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on Industrial Competition |
| By: | Silviano Esteve-Pérez (University of Valencia) |
| Abstract: | This paper presents a duopoly model of firm rivalry in a vertically differentiated industry when market dynamics is explicitly accounted for. It shows how the interplay between demand (degree of product differentiation, demand elasticity) and cost (fixed and quality costs) factors determine firms' relative strength when quality is irreversible. The main strategic choices are product quality, price and the timing of entry and exit. Further, firms incur sunk quality costs at time of entry and operating fixed costs of maintaining quality. Although the low quality firm may outlast its rival in the declining phase, both firms wish to be the "quality leader". |
| Keywords: | Entry; Exit; Vertical product differentiation |
| JEL: | L13 L11 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1107&r=com |
| By: | X. Henry Wang (Department of Economics, University of Missouri-Columbia); Lin Liu; JBill Z. Yang |
| Abstract: | The traditional wisdom holds that the benefits of a decentralized channel structure arise from downstream competitive relationships. In contrast, Arya and Mittendorf (2007) showed that the value of decentralization can also arise from upstream interaction when the downstream firm conveys internal strife (decentralization) to an upstream external supplier. This paper extends the single firm centralization- decentralization choice model of Arya and Mittendorf (2007) to a strategic choice model in which all downstream competitors play a strategic centralization-decentralization game. We demonstrate that whether the main conclusions in the context of non-strategic choice of channel structure continue to hold when all firms play a centralization-decentralization game depends critically on the market structure of the upstream input market. Specifically, the conclusions are valid if all firms have exclusive upstream input suppliers but not so if the upstream input market is monopolized. Thus, whether the value of decentralization can arise from upstream interaction depends critically on the market structure of the upstream market. |
| Keywords: | Strategic Choice, Channel Structure, Oligopoly |
| JEL: | L22 D21 |
| Date: | 2011–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1102&r=com |
| By: | Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal) |
| Abstract: | We provide a closed-form solution of the monopoly problem when the price imperfectly signals quality to the uninformed buyers, as well as expressions for the effects of noise on output, price, and information flows. |
| Keywords: | Asymmetric information, monopoly, learning, noise, quality, signaling |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:iea:carech:1103&r=com |
| By: | Saak, Alexander E. |
| Keywords: | Advertising, experience goods, Learning, monopoly, private information, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:1062&r=com |
| By: | Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger |
| Abstract: | We develop a theory of innovation for entry and sale into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under bidding competition. Asymmetric information problems are shown to be solved by verification through entry for sale. |
| Keywords: | Acquisitions; Entrepreneurship; Innovation; Ownership; Patent; Start-ups |
| JEL: | G24 L1 L2 M13 O3 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8281&r=com |
| By: | Kretschmer, Tobias; Miravete, Eugenio J; Pernías, Jose C |
| Abstract: | Liberalization of the European automobile distribution system in 2002 limits the ability of manufacturers to impose vertical restraints, leading to a substantial increase in competitive pressure among dealers. We estimate an equilibrium model of profit maximization to evaluate how dealers change their innovation adoption strategies following the elimination of exclusive territories. Using French data we evaluate the existence of complementarities between the adoption of software applications and the scale of production. Firms view these innovations as substitutes and concentrate their effort in one type of software as they expand their scale of production. Results are robust to the existence of unobserved heterogeneity. |
| Keywords: | Competitive Pressure; Complementarity; Product and Process Innovation |
| JEL: | C35 L86 O31 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8289&r=com |
| By: | Konings, Jozef; Roeger, Werner; Zhao, Liqiu |
| Abstract: | Reduced form approaches to estimate markups typically exploit variation in observed input and output. However, these approaches ignore the presence of fixed input factors, which may result in an overestimation of the price-cost margins. We first propose a new methodology to simultaneously estimate price-cost margins and the shares of fixed inputs. We then use Belgian firm level data for manufacturing and service sectors to show that markups are lower when taking into account fixed input factors. We find that the average price-cost margin of manufacturing firms is 0.041, compared to 0.090 when we do not control for fixed costs of production. We also show that price-cost margins increase with the share of fixed costs in turnover. Our findings provide new insights about observed high price-cost margins in service industries. In particular, we show that once fixed costs are taken into account, price-cost margins in service industries are comparable to those in manufacturing. |
