nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒05‒29
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Competitive Effects of Mass Customization By Oksana Loginova
  2. Price competition with consumer confusion. By Chioveanu, I.; Zhou, J.
  3. The classical notion of competition revisited By Salvadori, Neri; Signorino, Rodolfo
  4. On the strategic use of attention grabbers . By Eliaz, K.; Spiegler, R.
  5. Price and quality competition. By Chioveanu, I.
  6. Collusive networks in market-sharing agreements under the presence of an antitrust authority By Roldan, Flavia
  7. The Influence of Collusion on Price Changes: New Evidence from Major Cartel Cases By Korbinian von Blanckenburg; Alexander Geist; Konstantin A. Kholodilin
  8. European Commission decisions on anti-competitive behavior By Gual, Jordi; Mas, Nuria
  9. Platforms and Limits to Network Effects By Hanna Halaburda; Mikolaj Jan Piskorski
  10. Coordination and Critical Mass in a Network Market: An Experimental Investigation By Bradley J. Ruffle; Avi Weiss; Amir Etziony
  11. Competition and stability in banking By Vives, Xavier
  12. Level of Access and Competition in Broadband Markets By Bourreau, Marc; Dogan, Pinar
  13. One TV, one price?. By Imbs, J.; Mumtaz, H.; Ravn, M.O.; Rey, H.
  14. How Do Firms Set Prices? Survey Evidence from Ireland By Keeney, Mary J.; Lawless, Martina; Murphy, Alan
  15. Entry, Competitiveness and Exports: Evidence from Firm Level Data of Indian Manufacturing By Barua, Alokesh; Chakraborty, Debashis; Hariprasad , C. G.
  16. Competition and Innovation: Together a Tricky Rollercoaster for Productivity. By Wiel, H.P. van der

  1. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia)
    Abstract: Earlier theoretical literature on mass customization maintains that customization reduces product differentiation and intensifies price competition. In contrast, operations management studies argue that customization serves primarily to differentiate a company from its competitors. Interactive involvement of the customer in product design creates an affective relationship with the firm, relaxing price competition. This paper provides a model that incorporates consumer involvement to explain the phenomena described in the operations management literature. Two firms on the Hotelling line compete for a continuum of consumers with heterogeneous brand preferences. An exogenously given fraction of consumers is potentially interested in customization. Consumer benefits from customization are the rewards from a special shopping experience and the value of product customization (better fitting product); these benefits are higher for consumers located closer to the customizing brand. When a consumer purchases a customized product, he incurs the waiting cost. The firms decide whether to offer customization, then engage in price competition. I show that customization increases the ``stickiness" of a consumer to the customizing firm, leading to less intense price competition. As mass customization becomes more efficient (the lead time goes down and/or the sunk costs decrease), customization by one or both firms occurs in equilibrium. I perform comparative statics analysis with respect to the fraction of consumers potentially interested in customization.
    Keywords: horizontal differentiation, price competition, customization, brand familiarity, product knowledge
    JEL: D43 L13 C72
    Date: 2010–05–18
  2. By: Chioveanu, I.; Zhou, J.
    Abstract: This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). We model price framing by assuming that firms’ frame choices affect the comparability of their price offers: consumers may fail to compare prices due to frame differentiation, and due to frame complexity. In the symmetric equilibrium the firms randomize over both price frames and prices, and make positive profits. This result is consistent with the observed coexistence of price and price frame dispersion in the market. We also show that (i) the nature of equilibrium depends on which source of consumer confusion dominates, and (ii) an increase in the number of firms can increase industry profits and harm consumers.
    Date: 2009–08
  3. By: Salvadori, Neri; Signorino, Rodolfo
    Abstract: The paper seeks to fill a lacuna within Classical economics concerning the process of market price determination in a short-period equilibrium. To this aim, first we distinguish the Classical notion of free competition from the Walrasian notion of perfect competition and we argue that the latter is beset by some theoretical difficulties alien to the former. Second, we reconstruct in some detail Smith and Marx’s views concerning market price determination and we show that Marx’s extensive use of metaphors and numerical examples foreshadows the modern taxonomy of buyers’ market, sellers’ market and mixed strategy equilibrium in the capacity space of a standard Bertrand duopoly model. Finally, we highlight similarities and differences between the Classical notion of competition and contemporary game-theoretic oligopoly models
    Keywords: Classical and neoclassical notions of competition, Adam Smith, Karl Marx, mixed strategies.
    JEL: B12 L11
    Date: 2010–05–17
  4. By: Eliaz, K.; Spiegler, R.
    Abstract: When a …firm decides which products to offer or put on display, it takes into account the products' ability to attract attention to the brand name as a whole. Thus, the value of a product to the …firm emanates from the consumer demand it directly meets, as well as the indirect demand it generates for the firms other products. We explore this idea in the context of a stylzed model of competition between media content providers (broadcast TV channels, internet portals, newspapers) over consumers with limited attention. We characterize the equilibrium use of products as attention grabbers and its implications for consumer conversion, industry profi…ts and (mostly vertical) product differentiation.
