nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒07‒03
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Advertising for Attention in a Consumer Search Model By Marco A. Haan; José Luis Moraga-González
  2. A small firm leads to curious outcomes: Social surplus, consumer surplus, and R&D activities By Toshihiro Matsumura; Noriaki Matsushima
  3. Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  4. On Reputational Rents as an Incentive Mechanism in Competitive Markets By Bernardita Vial; Felipe Zurita
  5. Creative Destruction and Productive Preemption By Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
  6. Quantity Precommitment with Price Competition versus Quantity Precommitment with Market Clearing Prices in the Laboratory By David Goodwin; Stuart Mestelman
  7. Market Competition, Institutions, and Contracting Outcomes: Preliminary Model and Experimental Results By MacDonald, James; Wu, Steven Y.
  8. The Effect of Entry on R&D Investment of Leaders: Theory and Empirical Evidence By Dirk Czarnitzki; Federico Etro; Kornelius Kraft
  9. Risk Aversion and Tacit Collusion in a Bertrand Duopoly Experiment By Lisa R. Anderson; Beth A. Freeborn; Jason P. Hulbert
  10. Predatory Exclusive Dealing By Klein, Joachim; Zenger, Hans
  11. Patent Pools and Cross-Licensing in the Shadow of Patent Litigation By Choi, Jay Pil
  12. Using Accounting Data in Cartel Damage Calculations – Blessing or Menace? By Johannes Paha
  13. Asymmetric Price Effects of Competition By Saul Lach; José Luis Moraga-González
  14. Vertical Relations in the Presence of Competitive Recycling By Liliane Karlinger
  15. A Dynamic Model of Price Discrimination and Inventory Management at the Fulton Fish Market By Graddy, Kathryn; Hall, George
  16. Intermodal Competition in The London-Paris Passenger Market: High-Speed Rail and Air Transport By Christiaan Behrens; Eric Pels
  17. Expansion in Markets with Decreasing Demand – For-Profits in the German Hospital Industry By Christoph Schwierz
  18. The Competitive Effects of “Consideration Payments”: Lessons from Radio Payola. By Adam D. Rennhoff
  19. Cross-Border Mergers & Acquisitions: A Piece of The Natural Resource Curse Puzzle By Julia Swart; Charles van Marrewijk
  20. Regulatory Structure Under EC Competition Laws: Lessons for India By Tarun Jain
  21. Industrial Concentration, Price-Cost Margins, and Innovation By David Flath

  1. By: Marco A. Haan (University of Groningen); José Luis Moraga-González (University of Groningen)
    Abstract: We model the idea that when consumers search for products, they first visit the firm whose advertising is more salient. The gains a firm derives from being visited early increase in search costs, so equilibrium advertising increases as search costs rise. This may result in lower firm profits when search costs increase. We extend the basic model by allowing for firm heterogeneity in advertising costs.
    Keywords: Advertising; attention; consumer search; saliency
    JEL: D83 L13 M37
    Date: 2009–04–16
  2. By: Toshihiro Matsumura; Noriaki Matsushima
    Abstract: This paper investigates an asymmetric duopoly model with a Hotelling line. We find that helping a small (minor) firm can reduce both social and consumer surplus. This makes a sharp contrast to existing works showing that helping minor firms can reduce social surplus but always improves consumer surplus. We also investigate R&D competition. We find that a minor firm may engage in R&D more intensively than a major firm in spite of economies of scale in R&D activities.
    Date: 2009–06
  3. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus.
    Keywords: Oligopoly; Managerial delegation; Endogenous contracts
    JEL: D43 L21
    Date: 2009–06–15
  4. By: Bernardita Vial; Felipe Zurita
    Date: 2009–06–22
  5. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)); Svensson, Roger (Research Institute of Industrial Economics (IFN))
    Abstract: We develop a theory of commercialization mode (entry or sale) of entrepreneurial inventions into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Moreover, preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using detailed data on patents granted to small firms and individuals, we find evidence that high-quality inventions are often sold, and that they are sold under bidding competition.
