nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒10‒07
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Collusion and Durability By Dan Sasaki; Roland Strausz
  2. Strategic Informative Advertising in a Horizontally Differentiated Duopoly By Levent Çelik
  3. Asymmetric Information and the Signaling Role of Prices By Wassim Daher; Leonard J. Mirman; Marc Santugini
  4. Bertrand-Edgeworth games under oligopoly with a complete characterization for the triopoly By De Francesco, Massimo A.; Salvadori, Neri
  5. Existence of pure strategy equilibria in Bertrand-Edgeworth games with imperfect divisibility of money By De Francesco, Massimo A.
  6. Lerning by Copying By Francisco Martinez
  7. Irreversible R&D investment with inter-firm spillovers By Gianluca Femminis; Gianmaria Martini
  8. Optimal Two-Part Tariff Licensing Contracts with Differentiated Goods and Endogenous R&D By Ramón Faulí-Oller; Joel Sandonís
  9. Monopoly Power and Endogenous Product Variety: Distortions and Remedies By Florin O. Bilbiie; Fabio Ghironi; Marc J. Melitz
  10. Price Setting and Market Structure: An Empirical Analysis of Micro Data By Fabricio Coricelli; Roman Horváth
  11. Spatial Interaction, Spatial Multipliers, and Hospital Competition By Lee Mobley; Ted Frech; Luc Anselin
  12. Reputation and competition: evidence from the credit rating industry By Bo Becker; Todd Milbourn
  13. A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments By Victor Aguirregabiria; Chun-Yu Ho
  14. Market Structure and the Diffusion of E-Commerce: Evidence from the Retail Banking Industry By Jason Allen; Robert Clark; Jean-François Houde
  15. Integrating European retail payment systems: some economics of SEPA By Kemppainen, Kari
  16. Beyond the Cartel Law Handbook: How Corruption, Social Norms and Collectivist Business Cultures can Undermine Conventional Enforcement Tools By Andreas Stephan
  17. Allocating Costs in Ninth Circuit Predatory Pricing Cases: Marsann Co. v. Brammall, Inc. and its Problematic Progeny, Inglis v. Continental Baking and Thales v. Matsushita By Ted Frech; C. Paul Wazzan
  18. Collusion in Auctions for Emission Permits: An Experimental Analysis By Burtraw, Dallas; Goeree, Jacob; Holt, Charles A.; Myers, Erica; Palmer, Karen; Shobe, William
  19. Product Market Competition, Investment and Employment-Abundant versus Job-Poor Growth: A Real Options Perspective By Yu-Fu Chen; Michael Funke
  20. Turning Trade Marks into Brands: how Advertising Agencies Created Brands in the Global Market Place, 1900-1930 By Stefan Schwarzkopf

  1. By: Dan Sasaki; Roland Strausz (University of Tokyo; FU Berlin)
    Abstract: We develop a model to show that cartels that produce goods with lower durability are easier to sustain implicitly. This observation gen- erates the following results: 1) implicit cartels have an incentive to pro- duce goods with an inefficiently low level of durability; 2) a monopoly or explicit cartel is welfare superior to an implicit cartel; 3) welfare is non–monotonic in the number of firms; 4) a regulator may demand inefficiently high levels of durability to prevent collusion.
    Keywords: cartels, collusion, durability
    JEL: L15
    Date: 2008–09
  2. By: Levent Çelik
    Abstract: When firms possess information about their competitors’ products, their advertisements may leak extra information. I analyze this within a duopoly television market that lasts for two periods. Each station may advertise its upcoming program by airing a tune-in during the first program. Viewers may alternatively sample a program. I find that each station’s equilibrium tune-in decision depends on both upcoming programs - thereby revealing more information than the actual content - when the sampling cost is sufficiently low. Otherwise, tune-in decisions are made independently. It is welfare improving to ban tune-ins in the latter case but not in the former.
    Keywords: Informative advertising, Tune-ins, Sampling, Information disclosure, Signaling.
    JEL: D83 L13 M37
    Date: 2008–09
  3. By: Wassim Daher; Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal)
    Abstract: We study asymmetric information and the signaling role of prices in a noiseless and imperfectly competitive environment. Here, the price is determined by market forces. After describing the general model, we study information flows in applications of industrial organization and finance: a quantity-setting monopoly, Cournot oligopoly, and a model of choice and allocation of a risky asset. For each application, there is a unique signaling equilibrium in which the price conveys all the information. Moreover, the signaling equilibrium differs from the full information equilibrium..
