nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒11‒27
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Price and quality in spatial competition By Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
  2. Competition Among the Big and the Small By Shimomura, Ken-Ichi; Thisse, Jacques-François
  3. On Polarized Prices and Costly Sequential Search By Ruth G. Gilgenbach
  4. Why Do Sellers (Usually) Prefer Auctions? By Bulow, Jeremy I.; Klemperer, Paul
  5. Waiting to imitate: on the dynamic pricing of knowledge By Henry, Emeric; Ponce, Carlos
  6. Quality Certification with Geographical Indications, Trademarks and Firm Reputation By Menapace, Luisa; Moschini, GianCarlo
  7. The Determinants of Intra-Firm Trade By Corcos, Gregory; Irac, Delphine; Mion, Giordano; Verdier, Thierry
  8. Third-Degree Price Discrimination and Consumer Surplus By Simon Cowan
  9. A Dynamic Quality Ladder Model with Entry and Exit: Exploring the Equilibrium Correspondence Using the Homotopy Method By Borkovsky, Ron N.; Doraszelski, Ulrich; Kryukov, Yaroslav
  10. Endogenous Market Structure and Foreign Market Entry By James R. Markusen; Frank Stähler
  11. Network Effects, Market Structure and Industry Performance By Rabah Amir; Natalia Lazzati
  12. Switching Costs in Network Industries By Jiawei Chen
  13. A Simple Theory of Predation By Fumagalli, Chiara; Motta, Massimo
  14. Fines, Leniency and Rewards in Antitrust: an Experiment By Bigoni, Maria; Fridolfsson, Sven-Olof; Le Coq, Chloé; Spagnolo, Giancarlo
  15. Communication, Renegotiation, and the Scope for Collusion By Cooper, David J.; Kühn, Kai-Uwe
  16. Price Controls and Consumer Surplus By Bulow, Jeremy I.; Klemperer, Paul
  17. Consideration Sets and Competitive Marketing By Eliaz, Kfir; Spiegler, Ran
  18. Cash-out or flame-out! Opportunity cost and entrepreneurial strategy: Theory, and evidence from the information security industry By Ashish Arora; Anand Nandkumar
  19. A Fallacy of Division: The Failure of Market Concentration as a Measure of Competition in U.S. Banking By Jaap W.B. Bos; Ivy Chan; James W. Kolari; Jiang Yuan
  20. Digital Technology and the Allocation of Ownership in the Music Industry By Maija Halonen-Akatwijuka; Tobias Regner
  21. Do Retail Petrol Prices Rise More Rapidly Than They Fall in Australia’s Capital Cities? By Valadkhani, Abbas
  22. One TV, One Price? By Imbs, Jean; Mumtaz, Haroon; Ravn, Morten O.; Rey, Hélène
  23. Competition Policy Trends and Economic Growth: Cross-National Empirical Evidence By Clougherty, Joseph A.

  1. By: Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
    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: Income effects; Quality; Spatial competition
    JEL: D21 L13 L15
    Date: 2009–08
  2. By: Shimomura, Ken-Ichi; Thisse, Jacques-François
    Abstract: Armchair evidence shows that many industries are made of a few big commercial or manufacturing firms, which are able to affect the market outcome, and of a myriad of small family-run businesses with very few employees, each of which has a negligible impact on the market. Examples can be found in apparel, catering, publishers and bookstores, retailing, finance and insurances, and IT industries. We provide a new general equilibrium framework that encapsulates both market structures. Due to the higher toughness of the market, the entry of big firms leads them to sell more through a market expansion effect, which is generated by the exit of small firms. Furthermore, the level of social welfare increases with the number of oligopolistic firms because the procompetitive effect associated with the entry of a big firm dominates the resulting decrease in product variety.
