nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒01‒10
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Costly horizontal differentiation By João Correia-da-Silva; Joana Pinho
  2. Upstream Competition between Vertically Integrated Firms By Marc Bourreau; Johan Hombert; Jérôme Pouyet; Nicolas Schutz
  3. (In)efficient trading forms in competing vertical chains By Emmanuel Petrakis; Chrysovalantou Miliou; Nikos Vettas
  4. Anticompetitive vertical mergers waves By Johan Hombert; Jérôme Pouyet; Nicolas Schutz
  5. Bargaining power and supply base diversification By WAN, Zhixi; Beil, Damian R.
  6. Model for Studying Commodity Bundling with a Focus on Consumer Preference By Jungwoo Shin; Chang Seob Kimi; Jongsu Lee
  7. Predatory Pricing, Recoupment, and Consumers’ Reaction By Lisa Bruttel; Jochen Glöckner
  8. Does cartel leadership facilitate collusion? By Marc Escrihuela-Villar
  9. Monopoly Price Discrimination and Demand Curvature. By Iñaki Aguirre; Simon Cowan; John Vickers
  10. Joan Robinson Was Almost Right:: Output under Third-Defree Price Discrimination. By Iñaki Aguirre
  11. The Signaling Role of Prices: Cournot By Wassim DAHER; Leonard J. MIRMAN; Marc Santugini
  12. Incomplete Regulation, Competition and Entry in Increasing Returns to Scale Industries By Sara BIANCINI
  13. Persistence of and interrelation between horizontal and vertical technology alliances By Belderbos, Rene; Gilsing, Victor; Lokshin, Boris
  14. Firm boundaries and buyer-supplier match in market transaction: IT system procurement of U.S. credit unions By Yukako Ono; Junichi Suzuki
  16. The economic performance of cartels: evidence from the New Deal U.S. sugar manufacturing cartel, 1934-74 By Benjamin Bridgman; Shi Qi; James A. Schmitz, Jr.

  1. By: João Correia-da-Silva (CEF.UP and Faculdade de Economia, Universidade do Porto); Joana Pinho (Faculdade de Economia, Universidade do Porto)
    Abstract: We study the effect of quadratic differentiation costs in the Hotelling model of endogenous product differentiation. The equilibrium location choices are found to depend on the magnitude of the differentiation costs (relatively to the transportation costs supported by consumers). When the differentiation costs are low, there is maximum differentiation. When they are intermediate, there is partial differentiation, with a degree of differentiation that decreases with the differentiation costs. When they are above a certain threshold, there is no equilibrium. In any case, the socially optimal degree of differentiation is always lower than the equilibrium level. We also study the case of collusion between firms. If firms can combine locations but not prices, they locate asymmetrically when differentiation costs are high and choose maximum differentiation when they are low. When collusion extends to price setting, there is partial differentiation.
    Keywords: Costly product differentiation, Spatial competition, Hotelling model
    JEL: D43 L13 R32
    Date: 2009–12
  2. By: Marc Bourreau (Institut Télécom - Télécom ParisTech - Télécom ParisTech, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Johan Hombert (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE); Jérôme Pouyet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPR - (-)); Nicolas Schutz (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand result may not obtain, and the input may be priced above marginal cost in equilibrium, which is detrimental to consumers' surplus and social welfare. We obtain that these partial foreclosure equilibria are more likely to exist when downstream competition is fierce. We then use our model to assess the impact of several regulatory tools in the telecommunications industry.
    Keywords: Vertical foreclosure, vertically-related markets, telecommunications.
    Date: 2009–12–09
  3. By: Emmanuel Petrakis (Department of Economics, University of Crete, Greece); Chrysovalantou Miliou (Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126, Getafe (Madrid)); Nikos Vettas (Athens University of Economics and Business)
    Abstract: We study competing vertical chains where upstream and downstream firms bargain over their form and terms of trading. Both (conditionally) inefficient wholesale price contracts and efficient contracts that take the form of price-quantity bundles (and not of two-tariffs) arise in equilibrium under different parameter configurations. Changes in bargaining power distribution affect market outcomes by altering the trading terms and, more importantly, the trading form. As a result, a firm might benefit by a reduction in its bargaining power and consumers could benefit from an increase in the downstream �countervailing power� or from a more uneven bargaining power distribution.
    Keywords: Vertical chains; strategic contracting; bargaining; two-part tariffs; price-quantity bundles; wholesale prices; vertical integration
    JEL: L42 L14 L13 L22 L81
    Date: 2009–12–08
  4. By: Johan Hombert (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE); Jérôme Pouyet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPR - (-)); Nicolas Schutz (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper develops an equilibrium model of vertical mergers. We show that competition on an upstream market between integrated firms only is less intense than in the presence of unintegrated upstream firms. Indeed, when an integrated firm supplies the upstream market, it becomes a soft downstream competitor to preserve its upstream profits. This benefits other integrated firms, which may therefore choose not to cut prices on the upstream market. This mechanism generates waves of vertical mergers in which every upstream firm integrates with a downstream firm, and the remaining unintegrated downstream firms obtain the input at a high upstream price. We show that these anticompetitive vertical mergers waves are more likely when downstream competition is fiercer.
