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competition model with a cost-reducing stage prior to the price game and a settlement stage following it, we show that price deregulation entails decreasing monitoring investments and increasing claims both in the short and long run. Even equilibrium premiums may steadily increase if the “competition effect” connected to new entries is outweighed by a “monitoring effect” that raises marginal costs. KEYWORDS: motor insurance, settlement, cost reducing investments, deregulation ∗We thank Luigi Buzzacchi, Don Hester, Patrick Legros, Emma Sarno, the Editor Ching-to Albert Ma

. The paper studies the net effect of restructuring on retail prices and cost-reducing investment and discusses policy implications. JEL classification: D43, L43. Keywords: Access pricing; investment; double marginalization; vertical fore- closure; product differentiation. 1. INTRODUCTION It is widely believed that introducing competition is the key to achieving the full benefits of privatization in previously monopolized and regulated network industries, such as telecommunications, electricity or railways.1 The recent wave of ‘deregulation’ in these industries – i

, advertising expenditure and a cost-reducing investment. We find the conditions for complementarities among scale, advertising and innovation strategies to arise. In a duopoly with substitute products all variables are higher for the firm that moves from mass advertising to targeted advertising but decrease for the other. In an oligopoly with complementary products all variables are higher for all firms when they shift away from mass marketing. We conclude by linking our results to the empirical literature on internalization which finds a positive relationship between

) and our article are complements. Second, he did not consider a case in which heterogeneous firms engage in R&D. Stenbacka (1991) considered the case in which the results of a cost-reducing investment are uncertain and the realization of the results is private information belonging to the innovating firm. He then examined whether merger anticipation leads to ex ante incentives for innovating firms to reveal their cost-reducing information. 5 Barros (1998) investigated a simple model highlighting the basic economic intuition about the relationship between initial

Bertrand Equilibria Review of Economic Studies 53 85 92 Routledge, R. 2010. “Bertrand Competition with Cost Uncertainty.” Economics Letters 107:356–9. 10.1016/j.econlet.2010.03.006 Routledge R 2010 Bertrand Competition with Cost Uncertainty Economics Letters 107 356 9 Spulber, D. 1995. “Bertrand Competition When Rivals’ Costs Are Unknown.” Journal of Industrial Economics 43:1–11. 10.2307/2950422 Spulber D 1995 Bertrand Competition When Rivals’ Costs Are Unknown Journal of Industrial Economics 43 1 11 Thomas, C. 1997. “Disincentives for Cost-Reducing Investment

marginal e¤ectiveness of investment in cost reduction. Therefore, the indirect e¤ect always expands the optimal scale of …rms as long as …rms invest more with higher regulation. If the direct e¤ect works in the same direction as the indirect e¤ect, higher regulation is likely to lead to an equilibrium path with more shake-out of …rms. Even if the direct e¤ect does not expand the optimal scale of …rms, if the indirect e¤ect gener- ated by cost reducing investment is su¢ ciently strong and, in particular, the marginal cost of …rms fall sharply with investment, larger shake

investment stage. 6 Hence a firm’s investment xa is given by ps s n @gi @xi xa ðga þ nÞ2 1 ¼ 0 ð11Þ where ga :5 gi(xa, xa). 7 Implicit differentiation of (11) shows that investments under the GPS increase in the output price. Intuitively, for any given innovation yi a higher price induces more output [see (6)]. This makes cost- reducing investments more beneficial. Using (6) and (9), expected overall output is qaðpÞ :¼ E qi þ qjjxa ¼ 2p 1 sE yni jxa ¼ 2p 1 s ga ga þ n ð12Þ The effect of spillovers on investments and output depends on the characteristics of the

two-part tariff. Yoon (2010) considers a case in which an MNO and an MVNO are producing horizontally differentiated services and compares the cost-plus regulation and the retail-minus regulation. Furthermore, he analyzes the regulations effects on social welfare and the MNO’s incentive to make a cost-reducing investment. Hoffler and Schmidt (2007) consider a case where MNOs and MVNOs are producing horizontally differentiated services and the firms face symmetric demand and cost. In this setting, they show that the retail-minus regulation may increase retail

(b) efficient firms face higher integration incentives. The driving force are demand/mark-up complementarities in the product market. While this observation is new in the context of vertical-integration decisions, similar mechanisms have been exploited in other fields. For instance, Bagwell and Staiger (1994) and Athey and Schmutzler (2001) use the related idea that cost-reducing investments are strategic substitutes in the context of many oligopoly models. Complementarities between demand-enhancing and mark-up-increasing activities are crucial for this result.32

where the welfare implications, which differ from, for example, Cremer et al. (1991) and others, come from the welfare-maximizing price regulation, not from a location subgame. However, with endogenous production costs, privatization of the public firm would improve welfare compared with a mixed duopoly because it would mitigate the loss arising from excessive cost-reducing investments of the private firm (Matsumura and Matsushima, 2004). In price-regulated markets such as the hospital industry, firms rather compete in quality or location than in prices (Brekke, 2004