nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒02‒20
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Bertrand competition with non-rigid capacity constraints By Prabal Roy Chowdhury
  2. Dynamic price competition with network effects By Cabral, Luis
  3. Information Acquisition and Price Discrimination By Fatemi, Farshad
  4. Asset auctions, information and liquidity By Vives, Xavier
  5. Entry Barriers in Retail Trade By Fabiano Schivardi; E. Viviano
  6. Retailer Choice and Loyalty Schemes - Evidence from Sweden By Lundberg, Johan; Lundberg, Sofia
  8. Spatial Competition and Cross-border Shopping: Evidence from State Lotteries By Brian G. Knight; Nathan Schiff
  9. Dual Licensing in Open Source Software Markets By Fabio Maria Manenti; Stefano Comino
  10. How Do Firms Exercise Unilateral Market Power? Evidence from a Bid-Based Wholesale Electricity Market By Shaun D. MCRAE; Frank A. WOLAK
  11. Broadcasting Rights and Competitive Balance in European Soccer By Peeters Th.
  12. Delegation and emission tax in a differentiated oligopoly By Rupayan Pal
  13. Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets By Kris James Mitchener; David C. Wheelock
  14. Population, Innovation, Competition and Growth with and without Human Capital Investment By Alberto Bucci

  1. By: Prabal Roy Chowdhury (Indian Statistical Institute, New Delhi; Indian Statistical Institute, New Delhi)
    Abstract: We examine a model of Bertrand competition with non-rigid capacity constraints, so that by incurring an additional per unit cost of capacity expansion, firms can produce beyond capacity. We find that there is an interval of prices such that a price can be sustained as a pure strategy Nash equilibrium if and only if it lies in this interval. We then examine the properties of this set as [a] the number of firms becomes large and [b] the capacity cost increases.
    Keywords: Bertrand competition, capacity constraint
    JEL: D4 L1
    Date: 2009–01
  2. By: Cabral, Luis (IESE Business School)
    Abstract: I consider a dynamic model of competition between two proprietary networks. Consumers die and are replaced with a constant hazard rate; and firms compete for new consumers to join their network by offering network entry prices. I derive a series of results pertaining to: a) existence and uniqueness of symmetric equilibria, b) monotonicity of the pricing function (e.g., larger networks set higher prices), c) network size dynamics (increasing dominance vs. reversion to the mean), and d) firm value (how it varies with network effects). Finally, I apply my general framework to the study of termination charges in wireless telecommunications. I consider various forms of regulation and examine their impact on firm profits and market share dynamics.
    Keywords: Networks; dynamic competition; oligopoly competition; wireless telecommunications;
    Date: 2009–12–10
  3. By: Fatemi, Farshad
    Abstract: We consider a Hotelling model of price competition where firms may acquire costly information regarding the preferences (i.e. “location”) of customers. By purchasing additional information, a firm has a finer partition regarding customer preferences, and its pricing decisions must be measurable with respect to this partition. If information acquisition decisions are common knowledge at the point where firms compete via prices, we show that a pure strategy subgame perfect equilibrium exists, and that there is “excess information acquisition” from the point of view of the firms. If information acquisition decisions are private information, a pure strategy equilibrium fails to exist. We compute a mixed strategy equilibrium for a range of parameter values.
    Keywords: Information Acquisition; Price Discrimination
    JEL: L13 D82 D43
    Date: 2010–01–30
  4. By: Vives, Xavier (IESE Business School)
    Abstract: A model is presented of a uniform price auction where bidders compete in demand schedules; the model allows for common and private values in the absence of exogenous noise. It is shown how private information yields more market power than the levels seen with full information. Results obtained here are broadly consistent with evidence from asset auctions, may help explain the response of central banks to the crisis and suggest potential improvements in the auction formats of asset auctions.
    Keywords: adverse selection; market power; reverse auctions; bid shading;
    JEL: D44 D82 E58 G14
    Date: 2009–12–03
  5. By: Fabiano Schivardi; E. Viviano
    Abstract: <p>The 1998 reform of the Italian retail trade sector delegated the regulation of entry of large stores to the regional governments. We use the local variation in regulation to determine the effects of entry barriers on sectoral performance. We address the endogeneity of entry barriers through local fixed effects and using political variables as instruments. We also control for differences in trends and for area-wide shocks. We find that entry barriers are associated with substantially larger profit margins and lower productivity of incumbent firms. Liberalizing entry has a positive effect on investment in ICT, increases employment and compresses labor costs in large shops. In areas with more stringent entry regulation, lower productivity coupled with larger margins results in higher consumer prices.</p>
    Keywords: entry barriers; productivity growth; retail trade
    JEL: L81 L5 L11
    Date: 2009
  6. By: Lundberg, Johan (Department of Economics, Umeå University); Lundberg, Sofia (Department of Economics, Umeå University)
    Abstract: From economic theory, it is known that consumer loyalty schemes can have lock-in effects resulting in entry barriers and higher prices. This paper concerns consumer loyalty schemes where the main issue is to test the hypothesis that loyalty scheme membership affects the choice of food retailer. This choice is modeled as a random utility maximization problem estimated with maximum likelihood. Based on a data set covering 1,551 Swedish households, we find evidence supporting this hypothesis. Further, according to the results, store characteristics and geographical distance matter for the choice of retailer while household characteristics are not found to have a significant effect.