    Keywords: Acquisitions; Entrepreneurship; Innovation; Start-ups; Patent; Ownership; Quality
    JEL: G24 L10 L20 M13 O30
    Date: 2009–06–10
  6. By: David Goodwin; Stuart Mestelman
    Abstract: The paper reports the results of 39 laboratory duopoly markets for which pricing institution and participant experience are treatments. Cournot (C) duopolies (quantity precommitment and a price determined to clear the market) are contrasted with Kreps-Scheinkman (KS) duopolies (quantity precommitment and posted prices). Inexperienced participants in KS markets have much more difficulty selecting capacities consistent with the theoretical predictions than do those in C markets. With experience, the differences disappear.
    Keywords: Duopoly; Laboratory experiment; Quantity precommitment; Posted prices; Price competition; Market-clearing prices; Experience
    JEL: C92 D43 L13
    Date: 2009–06
  7. By: MacDonald, James; Wu, Steven Y.
    Keywords: Contracts, Competition, Market Power, Enforcement, Institutions, Agribusiness, Industrial Organization, Institutional and Behavioral Economics, Production Economics, C91, D02, D43, D86,
    Date: 2009
  8. By: Dirk Czarnitzki; Federico Etro; Kornelius Kraft
    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 than the average firm. We test these predictions with a Tobit model based on a unique dataset and survey for the German manufacturing sector (the Mannheim Innovation Panel). In line with our predictions, endogenous entry threats perceived by the firms reduce R&D intensity for the average firm, but not for an incumbent leader. Moreover, the size of the firms and their patent stocks, proxy for the protection of IPRs, are positively related to R&D intensity. These results hold after a number of robustness tests with instrumental variables.
    Keywords: R&D, Entry, Endogenous market structures, Leadership
    JEL: O31 O32
    Date: 2009–05
  9. By: Lisa R. Anderson (Department of Economics, College of William and Mary); Beth A. Freeborn (Department of Economics, College of William and Mary); Jason P. Hulbert (Department of Economics, College of William and Mary)
    Abstract: We investigate the relationship between collusive behavior in Bertrand oligopoly experiments and subject heterogeneity in risk preferences. We find that risk aversion is positively associated with tacit collusion when the goods are complements, but find no evidence of collusive behavior when the goods are substitutes. Furthermore, risk aversion is associated with lower prices with complement goods, but does not impact pricing behavior with substitute goods. In both treatments, we find that subjects tend to follow the price change of the other seller. In the complements treatment, however, this tendency increases with the degree of risk aversion.
    Keywords: Bertrand duopoly, risk aversion, collusion, experiment
    JEL: C9 L1
    Date: 2009–06–11
  10. By: Klein, Joachim; Zenger, Hans
    Abstract: While the previous literature on exclusive dealing has been concerned with the question of how exclusive dealing can raise static profits, this paper analyzes the question of how exclusive dealing can be used to predate in a dynamic context. It is shown that exclusive dealing may arise even if it reduces static profits. Exclusivity provisions may not only allow excluding efficient competitors, but indeed are often a cheaper exclusionary tool than predatory pricing. This is the case if the prey's access to finance is not too limited. Furthermore, it is more likely that exclusive dealing is preferable compared to predatory pricing the more market power the predator has with respect to the prey.
    Keywords: exclusive dealing; predation
    JEL: K21 L11 L12 L41 L42
    Date: 2009–06–09
  11. By: Choi, Jay Pil
    Abstract: This paper develops a framework to analyze the incentives to form a patent pool or engage in cross-licensing arrangements in the presence of uncertainty about the validity and coverage of patents that makes disputes inevitable. It analyzes the private incentives to litigate and compares them with the social incentives. It shows that pooling arrangements can have the effect of sheltering invalid patents from challenges. This result has an antitrust implication that patent pools should not be permitted until after patentees have challenged the validity of each other’s patents if litigation costs are not too large.
