nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒09‒02
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Too much R&D? - Vertical differentiation in a model of monopolistic competition By Jan Kranich
  2. Inventories and Endogenous Stackelberg Hierarchy in Two-period Cournot Oligopoly By MITRAILLE Sébastien; MOREAUX Michel;
  3. Strategic R&D with Knowledge Spillovers and Endogenous Time to Complete By Lukach, R.; Kort, P.M.; Plasmans, J.E.J.
  4. National Champion versus Foreign Takeover By Jens Suedekum
  5. Self-Reinforcing Market Dominance By Daniel Halbheer; Ernst Fehr; Lorenz Goette; Armin Schmutzler
  6. Organisation of Innovation in High-Tech Industries: Acquisitions as Means for Technology Sourcing. By Marcus Wagner
  7. How (Not) to Measure Competition By Boone, J.; Ours, J.C. van; Wiel, H.P. van der
  8. Maverick Firms: An Exploratory Analysis of Mortgage Providers in Australia By Robert Breunig & Flavio Menezes
  9. The National Regulation of Pharmaceutical Markets and the Timing of New Drug Launches in Europe By Alexander Heuer; Malwina Mejer; Jennifer Neuhaus
  10. Games of capacities : a (close) look to Nash Equilibria By Antonio Romero Medina; Mateo Triossi
  11. Informality as a Stepping Stone: Entrepreneurial Entry in a Developing Economy By John Bennett; Saul Estrin
  12. Intellectual Property Disclosure as “Threat” By Scott Baker; Pak Yee Lee; Claudio Mezzetti
  13. Real and Virtual Competition By Oksana Loginova
  14. How Social Reputation Networks Interact with Competition in Anonymous Online Trading: An Experimental Study By Gary E Bolton; Claudia Loebbecke; Axel Ockenfels
  15. Cross-Country Relative Price Volatility: Effects of Market Structure By Yin-wong Cheung; Eiji Fujii
  16. How does Club's Organizational Design Affect Competition Among Clubs? By Prufer, J.; Walz, U.
  17. Does Laboratory Trading Mirror Behavior in Real World Markets? Fair Bargaining and Competitive Bidding on EBay By Gary E Bolton; Axel Ockenfels
  18. Price Variation in Markets with Homogeneous Goods: The Case of Medigap By Nicole Maestas; Mathis Schroeder; Dana P. Goldman
  19. Communication, cooperation and collusion in team tournaments - An experimental study By Sutter, Matthias; Strassmair, Christina

  1. By: Jan Kranich (Leuphana Universität Lüneburg)
    Abstract: This paper discusses a model of vertical an horizontal product differentiation within the Dixit-Stiglitz framework of monopolistic competition. Firns coompete not only in prices and horizontal attributes of their products, but also in the quality that can be controlled by R&D activities. Based upon te results of a general equilibrium model, intra-sectoral trade and the welfare implications of public intervention in terms of research promotion are considered. The analysis involves a numerical application to ten basic European industries.
    Keywords: R&D, Monopolisitc Competition, Product Differentiation
    JEL: D43 F12 L13 L16
    Date: 2007–08
  2. By: MITRAILLE Sébastien; MOREAUX Michel (LERNA, TSE);
    Date: 2007–08
  3. By: Lukach, R.; Kort, P.M.; Plasmans, J.E.J. (Tilburg University, Center for Economic Research)
    Abstract: It is shown that asymmetry in R&D efficiency between firms is an important factor determining feasibility of the preemption and attrition scenarios in competitive R&D with time to build. Scenarios of attrition and preemption games are most likely to occur when competitors have similar R&D efficiencies. In case of largely asymmetric firms the games of attrition and preemption are very unlikely, thus the R&D duration choices of firms are determined by the actual trade-off between the benefits of earlier innovation and the costs of faster R&D project completion.
    Keywords: R&D Investment;Competition;Preemption;Attrition.
