nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒05‒22
twenty-six papers chosen by
Russell Pittman
US Department of Justice

  1. The Entry Incentives of Complementary Producers: A Simple Model with Implications for Antitrust Policy By Juan S. Lleras; Nathan H. Miller
  2. Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement By Nathan Miller; Matthew Osborne
  3. Competition versus Collusion: The Impact of Consumer Inertia By Bos Iwan; Peeters Ronald; Pot Erik
  4. Bundling and Competition for Slots: On the Portfolio Effects of Bundling By Jeon, Doh-Shin; Menicucci, Dominico
  5. Bundling and Competition for Slots: Sequential Pricing By Jeon, Doh-Shin; Menicucci, Dominico
  6. Managerial Effort Incentives and Market Collusion By Aubert, Cécile
  7. Competition and the signaling role of prices By F.Adriani; L.G.Deidda
  8. Non-Exclusive Competition in the Market for Lemons By Attar, Andrea; Mariotti, Thomas; Salanié, François
  9. The value of switching costs By Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
  10. Competition in two-sided markets with common network externalities By Bardey, David; Cremer, Helmuth; Lozachmeur, Jean-Marie
  11. Foreclosing Competition through Access Charges and Price Discrimination By Lopez, Angel; Rey, Patrick
  12. Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Nonlinear Pricing and Resale Price Maintenance By Bonnet, Céline; Dubois, Pierre
  13. Why Prices Rise Faster than they Fall By Sheldon Kimmel
  14. Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through By Bonnet, Céline; Dubois, Pierre; Villas Boas, Sofia B.
  15. Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms By Russell Pittman
  16. The Impact of Mergers on the Degree of Competition in the Banking Industry By Cerasi, Vittoria; Chizzolini, Barbara; Ivaldi, Marc
  17. Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers By Gerald R. Bodisch
  18. Does Competition Among Medicare Advantage Plans Matter?: An Empirical Analysis of the Effects of Local Competition in a Regulated Environment By Abe Dunn
  19. Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry By Bardey, David; Bommier, Antoine; Jullien, Bruno
  20. Welfare and Pricing of Mail in a Communications Market By Cremer, Helmuth; De Donder, Philippe; Dudley, Paul; Rodriguez, Frank
  21. The Pricing of Academic Journals: A Two-Sided Market Perspective By Jeon, Doh-Shin; Rochet, Jean-Charles
  22. Mobile Termination and Mobile Penetration By Hurkens, Sjaak; Jeon, Doh-Shin
  23. Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry By Claussen, Jörg; Kretschmer, Tobias; Spengler, Thomas
  24. Oligopoly and price transmission in Turkeyâs fluid milk market By Tekguc, Hasan
  25. Railway Mergers and Railway Alliances: Competition Issues and Lessons for Other Network Industries By Russell Pittman
  26. Competition Issues in Restructuring Ports and Railways, Including Brief Consideration of these Sectors in India By Russell Pittman

  1. By: Juan S. Lleras (University of California, Berkeley); Nathan H. Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We model competition between two firms in a vertical upstream-downstream relationship. Each firm can pay a sunk cost to enter the other’s market. For equilibria in which both firms enter, the downstream price can be lower than the joint profit maximizing level, and coordination (e.g., through merger) is anticompetitive.
    Date: 2009–11
  2. By: Nathan Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Matthew Osborne (Bureau of Economic Analysis)
    Abstract: The theoretical literature of industrial organization shows that the distances between consumers and firms have first-order implications for competitive outcomes whenever transportation costs are large. To assess these effects empirically, we develop a structural model of competition among spatially differentiated firms and introduce a GMM estimator that recovers the structural parameters with only regional-level data. We apply the model and estimator to the portland cement industry. The estimation fits, both in-sample and out-of-sample, demonstrate that the framework explains well the salient features of competition. We estimate transportation costs to be $0.30 per tonne-mile, given diesel prices at the 2000 level, and show that these costs constrain shipping distances and provide firms with localized market power. To demonstrate policy-relevance, we conduct counter-factual simulations that quantify competitive harm from a hypothetical merger. We are able to map the distribution of harm over geographic space and identify the divestiture that best mitigates harm.
    Date: 2010–03
  3. By: Bos Iwan; Peeters Ronald; Pot Erik (METEOR)
    Abstract: We consider a model of dynamic price competition to analyze the impact of consumer inertia on the ability of firms to sustain high prices. Three main consequences are identified, all of which contrast with predictions of the standard model of collusion: (i) maintaining high prices does not require punishment strategies when firms are sufficiently myopic, (ii) if buyers are sufficiently inert, then high prices can be sustained for all discount factors, and (iii) the ability to maintain high prices may depend non-monotonically on the level of the discount factor when the industry exhibits network externalities and demand is sufficiently viscous. These results provide a number of interesting insights with regard to competitive and collusive pricing behavior. In particular, we illustrate how direct communication between firms may facilitate collusion.
