nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒08‒14
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Matching Own Prices, Rivals' Prices, or Both By Morten Hviid; Greg Shaffer
  2. Ordered Search and Equilibrium Obfuscation By Chris M. Wilson
  3. Consumer protection and the incentive to become informed By Armstrong, Mark; Vickers, John; Zhou, Jidong
  4. Dynamic Price Dispersion in a Bertrand-Edgeworth Model By Sun, Ching-jen
  5. Endogenous Entry in Contests By John Morgan; Henrik Orzen; Martin Sefton
  6. Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem By Heintzelman, Martin; Salant, Stephen; Schott, Stephan
  7. 'Consumer Welfare' and Article 82EC: Practice and Rhetoric By Pinar Akman
  8. European Commission Opinions to National Courts in Antitrust Cases: Consistent Application and the Judicial-Administrative Relationship By Kathryn Wright
  9. How did the Turkish Industry Respond to Increased Competitive Pressures, 1998-2007? By Gokhan Yilmaz; Rauf Gonenc
  10. Licensing probabilistic Patents: The duopoly case. By Vargas Barrenechea, Martin
  11. Why, How and When Do Prices Land? Evidence from the Videogame Industry By Hernández-Mireles, C.; Fok, D.; Franses, Ph.H.B.F.
  12. Moderating Factors of Immediate, Dynamic, and Long-run Cross-Price Effects By Horváth, C.; Fok, D.

  1. By: Morten Hviid (ESRC Centre for Competition Policy and Norwich Law School, University of East Anglia); Greg Shaffer (ESRC Centre for Competition Policy, University of East Anglia, and Simon School of Business, University of Rochester)
    Abstract: Many retailers promise that they will not be undersold by rivals (price-matching guarantees) and extend their promise to include their own future prices (most-favored-customer clauses). This is puzzling because the extant literature has shown that each promise independently has the potential to facilitate supracompetitive prices, and so one might think that the two promises are substitutes. In this paper, we consider why a firm might make both promises in the same guarantee, and show that price-matching guarantees and most-favored-customer clauses complement each other and can lead to higher prices than either one could have facilitated by itself.
    Keywords: facilitating practices, low-price guarantees, antitrust policy
    JEL: L11 L13 L41
    Date: 2008–07
  2. By: Chris M. Wilson
    Abstract: This paper demonstrates the incentives for an oligopolist to obfuscate by deliberately increasing the cost with which consumers can locate its product and price. Consumers are allowed to choose the optimal order in which to search firms and firms are able to influence this order through their choice of search costs and prices. Competition does not ensure market transparency - for a large range of parameters, equilibrium search costs are positive and asymmetric across firms. Intuitively, an obfuscating firm can soften the competition for consumers with low time costs by inducing the remaining consumers to optimally first search its rival.
    Keywords: Search Costs, Search Order, Advertising
    JEL: L13 D43 D83
    Date: 2008
  3. By: Armstrong, Mark; Vickers, John; Zhou, Jidong
    Abstract: We discuss the impact of consumer protection policies on consumer incentives to become informed of the best deals available in the market. In a market with costly consumer search, we find that imposing a cap on suppliers' prices reduces the incentive to engage in search, with the result that prices paid by consumers (both informed and uninformed) may rise. In a related model where consumers have the ability to refuse to receive marketing, we find that this ability softens price competition and can make all consumers worse off.
    Keywords: Consumer protection; search; price caps; advertising
    JEL: D18 L51 D83
    Date: 2008–08
  4. By: Sun, Ching-jen
    Abstract: This paper considers a dynamic model of price competition in which sellers are endowed with one unit of the good and compete by posting prices in every period. Buyers each demand one unit of the good and have a common reservation price. They have full information regarding the prices posted by each firm in the market; hence, search is costless. The number of buyers coming to the market in each period is random. We characterize the dynamics of market prices and show that price dispersion persists over time.
