nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒02‒12
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Loss Leading as an Exploitative Practice By Rey, Patrick; Chen, Zhijun
  2. Consumer Search Markets with Costly Second Visits By Maarten C.W. Janssen; Alexei Parakhonyak
  3. Product innovation and market acquisition of firms By GABSZEWICZ, Jean; TAROLA, Ornella
  4. Bargaining and delay in patent licensing By MAULEON, Ana; VANNETELBOSCH, Vincent; VERGARI, Cecilia
  5. Dynamic joint investments in supply chains under information asymmetry By AGRELL, Per; KASPERZEC, Roman
  6. Endogenous Timing in a Mixed Duopoly: Wighted Welfare and Price Competition. By Juan Carlos Barcena-Ruiz; Maximo Sedano
  7. Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms? By Kurt R. Brekke; Luigi Siciliani; Odd Rune Straume
  8. Co-Production and Managed Competition in Mixed Quasi-markets By F. Delbono; D. Lanzi
  9. Measuring competition using the Profit Elasticity: American Sugar Industry, 1890 - 1914 By Jan Boone; Michiel van Leuvensteijn
  10. Welfare Effects of Pharmaceutical Informative Advertising By Paris Cleanthous
  11. Evaluating Innovation and Moral Hazard in Pharmaceuticals By Paris Cleanthous
  12. Entry and Exit of Physicians in a two-tiered public/private Health Care System By Martin Gächter; Peter Schwazer; Engelbert Theurl
  13. What do foreigners want? Evidence from targets in bank cross-border M&As By Caiazza, Stefano; Clare, Andrew; Pozzolo, Alberto Franco

  1. By: Rey, Patrick; Chen, Zhijun
    Abstract: Large retailers, enjoying substantial market power in some local markets, often compete with smaller retailers who carry a narrower range of products in a more efficient way. We find that these large retailers can exercise their market power by adopting a loss-leading pricing strategy, which consists of pricing below cost some of the products also offered by smaller rivals, and raising the prices on the other products. In this way, the large retailers can better discriminate multi-stop shoppers from one-stop shoppers — and may even earn more profit than in the absence of the more efficient rivals. Loss leading thus appears as an exploitative device, designed to extract additional surplus from multi-stop shoppers, rather than as an exclusionary instrument to foreclose the market, although the small rivals are hurt as a by-product of exploitation. We show further that banning below-cost pricing increases consumer surplus, small rivals’ profits, and social welfare. Our insights apply generally to industries where a firm, enjoying substantial market power in one segment, competes with more efficient rivals in other segments, and procuring these products from the same supplier generates customer-specific benefits. They also apply to complementary products, such as platforms and applications. There as well, our analysis provides a rationale for below-cost pricing based on exploitation rather than exclusion.
    Keywords: loss leading, exploitative practice, retail power
    JEL: L11 L41
    Date: 2010–11–23
  2. By: Maarten C.W. Janssen; Alexei Parakhonyak
    Abstract: This is the first paper on consumer search where the cost of going back to stores already searched is explicitly taken into account. We show that the optimal sequential search rule under costly second visits is very different from the traditional reservation price rule in that it is nonstationary and not independent of previously sampled prices. We explore the implications of costly second visits on market equilibrium in two celebrated search models. In the Wolinsky model some consumers search beyond the first firm and in this class of models costly second visits do make a substantive difference: equilibrium prices under costly second visits can both be higher and lower than their perfect recall analogues. In the oligopoly search model of Stahl where consumers do not search beyond the first firm, there remains a unique symmetric equilibrium that has firms use pricing strategies that are identical to the perfect recall case.
    JEL: D11 D40 D83 L13
    Date: 2011–01
  3. By: GABSZEWICZ, Jean (Professor Emeritus, Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); TAROLA, Ornella (University of Rome "La Sapienza", Italy)
    Abstract: The paper explores the incentives for an incumbent firm to acquire an entrant willing to sell a product innovation, rather than openly compete with this entrant and, in case of acquisition, the incentives to sell simultaneously both the existing products and the new one, rather than specializing on a single variant. We prove that, in some circumstances, an incumbent firm can find it profitable to make an acquisition proposal to the entrant in order to deter entry. Nevertheless, in this acquisition scenario, a product proliferation strategy is never observed at equilibrium. Rather, the incumbent restricts itself to offer either its own variant or the product innovation produced by the entrant, depending on the quality differential existing between them. It follows that, while being available for sale, sometimes the innovation simply remains unexploited
    Date: 2010–12–01
  4. By: MAULEON, Ana (Facultés universitaires Saint-Louis, CEREC, B-1000 Brussels, Belgium and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); VANNETELBOSCH, Vincent (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); VERGARI, Cecilia (Department of Economic Sciences, University of Bologna, I-40125 Bologna, Italy)
    Abstract: We consider a model of licensing of a non-drastic innovation in which the patent holder (an outside innovator) negotiates either up-front fixed fees or per-unit royal- ties with two firms producing horizontally differentiated brands and competing à la Cournot. We investigate how licensing schemes (fixed fee or per-unit royalty) and the number of licenses sold (exclusive licensing or complete technology diffusion) affect price agreements and delays in reaching an agreement. We show that the patent holder prefers to license by means of up-front fixed fees except if market competition is mild and the innovation size is small. Once there is private information about the relative bargaining power of the parties, the patent holder may prefer licensing by means of per-unit royalties even if market competition is strong. Moreover, the delay in reaching an agreement is greater whenever the patent holder chooses to negotiate up-front fixed fees instead of per-unit royalties.
