nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒08‒16
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Strategic Vertical Separation By Sloev, Igor
  2. A Search Cost Model of Obfuscation By Glenn Ellison; Alexander Wolitzky
  3. When Do Large Buyers Pay Less? Experimental Evidence By Ruffle, Bradley J.
  4. Accounting for Incomplete Pass-Through By Emi Nakamura; Dawit Zerom
  5. Coverage of Retail Stores and Discrete Choice Models of Demand: Estimating Price Elasticities and Welfare Effects By Franco Mariuzzo; Patrick Paul Walsh; Ciara Whelan
  6. Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate By Krämer, Jan; Wiewiorra, Lukas
  7. Mobile Termination and Mobile Penetration By Sjaak Hurkens; Doh-Shin Jeon
  8. Market Shares, Consumer Ignorance and the Reciprocal Termination Charges By Yu-Shan Lo; ;
  9. Lending Competition and Relationship Banking: Evidence from Japan By Ogura, Yoshiaki; Yamori, Nobuyoshi
  10. The retail activity of foreign banks in Italy: effects on credit supply to households and firms By Luigi Infante; Paola Rossi
  11. Beyond Testing: Empirical Models of Insurance Markets By Liran Einav; Amy Finkelstein; Jonathan Levin
  12. Bundling and Competition for Slots: Sequential Pricing By Doh-Shin Jeon; Domenico Menicucci
  13. A Nonparametric Test of Strategic Behavior in the Cournot Model By Deb, Rahul; Fenske, James
  14. A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments By Aguirregabiria, Victor; Ho, Chun-Yu
  15. Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery By David M. Cutler; Robert S. Huckman; Jonathan T. Kolstad
  16. Competition and Growth in an Endogenous Growth Model with Expanding product Variety without Scale Effects Revisited By Bianco, Dominique

  1. By: Sloev, Igor
    Abstract: The paper explores incentives for strategic vertical separation of firms in a framework of a simple duopoly model. Each firm chooses either to be a retailer of its own good (vertical integration) or to sell its good through an independent exclusive retailer (vertical separation). In the latter case a two-part tariff is applied. Retailers compete in quantities, goods are perfect substitutes and firms' cost functions are quadratic. I show that the equilibrium outcome crucially depends on the degree of (dis)economies of scale and asymmetry of costs. Two asymmetric equilibria arise, in which one firm separates while another integrates, under conditions that both firms' cost functions exhibit a sufficiently high diseconomies of scale, or extreme asymmetry of costs. Under a moderate asymmetry of costs a unique equilibrium exists in which the firm with the lower degree of diseconomies of scale separates, while its rival integrates. With the degree of diseconomies of scale low for both firms in the unique equilibrium both firms separate.
    Keywords: Vertical oligopoly; Vertical Separation; Vertical Integration; Delegation
    JEL: L42 L22
    Date: 2009–08–10
  2. By: Glenn Ellison; Alexander Wolitzky
    Abstract: This paper develops search-theoretic models in which it is individually rational for firms to engage in obfuscation. It considers oligopoly competition between firms selling a homogeneous good to a population of rational consumers who incur search costs to learn each firm's price. Search costs are endogenized: obfuscation is equated with unobservable actions that make it more time-consuming to inspect a product and learn its price. We note two mechanisms by which obfuscation can affect consumer beliefs about future search costs: a direct effect that applies when search costs are convex in time spent searching and a signal-jamming effect that applies when an informational link is present. As long as obfuscation is costless for firms, the presence of either of these mechanisms guarantees that obfuscation must occur in equilibrium, unless consumer search costs are already so high that consumers are willing to purchase at the highest equilibrium price in the absence of obfuscation. Changes in consumer search costs are at least partially offset by changes in the equilibrium level of obfuscation, raising doubts about whether reductions in consumer search costs must make markets more competitive. We also examine patterns of obfuscation and show that higher markups are usually associated with more obfuscation.