    Keywords: Bonus card; Conditional logit; Consumer choice; Distance; Food retailer; Loyalty scheme
    JEL: D12 L49 L66 L81 R10
    Date: 2010–02–09
  7. By: Reddy Nalla, Viayender; Veen, Jack van der; Venugopal, Venu (Nyenrode Business Universiteit)
    Abstract: This paper addresses pricing strategies in a serial supply chain (SC) consisting of a single Buyer, a single Supplier and where the end-consumers are comprised of two segments, each with a different willingness-to-pay. Under the assumption that the final demand and the segments’ willingness-to-pay are deterministic, sub-optimization occurs when the decisions on pricing strategies are decentralized. That is, for a wide range of parameter values, a decentralized SC set a higher price and selling to the high willingness-to-pay segment whereas setting a low price and selling to both the segments would have been more profitable for the SC as a whole. To overcome this issue, two coordinating mechanisms, namely revenue sharing and modified resale price maintenance (mRPM), are analyzed within the above SC setting. It is shown that for all parameter values there exist revenue sharing contracts and mRPM contracts, which can both coordinate the SC and lead to win-win opportunities.
    Keywords: Optimization, Value chain, Decision-making
    Date: 2009
  8. By: Brian G. Knight; Nathan Schiff
    Abstract: This paper investigates competition between jurisdictions in the context of cross-border shopping for state lottery tickets. We first develop a simple theoretical model in which consumers choose between state lotteries and face a trade-off between travel costs and the price of a fair gamble, which is declining in the size of the jackpot and the odds of winning. Given this trade-off, the model predicts that per-resident sales should be more responsive to prices in small states with densely populated borders, relative to large states with sparsely populated borders. Our empirical analysis focuses on the multi-state games of Powerball and Mega Millions, and the identification strategy is based upon high-frequency variation in prices due to the rollover feature of lottery jackpots. The empirical results support the predictions of the model. The magnitude of these effects is large, suggesting that states do face competitive pressures from neighboring lotteries, but the effects vary significantly across states.
    JEL: H20 H70
    Date: 2010–01
  9. By: Fabio Maria Manenti (University of Padua); Stefano Comino (Università di Udine)
    Abstract: In this paper we present a theoretical model to study the characteristics and the commerciaI sustainability of dual licensing, an open source (OS) business strategy that has gained popularity among software vendors. With dual licensing, a firm releases the same software product under both a traditional proprietary license and an open souree one. We show that the decision to employ a dual licensing strategy occurs whenever the feedbacks of the open souree community are valuable enough compared to the quality of the software that the firm is able to develop in-house. Our analysis points to the centraI role of an appropriate managing of OS licenses in order to balance the pros and cons of "going open source" and to make this versioning strategy viable for software vendors; our analysis also suggests a possible explanation for the observed proliferation of open source licenses.
