nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒08‒15
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Bertrand competition in markets with network effects and switching costs By Suleymanova, Irina; Wey, Christian
  2. ‘Lead, Follow or Cooperate’: Endogenous Timing & Cooperation in Symmetric Duopoly Games. By Marco Marini; Giorgio Rodano
  3. The Distribution of the Size of Price Changes By Cavallo, Alberto; Rigobon, Roberto
  4. Second-degree Price Discrimination and Inter-group Effects in Airline Routes between European Cities By Marco Alderighi; Alessandra Cento; Peter Nijkamp; Piet Rietveld
  5. Connectivity and Competition in Airline Networks: A Complexity Analysis of Lufthansa's Network By Aura Reggiani; Peter Nijkamp; Alessandro Cento
  6. Entry deterrence in banking: the role of cost asymmetry and adverse selection By Mallick, Indrajit
  7. Consumer, Manufacturer and Retailer Responses to Health Price Policies: the example of EU Sugar Price Reform on the Soft Drink Market By Bonnet, Celine; Requillart, Vincent
  8. The Dynamics of Interfirm Networks along the Industry Life Cycle: The Case of the Global Video Games Industry 1987-2007 By Pierre-Alexandre Balland; Mathijs de Vaan; Ron Boschma
  9. Is the Service Quality of Private Roads too Low, too High, or just Right when Firms compete Stackelberg in Capacity? By Vincent A.C. van den Berg; Erik T. Verhoef
  10. Modern food retailers and traditional markets in developing countries: Comparing quality, prices, and competition strategies in Thailand By Schipmann, Christin; Qaim, Matin
  11. Structure, Conduct and Performance in the South African Potato Processing Industry By Hanekom, J.W.; Willemse, B.J.; Strydom, D.B.
  12. Grain Distribution in Ghana under Imperfectly Competitive Market Conditions By Langyintuo, Augustine S.
  13. Grain price adjustment asymmetry: the case of cowpea in Ghana By Langyintuo, Augustine S.

  1. By: Suleymanova, Irina; Wey, Christian
    Abstract: We analyze Bertrand duopoly competition in markets with network effects and consumer switching costs. Depending on the ratio of switching costs to network effects, our modelerates four different market patterns: monopolization and market sharing which can be either monotone or alternating. A critical mass effect, where one firm becomes the monopolist for sure only occurs for intermediate values of the ratio, whereas for large switching costs market sharing is the unique equilibrium. For large network effcts both monopoly and market sharing equilibria exist. Our welfare analysis reveals a fundamental conflict between maximization of consumer surplus and social welfare when network effects are large. We also analyze firms' incentives for compatibility and we examine how market outcomes are affected by the switching costs, market expansion, and cost asymmetries. Finally, in a dynamic extension of our model, we show how competition depends on agents' discount factors. --
    Keywords: Network Effects,Switching Costs,Bertrand Competition
    JEL: L13 D43 L41
    Date: 2011
  2. By: Marco Marini (Department of Economics, Society & Politics, Università di Urbino "Carlo Bo" and CREI, Università di Roma III); Giorgio Rodano (Dipartimento di Informatica e Sistemistica "Antonio Ruberti", Università di Roma "La Sapienza")
    Abstract: The aim of this paper is to extend Hamilton and Slutsky's (1990) endogenous timing game by including the possibility for players to cooperate. At an initial stage players are assumed to announce both their purpose to play early or late a given duopoly game as well as their intention to cooperate or not with their rival. The cooperation and timing formation rule is rather simple: when both players agree to cooperate and play with a given timing, they end up playing their actions coordinately and simultaneously. Otherwise, they play as singletons with the timing as prescribed by their own announcement. We check for the existence of a subgame perfect Nash equilibrium (in pure strategies) of such a cooperation-timing duopoly game. Two main results on the emergence of cooperation are provided. If players' actions in the symmetric duopoly game are strategic substitutes and there is no discount, cooperating early (as a grand coalition) is a subgame perfect equilibrium of the extended timing-cooperation game. Conversely, cooperating late (at period two) represents an equilibrium when playersstrategies are strategic complements. Other equilibria are also possible. Most importantly, our model shows that, in general, the success of cooperation is a¤ected by the endogenous timing of the game. Moreover, the slope of players' best-replies appears crucial both for the success of cooperation as well as for the players' choice of sequencing their market actions.