    JEL: D43 D83 L13
    Date: 2009–08
  3. By: Ruffle, Bradley J.
    Abstract: The rise in mega-retailers has contributed to a growing literature on buyer power and large-buyer discounts. According to Rotemberg and Saloner (1986) and Snyder (1998), large buyers' ability to obtain price discounts depends on their relative (rather than absolute) size and the degree of competition between suppliers. I test experimentally comparative statics implications of this theory concerning the number of sellers and the sizes of the buyers in the market. The results track the comparative statics predictions to a surprising extent. Subtle changes in the distribution of buyer sizes or the number of suppliers can create or negate large-buyer discounts. The results highlight the previously unexplored role of the demand structure in determining buyer-size discounts. Furthermore, the experiments establish the presence of small-buyer premia, not anticipated by the theory.
    Keywords: experimental economics; large-buyer discounts; buyer power; seller competition
    JEL: C92 D43
    Date: 2009–08–06
  4. By: Emi Nakamura; Dawit Zerom
    Abstract: Recent theoretical work has suggested a number of potentially important factors in causing incomplete pass-through of exchange rates to prices, including markup adjustment, local costs and barriers to price adjustment. We empirically analyze the determinants of incomplete pass-through in the coffee industry. The observed pass-through in this industry replicates key features of pass-through documented in aggregate data: prices respond sluggishly and incompletely to changes in costs. We use microdata on sales and prices to uncover the role of markup adjustment, local costs, and barriers to price adjustment in determining incomplete pass-through using a structural oligopoly model that nests all three potential factors. The implied pricing model explains the main dynamic features of short and long-run pass-through. Local costs reduce long-run pass-through (after 6 quarters) by a factor of 59% relative to a CES benchmark. Markup adjustment reduces pass-through by an additional factor of 33%, where the extent of markup adjustment depends on the estimated "super-elasticity'' of demand. The estimated menu costs are small 0.23% of revenue) and have a negligible effect on long-run pass-through, but are quantitatively successful in explaining the delayed response of prices to costs. The estimated strategic complementarities in pricing do not, therefore, substantially delay the response of prices to costs. We find that delayed pass-through in the coffee industry occurs almost entirely at the wholesale rather than the retail level.
    JEL: E30 F10 L11 L16
    Date: 2009–08
  5. By: Franco Mariuzzo (The Geary Institute University College Dublin); Patrick Paul Walsh (SPIRe and The Geary Institute University College Dublin); Ciara Whelan (Univesity College Dublin)
    Abstract: Since retail stores tend to host a subset of products available in the market, Ackerberg and Rysman (2005) allow logit errors to represent idiosyncratic unobserved consumer preferences over retail stores and products. Having product level data on store coverage we are able to estimate their logit, nested logit and random coefficients logit models of product demand jointly with cost, in a structural model of equilibrium, for Carbonated Soft Drink products. As Ackerberg and Rysman’ (2005) Monte Carlo study suggests; using standard logit errors does lead to predictable biases in estimated price elasticities and welfare. A counterfactual that imposes full coverage of stores by products, in our structural equilibrium, increases the estimated price elasticities and welfare. Competition in markets is more curtailed than assumed when one works with standard logit errors.
    Keywords: Carbonated Soft Drinks, Differentiated products, discrete choice, Store coverage, structural model, price elasticities, welfare.
    JEL: L11 L62
    Date: 2009–07–21
  6. By: Krämer, Jan; Wiewiorra, Lukas
    Abstract: We model the main arguments of the net neutrality debate in a two-sided market framework with network congestion sensitive content providers and Internet consumers on each side, respectively. The platform is controlled by a monopolistic Internet service provider, who may choose to sell content providers prioritized access to its customers. We explicitly consider the adverse effects of traffic prioritization to the remaining best-effort class and find that network discrimination has overall positive effects on welfare, because congestion is better allocated to those content providers with congestion inelastic advertisement revenues. In the long-run, network discrimination leads to infrastructure investments in transmission capacity and encourages innovation on the content provider side. In the short-run, however, discrimination has no effect on innovation because the ISP expropriates the content providers' increased surplus through the price for priority access. This is the downside of network discrimination: Albeit total welfare is increased, content providers will--at least in the short-run--be worse off than under network neutrality.
