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

  1. Dynamic Informative Advertising of New Experience Goods By Saak, Alexander E.
  2. The empirical content of Cournot competition By Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK
  3. Persuading Consumers With Social Attitudes By Bühler, Stefan; Halbheer, Daniel
  4. A Model of Labeling with Horizontal Differentiation and Cost Variability By Saak, Alexander E.
  5. Vertical Integration, Innovation and Foreclosure By Allain, Marie-Laure; Chambolle, Claire; Rey, Patrick
  6. Formation of Decentralized Manufacturer-Supplier Networked Market By Yasuhiro Shirata
  7. Effect of Plant Location Decisions on Raw Material Input Prices By Burton, Diana M.; Love, H. Alan
  8. An Experimental Contribution to the Revision of the Guidelines on Research and Development Agreements By Christoph Engel
  9. Generic Advertising in Concentrated and Differentiated Agricultural Markets By Han, Sungill; Chung, Chanjin; Suh, Daeseok
  11. The Strategic Use of Private Quality Standards in Food Supply Chains By Vanessa von Schlippenbach; Isabel Teichmann
  12. Structural Model of Retail Market Power: The U.S. Milk Industry By Hovhannisyan, Vardges; Gould, Brian W.
  13. Market Power in the Carbonated Soft Drink Industry By Allender, William J.; Richards, Timothy J.
  14. Dynamic Assessment of Bertrand Oligopsony in the U.S. Cattle Procurement Market By Ji, In Bae; Chung, Chanjin
  15. Market Power and Shadow Prices for Nonrenewable Resources: An Empirical Dynamic Model By Lin, C.-Y. Cynthia; Zhang, Wei
  16. Pharmaceutical Use Following Generic Entry: Paying Less and Buying Less By Peter J. Huckfeldt; Christopher R. Knittel
  17. Estimating the Value of Antitrust Investigations: A Case Study in Agriculture By Coatney, Kalyn T.; Tack, Jesse B.
  18. Antitrust Law and the Promotion of Democracy and Economic Growth By Niels Petersen

  1. By: Saak, Alexander E.
    Abstract: This paper analyzes the optimal advertising and price policies of a monopolist who sells a new experience good over time to a population of heterogeneous forward-looking buyers. We consider informative advertising that can complement or substitute for learning-by-purchasing, and show that the advertising intensity always peaks during the early stages when the price extracts surplus from the buyers who are yet to learn their valuation for the good. We also show that even though informative advertising may temporarily raise prices and slow down the learning process, an advertising ban can reduce welfare.
    Keywords: Monopoly, Advertising, Experience Goods, Learning, Private Information, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, Marketing,
    Date: 2011
  2. By: Laurens CHERCHYE; Thomas DEMUYNCK; Bram DE ROCK
    Abstract: We consider the testable implications of the Cournot model of market competition. Our approach is nonparametric in that we abstain from imposing any functional specification on market demand and firm cost functions. We derive necessary and sufficient conditions for (reduced form) equilibrium market price and quantity functions to be consistent with the Cournot model. In addition, we present identification results for the corresponding inverse market demand function and the firm cost functions. Finally, we use our approach to derive testable restrictions for the models of perfect competition, collusion and conjectural variations. This identifies the conditions under which these different models are empirically distinguishable from the Cournot model.
    Date: 2011–05
  3. By: Bühler, Stefan; Halbheer, Daniel
    Abstract: This paper analyzes persuasive advertising and pricing in oligopoly if firms sell differentiated products and consumers have heterogenous social attitudes towards the consumption by others. Deriving product demand from primitives, we show that the demand-enhancing effect of persuasive advertising varies across consumers and increases in the average degree of conformity. In equilibrium, both quality and cost leaders choose higher advertising intensities and charge higher prices than their competitors. In addition, we show that an increase in the average degree of conformity among consumers reinforces asymmetries between firms.
