nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒10‒24
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Input pricing by an upstream monopolist into imperfectly competitive downstream markets By Ioannis Pinopoulos
  2. Search, Design and Market Structure By Heski Bar-Isaac; Guillermo Caruana; Vicente Cuñat
  3. Product Durability in Markets with Consumer Lock-in By Tobias Langenberg
  4. Spurious complexity and common standards in markets for consumer goods By Alexia Gaudeul; Robert Sugden
  5. Competitive Pressure and the Adoption of Complementary Innovations By Tobias Kretschmer; Eugenio Miravete; José Pernías
  6. "Hotelling's Spatial Competition Reconsidered" By Takatoshi Tabuchi
  7. Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium By Jacob A. Bikker; Sherrill Shaffer; Laura Spierdijk
  8. Welfare Enhancing Mergers Under Product Differentiation By Tina Kao; Flavio Menezes
  9. Endogenous Mergers Under Multi-Market Competition By Tina Kao; Flavio Menezes
  10. The search for trading partners and the cross-border merger decision. By T.Huw Edwards; Ben Ferrett
  11. Cross-border Mergers and Hollowing-out By Oana Secrieru; Marianne Vigneault
  12. Competition in two-sided markets with common network externalities By Cremer, Helmuth; Bardey, David; Lozachmeur, Jean-Marie
  13. Location Decisions of Competing Platforms By Konstantinos Serfes; Eleftherios Zacharias
  14. Participation in a Platform Ecosystem: Appropriability, Competition, and Access to the Installed Base By Peng Huang; Marco Ceccagnoli; Chris Forman; D.J. Wu
  15. Software Innovation and the Open Source threat By German Lambardi
  16. Broadband User Discrimination and the Net Neutrality Debate By Hong Guo; Subhajyoti Bandyopadhyay; Hsing K. Cheng
  17. The Effects of International Simple Resale on Prices in International Telecommunications Markets By Jason Pearcy; Scott J. Savage
  18. Bookshop, blockbusters and readers’ tastes: a new appraisal of the fixed book price By Perona, Mathieu
  19. The Economics of Open Air Markets By John A. List
  20. Equal Strength or Dominant Teams: Policy Analysis of NFL By Biner, Burhan
  21. Competition policy and productivity growth: An empirical assessment By Paolo Buccirossi; Lorenzo Ciari; Tomaso Duso; Giancarlo Spagnolo; Cristiana Vitale

  1. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: In downstream markets where entry is independent from profitability conditions, the upstream supplier’s optimal pricing policy is invariant with respect to downstream market structure. This price invariant result, however, is reversed when there is free entry in downstream market. When entry is endogenously dependent on profitability conditions, the upstream supplier’s price-setting behavior depends on the number of operative firms in the final good market. We show that the upstream supplier charges a higher input price under a free entry situation in downstream market than under a no-entry condition. We also show that a higher input price is set under Bertrand competition than under Cournot competition in a downstream market with free entry.
    Keywords: Vertical relationship; Pricing; Competition; Oligopoly; Free entry.
    JEL: L11 L13 D43
    Date: 2009–10
  2. By: Heski Bar-Isaac (Stern School of Business, NYU); Guillermo Caruana (CEMFI); Vicente Cuñat (London School of Economics)
    Abstract: The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.
    Date: 2009–09
  3. By: Tobias Langenberg (Free University of Berlin)
    Abstract: This paper examines a two-period duopoly where consumers are locked-in by switching costs that they face in the second period. The paper's main focus is on the question of how the consumer lock-in affects the firms' choice of product durability. We show that firms may face a prisoners' dilemma situation in that they simultaneously choose non-durable products although they would have higher profits by producing durables. From a social welfare perspective, firms may even choose an inefficiently high level of product durability.
    Keywords: Consumer Lock-in, Product Durability, Duopoly
    JEL: L13 D21
    Date: 2009–10
  4. By: Alexia Gaudeul (Jena Graduate School, Friedrich Schiller University Jena); Robert Sugden (Centre for Competition Policy and School of Economics, University of East Anglia)
    Abstract: It has been argued that cognitively constrained consumers respond sub-optimally to complex decision problems, and that firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. We model a countervailing force. Restricting one's choices to the most easily comparable options is a psychologically well-attested heuristic. Consumers who use this heuristic favour firms that follow common conventions about tariff structures. Because a 'common standard' promotes price competition, a firm's use of it signals that it offers value for money, validating the heuristic. This allows an equilibrium in which firms use common standards and set competitive prices.
