nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒05‒14
24 papers chosen by
Russell Pittman
US Department of Justice

  1. Entry and Competition in Differentiated Products Markets By Schaumans, C.B.C.; Verboven, F.L.
  2. Profitability of Horizontal Mergers in the Presence of Price Stickiness By H. Esfahani
  3. Mergers and Partial Ownership. By Foros, Øystein; Kind, Hans Jarle; Shaffer, Greg
  4. Merger simulations with observed diversion ratios. By Mathiesen, Lars; Nilsen, Øivind Anti; Sørgard, Lars
  5. Does Retailer Power Lead to Exclusion? By Rey, Patrick; Whinston, Michael
  6. Models of Spatial Competition: a Critical Review By Ricardo Biscaia; Isabel Mota
  7. Remanufacturing. By Sophie Bernard
  8. How to deal with resale price maintenance: What can we learn from empirical results? By Jürgen-Peter Kretschmer
  9. Legal Investor Protection and Takeovers By Mike Burkart; Denis Gromb; Holger M. Mueller; Fausto Panunzi
  10. The complementarity foundations of industrial organization By CALCIANO, Filippo L.
  11. Monopolistic competition in general equilibrium: beyond the CES By ZHELOBODKO, Evgeny; KOKOVIN, Sergey; PARENTI, Mathieu; THISSE, Jean - François
  12. Old controversy revisited: pricing, market structure, and competition By Lee, Frederic
  13. Cournot Oligopoly and concavo-concave demand By Christian Ewerhart
  14. Individual Preferences, Organization, and Competition in a Model of R&D Incentive Provision By Nicola Lacetera; Lorenzo Zirulia
  15. Quality competition with profit constraints: Do non-profit firms provide higher quality than for-profit firms? By Brekke, Kurt R.; Siciliani, Luigi; Straume, Odd Rune
  16. Exploring National Concerted Practices in an Open Small Economy: What Does the Change in the Competition Law in the Netherlands Reveal? By Ozbugday, F.C.
  17. Optimal Structuring of Assessment Processes in Competition Law: A Survey of Theoretical Approaches By Jürgen-Peter Kretschmer
  18. The strategic timing of R&D agreements. By Marco Marini; Maria Luisa Petit; Roberta Sestini
  19. Estimation of the competitive conditions in the Czech banking sector By Stavarek, Daniel; Repkova, Iveta
  20. Spillover and Competition Effects: Evidence from the sub-Saharan African Banking Sector By Birte Pohl
  21. Vertical Integration and Regulation in the Securities Settlement Industry By Cherbonnier, Frédéric; Rochet, Jean-Charles
  22. Margins and Market Shares: Pharmacy Incentives for Generic Substitution. By Brekke, Kurt Richard; Holmås, Tor Helge; Straume, Odd Rune
  23. Vertical integration and exclusivities in maritime freight transport By CANTOS-SANCHEZ, Pedro; MONER-COLONQUES, Rafael; SEMPERE-MONERRIS, José J.; ALVAREZ-SANJAIME, Oscar
  24. Strategic Pricing and Health Price Policies By Bonnet, Céline; Réquillart, Vincent

  1. By: Schaumans, C.B.C.; Verboven, F.L. (Tilburg University, Center for Economic Research)
    Abstract: We propose a methodology for estimating the competition effects from entry when firms sell differentiated products. We first derive precise conditions under which Bres- nahan and Reiss'entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition effects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition effects from entry. We apply our approach to seven different local service sectors. We find that entry typically leads to significant market expansion, implying that traditional ETRs may substantially underestimate the com- petition effects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insignificant effects. In one sector, we find that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.
    Keywords: competition;entry;local services sectors;entry threshold ratios.
    JEL: K21 L13 L41
    Date: 2011
  2. By: H. Esfahani
    Abstract: In this paper, we investigate the profitability of horizontal mergers of firms with price adjustments. We take a di¤erential game approach and both the open-loop as well as the closed-loop equlibria are considered. We show that the merger incentive is determined by how fast the price adapts to the equilibrium level.