| Keywords: | fixed input costs; price-cost margins; Solow residual |
| JEL: | L11 L13 L60 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8290&r=com |
| By: | Mohieddine Rahmouni (GREThA, CNRS, UMR 5113); Murat Yildizoglu (GREQAM, CNRS, UMR 6579) |
| Abstract: | The aim of this paper is to present the theoretical literature dedicated to the analysis of the motivations and the determinants of firms\' technological innovations. To this end, we follow a strategy of presentation that starts with the simplest possible framework in which the innovation can occur (Robinson Crusoe economy), and that encompasses gradually richer economic contexts. The discussion is hence organized in a progressive logic, ranging from purely individual motivations and conditions of innovations (in the case of Robinson, alone on his island), towards the more complex case where the innovative activities take place in an international framework, under particular institutional configurations, depending on the considered countries. The intermediate stages successively introduce the following economic phenomena: demand, sectoral dimensions, competition, public authorities, and finally, international competition. |
| Keywords: | Technological innovation, Industrial economics, Evolutionary economics |
| JEL: | O12 O30 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2011-10&r=com |
| By: | Colciago, Andrea; Rossi, Lorenza |
| Abstract: | We propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously. The interplay between firms endogenous entry, strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables, and helps addressing the unemployment-volatility puzzle. Consistently with U.S. evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net firms' entry is procyclical and the price mark up is countercyclical. |
| Keywords: | Endogenous Market Structures; Firms' Entry; Search and Matching Frictions |
| JEL: | E32 L11 E24 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29311&r=com |
| By: | Rudy Douven; Victoria Shestalova |
| Abstract: | We examine vertical integration and exclusive vertical restraints in health-care markets where insurers and hospitals bilaterally bargain over contracts. |
| JEL: | G22 G34 I11 L14 L42 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:172&r=com |
| By: | Paul Missios (Department of Economics, Ryerson University, Toronto, Canada); Ida Ferrara (DEpartment of Economics, York University, Toronto, Canada) |
| Abstract: | In this paper, we examine the role of insurance coverage in explaining the generic competition paradox in a two-stage game involving a single producer of brand-name drugs and n quantity-competing producers of generic drugs. Independently of brand loyalty, which some studies rely upon to explain the paradox, we show that heterogene- ity in insurance coverage may result in higher prices of brand-name drugs following generic entry. With market segmentation based on insurance coverage present in both the pre- and post-entry stages, the paradox can arise when the two types of drugs are highly substitutable and the market is quite pro?table but does not have to arise when the two types of drugs are highly di¤erentiated. However, with market segmentation occuring only after generic entry, the paradox can arise when the two types of drugs are weakly substituables, provided, however, that the industry is not very pro?table. In both cases, that is, when market segmentation is present in the pre-entry stage and when it is not, the paradox becomes more likely to arise as the market expands and/or insurance companies decrease deductables applied on the purchase of generic drugs. |
| Keywords: | brand-name pricing; generic entry; generic competition paradox; health insurance; health economics. |
| JEL: | L11 L13 I12 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:rye:wpaper:wp026&r=com |
| By: | Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune |
| 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: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8284&r=com |
| By: | L. Lambertini; A. Tampieri |
| Abstract: | We build up a differential game to investigate the interplay between the quality of health care and the presence of an evolving disease in a duopoly where patients are heterogeneous along the income dimension. We prove unicity, stability and perfection of the open-loop Nash solution. Moreover, we identify the admissible parameter region wherein price regulation achieves the twofold objectives of ensuring cares to all patients and eradicating the disease. |
| JEL: | C73 H42 I11 I18 L13 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp737&r=com |