    Keywords: Endogenous Timing, Cooperation
    JEL: C70 C71 D23 D43
    Date: 2011
  3. By: Cavallo, Alberto (MIT Sloan.); Rigobon, Roberto (MIT Sloan & NBER.)
    Abstract: Different theories of price stickiness have distinct implications on the number of modes in the distribution of price changes. We formally test for the number of modes in the price change distribution of 36 supermarkets, spanning 22 countries and 5 continents. We present results for three modality tests: the two best-known tests in the statistical literature, Hartigan's Dip and Silverman's Bandwidth, and a test designed in this paper, called the Proportional Mass test (PM). Three main results are uncovered. First, when the traditional tests are used, unimodality is rejected in about 90 percent of the retailers. When we used the PM test, which reduces the impact of smaller modes in the distribution and can be applied to test for modality around zero percent, we still reject unimodality in two thirds of the supermarkets. Second, category-level heterogeneity can account for about half of the PM test's rejections of unimodality. Finally, a simulation of the model in Alvarez, Lippi, and Paciello (2010) shows that the data is consistent a combination of both time and state-dependent pricing behaviors.
    Date: 2011–06
  4. By: Marco Alderighi (Universita della Valle d'Aosta, Aosta, Italy; Universita Bocconi, Italy); Alessandra Cento (KLM Royal Dutch Airlines, Milano, Italy); Peter Nijkamp (VU University Amsterdam); Piet Rietveld (VU University Amsterdam)
    Abstract: This paper presents a model of second-degree price discrimination and inter-group effects to describe the full-service pricing behaviour in the passenger aviation market. Consumer heterogeneity is assumed on both a horizontal and a vertical dimension, while various distinct market structures, some of which include low-cost carriers (LCCs), are considered. In the theoretical model framework, we derive that the rivalry between full-service carriers (FSCs) reduces fare differences between the business and leisure segments. Furthermore, the presence of LCCs increases fare gaps between leisure and business travellers, and it also induces FSCs to decrease fares in the leisure segment and eventually to increase them in the business one. This last outcome emerges from a change in passenger arrangements caused by inter-group effects. In our empirical analysis, we use data on published airfares of Lufthansa, British Airways, KLM and Alitalia for the main city-pairs from Italy to Germany, the UK and the Netherlands. Our results show that the empirical results provide support for our theoretical propositions.
    JEL: L1 L93 D4
    Date: 2011–08–09
  5. By: Aura Reggiani (University of Bologna, Italy); Peter Nijkamp (VU University Amsterdam); Alessandro Cento (KLM Royal Dutch Airlines, Milan, Italy)
    Abstract: Information, communication and transport networks have always been in a state of flux, while they also influence each other. Extensive research efforts have been made to investigate the dynamics in the structure and use of networks, e.g., by means of network geometries, small-world effects and scale-free phenomena. We will illustrate these new developments on the basis of airline network evolution. The present paper provides a new contribution to the analysis of topological properties of complex airline networks. Using Lufthansa's networks as an example, this paper aims to show the empirical relevance of various network indicators - such as connectivity and concentration - for understanding changing patterns in airline network configurations. After an extensive discussion of various statistical results, a decision-aid method, viz. multi-criteria analysis, is used to investigate the robustness of our findings. The results highlight the actual strategi c choices made by Lufthansa for its own network, as well in combination with its partners in Star Alliance.