    Keywords: monopolistic competition; oligopoly; product differentiation; welfare
    JEL: L13 L40
    Date: 2009–08
  3. By: Ruth G. Gilgenbach (Southern Methodist University)
    Abstract: This paper presents a homogenous goods duopoly model of costly sequential consumer search with three classes of consumers: costless searchers; moderately costly searchers; and consumers for whom search costs are extremely high--higher than the value they attach to the good. Under certain conditions, the mixed-strategy Nash equilibrium price distribution is one where low and high, but never moderate, prices are charged. In equilibrium, free searchers will always search for both prices, very costly searchers never will, and moderately costly searchers will engage in actual search with positive probability. Interestingly, the existence of consumers who do not themselves search for prices allows for the introduction of an equilibrium where costly search does occur.
    Keywords: Some, Sequential search, pricing, duopoly.
    JEL: D83 D43 L13 L11
    Date: 2009–11
  4. By: Bulow, Jeremy I.; Klemperer, Paul
    Abstract: We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether or not to enter the bidding. The sequential process is always more efficient. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry - precisely because of its inefficiency - it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc.
    Keywords: Auctions; entry; jump bidding; procurement; sequential sales
    JEL: D44 G34 L13
    Date: 2009–08
  5. By: Henry, Emeric; Ponce, Carlos
    Abstract: We study the problem of an inventor who brings to the market an innovation that can be legally copied. Imitators may 'enter' the market by copying the innovation at a cost or by buying from the inventor the knowledge necessary to reproduce and use the invention. The possibility of contracting affects the need for patent protection. Our results reveal that: (i) Imitators wait to enter the market and the inventor becomes a temporary monopolist; (ii) The inventor offers contracts which allow resale of the knowledge acquired by the imitators; (iii) As the pool of potential imitators grows large, the inventor may become a permanent monopolist.
    Keywords: contracting; knowledge trading; Patents; war of attrition
    JEL: C73 D23 L24 O31 O34
    Date: 2009–10
  6. By: Menapace, Luisa; Moschini, GianCarlo
    Abstract: This paper studies firm reputation as a mechanism to assure product quality in perfectly competitive markets in a context in which both certification and trademarks are available. Shapiro’s (1983) model of reputation is extended to reflect both collective and firm-specific reputations, and this framework is used to study certification and trademarks for food products with a regional identity, known as Geographical Indications (GIs). Our model yields two primary results. First, in markets with asymmetric information and moral hazard problems, credible certification schemes reduce the cost of establishing reputation and lead to welfare gains compared to a situation in which only private trademarks are available. Hence, certification improves the ability of reputation to operate as a mechanism for assuring quality. Second, the actual design of the certification scheme plays an important role in mitigating informational problems. From a policy perspective, our results have implications for the current debate and negotiations on GIs at the World Trade Organization and the ongoing product quality policy reform within the European Union. With regard to the instrument of choice to provide intellectual property protection for GIs, our model favors a sui generis scheme based on appellations over certification marks. Finally, our model supports the introduction of a scheme for “traditional products,” based exclusively on quality (rather than on geographical) requirements, the feasibility of which is currently being investigated by the European Union.
    Keywords: Asymmetric Information, Certification, Geographical Indications, Quality, Reputation
    Date: 2009–11–19
  7. By: Corcos, Gregory; Irac, Delphine; Mion, Giordano; Verdier, Thierry
    Abstract: How successful is the theory of the firm in explaining intra-firm trade? To answer this question we exploit a unique dataset of 1,141,393 French import transactions, spanning across firm, countries and products in 1999, and reporting whether a transaction is intra-firm. Overall, we find support for the main predictions of the partial equilibrium property-rights approach and further deliver facts that can be useful for further theoretical development. We document substantial within-industry heterogeneity while providing evidence of the importance of the firm dimension of sourcing choices as well as of the key distinction between the extensive and intensive margins.
    Keywords: extensive margin; firm heterogeneity; incomplete contracts; intensive margin; internationalization strategies; intra-firm trade; outsourcing; quality of institutions
    JEL: F12 F19 F23
    Date: 2009–11
  8. By: Simon Cowan
    Abstract: his paper presents simple conditions for monopoly third-degree price discrimination to have negative or positive effects on aggregate consumer surplus. Consumer surplus is often reduced by discrimination, for example when total welfare (consumer surplus and profits) falls. Surplus increases with discrimination, however, in two cases: first, when the marginal revenues without discrimination are close together and inverse demand in the market where the price will fall with discrimination is more convex; second, when inverse demand functions are highly convex and the discriminatory prices are close together.