    Keywords: common standard, spurious complexity, cognitive limitations
    JEL: D83 L13 L51
    Date: 2009–10–15
  5. By: Tobias Kretschmer (Institute for Communication Economics, LMU Munich); Eugenio Miravete (Department of Economics, University of Texas at Austin); José Pernías (Department of Economics, Universidad Jaume I de Castellón)
    Abstract: Liberalization of the European automobile distribution system in 2002 limits the ability of manufacturers to impose vertical restraints, leading to a substantial restructuring of the industry and increasing the competitive pressure among dealers. We estimate an equilibrium model of profit maximization to evaluate how dealers change their innovation strategies with this regime change. Using French data we evaluate the existence of complementarities among adoptions of innovations and the scale of production. We conclude that as firms expand their scale of production they concentrate their effort in one type of innovation only. Results are robust to the existence of unobserved heterogeneity.
    Keywords: Competitive Pressure, Complementarity, Product and Process Innovation
    JEL: C35 L86 O31
    Date: 2009–09
  6. By: Takatoshi Tabuchi (Faculty of Economics, University of Tokyo)
    Abstract: Oligopoly models are usually analyzed in the context of two firms anticipating that market outcomes would be qualitatively similar in the case of three or more firms. This is not an exception in the literature on Hotelling's location-then-price competition. In this paper, we show that the main findings in Hotelling's duopoly, brand bunching and the max-min principle of product differentiation no longer hold once three or more firms are allowed to enter the market. That is, oligopolists with three or more firms proliferate brands and neither maximize nor minimize product differentiation.
    Date: 2009–09
  7. By: Jacob A. Bikker; Sherrill Shaffer; Laura Spierdijk
    Abstract: The Panzar-Rosse model has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample covering more than 110,000 bank-year observations on almost 18,000 banks in 67 countries during 1986-2004.
    Date: 2009–10
  8. By: Tina Kao; Flavio Menezes
    Abstract: This paper considers a model of duopoly with differentiated products to examine the welfare effects of a merger between two asymmetric firms. We find that for quantity competition, the parameter range for welfare enhancing merger widens if the products are closer substitutes. On the other hand, mergers are never welfare enhancing in this setting when firms compete in prices.
    JEL: L11 L12
    Date: 2009–10
  9. By: Tina Kao; Flavio Menezes
    Abstract: This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play out. The first is the selection effect, which acts to increase welfare, as shutting down the relatively more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works to increase prices and, therefore, decrease consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.
    JEL: L11 L13 L44
    Date: 2009–10
  10. By: T.Huw Edwards (Dept of Economics, Loughborough University); Ben Ferrett (Dept of Economics, Loughborough University)
    Abstract: We investigate the merger decision between two firms in an outsourcing relationship, one upstream and the other downstream. The inter-firm relationship is subject both to ex ante matching uncertainty and to contractual efficiency issues. Cross-border merger is assumed to solve the latter problem, but at the expense of curtailing the match-searching process. The trade-off between these two factors is assumed to determine the dynamics of foreign direct investment in this kind of industry.
    Keywords: Trade, search, outsourcing, merger.
    JEL: F12 F23
    Date: 2009–10
  11. By: Oana Secrieru; Marianne Vigneault
    Abstract: The purpose of our paper is to examine the profitability and social desirability of both domestic and foreign mergers in a location-quantity competition model, where we allow for the possibility of hollowing-out of the target firm. We refer to hollowing-out as the situation where the target firm is shut down following a merger with a domestic or foreign acquirer. Our analysis shows that mergers have ambiguous effects on the profitability of merged firms and on social welfare. Hollowing-out occurs in very few instances in our framework. One such instance is the case of firms located side-by-side in the same cluster and only if it is very costly to transfer the more efficient technology of the acquirer to the domestic target firm. This happens regardless of the origin of the acquirer, domestic or foreign. We also show that there are instances when a cross-border merger with hollowing out is not profitable but it is socially desirable.