| By: | Alexandre De Cornière (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, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This article investigates the role of a search engine as an intermediary between firms and consumers. Search engines enable firms to target consumers who have revealed some specific needs through their query. In a framework with horizontal product differentiation, imperfect product information and in which consumers incur search costs, I show that introducing a "neutral" targeted advertising mechanism reduces social inefficiencies and tends to reduce the equilibrium price. Moreover, the accuracy of the mechanism has a non monotonic effect on the price of the good: the price is lowest when the accuracy is intermediate. |
| Keywords: | search-engine ; targeted advertising ; consumer search, product differentiation |
| Date: | 2011–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00575074&r=com |
| By: | Jacob de Haan; Tigran Poghosyan |
| Abstract: | We examine whether bank earnings volatility depends on bank size and the degree of concentration in the banking sector. Using quarterly data for non-investment banks in the United States for the period 2004Q1-2009Q4 and controlling for the quality of management, leverage, and diversification , we find that bank size reduces return volatility. The negative impact of bank size on bank earnings volatility decreases (in absolute terms) with market concentration. We also find that larger banks located in concentrated markets have experienced higher volatility during the recent financial crisis. |
| Keywords: | Bank Earnings Volatility; Bank Size; Market Concentration; Financial Crises |
| JEL: | G21 G32 L25 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:282&r=com |
| By: | Daunfeldt, Sven-Olov (The Ratio Institute and Dalarna University); Elert, Niklas (The Ratio Institute and Dalarna University); Lang, Åsa (Dalarna University and Mid Sweden University) |
| Abstract: | Gibrat’s Law predicts that firm growth is a purely random effect and therefore should be independent of firm size. The purpose of this paper is to test Gibrat’s law within the retail industry, using a novel data-set comprising all Swedish limited liability companies active at some point between 1998 and 2004. Very few studies have previously investigated whether Gibrat’s Law seems to hold for retailing, and they are based on highly aggregated data. Our results indicate that Gibrat´s Law can be rejected for a large majority of five-digit retail industries in Sweden, since small retail firms tend to grow faster than large ones. |
| Keywords: | firm dynamics; firm size; firm growth; retail |
| JEL: | L11 L25 L81 |
| Date: | 2011–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ratioi:0164&r=com |
| By: | Chalaux, Thomas; Conway, Paul; He, Ping; Herd, Richard; Yu, Jianxun |
| Abstract: | The extent of competition in product markets is an important determinant of economic growth in both developed and developing countries. This paper uses the 2008 vintage of the OECD indicators of product market regulation to assess the extent to which China’s regulatory environment is supportive of competition in markets for goods and services. The results indicate that, although competition is increasingly robust across most markets, the overall level of product market regulation is still restrictive in international comparison. These impediments to competition are likely to constrain economic growth as the Chinese economy continues to develop and becomes more sophisticated. The paper goes on to review various aspects of China’s regulatory framework and suggests a number of policy initiatives that would improve the extent to which competitive market forces are able to operate. Breaking the traditional links between state-owned enterprises and government agencies is an ongoing challenge. Reducing administrative burdens, increasing private sector involvement in network sectors and lowering barriers to foreign direct investment in services would also increase competition and enhance productivity growth going forward. Some of the reforms introduced by the Chinese government over the past two years go in this direction and should therefore help foster growth. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:648&r=com |
| By: | Bruno, Randolph; Bytchkova, Maria; Estrin, Saul |
| Abstract: | We analyse a micro-panel data set to investigate the effect of regional institutional environment and economic factors on Russian new firm entry rates across time, industries and regions. The paper builds on novel databases and exploits inter-regional variation in a large number of institutional variables. We find entry rates across industries in Russia are not especially low by international standards and are correlated with entry rates in developed market economies, as well as with institutional environment and firm size. Furthermore, industries that, for scale or technological reasons, are characterised by higher entry rates experience lower entry within regions affected subject to political change. A higher level of democracy enhances entry rates for small sized firms but reduces them for medium or large ones. |
| Keywords: | democracy; entry rate; institutions |
| JEL: | L26 P31 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8283&r=com |