    Keywords: Advertising, social attitude, consumption externality, quality
    JEL: D11 D43 L15 L21 M37
    Date: 2011–04
  4. By: Saak, Alexander E.
    Abstract: We study optimal disclosure of variety by a multi-product firm with random costs. In our model there are two varieties that are horizontally differentiated and differ in overall quality, but buyers cannot distinguish between them without labels. The equilibrium prices for labeled varieties are increasing functions of the absolute value of the cost differential and do not reveal which variety is cheaper to produce. Nondisclosure is most common when there is moderate uncertainty about the relative input cost, not too much idiosyncrasy in consumer valuations, and not too much difference in quality across varieties. Although mandatory disclosure of variety benefits consumers, it decreases expected welfare when relative input cost variability is large and quality asymmetry is small. The cheaper variety tends to be oversupplied (undersupplied) when disclosure is voluntary (mandatory). Competition among multi-product firms that source inputs in the same upstream market may not lead to more disclosure.
    Keywords: Agribusiness, Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety, Industrial Organization, Marketing, information, labeling, quality disclosure, product differentiation,
    Date: 2011
  5. By: Allain, Marie-Laure; Chambolle, Claire; Rey, Patrick
    Date: 2011–03–10
  6. By: Yasuhiro Shirata
    Abstract: This paper studies trading in a two-sided market where firms strategically form a network. In a networked market, manufacturers and suppliers must be connected by links for trading. We show that if no contingent contract is available, then any pairwise Nash stable network is inefficient. Each supplier under-invests in links (a hold-up problem). If a contract contingent on direct links is available and link cost is low, then the under-investment problem solves. Furthermore, the complete network resulting in the Walrasian outcome is uniquely pairwise Nash stable. However, this outcome is also inefficient. A new hold-up problem, over-investment in links, arises.
    Date: 2011–04
  7. By: Burton, Diana M.; Love, H. Alan
    Abstract: In processing industries, plant location decisions are costly and have consequences for firm profitability. When raw materials are heavy or perishable, transportation costs limit shipping distances and processors must compete locally for raw material inputs. To determine the likely profitability of a new plant, a processor must forecast the effect entry will have on local post-entry raw material price. This requires anticipating how entry will affect market structure and intensify competition for raw materials. Using an econometric representation of game-theoretic Nash equilibria relating input prices to processor competition in local procurement areas, an empirical model is developed to ex ante forecast the likely impact of entry on input price. The methods developed are applicable to a wide variety of industries where historic data are available.
    Keywords: input price, entry, Agribusiness, Industrial Organization, Livestock Production/Industries,
    Date: 2011
  8. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The European Commission is working on a revision of its Guidelines on Research and Development Agreements. On this occasion, this note surveys the existing experimental evidence. Experiments add a number of additional arguments to the normative assessment. R&D agreements have a much smaller effect on later competition in the product market if they serve as a substitute for incomplete (legal) protection of innovation effort. They may help firms settle the resulting fairness issue, and stay away from investment wars. Using the results from 107 published experiments on oligopoly, a meta-study shows that clearing an R&D agreement can be beneficial since it removes the additional collusion incentive resulting from fear that, through successful innovation, competitors might gain an advantage. This is the case if the opposite market side has countervailing power, and the more market conditions are stable. By contrast, the meta-data suggests that R&D agreements increase the risk of collusion in the product market if products are substitutes, if capacity cannot immediately be extended, if market participants may communicate, and if they are experienced; the latter two conditions are very likely to hold in the field.
    Keywords: Antitrust, Innovation, research and development agreements, block exemption, oligopoly experiments, meta-study
    JEL: D43 K21 L13 L41 O31 O34
    Date: 2010–12
  9. By: Han, Sungill; Chung, Chanjin; Suh, Daeseok
    Abstract: This study develops an analytical framework to examine the impact of generic advertising on brand advertising with alternative assumptions on demand changes (shift-up and rotation), product differentiation, market concentration, and relationship between commodity and brand advertising programs. The newly developed model allows one to determine the relationship between generic and brand advertising, which has not been clearly shown in previous studies. Analytical results show that when generic advertising leads to an inelastic demand, generic advertising would help brand advertising and could decrease the optimal brand advertising expenditures. However, when generic advertising leads to an elastic demand, it would negatively affect the profitability of brand advertising.
