nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒06‒04
nine papers chosen by
Russell Pittman
US Department of Justice

  1. Demand-Enhancing Investment in Mixed Duopoly By Stefan Bühler; Simon Wey
  2. Loyalty Rewards and Monopoly Pricing By Philipp Ackermann
  3. Vertical bargaining and countervailing power By Alberto Iozzi; Tommaso Valletti
  4. Non-Exclusive Competition in the Market for Lemons By Andrea Attar; Thomas Mariotti; François Salanié
  5. Intentional Price Wars on the Equilibrium Path By Pot Erik; Peeters Ronald; Peters Hans; Vermeulen Dries
  6. Market Competition, R&D and Firm Profits in Asymmetric Oligopoly By Junichiro Ishida; Toshihiro Matsumura; Noriaki Matsushima
  7. Patent licensing, bargaining, and product positioning By Toshihiro Matsumura; Noriaki Matsushima
  8. FDI in Post-Production Services and Product Market Competition By Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
  9. An Analysis of Bundle Pricing in Horizontal and Vertical Markets: The Case of the U.S. Cottonseed Market By Shi, Guanming; Stiegert, Kyle; Chavas, Jean-Paul

  1. By: Stefan Bühler; Simon Wey
    Abstract: This paper examines demand-enhancing investment and pricing in mixed duopoly. We analyze a model with differentiated products and reduced-form demand, making no assumptions on the relative efficiency of the public firm. First, we derive sufficient conditions for public investment to crowd out private investment. Second, we characterize the conditions under which individual investments (prices, respectively) in the mixed duopoly are higher (lower) than in the standard duopoly. Third, we show that with linear demand the public firm effectively disciplines the private firm, inducing an improvement in its price-quality ratio relative to the standard duopoly.
    Keywords: Mixed oligopoly, price, investment, quality
    JEL: D43 H42 L13
    Date: 2010–05
  2. By: Philipp Ackermann
    Abstract: This article examines the impact of customer reward programs on the competitive outcome in duopolistic markets. We argue that loyalty discounts for repeat customers constitute a commitment device beneficial to suppliers rather than customers. Analyzing a two-period Bertrand model we show that the use of loyalty discounts makes it possible for duopolists to attain the fully collusive outcome in both periods. By offering generous loyalty discounts, the firms can credibly commit to refrain from second period poaching given that they attract enough customers in period one. Loyalty discounts invite firms to collude in the first period.
    Keywords: switching costs; customer reward programs; loyalty discounts; repeat purchases; coupons; mixed equilibria
    JEL: C72 D43 L13 L14 L41
    Date: 2010–02
  3. By: Alberto Iozzi (Faculty of Economics, University of Rome "Tor Vergata"); Tommaso Valletti (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: We study the existence of countervailing buyer power in a vertical industry where the input price is set via Nash bargainings between one upstream supplier and many differentiated but competing retailers. In case one bilateral bargaining fails, the supplier still has the ability to sell to the other retailers. We show that the capacity of these other retailers to react in the final market has a dramatic impact on the supplier’s outside options and, ultimately, on input prices and welfare. Under downstream quantity competition, we find either no or opposite support to the hypothesis of countervailing power on input prices, as the retail industry becomes more concentrated. With price competition, we find a case for countervailing power, but its existence depends on the degree of product differentiation and on the ability of competing retailers to react to a disagreement.
    Keywords: Countervailing buyer power, Nash bargaining.
    JEL: L50
    Date: 2010–05–28
  4. By: Andrea Attar (Faculty of Economics, University of Rome "Tor Vergata"); Thomas Mariotti (Toulouse School of Economics); François Salanié (Toulouse School of Economics)
    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.
    Keywords: Adverse Selection, Competing Mechanisms, Non-Exclusivity
    JEL: D43 D82 D86
    Date: 2010–05–28
  5. By: Pot Erik; Peeters Ronald; Peters Hans; Vermeulen Dries (METEOR)