    Keywords: Third-degree price discrimination, Monopoly, Consumer surplus
    JEL: D42 L12 L13
    Date: 2009
  9. By: Borkovsky, Ron N.; Doraszelski, Ulrich; Kryukov, Yaroslav
    Abstract: This paper explores the equilibrium correspondence of a dynamic quality ladder model with entry and exit using the homotopy method. The homotopy method facilitates exploring the equilibrium correspondence in a systematic fashion; it is ideally suited for investigating the economic phenomena that arise as one moves through the parameter space and is especially useful in games that have multiple equilibria. We discuss the theory of the homotopy method and its application to dynamic stochastic games. We then present the following results: First, we find that the more costly and/or less beneficial it is to achieve or maintain a given quality level, the more a leader invests in striving to induce the follower to give up; the more quickly the follower does so; and the more asymmetric is the industry structure that arises. Second, we show that the possibility of entry and exit alone gives rise to predatory and limit investment. Third, we illustrate and discuss the multiple equilibria that arise in the quality ladder model, highlighting the presence of entry and exit as a source of multiplicity.
    Keywords: computation; dynamic stochastic games; homotopy method; Markov perfect equillibrium
    JEL: C63 C73
    Date: 2009–11
  10. By: James R. Markusen; Frank Stähler
    Abstract: Models dealing with cross-border acquisitions versus greenfield investment usually assume that the entry of a foreign firm into a market has effects on the outputs of all domestic firms in that market, but exit or entry of local firms is not considered. The purpose of this paper is to re-examine the acquisition versus greenfield versus exporting question under fixed versus free entry assumptions for local firms. Our finding is that greenfield entry and exporting options are more attractive relative to acquisition when the local market structure adjusts to foreign entry through local entry or exit than when it is fixed. The entering foreign firm may do better or worse under free entry versus a fixed market structure depending on its optimal choice under the latter assumption.
    JEL: F12 F23
    Date: 2009–11
  11. By: Rabah Amir (Department of Economics, University of Arizona); Natalia Lazzati (Department of Economics, University of Arizona)
    Abstract: This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firm's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market. We also characterize the effects of market structure on industry performance, with an emphasis on departures from standard markets. As per-firm profits need not be monotonic in the number of competitors, we revisit the concept of free entry equilibrium for network industries. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustrative examples with closed-form solutions are also provided.
    Keywords: Network effects, demand-side externalities, Cournot oligopoly, supermodularity.
    JEL: C72 D43 L13 L14
    Date: 2009–09
  12. By: Jiawei Chen (Department of Economics, University of California-Irvine)
    Abstract: In network industries, switching costs have two opposite effects on the tendency towards market tipping. First, the fat-cat effect makes the larger firm price less aggressively and lose consumers to the smaller firm. This effect tends to prevent tipping. Second, the network-solidifying effect reinforces network effects by making a network size advantage longer-lasting and hence more valuable, thus intensifying price competition when networks are of comparable size. This effect tends to cause tipping. I find that when switching costs are high, the fat-cat effect dominates and an increase in switching costs can change the market from a tipping equilibrium to a sharing equilibrium. When switching costs are low, the network-solidifying effect dominates and an increase in switching costs can change the market from a sharing equilibrium to a tipping equilibrium. Policy intervention to remove switching costs in network industries may substantially reduce the likelihood of market tipping.
    Keywords: Switching Costs, Network Effects, Dynamic Oligopoly, Market Tipping, Pricing
    Date: 2009–10
  13. By: Fumagalli, Chiara; Motta, Massimo
    Abstract: We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.
    Keywords: Anticompetitive behaviour; Antitrust; Below-cost pricing; Exclusion
    JEL: K21 L12 L40
    Date: 2009–07
  14. By: Bigoni, Maria; Fridolfsson, Sven-Olof; Le Coq, Chloé; Spagnolo, Giancarlo
    Abstract: This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.
