nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒03‒12
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Dynamic Competition with Consumer Inertia By Pot Erik; Flesch János; Peeters Ronald; Vermeulen Dries
  2. A Hotelling Style Model of Spatial Competition for Convenience Goods By B. Curtis Eaton; Jesse Tweedle
  3. Monopolistic competition in general equilibrium: Beyond the CES By Evgeny Zhelobodko; Sergey Kokovin; Mathieu Parenti; Jacques-François Thisse
  4. Can endogenous participation explain price volatility? Evidence from an agent-based cobweb model. By Domenico Colucci; Vincenzo Valori
  5. Misleading Advertising in Duopoly By Keisuke Hattori; Keisaku Higashida
  6. Trade in bilateral oligopoly with endogenous market formation By Alex Dickson; Roger Hartley
  7. Why are some prices stickier than others? Firm-data evidence on price adjustment lags By Daniel A. Dias; Carlos Robalo Marques; Fernando Martins; Joao M.C. Santos Silva
  8. How Does Size Matter? Investigating the Relationships Among Plant Size, Industrial Structure, and Manufacturing Productivity By Joshua Drucker
  9. Exclusive Dealing Contracts by Distributors By Ryoko Oki; Noriyuki Yanagawa
  10. Patent Pools and Product Development By Thomas Jeitschko; Nanyun Zhang
  11. Patent Races with Dynamic Complementarity By A. Blasco
  12. Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices By Courtemanche, Charles; Carden, Art
  13. Prevention of Competition by Competition Law: Evidence from Unbundling Regulation on Fiber-Optic Networks in Japan By Naoaki Minamihashi

  1. By: Pot Erik; Flesch János; Peeters Ronald; Vermeulen Dries (METEOR)
    Abstract: We study a framework where two duopolists compete repeatedly in prices and where chosen prices potentially affect future market shares, but certainly do not affect current sales. This assumption of consumer inertia causes (noncooperative) coordination on high prices only to be possible as an equilibrium for low values of the discount factor. In particular, high discount factors increase opportunism and aggressiveness of competition to such an extent that high prices are no longer sustainable as an equilibrium outcome (not even in trigger strategies). In addition, we find that both monopolization and enduring market share and price fluctuations (price wars) can be equilibrium path phenomena without requiring exogenous shocks in market or firm characteristics.
    Keywords: microeconomics ;
    Date: 2011
  2. By: B. Curtis Eaton; Jesse Tweedle
    Abstract: Ordinarily people do not make special purpose trips to acquire goods like gasoline or roceries, but instead buy them as the need arises in the course of their daily lives. Such goods are commonly called convenience goods. We modify Hotelling's model of spatial competition so that we can analyze the price equilibrium of duopolists that retail a convenience good. Certain features of the duopolists' demand functions suggest that price competition is more severe in the convenience goods model than in the Hotelling model. The same features complicate the analysis because they mean that a pure strategy price equilibrium does not exists for many locational con-figurations. Although we are not able to find the mixed strategy price equilibrium analytically, we do present some numerical results on equilibrium prices that broadly confirm this suggestion. We also provide a more general product differentiation interpretation of the convenience good model.
    Date: 2011–01–01
  3. By: Evgeny Zhelobodko (NSU - Novosibirsk State University - Novosibirsk State University); Sergey Kokovin (NSU - Novosibirsk State University - Novosibirsk State University, Sobolev Institute of Mathematics - Russian Academy of Science); Mathieu Parenti (Université Panthéon Sorbonne - Paris 1 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jacques-François Thisse (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain, CEPR - Centre for Economic Policy Research - Centre for Economic Policy Research, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA)
    Abstract: We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results.
