nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒01‒23
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. A general model of oligopoly endogenizing Cournot, Bertrand, Stackelberg, and Allaz-Vila By Breitmoser, Yves
  2. Conditioning prices on search behaviour By Armstrong, Mark; Zhou, Jidong
  3. Consumer Preferences in Monopolistic Competition Models By Tarasov, Alexander
  4. Competition Among the Big and the Small By Ken-Ichi Shimomura; Jacques-François Thisse
  5. Product variety, price elasticity of demand and fixed cost in spatial models By Gu, Yiquan; Wenzel, Tobias
  6. Strategic Vertical Separation By Igor Sloev
  7. SIGNALING IN AUCTIONS AMONG COMPETITORS By Benedikt von Scarpatetti; Cédric Wasser
  8. Competing Ad Auctions: Multi-homing and Participation Costs By Itai Ashlagi; Benjamin G. Edelman; Hoan Soo Lee
  9. The financing of innovative firms By Hall, Bronwyn H.
  10. The Role of Socially Concerned Consumers in the Coexistence of Ethical and Standard Firms By Fanelli, Domenico
  11. Social Preferences and Competition By Klaus M. Schmidt
  12. Food, Agriculture, and Antitrust: Looking at the Recent Past By MacDonald, James
  13. Indirect network effects with two salop circles: the example of the music industry By Dewenter, Ralf; Haucap, Justus; Wenzel, Tobias
  14. Exchange-Rate Misalignments in Duopoly: the Case of Airbus and Boeing By Agnes Benassy-Quere; Lionel Fontagne; Horst Raff
  15. Isolation or joining a mall? On the location choice of competing shops By Non, Marielle
  16. The Economics of Regional Demarcation in Banking By Simone Raab; Peter Welzel
  17. Product differentiation and welfare in a mixed duopoly with regulated prices: the case of a public and a private hospital By Herr, Annika
  18. Consolidation in banking and financial stability in Europe: empirical evidence By Uhde, André; Heimeshoff, Ulrich
  19. State Aid and Competition in Banking: the Case of China in the Late Nineties By Xiaoqiang Cheng; Patrick Van Cayseele

  1. By: Breitmoser, Yves
    Abstract: This paper analyzes a T-stage model of oligopoly where firms build up capacity and conclude forward sales in stages t<T, and they choose production quantities in t=T. We consider the case of n firms with asymmetric marginal costs. In the two-stage game, the set of outcomes is a quasi-hyperrectangle including Cournot, Allaz-Vila, and all two-stage Stackelberg outcomes. In general, it consists of T-1 such hyperrectangles where the lower bound approaches the Bertrand outcome as T tends to infinity. In the limit, a range of outcomes stretching from Cournot via Stackelberg to Bertrand can result in equilibrium, i.e. the mode of competition is entirely endogenous.
    Keywords: forward sales; capacity precommitment; Cournot; Stackelberg; Bertrand
    JEL: D43 C72
    Date: 2010–01–13
  2. By: Armstrong, Mark; Zhou, Jidong
    Abstract: We consider a market in which firms can partially observe each consumer's search behavior in the market. In our main model, a firm knows whether a consumer is visiting it for the first time or whether she is returning after a previous visit. Firms have an incentive to offer a lower price on a first visit than a return visit, so that new consumers are offered a "buy-now" discount. The ability to offer such discounts acts to raise all prices in the market. If firms cannot commit to their buy-later price, in many cases firms make "exploding" offers, and consumers never return to a previously sampled firm. Likewise, if firms must charge the same price to all consumers, regardless of search history, we show that they sometimes have the incentive to make exploding offers. We also consider other ways in which firms could use information about search behaviour to determine their prices.
    Keywords: Consumer search; oligopoly; price discrimination; high-pressure selling; exploding offers; costly recall
    JEL: D83 D43 L15
    Date: 2010–01
  3. By: Tarasov, Alexander
    Abstract: This paper develops a novel approach to modeling preferences in monopolistic competition models with a continuum of goods. In contrast to the commonly used CES preferences, which do not capture the effects of consumer income and the intensity of competition on equilibrium prices, the present preferences can capture both effects. I show that under an unrestrictive regularity assumption, the equilibrium prices decrease with the total mass of available goods (which represents the intensity of competition in the model) and increase with consumer income. The former implies that the entry of firms in the market or opening a country to international trade has a pro-competitive effect that decreases equilibrium prices.
    Keywords: firm prices; intensity of competition; consumer income.
