nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒05‒15
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Multiproduct Duopoly with Vertical Di¤erentiation By Yi-Ling Cheng; Shin-Kun Peng; Takatoshi Tabuchi
  2. Welfare losses in models of horizontal and vertical differentiation By Luis C. Corchón; Galina Zudenkova
  3. Increasing Dominance - the Role of Advertising, Pricing and Product Design By Kretschmer, Tobias; Rösner, Mariana
  4. Minimum Price Guarantees In a Consumer Search Model By Maarten Janssen; Alexei Parakhonyak
  5. Selling When Brand Image Matters By Stefan Bühler; Daniel Halbheer
  6. Asymmetric Price Responses of Gasoline Stations: Evidence for Heterogeneity of Retailers By Riemer P. Faber
  7. Consumer Preferences in Monopolistic Competition Models By Tarasov, Alexander
  8. Exploding offers and buy-now discounts By Armstrong, Mark; Zhou, Jidong
  9. Industry Dynamics and Entrepreneurship: An Equilibrium Model By Dennis Fok; Andre van Stel; Andrew Burke; Roy Thurik
  10. Is More Entrepreneurship better? By Philipp Koellinger; Christian Roessler
  11. The classical notion of competition revisited By Salvadori, Neri; Signorino, Rodolfo
  12. Quality, Upgrades, and Equilibrium in a Dynamic Monopoly Model By James Anton; Gary Biglaiser
  13. The Effect of Payoff Tables on Experimental Oligopoly Behavior By Gürerk, Özgür; Selten, Reinhard
  14. Coordination and Critical Mass in a Network Market: An Experimental Investigation By Bradley J. Ruffle; Avi Weiss; Amir Etziony

  1. By: Yi-Ling Cheng (National Taiwan University); Shin-Kun Peng (Institute of Economics, Academia Sinica, Taipei, Taiwan; National Taiwan University); Takatoshi Tabuchi (Faculty of Economics, University of Tokyo)
    Abstract: The paper investigates a two-stage competition in a vertical di¤erentiated industry, where each …firm produces an rbitrary number of similar qualities and sells them to heterogeneous consumers. We show that, when unit costs of quality are increasing and quadratic, each …firm has an incentive to provide an interval of qualities. The finding is in sharp contrast to the single-quality outcome when the market coverage is exogenously determined. We also show that allowing for an interval of qualities intensi…es competition, lowers the profi…ts of each fi…rm and raises the consumer surplus and the social welfare in comparison to the single-quality duopoly.
    Keywords: multiproduct …firms, market segmentation, quality competition, vertical product di¤erentiation.
    JEL: D21 D43 L11 L13
    Date: 2010–04
  2. By: Luis C. Corchón; Galina Zudenkova
    Abstract: We study the percentage of welfare losses (PWL) in models of horizontal and vertical differentiation. In the Hotelling model, we show that PWL depends on the underlying parameters in a non-monotonic way. We also show that PWL can be calculated from market data-locations and market size-except when the market is covered and exhibits maximal product differentiation. PWL can be very large-up to 37.4%-arising from firms located in the wrong places. In the Salop model, PWL can be calculated from market size. PWL may be large-up to 25%-but, in general, smaller than in Hotelling because firms are optimally located here. Finally, under vertical differentiation with two firms, PWL is discontinuous, but can be calculated from market prices and market coverage. In this model PWL is modest, always below 8.33%.
    Keywords: Welfare losses, Horizontal differentiation, Hotelling model, Salop model, Vertical differentiation
    JEL: D61 L11 L13 L50
    Date: 2010–04
  3. By: Kretschmer, Tobias; Rösner, Mariana
    Abstract: Despite the empirical relevance of advertising strategies in concentrated markets, the economics literature is largely silent on the effect of persuasive advertising strategies on pricing, market structure and increasing (or decreasing) dominance. In a simple model of persuasive advertising and pricing with differentiated goods, we analyze the interdependencies between ex-ante asymmetries in consumer appeal, advertising and prices. Products with larger initial appeal to consumers will be advertised more heavily but priced at a higher level - that is, advertising and price discounts are strategic substitutes for products with asymmetric initial appeal. We find that the escalating effect of advertising dominates the moderating effect of pricing so that post-competition market shares are more asymmetric than pre-competition differences in consumer appeal. We further find that collusive advertising (but competitive pricing) generates the same market outcomes, and that network effects lead to even more extreme market outcomes, both directly and via the effect on advertising.
