nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒10‒16
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Oligopolistic Price Competition with Informed and Uninformed Buyers By Michal Ostatnicky
  2. Multi-market competition, R&D, and welfare in oligopoly By Akio Kawasaki; Ming Hsin Lin; Noriaki Matsushima
  3. Robustness to Strategic Uncertainty (Revision of DP 2010-70) By Andersson, O.; Argenton, C.; Weibull, J.
  4. Endogenous governance transparency and product market competition By Ana Hidalgo-Cabrillana
  5. Franchise Contracts with Ex Post Limited Liability By Shane B. Evans
  6. Network Competition: Workhorse Resurrection By Thomas P. Tangerås
  7. Rockets and Feathers in the Laboratory By Ralph-C Bayer; Changxia Ke
  8. Media, Aggregators and the Link Economy: Strategic Hyperlink Formation in Content Networks By Chrysanthos Dellarocas; Zsolt Katona; William Rand
  9. Non Linear Contracting and Endogenous Buyer Power between Manufacturers and Retailers: Empirical Evidence on Food Retailing in France By Bonnet, Céline; Dubois, Pierre
  10. "Duopoly in the Japanese Airline Market: Bayesian Estimation for the Entry Game" By Shinya Sugawara; Yasuhiro Omori
  11. Large stores and contracting for mall locations By Tarun Sabarwal; Randal Watson
  12. Competition and Productivity: Evidence from the Post WWII U.S. Cement Industry By Timothy Dunne; Shawn Klimek; James Schmitz, Jr.
  13. A Contest Model of a Professional Sports League with Two-Sided Markets By Helmut Dietl; Tobias Duschl; Egon Franck; Markus Lang

  1. By: Michal Ostatnicky
    Abstract: The standard price competition of two or more players leads to Bertrand equilibrium in basic economic theory (if complete information is assumed, there are no capacity constraints, etc.). In reality, even on highly competitive Internet-based markets, the prices of seemingly undifferentiated goods (e.g. books and CDs on Amazon and similar e-shops) vary, although competition seems prima facie based on prices. I follow the literature that originated with Varian’s (1980) model, especially Kocas and Kiyak (2006), and analyze oligopolistic markets where buyers have reservation values drawn from a common distribution function rather than a single value (inelastic demand), as typically assumed in the models of Varian’s or Kocas and Kiyak’s type. The model presented in this paper is developed from the simplest symmetric set-up (uninformed buyers are assigned to sellers evenly) to the most complex asymmetric set-up with many competing sellers (uninformed buyers are distributed over sellers unevenly). The most complex set-up theoretically rationalizes the empirical findings of Kocas and Kiyak. In the equilibrium of my model, all sellers randomly choose prices from a non-trivial interval for (almost) every seller, while in Kocas and Kiyak’s theoretical model only two sellers randomize while others always offer the same price.
    Keywords: Oligopoly; price competition; price dispersion
    JEL: L11 D43
    Date: 2010–08
  2. By: Akio Kawasaki; Ming Hsin Lin; Noriaki Matsushima
    Abstract: We investigate a multi-market Cournot model with strategic process R&D investments wherein a multi-market monopolist meets entrants that enter one of the markets. We find that entry can enhance the total R&D expenditure of the incumbent firm. That is, entry can stimulate R&D effort. Moreover, the incumbent's profit nonmonotonically changes as the number of entrants increases. Depending on the fixed entry costs and R&D technologies, both insufficient and excess entrycan appear.
    Date: 2010–10
  3. 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
  4. By: Ana Hidalgo-Cabrillana
    Abstract: This paper endogenizes both the choice of governance transparency at the firrm level and the portfolio decisions of investors. ln the model, managers raise money in financial markets that are subject to imperfections arising from the non-observability of output for financiers. Investors, on the other hand, observe a signal correlated with returns. Formal contracting are needed to prevent expropriation of the investor`s wealth by the manager. The contract endogenously determines the nature and formation of the cost and benefits of voluntary disclosure. Managers optimally decide on the quality of the signal —used here as the measure of governance transparency- trading off the possibility of expropriating profits against the opportunity to raise more capital. We show that one important driving force behind governance transparency is product market competition: tougher competition translates into lower frictions on the capital market, since investors have better possibilities for portfolio diversification. Managers react to this loss of bargaining power by increasing transparency. Furthermore, firms characterized by low corporate profits or firms where investor protection is strong at the country level will be more likely to avoid voluntary disclosure regimes.
