nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒01‒03
34 papers chosen by
Russell Pittman
US Department of Justice

  1. Exclusionary Vertical Contracts with Multiple Entrants By Hiroshi Kitamura
  2. Nash Equilibrium and Mechanism Design By Eric Maskin
  3. The Determinants of Merger Waves: An International Perspective By Gugler, Klaus; Mueller, Dennis C.; Weichselbaumer, Michael
  4. The Effects of Capacity on Sales Under Alternative Vertical Contracts By Ioannis Ioannou; Julie Holland Mortimer; Richard Mortimer
  5. Sustaining Collusion in Growing Markets By Helder Vasconcelos; Helder Vasconcelos
  6. The Impact of a Corporate Leniency Program on Antitrust Enforcement and Cartelization By Myong-Hun Chang; Joseph E. Harrington, Jr.
  7. Price Discrimination between Retailers with and without Market Power By Barick Chung; Eric Rasmusen
  8. Collusion via Resale By Thomas Tröger; Rodney Garratt; Charles Zheng
  9. Barriers to Entry and Profitability By Heger, Diana; Kraft, Kornelius
  10. Extended RJV cooperation and social welfare By Gianluca Femminis; Gianmaria Martini
  11. A Test of the Quality of Concentration Indices By Heger, Diana; Kraft, Kornelius
  12. Quality-Ensuring Profits By Eric Rasmusen
  13. Price Regulation of Pluralistic Markets Subject to Provider Collusion By Roberta Longo; Marisa Miraldo; Andrew Street
  14. Perfecting Imperfect Competition By Seißer, Goetz
  15. An explanation for the inverted-U relationship between competition and innovation By Ferdinand Rauch
  16. Impact of bank competition on the interest rate pass-through in the euro area By Michiel van Leuvensteijn; Christoffer Kok Sørensen; Jacob A. Bikker; Adrian van Rixtel
  17. Incentives to Invest and to Give Access to Non-Regulated Next Generation Networks By Duarte Brito; Pedro Pereira; João Vareda
  18. The Price Effects of an Emerging Retail Market By Jiri Podpiera; Marie Rakova
  19. The Effect of Entry on R&D Investment of Leaders: Theory and Empirical Evidence By Czarnitzki, Dirk; Etro, Federico Gabriele; Kraft, Kornelius
  20. Incentives for merger in a noncompetitive permit market By Cathrine Hagem
  21. When Should a Firm Expand Its Business? The Signaling Implications of Business Expansion. By Ana Espinola-Arredondo; Esther Gal-Or; Felix Munoz-Garcia
  22. Convergence in institutions and market outcomes: Cross-country and time-series evidence from the BEEPS surveys in transition economies By Pradeep Mitra; Alexander Muravyev; Mark E. Schaffer
  23. Uniform Price Market and Behaviour Pattern: What Does the Iberian Electricity Market Point Out? By Vítor Marques; Isabel Soares; Adelino Fortunato
  24. Price dynamics and collusion under short-run price commitments By Leufkens Kasper; Peeters Ronald
  25. Exploring Network Effects of Point-to-Point Networks: An Investigation of the Spatial Entry Patterns of Southwest Airlines By Jia Yan; Xiaowen Fu; Tae Oum
  26. Imperfect Certification By Yiquan Gu
  27. Welfare Effects of Full-line Forcing Contracts in the Video Rental Industry By Justin Ho; Katherine Ho; Julie Holland Mortimer
  28. Innovation and Optimal Punishment, with Antitrust Applications By Keith N. Hylton; Haizhen Lin
  29. Competition under Time-Varying Demands and Dynamic Lot-Sizing Costs By Awi Federgruen; Joern Meissner
  30. First versus Second-Mover Advantage with Information Asymmetry about the Size of New Markets By Eric Rasmusen; Young-Ro Yoon
  31. Pricing on the European Mass Tourism Market: Tour Operators, Low Cost Carriers and Internet By Jaume Rosselló Nadal; Antoni Riera Font
  32. Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes By Alberto Galasso; Mark Schankerman
  33. Comparing Open and Sealed Bid Auctions: Evidence from Timber Auctions By Susan Athey; Jonathan Levin; Enrique Seira
  34. The Origins of Entrants and the Geography of the German Laser Industry By Guido Buenstorf; Matthias Geissler

  1. By: Hiroshi Kitamura (Graduate School of Economics, Osaka University)
    Abstract: This paper constructs a model of anticompetitive exclusive dealing in the presence of multiple entrants. Unlike a single-entrant model in the extant literature, an entrant competes not only with the incumbent to deal with buyers but also with other entrants. The competition among entrants then plays the role of commitment such that low wholesale prices are offered to buyers when they deviate from exclusive contracts. We argue that this commitment effect becomes a barrier to exclusive dealing and that the results differ drastically from the predictions of the single-entrant framework.
