nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒09‒16
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. The product life cycle of durable goods By Kaldasch, Joachim
  2. Open strategies and innovation performance By Barge-Gil, Andrés
  3. Trade Policy and Firm Boundaries By Laura Alfaro; Paola Conconi; Harald Fadinger; Andrew Newman
  4. Fixed export costs and multi-product firms By Roger Smeets; Harold Creusen
  5. Strategic Outsourcing with Technology Transfer By Tarun Kabiraj; Uday Bhanu Sinha
  6. Endogenous Competition Alters the Structure of Optimal Auctions By Ronald M Harstad
  7. Competition and Innovation By Michele Boldrin; Juan C Allamand; David K Levine; Carmine Ornaghi
  8. Why Mergers Fail By Ralph M. Sonenshine
  9. The dynamics of a Bertrand duopoly with differentiated products and bounded rational firms revisited By Fanti, Luciano; Gori, Luca
  10. A Note on “Modeling the Birth and Death of Cartels with An Application to Evaluating Competition Policy” by Harrington and Chang (2009) By Jun Zhou
  11. The Spatial Agent-based Competition Model (SpAbCoM) By Graupner, Marten
  12. Organizational design of multi-product multi-market firms By Joaquín Coleff
  13. New Imported Inputs, New Domestic Products By Italo Colantone; Rosario Crinò
  14. From Russia with Love: The Impact of Relocated Firms on Incumbent Survival By Oliver Falck; Christina Guenther; Stephan Heblich; William R. Kerr
  15. Low cost carriers and the evolution of the US airline industry By Hüschelrath, Kai; Müller, Kathrin
  16. The construction of a low cost airline network By Hüschelrath, Kai; Müller, Kathrin; Bilotkach, Volodymyr
  17. Bank Competition in the EU: How Has It Evolved? By Laurent Weill
  18. Price setting in a leading Swiss online supermarket By Martin Berka; Michael B. Devereux; Thomas Rudolph
  19. Did residential electricity rates fall after retail competition? a dynamic panel analysis By Adam Swadley; Mine Yücel
  20. Vertical Economies and the Costs of Separating Electricity Supply – A Review of Theoretical and Empirical Literature By Roland Meyer
  21. An economic analysis of online streaming: How the music industry can generate revenues from cloud computing By Thomes, Tim Paul

  1. By: Kaldasch, Joachim
    Abstract: The model presented here derives the product life cycle of durable goods. It is based on the idea that the purchase process consists of first purchase and repurchase. First purchase is determined by the market penetration process (diffusion process), while repurchase is the sum of replacement and multiple purchase. The key property of durables goods is to have a mean lifetime in the order of several years. Therefore replacement purchase creates periodic variations of the unit sales (Juglar cycles) having its origin in the initial diffusion process. The theory suggests that there exists two diffusion processes. The first can be described by Bass diffusion and is related to the information spreading process within the social network of potential consumers. The other diffusion process comes into play, when the price of the durable is such, that only those consumers with a sufficient personal income can afford the good. We have to distinguish between a monopoly market and a polypoly/oligopoly market. In the first case periodic variations of the total sales occur caused by the initial Bass diffusion, even when the price is constant. In the latter case the mutual competition between the brands leads with time to a decrease of the mean price. This change is associated with an effective increase of the market volume, which can be interpreted as a diffusion process. Based on an evolutionary approach, it can be shown that the mean price decreases exponentially and the corresponding diffusion process is governed by Gompertz equation (Gompertz diffusion). Most remarkable is that Gibrat's rule of proportionate growth is a direct consequence of the competition between the brands. The model allows a derivation of the lognormal size distribution of product sales and the logistic replacement of durables in competition. A comparison with empirical data suggests that the theory describes the main trend of the product life cycle superimposed by short term events like the introduction of new models.
