nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒06‒18
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Price competition on networked duopolistic markets By Zakaria Babutzidze
  2. Product innovation when consumers have switching costs By Evens Salies
  3. Open Innovation in a Dynamic Cournot Duopoly By I. Hasnas; L. Lambertini; A. Palestini
  4. Game complete analysis of Bertrand Duopoly By Carfì, David; Perrone, Emanuele
  5. The Timing of Repeated and Unrepeated Monopoly Investment under Wear and Tear and Demand By Jörg Borrmann; Gert Brunekreeft
  6. Vertical Limit pricing By Aggey Semenov; Julian Wright
  7. Entry deterrrence via renegotiation-proof non-exclusive contracts By Aggey Semenov; Julian Wright
  8. Fight Cartels or Control Mergers? On the Optimal Allocation of Enforcement Efforts within Competition Policy By Andreea Cosnita-Langlais; Jean-Philippe Tropeano
  10. Fair competition: The engine of economic development By Thomas, Alex M; Walling, Lima
  11. Separating the ex post effects of mergers: an analysis of structural changes on the Hungarian retail gasoline market By Gergely Csorba; G bor Koltay; D vid Farkas
  12. The effect of counter-trading on competition in electricity markets. By Dijk, Justin; Willems, Bert
  13. Volatility of Power Grids under Real-Time Pricing By Mardavij Roozbehani; Munther A Dahleh; Sanjoy K Mitter
  14. Vers une nouvelle forme de concurrence dans les marchés de l'électricité ? By Evens Salies

  1. By: Zakaria Babutzidze (Observatoire Français des Conjonctures Économiques)
    Date: 2011–04
  2. By: Evens Salies (Observatoire Français des Conjonctures Économiques)
    Abstract: Economists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This survey concentrates on another factor that confers innovators with firstmover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, which must be duplicated for any new seller. In this survey, we list several components of switching costs that are relevant as regards to firm innovation behaviour. The aim of this classification is twofold. First, consumer switching cost theory has matured to the point that some classification of switching costs for both understanding innovative firm behaviour and building policy-oriented models is necessary. Second, the classification included in this paper addresses the confusion that has been existing so far regarding the distinction between ‘good’ or ‘bad’ switching costs, perceived or paid switching costs, and between switching and search costs. This paper then surveys the existing literature on the effect of switching costs on product innovation by firms and the way they compete for consumers. We also raise several important regulation and competition policy questions, using examples from the real world.
    Keywords: Business Economics, Cognitive & Behavioural Economics, Competition policy, Consumer switching cost, Game Theory, History of Economic Thought, Industrial Competition, Innovation, Marketing, Microeconomics, Regulation, Search costs
    JEL: B21 D4 D83 L13 L14 L52 L96
    Date: 2011–03
  3. By: I. Hasnas; L. Lambertini; A. Palestini
    Abstract: We analyze an Open Innovation process in a Cournot duopoly using a differential game approach where knowledge spillovers are endogenously determined via the R&D process. The game produces multiple steady states, allowing for an asymmetric solution where a firm may trade off the R&D investment against information absorption from the rival.
    JEL: C73 L13 O31
    Date: 2011–05
  4. By: Carfì, David; Perrone, Emanuele
    Abstract: In this paper we apply the Complete Analysis of Differentiable Games (introduced by D. Carfì in [3], [6], [8] and [9]) and al-ready employed by himself and others in [4], [5], [7]) to the classic Bertrand Duopoly (1883), classic oligopolistic market in which there are two enterprises producing the same commodity and selling it in the same market. In this classic model, in a competitive background, the two enterprises employ as possible strategies the unit prices of their product, contrary to the Cournot duopoly, in which the enterprises decide to use the quantities of the commodity produced as strategies. The main solutions proposed in literature for this kind of duopoly (as in the case of Cournot duopoly) are the Nash equilibrium and the Collusive Optimum, without any subsequent critical exam about these two kinds of solutions. The absence of any critical quantitative analysis is due to the relevant lack of knowledge regarding the set of all possible outcomes of this strategic interaction. On the contrary, by considering the Bertrand Duopoly as a differentiable game (games with differentiable payoff functions) and studying it by the new topological methodologies introduced by D. Carfì, we obtain an exhaustive and complete vision of the entire payoff space of the Bertrand game (this also in asymmetric cases with the help of computers) and this total view allows us to analyze critically the classic solutions and to find other ways of action to select Pareto strategies. In order to illustrate the application of this topological methodology to the considered infinite game, several compromise pricing-decisions are considered, and we show how the complete study gives a real extremely extended comprehension of the classic model.
