nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒01‒23
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. Controlling Collusion in Auctions: The Role of Ceilings and Reserve Prices By Roy Chowdhury, Prabal
  2. Auctions with Costly Information Acquisition By Crémer, Jacques; Spiegel, Yossi; Zheng, Charles Zhoucheng
  3. Disclosing vs. withholding technology knowledge in a duopoly By Paolo Giorgio GARELLA; Emanuele BACCHIEGA
  4. Equilibrium Nonexistence in Spatial Competition with Quadratic Transportation Costs By Arguedas, Carmen; Hamoudi, Hamid; Saez, Manuel
  5. Asymmetric Information without Common Priors: An Indirect Evolutionary Analysis of Quantity Competition By Werner Güth; Loreto Llorente Erviti; Anthony Ziegelmeyer
  6. Why Suggest Non-Binding Retail Prices? By Clemens Puppe; Stephanie Rosenkranz
  7. Quality Upgrades and the (loss) of Market Power in a Dynamic Monopoly Model By James J. Anton; Gary Biglaiser
  8. Integration and Separation with Costly Demand Information By Elisabetta Iossa; Francesca Stroffolini
  9. Access to Bottleneck Inputs under Oligopoly: a Prisoners Dilemma? By Duarte Brito; Pedro Pereira
  10. When Do Input Prices Matter For Make-Or-Buy Decisions? By David Mandy
  11. Environmental Quality in a Differentiated Duopoly By Y. Hossein Farzin; Ken-Ichi Akao
  12. Why were FIFA World Cup Tickets so cheap?: Monopoly Pricing, Demand Quality and Two-Sided Markets By Eichhorn, Christoph; Sahm, Marco
  13. Competition in the Netherlands By Harold Creusen; Bert Minne; Henry van der Wiel
  14. The Economics of the Internet By Nicholas Economides;
  15. Competition in a Pure World of Internet Telephony By Christoph Engel
  16. Mobile Virtual Network Operators: Beyond the Hyperbolae By Duarte Brito; Pedro Pereira
  17. Exclusive Quality - Why Exclusive Distribution may Benefit the TV-viewers By Stennek, Johan
  18. Pricing of settlement link services and mergers of central securities depositories By Jens Tapking
  19. Lending Booms, Underwriting and Competition: The Baring Crisis Revisited By Juan-Huitzi Flores
  20. Small is Successful!? By Mathias Erlei
  21. Bidding Behavior when One Bidder and the Auctioneer Are Vertically Integrated Implications for the Partial Deregulation of EU Electricity Markets By Silvester van Koten
  22. Liberalisation of European energy markets By CPB, in collaboration with ZEW, Mannheim

  1. By: Roy Chowdhury, Prabal
    Abstract: We examine a simple model of collusion under a single-object second-price auction. Under the appropriate parameter conditions, in particular as long as collusion is neither too easy, nor too difficult, we find that the optimal policy involves both an effective ceiling, as well as a reserve price.
    Keywords: Auctions; ceilings; collusion; reserve prices.
    JEL: D44 C72
    Date: 2006–12
  2. By: Crémer, Jacques; Spiegel, Yossi; Zheng, Charles Zhoucheng
    Abstract: We characterize optimal selling mechanisms in auction environments where bidders must incur a cost to learn their valuations. These mechanisms specify for each period, as a function of the bids in previous periods, which new potential buyers should be asked to bid. In addition, these mechanisms must induce the bidders to acquire information about their valuations and to reveal this information truthfully. Using a generalized Groves principle, we prove a very general full extraction of the surplus result: the seller can obtain the same profit as if he had full control over the bidders' acquisition of information and could have observed directly their valuations once they are informed. We also present appealing implementations of the optimal mechanism in special cases.