    Keywords: airline networks; complexity; connectivity; concentration; degree distribution; network geometry; multicriteria analysis
    JEL: L93
    Date: 2011–08–09
  6. By: Mallick, Indrajit
    Abstract: Abstract In this paper, we review and explore the strategic mechanisms that deter entry in banking. The literature relies on externality between banks to generate entry deterrence. Typically, the externality generated is caused by differential adverse selection faced by incumbents and entrants. In this paper it is shown that adverse selection problem between a bank and its borrowers is neither a necessary nor a sufficient condition for entry deterrence. We show that cost asymmetry between different types of incumbents and private information about costs can generate conditional entry deterrence. This source of externality can cause entry deterrence just as other types of externalities created by differential adverse selection. Forward contracts can act as signaling device for incumbent costs. Incorporating adverse selection problem in the credit market in fact relaxes entry conditions: entry can take place even if the incumbent is of strong type and can signal credibly.
    Keywords: Key Words: Entry Deterrence; Cost Asymmetry; Adverse Selection; Signaling
    JEL: C70 G21
    Date: 2011–07–08
  7. By: Bonnet, Celine; Requillart, 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 analyses. Rather, passive pricing is assumed. Ignoring strategic pricing might lead to under-estimate or over-estimate the impact of food taxation. Based on the example of the soft drink industry, we analyse the bias which is introduced when assuming passive pricing. Using structural econometric model, we first estimate models of vertical relationships between the beverage industry and the retail industry. After selecting the âbestâ model of vertical relationships, we then simulate different scenrios of input cost changes or final products taxation. Our results indicate that assuming passive pricing by firms leads to under-estimate the impact on food consumption. In our example, the under-estimation amounts to 15% for regular products and 50% for diet ones when contracts between manufacturers and retailers are not taken into account. We thus conclude that for empirical analysis of food price policies for better health, considering strategic pricing is a key issue.
    Keywords: vertical contracts, two part tariffs, competition, manufacturers, private labels, retailers, differentiated products, soft drinks, non nested tests, sugar CMO, passthrough, Food Consumption/Nutrition/Food Safety, Health Economics and Policy,
    Date: 2011–04
  8. By: Pierre-Alexandre Balland; Mathijs de Vaan; Ron Boschma
    Abstract: In this paper, we study the formation of network ties between firms along the life cycle of a creative industry. We focus on three drivers of network formation: i) network endogeneity which stresses a path-dependent change originating from previous network structures, ii) five forms of proximity (e.g. geographical proximity) which ascribe tie formation to the similarity of actors' attributes; and (iii) individual characteristics which refer to the heterogeneity in actors capabilities to exploit external knowledge. The paper employs a stochastic actor-oriented model to estimate the - changing - effects of these drivers on inter-firm network formation in the global video game industry from 1987 to 2007. Our findings indicate that the effects of the drivers of network formation change with the degree of maturity of the industry. To an increasing extent, video game firms tend to partner over shorter distances and with more cognitively similar firms as the industry evolves.
    Keywords: network dynamics, industry life cycle, proximity, creative industry, video game industry, stochastic actor-oriented model
    JEL: D85 B52 O18
    Date: 2011–08
  9. By: Vincent A.C. van den Berg (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam)
    Abstract: We study road supply by competing firms between a single origin and destination. In previous studies, firms simultaneously set their tolls and capacities while taking the actions of the others as given in a Nash fashion. Then, under some widely used technical assumptions, firms set a volume/capacity ratio that is socially optimal, and thus the level of travel time or service quality is socially optimal. We find that this result does not hold if capacity and toll setting take place in separate stages, as then firms want to limit the toll competition by setting lower capacities; or when firms set capacities one after another in a Stackelberg fashion, as then firms want to limit their competitors' capacities by setting higher capacities. In our Stackelberg competition, the firms that act last have few if any capacity decisions to influence. Hence, they are more concerned with the toll-competition substage, and set a higher volume/capacity ratio than sociall y optimal. The firms that act first care more about their competitors' capacities that they can influence: they set a lower volume/capacity ratio. So the first firms to enter have a too short travel time from a social perspective, and the last firms a too long travel time. The average private travel time is shorter than socially optimal. Still, in our numerical model, for three or more firms, welfare is higher under Stackelberg competition than under Nash competition, because of the larger total capacity and lower tolls.