    Keywords: Economic models; International topics; Market structure and pricing
    JEL: D43 G34 L41 L13
    Date: 2009
  12. By: Cremer, Helmuth; Bardey, David; Lozachmeur, Jean-Marie
    Abstract: We study competition in two sided markets with common network externality rather than with the standard inter-group e¤ects. This type of externality occurs when both groups bene…t, possibly with di¤erent intensities, from an increase in the size of one group and from a decrease in the size of the other. We explain why common externality is relevant for the health and education sectors. We focus on the symmetric equilibrium and show that when the externality itself satis…es an homogeneity condition then platforms’ pro…ts and price structure have some speci…c properties. Our results reveal how the rents coming from network externalities are shifted by platforms from one side to other, according to the homogeneity degree. In the speci…c but realistic case where the common network externality is homogeneous of degree zero, platform’s pro…t do not depend on the intensity of the (common) network externality. This is in sharp contrast to conventional results stating that the presence of network externalities in a two-sided market structure increases the intensity of competition when the externality is positive (and decreases it when the externality is negative). Prices are a¤ected but in such a way that platforms only transfer rents from consumers to providers
    Date: 2009–10–15
  13. By: Konstantinos Serfes (LeBow College of Business, Drexel University); Eleftherios Zacharias (Athens University of Economics and Business)
    Abstract: There are examples of entry in two-sided markets, where first entrants occupy a `central location' and serve agents with `intermediate tastes', while later entrants are niche players. Why would the first entrant choose to become a `general' platform, given that later entrants will not have enough room for differentiation, resulting in an intense price competition? This one-sided market logic may not apply in a two-sided market. A key difference in a two-sided market, stemming from the presence of cross-group network externalities, is stronger demand creation. We develop a model which can deliver the above mentioned empirical observation, when the network externalities are intermediate. On the other hand, when externalities are low, our model predicts that differentiation will be maximum, as it would be in a one-sided market. Finally, for strong externalities only one platform is active and locates at the center.
    Keywords: Product Selection; Two-sided markets; Endogenous Locations; Cross-group Network Externalities.
    JEL: D43 L13
    Date: 2009–08
  14. By: Peng Huang (College of Management, Georgia Tech); Marco Ceccagnoli (College of Management, Georgia Tech); Chris Forman (College of Management, Georgia Tech); D.J. Wu (College of Management, Georgia Tech)
    Abstract: In this study we examine the antecedents of small independent software vendor (ISV) decisions to join a platform ecosystem. Using data on the history of partnering activities from 1201 ISVs from 1996 to 2004, we find that appropriability strategies based on intellectual property rights and the possession of downstream complementary capabilities by ISVs are positively related to partnership formation, and ISVs use these two mechanisms as substitutes to prevent expropriation by the platform owner. In addition, we show that greater competition in downstream product markets between the ISV and the platform owner is associated with a lower likelihood of partnership formation, while the platform’s penetration into the ISV’s target industries is positively associated with the propensity to partner. The results highlight the role of innovation appropriation, downstream complementary capabilities, and collaborative competition in the formation of a platform ecosystem.
    Keywords: platform ecosystem, partnership, intellectual property rights, downstream capabilities
    JEL: L26 L86 O33 O34
    Date: 2009–09
  15. By: German Lambardi (Toulouse School of Economics)
    Abstract: In this paper I study how innovation investment in a software duopoly is affected by the fact that one of the firms is, or might become Open Source. Firms can either be proprietary source (PS) or open source (OS) and have different initial technological levels. An OS firm is a for profit organization whose basic software is OS and it is distributed for free. The OS firm, however, is able to make profits from selling complementary software and, on the cost side, it receives development help from a community of users. I first compare a duopoly composed by two PS firms with a mixed duopoly of a PS and OS firm and I find that a PS duopoly might generate more innovation than a mixed duopoly if the initial technological gap between firms is small. However if this gap is large, a PS duopoly generates less innovation than a mixed duopoly. I then extend the setting to allow PS firms to switch to OS or to remain PS. A PS firm wants to become OS if it gets behind enough in the technological race against a competitor. I find that the outside option to become OS might soften competition on innovation since the technological leader prefers to reduce his innovation investment to avoid the OS switch of the follower. Therefore, although the switch to OS could generate higher investment levels ex-post it might generate lower investment ex-ante. In this context I find that a government subsidy to OS firms could be potentially harmful for innovation.
