nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒03‒17
ten papers chosen by
Russell Pittman
US Department of Justice

  1. Entry into a network industry: consumers’ expectations and firms’ pricing policies By Angelo Baglioni
  2. Cooperation without Coordination: Signaling, Types and Tacit Collusion in Laboratory Oligopolies By Douglas D. Davis; Korenok Oleg; Robert Reilly
  3. Fences and competition in patent races By Schneider, Cédric
  4. Perfect Competition By Khan, M. Ali Khan
  5. Equilibrium and Optimal R&D Roles in a Mixed Market By Vasileios Zikos
  6. Strategic Responses to Parallel Trade By Margaret K. Kyle
  7. Collusion with Persistent Cost Shocks By Susan Athey; Kyle Bagwell
  8. Multi-Product Firms, R&D, and Growth By Minniti, Antonio
  9. “Spot, Bilateral and Futures Trading in Electricity Markets. Implications for Stability” By Valeria Termini; Laura Cavallo
  10. “To Bid or Not to Bid, This is the Question: The Italian Experience in Competitive Tendering for Local Bus Services” By Boitani, Andrea; Cambini, Carlo

  1. By: Angelo Baglioni (DISCE, Università Cattolica)
    Abstract: This paper presents a model of entry into a network industry. The entrant tries to attract the customer base of the incumbent service provider. While the entrant is more efficient, the incumbent enjoys an advantage thanks to a bias in consumers’ expectations. Buyers enter the game with heterogenous beliefs as to which of the two firms is going to win competition. Then expectations converge - through higher order beliefs - and select one winner, who ends up being the single supplier. The path of expectations convergence crucially depends on the pricing policy followed by firms: so equilibrium beliefs are endogenous. Depending on parameter values, one of two outcomes obtains: (i) the incumbent is able to exclude the entrant, by lowering his price below the monopoly level; (ii) the entrant is successful, by undercutting the incumbent price. Productive efficiency and consumers’ welfare are hurt by exclusion; the entry threat is beneficial to consumers anyway. Imposing compatibility among networks is welfare improving, as it removes the exclusionary potential enjoyed by the incumbent.
    Keywords: network industries, critical mass, entry, exclusion, higher order beliefs
    JEL: D42 D84 L12 L41
    Date: 2006–11
  2. By: Douglas D. Davis (Department of Economics, VCU School of Business); Korenok Oleg (Department of Economics, VCU School of Business); Robert Reilly (Department of Economics, VCU School of Business)
    Abstract: This paper reports an experiment conducted to examine tacit collusion in posted offer markets. In addition to a baseline treatment, we study a ‘forecasting’ treatment, which allows an improved identification of intended signals, and a ‘types’ treatment, which examines pricing outcomes among cohorts of homogeneously ‘cooperative’ or ‘competitive’ subjects. Results indicate that while signals tend to affect subsequent pricing decisions, signaling does not affect long term transaction prices. On the other hand ‘types’ are stable across sessions and powerfully affect results. Markets comprised of ‘cooperative’ types tend to generate persistently higher transaction prices than do markets comprised of ‘competitive’ types.
    Keywords: Experiments, Tacit Collusion, Price Signaling, Types
    JEL: C9 L11 L13
    Date: 2007–03
  3. By: Schneider, Cédric
    Abstract: This paper studies the behaviour of firms facing the decision to create a patent fence, defined as a portfolio of substitute patents. We set up a patent race model, where firms can decide either to patent their inventions, or to rely on secrecy. It is shown that firms build patent fences, when the duopoly profits net of R&D costs are positive. We also demonstrate that in this context, a firm will rely on secrecy when the speed of discovery of the subsequent invention is high compared to the competitors. Furthermore, we compare the model under the First-to-Invent and First-to-File legal rules. Finally, we analyze the welfare implications of patent fence
    JEL: L10 O34
    Date: 2005–12–02
  4. By: Khan, M. Ali Khan
    Abstract: In his 1987 entry on ‘Perfect Competition’ in The New Palgrave, the author reviewed the question of the perfectness of perfect competition, and gave four alternative formalisations rooted in the so-called Arrow-Debreu-Mckenzie model. That entry is now updated for the second edition to include work done on the subject during the last twenty years. A fresh assessment of this literature is offered, one that emphasises the independence assumption whereby individual agents are not related except through the price system. And it highlights a ‘linguistic turn’ whereby Hayek’s two fundamental papers on ‘division of knowledge’ are seen to have devastating consequences for this research programme.
    Keywords: Allocation of Resources; Perfect Competition; Exchange Economy
    JEL: D00
    Date: 2007
  5. By: Vasileios Zikos (Dept of Economics, Loughborough University)