    Keywords: optimal auction, optimal search, information acquisition, full extraction, endogenous entry
    JEL: D8
    Date: 2007–01–16
  3. By: Paolo Giorgio GARELLA; Emanuele BACCHIEGA
    Abstract: We study firms' incentives to transfer knowledge about production technology to a rival in a Cournot duopoly. In a setting where two technologies are available, a technology is characterized by its associated cost function and no single technology is strictly superior to the other. A firm has superior information if it knows both techniques and the other only one. Cost efficiency may be "reversed" after the voluntary disclosure, so that the rival's costs are improved at the equilibrium level of output. Adding R&D investments to the picture, we find that a firm can decide to invest just for the purpose of acquiring knowledge that will be transferred and not used. Furthermore, for the same point in the parameters space, the acquisition of full knowledge may occur or not as a function of the initial distribution of information
    Keywords: Oligopoly, Information disclosure, R&D Joint Ventures, R&D Consortia, Returns to scale
    JEL: L13 O30
    Date: 2007–01
  4. By: Arguedas, Carmen (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.); Hamoudi, Hamid (Departamento de Economía Aplicada y Fundamentos del Análisis Económico II, Universidad Rey Juan Carlos); Saez, Manuel (Departamento de Economía, Universidad Europea de Madrid)
    Abstract: Under quadratic transportation costs, the existence of the sequential first-locate-thenprice equilibrium in spatial competition is well known in the literature. In this paper, we find that the equilibrium may fail to exist under certain restrictions with respect to the location of firms and consumers in the market. This result is valid for both the linear and the circular models
    Keywords: Product differentiation, circular model, linear model, quadratic transportation costs, sequential equilibrium
    JEL: C72 D43
  5. By: Werner Güth; Loreto Llorente Erviti; Anthony Ziegelmeyer
    Abstract: The common prior assumption justifies private beliefs as posterior probabilities when updating a common prior based on individual information. Common priors are pervasive in most economic models of incomplete information and oligopoly models with asymmetrically informed firms. We dispose of the common prior assumption for a homogeneous oligopoly market with uncertain costs and firms entertaining arbitrary priors about other firms’ cost-type to analyze which priors will be evolutionarily stable when truly expected profit measures (reproductive) success. When firms believe that all other firms entertain the same beliefs Nature’s priors are not the only evolutionarily stable priors. In a second model allowing for asymmetric priors Nature’s priors are not even evolutionarily stable.
    Keywords: (Indirect) evolution; Common prior assumption; Cournot competition
    JEL: C72 D43 D82 L13
    Date: 2006–12
  6. By: Clemens Puppe; Stephanie Rosenkranz
    Abstract: We provide a simple behavioral explanation of why manufacturers frequently announce non-binding suggested retail prices for their products. Our model is based on the assumption that once the actual price for a product exceeds its suggested retail price, the marginal propensity to consume suddenly jumps downward. This property of individual demand corresponds to Kahneman and TverskyÕs concept of loss aversion. We show that it may induce a monopolistic retailer to set the price equal to the suggested retail price in equilibrium, although the latter price is nonbinding. This, in turn, leads to a shift of profits from the retailer to the manufacturer.
    Keywords: manufacturer's suggested retail price, reference dependence, loss aversion
    JEL: D4 D10 L1 L2
    Date: 2006–05
  7. By: James J. Anton (Duke University); Gary Biglaiser (University of North Carolina)
    Date: 2007–01
  8. By: Elisabetta Iossa (Economics and Finance Section, School of Social Sciences, Brunel University; Centre for Market and Public Organization, (C.M.P.O.), and Universita' Tor Vergata.); Francesca Stroffolini (University of Napoli “Federico II” and CSEF)
    Abstract: We consider an industry characterized by a regulated natural monopoly in the upstream market and Cournot competition with demand uncertainty in the unregulated downstream market. The realization of demand cannot be observed by the regulator, whilst it can be privately observed at some cost by the upstream monopolist. Information acquisition is also unobservable. We study whether it is better to allow the monopolist to operate in the downstream market (integration) or instead to exclude it (separation). We show that asymmetric information on demand favours separation but unobservability of information acquisition favours integration.
    Keywords: Information acquisition, liberalization and separation
    Date: 2007–01–01
  9. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this article, we analyze the incentives of vertically integrated oligopolists to concede access to their bottleneck inputs to an entrant in the downstream retail market. We develop a two-stage model, where in the first stage a downstream entrant negotiates an access price with three vertically integrated incumbents, and in stage 2 firms compete on Salop's circle. The incumbents may be asymmetrically located on the circle, to reflect differences in consumer shares. For some levels of asymmetry, the incumbents face a prisoners dilemma with respect to conceding access to their bottleneck inputs. Entry by a downstream firm may lead to lower retail prices. However, entry may also lead to higher retail prices for the access provider and for the entrant.