    Keywords: Cartels; Collusion; Competition policy; Coordination; Corporate crime; Desistance; Deterrence; Law enforcement; Organized crime; Price-fixing; Punishment; Whistleblowers
    JEL: C73 C92 K21 L41
    Date: 2009–08
  15. By: Cooper, David J.; Kühn, Kai-Uwe
    Abstract: We use experiments to analyze what type of communication is most effective in achieving cooperation in a simple collusion game. Consistent with the existing literature on communication and collusion, even minimal communication leads to a short run increase in collusion. However, in a limited message-space treatment where subjects cannot communicate contingent strategies, this initial burst of collusion rapidly collapses. When unlimited pre-game communication is allowed via a chat window, an initial decline in collusion is reversed over time. Content analysis is used to identify multiple channels by which communication improves collusion in this setting. Explicit threats to punish cheating prove to be by far the most important factor to successfully establish collusion, consistent with the existing theory of collusion. However, collusion is even more likely when we allow for renegotiation, contrary to standard theories of renegotiation. What appears critical for the success of collusion with renegotiation is that cheaters are often admonished in strong terms. Allowing renegotiation therefore appears to increase collusion by allowing for an inexpensive and highly effective form of punishment.
    Keywords: collusion; communication; experiments; guilt aversion; renegotiation; trust
    JEL: C72 C73 C92 D43 L13 L41
    Date: 2009–11
  16. By: Bulow, Jeremy I.; Klemperer, Paul
    Abstract: The condition for when a price control increases consumer welfare in perfect competition is tighter than often realised. When demand is linear, a small restriction on price only increases consumer surplus if the elasticity of demand exceeds the elasticity of supply; with log-linear or constant-elasticity, demand consumers are always hurt by price controls. The results are best understood - and can be related to monopoly-theory results - using the fact that consumer surplus equals the area between the demand curve and the industry marginal-revenue curve.
    Keywords: Allocative Efficiency; Consumer Welfare; marginal revenue; Microeconomic Theory; Minimum Wage; rationing; rent control
    JEL: D45 D6 D61
    Date: 2009–08
  17. By: Eliaz, Kfir; Spiegler, Ran
    Abstract: We study a market model in which competing firms use costly marketing devices to influence the set of alternatives which consumers perceive as relevant. Consumers in our model are boundedly rational in the sense that they have an imperfect perception of what is relevant to their decision problem. They apply well-defined preferences to a “consideration set”, which is a function of the marketing devices employed by the firms. We examine the implications of this behavioral model in the context of a competitive market model, particularly on industry profits, vertical product differentiation, the use of marketing devices and consumers’ conversion rates.
    Keywords: Advertising; Bounded rationality; Consideration sets; Irrelevant alternatives; Limited attention; Marketing; Persuasion
    JEL: C72 D11 D21 D43
    Date: 2009–09
  18. By: Ashish Arora; Anand Nandkumar
    Abstract: We analyze how entrepreneurial opportunity cost conditions performance. We depart from the literature on entrepreneurship which identifies survival with performance. Instead, many entrepreneurs aim for a cash-out (IPO or acquisition), especially in innovation based industries. Striving for a cash-out makes mistakes more likely and increases the probability of failure. High opportunity cost entrepreneurs will attempt to cash-out (IPO or friendly acquisition) quickly, even if it implies a higher risk of failure. Entrepreneurs with fewer outside alternatives may tend to linger on longer. We formalize this intuition with a simple model. Using a novel dataset of information security startups we find that entrepreneurs with high opportunity costs are not only more likely to cash-out but they are also more likely to fail. As well, our results confirm the predicted role of venture quality in conditioning the relationship between entrepreneurial opportunity cost and entrepreneurial performance.
    JEL: J4 L26 O3
    Date: 2009–11
  19. By: Jaap W.B. Bos; Ivy Chan; James W. Kolari; Jiang Yuan
    Abstract: Empirical literature and related legal practice using concentration as a proxy for competition measurement are prone to a fallacy of division, as concentration measures are appropriate for perfect competition and perfect collusion but not intermediate levels of competition. Extending the classic Cournot-type competition model of Cowling and Waterson (1976) and Cowling (1976) used to derive the Hirschman-Herfindahl Index (HHI) of market concentration, we propose an adaptation of this model that allows collusive rents for all, none, or some of the firms in a market. Application of our model to data for U.S. commercial banks in the period 1984-2004 confirms that concentration measures are unreliable competition metrics. While collusion is prevalent in the banking industry at the state level, the critical market shares at which market power is achieved, rents earned from collusion, and collusive concentration levels vary widely across states. These and other results lead us to conclude that a fallacy of division exists in concentration-based competition tests.
