nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒03‒05
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Can Vertical Separation Reduce Non-Price Discrimination and Increase Welfare? By Duarte Brito; Pedro Pereira; João Vareda
  2. Ownership and Control in a Competitive Industry By Heiko Karle; Tobias J. Klein; Konrad O. Stahl
  3. Multiproduct firms and price-setting: theory and evidence from U.S. producer prices By Saroj Bhattarai; Raphael Schoenle
  4. Loyalty discounts By Ioana Chioveanu; Ugur Akgun
  5. Product innovation when consumers have switching costs By Salies, Evens
  6. Managing Strategic Buyers By Johannes Horner; Larry Samuelson
  7. Does intellectual monopoly stimulate or stifle innovation? By Chu, Angus C.; Cozzi, Guido; Galli, Silvia
  8. Competition and R&D Cooperation with Universities and Competitors By Thomas Bolli; Martin Woerter
  9. Price discrimination and competition in two-sided markets: Evidence from the Spanish local TV industry By Gil, Ricard; Riera-Crichton, Daniel
  10. Vertical integration and product market competition: Evidence from the Spanish local TV industry By Gil, Ricard
  11. Does regulation drive market competition? Evidence from the Spanish local TV industry By Gil, Ricard
  12. Estimations of the price transmission and market power in canola export market: implication to canola import of Japan By Nakajima, Toru

  1. By: Duarte Brito (Universidade Nova de Lisboa and CEFAGE-UE); Pedro Pereira (Autoridade da Concorrência and IST); João Vareda (Autoridade da Concorrência and CEFAGE-UE)
    Abstract: We investigate if vertical separation reduces non-price discrimination and increases welfare. Consider an industry consisting of a vertically integrated firm and an independent retailer, which requires access to the vertically integrated firm's wholesaler services. The wholesaler can degrade the quality of input it supplies to either of the retailers. Discrimination occurs if one of the retailers is supplied an input of lower quality than its rival. We show that separation of the vertically integrated firm reduces discrimination against the independent retailer, although it does not guarantee no-discrimination. Furthermore, with separation, the wholesaler may discriminate against the vertically integrated firm's retailer. Vertical separation impacts social welfare through two e¤ects. First, through the double-marginalization effect, which is negative. Second, through the quality degradation effect, which can be positive or negative. Hence, the net welfare impact of vertical separation is negative or potentially ambiguous.
    Keywords: Vertigal integration; Vertical separation; Non-price discrimination.
    Date: 2011
  2. By: Heiko Karle (ECARES, Universit´e Libre de Bruxelles); Tobias J. Klein (CentER, Netspar, TILEC, Tilburg University); Konrad O. Stahl (University of Mannheim, CEPR)
    Abstract: We study a differentiated product market in which an investor initially owns a controlling stake in one of two competing firms and may acquire a non-controlling or a controlling stake in a competitor, either directly using her own assets, or indirectly via the controlled firm. While industry profits are maximized within a symmetric two product monopoly, the investor attains this only in exceptional cases. Instead, she sometimes acquires a noncontrolling stake. Or she invests asymmetrically rather than pursuing a full takeover if she acquires a controlling one. Generally, she invests indirectly if she only wants to affect the product market outcome, and directly if acquiring shares is profitable per se.
    Keywords: Differentiated products, separation of ownership and control, private benefits of control
    JEL: L13 L41
    Date: 2011–02
  3. By: Saroj Bhattarai; Raphael Schoenle
    Abstract: In this paper, we establish three new facts about price-setting by multiproduct firms and contribute a model that can explain our findings. Our findings have important implications for real effects of nominal shocks and provide guidance for how to model pricing decisions of firms. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multiproduct firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings.
    Keywords: Price levels ; Productivity
    Date: 2011
  4. By: Ioana Chioveanu (Universidad de Alicante); Ugur Akgun (Charles Rivers Associates)
    Abstract: This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide an analysis of the market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit discounts (AU) and market share discounts (MS). We show that retailer’s risk attitude affects manufacturer’s preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk-averse, 2PT performs the worst from manufacturer’s perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting retailer’s product substitution possibilities MS makes the demand for manufacturer’s product more inelastic. This reduces the amount (share of profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme.