    Keywords: microeconomics ;
    Date: 2010
  4. By: Jeon, Doh-Shin; Menicucci, Dominico
    Abstract: We consider competition among sellers when each of them sells a portfolio of distinct products to a buyer having limited slots. We study how bundling affects competition for slots. Under independent pricing, equilibrium often does not exist and hence the outcome is often inefficient. When bundling is allowed, each seller has an incentive to bundle his products and an efficient equilibrium always exists. Furthermore, in the case of digital goods, all equilibria are efficient if slotting contracts are prohibited. We also identify portfolio effects of bundling and analyze the consequences on horizontal mergers. Finally, we derive clear-cut policy implications.
    JEL: D4 K21 L13 L41 L82
    Date: 2009–07–27
  5. By: Jeon, Doh-Shin; Menicucci, Dominico
    Abstract: In this paper we study, as in Jeon-Menicucci (2009), competition between sellers when each of them sells a portfolio of distinct products to a buyer having limited slots. This paper considers sequential pricing and complements our main paper (Jeon- Menicucci, 2009) that considers simultaneous pricing. First, Jeon-Menicucci (2009) find that under simultaneous individual pricing, equilibrium often does not exist and hence the outcome is often inefficient. By contrast, equilibrium always exists under sequential individual pricing and we characterize it in this paper. We find that each seller faces a trade-off between the number of slots he occupies and surplus extraction per product, and there is no particular reason that this leads to an efficient allocation of slots. Second, Jeon Menicucci (2009) find that when bundling is allowed, there always exists an efficient equilibrium but inefficient equilibria can also exist due to pure bundling (for physical products) or slotting contracts. Under sequential pricing, we find that all equilibria are efficient regardless of whether firms can use slotting contracts, and both for digital goods and for physical goods. Therefore, sequential pricing presents an even stronger case for laissez-faire in the matter of bundling than simultaneous pricing.
    JEL: D4 K21 L13 L41 L82
    Date: 2009–08
  6. By: Aubert, Cécile
    Abstract: We investigate the interactions between managers’ incentives to collude or compete, and incentives to exert effort. A manager privately chooses the competitive strategy of the firm, and his own effort to improve productivity; He may substitute collusion to effort to increase profits. High profit targets — i.e., strong effort incentives — make participating in a cartel more attractive. To answer this double moral hazard, owners may have to give the manager information rents, and to choose inefficient effort levels. This affects cartel sustainability and profitability. Because of reduced internal efficiency, welfare losses may arise even when the industry remains competitive. Antitrust policy has a novel value, specifically thanks to individual sanctions: They foster internal efficiency in competing firms while worsening it in cartelized firms. This improves both efficiency under competition and cartel deterrence. Individual fines are thus more beneficial than corporate fines; criminal sanctions are even more effective. Last, individual leniency programs have ambiguous effects, even when not used in equilibrium.
    Keywords: collusion, managerial incentives, leniency programs
    JEL: D82 K21 L41
    Date: 2009–12
  7. By: F.Adriani; L.G.Deidda
    Abstract: In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers’ chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competi- tion among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.
    Keywords: Market for lemons; Adverse selection; Price dispersion; Price- setting; Signaling; Competition
    JEL: D4 D8 L15
    Date: 2010
  8. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We consider an exchange economy in which a seller can trade an endowment of a divisible good whose quality she privately knows. Buyers compete in menus of non-exclusive contracts, so that the seller may choose to trade with several buyers. In this context, we show that an equilibrium always exists and that aggregate equilibrium allocations are generically unique. Although the good offered by the seller is divisible, aggregate equilibrium allocations exhibit no fractional trades. In equilibrium, goods of relatively low quality are traded at the same price, while goods of higher quality may end up not being traded at all if the adverse selection problem is severe. This provides a novel strategic foundation for Akerlof's (1970) results, which contrasts with standard competitive screening models postulating enforceability of exclusive contracts. Latent contracts that are issued but not traded in equilibrium turn out to be an essential feature of our construction.
    Date: 2009–06
  9. By: Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
    Abstract: We study the consequences of heterogeneity of switching costs in a dynamic model with free entry and an incumbent monopolist. We identify the equilibrium strategies of the incumbent and of the entrants and show that the strategic interactions are more complex and more interesting than either in static models or in models where all consumers have the same switching costs. In particular, we prove that even low switching cost customers have value for the incumbent: when there are more of them its prots increase. Indeed, their presence hinders entrants who nd it more costly to attract high switching cost customers. This leads to dierent comparative statics: for instance, an increase in the switching costs of all consumers can lead to a decrease in the prots of the incumbent.