    Abstract: This is the first paper to investigate the timing of the R&D decisions in a mixed market. Considering a model in which a public firm competes against a private one, we examine the desirable (welfare-maximizing) and the equilibrium R&D role of the public firm. Our results suggest that from a social point of view, the public firm should carry out its investment as a Stackelberg follower. Using the observable delay game of Hamilton and Slutsky [Games and Economic Behavior 2 (1990) 29], we show that the public firm may play this desirable role.
    Keywords: Endogenous timing; R&D; Stackelberg; mixed market.
    JEL: L13 L31 L32
    Date: 2007–02
  6. By: Margaret K. Kyle
    Abstract: This paper examines how pharmaceutical firms have responded to changes in intellectual property rights and trade barriers that legalized "parallel imports" within the European Union. The threat of arbitrage by parallel traders reduces the ability of firms to price discriminate across countries. Due to regulations on price and antitrust law on rationing supply, pharmaceutical firms may rely on non-price responses. Such responses include differentiation of products across countries and selective "culling" of product lines to reduce arbitrage opportunities, as well as raising arbitrageurs' costs through choice of packaging. Using a dataset of drug prices and sales from 1993-2004 covering 30 countries, I find evidence that the behavior of pharmaceutical firms in the EU with respect to their product portfolios is consistent with attempts to reduce parallel trade. This may at least partially explain why parallel trade has not yet resulted in significant price convergence across EU countries. Accounting for non-price strategic responses may therefore be important in assessing the welfare effects of parallel imports.
    JEL: D21 L1
    Date: 2007–03
  7. By: Susan Athey; Kyle Bagwell
    Date: 2007–03–14
  8. By: Minniti, Antonio
    Abstract: Multi-product firms dominate production activity in the global economy. There is widespread evidence showing that large corporations improve their efficiency by increasing the scale of their operations; this objective can be realized either by consistently investing in R&D or by expanding the product range. In this paper, we explore the implications of this fact by embedding multi-product firms in a General Equilibrium model of endogenous growth. We analyze an economy with oligopolistic firms that carry out in-house R&D programs in order to achieve cost-reducing innovations. Market structure is endogenous in the model and is jointly determined by the number of firms and the number of product varieties per firm. Both economies of scope and scale characterize the economic environment. We show that the market equilibrium involves too many firms (too much inter-firm diversity) and too few products per firm (too little intra-firm diversity); moreover, we find out that the total number of products and productivity growth are inefficiently low under laissez-faire. The nature of these distortions is discussed in detail.
    Keywords: imperfect competition; multi-product firms; endogenous growth; R&D
    JEL: E0 O31 O3
    Date: 2006
  9. By: Valeria Termini (SSPA); Laura Cavallo (Prime Minister's Office)
    Abstract: The design of wholesale electricity markets in the transition towards liberalization presents significant differences from country to country. Some spot markets have imposed the concentration of transactions to ensure market liquidity. Other markets are based on bilateral trading. The debate about the optimal trading mechanism mainly concentrates on how to deal with the trade off between the liquidity of the market and the stability of the system. The solution chosen by some market is a mandatory pool with a regulated market for electricity derivatives, that allows to hedge price volatility and to mitigate market power. This paper investigates whether, in the presence of a futures market, spot and bilateral trading can operate together and what are possible outcomes in terms of liquidity of the spot market and stability of the system. The paper extends existing literature on the role of futures market on the behavior of spot market prices, developing a multi-period model in which electricity consumers can choose whether to trade on the spot market or negotiate bilateral contracts. Results suggest that a spot market with futures contracts and a market for bilateral contracts are not necessarily alternative ways to manage stability problems, but may co-exist with positive and synergic outcomes on price behaviors and market power.
    Keywords: Derivatives, Electricity, Market power, Hedging
    JEL: G18 L94 Q41 Q48
    Date: 2007–02
  10. By: Boitani, Andrea; Cambini, Carlo
    Abstract: Competitive tendering is a popular mechanism for the provision of local bus services when a major objective is subsidy savings. Despite uncertainties in the legal rules some competitive tendering was implemented in Italy since 1998. The evidence so far is that participants were limited in number, the incumbents were almost everywhere able to gain the franchise, whilst subsidy savings were in many cases negligible. If some “political” conditions favouring more effective tendering procedures are not fulfilled, other regimes should be considered in order to obtain substantial subsidy savings.
    Keywords: Local bus services; Competitive Tendering
    JEL: R48 L51
    Date: 2006–07

This nep-com issue is ©2007 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.