    Keywords: Product Life Cycle; Consumer Durables; Product Diffusion; Bass Diffusion; Competition; Gompertz Diffusion; Replicator Equation; Logistic Growth; Evolutionary Economics; Monopoly; Takeoff; Gibrat's Rule; Juglar Cycles;
    JEL: M0 M31 D11 E32 D12 C50 D41 D42
    Date: 2011–09
  2. By: Barge-Gil, Andrés
    Abstract: Scholarly interest in the relationship between open strategies and innovation performance has been unfailing, and in recent years has even increased. The present paper focuses on inbound open strategies and reviews various approaches (transaction costs, competences, open innovation) dealing with firms´ decisions about these strategies. The different approaches result in different conclusions about the optimum level of openness. The different approaches are tested empirically taking account of the different degrees of openness (closed, semiopen, open, ultraopen) and their effects on sales of new–to-the-market products, and using a panel of Spanish firms from a CIS-type survey for 2004-2008. Our results show that closed and semiopen strategies are the most common among Spanish firms and that open strategies produce the best performance, while semiopen strategies are more effective than closed ones. These results hold across different subsamples based on firm size and industry, and are robust to different ways of defining the indicators and to different estimation methods.
    Keywords: open innovation strategies; collaboration; transaction costs; competences; CIS surveys; R&D; technology policy
    JEL: L2 D2 O3
    Date: 2011–07–06
  3. By: Laura Alfaro; Paola Conconi; Harald Fadinger; Andrew Newman
    Abstract: This paper provides evidence that market conditions matter for organization design by studying how trade policy affects vertical integration. We embed an incomplete-contract model of firm boundaries into an international trade framework. Integration decisions are driven by a tradeoff between managers’ pecuniary benefits of coordinating production and their private benefits of operating in preferred ways. Integration generates more output than non-integration, but imposes a cost on managers by forcing them to accommodate to common procedures. A key implication is that higher product prices result in more integration. Since trade policy affects prices, it influences organizational decisions: higher tariffs lead to more integration; moreover, ownership structures are more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries from a unique dataset. Our empirical analysis, which exploits both cross-section and time-series variation in import tariffs, provides strong support for the predictions of the model.
    Keywords: firm organization; vertical integration; incomplete contracts; trade policy
    Date: 2011–09
  4. By: Roger Smeets; Harold Creusen
    Abstract: <p>This paper has two aims. First, we uncover some salient components of fixed export costs, which play a crucial role in recent heterogeneous firms models of international trade. Second, we investigate whether the importance of these fixed export costs varies with the size of a firm’s export product portfolio. </p><p>We find that a destination country’s institutional quality, such as the quality of regulation or the extent of corruption, form important impediments to a firm’s export decision, lowering the export probability to up to 10%-points. Moreover, relative to single-product firms, multi-product firms experience additional export probability decreases of around 2%-points.</p>
    JEL: F12
    Date: 2011–08
  5. By: Tarun Kabiraj (Indian Statistical Institute); Uday Bhanu Sinha (Department of Economics, Delhi School of Economics, Delhi, India)
    Abstract: We analyze the outsourcing decision of a firm for a key input of a final good production to an independent input supplier even though the firm has an option of producing that key input in-house at a lower cost with a better technology. We find that for smaller technology gap with the independent input supplier the firm would outsource and for larger technology gap it would produce the input in-house for itself and for its rivals. The outsourcing occurs in order to take advantage of its sale of superior technology to the independent input supplier at a high payment although it involves a high price for the input to be acquired from the monopoly input supplier. Though the firm gains from strategic outsourcing, consumers’ welfare as well as social welfare goes down.
    Keywords: outsourcing; technology transfer; vertical structure; competition; welfare
    JEL: D43 L22 L23 L24
    Date: 2011–08
  6. By: Ronald M Harstad
    Abstract: Potential bidders respond to a sellerfs choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur an information-acquisition cost (and observe a private estimate), or forgo competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Sellerfs surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders.
    Date: 2011–09
  7. By: Michele Boldrin; Juan C Allamand; David K Levine; Carmine Ornaghi
    Date: 2011–08–29
  8. By: Ralph M. Sonenshine
    Abstract: A number of empirical studies have shown that negative abnormal returns often result shortly after a once promising merger is consummated. There are few consistent explanations, however, as to why so many mergers result in such poor performance. This paper sheds light on this issue by examining the effect that structural factors (including market concentration and R&D intensity) have on post-merger abnormal returns. The paper also attempts to assess how differences in valuation among bidders, along with the presence of multiple bidders, influencethe performance of the merged firm. Our findings show that firm value is positively impacted in the first one to three years post merger by acquiring related assets, but that participating in a merger wave in these years has a negative influence. Over longer periods of time these effects are not evident and instead post-merger performance is impacted foremost by intangible asset intensity.