    Keywords: Increasing dominance; persuasive advertising; duopoly; network effects
    JEL: D21 L11 L13
    Date: 2010–05–01
  4. By: Maarten Janssen (University of Vienna,and Erasmus University Rotterdam); Alexei Parakhonyak (Erasmus University Rotterdam)
    Abstract: This paper is the first to examine the effect of minimum price guarantees
    Keywords: Sequential Search; Minimum Price Guarantees,Welfare Analysis
    JEL: D40 D83 L13
    Date: 2009–10–13
  5. By: Stefan Bühler; Daniel Halbheer
    Abstract: This paper studies profit-maximizing seller behavior when brand image affects consumer demand. We consider a seller facing a population of consumers with heterogeneous tastes regarding product quality and brand image. First, we analyze “active branding” by the seller through costly advertising. Our analysis shows that advertising, price and profits are all increasing in the average valuation of brand image in the population. Second, we examine the role of “passive branding” emanating from the population’s consumption of the product. We demonstrate that seller profits increase in the average degree of conformity in the opulation whereas the price remains unaffected.
    Keywords: Quality; brand image; advertising; conformity; exclusivity
    JEL: D42 L15 L21 M37
    Date: 2010–05
  6. By: Riemer P. Faber (Erasmus University Rotterdam)
    Abstract: This paper studies asymmetric price responses of individual firms, via daily retail prices of almost all gasoline stations in the Netherlands and suggested prices of the five largest oil companies over more than two years. I find that 38% of the stations respond asymmetrically to changes in the spot market price. Hence, asymmetric pricing is not a feature of the market as a whole, but of individual firms. For asymmetrically pricing stations, the asymmetry is substantial directly after a change but disappears after one or two days. I study station-specific characteristics and conclude that asymmetric pricing seems to be a phenomenon that is randomly distributed across stations. I also find that none of the five largest oil companies adjust their suggested prices asymmetrically.
    Keywords: price setting; asymmetric price responses; gasoline markets
    JEL: D40 E31 L11 L81
    Date: 2009–11–19
  7. By: Tarasov, Alexander
    Abstract: This paper develops a novel approach to modeling references in monopolistic competition models with a continuum of goods. In contrast to the commonly used CES preferences, which do not capture the e¤ects 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 …rms in the market or opening a country to international trade has a pro-competitive effect that decreases equilibrium prices.
    Keywords: fi…rm prices; intensity of competition; consumer income
    JEL: D4
    Date: 2010–04
  8. By: Armstrong, Mark; Zhou, Jidong
    Abstract: We consider a market with sequential consumer search in which firms can distinguish potential customers visiting for the first time from returning visitors. We show that firms often have an incentive to make it costly for its visitors to return after investigating rivals, either by making an "exploding offer" (which permits no return once the consumer leaves) or by offering a "buy-now discount" (which makes the price paid by first-time visitors lower than that for returning visitors). Prices often increase when return costs are artificially increased in this manner, and this harms consumers and market performance. If firms cannot commit to their buy-later price the outcome depends on whether there is an intrinsic cost of returning to a firm: if the intrinsic return cost is zero, it is often an equilibrium for firms not to offer any buy-now discount; if the return cost is positive, firms are forced to make exploding offers.