    JEL: C73 D43 L13
    Date: 2011–05
  3. By: Foros, Øystein (Dept of Finance and Management Science, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Shaffer, Greg (University of Rochester and University of East Anglia)
    Abstract: In this paper we compare the profitability of a merger to the pro…tability of a partial ownership arrangement and …nd that partial ownership arrangements can be more profiable for the acquiring and acquired firm because they can result in a greater dampening of competition. We also derive comparative statics on the prices of the acquiring firm, the acquired firm, and the outside firms. In a dual context, we show that a cross-majority owner may have incentives to sell a fraction of the shares in one of the firms he controls to a silent investor who is outside the industry. Aggregate ex post operating profit in the two firms controlled by the cross-majority shareholder then increases, such that both the cross-majority shareholder and the silent investor will be better o¤ with than without the partial divestiture.
    Keywords: Media economics; Mergers; Corporate Control; Financial Control
    JEL: L13 L22 L82
    Date: 2010–01–21
  4. By: Mathiesen, Lars (Dept. of Economics, Norwegian School of Economics and Business Administration); Nilsen, Øivind Anti (Dept. of Economics, Norwegian School of Economics and Business Administration); Sørgard, Lars (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: A common approach to merger simulations used in antitrust cases is to calibrate demand from market shares and a few additional parameters. When the products involved in the merger case are differentiated along several dimensions, the resulting diversion ratios may be very different from those based upon market shares. This again may affect the predicted post-merger price effects. This article shows how merger simulation can be improved by using observed diversion ratios. To illustrate the effects of this approach we use diversion ratios from a local grocery market in Norway. In this case diversions from the acquired to the acquiring stores were considerably smaller than suggested by market shares, and the predicted average price increase from the acquisition was 40 % lower using this model rather than a model based upon market shares. This analysis also suggests that even a subset of observed diversion ratios may significantly change the prediction from a merger simulation based upon market shares.
    Keywords: Merger simulation; diversion ratio; asymmetric differentiation; merger policy.
    JEL: K21 L11 L41
    Date: 2010–09–30
  5. By: Rey, Patrick (Toulouse School of Economics); Whinston, Michael (Northwestern University and NBER)
    Abstract: This paper examines whether retailer bargaining power and upfront slotting allowances prevent small manufacturers (who have no bargaining power) from obtaining adequate distribution. In contrast to the findings of Marx and Shaffer (2007), who showed that all equilibria involve limited distribution (i.e., exclusion of a retailer), we show that there is always an equilibrium in which full distribution is obtained, provided that full distribution is the industry profit-maximizing outcome. The key feature leading to this differing result is that we do not restrict each retailer to offering the manufacturer a single tariff.
    Date: 2011–02
  6. By: Ricardo Biscaia (CIPES and Faculdade de Economia, Universidade do Porto); Isabel Mota (CEF.UP and Faculdade de Economia, Universidade do Porto)
    Abstract: This critical review focuses on the development of spatial competition models in which the location choice by firms plays a major role. Therefore, after a brief review of the roots of spatial competition modeling, this paper intends to offer a critical analysis over its recent developments. The starting point is the recognition of the increased importance of this topic through the quantification of the research in this field by using some bibliometric tools. After that, this study proceeds by identifying the main research paths within spatial competition modeling. Specifically, the type of strategy (Bertrand vs. Cournot competition) and its implications over location equilibria are discussed. Additionally, it is presented a comparison of the effects on the location equilibria of the most typical assumptions in literature, that respect to the market (linear vs. circular), production costs, transportation costs, as well as the number of firms. Finally, the type of information (complete vs. incomplete) and its effects over the equilibria are also discussed.