    Keywords: Bottleneck Input, Vertical Integration, Oligopoly, Entry
    JEL: L43 L96
    Date: 2006–11
  10. By: David Mandy (Department of Economics, University of Missouri-Columbia)
    Abstract: We investigate input pricing regimes that induce efficient make-or-buy decisions by entrants when there is constant returns in the production of the input(s) and simultaneous noncooperative price competition in downstream retail markets. A necessary and sufficient condition for efficient make-or-buy decisions is derived. This condition shows that input prices are relevant for make-or-buy decisions except under restrictive and often unverifiable assumptions on the demand structure, and that the least informationally-demanding way to ensure efficient make-or-buy decisions is to price inputs at marginal cost. The extent to which input prices can depart from marginal cost while still inducing efficient make-or-buy decisions depends on the relative efficiency of the incumbent and the demand displacement ratio, with significant departures possible even for modest efficiency differences when products are nearly homogeneous.
    Keywords: Input Pricing Policy, Productive Efficiency.
    JEL: L5 L9
    Date: 2007–01–16
  11. By: Y. Hossein Farzin (University of California); Ken-Ichi Akao (Waseda University)
    Abstract: In a duopoly industry with environmentally differentiated products, we examine the effects of introducing a mandatory environmental quality standard on firms’ environmental quality choices, profits, and the average environmental quality offered by the industry. We show that at low standard levels, both firms choose to overcomply regardless of the standard level. At intermediate levels, the mandatory standard can reduce the profit of the low-cost firm while increasing that of the high-cost firm, and that it can lower the industry’s average environmental quality below what it would be without the standard.
    Keywords: Duopoly, Environmental Quality, Mandatory Environmental Standard, Overcompliance, Product Differentiation
    JEL: Q58 L13 L51 D43
    Date: 2006–11
  12. By: Eichhorn, Christoph; Sahm, Marco
    Abstract: We examine the pricing decision of a multi-product monopolist in a two-sided market where the type structure of buyers on one side of the market is an important determinant of profit on the other side. In this situation it might be optimal to set prices below the maximum sellout price and to ration demand by a random mechanism in the first market to reach a type distribution more favorable for sales in the other market. The model establishes demand quality as an alternative link between markets in addition to standard quantitative effects and explains frequently observed underpricing, e.g. in the (sports) entertainment industry. It also provides an explanation for the effort a monopolist incurs to deter from resale.
    Keywords: Underpricing; Demand Rationing; Resale Deterrence
    JEL: L12 D42 D45
    Date: 2007–01
  13. By: Harold Creusen; Bert Minne; Henry van der Wiel
    Abstract: Competition in the Dutch market sector as a whole probably slightly declined during 1993- 2001. Within the market sector, a large variety in competition development exists. Competition changes have been rather small in many industries competition, but a considerable number of industries experienced a sharp rise or strong fall in competition. These findings are puzzling in light of regulatory reforms that have been implemented in the period observed. Yet, econometric analysis suggests that regulatory reforms could have intensified competition. However, strong growth of market demand has weakened competition and it counterbalanced to some extent the impact of regulatory reforms. If demand grows more rapidly than supply, then incumbent firms compete less aggressively. This should attract new competitors if entry barriers are low. Although entry has a positive effect on competition, its contribution has been negligible or even slightly negative. The analysis is based on two competition indicators. The model considerably explains the development of both indicators at the industry level. However, several determinants have statistically insignificant coefficients, particularly the estimated coefficients of entry and exit rates.
    Keywords: competition; measurement; competition policy
    JEL: D4 L1 L5
    Date: 2006–12
  14. By: Nicholas Economides (Stern School of Business, New York University);
    Abstract: We discuss salient economic aspects of the Internet, including the possible abolition of net neutrality by local broadband access networks as well as potential incompatibilities and degradation of connectivity in the Internet backbone.
    Keywords: Internet, net neutrality, price discrimination, antitrust
    Date: 2007–01
  15. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: From the angle of competition policy, Voice over IP looks like a panacea. It not only brings better service, but it also increases competitive pressure on former telecommunications monopolists. This paper points to the largely overlooked downside. In a pure world of Internet telephony, there would be no charge for individual calls, nor for telephony, as distinct from other services running over the uniform network. Specifically, establishing property rights for either of these would be costly, whereas these property rights were automatic and free of charge in switched telephony. Giving voice over IP providers classic telephone numbers would enhance systems competition with switched telephony. But this would make it more difficult for clients to swap providers. The anti-competitive caller pays principle would extend to IP telephony.
    Keywords: property right, non-linear pricing, pure bundling, club good, cross-subsidisation, packet switched telephony
    JEL: D D43 H41 K21 K23 L13 L15 L43 L86
    Date: 2007–01
  16. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this article, we discuss several aspects related to the entry of mobile virtual network operators. Some aspects, such as entry barriers and exclusionary practices, relate to the entry process itself. Other aspects, such as prices or the characteristics of the entrant’s product, relate to the consequences of the entry process.