    Keywords: Software Market, Open Source, Innovation Incentives
    JEL: L13 L17 O31 O38
    Date: 2009–09
  16. By: Hong Guo (Mendoza College of Business, University of Notre Dame); Subhajyoti Bandyopadhyay (Warrington College of Business Administration, University of Florida); Hsing K. Cheng (Warrington College of Business Administration, University of Florida)
    Abstract: The net neutrality debate has brought out economic rationale for and against a variety of proposals of the broadband service providers to differentiate between different classes of users. Broadband users are characterized by the differing amounts of content they request online, as well as their valuation for such content. A broadband service provider (BSP) has two potential instruments for user discrimination – price discrimination and traffic prioritization (or degradation). We model six different pricing and prioritization options that cover many of the strategies that actual BSPs have adopted in the marketplace. By comparing these options, we find that imposing net neutrality increases the BSP?s profit if the BSP price discriminates different consumer groups. If net neutrality is not imposed, however, the BSP might still prefer a net neutrality outcome depending on the various parameter values. These and other results will be useful both for the broadband service providers as they mull over the introduction of the different pricing strategies and for policymakers who are dealing with the net neutrality issue.
    Keywords: Net neutrality, Internet access pricing, congestion pricing, traffic prioritization, public policy, market regulation
    JEL: R4 D4 L5 L86
    Date: 2009–08
  17. By: Jason Pearcy (Tulane University); Scott J. Savage (University of Colorado at Boulder)
    Abstract: This paper empirically investigates the effect of international simple resale (ISR) authorization on the prices for international message telephone service (IMTS). We compile a firm-level panel data set for over 200 United States-foreign country bilateral markets from 1995 to 2004. These data provide detailed information on prices, variable costs, fixed costs and market shares for 75 firms for each bilateral market, as well as the timing of ISR authorization by the Federal Communications Commission for each bilateral market. Estimates from a difference-in-differences model show that ISR authorization, and the associated lowering of barriers to entry, almost always results in lower prices for all markets. Additionally, we find evidence that ISR authorization alters the relationship between market concentration and price. Prior to ISR authorization more concentrated markets have higher prices. ISR authorization dampens this effect and in some cases reverses the relationship so that market concentration is negatively correlated with IMTS prices set by incumbent firms.
    Keywords: barriers to entry, competition, international message telephone prices, international simple resale, prices
    JEL: L1 L13 L96
    Date: 2009–09
  18. By: Perona, Mathieu
    Abstract: This paper models the book retail market as a dual market. Consumers choose between competitively retailed, well-identified blockbusters and going to a monopoly bookshop to find the best match for their tastes. I show that uncertainty about the status on a given title (will it be a blockbuster or not?) places publishers in front of a trade-off between low prices (valuable if they get a blockbuster) and high prices (in the other case). The main effect of this trade-off is that the presence of blockbusters almost never lead to bookshop foreclosure by blockbusters and that a higher number of blockbusters leads to lower price for all books and increased consumer surplus. A fixed book price mitigates the effects of blockbuster, transferring suplus from blockbuster byuers towards publishers, and leads to perfect matching between readers and tastes. When the number of titles and of blockbusters becomes largers however, the situations with and without FBP converge.