    JEL: C72 D21 O31
    Date: 2007
  4. By: Jens Suedekum (University of Konstanz and IZA)
    Abstract: We analyze an oligopolistic market where a domestic and a foreign firm are engaged in a takeover battle for a domestic competitor. Any merger or acquisition (M&A) must be approved by a welfare maximizing domestic competition agency which may or may not be prone to "economic patriotism". A patriotic government does not (fully) count wealth of domestic shareholders as relevant producer surplus if this wealth has been generated by selling a domestic firm abroad. We show that globalization (decreasing transport costs) has a different impact on the equilibrium ownership structure of that industry, depending on the type of government. With an unbiased competition agency we find that the foreign takeover is more likely to occur the higher the level of trade openness is. However, when the domestic government is biased we find that globalization reinforces the case for promoting national champions. This may explain why some countries have recently spent considerable effort to deter foreign attempts to acquire domestic firms.
    Keywords: mergers, takeovers, national champions, international trade, trade integration
    JEL: F12 F23 L13 L52
    Date: 2007–07
  5. By: Daniel Halbheer (Socioeconomic Institute, University of Zurich); Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich); Lorenz Goette (Center for Behavioral Economics and Decision Making, Federal Reserve Bank of Boston); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in cost reductions than firms with higher initial costs. Wefind that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even strengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, aggregate investment is not affected by the initial efficiency distribution. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers.
    Keywords: Cost-reducing Investment, Asymmetric Oligopoly, Increasing Dominance, Experimental Study
    JEL: C90 D43 L13 O31
    Date: 2007–08
  6. By: Marcus Wagner
    Abstract: Innovation activities in the semiconductor industry provide considerable challenges for technology and innovation management. In particular, firms frequently face make-or-buy decisions and such decisions have considerable management implications. The semiconductor industry has a long history of radical innovations which are taking place through distinct industry cycles of high and low demand. The paper investigates these issues for the Electronic Design Automation industry which is a specific sub-segment of the semiconductor industry. Based on database searches and structured interviews, the paper analyses empirically the reasons for make or buy decisions with regard to innovation and the level of acquisition activities of innovative small firms in the Electronic Design Automation industry. This analysis is supported by an analysis of the SEC filings of large firms in the Electronic Design Automation industry.
    Date: 2007
  7. By: Boone, J.; Ours, J.C. van; Wiel, H.P. van der (Tilburg University, Center for Economic Research)
    Abstract: We introduce a new measure of competition: the elasticity of a firm?s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.
    Keywords: competition;profit elasticity;measures of competition;concentration;price cost margin;profits
    JEL: D43 L13
    Date: 2007
  8. By: Robert Breunig & Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: This paper develops an empirical strategy to measure maverick-like behaviour. It applies the strategy to a dataset that contains interest rates charged by mortgage providers in Australia from January 2003 to October 2006. The Reserve Bank of Australia raised its cash rate five times in this period, which provides a natural setting to observe suppliers’ responses. We examine suppliers’ behaviour both in terms of the rates they charge and the time it takes them to change their rates as a response to a systemic increase in costs. These empirical observations suggest that the development of a theory for maverick behaviour be focused on dynamic, asymmetric models and informed by institutions and market dynamics that are relevant to the case at hand.
  9. By: Alexander Heuer; Malwina Mejer; Jennifer Neuhaus
    Abstract: We analyze the impact of national pharmaceutical regulation on the launch delay of new chemical entities approved by the EMEA’s centralized procedure. We find that direct price control regimes have a significantly negative impact on the launch timing. These results cannot be found when investigating the impact of indirect price controls. Our results show that Germany (65%) has the highest probability of experiencing an early launch, while it is the lowest in southern European countries (18% for Portugal and 19% for Greece). This difference accrues from both price regulation and market attractiveness, since southern European countries generally have lower prices. Due to the possibilities for parallel trade within the EU, pharmaceutical companies, by acting strategically, may further increase launch delays.
    Keywords: pharmaceuticals, regulation, new chemical entity, parallel trade
    JEL: I11 I18 L51
    Date: 2007–03
  10. By: Antonio Romero Medina; Mateo Triossi
    Abstract: The paper studies two games of capacity manipulation in hospital-intern markets. The focus is on the stability of Nash equilibrium outcomes. We provide minimal necessary and sufficient conditions guaranteeing the existence of pure strategy Nash Equilibria and the stability of outcomes.