    Date: 2010–03–26
  5. By: Chioveanu, I.
    Abstract: This study considers an oligopoly model with simultaneous price and quality choice. Exante homogeneous sellers compete by offering products at one of two quality levels. The consumers have heterogeneous tastes for quality: for some consumers it is efficient to buy a high quality product, while for others it is efficient to buy a low quality product. In the symmetric equilibrium …firms use mixed strategies that randomize both price and quality, and obtain strictly positive pro…ts. This framework highlights trade-offs which determine the impact of consumer protection policy in the form of quality standards.
    Date: 2010–03
  6. By: Roldan, Flavia (IESE Business School)
    Abstract: This paper studies how the presence of an antitrust authority affects market-sharing agreements made by firms. These agreements prevent firms from entering each other's market. The set of these agreements defines a collusive network, which is pursued by antitrust authorities. This article shows that while in the absence of the antitrust authority, a network is stable if its alliances are large enough when considering the antitrust authority, and more competitive structures can be sustained through bilateral agreements. Antitrust laws may have a pro-competitive effect, as they give firms in large alliances more incentives to cut their agreements at once.
    Keywords: market-sharing; economic networks; antitrust authorit; oligopoly;
    JEL: D43 K21 L41
    Date: 2010–04–07
  7. By: Korbinian von Blanckenburg; Alexander Geist; Konstantin A. Kholodilin
    Abstract: In this paper, we compare the distribution of price changes between collusive and noncollusive periods for ten major cartels. The first moments focus on previous research. We extend the discussion to the third (skewness) and fourth (kurtosis) moments. However, none of the above descriptive statistics can be considered as a robust test allowing a differentiation between competition and cartel. Therefore, we implement the Kolmogorov-Smirnov test. According to our results, 8 out of 10 cartels were successful in controlling the market price for a number of years. The proposed methodology may be used for antitrust screening and regulatory purposes.
    Keywords: Cartel detection, collusion, competition policy
    JEL: L10 L60
    Date: 2010
  8. By: Gual, Jordi (IESE Business School); Mas, Nuria (IESE Business School)
    Abstract: This paper provides an analysis of all the European Commission's decisions on anti-trust cases between January 1999 and February 2004. We use a unique dataset that contains information not only on the cases that were analyzed by the Commission and for which a decision was finally made public, but also on all the cases that were never pursued any further and those for which there is no final public decision. We have two goals. First, this data allows us, for the first time in the literature, to determine whether there is any type of bias in the selection process followed by the Commission when deciding which cases to pursue until a final decision is reached. Our results show that the selection of cases is not random and that it is quite efficient. Second, we can help to determine whether the criteria that have been shown by the economic literature to play an important role in anti-competitive behavior are also important for the Commission's decisions in anti-trust cases. Our results suggest that this is the case.
    Keywords: Anti-trust; competition; selection bias;
    Date: 2010–03–03
  9. By: Hanna Halaburda (Harvard Business School, Strategy Unit); Mikolaj Jan Piskorski (Harvard Business School, Strategy Unit)
    Abstract: We model conditions under which agents in two-sided matching markets would rationally prefer a platform limiting choice. We show that platforms that offer a limited set of matching candidates are attractive by reducing the competition among agents on the same side of the market. An agent who sees fewer candidates knows that these candidates also see fewer potential matches, and so are more likely to accept the match. As agents on both sides have access to more candidates, initially positive indirect network effects decrease in strength, reach their limit and eventually turn negative. The limit to network effects is different for different types of agents. For agents with low outside option the limit to network effects is reached relatively quickly, and those agents choose the platform with restricted number of candidates. This is because those agents value the higher rate of acceptance more than access to more candidates. Agents with higher outside option choose the market with larger number of candidates. The model helps explain why platforms offering restricted number of candidates coexist alongside those offering larger number of candidates, even though the existing literature on network effects suggests that the latter should always dominate the former.
    Keywords: matching platform, indirect network effects, limits to network effects
    JEL: C7 D8
    Date: 2010–03
  10. By: Bradley J. Ruffle (Ben-Gurion University); Avi Weiss (Bar-Ilan University); Amir Etziony (Hewlett-Packard Israel)
    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: 2010–02
  11. By: Vives, Xavier (IESE Business School)
    Abstract: I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition.
    Keywords: trade-off; competition; stability; banking;
    Date: 2010–04–05
  12. By: Bourreau, Marc (Institut Telecom and CREST-LEI); Dogan, Pinar (Harvard U)
    Abstract: In this paper, we consider an unregulated incumbent who owns a broadband infrastructure and decides on how much access to provide to a potential entrant. The level of access, i.e., the network elements that are shared in the provision of competing broadband services, not only determines the amount of investment the entrant needs to undertake to enter the market, but also the intensity of post-entry competition. We consider an access scheme that determines an access level and an associated two-part tariff. We show that the equilibrium level of access is higher when the sensitivity of product differentiation to the level of access is lower, and when the marginal investment cost is higher. We also show that the unregulated incumbent sets a suboptimally low (high) level of access if the degree of service differentiation is sufficiently high (low).
