nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒06‒18
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. The strategic effect of bundling: a new perspective By A. Mantovani
  2. Bundling without Price Discrimination By Carvajal, Andrés; Rostek, Marzena; Weretka, Marek
  3. Relative and Absolute Preference for Quality By Angyridis , Constantine; Sen, Debapriya
  4. Optimal Price Setting with Observation and Menu Costs By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  5. Do Antitrust Agencies Facilitate Meetings in Smoke-Filled Rooms? By Bos Iwan; Peeters Ronald; Pot Erik
  6. Strategic Behavious of Firms in a Duopoly and the Impact of Extending the Patenting Period By Jolian McHardy; Tapan Biswas
  7. Competition Issues in the Seed Industry and the Role of Intellectual Property By Moschini, GianCarlo
  8. Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition By Eva Schliephake; Roland Kirstein
  9. Software Innovation and the Open Source Threat By germán daniel lambardi
  10. Health insurance competition: the effect of group contracts By Jan Boone; Carline Droge; Ilaria Mosca; Rudy Douven,
  11. The Effects of Vertical Integration on the Release of New Films By Claudio Agostini; Eduardo Saavedra
  12. Market concentration measures and investment decisions in Mexican manufacturing firms. By Lopez-Mateo, Celina; Ruiz-Porras, Antonio
  13. Privatización, competencia por depósitos y desempeño bancarios By Ruiz-Porras, Antonio

  1. By: A. Mantovani
    Abstract: This paper investigates the strategic effect of bundling when a multi-product firm producing two complements faces competition in both markets. I consider a demand structure where both Cournot and Bertrand competition can be evaluated. Bundling is completely ineffective when firms compete in quantities. On the contrary, under Bertrand competition, selling the two goods in a package is profitable when the goods produced by the rivals are perceived as close substitutes to those produced by the multi-product firm. Bundling drives prices up, and not only consumer surplus, but also social welfare shrinks, thus calling for the intervention of the antitrust agency.
    JEL: D43 L13 L41
    Date: 2010–05
  2. By: Carvajal, Andrés (Department of Economics, University of Warwick); Rostek, Marzena (Department of Economics, University of Wisconsin-Madison,); Weretka, Marek (Department of Economics, University of Wisconsin-Madison,)
    Abstract: This paper examines the optimal bundling strategies of a multiproduct monopoly in markets in which a seller cannot monitor and thereby restrict the purchases of buyers to a single bundle, while buyers have resale opportunities. In such markets, the standard mechanism through which bundling increases seller profits, based on price discrimination, is not feasible. The profit-maximizing bundling strategy is characterized, given the restrictions on pricing policies resulting from resale and a lack of monitoring. The welfare implications of optimal bundling are analyzed.
    Keywords: Bundling ; Pricing ; Revenue Maximization ; Product Design JEL Codes: D42 ; L12
    Date: 2010
  3. By: Angyridis , Constantine; Sen, Debapriya
    Abstract: This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it.
    Keywords: Relative Preference; Absolute Preference; Singular Menu; Separating Menu
    JEL: D86 D82 D42 L15
    Date: 2010–06–06
  4. By: Fernando Alvarez (University of Chicago); Francesco Lippi (University of Sassari, EIEF); Luigi Paciello (EIEF)
    Abstract: We study the price setting problem of a firm in the presence of both observation and menu costs. In this problem the firm optimally decides when to collect costly information on the adequacy of its price, an activity which we refer to as a price “review”. Upon each review, the firm chooses whether to adjust its price, subject to a menu cost, and when to conduct the next price review. This behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment. The goal of the paper is to study how the firm’s choices map into several observable statistics, depending on the level and relative magnitude of the observation vs the menu cost. The observable statistics are: the frequency of price reviews, the frequency of price adjustments, the size-distribution of price adjustments, and the shape of the hazard rate of price adjustments. We provide an analytical characterization of the firm’s decisions and a mapping from the structural parameters to the observable statistics. We compare these statistics with the ones obtained for the models with only one type of cost. The predictions of the model can, with suitable data, be used to quantify the importance of the menu cost vs. the information cost. We also consider a version of the model where several price adjustment are allowed between observations, a form of price plans or indexation. We find that no indexation is optimal for small inflation rates..
    Date: 2010
  5. By: Bos Iwan; Peeters Ronald; Pot Erik (METEOR)
    Abstract: The theory of industrial collusion generally does not distinguish between tacit and explicit collusion. We show that if tacit collusion is not sustainable, firms may still be willing and able to collude explicitly when demand is viscous, the expected antitrust penalty is limited and antitrust agencies are sufficiently effective in detecting and prosecuting cartels.
    Keywords: microeconomics ;
    Date: 2010
  6. By: Jolian McHardy (Department of Economics, The University of Sheffield Author-Person=pmc71); Tapan Biswas
    Abstract: This paper deals with strategic behaviour of firms in a duopoly, subsequent to the claim by one firm that it has reduced the unit cost of production. A variety of possible strategic equilibria are discussed in the context of a duopoly game between a multinational and a local firm. In the context of an extended uniform period of patenting, as finally agreed in the Uruguay round (1994), firms have increased incentive to take patents. In the presence of cost differences, the act of taking process-patents has implications for the equilibrium output strategies of the duopoly firms and sometimes may have a negative overall welfare effect for the local producer and consumers.
