nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒04‒16
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Quality and Reputation: Is Competition Beneficial to Consumers? By Alessandro Fedele; Piero Tedeschi
  2. Welfare, Competition, Specialization and Growth By Daria ONORI
  3. Dynamic Adverse Selection and the Size of the Informed Side of the Market By Ennio Bilancini; Leonardo boncinelli
  4. The Organization of Production and Trade By Chia-Hui Lu; Shin-Kun Peng; Ping Wang
  5. Economising, Strategising and the Decision to Outsource By Dermot Leahy; Catia Montagna
  6. Acquisitions, Entry and Innovation in Network Industries By Norbäck, Pehr-Johan; Persson, Lars; Tåg, Joacim
  7. Can Vertical Separation Reduce Non-Price Discrimination and Increase Welfare? By Duarte Brito; Pedro Pereira; João Vareda
  8. Entry decisions after deregulation: the role of incumbents' market power By Lorenzo Ciari; Riccardo De Bonis
  9. Imperfect Competition between Milk Manufacturers and Retailers in a Midwestern State in the U.S. By Hovhannisyan, Vardges; Stiegert, Kyle W.
  10. Retail Competition in the Milk Market in a U.S. Midwestern City By Hovhannisyan, Vardges; Gould, Brian W.
  11. The United States Tobacco Industry after the Buyout By Sheremenko, Ganna; Epperson, James E.
  12. Market Coordination in the Beef Stocker Sector: Short and Long Run Implications of Higher Corn Prices By Peel, Derrell S.
  13. An Analysis of the Banana Import market in the U.S. By Su, Chia-Hsien; Ishdorj, Ariun; Leatham, David J.
  14. Competiveness of Latin American Exports in the U.S. Banana Market By Muhammad, Andrew; Fonsah, Greg E.; Zahniser, Steven
  15. Some Evidence of Information Aggregation in Auction Prices By Chezum, Brian; Stowe, C. Jill
  16. Broadening Focus: Spillovers, Complementarities and Specialization in the Hospital Industry By Jonathan R. Clark; Robert Huckman

  1. By: Alessandro Fedele (Department of Economics, Università di Brescia); Piero Tedeschi (DISCE, Università Cattolica)
    Abstract: In this paper we develop a model of product quality and firms' reputation. If quality is not verifiable and there is repeated interaction between firms and consumers, we show that reputation emerges as a means of disciplining the former to deliver high quality. In order to that, we also prove that competitive firms can extract some rent in producing high quality, thus providing a solution to Stiglitz (1989) puzzle, alternative and complementary to Hörner's (2002) one. Positive profit are generated in equilibria characterized by the emergence of a social norm which prescribes a minimum quality level. Moreover, we demonstrate that more concentrated industry structures deliver better quality and higher social and consumer welfare. This finding should induce cautiousness in enhancing competition when product quality is at stake. We derive our results in the specific context of after-sales service quality provided by insurance companies. Yet, we argue that our analysis is of general applicability.
    Keywords: quality, reputation, Bertrand competition, insurance contracts.
    JEL: L13 D82 D81 C73
    Date: 2010–10
  2. By: Daria ONORI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and University of Rome “La Sapienza”, Faculty of Economics)
    Abstract: In this paper we consider a simple model of horizontal differentiation and derive the closed form solutions for the level of the variables in the decentralized economy and in the social planner case. This enables us to analyze consumers’ welfare as a function of the parameter representing market power. We surprisingly find that, when the total labor force is greater than a certain level, the welfare function is an inverted-N shape in the decentralized economy and monotonically decreasing in the centralized economy. This suggests that there is another effect which interacts with market power: the degree of returns to specialization.
    Keywords: Closed form solutions; Welfare; Competition; Degree of returns to specialization
    JEL: C61 L16 L4 O31 O33
    Date: 2011–03–28
  3. 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
  4. By: Chia-Hui Lu (City University of Hong Kong); Shin-Kun Peng (Institute of Economics, Academia Sinica, Taipei, Taiwan; National Taiwan University); Ping Wang (Department of Economics, Washington University in St. Louis)
    Abstract: We construct a uni…ed framework to study under what conditions one of the three frequently observed organizational structures of international middle-product production may arise in equilibrium: (i) separation of upstream and downstream …firms with middle-product trade, (ii) vertical integration of upstream and downstream …firms, and (iii) global sourcing with upstream fi…rms internalizing design and marketing tasks while only outsourcing the …final good production to subcontractors. We examine how conventional comparative advantage (search, communication, trade and labor diversi…cation costs) and the concern of the product-defect risk arising from outsourcing jointly determine the organization of production and trade. We show that the potential availability of one organizational structure can change the trade-off of the other two structures, thereby making simple pairwise comparison invalid. Moreover, we fi…nd that an equilibrium organizational structure may be suboptimal, as a result of conflicting effects on …firm's payoffs and the consumer's surplus. Furthermore, we calibrate various economies and illustrate why different organizational structures may be more frequently observed in different economic environments.