    Keywords: Private Road Supply; Oligopoly; Nash Competition; Stackelberg Competition; Service Quality; Volume/Capacity ratio; Traffic Congestion; Congestion Pricing
    JEL: D62 L13 R41 R42 R48
    Date: 2011–05–16
  10. By: Schipmann, Christin; Qaim, Matin
    Abstract: Supermarkets and hypermarkets are expanding rapidly in many developing countries. While consequences for farmers and consumers were analyzed recently, little is known about the implications for traditional retail formats such as wet markets. Using data from a market survey in Thailand and hedonic regression models, we analyze quality and prices for fresh vegetables from different retail outlets. Compared to wet markets, modern retailers sell higher quality at higher prices, indicating that they are primarily targeting better-off consumers. Hence, they are not directly competing for the same market segments. Yet there are signs that modern and traditional markets will gradually converge.
    Keywords: supermarkets, modern retailers, traditional wet markets, product quality, vegetables, Thailand, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, C21, L15, Q13,
    Date: 2011–04
  11. By: Hanekom, J.W.; Willemse, B.J.; Strydom, D.B.
    Abstract: The South African Potato industry was deregulated in the early 1990âs, leading to changes in market structure. The adjustment in market structure leads to changes in production and marketing practices, including contracting and pricing strategies for processing firms within the industry. The purpose of this paper is to investigate the current status in the potato processing industry, based on market structure, conduct and performance. The objective is to qualitatively measure the driving forces within the industry, and how these factors influence performance of the industry as a whole. The research method was based on the structure-conduct-performance paradigm, giving a better understanding of the potato processing industry and the driving forces, relating to future growth. A short case study of the Australian potato processing industry, which finds itself in a similar position as South Africa, reveals that increasing global competition in the form of low cost importers, are hampering competitiveness and profitability, along with rising production costs. It was found that the South African potato processing industry has a relatively high concentration, which means efficiency is lacking as market shares is not distributed effectively. It was further evident that a lack of trust between processors and producers is a source of concern for processors.
    Keywords: Crop Production/Industries,
    Date: 2010–09
  12. By: Langyintuo, Augustine S.
    Abstract: Interspatial and intertemporal grain distribution in Ghana is a private sector activity carried out mainly by traders. These traders sometimes collude to maximize their joint profits. By so doing they influence the conduct of the grains market. To examine the effect of their actions on the informal maize market in Ghana, a spatial equilibrium model was estimated under three scenarios: (1) Perfect competition, (2) Cournot-Narsh conjectures, and (3) Collusion. The results indicate that imperfect competition distorts grain flows, reduces consumer welfare and depresses tradersâ sales revenue. Collusive behavior of traders, on the other hand, causes the greatest distortion of grain flows as well as trader and consumer welfare. These results draw attention to policy makers and development agents to educate traders against using their associations to foster collusion.
    Keywords: Spatial equilibrium, monopoly, imperfect competition, interspatial, Cournot- Narsh conjectures, Crop Production/Industries, D4, L1,
    Date: 2010–09
  13. By: Langyintuo, Augustine S.
    Abstract: Patterns in price adjustment in response to information are important to market practitioners. This study looks at cowpea real wholesale price adjustment patterns in Bolgatanga, Wa, Makola and Techiman markets in Ghana. Using Techiman as the central market, a threshold autoregressive test for asymmetric price adjustment rejected the null hypothesis of symmetric adjustment for only the Bolgatanga-Techiman price series. An autoregressive conditional heteroskedastic regression indicates that wholesalers in Bolgatanga market respond differentially to price signals from Techiman than those in the other two markets. This suggests that policies targeting cowpea traders must recognize the differential responses by wholesalers to information.
    Keywords: Africa, Ghana, wholesalers, market information, autoregressive conditional heteroskedasticity, threshold autoregressive, Crop Production/Industries, D82, D43,
    Date: 2010–09

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