    Keywords: Asymmetric Information, Duopoly, Process Patenting, Repeated Games
    JEL: O12 D23 D43
    Date: 2010–06
  7. By: Moschini, GianCarlo
    Abstract: Research and Development (R&D) and innovation are crucial features of the seed industry. To support large R&D investments by the private sector, strong intellectual property rights, such as patents, are necessary. The exclusivity granted by patents naturally creates market power positions and raises difficult and unresolved competition issues in an antitrust context. 
    JEL: L1 L4 O3 Q1
    Date: 2010–06–08
  8. By: Eva Schliephake (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Roland Kirstein (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This paper analyses the competitive effects of capital requirement regulation on an oligopolistic credit market. In the first stage, banks choose the structure of refinancing their assets, thereby making an imperfect commitment to a loan capacity as a function of the chosen degree of capitalization and the regulatory capital requirement. In the second stage, loan price competition takes place. It is shown that a capital requirement regulation may not only decrease the supply of credit through an increased marginal cost effect but can have an additional collusive enhancing effect resulting in even higher credit prices and increased profits for the banks.
    Keywords: equity regulation, oligopoly, capacity constraint
    JEL: G21 K23 L13
    Date: 2010–05
  9. By: germán daniel lambardi
    Abstract: In this paper I study how innovation investment in a software duopoly is affected by the fact that one of the firms is, or might become Open Source. Firms can either be proprietary source (PS) or open source (OS), and have different initial technological levels. An OS firm is a for profit organization whose basic software is OS and it is distributed for free. The OS firm, however, is able to make profits from selling complementary software and, on the cost side; it receives development help from a community of users. I first compare a duopoly composed by two PS firms with a mixed duopoly of a PS and OS firm and I find that a PS duopoly might generate more innovation than a mixed duopoly if the initial technological gap between firms is small. However if this gap is large, a PS duopoly generates less innovation than a mixed duopoly. I then extend the setting to allow PS firms to switch to OS or to remain PS. A PS firm wants to become OS if it gets behind enough in the technological race against a competitor. I find that the outside option to become OS might soften competition on innovation since the technological leader prefers to reduce his innovation investment to avoid the OS switch of the follower. Therefore, although the switch to OS could generate higher investment levels ex-post it might generate lower investment ex-ante. In this context I find that a government subsidy to OS firms could be potentially harmful for innovation.
    Date: 2010–06–12
  10. By: Jan Boone; Carline Droge; Ilaria Mosca; Rudy Douven,
    Abstract: In countries like the US and the Netherlands health insurance is provided by private firms. These private firms can offer both individual and group contracts. The strategic and welfare implications of such group contracts are not well understood. Using a Dutch data set of about 700 group health insurance contracts over the period 2007-2008, we estimate a model to determine which factors explain the price of group contracts. We find that groups that are located close to an insurers’ home turf pay a higher premium than other groups. This finding is not consistent with the bargaining argument in the literature as it implies that concentrated groups close to an insurer’s home turf should get (if any) a larger discount than other groups. A simple Hotelling model, however, does explain our empirical results.
    Keywords: health insurance; health-plan choice; managed competition
    JEL: I11 L13
    Date: 2010–06
  11. By: Claudio Agostini (ILADES-Georgetown University, Universidad Alberto Hurtado); Eduardo Saavedra (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: This paper both theoretically and empirically addresses how a vertical structure in the motion-pictures industry determines the number of prints a distributor releases of a new film. A simple theoretical model shows that the optimal number of copies is increasing on the expected demand for the film and the revenue share of the distributor, and decreasing on the cost of each copy. The model also predicts that the optimal number of copies will decrease with the number of theaters that are vertically integrated with the distributor, as long as running a cinema requires financing a non-negligible cost of capital. The theoretical results are empirically tested using a very rich dataset of films exhibition patterns in the major Chilean markets. The empirical results show that, on average, a non-integrated distributor releases 8 more copies than an integrated distributor.
    Keywords: Motion-Pictures, Vertical Integration, Release of New Films
    JEL: L22 L82 C25
    Date: 2009–06
  12. By: Lopez-Mateo, Celina; Ruiz-Porras, Antonio
    Abstract: We study how alternative measures of market concentration may explain investment decisions of Mexican manufacturing firms. The measures include the Herfindahl-Hirschman Index and the Dominance one. The first one is the traditional measure of market structure concentration. The Dominance Index is a competition measure used by Mexican regulators. The econometric assessments suggest that investment decisions of Mexican firms can be better explained by the Dominance Index measure than by the Herfindahl-Hirschman one. Thus our results suggest that the Mexican Dominance Index might be useful as a measure of market structure and competition. Such conclusion is based on several econometric assessments. In all cases we use certain characteristics of the firms (size, cash flows, investment opportunities and capital intensity) as control variables.
    Keywords: Investment; Dominance Index; Herfindahl-Hirschman Index; Manufacturing; Mexico
    JEL: L22 L40 L60
    Date: 2010–02–17
  13. By: Ruiz-Porras, Antonio
    Abstract: In this article we develop a microeconomic framework to study the relationships among privatization, competition for deposits and performance in banking. Particularly, we analyze banking privatization when competitive strategies of the Cournot and Stackelberg types are allowed. Our findings show that some conditions are necessary to justify it under the following criteria: (i) efficiency, (ii) market power/financial stability and (iii) consumption availability for depositors. They also show that privatizations are relatively easy to justify when leader-follower relationships are allowed in the banking system. Even government revenues, due to privatization, are higher when these relationships exist.
    Keywords: banking; privatization; competition; performance; deposits
    JEL: D43 G21
    Date: 2010–04–08

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