    Keywords: SCP hypothesis, competition, Cournot, conjectural variation, efficiency hypothesis
    JEL: G21 L11 L22
    Date: 2009–11
  20. By: Maija Halonen-Akatwijuka (University of Bristol); Tobias Regner (Max Planck Institute of Economics, Jena)
    Abstract: We apply the property rights theory of Grossman-Hart-Moore in the music industry and study the optimal allocation of copyright between the artists who create music and the labels who promote and distribute it. Digital technology opens up a role for new intermediaries. We find that entry of online platforms occurs only if they are sufficiently more productive in distribution than the incumbent label. Furthermore, entry leads to a change in bargaining positions and it can become optimal for the copyright to be shifted from the label to the artist.
    Keywords: property rights theory, copyright, internet, music industry
    JEL: D23 L22 L23 L82 L86
    Date: 2009–11–17
  21. By: Valadkhani, Abbas (University of Wollongong)
    Abstract: This paper examines the long-run and short-run determinants of unleaded petrol prices in Australia’s capital cities using monthly data to test whether prices respond asymmetrically to external shocks. In the long-run petrol prices are mainly determined by the Tapis crude oil and Singapore petrol prices. There is some evidence of asymmetric price adjustments in the short-run since petrol price increases have been mostly passed on to the consumer faster than price decreases in four capital cities. One can thus argue that there are a significant degree of market inefficiency and/or collusion, requiring closer government price monitoring and scrutiny.
    Keywords: Petrol prices; Asymmetric effects; Australia.
    JEL: C22 E31 L11
    Date: 2009
  22. By: Imbs, Jean; Mumtaz, Haroon; Ravn, Morten O.; Rey, Hélène
    Abstract: We use a unique dataset on television prices across European countries and regions to investigate the sources of differences in price levels. Our findings are as follows: (i) Quality is a crucial determinant of price differences. Even in an integrated economic zone as Europe, rich economies tend to consume higher quality goods. This effect accounts for the lion’s share of international price dispersion. (ii) Sizable international price differentials subsist even for the same television sets. The average bilateral price difference is as high as 80 euros, or 8% of the average TV price in our sample. (iii) EMU countries display lower price dispersion than non-EMU countries. (iv) Absolute price differentials and relative price volatility are positively correlated with exchange rate volatility, but not with conventional measures of transport costs. (v) Importantly we show brand premia are sizable. They differ markedly across borders, in a way that does not correlate with transport costs, nor exchange rate movements. Taken together, the evidence is consistent firms exploiting market power through brand values to price discriminate across borders.
    Keywords: border effects; brand perception; international and regional price differences
    JEL: F15 F23 F41
    Date: 2009–10
  23. By: Clougherty, Joseph A.
    Abstract: Motivated by the general lack of empirical scholarship concerning the cross-national environment for competition policy, I present measures here of the overall resources dedicated to competition policy and the merger policy work-load for thirty-two antitrust jurisdictions over the 1992-2007 period. The data allow analysing a number of perceived trends in competition policy over the last two decades, and allow the generation of some factual insights concerning these trends: e.g., the budgetary commitment to competition policy in the cross-national environment for antitrust has substantially increased over this period; budgetary increases appear to be commensurate with increased antitrust workloads; yet, the role of economics does not appear to have substantially increased relative to the role of law. Moreover, I am also able to provide some evidence that budgetary commitments to antitrust institutions yield economic benefits in terms of improved economic growth: i.e., higher budgetary commitments to competition policy are associated with higher levels per-capita GDP growth.
    Keywords: competition policy; growth; policy trends
    JEL: C23 K21 L40 O40
    Date: 2009–10

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