    Keywords: Vertical Relation; Exclusive Dealing; Multiple Entrants; Antitrust Policy.
    JEL: L12 L41 L42
    Date: 2008–12
  2. By: Eric Maskin (Institute for Advanced Study, School of Social Science)
    Keywords: Nash, mechanism design
    Date: 2008–11
  3. By: Gugler, Klaus; Mueller, Dennis C.; Weichselbaumer, Michael
    Abstract: One of the most conspicuous features of mergers is that they come in waves that are correlated with increases in share prices and price/earnings ratios. We use a natural way to discriminate between pure stock market influences on firm decisions and other influences by examining merger patterns for both listed and unlisted firms. If "real" changes in the economy drive merger waves, as some neoclassical theories of mergers predict, both listed and unlisted firms should experience waves. We find significant differences between listed and unlisted firms as predicted by behavioral theories of merger waves.
    Keywords: Merger waves, listed versus non-listed firms, managerial discretion, overvaluation
    JEL: G3 L2
    Date: 2008
  4. By: Ioannis Ioannou; Julie Holland Mortimer; Richard Mortimer
    Abstract: Retailer capacity decisions can impact sales for a product by affecting, for example, availability and visibility. Using data from the U.S. video rental industry, we report empirical estimates of the effect of capacity on sales. New monitoring technologies facilitated new supply contracts in this industry, which lowered the upfront cost of capacity and required minimum capacity purchases, thus strongly impacting stocking decisions. Under the traditional supply contract, capacity costs $44 per tape (avg) and the marginal tape produces 10.4 to 18.0 additional rentals. Under the new contract, capacity costs $7 per tape (avg) and the marginal tape produces 0 to 4.9 additional rentals.
    JEL: L0
    Date: 2008–12
  5. By: Helder Vasconcelos (Universidade Católica Portuguesa and CEPR); Helder Vasconcelos (Universidade Católica Portuguesa and CEPR)
    Abstract: The impact of demand growth on the collusion possibilities is investigated in a Cournot supergame where market growth may trigger future entry and the collusive agreement is enforced by the most profitable grim trigger strategies available. It is shown that even in situations where perfect collusion can be sustained after entry, coping with a potential entrant in a market which is growing over time may completely undermine any pre-entry collusive plans of the incumbent firms. This is because, before entry, a deviation and the following punishment phase may become more attractive thanks to their additional effect in terms of delaying entry.
    Keywords: Collusion, Demand Growth and Entry
    JEL: D43 L13 L41
    Date: 2008–06
  6. By: Myong-Hun Chang; Joseph E. Harrington, Jr.
    Abstract: To explore the efficacy of a corporate leniency program, a Markov process is constructed which models the stochastic formation and demise of cartels. Cartels are born when given the opportunity and market conditions are right, while cartels die because of internal collapse or they are caught and convicted by the antitrust authority. The likelihood that a cartel, once identified, is convicted depends inversely on the caseload of the antitrust authority due to an implicit resource constraint. The authority also chooses an enforcement policy in terms of the fraction of non-leniency cases that it prosecutes. Using numerical analysis, the impact of a leniency program on the steady-state cartel rate is investigated. Holding the enforcement policy of the antitrust authority fixed, a leniency program lowers the frequency of cartels. However, the additional caseload provided by the leniency program induces the antitrust authority to prosecute a smaller fraction of cartel cases identified outside of the program. Because of this less aggressive enforcement policy, it is possible that the cartel rate is higher when there is a leniency program.