    Keywords: Telecommunication; Network Neutrality; Two-Sided Market; Traffic Prioritization; Innovation; Broadband Investment
    JEL: L5 L96 D4
    Date: 2009–08–05
  7. By: Sjaak Hurkens; Doh-Shin Jeon
    Abstract: In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.
    Keywords: Mobile Penetration, Termination Charge, Access Pricing, Networks, Interconnection, Regulation, Telecommunications
    JEL: D4 K23 L51 L96
    Date: 2009–07
  8. By: Yu-Shan Lo; ;
    Abstract: The aim of this paper is to study different regulatory effects on termination charges and social welfare. We employ a framework with a fixed network and two mobile networks competing in a market to study the following regulatory regimes: collusive and social welfaremaximising reciprocity, uniform termination charge, asymmetric regulation, and direct calling price. We incorporate the idea of partial consumer ignorance when calling to a mobile user and allow the network operator to discriminate between on-net and off-net calls by setting differential calling prices. Compared to the uniform termination charge and asymmetric regulation, it is shown in this paper that the regulator can improve social welfare, without too much intervention, by imposing reciprocity on termination charges. We also find that with stronger consumer ignorance the regulator is more capable of improving social welfare. Further we show that, depending upon the extent of consumer ignorance, direct regulation of calling prices may be a welfare-improving alternative over regulation of termination charges.
    Keywords: Telecommunications; Consumer ignorance; Termination Charges, Regulation
    JEL: L13 L50 L96
  9. By: Ogura, Yoshiaki; Yamori, Nobuyoshi
    Abstract: The question of whether more competition among banks increases relationship banking, which is predicted to improve credit availability for informationally opaque firms in theory, is a controversial issue in the banking literature. By using firm-level survey data in Japan, this paper provides evidence for the negative correlation between lending competition and the provision of relationship banking . This paper raises the question whether fierce interbank competition is always beneficial for small firms.
    Keywords: relationship banking; lending competition
    JEL: L11 D82 G21
    Date: 2009–06–30
  10. By: Luigi Infante (Bank of Italy); Paola Rossi (Bank of Italy)
    Abstract: This paper investigates the effects of the increasing activity of foreign banks in Italy, distinguishing between credit granted to households and firms. Foreign banks display a differentiated degree of business expansion across the provinces, we exploit this variability to measure how foreign banks affect competition and test it with reference to: i) a market share instability index ; ii) interest rates; iii) the collateral requested. Our results, over the period 1997-2006, show that an increase in foreign intermediaries’ market share leads to a less stable market share index. As for mortgage loans to households, this enhanced competitive pressure implies a reduction in the average interest rate applied and an increase in the loans granted with respect to collateral. We do not find a significant impact on the average interest rate conditions applied to firms, although, in the most recent period, a reduction in the collateral on loans with longer maturity has emerged.
    Keywords: foreign banks, credit market competition
    JEL: G21 E44 L10
    Date: 2009–06
  11. By: Liran Einav; Amy Finkelstein; Jonathan Levin
    Abstract: We describe recent advances in the empirical analysis of insurance markets. This new research proposes ways to estimate individual demand for insurance and the relationship between prices and insurer costs in the presence of adverse and advantageous selection. We discuss how these models permit the measurement of welfare distortions arising from asymmetric information and the welfare consequences of potential government policy responses. We also discuss some challenges in modeling imperfect competition between insurers, and outline a series of open research questions.