    Date: 2007–07
  11. By: John Bennett (Brunel University and IZA); Saul Estrin (London School of Economics and IZA)
    Abstract: We model decisions with respect to formality or informality for entrepreneurs in a new industry for a developing economy. We show that informality allows a leader to explore, without significant sunk costs, the potential profitability of the industry; that is, informality may be a stepping stone, enabling an entrepreneur to experiment cheaply in an uncertain environment. There are circumstances under which, without this option, the industry would not become established. We analyse the roles of parameters such as a minimum wage rate and we show that the existence of finance constraints can actually encourage entry in this context.
    Keywords: informal sector, entry, developing economy
    JEL: O17 L10
    Date: 2007–07
  12. By: Scott Baker; Pak Yee Lee; Claudio Mezzetti
    Abstract: This paper models the disclosure of knowledge as a "threat", useful in ensuring firms keep their commitments. We show that firms holding knowledge are better able to enforce agreements than firms that don’t. In markets requiring innovation to make a product, disclosure is a more powerful threat than entry by the punishing firm alone. Occasionally, the punishing firm won’t be able to innovate, making it impossible for it to enter the cheating firm’s market and punish. The punishing firm, however, can through disclosure credibly ensure that one, if not many, firms enter the cheating firm’s market. In the model, firms contract explicitly to exchange knowledge and tacitly to coordinate the introduction of innovations to the marketplace. We find conditions under which firms can self-enforce both agreements. The enforcement conditions are weaker when (1) firms possess knowledge and (2) knowledge is easily transferable to other firms. The disclosure threat has implication for antitrust law generally, which are considered.
    Date: 2007–08
  13. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia)
    Abstract: Although the Internet reduces market frictions by making it easier for consumers to obtain information about prices and product offerings, goods sold by electronic firms are not perfect substitutes for otherwise identical goods sold by conventional stores. Online purchases, due to non-zero shipping time, are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional store, on the other hand, involves positive travelling costs. A model extending the circular city paradigm with two types of firms, conventional and electronic, is studied. Under the benchmark setting with only conventional firms in the market, each consumer visits the nearest store and purchases the product there. When electronic firms enter the market, an intriguing type of market segmentation may arise. First, each consumer travels to the nearest conventional store to "try on" the product. Second, conventional retailers increase their prices and sell the good only to consumers who discover that they have high valuations; consumers with low valuations return "home" and order the good online. In spite of the increased competition from Internet retailers, welfare decreases.
    Keywords: Electronic Commerce, Oligopoly Pricing, Market Segmentation, Spatial Competition.
    JEL: D43 D81 L11
    Date: 2007–07–31
  14. By: Gary E Bolton; Claudia Loebbecke; Axel Ockenfels
    Abstract: Many Internet markets rely on ‘feedback systems’, essentially social networks of reputation, to facilitate trust and trustworthiness in anonymous transactions. Market competition creates incentives that arguably may enhance or curb the effectiveness of these systems. We investigate how different forms of market competition and social reputation networks interact in a series of laboratory online markets, where sellers face a moral hazard. We find that competition in strangers networks (where market encounters are one-shot) most frequently enhances trust and trustworthiness, and always increases total gains-from-trade. One reason is that information about reputation trumps pricing in the sense that traders usually do not conduct business with someone having a bad reputation not even for a substantial price discount. We also find that a reliable reputation network can largely reduce the advantage of partners networks (where a buyer and a seller can maintain repeated exchange with each other) in promoting trust and trustworthiness if the market is sufficiently competitive. We conclude that, overall, competitive online markets have more effective social reputation networks.
