nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒03‒18
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Multiproduct Cournot Oligopoly By David P. Myatt; Justin P. Johnson
  2. Strategic incentives for market share By Robert Ritz
  3. Markets : The Fulton Fish Market By Kathryn Graddy
  4. Vertical integration and the licensing of innovation with a fixed fee or a royalty By Lemari‚, S.
  5. Innovation, Competition and Welfare-Enhancing Monopoly By Michael R. Darby; Lynne G. Zucker
  6. Partnerships: A Potential Solution to the Common-Property Problem but a Problem for a Antitrust Authorities By Martin D. Heintzelman; Stephen W. Salant; Stephan Schott
  7. The need for scale as a driver of alliance formation : choosing between collaborative and autonomous production By Garrette, Bernard; Castaner, Xavier; Dussauge, Pierre
  8. List Prices, Bargaining and Resultant Productivity Diffusion Delay By John Thanassoulis
  9. Scale Economies and Imperfect Competition in WorldScan By Roland de Bruijn
  10. Incentive to reduce crop trait durability By Ambec, Stefan; Langinier, Corinne; Lemarie, Stephane
  11. Market Design Test Environments By Widergren, Steven; Sun, Junjie; Tesfatsion, Leigh S.
  12. Liberalisation of the European services market and its impact on Switzerland By Henk Kox; Arjan Lejour
  13. When do more patents reduce R&D? By Robert M. Hunt
  14. A decentralized market for a perishable good By Ahmed Anwar; Jozsef Sakovics
  15. Networks of Small Producers for Technological Innovation: Some Models By Chandra Pankaj

  1. By: David P. Myatt; Justin P. Johnson
    Abstract: We present a general Cournot model in which each firm may sell multiple quality-differentiated products. We use an upgrades approach, working not with the actual products, but instead with upgrades from one quality to the next. The properties of single-product Cournot models carry over to the supply of upgrades, but not necessarily to the supply of complete products. A firm`s product line is determined by the properties of demand, its costs, and competitor characteristics. For symmetric firms, these determinants reduce to returns to quality and changes in demand elasticity as quality increases. For asymmetric firms whose (potentially endogenous) technological capabilities are defined by their maximum feasible qualities, gaps in product lines are determined precisely by the capabilities of lesser rivals. Strategic commitment to product lines prior to quantity competition is considered. Incentives to so commit are markedly different from those under price-setting models.
    Keywords: multiproduct quality competition, multiproduct oligopoly, brands, Cournot competition, price discrimination, product lines
    JEL: D4 L1
    Date: 2005
  2. By: Robert Ritz
    Abstract: Market share objectives are prominent in many industries, especially where managers pay much attention to league table rankings. This paper explores the strategic rationale for giving managers incentives based on market share in an oligopoly competing in strategic substitutes. Moreover, the paper discusses evidence on executive compensation practice in the automotive and investment banking industries. As predicted by the theory, firms in both industries use explicit contractual incentives based on market share. The profitability squeeze in the US car industry due to aggressive buyer discount programs can thus be understood as a consequence of prevailing management incentives.
    Keywords: Strategic Delegation, Market Share, Executive Compensation, League Tables
    JEL: D21 D43 G24 J33 L62
    Date: 2005
  3. By: Kathryn Graddy
    Abstract: Centralized markets with large numbers of buyers and sellers are generally thought of as being competitive and well-functioning. However, an important role of centralized markets is matching heterogeneous products, such as fish, to buyers of these products. The high level of differentiation in the Fulton fish market and the institutional structure at the Fulton market has led to patterns of behaviour that suggest imperfect competition and market segmentation. At times in the past, the repeated nature of price setting and extensive knowledge of the sellers may have created the basis for tacit collusion and allowed the dealers to gather economic rents by exploiting the different elasticities and buying patterns. Additional economic rents at the market were created by subsidized rents and lax regulation created fertile ground for organized crime to operate.
    Keywords: Markets, Pricing, Fish
    JEL: L10 D40
    Date: 2006
  4. By: Lemari‚, S.
    Abstract: In this paper, we analyse a situation where a patent holder is considered as an upstream firm that can license its innovation to some downstream companies that compete on a final market with differentiated products. Licensing contract may be based either on a royalty or a fixed fee. The patent holder can either be independant or vertically integrated with one of the downstream companies. We show that a licence based on a royalty works better with vertical integration, and that consequently, the patent holder have some interest to vertically integrate if it enables him to apply a royalty based license. The effect of vertical integration on the social surplus can be either positive or negative.