    Keywords: Mergers, Challenges, Abnormal Returns, Research and Development (R&D), Market Concentration
    Date: 2011–07
  9. By: Fanti, Luciano; Gori, Luca
    Abstract: We revisit the study of the dynamics of a duopoly game à la Bertrand with horizontal product differentiation and bounded rational firms analysed by Zhang et al. (2009), (Zhang, J., Da, Q., Wang, Y., 2009. The dynamics of Bertrand model with bounded rationality. Chaos, Solitons and Fractals 39, 2048–2055), by introducing sound microeconomic foundations. We study how an increase in the relative degree of product differentiation affects the stability of the unique positive Bertrand-Nash equilibrium, in the case of both linear and non-linear costs. We show that an increase in either the degree of substitutability or complementarity between goods of different variety may destabilise the equilibrium of the two-dimensional system through a period-doubling bifurcation. Moreover, by using numerical simulations (i.e., phase portraits, sensitive dependence on initial conditions and Lyapunov exponents), we find that a “quasi-periodic” route to chaos and a large gamma of strange attractors for the cases of both substitutability and complementarity can occur.
    Keywords: Bifurcation; Chaos; Differentiated products; Duopoly; Price competition
    JEL: L13 D43 C62
    Date: 2011–09–09
  10. By: Jun Zhou (University of Bonn)
    Date: 2011–09
  11. By: Graupner, Marten
    Abstract: The paper presents a detailed documentation of the underlying concepts and methods of the Spatial Agent-based Competition Model (SpAbCoM). For instance, SpAbCoM is used to study firms' choices of spatial pricing policy (GRAUBNER et al., 2011a) or pricing and location under a framework of multi-firm spatial competition and two-dimensional markets (GRAUBNER et al., 2011b). While the simulation model is briefly introduced by means of relevant examples within the corresponding papers, the present paper serves two objectives. First, it presents a detailed discussion of the computational concepts that are used, particularly with respect to genetic algorithms (GAs). Second, it documents SpAbCoM and provides an overview of the structure of the simulation model and its dynamics. -- Das vorliegende Papier dokumentiert die zugrundeliegenden Konzepte und Methoden des Räumlichen Agenten-basierten Wettbewerbsmodells (Spatial Agent-based Competition Model) SpAbCoM. Anwendungsbeispiele dieses Simulationsmodells untersuchen die Entscheidung bezüglich der räumlichen Preisstrategie von Unternehmen (GRAUBNER et al., 2011a) oder Preissetzung und Standortwahl im Rahmen eines räumlichen Wettbewerbsmodells, welches mehr als einen Wettbewerber und zweidimensionalen Marktgebiete berücksichtigt. Während das Simulationsmodell in den jeweiligen Arbeiten kurz anhand eines Beispiels eingeführt wird, dient das vorliegende Papier zwei Zielen. Zum Einen sollen die verwendeten computergestützten Konzepte, hier speziell Genetische Algorithmen (GA), detailliert vorgestellt werden. Zum Anderen besteht die Absicht dieser Dokumentation darin, einen Überblick über die Struktur von SpAbCoM und die während einer Simulation ablaufenden Prozesse zu gegeben.
    Keywords: Agent-based modelling,genetic algorithms,spatial pricing,location model.,Agent-basierte Modellierung,Genetische Algorithmen,räumliche Preissetzung,Standortmodell.
    JEL: Y90
    Date: 2011
  12. By: Joaquín Coleff
    Abstract: In this paper, we seek to understand how a multi-product multi-market firm (for example, a multinational firm) designs its organizational structure and compensation scheme when its profitability is conditioned by how market information flows within the company. By modifying its organizational structure–centralizing or decentralizing decision making–and changing the weights of its compensation scheme, the firm can shape how information flows and is represented, changing the firm’s profitability. We find that, when being multi-product (having to allocate a scarce resource between markets), the headquarters links the organizational design of decision rights between different product markets. The headquarters decentralizes decision rights in products with higher returns to product differentiation while it centralizes decision rights in products with lower returns to product differentiation. As centralization is complementary with product standardization and decentralization is complementary with product differentiation, the organizational design conditions the firm’s market policy. The relation among product’s decision rights remains even when the headquarters cannot control how local managers allocate resources in their own local divisions. Our results are robust to different generalizations. Our paper therefore, contributes to the literature on organizational design by analyzing the case of multi-product multi-market firms.