    Date: 2009–12–09
  5. By: WAN, Zhixi; Beil, Damian R.
    Abstract: In this paper, the authors examine a supply base diversification problem faced by a buyer who periodically holds auctions to award short term supply contracts among a cohort of suppliers (i.e., the supply base). To mitigate significant cost shocks to procurement, the buyer can diversify her supply base by selecting suppliers from different regions. The authors find that the optimal degree of supply base diversification depends on the buyer’s bargaining power, i.e., the buyer’s ability to choose the auction mechanism. At one extreme, when the buyer has full bargaining power and thus can dictatorially implement the optimal mechanism, she prefers to fully diversify. At the other extreme, when the buyer uses a reverse English auction with no reserve price due to her lack of bargaining power, she may consider protecting herself against potential price escalation from cost-advantaged suppliers by using a less diversified supply base. The authors find that in general the more bargaining power the buyer has to control price escalation from cost-advantaged suppliers the more she prefers a diversified supply base. This insight is shown to be robust to correlation between regional costs, asymmetry across regions, and intermediate levels of bargaining power.
    Keywords: supply base diversification; supplier; buyer; procurement; bargaining
    JEL: M11
    Date: 2009–11–01
  6. By: Jungwoo Shin; Chang Seob Kimi; Jongsu Lee (Technology Management, Economics and Policy Program(TEMEP), Seoul National University)
    Abstract: This research complements demand side analysis of previous commodity bundling studies in which oligopoly models and game theory were used. According to demand side analysis, this study proposes the use of discrete-continuous consumption behavior applied to a commodity bundling model that incorporates consumer heterogeneity to analyze the effect of bundling strategies. Previous researchers have assumed a simple consumer utility model such that the heterogeneity of consumer preference is not reflected. Most analyzed effects of commodity bundling by focusing on firm behavior. However, to measure the results of the competition of bundling strategy, analysis of commodity bundling that is based on consumer preference is useful. Unlike previous research, this study proposes a model that directly analyzes consumer behavior for commodity bundling. This study conducted empirical analysis, obtained from data on information communication technology (hereafter, ICT) service subscription and usage in Korea, to validate the proposed model. The empirical results show that the proposed model is useful to analyze the effects of bundling for various services and products.
    Keywords: Bayesian estimation, Commodity bundling, Consumer heterogeneity, Game theory, Mixed multiple discrete-continuous extreme value model, Oligopoly model
    JEL: C11 C35 D11 D12 L40
    Date: 2009–11
  7. By: Lisa Bruttel; Jochen Glöckner
    Abstract: This paper tests two basic assumptions underlying court made or statutory provisions prohibiting predatory pricing on the economic grounds that monopolistic pricing likely to occur in the long run will cause harm to competition and consumers. The first assumption under scrutiny is that customers will accept monopolistic prices during the subsequent phase of recoupment, even though they have become accustomed to low prices during the price war. The second assumption is that even in the subsequent phase of recoupment neither any displaced nor any other competitor will (re-)enter the market to undercut the monopolistic prices. We can confirm earlier data according to which predatory pricing occurs rarely in an experimental environment. Moreover, the experiment indicates that both assumptions are not backed up by actual decision making both of consumers and of competitors.
    Keywords: Predatory Pricing, Recoupment, Experiment
    Date: 2009
  8. By: Marc Escrihuela-Villar (Universitat de les Illes Balears)
    Abstract: We discuss the implications of a Stackelberg sequence of play between a cartel and the fringe. We consider two different approaches to collusion: (i) one-stage static model and (ii) a multi-period oligopoly model. Our main result is that in the static model with quantity-setting firms a stable cartel only exist when cartel firms behave as a Stackelberg leader. It is also shown that in the supergame approach the cartel is always more easily sustained with the leadership than in the simultaneous-moves game. The opposite result is obtained in a price-setting supergame with differentiated products.
    Keywords: Collusion; Leadership; Stability; Sustainability
    JEL: L11 L13 L41 D43
    Date: 2009
  9. By: Iñaki Aguirre (UPV/EHU); Simon Cowan (University of Oxford); John Vickers (All Souls College, Oxford)
    Abstract: This paper presents a general analysis of the effects of monopolistic third-degree price discrimination on welfare and oputput when all markets are served. Sufficient conditions -involving straightforward comparisons of the curvatures of the direct and inverse demand functions in the different markets- are presented for discrimination to have negative or positive effects on social welfare and output.