    Date: 2010–02
  13. By: Imbs, J.; Mumtaz, H.; Ravn, M.O.; Rey, H.
    Abstract: We use a unique dataset on television prices across European countries and regions to investigate the sources of differences in price levels. Our findings are as follows: (i) Quality is a crucial determinant of price differences. Even in an integrated economic zone as Europe, rich economies tend to consume higher quality goods. This effect accounts for the lion’s share of international price dispersion. (ii) Sizable international price differentials subsist even for the same television sets. The average bilateral price difference is as high as 80 euros, or 8% of the average TV price in our sample. (iii) EMU countries display lower price dispersion than non-EMU countries. (iv) absolute price differentials and relative price volatility are positively correlated with exchange rate volatility, but not with conventional measures of transport costs. (v) Importantly we show brand premia are sizable. They differ markedly across borders, in a way that does not correlate with transport costs, nor exchange rate movements. Taken together, the evidence is consistent firms exploiting market power through brand values to price discriminate across borders.
    Date: 2009–10
  14. By: Keeney, Mary J. (Central Bank and Financial Services Authority of Ireland); Lawless, Martina (Central Bank and Financial Services Authority of Ireland); Murphy, Alan (Central Bank and Financial Services Authority of Ireland)
    Abstract: Despite the importance of understanding and estimating the “stickiness” of prices of goods and services, empirical assessment of price setting behaviour by firms has remained relatively limited. This is the first paper to provide detailed information on the pressures, manner and frequency with which Irish firms adjust their output prices. Using survey information from almost a thousand Irish firms, we present a number of stylised facts on price setting behaviour. One of the first of these relates to the level of control firms have over their pricing strategy – the most common approach for firms is to set a price based on costs and a self-determined profit margin. However, one-third of firms said that their price was set primarily by following that of their closest competitors. The perceived intensity of competition was found to be one of the most significant factors in determining the price-setting approach and is also a central factor in determining price changes
    Date: 2010–05
  15. By: Barua, Alokesh; Chakraborty, Debashis; Hariprasad , C. G.
    Abstract: The industry and trade policy regimes in India have witnessed drastic changes since 1991. The dismantling of the industrial licensing system and thereby allowing free entry to and exit from the industry of firms in 1991 followed by the WTO induced trade liberalization leading to substantial reduction in tariffs and gradual softening of foreign investment regulations, particularly in the context of foreign direct investment since 1995, may have had significant impact on the state of competitiveness in India industries. In this paper an attempt has been made to evaluate the effects of trade and industrial policy changes on domestic competitiveness for select Indian industries during post-liberalization period. Though there exists a pool of empirical literature focusing on the state of competitiveness in India, the link between theoretical models underlying the empirical analysis is not often strong. Moreover, a section of the literature focuses on a combination of firm and industry data for drawing conclusions on firm behavior, which may not reflect the actual scenario. Given this background, the present paper attempts to provide a unified approach to examine the inter-relationships between entry and competitiveness within a consistent oligopolistic market framework. The empirical analysis of the present study, carried out on the basis of firm data for 14 sectors over 1990-2008, indicates that Indian industry have shown considerable changes over the last decade in terms of entry and competitiveness. An overall decline in concentration is witnessed between the two end points, which signify the importance of newer entry in the markets. The Price-Cost Margin however behaves differently for different sectors, which could be explained by the differing level of spillover of technical changes as a result of increased pressure of competition due to liberalization. Demand curve is generally found to be inelastic and declines over the period. The relationship between the size of the firms and their export volume turns out to be significantly positive.
    Keywords: Competitiveness; entry; industrial liberalization; trade liberalization
    JEL: F12 L50
    Date: 2010–05–15
  16. By: Wiel, H.P. van der (Tilburg University)
    Abstract: This PhD thesis deals with competition and innovation as drivers of productivity. According to literature, competition and innovation seem to be indivisibly connected to each other. Competition stimulates innovation by firms, and firms that innovate try to beat their competitors otherwise they will be swallowed by them. Competition as well as innovation are main drivers of productivity growth, but according to recent insights a trade-off may exist between these drivers. In fact, the relationship could look like an inverted U suggesting that competition is not always positively correlated with innovation. If competition is too intense, it has a negative effect on innovation (and productivity). This thesis has two main goals. First, it sheds more light on how to measure competition on product markets. In that respect, it elaborates on a new competition measure, the profit elasticity (PE). Chapter 2 extensively discusses this indicator and explicitly focus on what is meant by ‘competition’. Chapter 3 provides a guide for researchers how to measure PE in practice. The second goal of this thesis is to analyze the relationship between competition, innovation and productivity. As empirical evidence for this relationship is hardly available for the Netherlands, chapter 4 fills this gap by using Dutch (aggregate) firm level data. Chapter 5 examines the link between competition and product innovation at the firm level. It particularly analyzes the effect of product differentiation related to making products less close substitutes, and hence making markets less competitive.
    Date: 2010

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