    Date: 2008–12
  7. By: Barick Chung (Department of Economics, Chinese University of Hong Kong); Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Some retail markets are more competitive than others. A manufacturer with market power in the wholesale market who sells his product to competing retailers in cities and monopolistic ones in each of various towns must set the wholesale price difference between towns and cities to be smaller than the transportation cost to prevent “grey market” arbitrage. If he uses linear pricing, the town retail price will be even higher than under single-retailer double marginalization. Two-part tariffs do not solve the problem as they would if there were a single retailer, because the wholesale unit price must be higher than marginal cost to prevent arbitrage to the cities. If transportation costs are low, price discrimination is difficult and two- part tariffs come to resemble inefficient linear monopoly pricing. High transportation costs allow greater efficiency in contracting, and this can outweigh the negative direct effect on welfare.
    Keywords: price discrimination, double marginalization, retail network, transportation costs, two-part tariffs, vertical restraints
    JEL: D4 L42 M21
    Date: 2008–10
  8. By: Thomas Tröger; Rodney Garratt; Charles Zheng
    Abstract: The English auction is susceptible to tacit collusion when post-auction inter-bidder resale is allowed. We show this by constructing equilibria where, with positive probability, one bidder wins the auction without any competition and divides the spoils by optimally reselling the good to the other bidders. These equilibria interim Pareto dominate (among bidders) the standard value-bidding equilibrium, without requiring the bidders to make any commitment on bidding behavior or post-bidding spoil-division.
    Keywords: English auction, resale, collusion
    JEL: D44
    Date: 2008–10
  9. By: Heger, Diana; Kraft, Kornelius
    Abstract: Barriers to entry are regarded as major impediments to the working of markets. Entry must not necessarily actually take place - the perceived threat of entry may encourage incumbent firms to behave as if they are in a competitive market, even if they are not. We present empirical evidence on effects of perceived threat of entry on profitability. Using information from managers about how they assess the existence of entry barriers a strong impact of these assessments on profitability is confirmed. The number and the relative size of competitors also exert considerable effects. We find no statistically significant relation between the perceived threat of entry and the actual number of firms if the size of the relevant market is taken into account.
    Keywords: Barriers to Entry, Profitability, Discrete Regression Models
    JEL: C25 L13 L25
    Date: 2008
  10. By: Gianluca Femminis (DISCE, Università Cattolica di Milano); Gianmaria Martini (Università di Bergamo)
    Abstract: A wider RJV extension hastens process innovations at the cost of increasing collusion in the final market. In a Cournot model, an extended RJV is welfare enhancing only when the Antitrust Authority is strong, so that the increase in distortion is limited, and when the size of the technical improvement is large, so that the introduction of the innovation is more valuable.
    Keywords: RJV, R&D, collusion
    JEL: L13 L41 O33
    Date: 2008–12
  11. By: Heger, Diana; Kraft, Kornelius
    Abstract: Theory predicts a positive relationship between market concentration and profitability in most scenarios. In empirical work, however, this relation is frequently not found or only a weak connection is observed. We compare the performance of concentration and market share variables, which are generated on the basis of the official industry classification, with information collected directly from firms. Information from companies on the number of competitors, their relative size and the intensity of price competition is highly significant in explaining profit levels, while none of the concentration indices performs well. Hence, the poor quality of industry data is responsible for the loose connection that is usually found between concentration and profitability.
    Keywords: Concentration Indices, Profitability, Discrete Regression Models
    JEL: C25 L13 L25
    Date: 2008
  12. By: Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: In the reputation model of Klein and Leffler (1981) firms refrain from cutting quality or price because if they did they would forfeit future profits. Something similar can happen even in a static setting. First, if there exist some discerning consumers who can observe quality, firms wish to retain their purchases. Second, if all consumers can sometimes but not always spot flaws, firms do not want to lose the business of those who would spot them on a given visit. Third, if the law provides a penalty for fraud, but not one so high as to to make fraud unprofitable, firms may prefer selling high quality at high prices to low quality at high prices plus some chance of punishment.
