nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒10‒30
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Managerial Incentives and Stackelberg Equilibria in Oligopoly By Marcella Scrimitore
  2. Partial collusion with asymmetric cross-price effects By L. Savorelli
  3. Managing Strategic Buyers By Johannes Horner; Larry Samuelson
  4. Exploding Offers and Buy-Now Discounts By Mark Armstrong; Jidong Zhou
  5. Is conformism desirable? Network effects, location choice, and social welfare in a duopoly By L. Savorelli
  6. Firm Size Distribution under Horizontal and Vertical R&D By Pedro Mazeda Gil; Fernanda Figueiredo
  7. Pricing, Advertising, and Market Structure with Frictions By Gomis-Porqueras, Pedro; Julien, Benoit; Wang, Chengsi
  8. Sorting versus screening: search frictions and competing mechanisms. By Eeckhout, Jan; Kircher, Philipp
  9. Price Increasing Competition? Experimental Evidence By Cary Deck; Jingping Gu
  10. Optimal Leniency Programs in Antitrust By Andrea Pinna
  11. Targeting in Advertising Markets: Implications for Offline vs. Online Media By Dirk Bergemann; Alessandro Bonatti
  12. Land Use Regulation as a Barrier to Entry: Evidence from the Texas Lodging Industry By Junichi Suzuki
  13. Economics of Open Source: A Dynamic Approach By Jeongmeen Suh; Murat Yilmaz
  14. Banking sector competition in Russia By Anzoategui, Diego; Soledad Martinez Peria, Maria; Melecky, Martin
  15. On Price Taking Behavior in a Nonrenewable Resource Cartel-Fringe Game By BENCHEKROUN, Hassan; WITHAGEN, Cees
  16. Market size, competition and the product mix of exporters By Thierry Mayer; Marc J. Melitz; Gianmarco I.P. Ottaviano

  1. By: Marcella Scrimitore
    Abstract: The paper investigates both quantity and price oligopoly games in markets with a variable number of managerial and entrepreneurial firms which defines market structure. Following Vickers (Economic Journal, 1985) which establishes an equivalence between the equilibrium under unilateral delegation and the Stackelberg quantity equilibrium, the outcomes of these games are compared with the ones in sequential multi-leaders and multi-followers games. The profitability of a managerial/entrepreneurial attitude vs leadership/followership is shown to critically depend upon the kind of strategy, price or quantity, and upon the assumed market structure. Indeed, the latter turns out to be crucial in determining the equivalence result that is shown to be contingent on the assumption that just one leader or one managerial firm operate in the market. A welfare analysis finally highlights the differences between the delegation and the sequential games, focusing on the impact of market structure and imperfect substitutability on the equilibria of the two games.
    Keywords: Strategic delegation, sequential games, quantity and price competition, welfare analysis.
    JEL: C72 L13 L22
    Date: 2010–10–19
  2. By: L. Savorelli
    Abstract: Asymmetries in cross-price elasticities have been demonstrated by several empirical studies. In this paper we study from a theoretical stance how introducing asymmetry in the substitution effects influences the sustainability of collusion. We characterize the equilibrium of a linear Cournot duopoly with substitute goods, and consider substitution e¤ects which are asymmetric in magnitude. Within this framework, we study partial collusion using Friedman (1971) solution concept. Our main result shows that the interval of quantities supporting collusion in the asymmetric setting is always smaller than the interval in the symmetric benchmark. Thus, the asymmetry in the substitution effects makes collusion more difficult to sustain. This implies that previous Antitrust decisions could be reversed by considering the role of this kind of asymmetry.
    JEL: C72 D43 L13
    Date: 2010–10
  3. By: Johannes Horner; Larry Samuelson
    Date: 2010–10–22
  4. By: Mark Armstrong; Jidong Zhou
    Abstract: A common sales tactic is for a seller to encourage a potential customer to make her purchase decision quickly. We consider a market with sequential consumer search in which firms often encourage first-time visitors to buy immediately, either by making an “exploding offer” (which permits no return once the consumer leaves) or by offering a “buy-now discount” (which makes the price paid for immediate purchase lower than the regular price). Prices often increase when these policies are used. If firms cannot commit to their sales policy, the outcome depends on whether consumer incur an intrinsic cost of returning to a firm: if there is no such return cost, it is often an equilibrium for firms to offer a uniform price to both first-time and returning visitors; if the return cost is positive, however, firms are forced to make exploding offers.
