nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒10‒23
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Competition and cost pass-through in differentiated oligopolies By Zimmerman, Paul R.; Carlson, Julie A.
  2. Horizontal mergers with synergies: first-price vs. profit-share auction By Wei Ding; Cuihong Fan; Elmar G. Wolfstetter
  3. Innovation by Entrants and Incumbents By Daron Acemoglu; Dan Vu Cao
  4. Competition for Scarce Resources.. By Eső, Péter; Nocke, Volker; White, Lucy
  5. Monopoly price discrimination and demand curvature.. By Aguirre, Iñaki; Cowan, Simon; Vickers, John
  6. Monopoly Sale of a Network Good By Masaki Aoyagi
  7. Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies By Ribeiro, Ricardo
  8. Alliance Partner Choice in Markets with Vertical and Horizontal Externalities By Hattori, Keisuke; Lin, Ming Hsin
  9. Cross-Border Alliances and Product Market Competition By TAKECHI Kazutaka
  10. Revealed Preference Tests of the Cournot Model By Andres Carvajal; Rahul Deb; James Fenske; John K.-H. Quah
  11. The effect of experience in Cournot play By José Luis Ferreira; Praveen Kujal; Stephen Rassenti
  12. Can they beat the Cournot equilibrium? Learning with memory and convergence to equilibria in a Cournot oligopoly By Thomas Vallée; Murat Yildizoglu
  13. Product Diversity, Strategic Interactions and Optimal Taxation By V. LEWIS
  14. Multimarket linkages, buyer power, and the productivity puzzle By Noriaki Matsushima; Laixun Zhao
  15. Product Market Competition, Information and Earnings Management By GAREN MARKARIAN; JUAN SANTALO
  16. Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions By Kazuko Kano; Takashi Kano; Kazutaka Takechi
  17. Developments in Cable Broadband Networks By Hyun-Cheol CHUNG
  18. Illustrations of Price Discrimination in Baseball By Daniel, Rascher; Andrew, Schwarz
  19. Innovation and competition in EU15: Empirical evidence on the Lisbon Decade and beyond By Ugur, Mehmet; Guner, Umit

  1. By: Zimmerman, Paul R.; Carlson, Julie A.
    Abstract: The impact that competition exerts on the incentives of firms to pass through reductions in their marginal costs is an important consideration in assessing the performance of alternate market structures. This paper examines the role of product differentiation on firm-specific and industry-wide pass-through rates. Relying on Shubik’s (1980) model of differentiated Cournot competition with linear demand, we show that there exists an initial critical range over which the firm-specific cost pass-through rate decreases in the number of firms. Beyond this range the rate continually increases – approaching 50 percent as the number of firms goes to infinity. This contrasts with a model of differentiated Bertrand competition in which cost pass through monotonically decreases in the number of firms. The disparate effects across the Cournot and Bertrand models are shown to stem from the influence of competition and product differentiation on the respective firm reaction functions. Suggestions for future empirical work based upon the models’ predictions and implications for antitrust policy are also discussed.
    Keywords: Competitive effects; Oligopoly; Merger; Pass-through; Product differentiation
    JEL: L13 L40
    Date: 2010–10–15
  2. By: Wei Ding (University of Bonn); Cuihong Fan (Shanghai University of Finance and Economics); Elmar G. Wolfstetter (Humboldt University of Berlin)
    Abstract: We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target. Two auction rules are considered: standard first-price and profit-share auctions, supplemented by entry fees. Since non-merged firms benefit from a merger if the synergies are low, bidders are subject to a positive externality. Nevertheless, pooling does not occur; and the profit-share auction is strictly more profitable than the first-price auction, regardless of whether firms observe the synergy parameter or only the winning bid before they play the oligopoly game.
    Keywords: Horizontal mergers, takeovers, auctions, externalities, oligopoly
    JEL: G34 D44 H23 L13 D43
    Date: 2010–10
  3. By: Daron Acemoglu; Dan Vu Cao
    Date: 2010–10–08
  4. By: Eső, Péter; Nocke, Volker; White, Lucy
    Abstract: We show that the efficient allocation of production capacity can turn a competitive industry and downstream market into an imperfectly competitive one. Even though downstream firms have symmetric production technologies, the downstream industry structure will be symmmetric only if capacity is sufficiently scarce. Otherwise it will be asymmetric, with one large fat capacity-hoarding firm and a fringe of smaller lean and fit firms, so that Tobin`s Q varies inversely with firm size. This is so even if the number of firms is infinitely large. As demand or input quantity varies, the industry may switch between symmetric and asymmetric phases, generating predictions for firm size and costs across the business cycle. Surprisingly, an increase in available capacity resulting in such a switch can cause a reduction in total output and consumer surplus.