    Keywords: Price Dispersion; Search Cost; Bertrand-Edgeworth Model
    JEL: L11 D43
    Date: 2005–10
  5. By: John Morgan (Haas School of Business, University of California-Berkeley); Henrik Orzen (School of Economics, University of Nottingham); Martin Sefton (School of Economics, University of Nottingham)
    Abstract: We report the results of laboratory experiments on rent-seeking contests with endogenous participation. Theory predicts that (a) contest entry and rent-seeking expenditures increase with the size of the prize; and (b) earnings are equalized between the contest and the outside option. While the directional predictions offered in (a) are supported in the data, the level predictions are not. Prediction (b) is not supported in the data: When the prize is large, contest participants earn more than the outside option. When the prize is small, contest participants earn less. Previous studies of gender and contest competition suggest that females should (a) not perform as well in the contest; and (b) enter at a lower rate. We find some support for (a) but not for (b). Women participate in the contest at the same rate as men.
    Keywords: Contests; Competition; Entry; Experiments
    JEL: C9 D4 D72
    Date: 2008–07
  6. By: Heintzelman, Martin; Salant, Stephen; Schott, Stephan
    Abstract: The common-property problem results in excessive mining, hunting, and extraction of oil and water. The same phenomenon is also responsible for excessive investment in R&D and excessive outlays in rent-seeking contests. We propose a "Partnership Solution" to eliminate or at least mitigate these excesses. Each of N players joins a partnership in the first stage and chooses his effort in the second stage. Under the rules of a partnership, each member must pay his own cost of effort but receives an equal share of the partnership's revenue. The incentive to free-ride created by such partnerships turns out to be beneficial since it naturally offsets the excessive effort inherent in such problems. In our two-stage game, this institutional arrangement can, under specified circumstances, induce the social optimum in a subgame-perfect equilibrium: no one has a unilateral incentive (1) to switch to another partnership (or create a new partnership) in the first stage or (2) to deviate from socially optimal actions in the second stage. The game may have other subgame-perfect equilibria, but the one associated with the ``Partnership Solution'' is strictly preferred by every player. We also propose a modification of the first stage which generates a unique subgame-perfect equilibrium. Antitrust authorities should recognize that partnerships can have a less benign use. By organizing as competing partnerships, an industry can reduce the ``excessive'' output of Cournot oligopoly to the monopoly level. Since no partner has any incentive to overproduce in the current period, there is no need to deter cheating with threats of future punishments.
    Keywords: partnerships;common property;tragedy of the commons;cartels
    JEL: Q5 L12
    Date: 2008–07–29
  7. By: Pinar Akman (Centre for Competition Policy and Norwich Law School, University of East Anglia)
    Abstract: This paper questions whether the objective of Article 82EC is indeed enhancing ‘consumer welfare’ as suggested by the EC Commission when one examines the application of the provision thus far. It critically analyses the case law of the EC Commission and Courts to show that there is great dissonance between the practice and the policy declarations on the provision. When one considers the practice alongside the rhetoric, Article 82EC appears as a provision enforced without a clear standard of harm leading to doubts about the legitimacy of enforcement. The article suggests that without a properly defined standard applied in actual decisions by the EC Commission and upheld by the EC Courts, the modernisation of Article 82EC cannot succeed.
    Keywords: Article 82EC, consumer welfare, restriction of competition, abuse of a dominant position, enforcement
    JEL: K21 P46
    Date: 2008–07
  8. By: Kathryn Wright (Centre for Competition Policy, University of East Anglia)
    Abstract: The House of Lords judgment in Inntrepreneur v Crehan, where the court did not consider itself bound by a finding of the European Commission, demonstrated the potentially contentious and constitutionally significant nature of the relationship between the European Commission and national judges in the field of antitrust. The decentralisation of enforcement of Articles 81 and 82EC arguably carries greater risks of divergent application of EC antitrust enforcement rules. While national competition authorities are linked through the European Competition Network, no such mechanism exists for national courts as this would offend against the principles of judicial independence and procedural autonomy. The Commission, as primary enforcer of competition law in the Community, has therefore attempted to complement the formal judicial 'dialogue' of the European Court of Justice's preliminary reference procedure with a strengthening of its own relations with the national courts. After addressing the broader theoretical context of administrative intervention in judicial decision-making, this paper examines the use of one tool to promote consistent application of EC antitrust rules - non-binding European Commission opinions and amicus curiae briefs to national courts in antitrust proceedings under Article 15 of the Modernisation Regulation. It identifies national cases where the Commission has actually intervened under Article 15 and assesses the nature and efficacy of this soft law mechanism. One finding is the difficulty in finding and tracing the cases, making the impact of the Commission’s advice difficult to judge. Transparency is desirable for legitimacy, legal certainty, and if Commission opinions are to have the most impact for promoting convergent application of EC antitrust rules among national judges.