    Date: 2010–02–03
  10. By: Bardey, David (University of Rosario, Bogota); Cremer, Helmuth (TSE (GREMAQ-CNRS)); Lozachmeur, Jean-Marie (TSE (GREMAQ-CNRS))
    Abstract: We study competition in two sided markets with common network externality rather than with the standard inter-group effects. This type of externality occurs when both groups bene…fit, possibly with different intensities, from an increase in the size of one group and from a decrease in the size of the other. We explain why common externality is relevant for the health and education sectors. We focus on the symmetric equilibrium and show that when the externality itself satis…es an homogeneity condition then platformspro…ts and price structure have some speci…fic properties. Our results reveal how the rents coming from network externalities are shifted by platforms from one side to other, according to the homogeneity degree. In the specifi…c but realistic case where the common network externality is homogeneous of degree zero, platforms pro…t do not depend on the intensity of the (common) network externality. This is in sharp contrast to conventional results stating that the presence of network externalities in a two-sided market structure increases the intensity of competition when the externality is positive (and decreases it when the externality is negative). Prices are affected but in such a way that platforms only transfer rents from consumers to providers.
    JEL: D42 L11 L12
    Date: 2009–10
  11. By: Lopez, Angel; Rey, Patrick
    Date: 2009–06
  12. By: Bonnet, Céline; Dubois, Pierre
    Date: 2009–05
  13. By: Sheldon Kimmel (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: For decades the fact that input price hikes are passed on faster than input price cuts was thought to be well explained by the assumption that competitive firms fully pass on all input price changes, so they can't price asymmetrically, so asymmetric pricing behavior is limited to oligopolies, firms that do all sorts of bizarre things (finding yet another one being no big deal). However, Peltzman found no effect of concentration on such asymmetric pricing, raising the puzzle of why competitive industries generally price asymmetrically. This paper solves that puzzle.
    Date: 2009–07
  14. By: Bonnet, Céline; Dubois, Pierre; Villas Boas, Sofia B.
    JEL: C13 L13 L41
    Date: 2009–07
  15. By: Russell Pittman (Director of Economic Research, Economic Analysis Group, Antitrust Division, U.S. Department of Justice, and visiting professor, New Economic School, Moscow)
    Abstract: Economists sometimes decry the persistence with which firms set prices above marginal cost and thus, according to the economists, fail to maximize profits. But it is the economists who have it wrong – first, because variable accounting costs are not always a good proxy for marginal economic costs, but more importantly because in an industry with U-shaped cost curves, a firm at a long-run sustainable equilibrium faces increasing marginal costs – i.e., a rising shadow price on some constrained input – i.e., in general, acost of capital. A corollary is that in such an industry the equilibrium mark-up over variable cost varies directly with capital intensity.
    Keywords: market power, price, mark-up, marginal cost, variable cost
    JEL: B21 D24 D43 K21 L11 L40
    Date: 2009–07
  16. By: Cerasi, Vittoria; Chizzolini, Barbara; Ivaldi, Marc
    Abstract: This paper analyses the relation between competition and concentration in the banking sector. The empirical answer is given by testing a monopolistic competition model of bank branching behaviour on individual bank data at county level (départements and provinces) in France and Italy. We propose a measure of the degree of competiveness in each local market that is function also of market structure indicators. We then use the econometric model to evaluate the impact of horizontal mergers among incumbent banks on competition and discuss when, depending on the pre-merger structure of the market and geographic distribution of branches, the merger is anti-competitive. The paper has implications for competition policy as it suggests an applied tool to evaluate the potential anti-competitive impact of mergers.
    JEL: G21 L13 L59
    Date: 2009–11
  17. By: Gerald R. Bodisch (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: State franchise laws prohibit auto manufacturers from making sales directly to consumers. This paper advocates eliminating state bans on direct manufacturer sales in order to provide automakers with an opportunity to reduce inventories and distribution costs by better matching production with consumer preferences.
    Date: 2009–05
  18. By: Abe Dunn (Economist, Antitrust Division, U.S. Department of Justice, Washington, DC 20530)
    Abstract: The regulatory oversight of the private Medicare Advantage (MA) program makes the role of competition in this market unclear. This paper empirically examines the impact of competition by measuring the effects of changes in market structure on enrollment. The study examines competition in local geographic markets using county-level enrollment data from 2001-07. I find that an increase in the number of competitors results in an increase in the number of enrollees served ­ consistent with competition motivating firms to provide more generous benefits. Competition also results in an increase in product proliferation, which highlights a dimension of competition not previously examined. Overall, the results are similar to what one might expect in an unregulated environment, suggesting that there are benefits from competition that are not realized by regulation alone.