    JEL: L25 F15 L11 F12
    Date: 2010
  5. By: Aguirre, Iñaki; Cowan, Simon; Vickers, John
    Abstract: This paper presents a general analysis of the effects of monopolistic third-degree price discrimination on welfare and output when all markets are served. Sufficient conditions — involving straightforward comparisons of the curvatures of the direct and inverse demand functions in the different markets — are presented for discrimination to have negative or positive effects on social welfare and output.
    JEL: L13 D42 L12
    Date: 2010–09
  6. By: Masaki Aoyagi
    Abstract: This paper studies the problem of a monopolist who sells a network good through a price posting scheme. The scheme posts a price of every possible allocation for each buyer, who are then asked to report their private information to the seller. The seller then implements the allocation based on the reports. The social choice functions that are ex post implementable through such a sales scheme are characterized, and the conditions are identified under which the revenue maximizing scheme has the property that the price of a larger network is more affordable than that of a smaller network.
    Date: 2010–09
  7. By: Ribeiro, Ricardo
    Abstract: The concept of diminishing marginal utility is a cornerstone of economic theory. The consumption of a good typically creates satiation that diminishes the marginal utility of consuming more. Temporal satiation induces consumers to increase their stimulation level by seeking variety and therefore substitute towards other goods (substitutability across time) or other differentiated versions (products) of the good (substitutability across products). The literature on variety-seeking has developed along two strands, each focusing on only one type of substitutability. I specify a demand model that attempts to link these two strands of the literature. This issue is economically relevant because both types of substitutability are important for retailers and manufacturers in designing intertemporal price discrimination strategies. The consumer demand model specified allows consumption to have an enduring effect and the marginal utility of the different products to vary over consumption occasions. Consumers are assumed to make rational purchase decisions by taking into account, not only current and future satiation levels, but also prices and product choices. I then use the model to evaluate the demand implications of a major pricing policy change from hi-low pricing to an everyday low pricing strategy. I find evidence that consumption has a lasting effect on utility that induces substitutability across time and that the median consumer has a taste for variety in her product decisions. Consumers are found to be forward-looking with respect to the duration since the last purchase, to price expectations and product choices. Pricing policy simulations suggest that retailers may increase revenue by reducing the variance of prices, but that lowering the everyday level of prices may be unprofitable.
    Keywords: Variety seeking; Intertemporal effects of consumption; product switching; Pricing; Dynamic demand;
    JEL: D12 L81 C61
    Date: 2010–08–15
  8. By: Hattori, Keisuke; Lin, Ming Hsin
    Abstract: This study investigates the choice between complementary and parallel alliances in a market with vertical and horizontal externalities. One composite goods firm competes with two components producers, each providing a complementary component of a differentiated com- posite good. Although the joint profits from a parallel alliance between the composite goods firm and a components producer are always larger than those from a complementary alliance between components producers, through Nash bargaining, a components producer prefers the complementary (parallel) alliance when the degree of product differentiation is sufficiently large (small). Combined with the result that a complementary alliance is socially preferable, our findings provide meaningful implications for antitrust policy.
    Keywords: Complementary alliance; Parallel alliance; Nash bargaining; Antitrust policy
    JEL: L11 L13 L41
    Date: 2010–10–08
  9. By: TAKECHI Kazutaka
    Abstract: Foreign manufacturers have the option of using sales networks of domestic rival firms to save local distribution costs. Such alliances may lead to collusion or create greater distortions because of the additional margins imposed by foreign firms, as shown in the theoretical literature. This paper empirically examines whether these outcomes are realized by alliances using Japanese antibiotics market data, where cross-border alliances are common. Empirical results show that the marginal costs of products supplied through cross-border alliances are lower than those supplied by foreign firms, suggesting that alliances are effective devices to reduce local distribution costs for foreign firms. Furthermore, my test results reveal little evidence of collusion or high markups caused by cross-border alliances.
