nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒04‒02
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Competitive Targeted Advertising with Price Discrimination By Rosa Branca Esteves; Joana Resende
  2. Dynamic Adverse Selection and the Size of the Informed Side of the Market By Ennio Bilancini; Leonardo Boncinelli
  3. Uncertain demand, consumer loss aversion, and flat-rate tariffs By Fabian Herweg; Konrad Mierendorff
  4. Leadership Contestability, Monopolistic Rents and Growth By Roberto Piazza
  5. `Breaking and entering' of contracts as a matter of bargaining power and exclusivity clauses By Stephanie Rosenkranz; Utz Weitzel
  6. On the feedback solution of a differential oligopoly game with capacity adjustment By D. Dragone; L. Lambertini; A. Palestini
  7. Repositioning Dynamics and Pricing Strategy By Ellickson, Paul B.; Misra, Sanjog; Nair, Harikesh S.
  8. Price Setting and Price Adjustment in Some European Union Countries: Introduction to the Special Issue By Daniel Levy; Frank Smets
  9. Why Are Some Prices Stickier Than Others? Firm-Data Evidence on Price Adjustment Lags By Daniel Dias; Carlos Robalo Marques; Fernando Martins; J.M.C.Santos Silva
  10. Shrinking Goods and Sticky Prices: Theory and Evidence By Avichai Snir; Daniel Levy
  11. Business as Usual: A Consumer Search Theory of Sticky Prices and Asymmetric Price Adjustment By Luís Cabral; Arthur Fishman
  12. Price Points and Price Rigidity By Daniel Levy; Dongwon Lee; Haipeng (Allan) Chen; Robert J. Kauffman; Mark Bergen
  13. Choosing Between Time and State Dependence: Micro Evidence on Firms' Price-Reviewing Strategies By Daniel Dias; Carlos Robalo Marques; Fernando Martins
  14. Antitrust Immunity and International Airline Alliances By William Gillespie; Oliver M. Richard
  15. Price discrimination and business-cycle risk By Marco Cornia; Kristopher S. Gerardi; Adam Hale Shapiro
  16. Spatial Competition, Network Externalities, and Market Structure: An Application to Commercial Banking. By Spitzer, Matthew L; Talley, Eric
  17. Coexistence of Service- and Facility-Based Competition: The Relevance of Access Prices for "Make-or-Buy"-Decisions By Christian M. Bender; Georg Götz
  18. Access Regulation, Entry and the Investment Ladder in Telecommunications By Fabio Manenti; Antonio Sciala'
  19. Organisational Structures in Network Industries – An Application to the Railway Industry By Benjamin Pakula; Georg Götz
  20. Blame the Switchman? Russian Railways Restructuring After Ten Years By Russell Pittman

  1. By: Rosa Branca Esteves (Universidade do Minho - NIPE); Joana Resende (Universidade do Porto - FEP)
    Abstract: This paper investigates the effects of price discrimination by means of targeted advertising in a duopolistic market where the distribution of consumers' preferences is discrete and where advertising plays two major roles. It is used by firms as a way to transmit relevant information to otherwise uninformed consumers, and it is used as a price discrimination device. We compare the firms' optimal marketing mix (advertising and pricing) when they adopt mass advertising/non-discrimination strategies and targeted advertising/price discrimination strategies. If firms are able to adopt targeted advertising strategies, we find that the symmetric price equilibrium is in mixed strategies, while the advertising is chosen deterministically. Our results also unveil that as long as we allow for imperfect substitutability between the goods, ?rms do not necessarily target more ads to their own market. In particular, firms' optimal marketing mix leads to higher advertising reach in the rival's market than in the firms' own market, provided that advertising costs are sufficiently low in relation to the consumer's reservation value. The comparison of the optimal marketing-mix under mass advertising strategies and targeted advertising strategies reveals that targeted advertising might constitute a tool to dampen price competition. In particular, if advertising costs are sufficiently low in relation to the value of the goods, we obtain that average prices with non-discrimination (mass advertising) are below those with price discrimination and targeted advertising (regardless of the market segment). Accordingly, when (i) goods are imperfect substitutes, (ii) advertising is not too expensive, and (iii) targeted advertising constitutes an effective price discrimination tool, price discrimination through targeted advertising may be detrimental to social welfare since it boosts industry profits at the expense of consumer surplus.