    Keywords: Corporate governance, Voluntary disclosure, Portfolio choice, Incentives, Product market competition
    JEL: D82 G11 G32 G34
    Date: 2010–09
  5. By: Shane B. Evans
    Abstract: This paper examines the contracting relationship between a manufacturer and a retailer when the retailer has ex ante private information, and is subject to limited liability. The contract takes place over two periods. In the first period, the retailer can make a report of private information, or take an action, either of which influences the manufacturer's beliefs about the distribution of demand states for a final good in the second period. In the second period, the retailer sells the manufacturers intermediate good into a final output market according to a variable fee schedule. The interaction of the limited liability constraints with incentive compatibility in the second stage gives rise to an expected surplus to the retailer, which the manufacturer can extract with a franchise fee. The franchise fee can also be used as a screening device or a means of eliciting the efficient first stage action from the retailer.
    JEL: D82 D86 L42
    Date: 2010–10
  6. By: Thomas P. Tangerås (Research Institute of Industrial Economics (IFN))
    Abstract: I generalize the workhorse model of network competition (Armstrong, 1998; Laffont, Rey and Tirole, 1998a,b) to include income effects in call demand. Income effects imply that call demand depends also on the subscription fee, not only on the call price. In the standard case of differentiated networks, weak income effects are enough to deliver results in line with stylized facts: The networks have an incentive to agree on high mobile termination rates to soften competition. They charge a higher price for calls outside (off-net) than inside (on-net) the network. This vindicates the use of (a perturbation of) the workhorse model of network competition.
    Keywords: bill-and-keep, call price discrimination, network competition, non-linear prices, profit neutrality.
    JEL: L51 L96
    Date: 2010–09
  7. By: Ralph-C Bayer (School of Economics, University of Adelaide); Changxia Ke (Max Planck Institute)
    Abstract: Consumers often complain that retail prices respond faster to increases in wholesale prices than to decreases. Despite many empirical studies confirming this 'Rockets-and-Feathers' phenomenon for different industries, the mechanism driving it is not well understood. In this paper, we show that, in contrast to the theoretical prediction, asymmetric price adjustment to cost shocks, as well as price dispersion, arises in experimental Diamond (1971) markets. The analysis of individual behavior suggests that the observed price dispersion can be explained by bounded rationality, as our data are well explained by Quantal Response Equilibrium (McKelvey and Palfrey 1995). Asymmetric price adjustment is caused by the updating speed of buyers with adaptive expectations being different after positive and negative cost shocks.
    Keywords: Asymmetric Price Adjustment, Search Cost, Price Dispersion, Bounded Rationality, Quantal Response Equilibrium
    JEL: D82 D83 C91 L13
    Date: 2010–10
  8. By: Chrysanthos Dellarocas (School of Management, Boston University); Zsolt Katona (Haas School of Business, University of California, Berkeley); William Rand (Robert H. Smith School of Business, University of Maryland)
    Abstract: A key property of the World Wide Web is the possibility for firms to place virtually costless links to third-party content as a substitute or complement to their own content. This ability to hyperlink has enabled new types of players, such as search engines and content aggregators, to successfully enter content ecosystems, attracting traffic and revenues by hosting links to the content of others. This, in turn, has sparked a heated controversy between content producers and aggregators regarding the legitimacy and social costs/benefits of uninhibited free linking. This work is the first to model the implications of interrelated and strategic hyper-linking and content investments. Our results provide a nuanced view of the much-touted Òlink economyÓ, highlighting both the beneficial consequences and the drawbacks of free hyperlinks for content producers and consumers. We show that content sites can reduce competition and improve profits by forming links to each other; in such networks one site makes high investments in content and other sites link to it. Interestingly, competitive dynamics often preclude the formation of link networks, even in settings where they would improve everyone's profits. Furthermore, such networks improve economic efficiency only when all members have similar abilities to produce content; otherwise the less capable nodes can free-ride on the content of the more capable nodes, reducing profits for the capable nodes as well as the average content quality available to consumers. Within these networks, aggregators have both positive and negative effects. By making it easier for consumers to access good quality content they increase the appeal of the entire content ecosystem relative to the alternatives. To the extent that this increases the total traffic flowing into the content ecosystem, aggregators can help increase the profits of the highest quality content sites. At the same time, however, the market entry of aggregators takes away some of the revenue that would otherwise go to pure content sites. Finally, by placing links to only a subset of available content, aggregators further increase competitive pressure on content sites. Interestingly, this can increase the likelihood that such sites will then attempt to alleviate the competitive pressure by forming link networks.
    Keywords: hyperlinks; content networks; content aggregators; strategic network formation.
