nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒02‒26
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Pricing, Advertising, and Market Structure with Frictions By Pedro Gomis-Porqueras; Benoit Julien; Chengsi Wang
  2. Free Entry, Market Diffusion, and Social Inefficiency with Endogenously Growing Demand By Hiroshi Kitamura; Akira Miyaoka; Misato Sato
  3. Competitive Prices as Profit-Maximizing Cartel Prices By Harold Houba; Evgenia Motchenkova; Quan Wen
  4. Targeted Advertising and Social Status By Nick Vikander
  5. Vertical Differentiation in a Cournot Industry: The Porter Hypothesis and Beyond By L. Lambertini; A. Tampieri
  6. Platform Pricing Structure and Moral Hazard By Guillaume Roger; Luis I. Vasconcelos
  7. Two-Sided Competition and Differentiation (with an Application to Media) By Guillaume Roger
  8. Pivotal Suppliers and Market Power in Experimental Supply Function Competition By Jordi Brandts; Stanley S. Reynolds; Arthur Schram
  9. Market Power in Water Markets By Erik Ansink; Harold Houba
  10. Trade Protection and Market Power: Evidence from US Antidumping and Countervailing duties By Laura ROVEGNO
  11. Sources of Corporate Profits in India -Business Dynamism or Advantages of Entrenchment? By Ashoka Mody; Anusha Nath; Michael Walton

  1. By: Pedro Gomis-Porqueras (School of Economics, Australian National University); Benoit Julien (School of Economics, University of New South Wales); Chengsi Wang (School of Economics, University of New South Wales)
    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: E52 E63
    Date: 2010–11
  2. By: Hiroshi Kitamura (Faculty of Economics, Sapporo Gakuin University); Akira Miyaoka (Graduate School of Economics, Osaka University); Misato Sato (Graduate School of Economics, GeorgeWashington University)
    Abstract: This paper analyzes market diffusion in the presence of oligopolistic interaction among firms. Market demand is positively related to past market size because of consumer learning, networks, and bandwagon effects. Firms enter the market freely in each period with fixed costs and compete in quantities. We demonstrate that free entry leads to a socially inefficient number of firms over time, and that the nature of the inefficiency changes as the market grows: the number of firms is initially insufficient but eventually excessive. This is in contrast with previous findings in the theoretical literature.
    Keywords: Free Entry; Market Diffusion; Intertemporal Externalities; Entry Regulation.
    JEL: D11 L11 L14
    Date: 2011–02
  3. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University)
    Abstract: Even under antitrust enforcement, firms may still form a cartel in an infinitely-repeated oligopoly model when the discount factor is sufficiently close to one. We present a linear oligopoly model where the profit-maximizing cartel price converges to the competitive equilibrium price as the discount factor goes to one. We then identify a set of necessary conditions for this seemingly counter-intuitive result.
    Keywords: Antitrust enforcement; Cartel; Oligopoly; Repeated game
    JEL: L4 C7
    Date: 2010–04–27
  4. By: Nick Vikander (Erasmus University Rotterdam, and University of Edinburgh)
    Abstract: This paper shows how a firm can use non-targeted advertising to exploit consumers' desire for social status. A monopolist sells multiple varieties of a good to consumers who each care about what others believe about his wealth. Advertising allows consumers both to buy different varieties and to recognize them when others buy. In equilibrium, the firm advertises each variety to those who will buy but also to all poorer consumers who will not, so that they understand what having the goods signals. If concern for status is sufficiently high, then the firm will only place a single variety on the market.
    Keywords: advertising; targeting; social status
    JEL: M37 L12 L15
    Date: 2011–01–24
  5. By: L. Lambertini; A. Tampieri
    Abstract: We modify the vertically differentiated duopoly model by André et al. (2009) replacing Bertrand with Cournot behaviour to show that firms may spontaneously adopt a green technology even in the complete absence of any form of regulation.
    JEL: L13 L51 Q55 Q58
    Date: 2011–02
  6. By: Guillaume Roger (School of Economics, The University of New South Wales); Luis I. Vasconcelos (Department of Economics, Universidade Nova de Lisboa)
    Abstract: We study pricing by a monopoly platform that matches buyers and sellers in an environment with cross-market externalities. Said platform has no private information, does not set the commodity's price and can only charge trading parties for the transaction. Our innovation consists in introducing moral hazard on the sellers' side and an equilibrium notion of platform reputation in an infinite horizon model. With linear fees the platform can mitigate, but not eliminate, the loss of reputation induced by moral hazard. If lump-sum fees (registration fees) can be levied, moral hazard can be overcome. The upfront payment determines the participation threshold of sellers and extracts them, while (lower) transactions fees provide incentives for good behavior. This breaks the equivalence of lump-sum payments and linear fees (Rochet and Tirole (2006)). We draw implications for the role of subsidies (Caillaud and Jullien (2003)).