    Keywords: spatial competition, review, Hotelling, game theory
    JEL: L13 R10 D82
    Date: 2011–04
  7. By: Sophie Bernard (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper presents a theoretical model of remanufacturing where a duopoly of original manufacturers produces a component of a final good. The specific component that needs to be replaced during the lifetime of the final good creates a secondary market where independent remanufacturers enter the competition. An environmental regulation imposing a minimum level of remanufacturability is also introduced. The main results establish that, while collusion of the firms on the level of remanufacturability increases both profit and consumer surplus, a social planner could use collusion as a substitute for an environmental regulation. However, if an environmental regulation is to be implemented, collusion should be repressed since competition supports the public intervention better. Under certain circumstances, the environmental regulation can increase both profit and consumer surplus. Part of this result supports the Porter Hypothesis, which stipulates that industries respecting environmental regulations can see their profits increase.
    Keywords: Remanufacturing, competition, environmental regulation, Porter hypothesis.
    JEL: H23 L10 L51 Q53 Q58
    Date: 2011–04
  8. By: Jürgen-Peter Kretschmer (University of Marburg)
    Abstract: The US Supreme Court’s overruling of the pre-existing per se illegality of resale price maintenance and the recommendation of a rule of reason approach in the Leegin decision (2007), raise the question whether other jurisdictions should follow this approach and what future assessments of resale price maintenance cases should look like. Policy decisions have to rely on the importance of various theories concerning welfare effects of resale price maintenance practises, which must be supported by empirical studies. Unfortunately, not much attention has been paid to this topic by researchers. Nevertheless, the few existing empirical studies allow for the analysis and discussion of existing assessment proposals. Furthermore, the paper derives a new recommended assessment procedure for resale price maintenance from a special point of view by combining empirical results with the decision-theoretic approach of optimal sequential investigation rules.
    Keywords: Antitrust Law, Law Enforcement, Resale Price Maintenance, Decision-Making
    JEL: K21 K40 L42 D81
    Date: 2011
  9. By: Mike Burkart; Denis Gromb; Holger M. Mueller; Fausto Panunzi
    Abstract: We study the role of legal investor protection for the efficiency of the market for corporate control. Stronger legal investor protection limits the ease with which an acquirer, once in control, can extract private benefits at the expense of non-controlling investors. This, in turn, increases the acquirer’s capacity to raise outside funds to finance the takeover. Absent effective competition for the target, the increased outside funding capacity does not make efficient takeovers more likely, however, because the bid price, and thus the acquirer’s need for funds, increase in lockstep with his pledgeable income. In contrast, under effective competition, the increased outside funding capacity makes it less likely that the takeover outcome is determined by the bidders’ financing constraints–and thus by their internal funds–and more likely that it is determined by their ability to create value. Accordingly, stronger legal investor protection can improve the efficiency of the takeover outcome. Taking into account the interaction between legal investor protection and financing constraints also provides new insights into the optimal allocation of voting rights, sales of controlling blocks, and the role of legal investor protection in cross-border M&A.
    JEL: G34
    Date: 2011–05
  10. By: CALCIANO, Filippo L. (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; Department of Economics, University of Rome 3, Italy)
    Abstract: In this paper we review the state of the art of Games with Strategic Complementarities (GSC), which are fundamental tools in modern Industrial Organization. The originality of the paper lies in the way the material is presented. Indeed, the mathematical aspects of GSC are complex and scattered in a literature which spans a long time period and a variety of research fields such as economics, applied mathematics and operations research. We organize a large amount of material in a unified and self-contained way, and concentrate on the intuitions and conceptual points that lie in the background of the mathematical modeling, with special emphasis on the modeling of complementarity. On the technical side, we investigate in details the choice and content of the assumptions. The scope of the paper is to allow the applied researcher to understand the theory, so that she may rapidly develop her own ability to deal with concrete problems.