    Keywords: : Multinational, Multi-product, Organization Design, Resource Scarcity, Cheap Talk
    JEL: D2 D8 L2 G34
    Date: 2011–05
  13. By: Italo Colantone (Erasmus University Rotterdam and ERIM); Rosario Crinò (University of Brescia, Centro Studi Luca d’Agliano and IAE-CSIC)
    Abstract: We study the effects of new imported inputs on the entry of new domestic products and their characteristics. To this purpose, we construct a novel, comprehensive and extremely detailed dataset, which contains product-level information on foreign trade and domestic production for 25 EU countries over 1995-2007. Using these data, we identify new domestic goods and new imported inputs, controlling for all changes in commodity classifications over time. We then show that new imported inputs substantially boost the introduction of new domestic products. We also show that this effect is directly proportional to the quality of new imported inputs and inversely related to their price (conditional on quality). Finally, we document that new products are characterized by higher prices and higher quality relative to existing goods, and that such premia are larger the greater is the use of new imported inputs in production.
    Keywords: New Intermediate Inputs; Product Innovation; Input and Output Prices; Input
    JEL: F1
    Date: 2011–09–06
  14. By: Oliver Falck; Christina Guenther; Stephan Heblich; William R. Kerr
    Abstract: We identify the impact of local firm concentration on incumbent performance with a quasi natural experiment. When Germany was divided after World War II, many firms in the machine tool industry fled the Soviet occupied zone to prevent expropriation. We show that the regional location decisions of these firms upon moving to western Germany were driven by non-economic factors and heuristics rather than existing industrial conditions. Relocating firms increased the likelihood of incumbent failure in destination regions, a pattern that differs sharply from new entrants. We further provide evidence that these effects are due to increased competition for local resources.
    Keywords: Agglomeration, competition, firm dynamics, labor, Germany
    JEL: R10 L10 H25 O10 J20
    Date: 2011–08
  15. By: Hüschelrath, Kai; Müller, Kathrin
    Abstract: The article studies the evolution of the U.S airline industry from 1995 to 2009 using T-100 traffic data and DB1B fare data from the U.S. Department of Transportation. Based on a differentiation in market size and major players, entry and exit, concentration, fares, service, costs and profits, the article provides a fresh look on recent developments in the structure, conduct and performance of the domestic U.S. airline industry in light of both the substantial growth of low cost carriers and severe internal and external shocks such as merger and bankruptcy activity or the recent recession. Unlike previous studies, a consistent split of the analysis in network carriers and low cost carriers is introduced. In general, we find that the competitive interaction between network carriers and low cost carriers increased substantially throughout the last decade and must be considered as the main driver of competition in the domestic U.S. airline industry. --
    Keywords: Airline industry,deregulation,network carrier,low cost carrier
    JEL: L40 L93
    Date: 2011
  16. By: Hüschelrath, Kai; Müller, Kathrin; Bilotkach, Volodymyr
    Abstract: The paper investigates the construction of a low cost airline network by analyzing JetBlue Airways' entry decisions into nonstop domestic U.S. airport-pair markets between 2000 and 2009. Adopting duration models with time-varying covariates, we find that JetBlue consistently avoided concentrated airports and targeted concentrated routes; network economies also affected entry positively. For non-stop entry into a route that has not been served on a non-stop basis before, our analysis reveals that the carrier focused on thicker routes and secondary airports, thereby avoiding direct confrontation with network carriers. Non-stop entry into existing non-stop markets, however, shows that JetBlue concentrated on longer-haul markets and avoided routes already operated by either other low cost carriers or network carriers under bankruptcy protection. --
    Keywords: Airline industry,network,entry,low cost carrier
    JEL: L11 L23 L93
    Date: 2011
  17. By: Laurent Weill (LaRGE Research Center, Université de Strasbourg)
    Abstract: Economic integration on the EU banking markets is expected to favor competition, which should provide economic gains. However, even if there is a commonly accepted view in favor of enhanced bank competition during the last decade, no study has been performed in the 2000s showing this trend. In this paper, we aim to fill this gap by measuring the evolution of bank competition in all EU countries during the 2000s. We estimate the Lerner index and the H-statistic for a sample of banks from all EU countries. We provide evidence of a general improvement in bank competition in the EU, even if cross-country differences are observed in the pattern of the evolution of bank competition. We check whether convergence in bank competition has taken place on the EU banking markets, by applying ? and ? convergence tests for panel data. We show convergence in bank competition. These findings are also observed with standard competition measures (Herfindahl index, profitability indicators). We thus support the view th at bank integration has taken place in the European Union.