    Keywords: reputation, product quality, moral hazard, quality-guaranteeing price
    Date: 2008–03
  13. By: Roberta Longo (Dipartimento di Teoria Economica e Metodi Quantitativi per le Scelte Politiche, University La Sapienza of Rome, Piazzale Aldo Moro 5, 00185 Roma, Italy and Centre for Health Economics, University of York); Marisa Miraldo (Imperial College Business School, Imperial College of London, South Kensington Campus, London SW7 2AZ UK); Andrew Street (Centre for Health Economics, University of York, UK)
    Abstract: We analyse incentives for collusive behaviour when heterogeneous providers are faced with regulated prices under two forms of yardstick competition, namely discriminatory and uniform schemes. Providers are heterogeneous in the degree to which their interests correspond to those of the regulator, with close correspondence labelled altruism. Deviation of interests may arise as a result of de-nationalisation or when private providers enter predominantly public markets. We assess how provider strategies and incentives to collude relate to provider characteristics and across different market structures. We differentiate between “pure” markets with either only self-interested providers or with only altruistic providers and “pluralistic” markets with a mix of provider type. We find that the incentive for collusion under a discriminatory scheme increases in the degree to which markets are self-interested whereas under a uniform scheme the likelihood increases in the degree of provider homogeneity. Providers’ choice of cost also depends on the yardstick scheme and market structure. In general, costs are higher under the uniform scheme, reflecting its weaker incentives. In a pluralistic market under the discriminatory scheme each provider’s choice of cost is decreasing in the degree of the other provider’s altruism, so a self-interested provider will operate at a lower cost than an altruistic provider. Under the uniform scheme providers always choose to operate at the same cost. The prospect of defection serves to moderate the chosen level of operating cost.
    Keywords: Price regulation; yardstick competition; collusion; altruism.
    JEL: I1 I18 L33
    Date: 2008–12
  14. By: Seißer, Goetz
    Abstract: This paper addresses the reduction of market failure under imperfect competition. It proposes a taxscheme that provides firms with an incentive to forgo their market power: Firms optimize after-tax profits. Now simply consider a firm´s gross profit margin the unique tax-rate it is charged on absolute profits. In theory the firm´s tax-rate would be the mark-up over marginal costs, the firm´s Lerner index. As a result every firm determines its own tax-rate by setting its price and incurring costs. This creates a new trade off for firms between a low tax-burden and the exercising of market power. Welfare for society increases since firms with market power choose a lower price and produce a quantity closer or equal to social optimum; at the original monopolistic price-level they can increase their profits by lowering their tax-burden. Essentially the tax-condition does not seem to distort profit incentives or markets; under perfect competition the tax-rate would be zero. Thus, it is clear that the tax only takes effect when markets work inefficiently and its countervailing nature subsequently helps to remedy inefficiencies of imperfectly competitive markets.
    Keywords: Imperfect competition, market power, tax-condition, monopoly, welfare, efficiency
    JEL: D00 D21 D40 H21 H25 H26 P11
    Date: 2008
  15. By: Ferdinand Rauch
    Abstract: The Dixit-Stiglitz model is extended by the possibility for rms to un- dertake process innovation. The model can provide a new explanation to describe the relationship that research activity of rms is positively corre- lated with product market competition at low levels of competition, and negatively at high levels that has been found in the data. The initial pos- itive relationship is caused by an increased business stealing opportunity with more competition, while the negative eect comes from the reduc- tion of the markup due to higher competition (measured as elasticity of substitution). Also the ambiguous relationship of market entry barriers with respect to research activity is discussed using a less general form of the model. This framework may also be used to explain the inverted-U relationship found between competition and advertising expenditures.
    JEL: L10 O3
    Date: 2008–12
  16. By: Michiel van Leuvensteijn (CPB Netherlands Bureau for Economic Policy Analysis); Christoffer Kok Sørensen (European Central Bank); Jacob A. Bikker (Nederlandsche Bank); Adrian van Rixtel (Banco de España)
    Abstract: This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest ratesin more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective.