    Keywords: Consumer search, oligopoly, price discrimination, high-pressure selling, exploding offers, buy-now discounts, costly recall.
    JEL: D40 D43 D83
    Date: 2010–10–24
  5. By: L. Savorelli
    Abstract: In this paper we study a duopoly where the network e¤ect is nonmonotone and the network can be overloaded. The firms choose prices and locations endogenously, and the agent's utility is influenced by the number of people patronizing the same firm she does. We determine the market equilibrium, and we study how the network effect influences social welfare. We compare this setting with the standard horizontal differentiation model with no network effects to understand whether and how conformism is socially desirable. The results show that whether network effects are desirable depends on how people are conformist, and whether overloading is feasible. If overloading is not possible (in either of the firm's network), and the total consumers' mass is sufficiently high, a network effect which is slightly concave increases social welfare. By contrast, if overloading is feasible, and the total consumers' mass is sufficiently small, social welfare is increased if the network effect is more concave than in the previous case.
    JEL: L14 D62
    Date: 2010–10
  6. By: Pedro Mazeda Gil (CEF.UP, Faculdade de Economia, Universidade do Porto); Fernanda Figueiredo (CEAUL, Faculdade de Economia, Universidade do Porto)
    Abstract: This paper studies the firm size distribution arising from an endogenous growth model of quality ladders with expanding variety. The probability distribution function of a given cohort of firms is a Poisson distribution that converges asymptotically to a normal of log size. However, due to firm entry propelled by horizontal R&D, the total distribution - i.e., when the entire population of firms is considered - is a mixture of Poisson distributions which is systematically right skewed and exhibits a fatter upper tail than the normal distribution of log size. Our theoretical results qualitatively match the empirical evidence found both for the cohort and the total distribution, and which has been presented as a challenge for theory to explain. Moreover, by obtaining a total distribution with a gradually falling variance over a long time span, the model is able to address complementary empirical evidence that points to a total distribution subtly evolving over time.
    Keywords: Firm size distribution; Skewness; Heavy tails; Endogenous growth; Horizontal and vertical R&D
    JEL: O41 O38 L11
    Date: 2010–10
  7. By: Gomis-Porqueras, Pedro; Julien, Benoit; Wang, Chengsi
    Abstract: This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers and uncoordinated buyers. Sellers' search intensity attracts buyers only probabilistically through costly informative advertisement. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed. The model generates an inverted U-shape relationship between individual advertisement and market tightness which is robust to alternative advertising technologies. The well known empirical fact in the IO literature reflects the trade-off between price and market tightness-matching effects. Finally, in this environment we can alleviate the discontinuity problem, allowing for unique symmetric equilibrium price to be derived.
    Keywords: Directed searching; Advertising; Pricing;Market structure
    JEL: L11 L13 M37
    Date: 2010–10–16
  8. By: Eeckhout, Jan; Kircher, Philipp
    Abstract: In a market where sellers compete by posting trading mechanisms, we allow for a general search technology and show that its features crucially affect the equilibrium mechanism. Price posting prevails when meetings are rival, i.e., when a meeting by one buyer reduces another buyer's meeting probability. Under price posting buyers reveal their type by sorting ex-ante. Only if the meeting technology is sufficiently non-rival, price posting is not an equilibrium. Multiple buyer types then visit the same sellers who screen ex-post through auctions.
    Date: 2010–07
  9. By: Cary Deck (Department of Economics, University of Arkansas); Jingping Gu (Department of Economics, University of Arkansas)
    Abstract: Economic intuition suggests that increased competition generates lower prices. However, recent theoretical work by Chen and Riordan (2008) shows that a monopolist may set a lower price in the absence of a competitor selling a differentiated product. The direction of the predicted price change is dependent upon the joint distribution of buyer values for the two products. We explore this relationship using controlled laboratory experiments. Our results indicate that the distribution of buyer values does affect prices in a manner consistent with the theoretical predictions, although price increasing competition is rare due in part to overly intense competition regardless of the distribution of buyer values.
    Keywords: product differentiation, pricing, market structure, market experiments
    JEL: C9 D4 L1
    Date: 2010
  10. By: Andrea Pinna
    Abstract: This paper analyses the incentive structure underlying the adoption of leniency programs in antitrust enforcement. The enforcement of competition law is treated as the delegation of the economic activity from the government to private firms. The model contributes to the debate over desirability of granting leniency to more than one cartelists. For this purpose, I introduce a probability of conviction that depends on authority-specific characteristics. This results in the optimal number of leniencies being specific to national authorities and market structures. The model confirms a result widely acknowledged in the antitrust literature - a program that merely reduces sanctions to the first reporter is ineffective.
