Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107855
Authors: 
Bleker, Sylvia
Behrens, Christiaan
Koster, Paul
Verhoef, Erik T.
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-142/VIII
Abstract: 
This article investigates competition in a market with an emerging technology using a discrete choice model to analyze demand and welfare. We focus on industry structure and investigate the impact of different market structures on demand for the new technology and on welfare. The car market serves as a prime example of such a market, where electric vehicles (EV’s) represent the new technology competing with standard cars with internal combustion engines (ICV’s). To analyze such a market, we use a nested logit model. In contrast to earlier literature, we allow firms to be asymmetric and active in multiple nests, with different numbers of variants in each nest, which can add up to any market share. Additionally, we add to existing literature by considering the case where substitutability between firms is stronger than between technologies, by nesting products by technology instead of by firm. We find implicit analytical solutions for the equilibrium mark-ups which can be used when there are two nests in the market; within that restriction firms can be asymmetric. Numerically, we find that EV sales are higher if offered by a new entrant only selling EV’s as opposed to when it is supplied by a firm selling variants of both types. We present an index based on mark-up differences between variants in the market, which can be used to a priori determine whether a change in market structure would increase or decrease welfare. These results are general to the nested logit model, and the index can thus be used in any market, as long as the market is sufficiently accurately described by the nested logit model.
Subjects: 
Nested logit model
asymmetry
market structure
welfare indices
emerging technology
JEL: 
D43
D60
L11
L91
Document Type: 
Working Paper

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