nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒12‒23
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Hotelling competition with multi-purchasing By Anderson, Simon P.; Foros, Øystein; Kind, Hans Jarle
  2. Strategic profit sharing leads to collusion in Bertrand oligopolies By José Luis Ferreira; Roberts Waddle
  3. Towards Analysis of Vertical Structure of Industries: a method and its application to U.S. industries By Sadao, Nishimura
  4. Testable implications for the Bresnahan-Lau model of market competition By Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK
  5. A Test of Monopoly Price Dispersion Under Demand Uncertainty By Humphreys, Brad; Soebbing, Brian
  6. Mergers and Partial Ownership By Foros, Øystein; Kind, Hans Jarle; Shaffer, Greg
  7. Vertical control of a distribution network - an empirical analysis of magazines By Stijn FERRARI; Frank VERBOVEN
  8. Product differentiation on a platform: the informative and persuasive role of advertising By Dries DE SMET; Patrick VAN CAYSEELE
  9. Two-Sided B2B Platforms By Jullien, Bruno
  10. Automobile engine variants and price discrimination By Øyvind THOMASSEN
  11. Vertical integration in the Czech agriculture – focus on dairy and meat sectors By Janda, Karel
  12. Price Competition on Graphs By Adriaan R. Soetevent

  1. By: Anderson, Simon P. (Dept. of Economics, University of Virginia); Foros, Øystein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: We analyze a Hotelling model where consumers either buy one out of two goods (single-purchase) or both (multi-purchase). The firms’ pricing strategies turn out to be fundamentally different if some consumers multi-purchase compared to if all single-purchase. Prices are strategic complements under single-purchase, and increase with quality. In a multi-purchase regime, in contrast, prices are strategically independent because firms then act monopolistically by pricing the incremental benefit to marginal consumers. Furthermore, prices can decrease with quality due to overlapping characteristics. Higher preference heterogeneity increases prices and profits in equilibrium with single-purchase, but decreases them with multi-purchase.
    Keywords: Multi-purchase; incremental pricing; content competition
    JEL: G00
    Date: 2010–12–11
  2. By: José Luis Ferreira; Roberts Waddle
    Abstract: One simple way to endogenize the degree of cross ownership in an industry is that rms give away part of their pro ts. We show that this possibility of unilaterally giving pro ts away to the rival previous to Bertrand competition opens the door to multiple equilibria. In the symmetric duopoly with con- stant marginal costs any price between the cost and the monopolistic price can be sustained in a subgame perfect equilibrium. Thus, tacit collusion in the one shot game can be achieved. Further, any market share can also be sustained for any equilibrium price. These results are extended to more than two rms and to asymmetric costs.
    Keywords: Profit sharing, Oligopoly, Collusion, Cross ownership, Bertrand
    JEL: L12
    Date: 2010–10
  3. By: Sadao, Nishimura
    Abstract: In this paper we present a method to analyse vertical structure of industries. A product of an industry has a hierarchical value structure with layers, each of which consists of value added injected by various production stages (current and previous) of various industries. This vertical structure makes it possible to measure value added (VA) levels (vertical positions) of VA receivers (stages of use industries), while products of supply industries and their value added flow into these stages of industries which have respective VA levels. These flows are value added contributions by supply industries. By calculating each industry's VA contributions and corresponding target VA levels, it is possible to evaluate vertical structure of industries in the whole economy. We applied this method to 1998--2008 U.S. Input-Output Tables. Resulting average VA contribution levels and graphs of VA contributions are displayed.
    Keywords: vertical structure; value added; supply; use
    JEL: D57 C67
    Date: 2010–12–15
  4. By: Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK
    Abstract: We derive necessary and sufficient testable implications on the reduced form price and quantity functions for the Bresnahan-Lau model of market competition. The conditions are twofold. A first condition relates to the fact that the reduced form price function should correspond to an inverse demand function. The second condition captures that the degree of competition must be invariant to changes in the exogenous variables.
    Date: 2010–04
  5. By: Humphreys, Brad (University of Alberta, Department of Economics); Soebbing, Brian (University of Alberta, Physical Education and Recreation)
    Abstract: Dana (2001) developed a model of price dispersion under demand uncertainty. The model predicts that, in the face of uncertain demand and inflexible prices, monopolists maximizes pro fits using ex ante price discrimination. We test the predictions of this model using a unique data set from Major League Baseball (MLB). Estimation of a two-way fixed effects model indicate that ticket price dispersion changes systematically with demand uncertainty in MLB, verifying the predictions of the model.
    Keywords: price dispersion; demand uncertainty; sports
    JEL: D42 L12 L83
    Date: 2010–12–07
  6. By: Foros, Øystein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Shaffer, Greg (University of Rochester and University of East Anglia)
    Abstract: In this paper we compare the profitability of a merger between two firms (one firm fully acquires another) and the profitability of a partial ownership arrangement between the same two firms in which the acquiring firm obtains corporate control over the pricing decisions of the acquired firm. We find that joint profit can be higher in the latter case because it may result in a greater dampening of competition with respect to an outside competitor. We also derive comparative statics on the prices of the acquiring firm, the acquired firm, and the outside firm and use them to explain puzzling features of the pay-TV markets in Norway and Sweden.