    Keywords: Duopoly; Normal form Games; Microeconomic Policy; Complete study; Bargaining solutions
    JEL: D0 C71 C7 C81 D01 C72
    Date: 2011
  5. By: Jörg Borrmann; Gert Brunekreeft
    Abstract: In an intertemporal model, we analyze the timing of irreversible and lumpy monopoly investment under certainty. There are two reasons for investing, i.e. wear and tear leading to replacement investment and demand growth leading to expansion investment. Both in a single investment setting and in a repeated investment setting, we find that a firm maximizing discounted social welfare invests earlier than an identical firm maximizing discounted profits. The investment date of an identical firm maximizing a discounted convex combination of social welfare and profits lies between these polar cases. All results apply both to replacement investment and to expansion investment.
    Keywords: Expansion investment, Investment timing, Monopoly, Repeated investment, Replacement investment
    JEL: D42 G00 L20
    Date: 2011–05
  6. By: Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON); Julian Wright (Department of Economics, National University of Singapour)
    Abstract: A new theory of limit pricing is provided which works through the vertical contract signed between an incumbent manufacturer and a retailer. We establish conditions under which the incumbent can obtain full monopoly profits, even if the potential entrant is more efficient. A key feature of the optimal vertical contract we describe is quantity discounting, typically involving three-part incremental-units or all-units tariffs, with a marginal wholesale price that is below the incumbent’s marginal cost for sufficiently large quantities.
    Keywords: limit pricing, vertical contracts, multi-part tariffs.
    JEL: L12 L42
    Date: 2011
  7. By: Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON); Julian Wright (Department of Economics, National University of Singapour)
    Abstract: We establish the entry-deterring role of vertical contracts in a setting that does not rely on asymmetric information, the exclusivity of the incumbent’s contracts, limits on distribution channels, or restrictions on the ability to renegotiate contracts in case of entry. The optimal contract we describe is a three-part quantity discounting contract that involves the payment of an allowance to the downstream firm and a marginal wholesale price below the incumbent’s marginal cost for sufficiently large quantities
    Keywords: entry, vertical contracts, exclusivity, renegotiation
    JEL: D21 L42
    Date: 2011
  8. By: Andreea Cosnita-Langlais; Jean-Philippe Tropeano
    Abstract: This paper deals with the optimal enforcement of the competition law between the merger and anti-cartel policies. We examine the interaction of these two branches of the competition policy given the budget constraint of the competition agency and taking into account the ensuing incentives for firms’ behavior in terms of choice between cartels and mergers. We are thus able to conclude on the optimal competition policy mix. We show for instance that to the extent that a tougher anti-cartel action triggers more mergers taking place, the public agency will optimally invest only in control fighting for a tight budget, and then in both instruments as soon as the budget is no longer tight. However, if the merger’s coordinated effect is taken into account, then when resources are scarce the agency may optimally have to spend first on controlling mergers before incurring the cost of fighting cartels.
    Keywords: competition law enforcement, antitrust, merger control, anti-cartel policy
    JEL: L41 K21 D82
    Date: 2011
  9. By: Wan Liza (University of Wisconsin Madison, Wisconsin, USA and Private Law Department, IIUM)
    Abstract: Of late, the element of competition has posed to be a conundrum to the emerging economies; Malaysia is no exception. Selection of economies theories indicated; competition has been used in innumerable sense. Entrepreneurial competition among producers defines competition as an attempt to offer product at lower prices, in contrast to the adjective; competition policy denotes deregulation of markets with a framework that elevates market disciplines, eliminates distortion and promotes economic efficiency. In developing a competitive framework: a significant question arose; does competition policy merely generates economic efficiency? Empirical analysis on trade and communication has indicated positive impacts. However, competition in Malaysia i.e. implemented through sector regulation; for example in electricity generation has shown little changes on economic efficiency and other benefits. This paper suggests competition policy advocates economic advantages and maximization of other benefits i.e. customer welfare. Simultaneously effects business dynamics. The key to workable ‘model’ originates from strong and independent structural and administrative implementation of the policy. This research reiterates plausible arguments of the benefits i.e. competitive markets generate efficiency and allow for the reflection of true prices in the markets. Alternatively, it also highlights competition impacts on business dynamics and cognizance of Malaysian Competition Act 2010
    Keywords: competition, competition policy, economic efficiency, Malaysia and Competition Act 2010
    JEL: M0
    Date: 2011–03
  10. By: Thomas, Alex M; Walling, Lima
    Abstract: This paper questions the existing notion of competition prevalent in economic theory. It is shown that the prevalent idea of competition is incompatible with economic development. Fair competition, this paper argues, ought to be understood in context. The paper ends by providing some preliminary suggestions to economists and policy makers on how to understand competition.