    Keywords: European Commission, national courts, amicus curiae, Modernisation Regulation, public and private competition enforcement
    JEL: K12 K49 P48
    Date: 2008–07
  9. By: Gokhan Yilmaz; Rauf Gonenc
    Date: 2008
  10. By: Vargas Barrenechea, Martin
    Abstract: In this work we study licensing games of non drastic innovations under the shadow of probabilistic patents. We study the situation of a insider innovator that get a new reduction cost innovation and acts in a duopoly market under Cournout competition. When the property rights are not ironclad the potential licensee additional to the option of use the backstop technology instead of the new technology ,has the option of infringe the patent. Under infringement the patent holder can sue the infringer in a court and if its successful could get a order of damages payment. Then when the infringer decides about what kind of technology to use the infringement is always better than to use the backstop technology then a difference of the ironclad licensing games probabilistic rights, change the threats points and makes attractive for the patent holder just to license big innovations under the Lost Profit rule.
    Keywords: Patents; innovation economics; probabilistic property rights; damage rules
    JEL: L0 K42 C72
    Date: 2008–08
  11. By: Hernández-Mireles, C.; Fok, D.; Franses, Ph.H.B.F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We examine how new products are priced over time, where we particularly look at sharp decreases in prices. New durable products like fashion, apparel, and videogames often show a significant price cut some time after the product’s introduction. We call this a price landing and we examine its drivers. Theory predicts that competitive effects or underperforming sales are drivers for such price landings. To our knowledge, however, a systematic empirical study of price landing is unavailable. To examine the drivers of significant price cuts of a new product, we consider a rich dataset concerning sales and prices of 1195 newly released videogames. Prior literature suggests that own sales, competitive sales, competitive prices or simply time could be such drivers. In this paper we put these suggestions to an empirical test. We put forward a mixture model that covers a set of pricing equations with the price landing moment and its speed as key parameters. Second, in a hierarchical model we explain the apparent heterogeneity across the products. Our main finding is that it is not sales thresholds but competition and time itself that makes managers decide to seriously cut prices.
    Keywords: pricing;pricing models;new products
    Date: 2008–07–22
  12. By: Horváth, C.; Fok, D. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In this article the authors describe their comprehensive analysis of moderating factors of cross-brand effects of price changes and contribute to the literature in five major ways. (1) They consider an extensive set of potential variables influencing cross-brand effects of price changes. (2) They examine moderators for the immediate as well as the dynamic cross-price effect. (3) They decompose price into regular and promotional price and study both cross-price effects separately. (4) They compare their findings with previous literature on the moderating factors of own-price effects to understand which factors influence own-price elasticity through affecting brand switching. (5) The authors use an advanced Bayesian estimation technique. The results show evidence of the neighborhood price effect and suggest that it is conditional on whether the promoted brand is priced above or below its competitor. The promoted brand's activities turn out to play a much more important role in determining the cross-price promotional effects than its competitor's similar activities. The authors outline conditions when cross-brand post-promotion dips tend to occur. Finally, they argue that the brand choice portion of the overall own-brand effect of a promotion depends on the brand's marketing strategy and on category-specific characteristics.
    Keywords: cross-price elasticity;asymmetry;dynamic effects;hierarchical Bayes
    Date: 2008–07–23

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