    Date: 2011
  2. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information. We show that in equilibrium all goods can be traded if a simple piece of information is made publicly available: the size of the informed side of the market. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. More precisely we prove that, if the size of the informed side of the market is a public information at each trading stage, then there exists a weak perfect Bayesian equilibrium where all goods are sold in finite time and where the price and quality of traded goods are increasing over time. Moreover, we show that as the time between exchanges becomes arbitrarily small, full trade still obtains in finite time – i.e., all goods are actually traded in equilibrium – while total surplus from exchanges converges to the entire potential. These results suggest two policy interventions in markets suffering from dynamic adverse selection: first, the public disclosure of the size of the informed side of the market in each trading stage and, second, the increase of the frequency of trading stages.
    Keywords: dynamic adverse selection; full trade; size of the informed side; frequency of exchanges; asymmetric information
    JEL: D82 L15
    Date: 2011–03
  3. By: Fabian Herweg; Konrad Mierendorff
    Abstract: We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit-maximizing two-part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two-part tariffs.
    Keywords: Consumer loss aversion, flat-rate tariffs, nonlinear pricing, uncertain demand
    JEL: D11 D43 L11
    Date: 2011–03
  4. By: Roberto Piazza
    Abstract: I construct an endogenous growth model where R&D is carried out at the industry level in a game of innovation between leaders and followers. Innovation costs for followers are assumed to increase with the technological lag from leaders. We obtain three results that contrast with standard Schumpeterian models, such as Aghion and Howitt (1992). First, leaders may innovate in equilibrium, in an attempt to force followers out of the innovation game. Second, policies (such as patents) that allow for strong protections of monopolies can reduce the steady state growth rate of the economy. Third, multiple equilibria arise when monopolies' protection is large.
    Date: 2011–03–23
  5. By: Stephanie Rosenkranz; Utz Weitzel
    Abstract: We analyze the effect of liquidated damage rules in exclusive contracts that are negotiated in a sequential bargaining process between one seller and two buyers with endogenous outside options. We show that assumptions on the distribution of bargaining power influence the size of the payment of damages and determine which contractual party benefits from including liquidated damage rules. Furthermore, we show that the effect of the payment of damages on the efficiency of the consummated deals depends on the possibility to sign more than one contract. Only if this is not possible, damage rules may prevent the breaking and entering of contracts and thus lead to inefficient deals in the market of corporate control, or allow for `naked' exclusion in the context of supplier contracts with externalities.
    Keywords: sequential bargaining, bargaining power, outside option, liquidated damage rules, termination fees, exclusivity agreements
    JEL: G34 C78 D44 C71
    Date: 2011–03
  6. By: D. Dragone; L. Lambertini; A. Palestini
    Abstract: We propose a simple method for characterising analytically the feedback solution of oligopoly games with capital accumulation à la Solow-Swan. As a result, it becomes possible to contrast the feedback equilibrium against the corresponding one generated by open-loop information. Our method accomodates extensions of the stripped down oligopoly model in several directions. As an example, we expand the setup to include environmental effects and Pigouvian taxation.
    JEL: C73 L13 Q55
    Date: 2011–03
  7. By: Ellickson, Paul B. (University of Rochester); Misra, Sanjog (University of Rochester); Nair, Harikesh S. (Stanford University)
    Abstract: We measure the revenue and cost implications to supermarkets of changing their price positioning strategy in oligopolistic downstream retail markets. Our estimates have implications for long-run market structure in the supermarket industry, and for measuring the sources of price rigidity in the economy. We exploit a unique dataset containing the price-format decisions of all supermarkets in the U.S. The data contain the format-change decisions of supermarkets in response to a large shock to their local market positions: the entry of Wal-Mart. We exploit the responses of retailers to WalMart entry to infer the cost of changing pricing-formats using a .revealed-preference. argument similar to the spirit of Bresnahan and Reiss (1991). The interaction between retailers and Wal-Mart in each market is modeled as a dynamic game. We find evidence that suggests the entry patterns of WalMart had a significant impact on the costs and incidence of switching pricing strategy. Our results add to the marketing literature on the organization of retail markets, and to a new literature that discusses implications of marketing pricing decisions for macroeconomic studies of price rigidity. More generally, our approach which incorporates long-run dynamic consequences, strategic interaction, and sunk investment costs, outlines how the paradigm of dynamic games may be used to model empirically firms' positioning decisions in Marketing.