    Keywords: Third-Degree Price Discrimiation, Output, Monopoly, Welfare
    JEL: D42 L12 L13
    Date: 2009–12–16
  10. By: Iñaki Aguirre (UPV/EHU)
    Abstract: In this paper, we show that in order for third-degree price discrimination to increase total output, the demands of the strong markets should be, as conjectured by Robinson (1933), more concave than the demands of the weak markets. By making the distinction between adjusted concavity of the inverse demand and adjusted concavity of the direct demand, we are able to state necessary conditions and su¢ cient conditions for third-degree price discrimination to increase total output.
    Keywords: Third-Degree Discrimination, Output, Monopoly, Welfare
    JEL: D42 L12 L13
    Date: 2009–12–18
  11. By: Wassim DAHER; Leonard J. MIRMAN; Marc Santugini (IEA, HEC Montréal)
    Abstract: Using the rational expectations approach, we study signaling in Cournot models, in which each oligopolist sets quantity, and, thus, partially controls the price-signal. We show that the quality of a homogeneous good is signaled by the market-clearing price. Moreover, our applications illustrate the tractability and usefulness of the rational expectations approach to signaling in complex economic settings. Indeed, the rational expectations equilibrium yields simple expressions for price, quantity, profit, and consumer surplus. Moreover, the rational expectations approach allows the model to specify posterior beliefs (including out-of-equilibrium beliefs).
    Keywords: Asymmetric information, Cournot, Learning, Oligopoly, Quality, Rational expectations, Signaling.
    JEL: D21 D43 D82 D83 D84 L13 L15
    Date: 2009–12
  12. By: Sara BIANCINI (THEMA, Université de Cergy Pontoise)
    Abstract: The paper analyzes the effects of liberalization in increasing returns to scale industries. It studies the optimal regulation of an incumbent competing with an unregulated strategic competitor, when public funds are costly. The model shows a trade off between productive and allocative efficiency. Moreover, the welfare gains of liberalization, as compared with regulated monopoly, are a non monotonic function of the cost of public funds. Finally, in the case of severe cash constraint of the government, incomplete regulation may also dominate full regulation of duopoly.
    Keywords: Incomplete Regulation, Asymmetric Information, Incentives, Cost of Public Funds.
    JEL: L43 L51 D82
    Date: 2009
  13. By: Belderbos, Rene (UNU-MERIT, Maastricht University and KU Leuven); Gilsing, Victor (Centre for Innovation Research, University of Tilburg); Lokshin, Boris (UNU-MERIT and Maastricht University)
    Abstract: We examine how and to what extent the propensity to be engaged in alliances with different partner types (suppliers, customers and competitors) depends on prior alliance engagement with partner firms of the same type (persistence) and prior engagement in alliances with the other partner types (interrelation). We derive hypotheses from a combined competence and governance view of collaboration, and test these on an extensive panel dataset of innovation-active Dutch firms during 1996-2004. We find persistence in alliance engagement of all three types of partners, but customer alliances are more persistent than supplier alliances. Most persistent are joint supplier and customer alliances, which we attribute to the advantages of value chain integration in innovation processes. Positive interrelation also exists in vertical alliances, as immediate past customer alliances increase the propensity to engage in supplier alliances and vice versa. On the other hand, while prior engagement in horizontal (competitor) alliances increases the propensity to engage in vertical alliances, this effect only occurs with a longer lag. Overall, our findings are highly supportive of the idea that alliance engagement with different partner types is heterogeneous but interrelated. Our analysis suggests that the inter-temporal relationship between different types of alliances may be as important as their simultaneous relationship in alliance portfolios.
    Keywords: R&D collaboration, technological partnerships, innovation, path dependency
    JEL: O31 O32
    Date: 2009
  14. By: Yukako Ono; Junichi Suzuki
    Abstract: By examining IT system procurement between U.S. Credit Unions (CUs) and IT vendors, we present descriptive analyses showing that firms’ outsourcing decisions might be interrelated to each other through suppliers’ market entry decisions. The buyer-supplier match in the market might also play an important role in determining firms’ boundaries. We also argue that market thickness along the product space might determine the characteristics of input that is procured through the market.
    Date: 2009
  15. By: Leonardo Raffo López
    Abstract: Documento de Trabajo No. 122
    Date: 2009–12–09
  16. By: Benjamin Bridgman; Shi Qi; James A. Schmitz, Jr.
    Abstract: We study the U.S. sugar manufacturing cartel that was created during the New Deal. This was a legal-cartel that lasted 40 years (1934-74). As a legal-cartel, the industry was assured widespread adherence to domestic and import sales quotas (given it had access to government enforcement powers). But it also meant accepting government-sponsored cartel-provisions. These provisions significantly distorted production at each factory and also where the industry was located. These distortions were reflected in, for example, a declining industry recovery rate, that is, the pounds of white sugar produced per ton of beets. It declined from about 310 pounds in 1934 to 240 pounds in 1974. The cartel provisions also distorted the location of industry. For example, it kept production in California and the Far West. Since the cartel ended in 1974, California's share of sugar production has dropped dramatically.
    Keywords: Cartels ; Productivity ; Competition
    Date: 2009

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