    Keywords: Middle-Product Trade, Vertical Mergers, Global Sourcing
    JEL: F20 F21 F23
    Date: 2011–03
  5. By: Dermot Leahy; Catia Montagna
    Abstract: We study the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Firms’ mode of operation decision depends on both the incentive to economize on costs and on strategic considerations. We explore the strategic incentives to outsource and show that asymmetric equilibria emerge, with firms choosing different modes of operation, even when they are ex-ante identical. With ex-ante asymmetries, higher cost firms are more likely to outsource. We apply our model to a number of different international trading setups.
    Keywords: Outsourcing, Vertical Integration, Trade Liberalisation, Oligopoly
    JEL: F12 L13 L14
    Date: 2011–04
  6. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)); Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: Why do so many high-priced acquisitions of entrepreneurial firms take place in network industries? We develop a theory of commercialization (entry or sale) in network industries showing that high equilibrium acquisition prices are driven by the incumbents' desire to prevent rivals from acquiring innovative entrepreneurial firms. This preemptive motive becomes more important when there is an increase in network effects. A consequence is higher innovation incentives under an acquisition relative to entry. A policy enforcing strict compatibility leads to more entry, but can be counterproductive by reducing bidding competition, thereby also reducing acquisition prices and innovation incentives.
    Keywords: Acquisitions; Commercialization; Compatibility; Entry; Network effects; Innovation; R&D; Regulation
    JEL: L10 L15 L26 L50 L86 O31
    Date: 2011–04–06
  7. 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
  8. By: Lorenzo Ciari (European University Institute - Firenze (I)); Riccardo De Bonis (Banca d'Italia, Economics and International Relations Area)
    Abstract: This paper investigates the role of incumbents' market power in shaping the entry decisions of Italian banks after branching liberalization in 1990. Using a unique dataset on 260 banks, we find that entry over the 1990-1995 period was targeted towards markets that were more competitive to begin with, i.e. where banking spreads were smaller. The results confirm the entry deterrent role of market power in the short-run and show a long run effect of regulation that survives after the removal of administrative barriers. The capacity of market power to discourage entry is confirmed in instrumental variables specifications, where we use the characteristics of the local banking markets in 1936, a proxy for tightness of banking regulation, to identify an exogenous source of variation in the spreads.
    Keywords: banking, barriers to entry, deregulation, market power
    JEL: G28 L1 L5
    Date: 2011–04
  9. By: Hovhannisyan, Vardges; Stiegert, Kyle W.
    Abstract: This manuscript studies the market conduct of the milk manufacturers and retail chains in a Midwestern state in the U.S. Following the menu approach we employ a random coefficient logit demand model to investigate several possible scenarios on the supply side. Demand estimates are obtained using both cross-sectional and time series variation in data. We also allow annual variation in consumer demographics which helps identify the coefficients of interaction between consumer demographics and product characteristics. To further enhance identification power we allow choice set of milk to vary across markets. The results are most supportive of the conjecture that manufacturers behave competitively letting the retailers be the residual claimants. Later they may collect a part or full rents from the retailers through two-part tariffs.
    Keywords: Market conduct, random coefficient logit, vertical chain, imperfect competition, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, D43, L13,
    Date: 2011
  10. By: Hovhannisyan, Vardges; Gould, Brian W.
    Abstract: The main goal of this manuscript is to explore the retailer conduct in the milk market in a U.S. Midwestern city, based upon a structural estimation of consumer milk demand and retailer optimality conditions. To model milk demand we rely upon the Almost Ideal Demand System, while allowing the retailer optimality conditions to cover a range of competitive scenarios from perfect competition to horizontal cartel. We employ a conjectural variation approach in the spirit of Newly Empirical Industrial Organization to study the competitive environment on the retail landscape. We find that the retail market in question is far from being competitive, with the two major retailers being engaged in an oligopolistic competition. Furthermore, the private label milk seems an important tool for some big players to extract rents from their competitors. The current study offers an idea of the competitive atmosphere in the retail sector of food marketing system. While we do not target direct estimates of retailer market power, this might serve an important first step to understand the nature of competition in a given market with only aggregate purchase quantity and price data.
