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on Industrial Competition |
| By: | Kurt R. Brekke (Department of Economics and Helth Economics Bergen, Norwegian School of Economics and Business Administration); Luigi Siciliani (Department of Economics and Centre for Health Economics, University of York, Heslington); Odd Rune Straume (Universidade do Minho - NIPE) |
| Abstract: | We study the relationship between competition and quality within a spatial competition framework where firms compete in prices and quality. We generalise existing literature on spatial price-quality competition along several dimensions, including utility functions that are non-linear in income and cost functions that are non-separable in output and quality. Our main message is that the scope for a positive relationship between competition and quality is underestimated in the existing literature. If we allow for income effects by assuming that utility is strictly concave in income, we find that lower transportation costs always lead to higher quality. The presence of income effects might also reverse a previously reported negative relationship between the number of firms and equilibrium quality. This reversal result is further strenghtened if there are cost substitutabilities between output and quality. Equilibrium quality provision is always less than socially optimal in the presence of income effects. |
| Keywords: | Spatial competition; Quality; Income effects. |
| JEL: | D21 L13 L15 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:21/2009&r=com |
| By: | HUANG Weihong (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore; Nanyang Technological University, Singapore) |
| Abstract: | The advantage of price-taking behavior in achieving relative profitability in oligopolistic quantity competition has been much appreciated recently from economic dynamics and evolutionary game theory, respectively. The current research intends to provide a direct economic interpretation as well as intuitive justification and further to build a linkage between different perspectives. In particular, a detailed illustration of an arbitrary oligopoly that produce a homogenous product is presented. So long as the outputs of other firms are fixed and the residual demand is downward sloping, for any two identical firms whose cost functions are convex, their output space can be divided symmetrically into mutually exclusive relatively profitability regimes. Furthermore, there exist infinitely many relative-profitability reactions for each firm in such “residual” duopoly, all of which intersect at the “residual” Walrasian equilibrium. This suggests that sticking to this dynamical equilibrium output constantly (i.e., the static Walrasian strategy) turns out to be a relative-profitability strategy at each period. On the other hand, regardless of what strategies its rival may take, a firm adopting price-taking strategy or more generally defined dynamic Walrasian strategies can achieve the relative profitability if an intertemporal equilibrium is reached. The methodology adopted and the conclusions arrived clarify the confusions and misunderstandings due to the different usages of same terminologies under different frameworks and generalize the previous available results in the literature to a higher level and a broader context. |
| Keywords: | Price-taking, Walrasian behavior, Relative profit, Oligopoly, Cournot, dynamic Walrasian strategy. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nan:wpaper:0903&r=com |
| By: | Andrei Dubovik (Erasmus University Rotterdam); Alexei Parakhonyak (Erasmus University Rotterdam) |
| Abstract: | We consider a dynamic (differential) game with three players competing against each other. Each period each player can allocate his resources so as to direct his competition towards particular rivals -- we call such competition selective. The setting can be applied to a wide variety of cases: competition between firms, competition between political parties, warfare. We show that if the players are myopic, the weaker players eventually loose the game to their strongest rival. Vice versa, if the players value their future payoffs high enough, each player concentrates more on fighting his strongest opponent. Consequently, the weaker players grow stronger, the strongest player grows weaker and eventually all the players converge and remain in the game. |
| Keywords: | selective competition; dynamic oligopolies; differential games |
| JEL: | C73 D43 |
| Date: | 2009–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090072&r=com |
| By: | Julian di Giovanni (International Monetary Fund); Andrei A. Levchenko (University of Michigan and International Monetary Fund) |
| Abstract: | Firm size follows Zipf's Law, a very fat-tailed distribution that implies a few large firms account for a disproportionate share of overall economic activity. This distribution of firm size is crucial for evaluating the welfare impact of macroeconomic policies such as barriers to entry or trade liberalization. Using a multi-country model of production and trade in which the parameters are calibrated to match the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the largest 50 economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade -- newly imported goods -- vanishes. The extensive margin of imports accounts for only about 3.5% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipf's Law, the large, inframarginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipf's Law the gains from a reduction in entry barriers are an order of magnitude larger, while the gains from trade liberalization are an order of magnitude smaller. |
| Keywords: | Zipf's Law, welfare, entry costs, trade barriers |
| JEL: | F12 F15 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:591&r=com |
| By: | Virag, Gabor |
| Abstract: | If agents engage in resale, it changes bidding in the initial auction. Resale offers extra incentives for bidders with lower valuations to win the auction. However, if resale markets are not frictionless, then use values affect bidding incentives, and stronger bidders still win the initial auction more often than weaker ones. I consider a first price auction followed by a resale market with frictions, and con rm the above statements. While intuitive, our results differ from the two bidder case of Hafalir and Krishna (2008): the two bidders win with equal probabilities regardless of their use values. The reason is that they face a common (resale) price at the relevant margin, a property that fails with more than two bidders. Numerical simulations show that asymmetry in winning probabilities increases in the number of bidders, and in large markets resale loses its e¤ect on allocations. |
| Keywords: | auction; resale |
| JEL: | D44 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17094&r=com |
| By: | Francisco Martínez-Sánchez (Universidad de Alicante) |