    Keywords: Competition; Economic development; Classical economics; Indian economy
    JEL: D63 D41 E13 O11 L16 D43 E11 O12
    Date: 2011
  11. By: Gergely Csorba (Institute of Economics - Hungarian Academy of Sciences); G bor Koltay (; D vid Farkas (
    Abstract: This paper develops an empirical method to identify the price effects of simultaneous mergers and to separate the different effects on the prices of the buyer and seller firms and on the prices of their respective competitors. Our difference-in-differences approach exploits variation in the presence of merging firms across local markets to form different treatment-control group pairs in order to estimate separate effects for each type of firms affected by the mergers. We apply this method to provide an ex post evaluation of two almost simultaneous mergers in the Hungarian retail gasoline market. We show that both mergers resulted in a significantly positive but economically negligible price effect, but while the first merger affected only the prices of buyer firm's stations, the second had an effect on the prices of seller's stations and of its competitors. We also demonstrate that the results are not sensitive to the assumed dates when the mergers effectively change the firms' pricing policy.
    Keywords: ex post evaluation, mergers, difference-in-differences estimation, treatment effects, retail gasoline
    JEL: D43 L13 L49
    Date: 2011–05
  12. By: Dijk, Justin; Willems, Bert (Universiteit van Tilburg)
    Date: 2011
  13. By: Mardavij Roozbehani; Munther A Dahleh; Sanjoy K Mitter
    Abstract: The paper proposes a framework for modeling and analysis of the dynamics of supply, demand, and clearing prices in power system with real-time retail pricing and information asymmetry. Real-time retail pricing is characterized by passing on the real-time wholesale electricity prices to the end consumers, and is shown to create a closed-loop feedback system between the physical layer and the market layer of the power system. In the absence of a carefully designed control law, such direct feedback between the two layers could increase volatility and lower the system's robustness to uncertainty in demand and generation. A new notion of generalized price-elasticity is introduced, and it is shown that price volatility can be characterized in terms of the system's maximal relative price elasticity, defined as the maximal ratio of the generalized price-elasticity of consumers to that of the producers. As this ratio increases, the system becomes more volatile, and eventually, unstable. As new demand response technologies and distributed storage increase the price-elasticity of demand, the architecture under examination is likely to lead to increased volatility and possibly instability. This highlights the need for assessing architecture systematically and in advance, in order to optimally strike the trade-offs between volatility, economic efficiency, and system reliability.
    Date: 2011–06
  14. By: Evens Salies (Observatoire Français des Conjonctures Économiques)
    Abstract: La loi de nouvelle organisation des marchés de l'électricité s'inscrit dans le prolongement du processus d'ouverture à la concurrence du secteur européen de l'énergie électrique engagé par les États membres de l'Union européenne en 1996. Cette nouvelle loi, qui modifie et complète celle de février 2000, est notamment une réponse du Gouvernement à la mise en cause par les autorités européennes de la compatibilité des tarifs réglementés français avec le droit de l'Union européenne et, plus généralement, de la configuration du secteur français qui bloquerait le développement de la concurrence. C'est en réalité EDF qui est visée avec cette loi, car, du fait de sa situation historique, l'entreprise produit plus de 85 % de l'électricité et sert la quasi-totalité des clients de la France métropolitaine. Sur le marché des petits professionnels ouvert le 1er juillet 2004 (seuls 7% d'entre eux avaient quitté leur entreprise historique d'électricité trois ans plus tard), puis sur le marché résidentiel (les particuliers) ouvert le 1er juillet 2007 (environ 5% étaient en 2010 servis par des fournisseurs alternatifs), peu de clients semblent vouloir passer à la concurrence, ce qui était prévisible.
    Keywords: Business Economics, Cognitive & Behavioural Economics, Industrial Competition, European Economics, Energy Economics, Innovation, Marketing, Regulation
    JEL: D2 D4 D83 H4 L4 L5 L94
    Date: 2011–03

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