    Keywords: open source software, open source business models, embedded software, dual licensing, versioning, license proliferation
    JEL: L11 L17 L86 D45
    Date: 2010–01
  10. By: Shaun D. MCRAE; Frank A. WOLAK
    Abstract: This paper uses the framework in Wolak (2003a,b and 2007) and data on half-hourly offer curves and market-clearing prices and quantities from the New Zealand wholesale electricity market over the period January 1, 2001 to June 30, 2007 to characterize how the four large suppliers in this imperfectly competitive industry exercise market power. To accomplish this we introduce half-hourly measures of the firm-level ability and incentive of an individual supplier to exercise unilateral market power that are derived from a simplified model of expected profit-maximizing offer behaviour in a multi-unit auction market. We then show that half-hourly market-clearing prices are highly correlated with the half-hourly values of the firm-level and firm-average measures of both the ability and incentive of the four large suppliers in New Zealand to exercise market power. We then present evidence consistent with the view that this increasing relationship between the ability or incentive of individual suppliers to exercise market power and higher market-clearing prices is caused by the four large suppliers submitting higher offer prices when they have a greater ability or incentive to exercise unilateral market power. We show that after controlling for changes in input fossil fuel prices and other factors that impact the opportunity cost of producing electricity during that half hour, each of the four suppliers submits a higher offer price into the wholesale market when it has a greater ability or incentive to exercise unilateral market power. To strengthen the case that this increasing relationship between market prices and the ability and incentive of each of the suppliers to exercise unilateral market power is actually caused by the four large suppliers exercising unilateral market power by changing their offer prices in response to their ability and incentive to exercise market power, we also perform a test of the implications of the null hypothesis that the four large suppliers behave as if they had no ability to exercise market power. We find strong evidence against this null hypothesis and instead find that these hypothesis testing results are consistent with the perspective that these suppliers are exercising all available unilateral market power.Classification-JEL:
    Keywords: Unilateral Market power analysis,New Zealand,Electricity Market,multi-unit auction
    Date: 2009–07–15
  11. By: Peeters Th.
    Abstract: Collective sales of media rights are a common practice in sports leagues. Proponents of the system claim that it is a necessary tool for the maintenance of competitive balance. In this empirical paper, I argue that, in European soccer, collective sales do not increase competitive balance as compared to individual sales. Secondly, I demonstrate the negative effect of the UEFA Champions League on competitive balance. Finally, I illustrate the beneficial effect of a larger market size and a more equal distribution of drawing power. These results shed new light on antitrust and solidarity policies in the sports industry.
    Date: 2009–09
  12. By: Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: This paper examines how product differentiation as well as strategic managerial delegation affects optimal emission tax rate, environmental damage and social welfare, under alternative modes of product market competition. It shows that, under pure profit maximization, the (positive) optimal emission tax rate is not necessarily decreasing in degree of product differentiation, irrespective of the mode of competition. The possibility of emission tax rate to be positive and lower for more differentiated products, under quantity (price) competition, is higher (lower) in case of delegation than that in case of no delegation. It also shows that, under quantity (price) competition, the equilibrium emission tax rate environmental damage and social welfare are higher (lower) in case of delegation than that in case of no delegation.
    Keywords: Emission tax, price competition, product differentiation, quantity competition, strategic managerial delegation
    JEL: H23 Q50 Q58 L13
    Date: 2009–10
  13. By: Kris James Mitchener; David C. Wheelock
    Abstract: This paper examines the relationship between the structure of banking markets and economic growth using a new dataset on manufacturing industry-level growth rates and banking market concentration for U.S. states during 1899-1929—a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically. Unlike studies of modern developing and developed countries, we find that banking market concentration had a positive impact on manufacturing sector growth in the early twentieth century, with little variation across industries with different degrees of dependence on external financing or access to capital. However, because regulations affecting bank entry varied considerably across U.S. states and the industrial organization of the U.S. banking system differs markedly from those of other countries, we also examine the impact of other aspects of banking market structure and policy on growth. We continue to find that banking market concentration boosted industrial growth. In addition, we find evidence that a greater prevalence of branch banking and more banks per capita increased the growth of industries that rely relatively heavily on external financing or have greater access to external funding sources, while deposit insurance depressed growth in the manufacturing sector. Regulations on bank entry and other banking market characteristics thus appear to exert an independent influence on manufacturing growth in geographically fragmented banking markets.
    JEL: E44 G21 G38 N11 N12 N21 N22 O16 O47
    Date: 2010–01
  14. By: Alberto Bucci (University of Milan)
    Abstract: This paper analyzes how population and product market competition may interact with each other in affecting the pace of productivity growth. We find that the impact of a change in population (size/growth) and in the degree of market concentration on economic growth varies depending on the structure of the underlying model economy and, more precisely, depending on the presence of purposeful human (versus physical) capital investment, the type of input used in the uncompetitive sector, the form of households' intertemporal utility and whether product market competition (measured by the elasticity of substitution between differentiated intermediates) is disentangled or not from the input-shares in total income. We also find that only a fully endogenous growth model with purposeful human capital investment at the individual level and a continuum of degrees of inter-generational altruism is simultaneously able to predict an ambiguous link between population and economic growth rates and to display no strong scale effects in economic growth, while keeping the property that positive economic growth is feasible even without any population change. The paper also examines the conditions under which population (size/growth) and product market competition/monopoly power can be complementary factors in economic growth.
    Keywords: Population (size and growth); Endogenous and Semi-endogenous Economic Growth; Human and Physical Capital Investment; Innovation; Scale Effects; Competition,
    Date: 2009–11–26

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