    Keywords: monopolistic competition ; additive preferences ; love for variety ; heterogeneous firms
    Date: 2011–02
  4. By: Domenico Colucci (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)
    Abstract: The cobweb model literature has mostly overlooked the issue of firms' financial viability and the related question of market entry and exit. This paper tries to address these problems building an agent-based computational cobweb model with borrowing constraints and endogenous participation of heterogeneous firms. The flow of firms' profit affects their financial wealth and borrowing is possible up to a limit. Past such threshold the firm goes bankrupt and exits. At the same time at each period a pool of potential entrants have a constant positive probability of becoming a startup in the market, provided the incumbent firms have realized non-negative mean profits in recent periods. Bounded dynamics and endogenous volatility are shown to follow without resorting to nonlinearities. Indeed, with respect to the literature assuming nonlinearities and heterogeneous firms switching between different predictors (e.g. Brock and Hommes, 1997) our structure is simpler, given that the model's main message remains valid even with linear demand and supply and firms having heterogeneous-parameters adaptive expectations. Additional insights are provided by the numerical simulations of the model. The saliency of the borrowing constraint has a large impact on profits and ultimately on firms' survival chances, beside an effect on average prices and therefore on consumer surplus. Further, the model confirms that behavioral heterogeneity, even in the mild form assumed here, matters, and is in fact crucial to ensure bounded price dynamics. Finally, the model generates reasonable (given the stylized facts accepted by the empirical literature) patterns of firms survival times.
    Keywords: heterogeneous agents, expectations, price instability, market entry and exit
    Date: 2011–02
  5. By: Keisuke Hattori (Faculty of Economics, Osaka University of Economics); Keisaku Higashida (School of Economics, Kwansei Gakuin University)
    Abstract: In this paper, we build a model of strategic misleading advertising in duopolistic markets with horizontal product differentiation and advertising externality between firms. We investigate the effects of regulating misinformation on market competition, behavior of firms, and social welfare. We show that the degree of advertising externality and the magnitude of advertising costs are crucial for determining the welfare effects of several regulations, including prohibiting misleading advertising, educating consumers, taxing production, and taxing misleading advertising. We then extend the model by introducing two types of heterogeneities; heterogeneous consumers and heterogeneous production costs between firms.
    Keywords: Misleading Advertising, Regulation; Duopoly, Product Differentiation, Advertising Externality
    JEL: L13 L15 M37
    Date: 2011–03
  6. By: Alex Dickson (Department of Economics, University of Strathclyde); Roger Hartley (Department of Economics, University of Manchester)
    Abstract: We study a strategic market game in which traders are endowed with both a good and money and can choose whether to buy or sell the good. We derive conditions under which a non-autarkic equilibrium exists and when the only equilibrium is autarky. Autarky is ‘nice’ (robust to small perturbations in the game) when it is the only equilibrium, and ‘very nice’ (robust to large perturbations) when no gains from trade exist. We characterize economies where autarky is nice but not very nice; that is, when gains from trade exist and yet no trade takes place.
    Keywords: Bilateral oligopoly, strategic market game, trade.
    JEL: C72 D43 D51 L13
    Date: 2010–02
  7. By: Daniel A. Dias (Department of Economics, University of Illinois.); Carlos Robalo Marques (Banco de Portugal, Research Department.); Fernando Martins (Banco de Portugal, Research Department, ISEG (Technical University of Lisbon) and Universidade Lusíada de Lisboa.); Joao M.C. Santos Silva (Department of Economics, University of Essex and CEMAPRE.)
    Abstract: Infrequent price changes at the firm level are now well documented in the literature. However, a number of issues remain partly unaddressed. This paper contributes to the literature on price stickiness by investigating the lags of price adjustments to different types of shocks. We find that adjustment lags to cost and demand shocks vary with firm characteristics, namely the firm’s cost structure, the type of pricing policy, and the type of good. We also document that firms react asymmetrically to demand and cost shocks, as well as to positive and negative shocks, and that the degree and direction of the asymmetry varies across firms. JEL Classification: C41, D40, E31.
    Keywords: Firm heterogeneity, Panel-ordered probit, Real rigidities, Survey data.
    Date: 2011–03
  8. By: Joshua Drucker
    Abstract: Industrial concentration and market power have been studied extensively at the national scale, in fields ranging from economics and industrial organization to regional science and economic development. At the regional scale, however, industrial structure and firm size relationships have received little attention outside of non-generalizable case studies, primarily because accurate measurements require difficult-to-obtain plant- or firm-level information. Readily available secondary data sources on establishment size distributions (such as County Business Patterns or the Census of Manufactures) cannot be linked to performance information for particular establishments or firms. Yet region-specific industrial structure may be a crucial determinant of firm performance and thus regional economic fortunes as well (Chinitz 1961; Christopherson and Clark 2007). This paper examines how industrial concentration and agglomeration economies impact plant performance, focusing on the influence of establishment size in mediating these effects. The Longitudinal Research Database of the U.S. Census Bureau is accessed to construct production functions for three manufacturing industries nationwide. These production functions, specified at the establishment level, incorporate characteristics of establishments, industries, and regions, including spatially-differentiated measures of agglomeration economies. Establishment size is evaluated both as an absolute metric and relative to other regional industry plants, as theory suggests that absolute size may be most pertinent to agglomeration benefits but relative size more relevant to industrial structure (Caves and Barton 1990; Bothner 2005). The research builds on earlier work by the author that establishes a direct link between regional industry concentration and the productivity of manufacturing establishments.