    JEL: D83 D85 L14 O34
    Date: 2010–09
  9. By: Bonnet, Céline; Dubois, Pierre
    Abstract: We present the first empirical estimation of a structural model taking into account explicitly the endogenous buyer power of downstream players facing two part tariffs contracts offered by the upstream level. We consider vertical contracts between manufacturers and retailers where resale price maintenance may be used with two part tariffs and allow retailers to have some endogenous buyer power from the horizontal competition of manufacturers. Our contribution allows to recover price-cost margins at the upstream and downstream levels in these different structural models using the industry structure and estimates of demand parameters. We apply it to the market of bottled water in France, estimating a mixed logit demand model on individual level data. Empirical evidence shows that two part tari¤s contracts are used with no resale price maintenance and that the buyer power of supermarket chains is endogenous to the structure of manufacturers competition.
    JEL: C12 C33 L13 L81
    Date: 2010–08
  10. By: Shinya Sugawara (Graduate School of Economics, University of Tokyo); Yasuhiro Omori (Faculty of Economics, University of Tokyo)
    Abstract: This paper provides an econometric analysis on a duopoly game in the Japanese domestic airline market. We establish a novel Bayesian estimation approach for the entry game, which is free from the conventional identification problem and thus allows the incorporation of flexible inference techniques. We find asymmetric strategic interactions between Japanese firms, which implies that competition will still be influenced by the former regulation regime. Furthermore, our prediction analysis indicates that the new Shizuoka airport will suffer from a lack of demand.
    Date: 2010–10
  11. By: Tarun Sabarwal (Department of Economics, University of Kansas); Randal Watson (Department of Economics, University of Texas)
    Abstract: We analyze the contracting problem between a shopping mall and potential anchors (large stores) in a market where consumers with high search costs must choose shopping destinations prior to learning prices. Our model incorporates the interaction between contracting and asymmetric firm sizes into a framework of competing platforms. The mall is but one of three potential destinations in the market, complemented by a stand-alone location for a large store, and a competitive ‘downtown’ centre occupied by small retailers. As in Dudey’s (1990) homogeneousgood framework, consumers choose to visit only one of these locations, based on expected prices at each site. A game of sequential contracting for slots at the mall determines the equilibrium distribution of firms across locations based on their costs and relative bargaining power. We analyze the effects of three policies. First, prohibition of the stand-alone site can increase social welfare, by alleviating excess entry and countering inefficiencies in contracting between the mall owner and potential anchors. Second, subsidies for downtown may push prices at the mall closer to socially efficient levels, but can never increase welfare if the market is initially dominated by a stand-alone big store. A subsidy’s effect on the equilibrium size distribution of mall tenants depends on the concavity of demand. Third, a merger between two big stores can increase social welfare, in part by ameliorating a problem of externalities on non-traders in the contracting with the mall owner. Merged anchor stores that operate at stand-alone sites may retain occupancy of mall space for purely strategic reasons, in order to deter entry.
    Date: 2010–10
  12. By: Timothy Dunne; Shawn Klimek; James Schmitz, Jr.
    Abstract: In the mid 1980s, the U.S. cement industry faced a large increase in foreign competition. Foreign cement producers began offering cement at very large discounts on U.S. prices. We show that productivity (measured by TFP) in the industry was falling during the 1960s and 1970s, but that following the increase in competition, productivity has reversed course and is growing strongly. When foreign competition was weak, productivity fell. When it was strong, productivity grew robustly. We explore the reasons for the large productivity increase. We argue that a large share of the productivity gains resulted from significant changes in management practices at plants.
    Date: 2010–09
  13. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Tobias Duschl (Institute for Strategy and Business Economics, University of Zurich); Egon Franck (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: This paper develops a model of a professional sports league with network externalities by integrating the theory of two-sided markets into a contest model. In professional team sports, leagues function as a platform that enables sponsors to interact with fans. In these league-mediated interactions, positive network effects operate from the fan market to the sponsor market, while negative network effects operate from the sponsor market to the fan market. Clubs react to these network effects by charging higher (lower) prices to sponsors (fans). Our analysis shows that the size of these network effects determines the level of competitive balance within the league. Traditional models, which do not take network externalities into account, under- or overestimate the actual level of competitive balance, which may lead to wrong policy decisions. Moreover, we show that clubs benefit from stronger combined network effects through higher profits. Finally, we derive policy recommendations for improving competitive balance by taking advantage of network externalities.
    Keywords: Competitive balance, contest, multisided market, network externalities, team sports league
    JEL: L11 L13 L83 M21
    Date: 2009–11

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