    Date: 2011–01
  8. By: Daniel Levy (Department of Economics, Bar Ilan University and RCEA); Frank Smets (European Central Bank and CEPR)
    Abstract: This introductory essay briefly summarizes the eleven empirical studies of price setting and price adjustment that are included in this special issue. The studies, which use data from several European countries, were conducted as part of the European Central Bank’s Inflation Persistence Network.
    Keywords: Price Rigidity, Price Flexibility, Cost of Price Adjustment, Menu Cost, Managerial and Customer Cost of Price Adjustment, Pricing, Price System, Price Setting, New Keynesian Economics, Store-Level Data, Micro-Level Data, Product-Level Data
    JEL: D21 D40 E12 E31 E50 E52 E58 L11 L16 M20 M30
    Date: 2010–12
  9. By: Daniel Dias; Carlos Robalo Marques; Fernando Martins; J.M.C.Santos Silva
    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: C41 D40 E31
    Date: 2011
  10. By: Avichai Snir (Bar-Ilan University and Humboldt-Universität zu Berlin); Daniel Levy (Department of Economics, Bar Ilan University and RCEA)
    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, Price Adjustment, Quantity
    JEL: E31 L16
    Date: 2011–03
  11. By: Luís Cabral (IESE Business School and NYU); Arthur Fishman (Bar-Ilan University)
    Abstract: Empirical evidence suggests that prices are sticky with respect to cost changes. Moreover, prices respond more rapidly to cost increases than to cost decreases. We develop a search theoretic model which is consistent with this evidence and allows for additional testable predictions. Our results are based on the assumption that buyers do not observe the sellers costs, but know that cost changes are positively correlated across sellers. In equilibrium, a change in price is likely to induce consumer search, which explains sticky prices. Moreover, the signal conveyed by a price decrease is different from the signal conveyed by a price increase, which explains asymmetry in price adjustment.
    Date: 2011–01
  12. By: Daniel Levy (Department of Economics, Bar Ilan University and RCEA); Dongwon Lee (Korea University); Haipeng (Allan) Chen (Texas A&M University); Robert J. Kauffman (Arizona State University); Mark Bergen (University of Minnesota)
    Abstract: We study the link between price points and price rigidity, using two datasets: weekly scanner data, and Internet data. We find that: “9” is the most frequent ending for the penny, dime, dollar and ten-dollar digits; the most common price changes are those that keep the price endings at “9”; 9-ending prices are less likely to change than non-9-ending prices; and the average size of price change is larger for 9-ending than non-9-ending prices. We conclude that 9-ending contributes to price rigidity from penny to dollar digits, and across a wide range of product categories, retail formats and retailers.
    Keywords: Price Point, 9-Ending Price, Price Rigidity
    JEL: E31 L16 D80 M21 M30
    Date: 2010–12
  13. By: Daniel Dias; Carlos Robalo Marques; Fernando Martins
    Abstract: Thanks to recent findings based on survey data, it is now well known that firms differ from each other with respect to their price-reviewing strategies. While some firms review their prices at fixed intervals of time, others prefer to perform price revisions in response to changes in economic conditions. In order to explain this fact, some theories have been suggested in the literature. However, empirical evidence on the relative importance of the factors determining firms' different strategies is virtually nonexistent. This paper contributes to filling this gap by investigating the factors that explain why firms follow time-, state- or time- and state-dependent price-reviewing rules. We find that firms' strategies vary with firm characteristics that have a bearing on the importance of information costs, the variability of the optimal price and the sensitivity of profits to non-optimal prices. Menu costs, however, do not seem to play a significant role.
    JEL: C41 D40 E31
    Date: 2011
  14. By: William Gillespie (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Oliver M. Richard
    Abstract: Most of the major carriers worldwide have joined one of three international airline alliances. The U.S. Department of Transportation has granted immunity from the U.S. antitrust laws to many carriers within these alliances. This article assesses the competitive effects and efficiencies associated with such grants. A grant of antitrust immunity to carriers in an alliance reduces competition in routes where these carriers offer competing flights, and the data show that fares paid by passengers for travel in non-stop trans-Atlantic flights are higher in routes with fewer independent competitors. The data also show that the alliances can produce pricing efficiencies for trans-Atlantic passengers who travel with connecting itineraries, but antitrust immunity within an alliance is not necessary to achieve such efficiencies.