    Keywords: Consumer search; oligopoly; price discrimination; high-pressure selling; buy-now discounts; costly recall
    JEL: D18 D83 D43
    Date: 2010–05
  9. By: Dennis Fok (Erasmus University Rotterdam); Andre van Stel (University of Amsterdam); Andrew Burke (Cranfield University, UK); Roy Thurik (Erasmus University Rotterdam)
    Abstract: This paper conducts the first general equilibrium analysis of the role of entry, exit and profits in industry dynamics. The benefit of our model is twofold. First, to discriminate between entrants’ role of performing the entrepreneurial function of creating disequilibrium and the conventional equilibrating role of moving the industry to a new equilibrium. Second, to discriminate between three aspects of industry dynamics: the effect of entry and exit on market equilibrium, duration of disequilibrium and patterns of adjustment. Using a rich data set of the retail industry, we construct a dynamic simultaneous equilibrium model of profits, entry and exit. We find that indeed entrants play an entrepreneurial function causing long periods of disequilibrium after which a new equilibrium is attained. Moreover, we find ample support for the statement that disequilibrium is the essence of economic progress.
    Keywords: entry; exit; profits; equilibrium; industrial dynamics; retailing
    JEL: B50 J01 L00 L1 L26
    Date: 2010–01–13
  10. By: Philipp Koellinger (Erasmus University Rotterdam); Christian Roessler (Brown University)
    Abstract: We develop a new perspective on the boundary of the firm that is consistent with the empirical observation that the share of entrepreneurs first decreases and then increases in the course of economic development. Existing theory based on transaction costs is difficult to relate to these well-established dynamics. Our approach focuses on changing incentives to specialize and adapt, in order to access complementarities that arise from diverse abilities and access to wealth. We discuss why the efficient number of entrepreneurs is bounded and changes in the course of economic development.
    Keywords: Entrepreneurship; theory of the firm; organizations; economic development
    JEL: L26 D20 J24 O10
    Date: 2009–11–19
  11. By: Salvadori, Neri; Signorino, Rodolfo
    Abstract: We compare and analyse two different conceptions of market competition: the walrasian notion of perfect competition and the Classical notion of free competition: while the former may be described as an equilibrium state in which atomistic agents treat prices parametrically, the latter is a situation in which agents, endowed by market power, fix prices strategically. We show that price undercutting or outbidding are the typical phenomena that, for the Classical authors, may be observed in a market characterized by free competition. We investigate some problematic aspects of the neoclassical notion of perfect competition and we reconstruct the Classical theory of free competition, as developed, in particular, by Adam Smith and Karl Marx, in the light of the modern notion of mixed strategies equilibria.
    Keywords: Classical Economics; Competition; Adam Smith; Karl Marx; mixed strategies
    JEL: B12 L11
    Date: 2010–05–03
  12. By: James Anton; Gary Biglaiser
    Date: 2010–05–04
  13. By: Gürerk, Özgür; Selten, Reinhard
    Abstract: We explore the effects of the provision of an information-processing instrument - payoff tables - on behavior in experimental oligopolies. In one experimental setting, subjects have access to payoff tables whereas in the other setting they have not. It turns out that this minor variation in presentation has non-negligible effects on participants' behavior, particularly in the initial phase of the experiment. In the presence of payoff tables, subjects tend to be more cooperative. As a consequence, collusive behavior is more likely and quickly to occur.
    Keywords: Collusion; Cournot oligopoly; payoff tables; bounded rationality; framing; presentation effect
    JEL: L13 C92 C72
    Date: 2010–04–29
  14. By: Bradley J. Ruffle (Department of Economics, Ben-Gurion University of the Negev); Avi Weiss (Department of Economics Bar-Ilan University); Amir Etziony (Hewlett-Packard)
    Abstract: A network market is a market in which the benefit each consumer derives from a good is an increasing function of the number of consumers who own the same or similar goods. A major obstacle that plagues the introduction of a network good is the ability to reach critical mass, namely, the minimum number of buyers required to render purchase worthwhile. This can be likened to a coordination game with multiple Pareto-ranked equilibria. We introduce an experimental paradigm to study consumers' ability to coordinate on purchasing the network good. Our results highlight the central importance of the level of the critical mass.
    Keywords: experimental economics, network goods, coordination game, critical mass
    JEL: C92 L19
    Date: 2010

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