    Keywords: patent licensing, fixed fee, royalty, bargaining, private information
    JEL: C78 D43 D45 L13
    Date: 2010–12–01
  5. By: AGRELL, Per (Université catholique de Louvain, CORE & Louvain School of Management, B-1348 Louvain-la-Neuve, Belgium); KASPERZEC, Roman (Siemens AG, Fossil Power Generation Division, D-91058 Erlangen, Germany)
    Abstract: Supply chain management involves the selection, coordination and motivation of independently operated suppliers. However the central planner's perspective in operations management translates poorly to vertically separated chains, where suppliers may have rational myopic reasons to object to full in- formation sharing and centralized decision rights. Particular problems occur when a downstream coordinator demands relation-specific investments (equipment, cost improvements in processes, adaptation of components to downstream processes, allocation of future capacity etc) from upstream suppliers without being able to commit to long-term contracts. In practice and theory, this leads of- ten to a phenomenon of either underinvestment in the chain or costly vertical integration to solve the commitment problem. A two-stage supply chain under stochastic demand and information asymmetry is modelled. A repeated investment-production game with coordinator commitment in supplier's investment addresses the information sharing and asset- specific investment problem. We provide a mitigation of the hold-up problem on the investment cost observed by the supplier and an instrument for truthful revelation of private information by using an investment sharing device. We show that there is an interior solution for the investment sharing parameter and discuss some extensions to the work.
    Keywords: supply chain management, investment, information
    JEL: M11 L24
    Date: 2010–12–01
  6. By: Juan Carlos Barcena-Ruiz (Universidad del País Vasco); Maximo Sedano (Universidad del País Vasco)
    Abstract: In this paper we analyse the endogenous order of moves in a mixed duopoly for differentiated goods. Firms choose whether to set prices sequentially or simultaneously. The private firm maximises profits while the public firm maximises the weighted sum of the consumer and producer surpluses (wighted welfare). It is shown that the result obtained in equilibrium depends crucially on the weigth given to the consumer surplus in weighted welfare and on the degree to which goods are substitutes or complements. We also anlyse whether the equilibria obtained maximise the sum of the consumer and producer suspluses or not. Finally we study whether the nationality of the private firm influences the results.
    Keywords: Mixed duopoly; Price competition; Endogenous timing; Weighted welfare
    JEL: L00 L30
    Date: 2011–01–31
  7. By: Kurt R. Brekke (Department of Economics and Helth Economics Bergen, Norwegian School of Economics and Business Administration); Luigi Siciliani (Department of Economics and Centre for Health Economics, University of York, Heslington); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: In many markets, such as education, health care and public utilities, firms are often profit-constrained either due to regulation or because they have non-profit status. At the same time such firms might have altruistic concerns towards consumers. In this paper we study semi-altruistic firms’ incentives to invest in quality and cost-reducing effort when facing constraints on the distribution of profits. Using a spatial competition framework, we derive the equilibrium outcomes under both quality competition with regulated prices and quality price competition. Profit constraints always lead to lower cost-efficiency, whereas the effects on quality and price are ambiguous. If altruism is high (low), profit-constrained firms offer higher (lower) quality and lower (higher) prices than firms that are not profit-constrained. Compared with the first-best outcome, the cost-efficiency of profit-constrained firms is too low, while quality might be over- or underprovided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism.
    Keywords: Profit constraints, Quality competition, Semi-altruistic providers
    JEL: D21 D43 L13 L30
    Date: 2011
  8. By: F. Delbono; D. Lanzi
    Abstract: In this paper, we provide a very simple model to shed light on the issue of managed competition in mixed quasi-markets (i.e. regulated markets in which social and for-profit firms coexist). In doing this, we consider the literature on mixed oligopolies as a reasonable reference point and try to enrich it with the idea of quasi-market. Firstly, our results show that social firms serve the relatively richer portion of the population. Only relatively poor consumers buy units of service from the profit-oriented firm. Secondly, the socially-preferable form of managed competition is to introduce coproduction practices and, hence, to raise profit-oriented firm's production costs. The diffusion of coproduction paradigms ensures maximal service quality and eliminates mark-up from the market.
    JEL: I18 L13 L84
    Date: 2011–02
  9. By: Jan Boone; Michiel van Leuvensteijn
    Abstract: The Profit Elasticity (PE) is a new competition measure introduced in Boone (2008). So far, there was no direct proof that this measure can identify regimes of competition empirically. This paper focuses on this issue using data of Genesove and Mullin (1998) in which different regimes of competition are identified. We derive a version of PE suitable for this data set. This competition measure correctly classifies the monopoly / cartel regime as being less competitive than both the price was regime and break-up of cartel regime.