    Date: 2009–03
  12. By: Johannes Paha (Justus-Liebig-University Gießen, Licher Straße 62, D-35394 Gießen)
    Abstract: Standard methods for calculating cartel-damages rely on data of prices charged and quantity sold. Such data may not easily be available. In this paper, it is shown that a lower bound for cartel-damages can also be computed from accounting data. In previous literature it is shown that economic profits can hardly be inferred from accounting data. Therefore, it is shown under which econometrically testable assumptions on accounting costs a meaningful lower bound for cartel damages can consistently be estimated from accounting data. An estimation of cartel-damages is performed for four vitamins producers that participated in the vitamins cartel. The results indicate that both the aggregation-level and the publication-frequency of accounting data pose a challenge to the estimation of cartel damages. A further challenge is to appropriately reflect the strength respectively effectiveness of the collusive agreement in the specification of any such estimation.
    JEL: C22 L12 L13 L41
    Date: 2009
  13. By: Saul Lach (The Hebrew University and CEPR); José Luis Moraga-González (University of Groningen)
    Abstract: This paper examines how the distribution of prices changes with the number of competitors in the market. Using gasoline price data from the Netherlands we find that as competition increases, the distribution of prices spreads out: the low prices go down while the high prices go up, on average. As a result, competition has an asymmetric effect on prices. These findings, which are consistent with a theoretical model where consumers differ in the information they have about prices, imply that consumers' gains from competition depend on their shopping behavior. In our data, all consumers, irrespective of the number of prices they observe, benefit from an increase in the number of gas stations. The magnitude of the welfare gain, however, is greater for those consumers that are aware of more prices. We conclude that an increase in the number of gas stations has a positive but unequal effect on the welfare of consumers in the Netherlands.
    Keywords: gasoline prices; imperfect information; number of firms and price distribution
    JEL: J1
    Date: 2009–06–03
  14. By: Liliane Karlinger
    Abstract: This paper studies the vertical relations between a manufacturer and one or more retailers over two periods in the presence of a competitive recycling sector. In a bilateral monopoly, contracting is (generally) efficient, i.e. the manufacturer will produce the joint-profit-maximizing output. However, both competition downstream and upstream may lead to inefficient outcomes: Under retailer competition, some rent will be siphoned off by the recycling sector, and so the manufacturer will either overproduce in the second period or underproduce in the first period. If instead upstream entry occurs and full rent extraction is not possible, then the incumbent may overproduce in the pre-entry period. Vertical restraints that restore profit maximization (e.g. loyalty rebates) will harm consumers whenever the manufacturer would overproduce otherwise.
    JEL: L12 L14 L42
    Date: 2009–06
  15. By: Graddy, Kathryn; Hall, George
    Abstract: We estimate a dynamic profit-maximization model of a fish wholesaler who can observe consumer characteristics, set individual prices, and thus engage in third-degree price discrimination. Simulated prices and quantities from the model exhibit the key features observed in a set of high quality transaction-level data on fish sales collected at the Fulton fish market. The model’s predictions are then compared to the case in which the dealer must post a single price to all customers. We find the cost to the dealer of posting a uniform price to be extremely small.
    Keywords: dynamic programming; fish; indirect inference; price discrimination; yield management
    JEL: C15 D21 D4 L1 L81
    Date: 2009–06
  16. By: Christiaan Behrens (VU University Amsterdam); Eric Pels (VU University Amsterdam)
    Abstract: This paper studies inter- and intramodal competition in the London-Paris passenger market. Using revealed preference data, we estimate nested and mixed multinomial logit models to examine passenger behaviour in the London-Paris market. We present a case study on the relocation of Eurostar services from Waterloo International to St Pancras International station. The results show that competition is present in this market. Demand is elastic, and passengers are heterogeneous in their valuation of fares and accessibility. Aviation and high-speed rail are homogenous in unobserved effects. The large market share of the Eurostar and the withdrawal of aviation alternatives indicate that competition will decline in the long-run.
