nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒03‒26
ten papers chosen by
Russell Pittman
US Department of Justice

  1. Dynamic Market for Lemons with Endogenous Quality Choice by the Seller By Kawai, Keiichi
  2. Intra-firm bargaining and learning in a market equilibrium By Mikhail Drugov
  3. Consumer Reactions To Unobserved Changes in Price Schedules By Peter Katuscak
  4. Shrinking Goods and Sticky Prices: Theory and Evidence By Snir, Avichai; Levy, Daniel
  5. Do followers really matter in Stackelberg competition? By Ludovic A. Julien; Olivier Musy; Aurélien W. Saïdi
  6. Estimating the Lock-in Effects of Switching Costs from Firm-Level Data By Gabor Kezdi; Gergely Csorba
  7. R&D collaboration with uncertain intellectual property rights By Czarnitzki, Dirk; Hussinger, Katrin; Schneider, Cédric
  8. Intellectual Property Rights Protection and Enforcement in a Software Duopoly By Jiri Strelicky; Kresimir Zigic
  9. An empirical Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry By Vivienne Pham; David Prentice
  10. Product market relationships and cost of bank loans: evidence from strategic alliances By Fang, Yiwei; Francis , Bill; Hasan , Iftekhar; Wang, Haizhi

  1. By: Kawai, Keiichi
    Abstract: We analyze a dynamic market for lemons in which the quality of the good is endogenously determined by the seller. Potential buyers sequentially submit offers to one seller. The seller can make an investment that determines the quality of the item at the beginning of the game, which is unobservable to buyers. At the interim stage of the game, the information and payoff structures are the same as in the market for lemons. Our main result is that the possibility of trade does not create any efficiency gain if (i)the common discounting is low, and (ii)the static incentive constraints preclude the mutually agreeable ex-ante contract under which the trade happens with probability one. Our result does not depend on whether the offers by buyers are private or public.
    Keywords: Bargaining; delay; impasse; observability; lemons problem.
    JEL: D82
    Date: 2011
  2. By: Mikhail Drugov
    Abstract: This paper introduces an agency relationship into a dynamic game with informational externalities. Two principals bargain with their respective agents about the production cost which is the private information of the agents and is correlated between them. We find that the agency relationship creates an incentive for simultaneous production, even if this involves an inefficient delay. As the commitment power of the principals decreases, this incentive becomes stronger. When principals compete, the effect of competition is decomposed into two parts. Inter-period competition (from past and future actions) pushes principals towards simultaneous actions, while intra-period competition (from concurrent actions) does the opposite.
    Keywords: Bargaining, Adverse selection, Learning, Information, Externalities, Delay
    JEL: C78 D82 D83 L10
    Date: 2011–03
  3. By: Peter Katuscak
    Abstract: Economic theory presumes that individuals respond to true marginal prices when de- ciding on the amount of goods and services they buy and many other economic decisions. However, learning about these marginal prices is often costly in terms of search time, cog- nitive effort or monetary outlays. This is likely to be true of price changes in subscription plans. Consumers may therefore opt to be satisfied with only an approximate knowledge of the relevant marginal prices. This paper presents an experiment that studies repeated consumer purchase and price information updating and acquisition decisions when param- eters of the price schedule are serially correlated but unknown. Subjects have an option to acquire the pricing information at a cost, or otherwise just update their beliefs based on the observation of the total cost of purchase. We find the following: (1) conditional on information acquisition decisions, the model of Bayesian updating provides a good approx- imation for revealed mean beliefs about the per-unit price held by subjects who appear to understand the experiment and/or report their expected cost of purchase accurately; it is not a good approximation for other subjects; (2) the demand for information decreases with the cost of information, as expected; (3) controlling for Bayesian beliefs and cost of information, the demand for information does not vary with the length of the remaining time horizon in which the information can be used, contrary to the theoretical prediction; (4) large positive surprises in the cost of purchase in the most recent period increase infor- mation demand, whereas negative surprises decrease it, relative to the no-surprise baseline, which is contrary to the theoretical prediction.
    Keywords: price scheme; complexity; consumer decisions
    JEL: D12 D83
    Date: 2011–02
  4. By: Snir, Avichai; Levy, Daniel
    Abstract: If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices remain sticky. We study a situation where producers adjust the quantity (per package) rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information. The model is based on evidence from cognitive psychology and explains consumers’ decision whether or not to process goods’ price and quantity information. Our findings explain why producers sometimes adjust goods’ prices and sometimes goods’ quantities. In addition, they predict variability in price adjustment costs over time and across economic conditions.
    Keywords: Sticky Prices; Rigid Prices; Cognitive Costs of Attention; Information Processing Cost; Rational Inattention; Price Adjustment; Quantity Adjustment; Downsizing;