    Keywords: strategic complementarity, oligopoly theory, supermodularity, Nash equilibria, lattices
    JEL: C60 C70 C72
    Date: 2011–01–01
  11. By: ZHELOBODKO, Evgeny (Novosibirsk State University, Russia); KOKOVIN, Sergey (Novosibirsk State University and Sobolev Institute of Mathematics, Russia); PARENTI, Mathieu (Université Paris 1 and PSE, France); THISSE, Jean - François (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; Paris School of Economics and CEPR)
    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
    JEL: D43 F12 L13
    Date: 2011–02–01
  12. By: Lee, Frederic
    Abstract: In this essay, I examine the connection between pricing, profit mark ups, competition, and economic activity from a heterodox perspective. These issues are examined utilizing a two-industry Burchardt-Kaleckian production model and a labor-based mark up pricing model; the conclusion reached is that market structure and competition have no fundamental role in affecting pricing, profit mark ups, or economic activity. However, it is generally perceived in heterodox economics that competition does play an important role in the economy. This theme is discussed in conjunction with the going business enterprise.
    Keywords: Heterodox; Pricing; Competition
    JEL: D4 B5
    Date: 2011–03–03
  13. By: Christian Ewerhart
    Abstract: Using an expanded notion of concavity, the N-fi…rm Cournot model is reviewed to obtain generalized and unifi…ed conditions for existence of a pure strategy Nash equilibrium. The main theorem imposes independent conditions on inverse demand (generalized concavity) and cost functions (monotonicity). No separate assumption for large outputs is needed. We also find new conditions for strict quasiconcavity and equilibrium uniqueness.
    Keywords: Cournot competition, existence and uniqueness of Nash equilibrium, generalized concavity, supermodular games.
    JEL: L13 C72 C62
    Date: 2011–04
  14. By: Nicola Lacetera; Lorenzo Zirulia
    Abstract: Understanding the organization of R&D activities requires the simultaneous consideration of scientific workers' talent and tastes, companies' organizational choices, and the characteristics of the relevant industry. We develop a model of the provision of incentives to corporate scientists, in an environment where (1) scientists engage in multiple activities when performing research; (2) knowledge is not perfectly appropriable; (3) scientists are responsive to both monetary and non-monetary incentives; and (4) firms compete on the product market. We show that both the degree of knowledge spillovers and of market competition affect the incentives given to scientists, and these effects interact. First, high knowledge spillovers lead firms to soften incentives when product market competition is high, and to strengthen incentives when competition is low. Second, the relationship between the intensity of competition and the power of incentives is U-shaped, with the exact shape depending on the degree of knowledge spillovers. We also show that the performance-contingent pay for both applied and basic research increases with the non-pecuniary benefits that scientists obtain from research. We relate our findings to the existing empirical research, and also discuss their implications for management and public policy.
    JEL: L1 L22 M12 O31 O32
    Date: 2011–05
  15. By: Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Siciliani, Luigi (University of York); Straume, Odd Rune (University of Minho)
    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 qualityprice 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: 2011–02–07
  16. By: Ozbugday, F.C. (Tilburg University, Center for Economic Research)
    Abstract: The present study examines the impact of several industry characteristics on the propensity to collude using a dataset on the existence of collusion across Dutch industries during the late 1990s and early 2000s. The results of the Probit model with sample selection indicate that our sample of Dutch concerted practices is non-random in the sense that it only consists of anti-competitive agreements that were subject of an antitrust immunity behavior. Our bivariate probit model with sample selection indicates that concerted practices are less likely to be seen in service industries relative to manufacturing industries. The results also show that it is more likely that firms engaged in concerted practices in unconcentrated industries. Furthermore, we could not find a non-linear relationship between concentration and the presence of collusion. There is also strong evidence from all the regressions that concerted practices are less likely in industries where entry is more possible. Interestingly, our estimation results indicate that there is a positive correlation between cartel prevalence and import penetration, which implies that import competition did not discipline firm behavior and foreign importers joined the cartel paradise in the Netherlands. As to the role of measures of asymmetry on concerted practice prevalence, the association between patenting activity and propensity to engage in collusion is ambiguous in the current setting, while advertising intensity, as the second measure of asymmetry, is associated with increased likelihood of collusion. Contrary to the previous empirical findings, market growth has been found to have a negative effect on the probability of a concerted practice in an industry. Furthermore, our proposition that growing demand might attract new entrants, which, in turn, hampers collusion, has been falsified in the current context.
