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on Industrial Competition |
| By: | Paul Klemperer (Nuffield College, University of Oxford); Joseph Farrell (University of California) |
| Abstract: | Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in effciency, and gives vendors lucrative ex post market power-over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such "competition for the market" or "life-cycle competition" can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct effciency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-effciency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later "tips" to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and s also discourage more aggressive entry. Because of these competitive effects, even ineffcient incompatible competition is often more profitable than compatible competition, especially for dominant rms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy. |
| Date: | 2006–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0607&r=com |
| By: | Marvin Kraus (Boston College) |
| Keywords: | Networks, congestion, returns to scale, congestion pricing |
| Date: | 2006–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:644&r=com |
| By: | Patrick Lunnemann (Banque Central du Luxembourg, 2, boulevard Royal, L-2983 Luxembourg, Luxembourg.); Ladislav Wintr (Clark University, Worcester, MA 01610, United States.) |
| Abstract: | This paper studies the behaviour of Internet prices. It compares price rigidities on the Internet and in traditional brick-and-mortar stores and provides a cross-country perspective. The data set covers a broad range of items typically sold over the Internet.It includes more than 5 million daily price quotes downloaded from price comparison web sites in France, Germany, Italy, the UK and the US. The following results emerge from our analysis. First, and contrary to the recent findings for common CPI data, Internet prices in the EU countries do not change less often than online prices in the US. Second, prices on the Internet are not necessarily more flexible than prices in traditional brick-and-mortar stores. Third, there is substantial heterogeneity in the frequency of price change across shop types and product categories. Fourth, the average price change on the Internet is relatively large, but smaller than the respective values reported for CPI data. Finally, panel logit estimates suggest that the likelihood of observing a price change is a function of both state- and time-dependent factors. JEL Classification: E31; L11. |
| Keywords: | Price stickiness; Internet; price setting behaviour. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060645&r=com |
| By: | George J. Mailath (Cowles Foundation, Yale University); Georg Noldeke (Universitat Bonn) |
| Abstract: | Extreme adverse selection arises when private information has unbounded support, and market breakdown occurs when no trade is the only equilibrium outcome. We study extreme adverse selection via the limit behavior of a financial market as the support of private information converges to an unbounded support. A necessary and sufficient condition for market breakdown is obtained. If the condition fails, then there exists competitive market behavior that converges to positive levels of trade whenever it is first best to have trade. When the condition fails, no feasible (competitive or not) market behavior converges to positive levels of trade. |
| Keywords: | Adverse selection, Market breakdown, Separation, Competitive pricing |
| JEL: | D40 D82 D83 G12 G14 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1573&r=com |
| By: | Giovanni Dosi; Luigi Marengo; Corrado Pasquali |
| Abstract: | The paper attempts a critical assessment of both the theory and the empirical evidence on the role of appropriability and in particular of Intellectual Property Right (IPR) as incentives for technological innovation. We start with a critical discussion of the standard justification of the attribution of IPR in terms of "market failures" in knowledge generation. Such an approach we argue misses important features of technological knowledge and also neglects the importance of non-market institutions in the innovation process. Next, we examine the recent changes in the IPR regimes and their influence upon both rates of patenting and underlying rates of innovation. The evidence broadly suggests that, first, IPRs are not the most important device apt to "profit from innovation"; and second, they have at best no impact, or possibly even a negative impact on the underlying rates of innovation. Rather, we argued, technology- and industry-specific patterns of innovation are primarily driven by the opportunities associated with each technological paradigm. Conversely, firm-specific abilities to seize them and "profit from innovation" depend partly on adequacy of the strategic combinations identified by the taxonomy of Teece (1986) and partly on idiosyncratic capabilities embodied in the various firms. |