    Date: 2008–09
  4. By: De Francesco, Massimo A.; Salvadori, Neri
    Abstract: The paper extends the analysis of price competition among capacity-constrained sellers beyond the cases of duopoly and symmetric oligopoly.We first provide some general results for the oligopoly and then focus on the triopoly, providing a complete characterization of the mixed strategy equilibrium of the price game. The region of the capacity space where the equilibrium is mixed is partitioned according to the features of the mixed strategy equilibrium arising in each subregion. Then computing the mixed strategy equilibrium becomes a quite simple task. The analysis reveals features of the mixed strategy equilibrium which do not arise in the duopoly
    Keywords: Bertrand-Edgeworth; Price game; Oligopoly; Triopoly; Mixed strategy equilibrium
    JEL: L13 D43 C72
    Date: 2008–05–11
  5. By: De Francesco, Massimo A.
    Abstract: This paper incorporates imperfect divisibility of money in a price game where a given number of identical firms produce a homogeneous product at constant unit cost up to capacity. We find necessary and sufficient conditions for the existence of a pure strategy equilibrium. Unlike in the continuous action space case, under discrete pricing there may be a range of symmetric pure strategy equilibria - which we fully characterize - a range which may or may not include the competitive price. Also, we determine the maximum number of such equilibria when competitive pricing is itself an equilibrium.
    Keywords: Bertrand-Edgeworth competition; Price game; Oligopoly; Pure strategy equilibrium; Discrete pricing.
    JEL: L13 D43 C72
    Date: 2008–09–29
  6. By: Francisco Martinez (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: We analyze the behavior of a multiproduct monopolist, a duopolist and consumers who are able to learn by copying. We show that when the effect of learning by copying is strong and the cost of copying is low enough, consumers decide to copy all goods, independently of their prices. This suggests that the DRM systems implemented by the digital industry have adverse consequences, because they hinder the use of original information goods and provide consumers with an incentive for copying. Moreover, we obtain two more kinds of equilibrium: one where each firm sells to the consumer who values its good more highly and another where each firm sells to all consumers. These results are robust when we consider that consumers’ preferences are “opposed.” Finally, by analyzing social welfare we show that, from a static perspective, the multiproduct monopoly provides a welfare at least as great as the duopoly and, from a dynamic perspective, a duopolist has at least the same incentive to create a new product as a monopolist.
    Keywords: Consumers, Learning by Copying, Opposed Preferences, DRM, Copy, Piracy.
    JEL: K42 L11 L86 O34
    Date: 2008–06–13
  7. By: Gianluca Femminis (DISCE, Università Cattolica); Gianmaria Martini (Università di Bergamo)
    Abstract: In our duopoly, an irreversible investment incorporates a significant amount of R&D, so that the improvement it introduces in production processes generates a spillover lowering the second comer's investment cost. The presence of the inter-firm spillover substantially affects the equilibrium of the dynamic game: for low -- and hence realistic -- spillover values, the leader delays her investment until the stochastic fundamental has reached a level such that the follower's optimal strategy is to invest as soon as he attains the spillover. This bears several interesting implications. First, because the follower invests upon benefiting from the spillover, in our equilibrium the average time delay between the two investments is short, which is realistic. Second, we show that in case of a major innovation, an optimal public policy requires a substantial intervention in favour of the investment activity; moreover, an increase in uncertainty -- delaying the equilibrium -- calls for higher subsidization rates. Third, we find, by means of numerical simulations, that the spillover reduces the difference in the leader's and in the follower's maximum value function. Accordingly, our model can help generating realistic market betas.