    Keywords: Monetary transmission, banks, retail rates, competition, panel data
    JEL: D4 E50 G21 L10
    Date: 2008
  17. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência); João Vareda (Autoridade da Concorrência)
    Abstract: We analyze the incentives of a telecommunications incumbent to invest and give access to a downstream entrant to a next generation network, NGN. We model the industry as a duopoly, where a vertically integrated incumbent and a downstream entrant, that requires access to the incumbent's network, compete on Hotelling's line. The incumbent can invest in the deployment of a NGN that improves the quality of the retail services. Access to the old network is regulated, but access to the NGN is not. If the innovation is drastic, the incumbent always invests in the NGN, but does not give access to the entrant. If the innovation is non-drastic and if the access price to the old network is low, the incumbent voluntarily gives access to the NGN. If the innovation is non-drastic, there is no monotonic relation between the access price to the old network and the incumbent's incentives to invest. A regulatory moratorium emerges as socially optimal, if the innovation is large but non-drastic. We also analyze the case where both firms can invest in the deployment of a NGN.
    Keywords: Next Generation Networks, Investment, Access, Regulation.
    JEL: L43 L51 L96 L98
    Date: 2008–10
  18. By: Jiri Podpiera; Marie Rakova
    Abstract: In this paper we analyze the effects of changing market structure on price dynamics of final goods in the emerging Czech retail market. We estimate the extent of upstream and downstream market power and find that changing market structure was responsible for an average yearly decrease in the prices of retailed products of 0.8 p.p. during 2000–2005. At the same time, however, we anticipate that the already started period of mergers and acquisitions could cause yearly increases in the prices of retailed products of 1.2 p.p. (approximately 0.5 p.p. in the CPI) over the next ten years.
    Keywords: Market structure, retail market, transition economy.
    JEL: L1 L81
    Date: 2008–11
  19. By: Czarnitzki, Dirk; Etro, Federico Gabriele; Kraft, Kornelius
    Abstract: We develop a simple model of competition for the market that shows that, contrary to the Arrow view, endogenous entry threat in a market induces the average firm to invest less in R&D and the incumbent leader to invest more. We test these predictions with a Tobit model based on a unique dataset and survey for the German manufacturing sector (the Mannheim Innovation Panel). We confirm the empirical validity of our predictions and perform a number of robustness test with instrumental variables.
    Keywords: R&D, Entry, Endogenous market structures, Leadership
    JEL: O31 O32
    Date: 2008
  20. By: Cathrine Hagem (Statistics Norway)
    Abstract: A group of small competitive permits traders facing an imperfectly competitive permit market may consider cooperation (merger) to act strategically in the permit market. It is a well-known result in the literature that the horizontal merger of Cournot players may be unprofitable because of the response of nonmerging agents (a negative strategic effect). We show that the strategic effect of a merger among competitive agents substantially differs from the strategic effect of a merger among Cournot players. Furthermore, we show how the profitability of a merger depends on whether the merged agents are on the same side of the market as the preexisting dominant agent(s). These results show how the expected competitive environment in the permit market may determine how potentially large traders such as the US, and group of small, competitive traders, such as the EU countries, organize their permit trade in any follow-up agreement to the Kyoto protocol.
    Keywords: Emission permits; strategic permit trading; mergers; climate agreement; market power.
    JEL: D43 Q54
    Date: 2008–12
  21. By: Ana Espinola-Arredondo; Esther Gal-Or; Felix Munoz-Garcia (School of Economic Sciences, Washington State University)
    Abstract: We examine an incumbent?s trade-o¤ between expanding her business, which increases her pro?ts, and the information that such expansion signals to potential competitors, which attracts them to the market. Speci?cally, we consider a signaling game where the incumbent knows the actual realization of demand, whereas the entrant can only observe whether the incumbent de- cided to expand the size of her business in the past. In particular, we analyze the set of pooling and separating equilibria surviving the intuitive criterion in this signaling model. Our predic- tions can support the expected observation that only incumbents in good market conditions expand their businesses (separating equilibria), but also the less obvious and interesting pooling equilibria in which no ?rm expands her business, and despite such non-expansion entrants choose to enter the industry. This equilibrium result helps us provide an explanation about the high failure rates that new ?rms face when entering a market, as con?rmed by multiple empirical studies.
    Keywords: Business expansion, Signaling, Entry deterrence. Failure rates.
