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on Industrial Competition |
| By: | Andersson, O.; Argenton, C.; Weibull, J. (Tilburg University, Center for Economic Research) |
| Abstract: | We model a player’s uncertainty about other players’ strategy choices as smooth probability distributions over their strategy sets. We call a strategy profile (strictly) robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence (all sequences) of strategy profiles, in each of which every player’s strategy is optimal under under his or her uncertainty about the others. We derive general properties of such robustness, and apply the definition to Bertrand competition games and the Nash demand game, games that admit infinitely many Nash equilibria. We show that our robustness criterion selects a unique Nash equilibrium in the Bertrand games, and that this agrees with recent experimental findings. For the Nash demand game, we show that the less uncertain party obtains the bigger share. |
| Keywords: | Nash equilibrium;refinement;strategic uncertainty;price competition;Bertrand competition;bargaining;Nash demand game |
| JEL: | C72 D43 L13 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201070&r=com |
| By: | Clements, Matthew T. |
| Abstract: | If a product has two dimensions of quality, one observable and one not, a firm can use observable quality as a signal of unobservable quality. The correlation between consumers' valuation of high quality in each dimension is a key determinant of the feasibility of such signaling. A firm may use price alone as a signal, or price and quality together. Both signals tend to be used when the market is very uninformed, whereas price signaling alone tends to be used when the market is moderately informed. If high observable quality is inexpensive to provide, then it cannot signal high unobservable quality, and low observable quality is always an indication that unobservable quality is high. -- |
| Keywords: | Signaling,quality |
| JEL: | D82 L15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201020&r=com |
| By: | Brouwer, E.; Wiel, H.P. van der (Tilburg University, Center for Economic Research) |
| Abstract: | This paper examines the relationship between competition, innovation and productivity for the Netherlands. We use industry level data aggregated from micro data as well as moments from firm level data for the period 1996-2006. We match innovation data from Community Innovation Survey with accounting data to link innovative activities with performance at the industry level. We find strong evidence for a positive impact of competition on Total Factor Productivity (TFP) at the industry level. Competition directly increases TFP by reducing X-ineficiencies and removing inefficient forms from markets, but also through more innovation. Nonetheless, there exists an inverted U- curve between competition and innovation for the Netherlands, at least for manufacturing industries. Yet, our results indicate that a negative effect of competition on productivity through lower innovation expenditures arises only at very high levels of competition. |
| Keywords: | competition;innovation;profit elasticity;productivity |
| JEL: | D40 L16 O31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201052&r=com |
| By: | Askenazy, P.; Breda, T.; Irac, D. |
| Abstract: | Advertising and innovation are two engines for firms to escape competition through a better attraction power toward consumers or quality advantage. We propose a model that encompasses both the static and dynamic interactions between R&D, advertising and competitive environment. This model provides two main predictions. First, for a given competitive environment, quality leaders spend more in advertising in order to extract maximal rents; thus, lower costs of ads may favor R&D. Second, more competition pushes Neck and Neck firms to advertise more to attract a larger share of consumers on their products or services. Empirical evidence from a large panel of 59,000 French firms over 1990-2004 supports these two properties. |
| Keywords: | Advertising, Innovation, Competition, Lerner. |
| JEL: | D4 O31 D12 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:284&r=com |
| By: | Corchón, Luis C.; Marcos, Félix |
| Abstract: | In this paper we consider price regulation in oligopolistic markets when firms are quantity setters. We consider a market for a homogeneous good with a special form of the demand function (Ï-linearity), constant returns to scale and identical firms. Marginal costs can take two values only: low or high. The regulator knows all parameters except marginal costs. Assuming that the regulator is risk neutral, we characterize the optimal policy and show how this policy depends on the basic parameter of demand and costs |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ner:carlos:info:hdl:10016/6376&r=com |
| By: | Katja Seim; Joel Waldfogel |