    Keywords: books; fixed book price; book economy; resale price maintenance
    JEL: L11 L42 Z11
    Date: 2009–10
  19. By: John A. List
    Abstract: Despite their current prevalence and historical significance, little is known about the economics of open air markets. This paper uses open air markets as a natural laboratory to provide initial insights into the underlying operation of such markets. Using data on thousands of individual transactions gathered from May 2005- August 2008, I report several insights. First, the natural pricing and allocation mechanism in open air markets is capable of approaching full efficiency, even in quite austere conditions. Yet, a second result highlights the fragility of this finding: allowance of explicit seller communication frustrates market efficiency in a broad array of situations. Making use of insights gained from a “mole†in the marketplace, a third set of results revolves around economic questions pertaining to collusive arrangements that are otherwise quite difficult to investigate. Overall, I find data patterns that are consistent with certain theoretical predictions, as the evidence suggests that i) cheating rates increase as the coalition is expanded, ii) sellers cheat less when they have collusive arrangements in several spatially differentiated markets, and iii) sellers cheat more when they are experiencing periods of abnormally high profits. These results follow from a combination of insights gained from building a bridge between the lab and the naturally-occurring environment. By doing so, the study showcases that in developing a deeper understanding of economic science, it is desirable to take advantage of the myriad settings in which economic phenomena present themselves.
    JEL: C9 C91 C92 C93 L4
    Date: 2009–10
  20. By: Biner, Burhan
    Abstract: In North America, professional sports leagues operate mostly as cartels. They employ certain policies such as revenue sharing, salary caps to ensure that teams get high revenues and players get high wages. There are two major hypotheses regarding the talent distribution among the teams that would maximize the total revenues, dominant teams rule and equal strength team rule. This paper examines the revenue structure of National Football League and proposes policy recommendations regarding talent distribution among the teams. By using a unique, rich data set on game day stadium attendance and TV ratings I am able to measure the total demand as a function of involved teams’ talent levels. Reduced form regression results indicates that TV viewers are more interested in close games, on the other hand stadium attendees are more interested in home teams’ dominance. In order to identify the true effects of possible policy experiments, I estimate the parameters of the demand for TV as functions of team talent , fixed team and market variables by using partial linear model described as in Yatchew (1998) which uses non-parametric and difference-based estimators. I then estimate the demand for stadium attendance using random coefficients model by using normative priors for the 32 cities that hosts the teams. Estimated demand for TV ratings and stadium attendance corroborates the findings of reduced form regressions, stadium demand and TV demand working against each other. We therefore propose a “somewhat” equal strength team policy where big market teams has a slight advantage over the others. Total revenues of the league is maximized under such a policy.
    Keywords: Perfect Competition; Dominant Team; Cartels
    JEL: C14 C34 L52 L83
    Date: 2009–03–25
  21. By: Paolo Buccirossi; Lorenzo Ciari; Tomaso Duso; Giancarlo Spagnolo; Cristiana Vitale
    Abstract: This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy as measured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities, to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional set up and antitrust activities (rather than merger control). The effect is strengthened by a good legal system, suggesting complementarities between competition policy and the efficiency of law enforcement institutions. <br> <br> <i>ZUSAMMENFASSUNG - (Wettbewerbspolitik und Produktivitätswachstum: Eine empirische Bewertung) <br>In diesem Beitrag untersuchen wir die Effektivität von Wettbewerbspolitik anhand der empirischen Schätzung ihrer Auswirkung auf das totale Faktorproduktivitätswachstum (TFP) für 22 Branchen in 12 OECD-Ländern über den Zeitraum 1995-2005. Wir finden eine robuste positive und statistisch signifikante Wirkung der Wettbewerbspolitik, welche von neu erstellten Indizes gemessen wird. Wir präsentieren unterschiedliche Argumente und Ergebnisse basierend auf Instrumental-Variablen Schätzern sowie Nichtlinearitäten, um den geschätzten Zusammenhang als kausal interpretieren zu können. Auf einer disaggregierten Ebene aufgeschlüsselt ist die Auswirkung auf das TFP-Wachstum besonders stark für spezifische Aspekte der Wettbewerbspolitik, welche eher mit deren institutionellen Aufbau und kartellrechtlichen Tätigkeiten in Zusammenhang stehen als mit der Fusionskontrolle. Wir zeigen, dass der gemessene Effekt durch gute Rechtssysteme gestärkt wird, was auf Komplementaritäten zwischen Wettbewerbspolitik und der Effizienz der Justiz hindeutet.<i>
    Keywords: Competition Policy, Productivity Growth, Institutions, Deterrence, OECD
    JEL: L4 K21 O4 C23
    Date: 2009–10

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