    Date: 2011–03
  9. By: Ryoko Oki (Graduate School of Economics, University of Tokyo); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: The existing literature about exclusive dealing contracts has focused on cases where an incumbent manufacturer offers exclusive contracts to deter an entry. In contrast, we consider the case where an incumbent distributor offers exclusive dealing contracts to deter an entry. Exclusive dealing contracts by a distributor are less effective. We will show that the outcome of such contracts is quite different from the outcomes in the traditional literature. If the number of manufacturers is sufficiently high, it is impossible to exclude an efficient entry. Furthermore, if we allow two- part tariff contracts, the entrant distributor can enter the market for any number of manufacturers.
    Date: 2011–02
  10. By: Thomas Jeitschko (Antitrust Division, U.S. Department of Justice and Department of Economics, Michigan State University); Nanyun Zhang (Department of Economics, Towson University)
    Abstract: The conventional wisdom is that the formation of patent pools is welfare enhancing when patents are complementary, since the pool avoids a double-marginalization problem associated with independent licensing. The focus of this paper is on (downstream) product development and commercialization on the basis of perfectly complementary patents. We consider development technologies that entail spillovers between rivals, and assume that nal demand products are imperfect substitutes. If pool formation either increases spillovers in development or decreases the degree of product dierentiation, pool formation can actually adversely aect overall welfare by reducing incentives towards product development and product market competition|even with perfectly complementary patents. This significantly modifies and possibly even negates the conventional wisdom for many settings. The paper provides insights into why patent pools are uncommon in science-based industries such as biotech, despite there being strong policy advocacy for them.
    Keywords: Patent Pools, Research and Development, Innovation, BioTechnology, Electronics.
    JEL: L1 L2 L4 L6 D2 D4
    Date: 2011–02
  11. By: A. Blasco
    Abstract: Recent models of multi-stage R&D have shown that a system of weak intellectual property rights may lead to faster innovation by inducing firms to share intermediate technological knowledge. In this article I introduce a distinction between plain and sophisticated technological knowledge, which has not been noticed so far but plays a crucial role in determining how different appropriability rules affect the incentives to innovate. I argue that the positive effect of weak intellectual property regimes on the sharing of intermediate technological knowledge vanishes when technological knowledge is sophisticated, as is likely to be the case in many high tech industries.
    JEL: L10 O30
    Date: 2011–02
  12. By: Courtemanche, Charles (University of North Carolina at Greensboro, Department of Economics); Carden, Art (University of North Carolina at Greensboro, Department of Economics)
    Abstract: Research shows that grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big box retailers – Costco and Walmart-owned Sam's Club – are quite different. Using city-level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers, and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along non-price dimensions such as product quality or quality of the shopping experience. We find no evidence that Sam’s Club entry affects grocery stores’ prices, consistent with Sam’s Club’s focus on small businesses instead of consumers.
    Keywords: Wal-Mart; Walmart; Costco; Sam’s Club; warehouse clubs; grocery prices; competition; retail
    JEL: L11 L13 L81 R10
    Date: 2011–02–28
  13. By: Naoaki Minamihashi
    Abstract: This paper finds that a regulation that promotes competition in one market may decrease competition in other related markets. Policy makers in the telecommunication industry currently are facing an important decision about whether to continue unbundling regulations on new optical-fiber lines. I find that unbundling regulation prevents new providers from building optical-fiber networks, by estimating a dynamic entry game with a dataset of fiber-optic network constructions in Japan from 2005 to 2009. In particular, when a new technology is introduced, unbundling regulation has an oligopolization effect on the regulated firms. This finding in the Japanese telecommunications industry suggests that unbundling regulation during periods of new technology diffusion may reduce the price of service but also decrease competition in the infrastructure market.
    Date: 2011–03

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