    JEL: D45 L22 L42 O31 O32
    Date: 2005
  5. By: Michael R. Darby; Lynne G. Zucker
    Abstract: The basic competitive model with freely available technology is suited for static industries but misleading as applied to major innovative economies for which development of new technologies equals in magnitude around 10% of gross domestic investment. We distinguish free generic technology from proprietary technologies resulting from risky investment with uncertain outcome. The totality of possible outcomes drives the national innovation system and the returns to a particular successful technology cannot be compared to its own direct investment costs. Eureka moments are hardly ever self-enabling and incentives are required to motivate investment attempting to turn them into an innovation. The alternative to a valuable proprietary innovation is not the same innovation freely available but the unchanged generic technology. Growth is concentrated in any country at any time in a few firms in a few industries that are achieving metamorphic technological progress as a result of breakthrough innovations. So long as the entry and exit of firms using the generic technology sets the price in an industry, one or more price-taking firms can coexist with proprietary technologies yielding more or less substantial quasi-rents to the sunk development costs. Consumer welfare is increased if an innovator creates a proprietary technology such that the market equilibrium price is reduced and output increased. If the technological breakthrough is sufficiently large for the innovator to drive all generic producers out of the industry and increase output as a wealth-maximizing monopolist, consumer welfare is surely increased. After some time, the innovative technology will diffuse into an imitative generic technology. The best innovators develop a stream of innovations so that technological leaders can maintain their status as dominant firm or monopolist for extended periods of time despite lagged diffusion, and consumers benefit from this stream as well. The economics of an innovative nation are different from those of the no-growth stationary state which we teach and fall back on. We propose an ambitious agenda to integrate major research streams treating innovation as an object of economic analysis into our standard models.
    JEL: D40 D24 O31 L1
    Date: 2006–03
  6. By: Martin D. Heintzelman; Stephen W. Salant; Stephan Schott
    Date: 2005–05–14
  7. By: Garrette, Bernard; Castaner, Xavier; Dussauge, Pierre
    Abstract: In this paper, the authors reconsider why firms choose to form horizontal alliances when launching a new product rather to undertake such a project on their own.
    Keywords: alliance formation; autonomous production; collaborative production
    JEL: M10 M14
    Date: 2006–03–07
  8. By: John Thanassoulis
    Abstract: List prices are not completely credible as take it or leave it prices: buyers are able to seek reductions by bargaining with firms. We show that this realisation leads to the existence of a critical threshold number of competitors in an industry which depends on fundamentals. In industries with fewer competitors than the critical level, there is productivity diffuson delay: low and high cost firms coexist, list prices have no information value and transaction price dispersion exists. Above this critical number of competitors, efficient firms price to drive the high cost firms from the market: productivity gains diffuse to consumers and list prices now carry cost information. Prices never fall to the Bertrand floor however. All of these results are in close keeping with, and provide an explanation for empirical results showing productivity dispersion persistence and the explanatory power of having 5 competitors or more (Nickell 1996).
    Keywords: Bargaining, List Prices, Transaction Prices, Bertrand Paradox, Productivity, Productivity Diffusion Delay
    JEL: D24 D43 L11
    Date: 2005
  9. By: Roland de Bruijn
    Abstract: WorldScan, the CGE model for international policy analysis and long-term scenario studies, is applied regularly at the CPB. The production technology in the model is that of constant returns to scale and the market structure is characterized by perfect competition. However, it is a well known fact that many sectors such as manufacturing and service sectors feature increasing returns and firms compete imperfectly. To give the model more realism, it is therefore necessary to expand the model. Besides that, several research projects require an identification of scale economies in order to perform a sound welfare analysis. In this memorandum, I review the literature on scale economies and imperfect competition and analyze which approach is most suitable to implement in WorldScan. For the objectives at hand it appears most efficient to expand the model with an extended Dixit-Stiglitz approach. Simulations with an aggregated version of WorldScan show that the effects of incorporating scale economies are significant. Evidently, in a liberalisation scenario, sectors with increasing returns can exploit their technology more than sectors with constant returns, implying considerable increases in production and exports for these sectors. Concluding, this expansion of the model allows for an identification of formerly unidentified welfare effects.
    Keywords: Love of variety; monopolistic competition; general equilibrium; specialisation
    JEL: D43 D58 F12 L13
    Date: 2006–01
  10. By: Ambec, Stefan; Langinier, Corinne; Lemarie, Stephane
    Abstract: To reduce the competition from farmers who self-produce seed, an inbred line seed producer can switch to nondurable hybrid seed. In a two-period model we investigate the impact of crop durability on self-production, pricing and switching decisions, and we examine the impact of license fees paid by self-producing farmers. First, in an inbred line seed monopoly model, we find that the monopolist may produce technologically dominated hybrid seed in order to extract more surplus from farmers. Further, the introduction of license fees improves efficiency. Second, we study how the monopolist's behavior is affected by the entry of a nondurable hybrid seed producer. We show that the inbred line seed producer might benefit from competing with a technologically dominated hybrid seed producer, as this allows for consumers' discrimination.
