nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒03‒13
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Optimal market design By Jan Boone; Jacob K. Goeree
  2. The Optimal Marketing Mix of Posted Prices, Discounts and Bargaining By David Gill; John Thanassoulis
  3. Complementary Patents and Market Structure By Klaus Schmidt
  5. Innovation Contests with Entry Auction By Thomas Giebe
  6. Unique Equilibrium in Two-Part Tariff Competition between Two-Sided Platforms By Markus Reisinger
  7. Discriminatory fees, coordination and investment in shared ATM networks By Stijn Ferrari
  8. Intellectual Property Right Protection in the Software Market By Yasuhiro Arai
  9. Vertical Integration, Exclusivity and Game Sales Performance in the U.S. Video Game Industry By Gil, Ricard; Warzynski, Frédéric
  10. Understanding the timing and magnitude of advertising spending patterns. By Gijsenberg, Maarten; van Heerde, Harald J.; Dekimpe, Marnik; Steenkamp, Jan-Benedict E.M.; Nijs, Vincent R.
  11. Competition in complementary goods: Airport handling markets and Council Directive 96/67/EC By Maria Cristina Barbot
  12. Simulation and Prosecution of a Cartel with Endogenous Cartel Formation By Johannes Paha
  13. Where do Creditor Rights Matter? Creditor Rights, Political Constraints, and Cross-Border M&A Activity. By Martin Gassebner; Pierre-Guillaume Méon
  14. MONOPOLY POWER By Paul Sommers

  1. By: Jan Boone; Jacob K. Goeree
    Abstract: This paper introduces three methodological advances to study the optimal design of static and dynamic markets. First, we apply a mechanism design approach to characterize all incentive-compatible market equilibria. Second, we conduct a normative analysis, i.e. we evaluate alternative competition and innovation policies from a welfare perspective. Third, we introduce a reliable way to measure competition in dynamic markets with non- linear pricing. We illustrate the usefulness of our approach in several ways. We reproduce the empirical finding that innovation levels are higher in markets with lower price-cost margins, yet such markets are not necessarily more competitive. Indeed, we prove the Schumpeterian conjecture that more dynamic markets characterized by higher levels of innovation should be less competitive. Furthermore, we demonstrate how our approach can be used to determine the optimal combination of market regulation and innovation policies such as R&D subsidies or a weakening of the patent system. Finally, we show that optimal markets are characterized by strictly positive price-cost margins.
    JEL: D4 L51
    Date: 2010–02
  2. By: David Gill; John Thanassoulis
    Abstract: In many markets firms set posted prices which are potentially negotiable. We analyze the optimal marketing mix of pricing and bargaining when price takers buy at posted prices but bargainers attempt to negotiate discounts. The optimal bargaining strategy involves the firms offering bargainers randomly-sized discounts. Competing firms keep posted prices high to weaken the bargainers’ outside option, thus forgoing the chance to increase profits from price takers by undercutting their rival. A range of posted price equilibria are possible, and the higher price in the range inrceases when the proportion of bargainers goes up or the bargainers become less skilled. We consider how firms and competition authorities might encourage more consumers to bargain and determine the conditions under which each would choose to do so. Finally, we study the firms’ strategic decision about how much bargaining discretion sales staff should be allowed. Both firms allowing full bargaining flexibility is always an equilibrium - but not always the most profitable one. If there are enough bargainers, both firms committing to only matching the rival’s posted price is also an equilibrium: price matching moderates competition, thus raising profits.
    Keywords: Posted prices, List prices, Bargaining, Negotiation, Haggling, Discounts, Outside option, Price takers, Competition policy, Price matching
    JEL: C78 D43 L13
    Date: 2010
  3. By: Klaus Schmidt (University of Munich)
    Abstract: Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always benefits from entry and innovation
    Keywords: IP rights, complementary patents, standards, licensing, patent pool, vertical integration
    JEL: L1 L4
    Date: 2009–08
  4. By: Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We assess the effects of imitation and intellectual property (IP) protection in a model of industry dynamics in which the value of IP is eroded by further innovations and imitations. Innovations result from the development of ideas engendered by entrepreneurs. We find that innovation and welfare are decreasing in the protection of IP against further innovations, while their relationship with the protection against imitations typically has an inverted-U shape (partly because imitation reduces the resistance of incumbents to innovators). We also find that the welfare gains from increasing IP protection increase if entrepreneurs are financially constrained.