    JEL: L12 D82
    Date: 2008–08
  22. By: Pradeep Mitra; Alexander Muravyev; Mark E. Schaffer (Heriot-Watt University)
    Abstract: This paper uses firm-level data from the Business Environment and Enterprise Performance Surveys (BEEPS) to study the process of convergence of transition countries with developed market economies. The primary focus of the study is on competition and market structure, finance and the structure of lending to firms, and how firms respond to the economic environment by restructuring; we are able to do this because the BEEPS cover thousands of firms from virtually all transition countries over a long time period (1996-99 through 2002-05), as well firms from developed market economies, thus providing a set of natural benchmarks. We find substantial evidence of convergence of transition countries with developed market economies in a number of dimensions. The pattern of growth at the country, sectoral and firm level shows rapid growth of the new private sector and of the micro- and small-firm sectors, with the size distribution of firms moving towards the pattern observed in the BEEPS surveys of developed market economies. Our interpretation of the evidence on competition is that there is an initial move by firms into niches to exploit local market power, and later in transition entry and domestic competitive pressure increases. In finance, the increasing reliance on retained earnings in transition countries reflects a maturation of the sector as new firms come to rely less on informal and family sources of finance. The scale of restructuring and innovation activity is as high or higher in transition economies as in developed market economies. Interestingly, we find evidence of an inverse-U shape pattern, with the peak of restructuring activity taking place in 2002, the middle of the period analyzed. Throughout, the regional patterns suggest greater convergence in the transition countries that joined the European Union in 2004 than in the other, lower-income transition economies.
    Keywords: transition, convergence, market structure, competition, enterprise finance, enterprise restructuring
    JEL: G32 L11 O12 P31
    Date: 2008
  23. By: Vítor Marques (ERSE); Isabel Soares (Faculdade de Economia, Universidade do Porto); Adelino Fortunato (Faculdade de Economia and GEMF, Universidade de Coimbra)
    Abstract: The electricity spot markets can be considered as capacity constrained markets (Kreps and Scheinkman, 1983), where market price definition depends on the quantity strategies. In this theoretical framework, the main target of the present paper is to show to what extent a spot market organized like a Uniform Price Auction (UPA) is naturally inclined to develop anti-competitive practices, in particular through quantity strategies. To achieve this objective, multivariable models are defined for each daily demand period of the Iberian electricity market. Each model correlates the hourly market price change and the bid quantities of the two main Iberian producers (Endesa and Iberdrola), for every summer between 2001 and 2004. To apply those models one has to solve the endogeneity problem. This exercise is also useful to highlight any anti-competitive behaviour. Quantities produced by the producers with infra marginal bids should not be endogenous when there is no risk that they will not be dispatched, unless producers have some expectations about the system marginal price. In addition, this kind of endogeneity reinforces the model’s theoretical assumption that change in the system marginal price stems from quantity strategies. The models present some expectable but interesting results. Those results show that even base load units’ bids may depend on expectations about the system marginal price evolution. Those expectations can reflect market strategies. Therefore, in a market where the main companies own base load and peak load units, like the Iberian wholesale electricity market, the UPA is an open window to anti-competitive practices based on quantity strategies, such as the raising of the system marginal price through the capacity withdrawal from base load units.
    Keywords: oligopoly, electricity, endogeneity, uniform-price market
    JEL: L13
    Date: 2008–12
  24. By: Leufkens Kasper; Peeters Ronald (METEOR)
    Abstract: We consider a dynamic homogenous oligopoly in which firms set prices repeatedly. Theory predicts that short-run price commitments have an increasing impact on profits and may lead to less price stability. The experiments that we conduct provide support for the first effect and against the second effect when a random ending rule is applied. Application of a fixed ending rule seems to reverse these findings, but none of the effects is significant.
    Keywords: microeconomics ;
    Date: 2008
  25. By: Jia Yan; Xiaowen Fu; Tae Oum (School of Economic Sciences, Washington State University)
    Abstract: This paper explores network effects in Point-to-Point airline networks by examining the spatial entry patterns of Southwest airlines during the 1990-2006 period. Estimation results from a spatial probit model reveal clear spatial dependence in profitability across different routes served by the carrier. Detailed investigation suggests two main sources of network effects, namely: (1) airport and regional presence, and (2) substitutability of markets. Findings of the paper suggest also that the network effects embedded in Southwest’s Point-to-Point network have many distinguishing features as compared to those identified in a typical Hub-and-Spoke network. This study brings some fresh insights on airline network effects in general, as well as explaining the pattern of aggressive network expansions of LCCs in particular.