| Abstract: | While private monopolists are generally assumed to maximize profits, the goals of public enterprises are less well known. Using the example of Pennsylvania's state liquor retailing monopoly, we use information on store location choices, prices, wholesale costs, and sales to uncover the goals implicit in its entry decisions. Does it seek to maximize profits or welfare? We estimate a spatial model of demand for liquor that allows us to calculate counterfactual configurations of stores that maximize profit and welfare. We find that welfare maximizing networks have roughly twice as many stores as would maximize profit. Moreover, the actual network is much more similar in size and configuration to the welfare maximizing configuration. An alternative to a state monopoly would be the common practice of regulated private entry. While such regimes can give rise to inefficient location decisions, little is known about the size of the resulting inefficiencies. Even for a given number of stores, a simple characterization of free entry with our model results in a store configuration that produces welfare losses of between 3 and 9% of revenue. This is a third to half of the overall loss from unregulated free entry. |
| JEL: | L13 L21 L3 L81 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16258&r=com |
| By: | Bart J. Bronnenberg; Jean-Pierre H. Dube; Matthew Gentzkow |
| Abstract: | We study the long-run evolution of brand preferences, using new data on consumers' life histories and purchases of consumer packaged goods. Variation in where consumers have lived in the past allows us to isolate the causal effect of past experiences on current purchases, holding constant contemporaneous supply-side factors such as availability, prices, and advertising. Heterogeneity in brand preferences explains 40 percent of geographic variation in market shares. These preferences develop endogenously as a function of consumers' life histories and are highly persistent once formed, with experiences 50 years in the past still exerting a significant effect on current consumption. Counterfactuals suggest that brand preferences create large entry barriers and durable advantages for incumbent firms, and can explain persistence of early-mover advantage over long periods. Variation across product categories shows that the persistence of brand preferences is related in an intuitive way to both advertising levels and the social visibility of consumption. |
| JEL: | D12 L1 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16267&r=com |
| By: | Askenazy, P.; Celerier, C.; Irac, D. |
| Abstract: | The share of retail sales made via distance selling has increased steadily, driven by Internet sales. Meanwhile, a large body of research has been devoted to measuring the impact of online shopping on consumer prices. These studies are based primarily on microeconomic data and they reveal contrasting effects due to diverging microeconomic behaviours. This paper aims to use a macro-sector estimation to show how the price-decreasing effects of Internet shopping outweigh the price-increasing effects. In that purpose, we use French price index series and distance selling sales covering about 30 sectors, from 1990 to 2007. We find that downward effects dominate: the recent development of distance selling, due to the development of online selling, results in lower prices. |
| Keywords: | E-Commerce, Price, Competition. |
| JEL: | D12 E31 L8 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:288&r=com |
| By: | Schaeck, K.; Cihák, M. (Tilburg University, Center for Economic Research) |
| Abstract: | How can competition enhance bank soundness? Does competition improve soundness via the efficiency channel? Do banks heterogeneously respond to competition? To answer these questions, we exploit an innovative measure of competition [Boone, J., A new way to measure competition, EconJnl, Vol. 118, pp. 1245-1261] that captures the reallocation of profits from inefficient banks to their efficient counterparts. Based on two complementary datasets for Europe and the U.S., we first establish that the new competition indicator captures a broad variety of other characteristics of competition in a consistent manner. Second, we verify that competition increases efficiency. Third, we present novel evidence that efficiency is the conduit through which competition contributes to bank soundness. In a final examination of banks’ heterogeneous responses to competition, we find that smaller banks’ soundness measures respond more strongly to competition than larger banks’ soundness measures, and two-stage quantile regressions indicate that the soundness-enhancing effect of competition is larger in magnitude for sound banks than for fragile banks. |
| Keywords: | bank competition;efficiency;soundness;Boone indicator;quantile regression |
| JEL: | G21 G28 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201068s&r=com |
| By: | Craig, B.R.; Dinger, V. (Tilburg University, Center for Economic Research) |
