away from the fully integrated monopoly outcome. To avoid such distortion, the first contracting parties may prefer to sign a contract which has no commitment power and can be renegotiated from scratch should the manufacturer fail in its subsequent negotiation with the second retailer. Renegotiation from scratch induces the first contracting parties to implement the monopoly prices and might enable them to capture the maximized industry profit. A slotting fee, an up-front fee paid by the manufacturer to the first retailer, and a menu of tariff-quantity pairs are sufficient contracts to implement the monopoly outcome. These results do not depend on the type of retail competition, the level of differentiation between the retailers, the order of sequential negotiations, the level of asymmetry between the retailers in terms of their bargaining power vis-à-vis the manufacturer or their profitability in exclusive dealing.

Pages 36

ESMT Working Paper

Merger efficiency and welfare implications of buyer power

ESMT Working Paper
Özlem Bedre-Defolie, Stéphane Caprice (2011)
Abstract:
Subject(s): Economics, politics and business environment
Keyword(s): buyer mergers, non-linear supply contracts, merger efficiencies, size discounts, waterbed effects
JEL Code(s): D43, K21, L42

This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are "waterbed effects," that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, "anti-waterbed effects," if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the final price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.

Pages 26

ESMT Working Paper

Sales tax competition and a multinational with a decreasing marginal cost

ESMT Working Paper
Alexei Alexandrov, Özlem Bedre-Defolie (2011)
Abstract:
Subject(s): Economics, politics and business environment
Keyword(s): tax competition, sales taxes, multinationals, decreasing marginal cost, economies of scale
JEL Code(s): F12, F23, H25, H71

We examine a multinational firm which has a decreasing marginal cost, and the optimal sales tax policies of the regions where that firm operates. We show that the regions set higher sales taxes than those given by a cooperative equilibrium. Each region fails to fully internalize the effects of its tax level on another region's welfare and the incentives for that region's authority. Exponential cost functions which exhibit economies of scale (for example Cobb-Douglas) and linear demand functions satisfy our assumptions. Our results suggest the need to coordinate sales tax levels between countries and between smaller entities, like states in the United States. Smaller regions benefit more from such coordination. Lowering sales taxes in each region increases welfare for all regions, profits for firms, and consumer welfare.

Pages 22

ESMT Working Paper

Pricing payment cards

ESMT Working Paper
Özlem Bedre-Defolie, Emilio Calvano (2010)
Abstract:
Subject(s): Economics, politics and business environment
Keyword(s): Payment card networks, interchange fees, merchant fees
JEL Code(s): G21, L11, L42, L31, L51, K21

Payment card networks, such as Visa, require merchants' banks to pay substantial "interchange" fees to cardholders' banks, on a per transaction basis. This paper shows that a network's profit-maximizing fee induces an inefficient price structure, over-subsidizing card usage and over-taxing merchants. In contrast to the literature we show that this distortion is systematic and arises from the fact that consumers make two distinct decisions (membership and usage) whereas merchants make only one (membership). These findings are robust to competition for cardholders and/or for merchants, network competition, and strategic card acceptance to attract consumers.

An earlier version of this working paper appeared in the European Central Bank Working Paper Series (No. 1139).

Pages 38