    JEL: F12 D43
    Date: 2009–11
  4. By: Ken-Ichi Shimomura; Jacques-François Thisse (CREA, University of Luxembourg)
    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 eect, 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 rm dominates the resulting decrease in product variety.
    JEL: L13 L40
    Date: 2009
  5. By: Gu, Yiquan; Wenzel, Tobias
    Abstract: This paper explores the implications of price-dependent demand in spatial models of product differentiation. We introduce consumers with a quasi-linear utility function in the framework of the Salop (1979) model. We show that the so-called excess entry theorem relies critically on the assumption of completely inelastic demand. Our model is able to produce excessive, insufficient, or optimal product variety. A proof for the existence and uniqueness of symmetric equilibrium when price elasticity of demand is increasing in price is also provided. --
    Keywords: Demand elasticity,Spatial models,Excess entry theorem
    JEL: L11 L13
    Date: 2009
  6. By: Igor Sloev (Humboldt University Berlin)
    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: L22 L42
    Date: 2009–09
  7. By: Benedikt von Scarpatetti (University of Basel); Cédric Wasser (Humboldt University of Berlin)
    Abstract: We consider a model of oligopolistic firms that have private information about their cost structure. Prior to competing in the market a competitive advantage, i.e., a cost reducing technology, is allocated to a subset of the firms by means of a multi-object auction. After the auction either all bids or only the prices to be paid are revealed to all firms. This provides an opportunity for signaling. Whether there exists an equilibrium in which bids perfectly identify the bidders’ costs generally depends on the type and fierceness of the market competition, the specific auction format, and the bid announcement policy.
    Keywords: Auction; Oligopoly; Signaling
    JEL: D44 L13 D43 D82 C72
    Date: 2010–01
  8. By: Itai Ashlagi (Harvard Business School, Negotiation, Organizations & Markets Unit); Benjamin G. Edelman (Harvard Business School, Negotiation, Organizations & Markets Unit); Hoan Soo Lee (Harvard Business School, Negotiation, Organizations & Markets Unit)
    Abstract: We model competing auctions for online advertising, with attention to the participation costs that limit advertisers' interest in using small ad platforms. When participation costs are large relative to the volume of traffic an ad platform can offer, an advertiser may forego use of an ad platform that the advertiser otherwise finds profitable. Mergers between ad platforms can increase advertiser welfare if the resulting click-through rate and volume of traffic are sufficiently improved relative to the offerings of the ad auctions when separate. When there is an insufficient improvement, such mergers can harm advertisers.
    Date: 2010–01
  9. By: Hall, Bronwyn H. (University of California-Berkeley)
    Abstract: To what extent are new and/or innovative firms fundamentally different from established firms, and therefore require a different form of financing? The theoretical background for this proposition is presented, and the empirical evidence on its importance is reviewed. Owing to the intangible nature of their investment, asymmetric-information and moral-hazard, these firms are more likely to be financed by equity than debt and behave in some cases as though they are cash-constrained, especially if they are small. Recognising the role for public policy in this area, many countries have implemented specific policies to bring the cost of financing innovation more in line with the level that would prevail in the absence of market failures.
    Keywords: R&D; innovation; financing; liquidity constraints; venture capital
    JEL: G24 G32 O32 O38
    Date: 2009–12–23
  10. By: Fanelli, Domenico
    Abstract: The purpose of this paper is to investigate how socially concerned consumers' preferences affects firms' decisions to commit to social responsibility. In a market in which firms face the same demand function and products are homogeneous, we find that a large group of socially concerned consumers or a low cost of social responsibility induces an equilibrium outcome in which ethical and standard firms coexists in the same market. Our result is relevant because we do not assume a product differentiation setup and firms do not separate the market through labeling schemes.
    Keywords: CSR; Price Competition; Duopoly; ESS; Replicator Dynamics
    JEL: M14 D43 C73
    Date: 2010–01–18
  11. By: Klaus M. Schmidt (University of Munich)
    Abstract: There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. 2008) suggest that competition forces people to behave as if they were purely self-interested. We qualify this view. Social preferences are irrelevant if and only if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets.
    Keywords: Social preferences, competition, separability, incomplete contracts, asset markets, labor markets.