    Abstract: In this paper we study the effect of information on the occurrence of intentional price wars on the equilibrium path. An episode of low prices is an intentional price war if it follows a period of high prices which was ended intentionally by one of the firms in the market (the price war leader). We show that for intentional price wars to exist on the equilibrium path, two elements are necessary regarding the information on which the firms base their decisions: (1) interperiod dynamics and (2) informational asymmetries. We illustrate this by means of a repeated price-setting game in which market shares fluctuate. Firms learn about the market share realizations at the beginning of each period. We show that intentional price wars on the equilibrium path are possible when firms have private information about their market share. When market shares are public information, we either see collusive price adjustment or episodes of low prices that do not classify as an intentional price war.
    Keywords: microeconomics ;
    Date: 2010
  6. By: Junichiro Ishida; Toshihiro Matsumura; Noriaki Matsushima
    Abstract: We investigate a Cournot model with strategic R&D investments wherein efficient low-cost firms compete against less efficient high-cost firms. We find that an increase in the number of high-cost firms can stimulate R&D by the low-cost firms, while it always reduces R&D by the high-cost firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the low-cost firms' profits may indeed increase with the number of high-cost firms. An implication of this result is far-reaching, as it gives low-cost firms an incentive to help, rather than harm, high-cost competitors. We relate this implication to a practice known as open knowledge disclosure, especially Ford's strategy of disclosing its know-how publicly and extensively at the beginning of the 20th century.
    Date: 2010–05
  7. By: Toshihiro Matsumura; Noriaki Matsushima
    Abstract: Innovators who have developed advanced technologies, along with launching new products by themselves, often license these technologies to their rivals. When a firm launches a new product, product positioning is also an important matter. We consider a standard linear city model with two firms in which the licenser and the licensee negotiate on licensing and engage in Nash bargaining after they determine their product positions. We investigate how the bargaining power of the licenser affects the product positions of the firms. We find that the licenser more likely chooses the central position when its bargaining power is weak whereas the product position of the licenser accelerates price competition between the firms. We also discuss the welfare implication. We find that the inverse U shape relationship between the bargaining power of the licenser and total social surplus, i.e., neither too strong nor too weak bargaining power of the licensor is optimal.
    Date: 2010–05
  8. By: Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
    Abstract: Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. We explore an international duopoly model in which a foreign firm has the option of outsourcing post-production services to its domestic rival or providing those services by establishing its own facilities through FDI. We demonstrate that trade liberalization in goods may hurt domestic consumers and lower world welfare, and that the negative welfare impacts are turned into positive ones if service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is still limited.
    Keywords: post-production services, trade liberalization, FDI, outsourcing, international oligopoly
    Date: 2010–04
  9. By: Shi, Guanming (University of Wisconsin); Stiegert, Kyle (University of Wisconsin); Chavas, Jean-Paul (University of Wisconsin)
    Abstract: In this paper, we investigate substitution/complementarity relationships among products sold with different bundled characteristics and under different vertical arrangements. Our conceptual model demonstrates the interactive price impacts emanating from product differentiation, market concentration and market size. The model is applied to the U.S. cottonseed market using transaction level data from 2002 to 2007. This market has been impacted structurally in numerous ways due to the advances and the rapid adoption of seeds with differing bundles of biotechnology traits and vertical penetration emanating from the biotechnology seed industry. Several interesting findings are reported. The econometric investigation finds evidence of sub-additive pricing in the bundling of patented biotech traits. Vertical organization is found to affect pricing and the exercise of market power. While higher market concentration is associated with higher prices, there is also evidence of cross-product complementarity effects that lead to lower prices. Simulation methods are developed to measure the net price effects. These simulations are applicable for use in pre-merger analysis of industries producing differentiated products and exhibiting similar market complexities.
    JEL: L13 L40 L65
    Date: 2009–12

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