    Keywords: AIDS demand, conjectural variation, market power, oligopolistic competition., Demand and Price Analysis, Industrial Organization, D11, D12, D43, L13,
    Date: 2011–01–14
  11. By: Sheremenko, Ganna; Epperson, James E.
    Abstract: The elimination of the quota and price support program in 2004 meant limited government intervention and made U.S. tobacco producers more vulnerable to market risks. In this paper we provide an examination of the situation in the U.S. tobacco industry before and after the buyout and identify how the enacted policy change affected the U.S. tobacco industry in terms of supply and demand. The supply and demand system is estimated using the generalized method of moments (GMM). The results suggest that the buyout, which began with lowering the price for tobacco as well as increasing the cost of production, had a negative impact on the number of farmers in the United States as it declined substantially after 2004. However, tobacco producers who remained in the industry apparently became more efficient and more competitive on the world tobacco market in the face of lower tobacco prices. Improved overall competitiveness of the U.S. tobacco industry along with changes in U.S. consumer tastes and preferences for less consumption of tobacco products resulted in an increase in U.S. exports of tobacco leaf after the elimination of the government policy.
    Keywords: Agricultural and Food Policy,
    Date: 2011
  12. By: Peel, Derrell S.
    Abstract: Beef industry sectors are coordinated by a relatively subtle combination of absolute price levels and price relationships across feeder cattle weights. This paper presents a conceptual framework to understand market based coordination of production in the beef industry. The paper illustrates with examples from history and discusses the implications of permanently higher corn prices.
    Keywords: Cattle Markets, Stocker Cattle, Market Coordination, Marketing,
    Date: 2011
  13. By: Su, Chia-Hsien; Ishdorj, Ariun; Leatham, David J.
    Keywords: Demand, banana, import, market power, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety,
    Date: 2011–01–14
  14. By: Muhammad, Andrew; Fonsah, Greg E.; Zahniser, Steven
    Abstract: U.S. banana demand differentiated by country of origin is estimated using the generalized dynamic Rotterdam model. Results indicate that dynamic factors play a significant role in determining the allocation of U.S. banana expenditures across exporting sources. Of particular interest is Guatemalaâs increased share and Costa Ricaâs decreased share of U.S. banana supply. A number of factors explained why Guatemala replaced Costa Rica as the leading U.S. supplier in 2007. (1) Guatemala is the least expensive source on average. (2) Habit persistence, adjustment costs, and other dynamic factors favor Guatemalaâs exports. (3) Given increases in the relative price of Costa Ricaâs bananas, the price competition between Costa Rica and Guatemala is highly significant. (4) Bananas from Costa Rica are highly responsive to own-price while imports from Guatemala are more price-inelastic. (5) Heavy rains and fluctuating temperatures in Costa Rica have decreased banana production and exports.
    Keywords: bananas, imports, demand, Latin America, United States, Demand and Price Analysis, International Relations/Trade, F14, Q11, Q13, Q17,
    Date: 2011
  15. By: Chezum, Brian; Stowe, C. Jill
    Abstract: Paper was previously titled "The Informativeness of Prices as Quality Signals in the Thoroughbred Industry"
    Keywords: Efficient Markets Hypothesis, information aggregation, auctions, Thoroughbred industry, Agribusiness, Livestock Production/Industries,
    Date: 2010–11–30
  16. By: Jonathan R. Clark; Robert Huckman
    Abstract: The long-standing argument that focused operations outperform others stands in contrast to claims about the benefits of broader operational scope. The performance benefits of focus are typically attributed to reduced complexity, lower uncertainty, and the development of specialized expertise, while the benefits of greater breadth are linked to the economies of scope achieved by sharing common resources, such as advertising or production capacity, across activities. Within the literature on corporate strategy, this tension between focus and breadth is reconciled by the concept of related diversification (i.e., a firm with multiple operating units, each specializing in distinct but related activities). We consider whether there are similar benefits to related diversification within an operating unit and examine the mechanism that generates these benefits. Using the empirical context of cardiovascular care within hospitals, we first examine the relationship between a hospital’s level of specialization in cardiovascular care and the quality of its clinical performance on cardiovascular patients. We find that, on average, focus has a positive effect on quality performance. We then distinguish between positive spillovers and complementarities to examine: (1) the extent to which a hospital’s specialization in areas related to cardiovascular care directly impacts performance on cardiovascular patients (positive spillovers) and (2) whether the marginal benefit of a hospital’s focus in cardiovascular care depends on the degree to which the hospital “co-specializes” in related areas (complementarities). In our setting, we find evidence of such complementarities in specialization.
    JEL: I1 L15 M11
    Date: 2011–04

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