| Keywords: | Appropriability, Intellectual Property Right, Innovation, Technological opportunities |
| Date: | 2006–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2006/17&r=com |
| By: | Sophie Claeys (Department of Financial Economics and CERISE, Ghent University, W. Wilsonplein 5D, B-9000 Ghent, Belgium.); Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany.) |
| Abstract: | Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from 10 transition countries of Eastern Europe for the period 1995-2003. JEL Classification: G21, D4, L31. |
| Keywords: | Banking, Foreign Entry, Mode of Entry, Interest Rate, Asymmetric Information. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060653&r=com |
| By: | Sumru G. Altug; Murta Usman |
| Abstract: | We examine bank lending decisions in an economy with spillover effects in the creation of new investment opportunities and asymmetric information in credit markets. We examine pricesetting equilibria with horizontally differentiated banks. If bank lending takes place under a weak corporate governance mechanism and is fraught with agency problems and ineffective bank monitoring, then an equilibrium emerges in which loan supply is strategically restricted. In this equilibrium, the loan restriction, the “under-lending” strategy, provides an advantage to one bank by increasing its market share and sustaining monopoly interest rates. The bank’s incentives for doing so increase under conditions of increased volatility of lending capacities of banks, more severe borrower-side moral hazard, and lower returns on the investment projects. Although this equilibrium is not always unique, with poor bank monitoring and corporate governance, a more intense banking competition renders the bad equilibrium the unique outcome. |
| Keywords: | Bank lending, threshold effects, underlending equilibria, interest rate competition. |
| JEL: | E22 E62 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0608&r=com |
| By: | Camera, Gabriele; Selcuk, Cemil |
| Abstract: | We study equilibrium prices and trade volume with n identical buyers and a seller who initially commits to some capacity. Sales are sequential and each price is determined by strategic bargaining. A unique sub-game perfect equilibrium exists. It is characterized by absence of costly bargaining delays and each trade is settled at a different price. Prices increase with n and fall in the seller’s capacity, so if buyers have significant bargaining power, then the seller will strategically constrain capacity to less than n. Thus, despite the efficiency of the bargaining solution, certain distributions of bargaining powers give rise to an allocative inefficiency. |
| Keywords: | Commitment ; Inefficiency ; Peripheral players ; Price heterogeneity ; Strategic bargaining |
| JEL: | C78 D20 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1190&r=com |
| By: | Gine, Xavier; Love, Inessa |
| Abstract: | The authors study the effect of reorganization costs on the efficiency of bankruptcy laws. They develop a simple model that predicts that in a regime with high costs, the law fails to achieve the efficient outcome of liquidating unviable businesses and reorganizing viable ones. The authors test the model using the Colombian bankruptcy reform of 1999. Using data from 1,924 firms filing for bankruptcy between 1996 and 2003, they find that the pre-reform reorganization proceeding was so inefficient that it failed to separate economically viable firms from inefficient ones. In contrast, by substantially lowering reorganization costs, the reform improved the selection of viable firms into reorganization. In this sense, the new law increased the efficiency of the bankruptcy system in Colombia. |
| Keywords: | Banks & Banking Reform,Corporate Law,Small Scale Enterprise,Microfinance,Economic Theory & Research |
| Date: | 2006–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3970&r=com |
| By: | Wilhelm Althammer; Susanne Dröge |
| Abstract: | We investigate in a horizontal product differentiation model with North-South trade the implications of a home bias in consumers' demand for labelled goods. We compare mutual recognition and international harmonisation of ecological labels with respect to firms' profits and welfare. Northern consumers perceive a warm glow from buying green, but have information problems with imported labelled products. Firms differ in labelling costs which could help a Southern firm to compensate for the home bias under mutual recognition. Under harmonisation the home bias disappears. Welfare analysis of harmonised labelling shows that a Southern firm gains from adopting a harmonised label - even if there is "eco-imperialism". Given the specific trade structure in our model, harmonisation is a beneficial regime except for the case that labelling costs reach a specific treshold. |
| Keywords: | Ecological Labels; Product Differentiation; North-South Trade; WTO Rules |
| JEL: | F13 F18 L13 Q56 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp604&r=com |