    Keywords: </dc:subject><dc:subject>generic advertising, brand advertising, product differentiation., Agribusiness, Demand and Price Analysis, Industrial Organization, Marketing,
    Date: 2011
  10. By: Giovanni Anania; Rosanna Nisticò (Dipartimento di Economia e Statistica, Università della Calabria)
    Abstract: Price dispersion, i.e. a homogeneous product sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side large supermarkets. The extent of observed price dispersion is quite high, suggesting that monopolistic competition prevails as a result of the heterogeneity of services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) have been compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition did not yield lower prices; quite the contrary, they were, on average, higher for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study suggest that sellers behave differently in their pricing strategies; these differences emerge both at the firm level, and for supermarkets within the same chain. The fact that products considered were homogeneous, purchases frequently repeated, the number of sellers large, and search costs relatively low, did not suffice to keep price dispersion low. From the results presented in the paper, it is clear that what is important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services) and consumers (in terms of search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retailers to remain in business.
    Keywords: Price dispersion, Retail pricing, Food markets
    JEL: L81 D83 D43 Q13
    Date: 2011–05
  11. By: Vanessa von Schlippenbach; Isabel Teichmann
    Abstract: This paper highlights the strategic role that private quality standards play in food supply chains. Considering two symmetric retailers that are exclusively supplied by a finite number of producers and endogenizing the producers' delivery choice, we show that there exist two asymmetric equilibria in the retailers' quality requirements. The asymmetry is driven by both the retailers.incentive to raise their buyer power and the retailers' competition for suppliers. We .nd that the use of private quality standards is detrimental to social welfare. A public minimum quality standard can remedy this unfavorable welfare outcome.
    Keywords: Private quality standards, vertical relations, buyer power, food supply chain
    JEL: L15 L42 Q13
    Date: 2011
  12. By: Hovhannisyan, Vardges; Gould, Brian W.
    Abstract: The objective of our research is to investigate retailer market conduct in the sale of beverage milk using a structural model of consumer behavior and retailer optimality conditions that embrace a range of competitive scenarios. The study is based on an aggregate level analysis of retailer behavior with milk quantity used as a strategic variable. We contribute to the literature by employing a Generalized Quadratic Almost Ideal Demand System (GQAIDS) to model milk demand. Furthermore, we derive the retailer optimality conditions that incorporate the slopes of inverse GQAIDS demand curves for the products under study. Lastly, we apply this generalized structural model to study the retailer behavior in marketing national brand (NB) and private label (PL) milk. The market in question is rather concentrated at the downstream level; however we believe that the retailer behavior is most consistent with a competitive atmosphere. Moreover, the results support the conjecture that retailers mainly use the leading NB milk to assure some store traffic while utilizing PL brands for rent extraction.
    Keywords: Demand and Price Analysis, Industrial Organization, GQAIDS demand, structural model, national brand, private label milk,
    Date: 2011–07
  13. By: Allender, William J.; Richards, Timothy J.
    Abstract: We investigate the strategic pricing for leading brands sold in the carbonated soft drink (CSD) market in the context of a flexible demand specification (i.e. random parameter nested logit) and a structural pricing equation. Our approach does not rely upon the often used ad hoc linear approximations to demand and profit-maximizing first-order conditions. We estimate the structural pricing equation using four different estimators (i.e. OLS, LIML, 2SLS, and GMM) and compare the implied deviation from Bertrand-Nash competition. Our results suggest that retailers, on average, price CSD brands below their cost, likely a result of the competitive retailing environment. We also find CSD wholesalers price their brands significantly more cooperatively than Bertrand-Nash would suggest, thus inflating profits.