    Keywords: Platforms; Two-Sided Markets; Reputation; Moral Hazard
    JEL: L11 L12 L14 L81 D21 D82
    Date: 2010–11
  7. By: Guillaume Roger (School of Economics, The University of New South Wales)
    Abstract: We model a duopoly in which two-sided platforms compete on both sides of a two-sided market. Platforms (or intermediaries) select the quality they offer consumers, and the prices they charge to consumers and firms. In this model, non-trivial competition on both sides induces non-quasiconcave payoffs in one subgame. All equilibria are characterized. Under well-defined conditions, the unique equilibrium in pure strategies can be computed. Prices entail a discount on one side, a premium on the other one and the quality offered to consumers is distorted downward. When the pure-strategy equilibrium fails to exist, a mixed-strategy equilibrium is shown to always exist and the distributions are characterized. In this case, the market may be preempted ex post. The model may find applications in the media, internet trading platforms, the software industry or even the health care industry (HMO/PPO).
    Keywords: Two-Sided Market; Vertical Differentiation; Industrial Organization; Platform Competition
    JEL: C72 D43 D62 L13 L15
    Date: 2010–11
  8. By: Jordi Brandts (Universitat Autonoma de Barcelona); Stanley S. Reynolds (University of Arizona); Arthur Schram (University of Amsterdam)
    Abstract: In the process of regulatory reform in the electric power industry, the mitigation of market power is one of the basic problems regulators have to deal with. We use experimental data to study the sources of market power with supply function competition, akin to the competition in wholesale electricity markets. An acute form of market power may arise if a supplier is pivotal; that is, if the supplier's capacity is required in order to meet demand. To be able to isolate the impact of demand and capacity conditions on market power, our treatments vary the distribution of demand levels as well as the amount and symmetry of the allocation of production capacity between different suppliers. We relate our results to a descriptive power index and to the predictions of two alternative models: a supply function equilibrium (SFE) model and a multi-unit auction (MUA) model. We find that pivotal suppliers do indeed exercise their market power in the experiments. We also find that observed behavior is consistent with the range of equilibria of the unrestricted SFE model and inconsistent with the unique equilibria of two refinements of the SFE model and of the MUA model.
    Keywords: Market Power; Electric Power Markets; Pivotal Suppliers; Experiments
    JEL: C92 D43 L11 L94
    Date: 2011–02–11
  9. By: Erik Ansink (IVM, VU University Amsterdam, and Wageningen University); Harold Houba (VU University Amsterdam)
    Abstract: Water markets with market power are analysed as multi-market Cournot competition in which the river structure constrains access to local markets and limited resources impose capacity constraints. Conditions for uniqueness are identified. Lerner indices are larger under binding resource constraints. The number of cases explodes in the number of local markets. Under quadratic benefit functions and symmetric constant marginal extraction costs, closed-form solutions for selected cases are derived, and numerical implementation through a single optimization program is available. Upstream locations face less competition than downstream. Observed price patterns in the Goulburn-Murray Irrigation District are consistent with the theoretical results.
    Keywords: Water markets; oligopoly; market power; Cournot-Walras equilibrium
    JEL: C72 C73 Q25
    Date: 2010–05–27
  10. By: Laura ROVEGNO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: This paper uses a long panel of US 4-digit industries to analyse the impact of US Antidumping (AD) and Countervailing duties (CVD) on domestic producers' price-cost margins (PCM). In the analysis I account for selection bias in the imposition of AD/CVD as well as the intensity of the protection granted. I find evidence of a positive effect of AD/CVD on PCM. However, the point estimates are small suggesting that whilst the effects of these policies on the market of the products directly affected may be important, their sector level effects are modest.
    Keywords: Antidumping, Countervailing duties, Import tariffs, Markup, Price-cost margin, Trade diversion, Competition
    JEL: C33 D21 D43 F12 F13
    Date: 2010–12–08
  11. By: Ashoka Mody; Anusha Nath; Michael Walton
    Abstract: Some see India’s corporate sector as the fundamental driver of recent and future prosperity. Others see it as a source of excessive market power, personal enrichment, and influence over the State, with an ultimately distorting influence. To inform this debate, this paper analyses the correlates of profitability of firms listed on the Bombay Stock Exchange, covering a dynamic period-in terms of firm entry and growth-from the early 1990s to the late 2000s. Overall, the results do not provide support for the systematic exercise of market power via the product market. At least for this period, the story is more consistent with a competitive and dynamic business sector, despite the continued dominance of business houses and public sector firms in terms of sales and assets. Those with opposing views can, with justification, argue that our analysis does not cover influences, such as corporate governance and state-corporate relations, which may paint a less flattering picture of the corporate sector’s role. Those broader themes deserve further attention.
    Keywords: Competition , Corporate sector , Economic models , India , Profits ,
    Date: 2011–01–07

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