| Abstract: | In this paper we revisit the long debate on the risk effects of bank competition and propose a new approach to the empirical estimation of the relation between deposit market competition and bank risk. Our approach accounts for the opportunity of banks to shift to wholesale funding when deposit market competition is intense. The analysis is based on a unique comprehensive dataset which combines retail deposit rates data with data on bank characteristics and with data on local deposit market features for a sample of 589 U.S. banks. Our results support the notion of a risk-enhancing effect of deposit market competition. |
| Keywords: | bank competition;wholesale funding;bank risk;deposit rates |
| JEL: | G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201065s&r=com |
| By: | Di Nicolo, G.; Lucchetta, M. (Tilburg University, Center for Economic Research) |
| Abstract: | We study a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents. We show that more bank competition results in lower economy-wide risk, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations. Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization. These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium. Importantly, they are empirically relevant, and demonstrate the need of general equilibrium modeling to design financial policies aimed at attaining socially optimal levels of systemic risk in the economy. |
| Keywords: | General Equilibrium;Bank Competition;Market Power Rents;Risk |
| JEL: | D5 G21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201067s&r=com |
| By: | Özlem Bedre-Defolie (ESMT European School of Management and Technology); Emilio Calvano (Bocconi University) |
| Abstract: | Payment card networks, such as Visa, require merchants' banks to pay substantial "interchange" fees to cardholders' banks, on a per transaction basis. This paper shows that a network's profit-maximizing fee induces an inefficient price structure, over-subsidizing card usage and over-taxing merchants. In contrast to the literature we show that this distortion is systematic and arises from the fact that consumers make two distinct decisions (membership and usage) whereas merchants make only one (membership). These findings are robust to competition for cardholders and/or for merchants, network competition, and strategic card acceptance to attract consumers. |
| Keywords: | payment card networks, interchange fees, merchant fees |
| JEL: | G21 L11 L42 L31 L51 K21 |
| Date: | 2010–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-10-005&r=com |
| By: | Boone, J.; Douven, R.C.M.H.; Droge, C.; Mosca, I. (Tilburg University, Center for Economic Research) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201055&r=com |
| By: | Jeon, Doh-Shin; Rochet, Jean-Charles |
| JEL: | D42 L42 L82 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/2685/&r=com |
| By: | Kox, Henk L.M.; Leeuwen, George van; Wiel, Henry van der |
| Abstract: | The paper investigates whether scale effects, market structure, and regulation determine the poor productivity performance of the European business services industry. We apply parametric and nonparametric methods to estimate the productivity frontier and subsequently explain the distance of firms to the productivity frontier by market characteristics, entry- and exit dynamics and national regulation. The frontier is assessed using detailed industry data panel for 13 EU countries. Our estimates suggest that most scale advantages are exhausted after reaching a size of 20 employees. This scale inefficiency is persistent over time and points to weak competitive selection. Market and regulation characteristics explain the persistence of X-inefficiency (sub-optimal productivity relative to the industry frontier). More entry and exit are favourable for productivity performance, while higher market concentration works out negatively. Regulatory differences also appear to explain part of the business services' productivity performance. In particular regulation-caused exit and labour reallocation costs have significant and large negative impacts on the process of competitive selection and hence on productivity performance. Overall we find that the most efficient scale in business services is close to 20 employees and that scale inefficiencies show a hump-shape pattern with strong potential scale economies for the smallest firms and diseconomies of scale for the largest firms. The smallest firms operate under competitive conditions, but they are too small to be efficient. And since this conclusion holds for about 95 out of every 100 European business services firms, this factor weighs heavily for the overall productivity performance of this industry. |
| Keywords: | productivity; frontier models; scale; industry dynamics; regulation; European Union; business services |
| JEL: | L8 C34 L1 R38 |
| Date: | 2010–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24389&r=com |