    Keywords: irreversible investment, knowledge spillover, dynamic oligopoly
    JEL: C73 L13 O33
    Date: 2008–09
  8. By: Ramón Faulí-Oller (Universidad de Alicante); Joel Sandonís (Universidad de Alicante)
    Abstract: In this paper we get the optimal two-part tariff contract for the licensing of a cost reducing innovation to a differentiated goods industry of a general size. We analyze the cases where the patentee is an independent laboratory or an incumbent firm. We show that, regardless of the number of firms, the degree of product differentiation and the type of patentee, the innovation is licensed to all firms. Moreover, we endogenize R&D investment and get that an internal patentee invests more (less) in R&D when the technological opportunity is low (high). In this paper we get the optimal two-part tariff contract for the licensing of a cost reducing innovation to a differentiated goods industry of a general size. We analyze the cases where the patentee is an independent laboratory or an incumbent firm. We show that, regardless of the number of firms, the degree of product differentiation and the type of patentee, the innovation is licensed to all firms. Moreover, we endogenize R&D investment and get that an internal patentee invests more (less) in R&D when the technological opportunity is low (high).
    Keywords: patent licensing, two-part tariff contracts, R&D, product differentiation.
    JEL: L11 L13 L14
    Date: 2008–07
  9. By: Florin O. Bilbiie; Fabio Ghironi; Marc J. Melitz
    Abstract: We study the efficiency properties of a dynamic, stochastic, general equilibrium, macroeconomic model with monopolistic competition and firm entry subject to sunk costs, a time-to-build lag, and exogenous risk of firm destruction. Under inelastic labor supply and linearity of production in labor, the market economy is efficient if and only if symmetric, homothetic preferences are of the C.E.S. form studied by Dixit and Stiglitz (1977). Otherwise, efficiency is restored by properly designed sales, entry, or asset trade subsidies (or taxes) that induce markup synchronization across time and states, and align the consumer surplus and profit destruction effects of firm entry. When labor supply is elastic, heterogeneity in markups across consumption and leisure introduces an additional distortion. Efficiency is then restored by subsidizing labor at a rate equal to the markup in the market for goods. Our results highlight the importance of preserving the optimal amount of monopoly profits in economies in which firm entry is costly. Inducing marginal cost pricing restores efficiency only when the required sales subsidies are financed with the optimal split of lump-sum taxation between households and firms.
    JEL: D42 H32 L16
    Date: 2008–10
  10. By: Fabricio Coricelli (University of Siena; University of Paris I; CEPR); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Abstract: Most empirical studies on price setting that use micro data focus on advanced industrial countries. In this paper we analyze the experience of an emerging economy, Slovakia, using a large micro-level dataset that accounts for a substantial part of the consumer price index (about 5 million observations). We find that market structure is an important determinant of pricing behavior. The effect of market structure on persistence of inflation results from two conflicting forces. Increased competition may reduce persistence by increasing the frequency of price changes. In contrast, higher competition may increase persistence through inertial behaviour induced by the strategic complementarity among price setters. In our case study, we find that the latter effects dominate. Indeed, the dispersion of prices is higher while persistence is lower in the non-tradable sectors, suggesting that higher competition is not conducive to lower persistence. Furthermore, we find that the frequency of price changes depends negatively on the price dispersion and positively on the product-specific inflation. These results seem consistent with predictions of Calvo’s staggered price model.
    Keywords: price setting, market structure, emerging markets
    JEL: D40 E31
    Date: 2008–09
  11. By: Lee Mobley (RTI International); Ted Frech (University of California, Santa Barbara); Luc Anselin (Arizona State University)
    Abstract: The hospital competition literature demonstrates that estimates of the effect of local market structure on competition are sensitive to geographic market definition. Our spatial lag approach effects smoothing of the explanatory variables across the discrete market boundaries. This approach results in robust estimates of the impact of market structure on hospital pricing, which can be used to estimate the full effect of changes in prices inclusive of spillovers that cascade through the neighboring hospital markets. In markets where concentration is relatively high before a proposed merger, we demonstrate that OLS estimates can lead to the wrong antitrust policy conclusion while the more conservative lag estimates do not.