| Abstract: | In this paper we analyze firms' ability to tacitly collude on pricesin an infinitely repeated duopoly game of vertical productdifferentiation. We show that firms collude if and only if their discountfactor is high enough, i.e. if they value future profits sufficiently. We alsoshow that a lower cost of copying facilitates collusion but that a higherquality of the copy hinders collusion. Thus, the overall effect of thesenew characteristics of copies made by consumers is ambiguous. |
| Keywords: | Collusion, competition, piracy, consumers, cost of copying, |
| JEL: | D40 K42 L13 L40 O34 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2009-20&r=com |
| By: | Tropéano, J.P.; Trommetter, M. |
| Abstract: | The authors develop a theoretical model where two competing firms need access to basic knowledge that only one firm owns. They determine the impact of an imperfect property right on the incentive to transfer that knowledge to the competitor. They compare these transfer strategies. (i) Patenting may lead to litigation costs that depend on the competition toughness. (ii) Keeping the knowledge secret involves no licence revenue but ensures a monopoly profit. (iii) The firm can also coooperate with the competitor and thereby avoids litigation. They show that whenever competition between both firms is low, making patentable basic knowledge promotes knowledge transfer through research cooperation. |
| Keywords: | INNOVATION;SECRET;PATENT;cooperation;KNOWLEDGE SHARING |
| JEL: | D23 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:200904&r=com |
| By: | Toshihiro Matsumura; Noriaki Matsushima; Susumu Cato |
| Abstract: | This paper formulates a duopoly model in which firms care about relative profits as well as their own profits. Our purpose is to investigate the relationship between the weight of relative performance and R&D expenditure. We find a non-monotone relationship between the weight of relative performance in their objectives and their R&D levels. Both highly reciprocal (altruism) and negative reciprocal attitudes yield high levels of R&D, while the intermediate situations yield low levels of R&D. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0752&r=com |
| By: | Bronwyn H. Hall; Josh Lerner |
| Abstract: | Evidence on the “funding gap“ for investment innovation is surveyed. The focus is on financial market reasons for underinvestment that exist even when externality-induced underinvestment is absent. We conclude that while small and new innovative firms experience high costs of capital that are only partly mitigated by the presence of venture capital, the evidence for high costs of R&D capital for large firms is mixed. Nevertheless, large established firms do appear to prefer internal funds for financing such investments and they manage their cash flow to ensure this. Evidence shows that there are limits to venture capital as a solution to the funding gap, especially in countries where public equity markets for VC exit are not highly developed. We conclude by suggesting areas for further research. |
| JEL: | G24 G32 O32 O38 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15325&r=com |
| By: | Nicholas Economides (Stern School of Business, NYU); Ioannis Lianos (Faculty of Laws, University College London) |
| Abstract: | The Microsoft cases in the United States and in Europe have been influential in determining the contours of the substantive liability standards for dominant firms in US antitrust law and in EC Competition law. The competition law remedies that were adopted, following the finding of liability, seem, however, to constitute the main measure for the “success” of the case(s). An important disagreement exists between those arguing that the remedies put in place failed to address the roots of the competition law violation identified in the liability decision and others who advance the view that the remedies were far-reaching and that their alleged failure demonstrates the weakness of the liability claim. This study evaluates these claims by examining the variety of remedies that were finally imposed in the European Microsoft cases, from a comparative perspective. The study begins with a discussion of the roots of the Microsoft issues in Europe and the consequent choice of a remedial approach by the Commission and the Court. It then explores the effectiveness of the remedies in achieving the aims that were set. The non-consideration of the structural remedy in the European case and the pros and cons of developing such a remedy in the future are briefly discussed before more emphasis is put on alternative remedies (competition and non-competition law ones) that have been suggested in the literature. The study concludes by discussing the fit between the remedy and the theory of consumer harm that led to the finding of liability and questions a total dissociation between the two. We believe that it is important to think seriously about potential remedies before litigation begins. However, we do not require an ex ante identification of an appropriate remedy by the plaintiffs, since this could lead to underenforcement or overenforcement. |
| Keywords: | antitrust, remedies, Microsoft, complementarity, innovation, efficiency, monopoly, oligopoly, media player, interoperability, Internet browser |
| JEL: | K21 L41 L42 L12 L86 L63 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0905&r=com |
| By: | Gábor Pellényi; Tamás Borkó |
| Abstract: | We examine the impact of bank competition and institutional factors on net firm entry in a sample of European manufacturing industries over the 1995-2006 period. Taking into account industry differences in the need for external finance, we find that bank competition helps firm entry. In addition, better institutions - especially legal structure and property rights - also have a positive impact, particularly through a better functioning financial system. |
| Keywords: | market structure, banks, market entry, manufacturing, financial development |
| JEL: | D4 G21 L11 L60 O16 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin05010&r=com |
| By: | Gurnain Kaur Pasricha (Hong Kong Institute for Monetary Research, University of California, Santa Cruz) |
| Abstract: | In the debate on the benefits and costs of international financial integration recent literature has emphasized thresholds in the development of domestic markets as preconditions to benefitting from international integration. This paper offers an alternative view - that of development of competition in domestic markets as an aide to de-facto openness. Lack of competition in domestic financial systems may prevent countries from reaping the benefits of international integration simply because they prevent countries from being integrated in a meaningful way - that of price equalization. Using a new index of de facto financial openness, this paper explores the trends in and determinants of cross border integration of interbank markets. It finds a strong link between greater competitiveness in domestic banking and international integration. The level of de jure controls, volatility and institutions matter for price integration but their importance differs between developed and developing countries. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:242009&r=com |