    Keywords: competition, measures of competition, price cost margin, profit elasticity.
    JEL: D43 L13
    Date: 2010–12
  10. By: Paris Cleanthous
    Abstract: Pharmaceutical markets are characterized by a high degree of innovation, complexity and uncertainty, especially markets of idiosyncratic symptomatolgy and response to treatment such as the antidepressant market. It may, therefore, be unreasonable to assume that consumers are aware of all antidepressants for sale at the time of purchase, as is the case in traditional models of consumer choice. Such an assumption will bias demand curves towards being more elastic and the evaluation of consumer welfare downwards. This paper, therefore, aims at analyzing and evaluating the effects of promotions by pharmaceutical firms on patient welfare taking into account the interaction of multiple agents (patients, physicians, insurance companies and pharmaceutical companies) in the decision process. I present an empirical discrete-choice model of limited information, where advertising influences the set of drugs from which a purchase choice is made. The estimation technique incorporates both macro- and micro-level data. Estimation results indicate that pharmaceutical firms use advertising media to target high-income households and households with more comprehensive prescription drug insurance schemes through their physicians or directly. Model comparison shows that limited information leads to less elastic demand curves and larger estimates of patient welfare due to pharmaceutical innovation that exacerbate the moral hazard issue that coexists with insurance coverage.
    Keywords: Advertising, Health, Information, Moral Hazard, Pharmaceuticals, Welfare
    Date: 2011–01
  11. By: Paris Cleanthous
    Abstract: This paper formulates an empirical methodology that evaluates pharmaceutical innovation in the American antidepressant market by quantifying patient welfare benefits from innovation. While evaluating pharmaceutical innovation in antidepressants, I uncover and address the moral hazard issue that arises due to the existence of prescription drug insurance coverage. A combination of market-level data, drug and patient characteristics are used to estimate demand for all antidepressants between 1980 and 2001. The paper estimates large and varied patient welfare gains due to innovation and helps explain a detected divergence between social and private patient benefits by the existence of insurance.
    Keywords: Health, Innovation, Moral Hazard, Pharmaceuticals, Welfare
    Date: 2011–01
  12. By: Martin Gächter; Peter Schwazer; Engelbert Theurl
    Abstract: Firm turnover has recently attracted increased interest in economic research. The entry of new firms increases competition and promises efficiency gains. Moreover, changes in the market structure influence productivity growth, because firm entry usually leads to increased innovation. The health care market exhibits important differences as compared to other markets, including various forms of market failure and, as a consequence, extensive market regulation. Thus, the economic effects of entries and exits in health care markets are less obvious. The following paper studies the determinants of entry and exit decisions of physicians in the private sector of the outpatient part of the Austrian health care system. We apply a Poisson panel estimation to a data set of 2,379 local communities and 121 districts in Austria in the time period 2002 - 2008. We are particularly interested in the question how public physicians (GPs/specialists) and their private counterparts influence the entrance and exit of private physicians. We find a significantly negative effect of existing capacities, measured by both private and public physician density of the same specialty, on the entry of new private physicians. On the contrary, we find a significantly positive effect of private GPs on the entry of private specialists. Interestingly, this cooperation/network effect also works in the other direction, as a higher density of private specialists increases the probability of the market entry of private GPs. Based on the results of previous literature, we thus conclude that private physicians establish networks to cooperate in terms of mutual referrals etc. Our estimations for market exits basically confirm the entry results, as higher competitive forces positively influence the market exit of private physicians.
    Keywords: Entry, Exit, Health Care, Physician location
    JEL: I11 I18 L14
    Date: 2011–02
  13. By: Caiazza, Stefano; Clare, Andrew; Pozzolo, Alberto Franco
    Abstract: Given the recent traumatic events in the world’s banking industry it is important to understand what drives bankers to create larger and larger, often multinational, banking groups. In this paper we investigate whether the targets in cross-border bank M&As are materially different from those banks targeted in domestic M&A deals. To address this question we use a sample of over 24,000 banks from more than 100 countries. We begin by estimating the probability that a bank will be a M&A target; this probability is based upon both bank specific and country specific characteristics. The sample also naturally includes banks that were not involved in any M&A deal, this set of banks acts as a control sample for the study. We then estimate a multinomial model that distinguishes between (i) targets in domestic operations, (ii) targets in cross-border operations and (iii) non-targets. The main message of the paper is that, with few exceptions, domestic and foreign investors target similar banks. In particular, contrary to what one might expect, bank size does not affect differently the probability of being a domestic or a cross-border target, but it has a positive and highly significant effect in both cases. What differs between national and international M&As are the characteristics of the countries where banks operate. On average, banking systems characterized by lower leverage, higher cost inefficiency and lower liquidity are more likely to be targets of cross-border acquisitions, while none of this characteristics affects the likelihood of being acquired domestically.
    Keywords: M&As, M&Asbank internationalisation
    JEL: G15 G21 G34
    Date: 2011–02–01

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