    JEL: D21 L11 D11 E31 D40 L00 L16 M31 L15 M21
    Date: 2011–03–13
  5. By: Ludovic A. Julien; Olivier Musy; Aurélien W. Saïdi
    Keywords: Leader’s markup discount factor, linear economy, follower’s output discount factor, myopic behavior
    JEL: L13 L20
    Date: 2011
  6. By: Gabor Kezdi (Institute of Economics Hungarian Academy of Sciences); Gergely Csorba (Institute of Economics Hungarian Academy of Sciences)
    Abstract: This paper proposes a simple method for estimating the lock-in effects of switching costs from firm-level data. We compare the behavior of already contracted consumers to the behavior of new consumers as the latter can serve as contrafactual to the former. In panel regressions on firms' incoming and quitting consumers, we look at the differential response to price changes and identify the lock-in effect of switching costs from the difference between the two. We illustrate our method by analyzing the Hungarian personal loan market and find strong lock-in effects.
    Keywords: switching costs, lock-in, panel data
    JEL: C33 D12 L13
    Date: 2011–02
  7. By: Czarnitzki, Dirk; Hussinger, Katrin; Schneider, Cédric
    Abstract: Patent pendencies create uncertainty in research and development (R&D) collaboration agreements, resulting in a threat of expropriation of unprotected knowledge by potential partners, reduced bargaining power and enhanced search costs. In this paper, we show that - depending of the type of partner - uncertain intellectual property rights (IPR) lead to reduced collaboration between firms and may hinder the production of knowledge. This has implications for technology policy as R&D collaborations are exempt from anti-trust legislation in order to increase R&D in the economy. We argue that a functional IPR system is needed for successful utilization of this policy. --
    Keywords: R&D collaboration,intellectual property,uncertainty,patents
    JEL: O31 O38
    Date: 2011
  8. By: Jiri Strelicky; Kresimir Zigic
    Abstract: We study the economic impacts of the interaction between a regulator's Intellectual Property Rights (IPR) protection policy against software piracy on the one side and the forms of IPR protection that software producers may themselves undertake to protect their intellectual property on the other side. Two developers, each offering a variety of different quality, compete for heterogeneous users who choose among purchasing a legal version, using an illegal copy, and not using a product at all. Using an illegal version violates IPR and is thus punishable when disclosed. If a developer considers the level of piracy as high, he can either introduce a form of physical protection for his product or introduce a protection in the form of restricting support and other services to illegal users. The quality of each developer's product is exogenously given, and the developers compete in prices. We examine the above issues within the framework of Bertrand and Stackelberg competition while the monopoly set-up serves as a point of reference.
    Keywords: vertically differentiated duopoly, software piracy, Bertrand competition, private and public intellectual property rights protection
    JEL: D43 L11 L21 O25 O34
    Date: 2011–03
  9. By: Vivienne Pham (School of Economics and Finance, La Trobe University); David Prentice (School of Economics and Finance, La Trobe University)
    Abstract: In this paper we empirically analyse two counterfactual situations facing an anti-trust authority following the merger of two of the largest international cigarette companies. First we estimate a nested logit model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are both broadly consistent with the limited independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian anti-trust author- ity. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows the model successfully anticipated the behaviour of the divested brands. This suggests structural econometric analysis us- ing a nested logit may be usefully utilised by anti-trust authorities to assess the welfare implications of proposed mergers and partial divestitures.
    Date: 2010–11
  10. By: Fang, Yiwei (Lally School of Management and Technology, Rensselaer Polytechnic Institute); Francis , Bill (Lally School of Management and Technology, Rensselaer Polytechnic Institute); Hasan , Iftekhar (Lally School of Management and Technology, Rensselaer Polytechnic Institute and Bank of Finland Research); Wang, Haizhi (Stuart School of Business. Illinois Institute of Technology)
    Abstract: This paper examines the effects of strategic alliances on non-financial firms’ bank loan financing. We construct several measures to capture firms’ alliance activities using the frequency of alliance activities, the prominence of the alliance partner and the relative networking position in the overall alliance network. We find that firms with active alliance involvement experience a lower cost of debt from banks. We also document that allying with a prestigious partner (ie S&P 500 firms) can provide an endorsement effect and benefit the borrowers by reducing the price of bank loans. Moreover, a borrowing firm positioned at the centre of an alliance network enjoys a lower cost of bank loans. Finally, we find that borrowing firms with alliance experience are less likely to use collateral and covenants in their loan contracts.
    Keywords: cost of bank loans; strategic alliances; product market relationships
    JEL: D82 D85 G21 G30
    Date: 2011–03–15

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