    Date: 2010–10
  10. By: Andres Carvajal; Rahul Deb; James Fenske; John K.-H. Quah
    Abstract: We consider an observer who makes a finite number of observations of an industry producing a homogeneous good, where each observation consists of the market price and firm specific production quantities. We develop a revealed preference test (in the form of a linear program) for the hypothesis that the firms are playing a Cournot game, assuming that they have convex cost functions that do not change and the observations are generated by the demand function varying across observations. Extending this basic result, we develop tests for the case where (in addition to changes to demand) firms’ cost functions may vary across observations. We also develop tests of Cournot interaction in cases where there are multiple products and where cost functions may be non-convex. Applying these results to the crude oil market, we show that Cournot behavior is strongly rejected.
    Keywords: Nonparametric test, Observable restrictions, Linear programming, Multi-product Cournot oligopoly, Collusion, Crude oil market
    JEL: C14 C61 C72 D21 D43
    Date: 2010
  11. By: José Luis Ferreira; Praveen Kujal; Stephen Rassenti
    Abstract: Strategic play requires that players in oligopolies be more sophisticated than in perfectly competitive markets. It thus seems reasonable to assume that player experience becomes important as the environment gets more complicated. We find that subject experience indeed plays an important role. While inexperienced symmetric duopolies play around the Nash-Cournot quantity, experienced duopolies reduce output and get closer to the monopolistic outcome. Both inexperienced and experienced symmetric quadropolies,however, produce output above the Nash-Coumot equilibrium but, even in this case, output is lower for experienced quadropolies. Experience, however, does not make markets less competitive with the introduction of cost asymmetry. Under cost asymmetry, and relative to the equilibrium prediction, high cost firms produce more output than low cost firms. Analysis of individual data tells us that experienced duopolies and quadropolies adjust output in the same direction as their rivals. Due to the strategic substitutability of quantity choice, we interpret this as an attempt at tacitly colluding. This is true for both duopolies and quadropolies.
    Date: 2010–05
  12. By: Thomas Vallée (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Murat Yildizoglu (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: This article analyses the possibility of firms learning collusive solutions in a Cournot quantity game. Starting from the results of Vallée and Yildizoglu (2009) and of Alos-Ferrer (2004), we study the role of random experimenting, social learning (imitation), and (updated) memory in helping firms to discover more collusive market configurations than those of the Cournot equilibrium (CE). We show that long memory and its update is necessary to achieve such configurations.
    Keywords: Cournot oligopoly; Learning; Evolution; Selection; Evolutionary stability; Nash Equilibrium; Collusion
    Date: 2010–10–15
  13. By: V. LEWIS
    Abstract: The entry of a new product increases consumer surplus through additional product di- versity but decreases firm profits. In markets where .rm entry competition and reduces markups through strategic interactions, we expect entry to be excessively high. In a simple general equilibrium model, this is true for industries with very similar goods. If goods are instead highly differentiated, entry is below optimum. In both cases, the optimal policy is a labour subsidy and a tax on entry. If labour subsidies are unavailable, subsidising entry is optimal for industries with low degrees of product differentiation.
    Keywords: product diversity, entry, strategic interactions, optimal taxation
    JEL: E22 E61 E62
    Date: 2010–07
  14. By: Noriaki Matsushima; Laixun Zhao
    Abstract: This paper examines the relationship between firms' productivity improvement and the volume of exports, and shows that it can be sometimes negative. Specifically, we simultaneously take into account intermediate retailers (i.e., vertically) and multimarket linkages (i.e., horizontally). We find that an improvement of the manufacturing productivity affects the bargained wholesale prices in opposite directions in asymmetric markets, causing retailers to make corresponding changes that look surprising. This result can explain for the empirical "left productivity puzzle" found in Ghemawat et al. (2010). Related to this issue is the relationship between buyer power (caused by a retail merger) and profitability. Contrary to the existing literature, in an extended setup, we find that the merger between the downstream duopolists does not improve their profits if their bargaining power is strong vs. upstream suppliers.