    Date: 2011–02
  15. By: Marco Cornia; Kristopher S. Gerardi; Adam Hale Shapiro
    Abstract: A parsimonious theoretical model of second degree price discrimination suggests that the business cycle will affect the degree to which firms are able to price-discriminate between different consumer types. We analyze price dispersion in the airline industry to assess how price discrimination can expose airlines to aggregate-demand fluctuations. Performing a panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly procyclical. Estimates show that a rise in the output gap of 1 percentage point is associated with a 1.9 percent increase in the interquartile range of the price distribution in a market. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, firms can significantly raise the markup charged to those with a high willingness to pay. The analysis suggests that this impact on firms' ability to price-discriminate results in additional profit risk, over and above the risk that comes from variations in cost.
    Date: 2011
  16. By: Spitzer, Matthew L; Talley, Eric
    Keywords: Law
    Date: 2011–03–24
  17. By: Christian M. Bender (University of Giessen); Georg Götz (University of Giessen)
    Abstract: This paper models competition between two firms, which provide broadband Internet access in regional markets with different population densities. The firms, an incumbent and an entrant, differ in two ways. First, consumers bear costs when switching to the entrant. Second, the entrant faces a make-or-buy decision in each region and can choose between service-based and facility-based entry. The usual trade-off between static and dynamic eficiency does not apply in the sense that higher access fees might yield both, lower retail prices and higher total coverage. This holds despite a strategic effect in the entrant's investment decision. While investment lowers marginal costs in regions with facility-based entry, it intensifies competition in all regions. We show that the cost-reducing potential of investments dominates the strategic effect: Higher access fees increase facility-based competition, decrease retail prices and increase total demand.
    Keywords: Broadband access markets, facility- and service-based entry, investments, economies of density, switching costs
    JEL: D43 L13 L51 L96
    Date: 2011
  18. By: Fabio Manenti (Università di Padova); Antonio Sciala' (Universita' Roma Tre)
    Abstract: This paper presents a model of competition between an incumbent and an entrant firm in telecommunications. The entrant has the option to enter the market with or without having preliminary invested in its own infrastructure; in case of facility based entry, the entrant has also the option to invest in the provision of enhanced services. In case of resale based entry the entrant needs access to the incumbent network. Unlike the rival, the incumbent has always the option to upgrade the existing network to provide advanced services. We study the impact of access regulation on the type of entry and on firms' investments. Without regulation, we find that the incumbent sets the access charge to prevent resale based entry and this overstimulates rival's investment that may turn out to be socially inefficient. Access regulation may discourage welfare enhancing investments, thus also inducing a socially inefficient outcome. We extend the model to account for negotiated interconnection in case of facilities based entry.
    Keywords: telecommunications, ladder of investment, access regulation, interconnection.
    JEL: L86 L96 L51
    Date: 2010–09
  19. By: Benjamin Pakula (University of Giessen); Georg Götz (University of Giessen)
    Abstract: This paper analyses the incentives to upgrade input quality in vertically related (network) industries. Upstream investments have a biased effect on the downstream companies and lead to vertical product differentiation. Different vertical structures such as vertical integration, ownership and legal unbundling lead to different investments. We find that, without regulation, vertical integration and legal unbundling regimes provide highest investment incentives and lead to highest welfare. However, we also find foreclosure in the downstream market if the potential degree of horizontal product differentiation of the entrant is low. Under ownership unbundling, investment incentives are lower but there is never foreclosure of the entrant since this would worsen double marginalisation. When the network operator is subject to a break-even regulation, the investment incentives are crowded out under legal and ownership unbundling whereas they remain nearly unchanged under vertical integration. Welfare and co umer surplus decrease under legal unbundling, but increase under the two other regimes.
    Keywords: Vertical Integration, Investment, Foreclosure, Regulation
    JEL: D2 D4 L43 L51 L92
    Date: 2011
  20. By: Russell Pittman (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: The Russian economy relies on the Russian freight railways to an extraordinary degree. In 2001, after years of debate, the Russian government adopted an ambitious plan to transform this vertically integrated, government owned monopoly into a system that would rely more on private investment and competition and less on government ownership and regulation. This paper examines the state of the industry after ten years of reforms, with a focus on competition, tariffs, and private sector participation. Much remains to be decided, in particular the question of whether Russia will settle on its own unique model of railways restructuring or will move in the direction of one of the three standard models seen in other countries: vertical separation as in the UK and Sweden, third party access as in Germany and France, or horizontal separation, as in the US, Canada, and Mexico.
    Keywords: freight railways, restructuring, competition, Russian Federation, vertical separation, third party access, horizontal separation
    Date: 2011–02

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