    Keywords: Durable good, nondurable good, licenses.
    JEL: Q1
    Date: 2006–03–14
  11. By: Widergren, Steven; Sun, Junjie; Tesfatsion, Leigh S.
    Abstract: Power industry restructuring continues to evolve at multiple levels of system operations. At the bulk electricity level, several organizations charged with regional system operation are implementing versions of a Wholesale Power Market Platform (WPMP) in response to U.S. Federal Energy Regulatory Commission initiatives. Recently the Energy Policy Act of 2005 and several regional initiatives have been pressing the integration of demand response as a resource for system operations. These policy and regulatory pressures are driving the exploration of new market designs at the wholesale and retail levels. The complex interplay among structural conditions, market protocols, and learning behaviors in relation to short-term and longer-term market performance demand a flexible computational environment where designs can be tested and sensitivities to power system and market rule changes can be explored. This paper discusses the use of agent-based computational methods for the study of electricity markets at the wholesale and retail levels, and explores distinctions in problem formulation between these levels.
    JEL: B4 C0 C6 L1 L5 Q4
    Date: 2006–03–06
  12. By: Henk Kox; Arjan Lejour
    Abstract: This report estimates the quantitative economic implications of a possible decision by the Swiss government to fully adopt the European Commission proposals for a services directive. The European Commission's 2004 proposals for a Services Directive consists of measures to reduce or eliminate the obstacles of cross-border trade of services by introducing the 'country of origin' principle. It implies that regulation of the country of origin is relevant, and that the country of destination has no right to impose new regulation.<BR> Our results indicate that the introduction of the 2004 EU services directive in Switzerland would very much intensify the economic relations between the service industries of Switzerland and the European Union. We have investigated the direct effects of mutual liberalisation of services markets. These are positive, both for Switzerland and the EU. Swiss exports of commercial services to the EU could increase by 40 to 84 per cent, while Swiss foreign direct investment stocks in EU services industries could increase by 20 to 41 per cent. EU services exports to Switzerland may rise by 41 to 85 per cent, while EU direct investment stocks in Swiss service markets could rise by 29 to 55 per cent.
    Keywords: EU; internal market; services; service trade; direct investment; regulatory barriers; gravity model; Switzerland
    JEL: F13 F15 F17 F23 L5 L8
    Date: 2005–12
  13. By: Robert M. Hunt
    Abstract: This paper develops a simple duopoly model in which investments in R&D and patents are inputs in the production of firm rents. Patents are necessary to appropriate the returns to the firm’s own R&D, but patents also create potential claims against the rents of rival firms. Analysis of the model reveals a general necessary condition for the existence of a positive correlation between the firm’s R&D intensity and the number of patents it obtains. When that condition is violated, changes in exogenous parameters that induce an increase in firms’ patenting can also induce a decline in R&D intensity. Such a negative relationship is more likely when (1) there is sufficient overlap in firms’ technologies so that each firm’s inventions are likely to infringe the patents of another firm, (2) firms are sufficiently R&D intensive, and (3) patents are cheap relative to both the cost of R&D and the value of final output.
    Keywords: Patents ; Research and development
    Date: 2006
  14. By: Ahmed Anwar; Jozsef Sakovics
    Abstract: We characterize the steady state of a market with random matching and bargaining, where the sellers' goods can perish overnight. Generally, the quantity traded is suboptimal, prices are dispersed and their is a dead-weight loss caused by excess supply or demand. In the limit, as the cost of staying in the market tends to zero, only th amuount of trade tends to the efficient level, the other two non-competitive characteristics remain. We discuss the implications of these findings on the foundations of competitive equilibrium and on the robustness of the results in the literature of durable-goods markets.
  15. By: Chandra Pankaj
    Abstract: Small producers face a variety of challenges - some related to markets and others related to capabilities. Inability to develop technological capabilities has often restricted small firms from growing large. In this paper, we present learning from three global networks , i.e., TAMA in Japan, Wenzhou in China and Rajkot in India, that have adopted a variety of mechanisms of coordination between small producers and has led to both capability enhancement and demand enhancement. We argue that the capability enhancement effects play as significant a role as demand enhancement effects in the growth of small firms. Coordination that allows firms to improve their capabilities enhances both productivity as well as innovative capabilities to develop new products and processes. The paper, with the help of these three case studies, presents a generic model for SME development that is based on acquiring distinctive capabilities and linkages with other small producers or other members of the supply chain. We propose distinctive determinants of a collaborative model for engaging SMEs in technological innovation over a period of time. These are : Focus of the Firm, Interactive Producers, Processing and Product Manufacturing, Innovation Investment, Markets, Market Makers (and market making processes), and Regulatory Support.
    Date: 2006–03–07

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