    Date: 2010–02
  5. By: Thomas Giebe (Humboldt University at Berlin)
    Abstract: We consider procurement of an innovation fromheterogeneous sellers. Innovations are random but depend on unobservable effort and private information. We compare two procurement mechanisms where potential sellers first bid in an auction for admission to an innovation contest. After the contest, an innovation is procured employing either a fixed prize or a first–price auction. We characterize Bayesian Nash equilibria such that both mechanisms are payoff–equivalent and induce the same efforts and innovations. In these equilibria, signaling in the entry auction does not occur since contestants play a simple strategy that does not depend on rivals’ private information.
    Keywords: Contest, Auction, Innovation, Research, R&D, Procurement, Signaling
    JEL: D21 D44 D82 H57 O31 O32
    Date: 2010–02
  6. By: Markus Reisinger (Department of Economics, University of Munich)
    Abstract: Two-sided market models in which platforms compete via two-part tariffs, i.e. a subscription and a per-transaction fee, are often plagued by a continuum of equilibria. This paper augments existing models by allowing for heterogeneous trading behavior of agents on both sides. We show that this simple method yields a unique equilibrium even in the limit as the heterogeneity vanishes. In case of competitive bottlenecks we find that in this equilibrium platforms benefit from the possibility to price discriminate if per-transaction costs are relatively large. This is the case because two-part tariffs allow platforms to better distribute these costs among the two sides. Under two-sided single-homing price discrimination hurts platforms if per-transaction fees can be negative.
    Keywords: Two-Sided Markets, Per-Transaction Fee, Subscription Fee, Two-Part Tariffs, Unique Equilibrium
    JEL: D43 L13
    Date: 2010–02
  7. By: Stijn Ferrari (National Bank of Belgium, Financial Stability Department; Catholic University of Leuven)
    Abstract: This paper empirically examines the effects of discriminatory fees on ATM investment and welfare, and considers the role of coordination in ATM investment between banks. Our main findings are that foreign fees tend to reduce ATM availability and (consumer) welfare, whereas surcharges positively affect ATM availability and the different welfare components when the consumers' price elasticity is not too large. Second, an organization of the ATM market that contains some degree of coordination between the banks may be desirable from a welfare perspective. Finally, ATM availability is always higher when a social planner decides on discriminatory fees and ATM investment to maximize total welfare. This implies that there is underinvestment in ATMs, even in the presence of discriminatory fees
    Keywords: investment, coordination, ATMs, network industries, empirical entry models, spatial discrete choice demand models
    JEL: G21 L10 L50 L89
    Date: 2010–01
  8. By: Yasuhiro Arai
    Abstract: We discuss the software patent should be granted or not. There exist two types of coping in the software market; reverse engineering and software duplication. Software patent can prevent both types of copies since a patent protects an idea. If the software is not protected by a patent, software producer cannot prevent reverse engineering. However, the producer can prevent the software duplication by a copyright. It is not clear the software patent is socially desirable when we consider these two types of coping. We obtain the following results. First, the number of copy users under the patent protection is greater than that under the copyright protection. Second, the government can increase social welfare by applying copyright protection when the new technology is sufficiently innovative.