    Keywords: Cartels;Competition law;Overt collusion;Probit model with sample selection;the Netherlands.
    JEL: K21 L41
    Date: 2011
  17. By: Jürgen-Peter Kretschmer (University of Marburg)
    Abstract: In competition law, the problem of the optimal design of institutional and procedural rules concerns assessment processes of the pro- and anticompetitiveness of business behaviors. This is well recognized in the discussion about the relative merits of different assessment principles such as the rule of reason and per se rules. Supported by modern industrial organization research, which applies a more differentiated analysis to the welfare effects of different business behaviors, a full-scale case-by-case assessment seems to be the prevailing idea. Even though the discussion mainly focuses on extreme solutions, different theoretical approaches do exist, which provide important determinants and allow for a sound analysis of appropriate legal directives and investigation procedures from a ‘Law and Economics’ perspective. Integrating and examining them in light of various constellations results in differentiated solutions of optimally structured assessment processes.
    Keywords: Law Enforcement, Competition Law, Competition Policy, Antitrust Law, Antitrust Policy, Decision-Making
    JEL: K21 K40 L40 L49 D81
    Date: 2011
  18. By: Marco Marini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo"); Maria Luisa Petit (Department of Computer and System Sciences "Antonio Ruberti", Università di Roma "La Sapienza"); Roberta Sestini (Department of Computer and System Sciences "Antonio Ruberti", Università di Roma "La Sapienza")
    Abstract: We present a model of endogenous formation of R&D agreements among firms in which also the timing of R&D investment is made endogenous. The purpose is to bridge two usually separate streams of literature, the noncooperative formation of R&D alliances and the endogenous timing literature. Our approach allows to consider the formation of R&D agreements over time. It is shown that, when both R&D spillovers and investment costs are sufficiently low, firms may find difficult to maintain a stable R&D agreement due to the strong incentive to invest noncooperatively as leaders. In such a case, to be stable a R&D agreement requires that the joint investment occurs at the initial stage, avoiding any delay. When instead R&D spillover rates are sufficiently high, the cooperation in R&D constitutes a profitable option, although firms also possess the incentive to sequence their investment over time. Finally, when spillovers are asymmetric and the knowledge leaks mainly from the leader to the follower, to invest as follower becomes extremely profitable, making R&D alliances hard to sustain unless firms strategically delay their joint investment in R&D.
    Keywords: R&D investment, Spillovers, Endogenous Timing.
    JEL: C72 D43 L11 L13 O30
    Date: 2011
  19. By: Stavarek, Daniel; Repkova, Iveta
    Abstract: The paper uses New Empirical Industrial Organization approach, especially Panzar Rosse model to estimates the level of competition of the banking industry in the Czech Republic during the period 2001–2009. We apply Panzar-Rosse model to estimate H statistic for a panel of 15 banks, which represent almost 90 % of the market. This paper also measures and compares the degree of banking competition in two sub-periods, 2001–2005 and 2005–2009, in order to investigate development of the competitive structure of the Czech banking industry. We found that the market was in equilibrium during most of the estimation period, which is a necessary condition for sound evaluation of the competition level. While the market can be described as perfectly competitive in 2001–2005, the intensity of competition decreased after joining the EU in 2004 and the market can be characterized as one of monopolistic competition in 2005–2009. The monopolistic competition in the Czech banking market was also revealed if the full sample 2001–2009 is considered.
    Keywords: Panzar-Rosse model; competition; banking sector; Czech Republic
    JEL: D40 C33 G21
    Date: 2011–03
  20. By: Birte Pohl
    Abstract: This paper examines the efficiency effects of foreign bank entry on domestic banks in sub- Saharan Africa during the period 1999–2006. Using a recently compiled dataset on foreign bank presence, the competition and spillover effects of North–South, regional and nonregional South–South banks are distinguished. The results show that the competitive pressure on domestic banks' net interest margins emanates only from regional South–South banks. There is evidence of spillover effects from North-South and regional South-South banks on domestic banks. As domestic banks invest in foreign technologies, their overhead costs increase in the short-run. Non-regional South-South banks seem to have little effect on the efficiency of domestic banks.