    Keywords: Market Power, Carbonated Soft Drinks, Econometrics, LIML, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization,
    Date: 2011
  14. By: Ji, In Bae; Chung, Chanjin
    Abstract: The new empirical industrial organization approach with the Bertrand model is employed to measure the oligopsony market power in the U.S. cattle procurement market. The assumption of price competition (Bertrand model) based on the nature of cattle production such as cattle cycle and seasonality is used and compared to quantity competition (Cournot model). The empirical results show that the oligopsony market power exists in the U.S. cattle procurement market. The cattle cycle and seasonality affect the oligopsony market power and the cattle cycle causes the change of market power. However, concentration has a negative effect on the oligopsony market power.
    Keywords: cattle cycle, concentration, market power, NEIO, oligopsony, seasonality, Agribusiness, Demand and Price Analysis, Industrial Organization, Livestock Production/Industries, Marketing, Q13, L13, L16,
    Date: 2011–07–26
  15. By: Lin, C.-Y. Cynthia; Zhang, Wei
    Abstract: This paper estimates a dynamic model of the world market for nine nonrenewable resources over the period 1970-2004, and tests whether the countries supplying a nonrenewable resource behaved as price-takers or oligopolists. The model generates estimates of the shadow price of the nine minerals with minimal functional form assumptions. The results show that the countries supplying hard coal, lead, and oil behaved as oligopolists during the study period, while the world market for other nonrenewable resources could be characterized as perfectly competitive. The shadow prices do not increase monotonically, which is evidence for stock effects in extraction costs. The shadow prices of most minerals peaked between 1970 and 1980.
    Keywords: nonrenewable resources, market power, shadow price, empirical dynamic model, Resource /Energy Economics and Policy, Q31, L13,
    Date: 2011
  16. By: Peter J. Huckfeldt; Christopher R. Knittel
    Abstract: We study the effects of generic entry on prices and utilization using both event study models that exploit the differential timing of generic entry across drug molecules and cast studies. Our analysis examines drugs treating hypertension, high blood pressure, type 2 diabetes, and depression using price and utilization data from the Medical Expenditure Panel Survey. We find that utilization of drug molecules starts decreasing in the two years prior to generic entry and continues to decrease in the years following generic entry, despite decreases in prices offered by generic versions of a drug. This decrease coincides with the market entry and increased utilization of branded reformulations of a drug going off patent. We show case study evidence that utilization patterns coincide with changes in marketing by branded drug manufacturers. While the reformulations---often extended-release versions of the patent-expiring drug---offer potential health benefits, the FDA does not require evidence that the reformulations are improvements over the previous drug in order to grant a patent. Indeed, in a number of experiments comparing the efficacies of the patent-expiring and reformulated drugs do not find statistical differences in health outcomes calling into question the patent-extension policy.
    JEL: I18 L11 M3 O31 O38
    Date: 2011–05
  17. By: Coatney, Kalyn T.; Tack, Jesse B.
    Abstract: The goal of our analysis is to enhance the understanding of the value of antitrust regulatory activities, specifically the impact of investigations of anticompetitive behavior. The results suggest that prices significantly increased as soon as the targets of the investigation were made aware they were being investigated. Higher prices are suggestive of a more competitive market outcome, which in turn suggests that the benefits of an investigation begin accruing immediately upon awareness by the offending party. The higher prices remained as long as the investigation was open. After the investigation was closed, market prices systematically declined to the same low pre-knowledge state.
    Keywords: Antitrust, Auctions, Agricultural and Food Policy, Demand and Price Analysis, K42, D44, C23,
    Date: 2011–05
  18. By: Niels Petersen (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: There is a considerable debate in the legal literature about the purpose of antitrust institutions. Some argue that antitrust law merely serves the purpose of economic growth, while others have a broader perspective on the function of antitrust, maintaining that the prevention of economic concentration is an important means to promote democratization and democratic stability. This contribution seeks to test the empirical assumptions of this normative debate. Using panel data of 154 states from 1960 to 2007, it analyzes whether antitrust law actually has a positive effect on democracy and economic growth. The paper finds that antitrust law has a strongly positive effect on the level of GDP per capita and economic growth. However, there is no significant positive effect on the level of democracy. It is suggested that these results might be due to the current structure of existing antitrust laws, which are designed to promote economic efficiency rather than to prevent economic concentration.
    Date: 2011–01

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