    Date: 2006–10
  17. By: Stennek, Johan (Research Institute of Industrial Economics)
    Abstract: Sports organizations, Hollywood studios and TV channels grant satellite and cable networks exclusive rights to televise their matches, movies and media contents. Exclusive distribution prevents viewers from watching attractive programs, and reduces the TV-distributors incentives to compete in prices. This paper demonstrates that exclusive distribution may also give providers of contents incentives to invest in higher quality and, as a result, force competitors to reduce their prices. Exclusive distribution may benefit all viewers, including those who are excluded
    Keywords: Exclusive Contracts; Quality; Bargaining; Avertising; Investment
    JEL: C78 D43 K21 L42
    Date: 2007–01–09
  18. By: Jens Tapking (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper tries to contribute to the discussion on the role of securities settlement infrastructures for financial integration in Europe. It presents a model that can explain a well-known stylized fact of securities settlement, the surprisingly high fees charged by central securities depositories (CSDs) for settlement through links between CSDs. As the model turns out to provide a robust explanation for this stylized fact, it is then used to analyzes an important policy question, the welfare effects of mergers of CSDs. JEL Classification: G21, G15, L13.
    Keywords: Securities settlement, link settlement fees, central securities depositories.
    Date: 2007–01
  19. By: Juan-Huitzi Flores
    Abstract: This paper aims to provide new light on a famous episode in financial history, the so called Baring crisis. Taking a microeconomic approach, this paper addresses issues that were not emphasized in traditional explanations of the crisis. We analyze borrowing costs in the 1880s using new data from debt contracts. We argue that, despite a worsening macroeconomic situation in Argentina, its Government continued to have capital market access besides decreasing borrowing costs. This paper suggests that competition between financial intermediaries was a main cause behind the crisis.
    Date: 2007–01
  20. By: Mathias Erlei (Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal))
    Abstract: This paper provides experimental evidence on exit behavior of asymmetrically sized firms in a duopoly with declining demand. We conduct three treatments: (a) The basic model with indivisible real capital. The structure of this treatment represents the main findings of Ghemawat and Nalebuff (1985); (b) an extension of the basic model by introducing a bankruptcy constraint; (c) here we allow for divisible real capital (Ghemawat and Nalebuff (1990)). In all three treatments we find behavior that is, by and large, in line with subgame perfect Nash Equilibrium. However, there is a problem of multiplicity of equilibria in (b) and we find an anchor effect as well as learning effects in (c).
    Keywords: Exit, duopoly, declining market, experimental economics
    JEL: D43 L11 C92
    Date: 2006
  21. By: Silvester van Koten
    Abstract: When a bidder (referred to as the privileged bidder) is residual claimant to a part of the revenue from an auction with two bidders whose valuations are independently and identically distributed, bidding incentives are changed. Specifically, the privileged bidder will bid more aggressively to increase the auction revenue. Indeed, the privileged bidder is more likely to win the auction and the good is sold for a higher price. However, since the auction is now inefficient, welfare is decreased. These results are of interest for regulators of the EU electricity industry. The extant EU regulatory framework allows for profits from new cross-border transmission lines (socalled interconnectors) to be unregulated and for incumbent Vertically Integrated Utilities (VIUs) to have ownership of generating and transmission activities. When electricity generators have to secure transmission rights in an auction, the VIU, because of its combined ownership of generation and transmission activities, is in the position of a privileged bidder. The VIU will secure a higher profit, while competing electricity generators will earn less because they are less likely to gain transmission rights and, in any case, pay a higher price for it.
    Keywords: Asymmetric auctions, bidding behavior, electricity markets, regulation,vertical integration.
    JEL: L43 L51 L94 L98
    Date: 2006–12
  22. By: CPB, in collaboration with ZEW, Mannheim
    Abstract: The European electricity and gas markets have been going through a process of liberalisation since the early 1990s. This process has changed the sector from a regulated structure of, predominantly, publicly owned monopolists controlling the entire supply chain, into a market where private and public generators and retailers compete on a regulated and unbundled system of transport infrastructure. This report assesses the evidence of the effects of liberalisation on efficiency, security of energy supply and environmental sustainability.
    Keywords: Liberalisation; energy; efficiency; security of supply; environmental policy
    JEL: L5 L94 L95 L98 Q4 Q5
    Date: 2006–12

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