    Keywords: Media economics; Mergers; Corporate Control; Financial Control
    JEL: G34
    Date: 2010–12–11
  7. By: Stijn FERRARI; Frank VERBOVEN
    Abstract: How does an upstream firm determine the size of its distribution network, and what is the role of vertical restraints? To address these questions we develop and estimate two models of outlet entry, starting from the basic trade-o¤ between market expansion and fixed costs. In the coordinated entry model the upstream firm sets a market-specific wholesale price to implement the first-best number of outlets. In the restricted/free entry model the upstream firm has insufficient price instruments to target local markets. It sets a uniform wholesale price, and restricts entry in markets where market expansion is low, while allowing free entry elsewhere. We apply the two models to magazine distribution. The evidence is more consistent with the second model where the upstream firm sets a uniform wholesale price and restricts the number of entry licenses. We use the model to assess the profitability of modifying the vertical restraints. A government ban on restriced licensing would reduce profits by a limited amount, so that the business rationale for restricted licensing should be sought elsewhere. Furthermore, introducing market-specific wholesale prices would implement the first-best, but the profit increase would be small, providing a rationale for the current uniform wholesale prices.
    Date: 2010–05
  8. By: Dries DE SMET; Patrick VAN CAYSEELE
    Abstract: Both sides of a two-sided market are usually modeled as markets without product differentiation. Often however,it will be profit maximizing to differentiate one or two sides in two or more types. In a simple theoretical model,inspired by Yellow Pages,we show that this decision crucially depends on the appreciation of these differentiated types by the other side. We argue that this consists of two parts: first, a preference for informative advertisement by users and second, the effect of persuasive advertisements on users. The relation between both effects drives the monopolist decision to engage in product differentiation. We test this conceptual framework in an empirical investigation of Yellow Pages. We find that Yellow Pages publishers offer large ads even though users don't value them at all. The economic rationale for this is that each advertisement type contributes directly (by the price paid for it) and indirectly (by increased usage) to revenues. Large ads are mainly set for this direct contribution, small ads for this indirect contribution. If a platform can choose the size, it will make the size difference between small and large ads as large as possible, in order to attract as much users as possible, but also to induce self selection among advertisers.
    Keywords: two-sided markets, product differentiation, Yellow Pages, advertising
    JEL: D42 L12 L86
    Date: 2010–01
  9. By: Jullien, Bruno
    Abstract: This chapter provides a roadmap to the burgeoning literature on two-sided markets with a specific focus on BtoB market places. On-line intermediation involves two-sided network effects between buyers and sellers, and the implications for optimal BtoB platforms’ tariffs are discussed. The chapter discusses first the monopoly case, drawing attention to the distinction between upfront registration and transaction fees. Then the competitive case is discussed, with different degrees of differentiation, the distinction between single-homing and multi-homing, and different business models. The last section is devoted to non-price issues such as tying, the design of the matching process and the ownership structure.
    Date: 2010–10–31
  10. By: Øyvind THOMASSEN
    Abstract: Using a structural model of demand for automobile engine variants, this paper finds that there is second-degree price discrimination: markups increase with engine size. Still, average markups are lower than when models have just one engine. The paper develops the first empirical demand framework suitable for markets with variants. There is an unobserved product characteristic and a consumer-specific logit term for classes of products, but both are fixed across variants. Fixed effects control for unobservables. The literature’s assumption of orthogonality between unobserved and observed product characteristics is not needed.
    Keywords: second-degree price discrimination, automobiles, discrete-choice demand models
    JEL: L11 L62 C25
    Date: 2010–04
  11. By: Janda, Karel
    Abstract: In this paper we provide an overview of the two most important sectors in the Czech agriculture: the dairy farming and the meat production. Since the focus of our paper in on the vertical integration, we provide this overview along the whole production vertical line. We start with the suppliers for the farmers and continue through the farm production, distribution and milk and meat processing and storage facilities. The final links in the production vertical structure are wholesale and retail consumers. In both of the considered vertical lines we concentrate on the key analytical parameters which are price transmission elasticities and we provide an overview of their values obtained in the Czech agricultural economic research. Since the question of competition and strategic relations inside the vertical supply-demand structure is an important topic in industrial organization theory and policy, we also pay attention to major cases of alleged fair competition violations in the Czech meat and diary industry.
    Keywords: Vertical integration; meat; dairy; Czech Republic
    JEL: L11 Q13 Q12
    Date: 2010–12–12
  12. By: Adriaan R. Soetevent (University of Amsterdam)
    Abstract: This paper extends Hotelling's model of price competition with quadratic transportation costs from a line to graphs. I propose an algorithm to calculate firm-level demand for any given graph, conditional on prices and firm locations. One feature of graph models of price competition is that spatial discontinuities in firm-level demand may occur. I show that the existence result of D'Aspremont et al. (1979) does not extend to simple star graphs. I conjecture that this non-existence result holds more generally for all graph models with two or more firms that cannot be reduced to a line or circle.
    Keywords: spatial competition; Hotelling; graphs
    JEL: D43 L10 R12
    Date: 2010–12–13

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