    JEL: C9 D5 J0
    Date: 2009–12
  12. By: MacDonald, James
    Abstract: Presented to USDA Economists Group, Washignton, DC
    Keywords: Antitrust, agriculture, Agribusiness, Agricultural and Food Policy, Q, L,
    Date: 2009–10
  13. By: Dewenter, Ralf; Haucap, Justus; Wenzel, Tobias
    Abstract: This paper analyses the interdependency between the market for music recordings and concert tickets, assuming that there are positive indirect network effects both from the record market to ticket sales for live performances and vice versa. Using a model with two interrelated Salop circles we show that prices in both markets are corrected downwards when compared to the standard Salop model. Furthermore, we show that the effects of file sharing on firms' profitability and on variety are ambiguous. File sharing can increase profits through increased concert ticket demand and thereby also lead to additional market entry and additional variety. --
    Keywords: Music Industry,Indirect Network Effects,Salop Model,File Sharing
    JEL: L13 L82 Z10
    Date: 2009
  14. By: Agnes Benassy-Quere; Lionel Fontagne; Horst Raff
    Abstract: We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs costs mostly in euros. We construct and calibrate a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment, and how this affects profit margins and volumes. We also explore the effects on the long-run dynamics of competition. We conclude that, due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers through higher prices. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry.
    Keywords: Exchange-rate pass-through; duopoly; aircraft industry
    JEL: F31 D43 L11 L62
    Date: 2009–06
  15. By: Non, Marielle
    Abstract: I study the location choice of competing shops. A shop can either be isolated or join a mall. A fraction of consumers is uninformed about prices and incurs costs to travel between market places and to enter a shop. The equilibrium mall size is computed for several parameter values, showing that mall and isolated shops can coexist. Several effects play a role. Mall shops attract more consumers, but isolated shops set a higher maximum price. Moreover, numerical evaluations show that an increase in mall size decreases the average price level and increases the participation level of uninformed consumers.
    Keywords: location choice; travel costs; pricing; consumer search
    JEL: L11 L13 D83
    Date: 2010–01–15
  16. By: Simone Raab (University of Augsburg, Department of Economics); Peter Welzel (University of Augsburg, Department of Economics)
    Abstract: Cooperation among savings and cooperative banks was criticized by the European Commission because of potentially anti-competitive effects. In an industrial economics model of banks taking deposits and giving loans we look at regional demarcation as one of such cooperative practices. There are two adjacent markets with one savings or cooperative bank being focused on each one and one private commercial bank serving both. We find that abolishing regional demarcation indeed increases total loan volume. Savings or cooperative banks always improve market performance and do better without regional demarcation which shields the private commercial bank from aggressive competition by these banks.
    Keywords: banking, competition, cooperation, non-profit firms
    JEL: G21 L41 L44 L33 L13
    Date: 2010–01
  17. By: Herr, Annika
    Abstract: Hospital markets are often characterised by price regulation and the existence of different ownership types. Using a Hotelling framework, this paper analyses the effect of different objectives of the hospitals on quality, profits, and overall welfare in a price regulated duopoly with symmetric locations. In contrast to other studies on mixed oligopolies, this paper shows that in a duopoly with regulated prices privatisation of the public hospital may increase overall welfare depending on the difference of the hospitals' marginal costs and the weight of the additional public hospital's motive. --
    Keywords: mixed oligopoly,price regulation,quality,hospital competition
    JEL: L13 I18 H42
    Date: 2009
  18. By: Uhde, André; Heimeshoff, Ulrich
    Abstract: Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 this paper provides empirical evidence that national banking market concentration has a negative impact on European banks' financial soundness as measured by the Z-score technique while controlling for macroeconomic, bank-specific, regulatory, and institutional factors. Furthermore, we find that Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification opportunities and a higher fraction of government-owned banks are more prone to financial fragility whereas capital regulations have supported financial stability across the entire European Union. --
    Keywords: Market structure,Financial stability,Banking regulation
    JEL: G21 G28 G34 L16
    Date: 2009
  19. By: Xiaoqiang Cheng; Patrick Van Cayseele
    Abstract: Many contributions to the literature on competition in banking use the Panzar and Rosse test (1987). This test encompasses a variety of market outcomes assuming firms maximize profits. However, when applied to the banking industry, this assumption may not be always valid as banks sometimes may carry social objectives or aim to be systemic players so as to be "too big to fail". This then motivates different objective functions, departing from profit maximization. We present a reduced form model where banks can pursue other goals than profit maximization. This allows us to test for behavioral changes of banks over time. Our model provides a framework to evaluate whether moral hazard issues may plague banks receiving state aid, which concerns greatly the recent debate on government intervention in financial markets during the global financial crisis in 2008. To test the impact of state aid, we examine a natural experiment in the banking sector in China in the 1990s. We cannot reject that the possibility of receiving state aid triggers moral hazard prone conduct.
    Keywords: State Aid, banking industry, Panzar-Rosse model, Moral Hazard, To Big To Fail
    JEL: G21 G28 L21
    Date: 2009

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