    Keywords: sub-Saharan Africa, efficiency, South–South banks, spillover
    Date: 2011–04
  21. By: Cherbonnier, Frédéric (Toulouse School of Economics); Rochet, Jean-Charles (Toulouse School of Economics)
    Date: 2010–05–30
  22. By: Brekke, Kurt Richard (Dept. of Economics, Norwegian School of Economics and Business Administration); Holmås, Tor Helge (Stein Rokkan Centre for Social Studies); Straume, Odd Rune (University of Minho)
    Abstract: We study the impact of product margins on pharmacies’ incentive to promote generics instead of brand-names. First, we construct a theoretical model where pharmacies can persuade patients with a brand-name prescription to purchase a generic version instead. We show that pharmacies’substitution incentives are determined by relative margins and relative patient copayments. Second, we exploit a unique product level panel data set, which contains information on sales and prices at both producer and retail level. In the empirical analysis, we find a strong relationship between the margins of brand-names and generics and their market shares. In terms of policy implications, our results suggest that pharmacy incentives are crucial for promoting generic sales.
    Keywords: Pharmaceuticals; Pharmacies; Generic Substitution.
    JEL: I11 I18 L13 L65
    Date: 2010–07–07
  23. By: CANTOS-SANCHEZ, Pedro (Department of Economic Analysis and ERI-CES, University of Valencia, Spain); MONER-COLONQUES, Rafael (Department of Economic Analysis and ERI-CES, University of Valencia, Spain); SEMPERE-MONERRIS, José J. (Department of Economic Analysis and ERI-CES, University of Valencia, Spain and Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium); ALVAREZ-SANJAIME, Oscar (Department of Economic Analysis and ERI, University of Valencia, Spain)
    Abstract: A key recent theme in maritime freight transport is the involvement of shipping lines in terminal management. Such investments are costly but allow liners to provide better service. Most of these new terminals are dedicated terminals but some are non-exclusive and let rivals access them for a fee. In this paper, we show that a shipping line that builds its own terminal finds it strategically profitable i) to continue routing part of its cargo through the open port facilities, and ii) to keep its terminal non-exclusive. In this way, the liner investor pushes part of the rival's freight from the open to the new terminal. Besides, under non-exclusivities, the shipping lines offer a wider variety of services, total freight increases and the resulting equilibrium fares are higher than with a dedicated terminal.
    Keywords: freight transport, shipping lines, vertical integration
    JEL: L13 L91 R40
    Date: 2011–03–01
  24. By: Bonnet, Céline; Réquillart, Vincent
    Abstract: Healthier food diet is likely to prevent numerous non communicable diseases. Then there is a growing interest in evaluating the impact of food price taxation on food consumption. However, strategic reactions of both manufacturers and retailers are missing in empirical analysis. Rather, passive pricing is assumed. We develop a structural econometric model, to analyze vertical relationships between the food industry and the retail industry. We apply this model to the beverage industry and consider taxation of sugar. After selecting the ’best’ model of vertical relationships, we simulate different taxation scenarios. We consider excise tax as well as ad valorem tax. We find that firms behave differently when facing an ad valorem tax or an excise tax. Excise tax is overshifted to consumer prices while ad valorem tax is undershifted to consumer prices. We find that an excise tax based on sugar content is the most efficient at reducing soft drink consumption. Our results also indicate that ignoring strategic pricing by firms leads to misestimate the impact of taxation by 15% to 40% depending on the products and the tax implemented.
    Keywords: excise tax, ad valorem tax, vertical contracts, strategic pricing, differentiated products, soft drinks
    JEL: H32 L13 Q18 I18
    Date: 2011–04

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