    Date: 2009–07
  19. By: Bardey, David; Bommier, Antoine; Jullien, Bruno
    JEL: I18 L11 L15 L51
    Date: 2009–07
  20. By: Cremer, Helmuth; De Donder, Philippe; Dudley, Paul; Rodriguez, Frank
    Abstract: We build a model where a postal incumbent offering single piece, transactional and advertising mail competes with postal entrants and with a firm offering an alternative medium. We solve for the optimal prices under various competition assumptions. We calibrate the model and provide numerical simulations in order to shed light on the impact of these assumptions on volumes and welfare levels.
    Date: 2010–04–02
  21. By: Jeon, Doh-Shin; Rochet, Jean-Charles
    Abstract: More and more academic journals adopt an open-access policy, by which articles are accessible free of charge, while publication costs are recovered through author fees. We study the consequences of this open access policy on a journal’s quality standard. If the journal’s objective was to maximize social welfare, open access would be optimal as long as the positive externalities generated by its diffusion exceed the marginal cost of distribution. However, we show that if an open access journal has a different objective (such as maximizing readers’ utility, the impact of the journal or its profit), it tends to choose a quality standard below the socially efficient level.
    JEL: D42 L42 L82
    Date: 2009–10
  22. By: Hurkens, Sjaak; Jeon, Doh-Shin
    Abstract: In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.
    JEL: D4 L96 K23 L51
    Date: 2009–07–28
  23. By: Claussen, Jörg; Kretschmer, Tobias; Spengler, Thomas
    Abstract: The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. We study if backward compatibility can help moderate this process of rebuilding an installed base. Using a structural model of the US market for handheld game consoles, we show that backward compatibility lets incumbents transfer network effects from the old generation to the new to some extent but that it also reduces supply of new software. We also find that backward compatibility matters most shortly after the introduction of a new generation. Finally, we examine the tradeoff between technological progress and backward compatibility and find that backward compatibility matters less if there is a large technological leap between two generations. We subsequently use our results to assess the role of backward compatibility as a strategy to sustain a dominant market position.
    Keywords: backward compatibility market dominance network effects two-sided markets
    JEL: L15 L82 O33
    Date: 2010–05
  24. By: Tekguc, Hasan
    Abstract: Farmers and consumers suspect that processing firms abuse their power in the milk marketing chain. We employ threshold autoregressive and moment threshold autoregressive tests and contrary to expectations find evidence of a downward trend in UHT milk real price without a corresponding decline in farm-gate prices. The downward trend coincides with increased competition in the dairy industry and with the growing market share of the formal sector at the expense of the informal sector. Major dairy processing firms expand their market share and still enjoy healthy profits thanks to increasing returns to scale in processing and distribution in a growing market.
    Keywords: Dairy, Turkey, Oligopsony, TAR, M-TAR, Agricultural and Food Policy, Farm Management, Land Economics/Use,
    Date: 2010–04
  25. By: Russell Pittman (Antitrust Division, U.S. Department of Justice, and New Economic School, Moscow)
    Abstract: Freight railway enterprises in both Europe and North America are in the process of significant restructuring, with EC policy changes dictating new ownership, organization, and cooperation arrangements in Europe and a series of major mergers having already led to highly concentrated regional markets in the U.S. and Canada. Mergers, alliances, and organizational changes may raise important and complex issues regarding the level of competition facing goods shippers, with differing implications depending on the differing institutional contexts. This paper examines the competitive consequences of these developments in Europe and North America and suggests some lessons for other network industries.
    Keywords: railway, competition, mergers, alliances
    Date: 2009–05
  26. By: Russell Pittman (Director of Economic Research, Antitrust Division, U.S. Department of Justice, and Visiting Professor, New Economic School, Moscow.)
    Abstract: One important issue facing reformers considering the restructuring of the seaports and freight railways sectors of a developing country is the creation of competition ­ or, alternatively, avoiding the creation or preservation of monopoly power. In seaports a crucial distinction is often that between intraport and interport competition; in freight railways, between competition among train operating companies over a monopoly track and competition among vertically integrated railways. In both cases it is useful to frame the issue as one of competition at the component level within an open system versus competition between closed systems. In both cases as well, the market definition paradigm suggested by the Horizontal Merger Guidelines of the U.S. competition agencies provides a useful framework for analysis.
    Keywords: competition, ports, railways, market definition, India
    JEL: L14 L23 L33 L91 L92 O14 O22 R48
    Date: 2009–11

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