    Date: 2010–10
  15. By: GAREN MARKARIAN (Instituto de Empresa); JUAN SANTALO (Instituto de Empresa)
    Abstract: Abstract: We study the effect of product market competition on the incentives to engage in earnings manipulation and we find that they crucially depend on the level of visibility of firm real activity in the marketplace. If investors can perfectly observe real firm output and sales, then CEOs are forced to act in the marketplace in a consistent manner with the earnings they are reporting. We show in a simple model how this is too expensive in more competitive markets and therefore competition should reduce rather than increase earnings manipulation. On the contrary, if investors and analysts cannot observe firm real output in the marketplace we show how manipulating earnings might be particu
    Date: 2010–05
  16. By: Kazuko Kano (School of Finance and Economics, University of Technology, Sydney); Takashi Kano (Graduate School of Economics, University of Tokyo); Kazutaka Takechi (Faculty of Economics, Hosei University)
    Abstract: Past studies in the literature of the law of one price (LOP) show statistically significant but economically subtle roles of geographical distance in regional price dispersions. In this paper, we challenge this empirical "death of distance" as a primary source of LOP violations investigating a unique daily data set of wholesale prices of agricultural products in Japan that enables us to identify source regions and observe product-delivery patterns to consuming regions. We build a simple structural model to explain the observed product-delivery patterns and argue that ignoring the underlying delivery choice results in a serious under-bias toward inferences on distance effects on regional price dispersions due to sample selection. Estimating a sample-selection model, on which theoretical restrictions of our structural model are imposed, with data of several agricultural products, we find quite large estimates of the distance elasticity of price differential compared with conventional estimates. This paper, hence, provides evidence that conventional estimates of the distance elasticity could be heavily biased downwards and spuriously underestimate the role transportation costs play in regional price dispersions and LOP violations.
    Keywords: law of one price; regional price dispersion; transportation cost; geographical distance; agricultural wholesale price; sample-selection bias
    JEL: F11 F14 F41
    Date: 2010–10–01
  17. By: Hyun-Cheol CHUNG
    Abstract: The position of cable operators within the pay TV market has changed drastically in recent years. Although video service remains core to the cable industry’s business model, cable TV’s market share has been dropping significantly with intense competition from direct broadcast satellite services (DBS), Internet protocol Television (IPTV) services, digital terrestrial television services (DTT) and finally from over-the-top (OTT) service providers that supply video over an existing data connection from a third party. Cable still has a strong market position for video, particularly because of its existing relationships with content providers but the market is likely to become more competitive as other substitutable offers become available over a range of media.
    Date: 2010–03–23
  18. By: Daniel, Rascher; Andrew, Schwarz
    Abstract: Price discrimination of this nature, focused on differing degrees of quality, bundled goods, volume discounts, and other forms of second-degree price discrimination, is commonplace in MLB. Indeed, it is safe to say that every single MLB ticket is sold under some form of price discrimination. As teams grow increasingly sophisticated in their pricing strategies, price discrimination is becoming more precise, more wide-spread, and more profitable, while at the same time providing for more opportunities for more fans to find tickets at a price they are willing to pay. Unlike a baseball game, where one team must lose and one must win, price discrimination allows for win-win economic outcomes for teams and fans alike.
    Keywords: price discrimination; bundling; variable pricing; dynamic pricing; secondary ticketing; two-part tariff; loaded ticket
    JEL: L83 D4
    Date: 2010
  19. By: Ugur, Mehmet; Guner, Umit
    Abstract: In March 2000, the Lisbon Summit set the European Union the goal of becoming ‘the most dynamic and competitive knowledge-based economy in the world’ by 2010. This paper aims to ascertain the extent to which various indicators of innovation in EU15 have improved and whether such improvement has been driven by higher levels of competition in EU15 economies. To this end, we provide a descriptive account of the competition and innovation indicators from 1980-2008. Then, we discuss the relationship between market structure (level of competition) and innovation; and estimate the impact of the former on the latter. We report that aggregate innovation measures for EU15 have been increasing over the 1980-2008 period and there does not seem to be a significant change in the trend during the Lisbon decade (200-2008). Furthermore, increasing levels of innovation have been associated with increasing economic rents – i.e., with further departures from the perfect-competition baseline. Fixed-effect panel-data regression results point out a positive and statistically significant relationship between economic rents and various measures of innovations.
    Keywords: Innovation; competition; European Union; Lisbon Agenda
    JEL: O38 O31 D43
    Date: 2010–09

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