    Date: 2007–08–01
  15. By: Yin-wong Cheung (University of California Santa Cruz); Eiji Fujii (University of Tsukuba)
    Abstract: Using annual data on nine manufacturing sectors of eighteen OECD countries, the article studies the implications of market structure for cross-country relative price variability. It is found that, in accordance with predictions from a standard markup pricing model, reductions in market competition, along with increased nominal exchange rate volatility, are associated with greater variability of cross-country relative prices. The market structure also has similar effects on components of crosscountry relative price variability. The empirical findings are robust to the inclusion of various control variables and alternative sample specifications.
    Keywords: Relative price volatility, market structure, price-cost margin, variance decomposition
    JEL: F31 F41
    Date: 2005–11
  16. By: Prufer, J.; Walz, U. (Tilburg University, Center for Economic Research)
    Abstract: We analyze competition among clubs in which the status of club members is the crucial added value accruing to fellow club members through social interaction within the club (e.g. in country clubs, academic faculties, or internet communities). In the course of competition for new members, clubs trade off the effect of entry on average status of the club and candidates? monetary payment via an entrance fee. We show that the best candidates join the best clubs but they pay higher entrance fees than some lowerranking candidates. We distinguish among various decision rules and organizational set-ups, including majority voting, unanimity, and meritocracy. We find that, from a second-best welfare perspective, the unanimity rule leads to inefficient exclusion of some candidates, while meritocracy leads to inefficient inclusion. Our main policy implication is that consensus-based clubs, such as many academic faculties in Europe, could improve the well-being of their members if they liberalized their internal decision making processes.
    Keywords: club theory;status organizations;design of decision making;collective action
    JEL: D71 L22 L31
    Date: 2007
  17. By: Gary E Bolton; Axel Ockenfels
    Abstract: We conducted a controlled field experiment on eBay and examined to what extent both social and competitive laboratory behavior is robust to institutionally complex real world markets with experienced traders, who selected themselves into these markets. EBay’s natural trading system provides bridges between lab and field environment that can be exploited to explore differences in behavior in the two environments. We find that many sellers do not make use of their commitment power as predicted by standard theories of both selfish and social behavior. However, a concern for equity strongly affects outcomes and reputation building in bilateral bargaining, while buyer competition effectively masks this concern and robustly yields equilibrium outcomes. The dichotomy of behaviors mirrors observations in laboratory research. Furthermore, we find that behavioral patterns in the field experiment mirror fully naturally occurring trading patterns in the market.
    Date: 2007–08–16
  18. By: Nicole Maestas; Mathis Schroeder; Dana P. Goldman
    Abstract: About one-third of elderly Americans age 65 and older supplements their Medicare health insurance in a private insurance market known as the ÒMedigapÓ market. Prices for Medigap policies vary widely, despite the fact that regulations enacted in 1992 standardized all Medigap policies, thereby creating a market with homogenous insurance products. Economic theory suggests that consumer search costs can lead to a non-degenerate price distribution within a market for otherwise homogenous goods. Using a structural model of equilibrium search costs first posed by Carlson and McAfee (1983), the authors find that nearly all consumers face search costs high enough to prevent them from searching until they find the lowest priced Medigap policy. They estimate average search costs to be $249, substantially higher than has been found in other markets, but plausible given the complex nature of the Medigap market and its elderly consumer population. The implied aggregate welfare loss is approximately $798 million or $484 per policyholder.
    Keywords: health insurance, medigap, elderly
    JEL: G22 I11
    Date: 2006–07
  19. By: Sutter, Matthias; Strassmair, Christina
    Abstract: We study the effects of communication in an experimental tournament between teams. When teams, rather than individuals, compete for a prize there is a need for intra-team coordination in order to win the inter-team competition. Introducing communication in such situations may have ambiguous effects on effort choices. Communication within teams may promote higher efforts by mitigating the internal free-rider problem. Communication between competing teams may lead to collusion, thereby reducing efforts. In our experiment we control the channels of communication by letting subjects communicate through an electronic chat. We find, indeed, that communication within teams increases efforts and communication between teams reduces efforts. We use team members’ dialogues to explain these effects of communication, and check the robustness of our results.
    Keywords: Tournament; Team decision making; Communication; Collusion; Free-riding; Experiment
    JEL: C92 J33
    Date: 2007–08

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