    Keywords: spatial econometrics, spatial lag model, spatial multiplier, spatial spillovers, hospital antitrust, hospital competition, strategic pricing, Nash bargaining,
    Date: 2008–06–01
  12. By: Bo Becker (Harvard Business School, Finance Unit); Todd Milbourn (Washington University, St. Louis.John M. Olin School of Business)
    Abstract: Fair and accurate credit ratings arguably play an important role in the financial system. In an environment absent free entry of rating agencies, the provision of quality ratings is at least partially sustained by the reputational concerns of the rating agencies. The economically significant entry of a third agency into a market that was previously best described as a duopoly provides a unique experiment to examine the effect of increased competition on the disciplining effects of reputation. Using a variety of data sources, we find that competition leads to more issuer-friendly and less informative ratings. First, the credit ratings issues by the two incumbent agencies increased toward good ratings. Second, the correlation between bond yields and ratings fell. And lastly, negative stock price responses to announced rating downgrades are larger in absolute value (a downgrade in this weaker ratings environment is even worse news). Ultimately, our findings are consistent with models that suggest competition can impede the reputational mechanism.
    JEL: C7 D83 G14
    Date: 2008–10
  13. By: Victor Aguirregabiria; Chun-Yu Ho
    Abstract: This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition that incorporates three groups of factors which may explain the adoption of hub-and-spoke networks: (1) travelers value the services associated with the scale of operation of an airline in the hub airport (e.g., more convenient check-in and landing facilities); (2) operating costs and entry costs in a route may decline with an airline's scale operation in origin and destination airports (e.g., economies of scale and scope); and (3) a hub-and-spoke network may be an effective strategy to deter the entry of other carriers. We estimate the model using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As a methodological contribution, we propose and apply a simple method to deal with the problem of multiple equilibria when using the estimated model to predict the effects of changes in structural parameters. We find that the most important factor to explain the adoption of hub-and-spoke networks is that the cost of entry in a route declines very importantly with the scale of operation of the airline in the airports of the route. For some of the larger carriers, strategic entry deterrence is the second most important factor to explain hub-and-spoke networks.
    Keywords: Airline industry; Hub-and-spoke networks; Entry costs; Industry dynamics; Estimation of dynamic games; Counterfactuals with multiple equilibria
    JEL: C10 C35 C63 C73 L10 L13 L93
    Date: 2008–09–29
  14. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: This paper studies the role that market structure plays in affecting the diffusion of electronic banking. Electronic banking (and electronic commerce more generally) reduces the cost of performing many types of transactions for firms. The full benefits for firms from adoption, however, only accrue once consumers begin to perform a significant share of their transactions online. Since there are learning costs to adopting the new technology firms may try to encourage consumers to go online by affecting the relative quality of the online and offline options. Their ability to do so is a function of market structure. In more competitive markets, reducing the relative attractiveness of the offline option involves the risk of losing customers (or potential customers) to competitors, whereas, this is less of a concern for a more dominant firm. We develop a model of branch-service quality choice with switching costs meant to characterize the trade-off banks face when rationalizing their network between technology penetration and business stealing. The model is solved numerically and we show that the incentive to lower branch-service quality and drive consumers into electronic banking is greater in more concentrated markets and for more dominant banks. We find support for the predictions of the model using a panel of household survey data on electronic payment usage as well as branch location data, which we use to construct measures of branch quality.
    Keywords: Financial institutions; Market structure and pricing
    JEL: D14 D4 G21 L1
    Date: 2008
  15. By: Kemppainen, Kari (Bank of Finland Research)
    Abstract: Using a spatial competition model of retail payment networks, this paper discusses the likely economic consequences associated with the formation of the Single Euro Payments Area (SEPA). The model considers an expansion of positive network externalities on the demand side and adjustment cost on the supply side and reveals that the introduction of SEPA may not lead to a fully competitive and integrated retail payment markets. This is especially the case when the markets are segments before the introduction of SEPA. In such a scenario, the post-integrated markets are likely to remain segmented or will be characterised by a kinked equilibrium where no significant price competition takes place. In both outcomes, SEPA leads to increased prices, larger network sizes (ie increased number of customers) and a higher consumer surplus. Additionally, if the SEPA-induced adjustment costs for payment networks are not prohibitively high, SEPA may also lead to an increase in both profits and social welfare.
    Keywords: integration; network effects; retail payments
    JEL: G21 L14 L15
    Date: 2008–09–24
  16. By: Andreas Stephan (Centre for Competition Policy, University of East Anglia)
    Abstract: The combination of leniency programmes, high sanctions, complaints from customers and private actions for damages, has proven very successful at uncovering and punishing cartel agreements in the US. Countless jurisdictions are being encouraged to adopt these ‘conventional’ enforcement tools, in the absence of an international competition authority. The purpose of this paper is to widen the debate on cartel enforcement by identifying three issues which can undermine their effectiveness in some jurisdictions: (1) Corruption and organised crime; (2) Social norms that are sympathetic to collusive practices; (3) Collectivist business cultures built on personal relationships.