    Keywords: inter- and intramodal competition; nested logit; mixed logit; aviation; rail
    JEL: R40 R41
    Date: 2009–06–08
  17. By: Christoph Schwierz
    Abstract: Over the last 20 years, acute care hospitals in most OECD have built up costly overcapacities. From the perspective of economic policy, it is desirable to know how hospitals of different ownership form respond to changes in demand and are probably best suited to deal with existing overcapacities. This paper examines ownership-specific differences in the responsiveness to changes in demand for hospital services in Germany between 1996 and 2006. With respect to the speed of adaptation to changes in demand, the study finds for-profit ownership to be superior to public and nonprofit ownership. Further, it is shown that declining demand can contribute to the expansion of for-profits through conversions by mainly publicly owned hospitals. Thus, the study finds evidence that to some extent the privatization of the hospital sector may be an adequate answer to reduce excess capacities.
    Keywords: Hospital ownership, privatization, hospital market structure
    JEL: I11 I12 L31
    Date: 2009–05
  18. By: Adam D. Rennhoff
    Abstract: It is not uncommon for upstream manufacturers to make payments to downstream firms in order to obtain preferential treatment. These payments may generally be called “consideration payments.” Examples of this include the slotting allowance payments often discussed in the grocery, pharmaceutical, and consumer electronics industries. Payola in the radio industry shares many of the same characteristics as slotting allowances. The prohibition of radio payola in 1960 gives us an opportunity to empirically examine the effect that these payments had on the record labels using them and on overall product variety. We construct a unique variety measure based on the musical styles of Billboard chart artists and supplement this with information on radio airplay from Billboard charts to evaluate the effects of payola. We find that the prohibition of payola reduced musical variety and overall record sales, but may have helped increase access for smaller record labels. These findings support the theory that payola payments, which may impose a non-trivial financial burden on the record label, serve to reduce the radio station’s risk.
    Keywords: Radio; Payola; Regulation; Slotting Allowances
    JEL: L42
    Date: 2009–06
  19. By: Julia Swart (Erasmus University Rotterdam); Charles van Marrewijk (Utrecht University)
    Abstract: We combine the resource curse literature with the literature on cross-border mergers and acquisitions (M&As) to investigate two hypotheses, namely (i) countries with a comparative advantage in natural resources attract more M&As in natural resource intensive sectors and (ii) countries with a high natural resource dependency attract fewer M&As in other sectors. Using the Thomson dataset we test these hypotheses for a sample of 49 African and Latin American countries in the period 1988 - 2007. Both hypotheses were confirmed by our findings. Thus, resource dependency has a “crowding out” effect on M&As in sectors not intensive in natural resources, and a comparative advantage in natural resources has a “crowding in” effect on M&As in sectors intensive in natural resources.
    Keywords: Gravity Equation; Mergers and Acquisitions; Natural Resources; Resource Curse
    JEL: F23 Q56
    Date: 2009–06–12
  20. By: Tarun Jain
    Abstract: Competition law is different from other branches of law. It is not about the fairness or morality to be instilled in the actions which mark societal behaviour. Instead the rules of competition reflect economic principles, designed to render the operation of the markets in a manner beneficial to the common good.This article examines the regulatory structure in vogue under the EC competition law and to identify the key traits which may as well be applicable for the recently formulated Competition Commission of India, in its quest towards rendering competition workable in the Indian markets.
    Keywords: competition law, European Economic Commission, regulatory structure, Competition Commission of India, legal studies, international trade, trade laws, economic reform, India, India-Europe
    Date: 2009
  21. By: David Flath
    Abstract: This paper explores a panel data set matching establishment-based production statistics from Japan's Census of Manufacturers with wholesale price indices from the Bank of Japan, and Herfindahl indices from the Japan Fair Trade Commission. The data include annual observations over the period 1961-1990, for 74 industries at the 4-digit s.i.c. level. We estimate Cobb-Douglas production functions and Solow residuals for each industry and then use these estimates to further analyze the determinates of industrial concentration and innovation. The industries having great capital intensity, small employment of labor, and with high price-cost margins tend to be more concentrated. Cross-section estimates reveal a U-shaped mapping from concentration to innovation.
    Date: 2009–05

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