nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒04‒11
seven papers chosen by
Russell Pittman
US Department of Justice

  1. Robustness to strategic uncertainty in price competition By Andersson, Ola; Argenton, Cédric; Weibull, Jörgen
  2. On the mechanics of firm growth By Erzo G.J. Luttmer
  3. Competition and productivity: a review of evidence By Thomas J. Holmes; James A. Schmitz, Jr.
  4. Costs, demand, and producer price changes. By Loupias, C.; Sevestre, P.
  5. Land Use Regulation as a Barrier to Entry: Evidence from the Texas Lodging In dustry By Junichi Suzuki
  6. How Does Competition Impact Bank Risk-Taking? By Gabriel Jiménez; Jose A. Lopez; Jesús Saurina

  1. By: Andersson, Ola (Dept. of Economics, Stockholm School of Economics); Argenton, Cédric (Tilburg University); Weibull, Jörgen (Dept. of Economics, Stockholm School of Economics)
    Abstract: We model a player's uncertainty about other player's strategy choices as probability distributions over their strategy sets. We call a strategy profile robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence of strategy profiles in each of which every player's strategy is optimal under his or her uncertainty about the pthers. We apply this definition to Bertrand games with a continuum of equilibrium prices and show that our robustness criterion selects a unique Nash equilibrium price. This selection agrees with available experimental findings.
    Keywords: Nash equilibrium; refinement; strategic uncertainty; price competition
    JEL: C72 D43 L13
    Date: 2010–03–31
  2. By: Erzo G.J. Luttmer
    Abstract: The Pareto-like tail of the size distribution of firms can arise from random growth of productivity or stochastic accumulation of capital. If the shocks that give rise to firm growth are perfectly correlated within a firm, then the growth rates of small and large firms are equally volatile, contrary to what is found in the data. If firm growth is the result of many independent shocks within a firm, it can take hundreds of years for a few large firms to emerge. This paper describes an economy with both types of shocks that can account for the thick-tailed firm size distribution, high entry and exit rates, and the relatively young age of large firms. The economy is one in which aggregate growth is driven by the creation of new products by both new and incumbent firms. Some new firms have better ideas than others and choose to implement those ideas at a more rapid pace. Eventually, such firms slow down when the quality of their ideas reverts to the mean. As in the data, average growth rates in a cross section of firms will appear to be independent of firm size, for all but the smallest firms.
    Date: 2010
  3. By: Thomas J. Holmes; James A. Schmitz, Jr.
    Abstract: Does competition spur productivity? And if so, how does it do so? These have long been regarded as central questions in economics. This essay reviews the literature that makes progress toward answering both questions.
    Keywords: Competition ; Monopolies ; Productivity
    Date: 2010
  4. By: Loupias, C.; Sevestre, P.
    Abstract: We estimate an ordered probit model in order to explain the occurrence and magnitude of producer price changes in the French manufacturing sector. We use data consisting essentially of the Banque de France monthly business surveys, pooled over the years 1998-2005. Our results show that changes in the price of intermediate inputs are the main driver of producer price changes. Firms also appear to react significantly to changes in the producer price index of their industry. Variations in labor costs as well as in the production level also appear to increase the likelihood of a price change but their influence seems to be of a lesser importance. We also show that estimating an unconstrained dynamic model allows improving the estimation results as compared to those associated with a standard state-dependent model. Finally, our results point to an asymmetry in price adjustments. When they face a change in their costs, firms adjust their prices upward more often and more rapidly than they do it downward.
    Keywords: Price stickiness, frequency of price changes, price setting-behavior, survey data, ordered probit model.
    JEL: E31 C23 C25
    Date: 2010
  5. By: Junichi Suzuki
    Abstract: I empirically examines the anticompetitive effects of land use regulation by using microdata on midscale chain hotels in Texas. I construct a dynamic entry-exit model of midscale hotel chains. By endogenizing their entry decisions, the model explicitly considers hotel chains' reactions to the stringency of land use regulation. Estimation results indicate that imposing stringent regulation increases cost enough to affect hotel chains' entry decisions. Although hotel chains are the immediate payers of the increased entry cost, incumbents shift a part of their cost increase onto consumers by exploiting their increased market power. (JEL: R3, L1, L5)
    Keywords: Land use regulation, zoning, barrier to entry, lodging industry
    JEL: R3 L1 L5
    Date: 2010–04–01
  6. By: Gabriel Jiménez (Banco de España); Jose A. Lopez (Federal Reserve Bank Of San Francisco); Jesús Saurina (Banco de España)
    Abstract: A common assumption in the academic literature is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. We test this hypothesis using data for the Spanish banking system. We find that standard measures of market concentration do not affect bank risk-taking. However, we find a negative relationship between market power measured using Lerner indexes based on bank-specific interest rates and bank risk. Our results support the franchise value paradigm.
    Keywords: bank competition, franchise value, Lerner index, credit risk, financial stability.
    JEL: G21 L11
    Date: 2010–03
  7. By: Hassan Benchekroun; Cees Withagen
    Abstract: We consider a nonrenewable resource game with one cartel and a set of fringe members. We show that (i) the outcomes of the closed-loop and the open-loop nonrenewable resource game with the fringe members as price takers (the cartel-fringe game a la Salant 1976) coincide and (ii) when the number of fringe firms becomes arbitrarily large, the equilibrium outcome of the closed-loop Nash game does not coincide with the equilibrium outcome of the closed-loop cartel-fringe game. Thus, the outcome of the cartel-fringe open-loop equilibrium can be supported as an outcome of a subgame perfect equilibrium. However the interpretation of the cartel-fringe model, where from the outset the fringe is assumed to be price taker, as a limit case of an asymmetric oligopoly with the agents playing Nash-Cournot, does not extend to the case where firms can use closed-loop strategies.
    JEL: D43 Q30 L13
    Date: 2010–03

This nep-com issue is ©2010 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.