    Keywords: vertical contracts, loyalty discounts, private information, market share discounts.
    JEL: J42 J12 J13
    Date: 2011–02
  5. By: Salies, Evens
    Abstract: Economists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This survey concentrates on another factor that confers innovators with first-mover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, that must be duplicated for any new seller. In this survey, we list several components of switching costs that are relevant as regards to firm innovation behaviour. The aim of this classification is twofold. First, consumer switching cost theory has matured to the point that some classification of switching costs for both understanding innovative firm behaviour and building policy-oriented models is necessary. Second, the classification included in this paper addresses the confusion that has been existing so far regarding the distinction between ‘good’ or ‘bad’ switching costs, perceived or paid switching costs, and between switching and search costs. This paper then surveys the existing literature on the effect of switching costs on product innovation by firms and the way they compete for consumers. We also raise several important regulation and competition policy questions, using examples from the real world.
    Keywords: Consumer switching costs; Search costs; Product innovation; Competition policy; Economic methodology
    JEL: L14 L96 B21 L13 L52 D83 D4
    Date: 2010–09–17
  6. By: Johannes Horner; Larry Samuelson
    Date: 2011–02–22
  7. By: Chu, Angus C.; Cozzi, Guido; Galli, Silvia
    Abstract: This study develops an R&D-based growth model that features both vertical and horizontal innovation to shed some light on the current debate on whether patent protection stimulates or stifles innovation. Specifically, we analyze the growth and welfare effects of patent protection in the form of profit division between sequential innovators along the quality ladder. We show that patent protection has asymmetric effects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Maximizing the incentives for vertical (horizontal) innovation requires a profit-division rule that assigns the entire flow profit to the entrant (incumbent) of a quality ladder. In light of this finding, we argue that in order to properly analyze the growth and welfare implications of patent protection, it is important to disentangle its different effects on vertical and horizontal innovation.
    Keywords: economic growth; innovation; intellectual property rights
    JEL: O34 O31 O40
    Date: 2010–11
  8. By: Thomas Bolli (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Martin Woerter (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyzes the relationship between competition and R&D cooperation with universities and competitors. Our simple model predicts that more competitors reduce the incentives for horizontal cooperation as it diminishes the gains from “collusion”. Assuming that the value of synergies and spillovers created by cooperation depends on competition intensity reveals two distinct and opposing incentives for cooperation. While synergies foster R&D cooperation, spillovers may hinder cooperation. We mainly hypothesize that university cooperation corresponds to product innovation and hence quality competition, while horizontal cooperation lead to process innovations and therefore relates to price competition. We test these hypotheses based on Swiss firm-level panel data controlling for simultaneity of cooperation decisions and endogeneity of competition. Our empirical analysis supports the relevance of distinguishing between competition dimensions and cooperation partners, respectively. We find that price competition matters for both university and horizontal cooperation and it takes the form of an inverted U-shape. On the contrary, quality competition only matters for university cooperation and the relationship shows a U-form. Moreover we see that the number of principal competitors is significantly related only to cooperation between competitors and the relationship shows an inverted U-form. Hence, markets with a medium number of competitors are more receptive for horizontal cooperation. In sum these findings advance our understanding of the relationship between innovation and competition policy.
    Keywords: innovation cooperation, university cooperation, horizontal cooperation, number of competitors, price competition, quality competition, synergy, knowledge spillover, collusion
    JEL: O3
    Date: 2011–02
  9. By: Gil, Ricard (IESE Business School); Riera-Crichton, Daniel (Bates College)
    Abstract: In this paper, we empirically test the relation between price discrimination and product market competition in a two-sided market setting using a new data set of Spanish local TV stations that provides information on subscription and advertising prices per station for 1996, 1999 and 2002. During these years, changes in regulation in this sector had a deep impact on the degree of local market competition. We use differences in market structure across markets and across years to study the relation between competition and price discrimination in this setting. Our findings suggest that stations in more competitive markets are less likely to use price discrimination. We also find evidence that stations price discriminating in a market are also more likely to price discriminate on the other market. Finally, cable subscription fees and advertising prices are higher in more competitive markets which suggests that tougher competition may increase market segmentation through station differentiation, driving stations to charge higher uniform prices to more loyal customers. This may indicate that less price discrimination may be associated with lower consumer surplus in all markets.