    Keywords: banking, competition, European integration
    JEL: G21 F36 L16
    Date: 2011
  18. By: Martin Berka; Michael B. Devereux; Thomas Rudolph
    Abstract: We study a newly released data set of scanner prices for food products in a large Swiss online supermarket. We find that average prices change about every two months, but when we exclude temporary sales, prices are extremely sticky, changing on average once every three years. Non-sale price behavior is broadly consistent with menu cost models of sticky prices. When we focus specifically on the behavior of sale prices, however, we find that the characteristics of price adjustment seems to be substantially at odds with standard theory.
    Keywords: Pricing ; Profit
    Date: 2011
  19. By: Adam Swadley; Mine Yücel
    Abstract: A key selling point for the restructuring of electricity markets was the promise of lower prices, that competition among independent power suppliers would lower electricity prices to retail customers. There is not much consensus in earlier studies on the effects of electricity deregulation, particularly for residential customers. Part of the reason for not finding a consistent link with deregulation and lower prices was that the removal of the transitional price caps led to higher prices. In addition, the timing of the removal of price caps coincided with rising fuel prices, which were passed on to consumers in a competitive market. Using a dynamic panel model, we analyze the effect of participation rates, fuel costs, market size, a rate cap and a switch to competition for 16 states and the District of Columbia. We find that an increase in participation rates, price controls, a larger market, and high shares of hydro in electricity generation lower retail prices, while increases in natural gas and coal prices increase rates. The effects of a competitive retail electricity market are mixed across states, but generally appear to lower prices in states with high participation and raise prices in states that have little customer participation.
    Keywords: Price regulation
    Date: 2011
  20. By: Roland Meyer
    Abstract: Motivated by the European movement towards a separation of electricity networks from the competitive functions generation and supply this paper reviews theoretical and empirical literature on vertical synergies in electricity supply. In the analysis a clear distinction is made between four different unbundling options leading to different forms and magnitudes of synergy losses. Apart from coordination economies a main source of scope economies seems to result from a market risk effect if generation and retail are separated. Accordingly, the European policy of network unbundling (either transmission or distribution) results in synergy losses between 2 and 5 percent due to coordination losses, while an unbundling option that includes a separation between retail and generation, as observed in some U.S. states, may lead to a permanent cost increase of 15 percent and more due to a significant risk increase.
    Keywords: ownership unbundling, vertical integration, economies of scope
    Date: 2011–04
  21. By: Thomes, Tim Paul
    Abstract: This paper investigates the upcoming business model of online streaming services allowing music consumers either to subscribe to a service which provides free-of-charge access to streaming music and which is funded by advertising, or to pay a monthly flat fee in order to get ad-free access to the content of the service accompanied with additional benefits. Both businesses will be launched by a single provider of streaming music. By imposing a two-sided market model on the one hand combined with a direct transaction between the streaming service and its flat-rate subscribers on the other hand, the investigation shows that it can be highly profitable to launch a business which is free-of-charge for subscribers if advertising imposes a weak nuisance to music consumers. If this is the case, and by imposing an endogenously determined level of advertising which will be provided by homogeneous advertisers, the analysis shows that the monopolistic streaming service increases the price for its flat-rate subscribers in order to stimulate free-of-charge demand and to capture higher revenues from advertisers. An extension of the model by illegal file-sharing reveals that an increase in copyright enforcement shifts rents from music consumers to the monopolistic provider, moreover a maximal punishment for piracy will be welfare-maximizing. --
    Keywords: Advertising media,Music industry,Online streaming,Piracy
    JEL: D42 L12 L82
    Date: 2011

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