    JEL: C51 D82
    Date: 2009–08
  12. By: Doh-Shin Jeon; Domenico Menicucci
    Abstract: In this paper we study, as in Jeon-Menicucci (2009), competition between sellers when each of them sells a portfolio of distinct products to a buyer having limited slots. This paper considers sequential pricing and complements our main paper (Jeon- Menicucci, 2009) that considers simultaneous pricing. First, Jeon-Menicucci (2009) find that under simultaneous individual pricing, equilibrium often does not exist and hence the outcome is often inefficient. By contrast, equilibrium always exists under sequential individual pricing and we characterize it in this paper. We find that each seller faces a trade-off between the number of slots he occupies and surplus extraction per product, and there is no particular reason that this leads to an efficient allocation of slots. Second, Jeon-Menicucci (2009) find that when bundling is allowed, there always exists an efficient equilibrium but inefficient equilibria can also exist due to pure bundling (for physical products) or slotting contracts. Under sequential pricing, we find that all equilibria are efficient regardless of whether firms can use slotting contracts, and both for digital goods and for physical goods. Therefore, sequential pricing presents an even stronger case for laissez-faire in the matter of bundling than simultaneous pricing.
    Keywords: Bundling, Portfolios, Slots (or Shelf Space), Pure Bundling, Slotting Contracts
    JEL: D4 K21 L13 L41 L82
    Date: 2009–08
  13. By: Deb, Rahul; Fenske, James
    Abstract: We devise a nonparametric test of strategic behavior in a multiproduct Cournot oligopoly. It is assumed that firms have cost functions that do not change over the period of observation but that market demand can change in each period. Market prices and firm-specific production quantities are observed and it is assumed that neither the inverse demand functions nor the cost functions are known. The driving assumptions of the test are that market inverse demand functions are decreasing and differentiable at each period and that cost functions are increasing and convex for each firm. Under these very general conditions, we show that this test imposes strong restrictions on observed data. We apply the test to the crude oil market and find that strategic behavior is strongly rejected.
    Keywords: Competitive behavior; Multiproduct Cournot oligopoly; Nonparametric test; Crude oil market; OPEC.
    JEL: D21 C14 D43 C72
    Date: 2009–08–01
  14. By: Aguirregabiria, Victor; Ho, Chun-Yu
    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 that may explain hub-and-spoke networks: (1) travelers may value the services associated with the scale of operation of an airline in the hub airport; (2) operating costs and entry costs in a route may decline with the airline's scale of operation in the 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 methodological contributions, we propose and apply a method to reduce the dimension of the state space in dynamic games, and a procedure to deal with the problem of multiple equilibria when using a estimated model to make counterfactual experiments. 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 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; Counterfactual experiments in models with multiple equilibria.
    JEL: C10 L93 L13 C63 L10 C35 C73
    Date: 2009–08–09
  15. By: David M. Cutler; Robert S. Huckman; Jonathan T. Kolstad
    Abstract: Prior studies suggest that, with elastically supplied inputs, free entry may lead to an inefficiently high number of firms in equilibrium. Under input scarcity, however, the welfare loss from free entry is reduced. Further, free entry may increase use of high-quality inputs, as oligopolistic firms underuse these inputs when entry is constrained. We assess these predictions by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for cardiac surgery in the state. We show that entry led to a redistribution of surgeries to higher-quality surgeons and that this entry was approximately welfare neutral.
    JEL: I10 I11 I18 L1 L15 L23 L5 L8
    Date: 2009–08
  16. By: Bianco, Dominique
    Abstract: This paper shows that the results of Bianco (2006) depend critically on the assumption that there are no difference between the intermediate goods share in final output, the returns of specialization and the degree of market power of monopolistic competitors. In this paper, we disentangle the market power parameter from the intermediate goods share in final output and the returns to specialization. The main result of this paper is the death of the inverted-U shape relationship between competition and growth. Indeed, we find a decreasing relationship between competition and growth which is due to the composition of two negative effects on growth : resource allocation and Schumpeterian effects.
    Keywords: Endogenous growth; Horizontal differentiation; Technological change; Imperfect competition.
    JEL: O41 O31
    Date: 2009–08

This nep-com issue is ©2009 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.