    Keywords: Price discrimination; market competition; Local TV Industry; product; subscription; advertising;
    Date: 2011–01–13
  10. By: Gil, Ricard (IESE Business School)
    Abstract: This paper empirically examines the relation between product market competition and vertical integration in the Spanish local TV industry. For this reason, I use a data set of Spanish local TV stations that provides station level information on vertical integration and product market competition, as well as other station and market characteristics, for the years 1996, 1999 and 2002. During this period, changes in regulation in this industry had a strong impact on the level of market competition faced by local TV stations. I use differences in market structure across markets and years to empirically study the relation between vertical integration and competition. My results show that there exists a negative relation between vertical integration and market competition. I also find that despite the fact that private stations are less likely to integrate content production, they are more likely to do so the higher the number of competing stations in their coverage area. Private stations do so because by increasing the percentage of content produced in-house they differentiate themselves from competition and therefore soften competition and maximize profits.
    Keywords: market competition; local TV Industry; product; vertical integration;
    Date: 2011–01–11
  11. By: Gil, Ricard (IESE Business School)
    Abstract: This paper empirically examines whether regulation decreases market competition. For this purpose, I use data from Spanish local TV stations for 1996, 1999 and 2002. During this period of time, this industry transitioned from a state of alegality (no regulation in place whatsoever), to being highly regulated and finally to being liberalized. I estimate station population entry thresholds by number of entrants across years to proxy by the nature of competition by determining the necessary market size to sustain an extra station. I find that stations soften competition the most under no regulation and they seem to compete the hardest when highly regulated. I explain in the paper that, even though this is at odds with previous literature, this result is explained by the industry institutions, its low profitability and the nature of the first regulation and its consequent liberalization.
    Keywords: regulation; market; competition; TV industry; liberalization;
    Date: 2011–01–15
  12. By: Nakajima, Toru
    Abstract: In this paper, I analyze the price transmission of canola, or low erucic acid rapeseed, in the international market and the market power of canola exporting countries over one of the major importing countries, Japan. Canola oil production in Japan is almost completely dependent on the canola imported from Canada and Australia. The export from Canada generally accounts for more than 80% in recent years. Does Canada exercise market power over Japan? Does Canada have more market power than Australia in the Japanese canola market? What strategies should Japan have on canola import? To answer these questions, firstly I conducted an empirical analysis of asymmetric price transmission (APT), in which the speed of adjustments of the output price after the input price increases or decreases is different; the existence of APT possibly implies the existence of market power. Widely used threshold autoregressive (TAR) model was applied to test the existence of APT from futures price in Winnipeg to the Canadian FOB price of canola for each country. Significant APT was found in the Canadian canola export to Japan in such a way that Canada enjoyed long-lasting excess profits over Japan. Moreover, such tendency became more evident in recent years when Canada expanded and diversified export counterparts of canola. To answer the second question and establish the relationship between APT and market power, I estimated the market power of Canada and Australia over Japan when exporting canola. Considering the existence of adjustment process in canola exporting countries, linear-quadratic dynamic duopoly model was employed, in which the parameterized conjectural variations of both exporting countries were estimated. I found that Canada had intermediate level of market power. Meanwhile, I found that Australia had no market power, which means that the Australian canola prices are set at competitive level or price-taking level. Based on these empirical analyses, I drew some implications. The major implication is that Japan should diversify the origins of canola to avoid the use of market power of an exporting country. This paper also contributes in that it constructs the relationship between APT and market power empirically.
    Keywords: asymetric price transmission, TAR, market power, canola, International Relations/Trade,
    Date: 2011

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