    Keywords: Point-to-Point Networks, spatial entry patterns, Southwest airlines, spatial probit model
    Date: 2008–11
  26. By: Yiquan Gu
    Abstract: This paper proposes a model for a certification market with an imperfect testing technology. Such a technology only assures that whenever two products are tested the higher quality product is more likely to pass than the lower quality one.When only one certifier with such testing technology is present in the market, it is found that this monopoly certifier can be completely ignored in equilibrium, in contrast to the prediction of a model with perfect testing technology. A separating equilibrium is also supported in which only relatively high quality types (products) choose to pay for the certification service. It is true that in such an equilibrium having a certificate is better than not. The exact value of a certificate, however, depends both on the prior distribution of product quality and the nature of the testing technology.Welfare accounting shows that the monopolistic certifier’s profit maximizing conduct can lead to under or over supply of certification service depending on model specification. Optimal certification fee is always positive and such that it makes all positive types choose to test. In the case of two competing certifiers with identical testing technologies, the intuition of Bertrand competition does not necessarily hold. Segmentation equilibrium in which higher seller types choose the more expensive certification service and not so high types choose the less expensive service can be supported. As an application, we argue that the fee differentiation between major and non-major auditing firms need not be a result of any differences in their auditing technologies.
    Keywords: Asymmetric information, imperfect certification
    JEL: C72 D82 L15
    Date: 2008–11
  27. By: Justin Ho; Katherine Ho; Julie Holland Mortimer
    Abstract: An extensive theoretical literature on bundling examines its potential efficiency and anti-competitive effects. In this paper, we provide an empirical study of bundling in a supply chain, referred to as full-line forcing. Using an extensive dataset on contracts between video retailers and movie distributors, we identify and measure three effects of full-line forcing: market coverage, leverage, and efficiency. We estimate a structural model of demand and the cost of holding inventory. Using the estimated parameters, we examine the effects of delaying the introduction of full-line forcing contracts. We find that delay results in a welfare loss for firms and consumers.
    JEL: L0
    Date: 2008–12
  28. By: Keith N. Hylton (Boston University Law School); Haizhen Lin (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This paper modifies the optimal penalty analysis by incorporating investment incentives with external benefits. In the models examined, the recommendation that the optimal penalty should internalize the marginal social harm is no longer valid as a general rule. We focus on antitrust applications. In light of the benefits from innovation, the optimal policy will punish monopolizing firms more leniently than suggested in the standard static model. It may be optimal not to punish the monopolizing firm at all, or to reward the firm rather than punish it. We examine the precise balance between penalty and reward in the optimal punishment scheme.
    Keywords: optimal law enforcement, optimal antitrust penalty, monopolization, innovation, internalization, strict liability, static penalty
    JEL: D42 K14 K21 K42 L41 L43
    Date: 2008–11
  29. By: Awi Federgruen (Graduate School of Business, Columbia University); Joern Meissner (Department of Management Science, Lancaster University Management School)
    Abstract: We develop a competitive pricing model which combines the complexity of time-varying demand and cost functions and that of scale economies arising from dynamic lot sizing costs. Each firm can replenish inventory in each of the T periods into which the planing horizon is partitioned. Fixed as well as variable procurement costs are incurred for each procurement order, along with inventory carrying costs. Each firm adopts, at the beginning of the planning horizon, a (single) price to be employed throughout the horizon. Based on each period's system of demand equations, these prices determine a time series of demands for each firm, which needs to service them with an optimal corresponding dynamic lot sizing plan. We establish the existence of a price equilibrium and associated optimal dynamic lotsizing plans, under mild conditions and employing a close approximation for the optimal lotsizing costs. We also design efficient procedures to compute the equilibrium prices and dynamic lotsizing plans.