    Keywords: Copyright Protection, Intellectual Property Right, Software
    JEL: D42 K39 L86
    Date: 2010–02
  9. By: Gil, Ricard; Warzynski, Frédéric
    Abstract: This paper empirically investigates the relation between vertical integration and video game performance in the U.S. video game industry. For this purpose, we use a widely used data set from NPD on video game montly sales from October 2000 to October 2007. We complement these data with handly collected information on video game developers for all games in the sample and the timing of all mergers and acquisitions during that period. By doing this, we are able to separate vertically integrated games from those that are just exclusive to a platform First, we show that vertically integrated games produce higher revenues, sell more units and sell at higher prices than independent games. Second, we explore the causal effect of vertical integration and find that, for the average integrated game, most of the difference in performance comes from better release period and marketing strategies that soften competition. By default, vertical integration does not seem to have an effect on the quality of video game production. We also find that exclusivity is associated with lower demand.
    Keywords: vertical integration; exclusivity; performance; video games
    JEL: L14 D23 L20
    Date: 2009–12
  10. By: Gijsenberg, Maarten; van Heerde, Harald J.; Dekimpe, Marnik; Steenkamp, Jan-Benedict E.M.; Nijs, Vincent R.
    Abstract: Notwithstanding the fact that advertising is one of the most used marketing tools, little is known about what is driving (i) the timing and (ii) the magnitude of advertising actions. Building on normative theory, the authors develop a parsimonious model that captures this dual investment process. They explain advertising spending patterns as observed in the market, and investigate the impact of company, competitive, and category-related factors on these decisions, thereby introducing the novel concept of Ad-sensor. Analyses are based on a unique combination of (i) weekly advertising data on 748 CPG brands in 129 product categories in the UK, (ii) household panel purchase data, and (iii) data on new product introductions. The analyzed brands include both large and small brands, both frequent and infrequent advertisers, thus providing a more complete and correct overview of the market. The results show that advertising spending patterns can be explained as real-life applications of the normative literature, in which advertising and advertising goodwill management are embedded in dynamic (s,S) inventory systems. Adstock and Ad-sensor show a positive effect on both timing and magnitude decision. Competitive reasoning is found to have little to no effect on advertising decisions, whereas category-related factors do show an impact. The extent to which campaigning strategies are more or less the outcome of advertising goodwill management systems, however, varies across brands as a function of their relative size and advertising frequency.
    Keywords: advertising; timing; competition; Tobit-II; Bayesian inference;
    Date: 2009–04
  11. By: Maria Cristina Barbot (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: This paper addresses the case of complementary services with vertical relations. Using the example of airport handling activities, we develop a model to investigate the effects on welfare and competitiveness of four different handling market situations. We find out that the usual Cournot result on welfare when firms compete in complementary goods is verified unless there are efficiency gaps between the firms, or if vertically related firms also compete on the same market. We also find that the presence of a horizontally integrated firm may lead to market foreclosure. Moreover, we add a few remarks on regulatory issues, where we show that regulation may be pointless or even anti-competitive. In particular, we show that Council Directive 96/67/EC, while intending to increase competition, may lead to anti-competitive situations and consumers surplus decreases.
    Keywords: Complementary goods competition; airport handling; vertical relations.
    Date: 2010–02
  12. By: Johannes Paha (Justus-Liebig-University Gießen)
    Abstract: In many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a Differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.
    Keywords: Collusion, Cartel Detection, Cartel Formation, Differential Evolution, Heuristic Optimization, Industry Simulation
    JEL: C51 C69 C72 D43 L12 L13 L40
    Date: 2010
  13. By: Martin Gassebner (ETH Zurich, KOF Swiss Economic Institute, Zurich.); Pierre-Guillaume Méon (Centre Emile Bernheim and DULBEA, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels.)
    Abstract: In this paper, we evaluate the impact of creditor rights and political risk on both the number and the value of cross-border M&A flows in a gravity model using a negative binomial model and Heckman’s two-stage selection model, respectively. Our results confirm that creditor-friendly rules and political risk decrease M&A inflows. The impact of formal legal rules is, however, almost entirely driven by politically stable countries, where those rules can be expected to hold. De jure rules therefore only matter where political stability is achieved.
    Keywords: Mergers and acquisitions, multinational firms, creditor rights, political risk, gravity model.
    JEL: F23 G18 G34 P16
    Date: 2010–03
  14. By: Paul Sommers
    Date: 2010

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