    Keywords: Antitrust; Leniency; Deterrence
    JEL: K21 L13 L14
    Date: 2010
  11. By: Dirk Bergemann; Alessandro Bonatti
    Date: 2010–10–22
  12. By: Junichi Suzuki
    Abstract: This paper examines the anticompetitive effects of land use regulation using microdata on mid-scale chain hotels in Texas. I construct a dynamic entry-exit model that endogenizes hotel chains\' reactions to land use regulation. Estimation results indicate that imposing stringent regulation increases costs considerably. Hotel chains nonetheless enter highly regulated markets even if entry probabilities are lower, anticipating fewer rivals and hence greater market power. Consumers incur the costs of regulation indirectly in the form of high prices.
    Keywords: Land use regulation; firms\' entry; lodging industry;
    JEL: R3 L1 L5
    Date: 2010–10–21
  13. By: Jeongmeen Suh; Murat Yilmaz
    Date: 2010
  14. By: Anzoategui, Diego; Soledad Martinez Peria, Maria; Melecky, Martin
    Abstract: The Russian banking sector includes approximately 1,000 banks, but is it competitive? This paper analyzes bank competition in Russia during 2002-2008. The authors examine indicators of concentration and contestability, and compute non-structural measures of competition. They compare competition in Russia to that in Brazil, China, and India, and contrast competition across different groups of banks within Russia. Contestability in Russia is obstructed by uneven supervisory practices and an unclear exit process. Non-structural measures reveal that banks in Russia are less competitive than those in Brazil. Within Russia, large banks and state-owned banks exert more market power than the smaller and privately-owned institutions. Finally, business-oriented banks are more competitive than those concentrating on lending to individuals.
    Keywords: Banks&Banking Reform,Access to Finance,Financial Intermediation,Financial Crisis Management&Restructuring,Emerging Markets
    Date: 2010–10–01
  15. By: BENCHEKROUN, Hassan; WITHAGEN, Cees
    Abstract: We consider a nonrenewable resource game with one cartel and a set of fringe members. We show that (i) the outcomes of the closed-loop and the open-loop nonrenewable resource game with the fringe members as price takers (the cartel-fringe game à la Salant 1976) coincide and (ii) when the number of fringe firms becomes arbitrarily large, the equilibrium outcome of the closed-loop Nash game does not coincide with the equilibrium outcome of the closed-loop cartel-fringe game. Thus, the outcome of the cartel-fringe open-loop equilibrium can be supported as an outcome of a subgame perfect equilibrium. However the interpretation of the cartel-fringe model, where from the outset the fringe is assumed to be price-taker, as a limit case of an asymmetric oligopoly with the agents playing Nash-Cournot, does not extend to the case where firms can use closed-loop strategies.
    Keywords: cartel-fringe, dominant firm versus fringe, price taking, nonrenewable resources, dynamic games, open-loop versus closed-loop strategies
    JEL: D43 Q30 L13
    Date: 2010
  16. By: Thierry Mayer (Sciences-Po; CEPII; CEPR); Marc J. Melitz (Harvard University; NBER; CEPR); Gianmarco I.P. Ottaviano (Bocconi University; Fondazione Eni Enrico Mattei (FEEM); CEPR)
    Abstract: Recent empirical evidence has highlighted how the export patterns of multi-product firms dominate world trade flows, and how these multi-product firms respond to different economic conditions across export markets by varying the number of products they export. In this paper, we further analyze the effects of those export market conditions on the relative export sales of those goods: we refer to this as the firm's product mix choice. We build a theoretical model of multi-product firms that highlights how market size and geography (the market sizes of and bilateral economic distances to trading partners) affects both a firm's exported product range and its exported product mix across market destinations. We show how tougher competition in an export market - associated with a downward shift in the distribution of markups across all products sold in the market - induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Our theoretical model shows how this effect of export market competition on a firm's product mix then translates into differences in measured firm productivity. Thus, a firm operating a given technology will produce relatively more output per worker when it exports to markets with tougher competition. This productivity gain is further compounded by the effect of competition on the mix of exported products.
    Date: 2010–10

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