    Keywords: equilibrium, price, competition, game theory, inventory models, lot sizing, pricing, supply chain management
    JEL: C61
    Date: 2004–06
  30. By: Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Young-Ro Yoon (Department of Economics, Indiana University)
    Abstract: Is it better to move first, or second— to innovate, or to imitate? We look at this in a context with both asymmetric information and payoff externalities. Suppose two players, one with superior information about market quality, consider entering one of two new markets immediately or waiting until the last possible date. We show that the more accurate the informed player’s information, the more he wants to delay to keep his information private. The less-informed player also wants to delay, but in order to learn. The less accurate the informed player’s information, the more both players want to move first to foreclose a market. More accurate information can lead to inefficiency by increasing the players’ incentive to delay. Thus, a moderate delay cost can increase industry profits.
    Keywords: market entry, first- and second mover advantage, payoff externalities, informational externalities, endogenous timing
    JEL: D81 D82 L13
    Date: 2008–11
  31. By: Jaume Rosselló Nadal (Centre de Recerca Econòmica (UIB · Sa Nostra)); Antoni Riera Font (Centre de Recerca Econòmica (UIB · Sa Nostra))
    Abstract: The recent expansion of Low Cost Carriers (LCCs) and the increasing use of Internet are provoking a deep transformation in the marketing of the typical Mediterranean summer tourism product in Europe. Internet may significantly reduce intermediary costs by enabling the connection between accommodation and transport business and consumers. At the same time, a more flexible product can be created in contrast to the conventional rigid tourist package offered by traditional tour operators. This paper investigates differences in price level and price dispersion across off-line and on-line markets and across tour operators and new emerging Internet retailers -including LCCs- using microdata on travel & accommodation individual expenses of tourists in the Balearic Islands, one of the most representative mature Mediterranean resorts. On the basis of the hedonic regression model, results suggest that price of transport; accommodation and board offered on Internet are lower than those offered by others channels, whatever the quality and quantity. Additionally, results reveal how on-line and off-line markets differ in the indirect value attributed to different characteristics of the product showing market segmentation.
    Keywords: Internet pricing, e-tail, hybrid retailers, intermediaries, tourist products, Mediterranean Sea.
    Date: 2008
  32. By: Alberto Galasso; Mark Schankerman
    Abstract: We study how fragmentation of patent rights ('patent thickets') and the formation of theCourt of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, andthus the speed of technology diffusion through licensing. We develop a model of patentlitigation which predicts faster settlement agreements when patent rights are fragmented andwhen there is less uncertainty about court outcomes, as was associated with the 'pro-patentshift' of CAFC. The model also predicts that the impact of fragmentation on settlementduration should be smaller under CAFC. We confirm these predictions empirically using adataset that covers nearly all patent suits in U.S. federal district courts during the period1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking intoaccount both reduction in duration per dispute and the increase in the number of requiredpatent negotiations associated with patent thickets.
    Keywords: patents, anti-commons, patent thickets, litigation, settlement
    JEL: K41 L24 O31 O34
    Date: 2008–08
  33. By: Susan Athey; Jonathan Levin; Enrique Seira
    Abstract: We study entry and bidding patterns in sealed bid and open auctions with heterogeneous bidders. Using data from U.S. Forest Service timber auctions, we document a set of systematic effects of auction format: sealed bid auctions attract more small bidders, shift the allocation towards these bidders, and can also generate higher revenue. We show that a private value auction model with endogenous participation can account for these qualitative effects of auction format. We estimate the model's parameters and show that it can explain the quantitative effects as well. Finally, we use the model to provide an assessment of bidder competitiveness, which has important consequences for auction choice.
    JEL: D44 D82 L13 L40
    Date: 2008–12
  34. By: Guido Buenstorf; Matthias Geissler
    Abstract: Entry into an industry often clusters in regions where the industry is already concentrated, which is suggestive of agglomeration economies. Regional public research activities may exert another attracting force on entrants into science-based industries. Empirically these proximity effects are confounded by other influences on where entrants originate and locate. This paper begins to disentangle the effects of agglomeration, public research, and the supply of capable entrants for the German laser industry. Our findings indicate that the industry’s geography was shaped by the local availability of potential entrants rather than localization economies. The impact of public research increased over time.
    Keywords: Industry clusters, agglomeration economies, public research, entry, heritage Length 29 pages
    JEL: L26 M13 R30
    Date: 2008–12

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