    Keywords: cartels, leniency programmes, enforcement, corruption, organised crime, social norms, collectivism
    JEL: D21 K21 K42 L40 Z1
    Date: 2008–09
  17. By: Ted Frech (University of California, Santa Barbara); C. Paul Wazzan (Navigant Consulting, Inc.)
    Abstract: In U.S. antitrust, pricing below some level of cost has become almost necessary to a finding of predatory pricing. The case law is ambiguous on this, and the Circuits have differing standards, but many courts require a showing that price is, or was, below marginal (sometimes called incremental) costs as a threshold issue. This necessitates using reasonable economic and accounting techniques to estimate marginal cost. A similar issue arises in the calculation of lost profits in much commercial litigation. In the case Marsann Co. v. Brammall, Inc, the Ninth Circuit interpreted the estimate of marginal cost in a narrow formalistic way that is inconsistent with ordinary cost accounting and economic analysis. That ruling, which was adopted by Inglis v. Continental Baking, makes a finding of predatory pricing almost impossible and provides incentives for would-be predators to structure their accounting systems to evade liability. The consequences of Marsann and Inglis are illustrated by Thales Avionics, Inc. v. Matsushita Avionics Systems Corporation where the Court's application of Marsann and Inglis precluded plaintiff from establishing estimates of marginal cost and therefore the existence of predatory pricing.
    Keywords: Predatory Pricing, Areeda-Turner, Monopolization, Cost Allocation,
    Date: 2008–05–01
  18. By: Burtraw, Dallas (Resources for the Future); Goeree, Jacob; Holt, Charles A.; Myers, Erica; Palmer, Karen; Shobe, William
    Abstract: Environmental markets have several institutional features that provide a new context for the use of auctions and which have not been studied previously. This paper reports on laboratory experiments testing three auction forms -– uniform and discriminatory price sealed bid auctions and an ascending clock auction. We test the ability of subjects to tacitly or explicitly collude in order to maximize profits. Our main result is that the discriminatory and uniform price auctions produce greater revenues than the clock auction, both without and with explicit communication. The clock appears to be more subject to successful collusion because of its sequential structure and because it allows bidders to focus on one dimension of cooperation (quantity) rather than two (price and quantity).
    Keywords: auctions, collusion, experiments, carbon dioxide, greenhouse gases
    JEL: C92 D43 D44
    Date: 2008–09–15
  19. By: Yu-Fu Chen; Michael Funke
    Abstract: The role of product market reforms in achieving the objective of higher employment and growth has recently received much attention amongst academics. The aim of this paper is to analyse some of the channels through which cross-market effects come about and to assess their policy relevance. The analytic strategy of this paper relies upon the stochastic real options modelling approach. In a nutshell, our simulations using numerical methods indicate that comprehensive product market reforms would increase factor demand and growth significantly in the medium and long run.
    Keywords: Product market competition; Regulation; Real options; Investment; Employment
    JEL: C61 D81 D92 J23 L51
    Date: 2008–02
  20. By: Stefan Schwarzkopf
    Abstract: While historians and management students are familiar with the lore of how an internal memo at Procter & Gamble ‘invented’ brand management in 1931 (Fullerton, Low 1994; Dyer et al. 2004), little is known about how advertising agencies conceptualised and practiced branding during the early parts of the twentieth century. This paper presents evidence that by the 1920s advertising agencies drew on shared forms of implicit knowledge about consumer psychology which anticipated post-1950s debates about brand image, brand personality, brand identity, lifestyle brands and the global brand. I argue that large-scale, international advertising agencies discovered the symbolic and emotional capacities of brands in building consumer loyalty and in forming certain consumer identities much earlier than usually acknowledged. American and British agencies developed the field of tacit knowledge about the brand-consumer relationship as a source of competitive advantage in the competition for clients which increasingly sought consumers in overseas markets.
    Keywords: brands, marketing, advertising, advertising agencies, business history
    JEL: M31 M37 N84
    Date: 2008–08

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