nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒10‒01
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Dual Distribution and Differentiated Products By Philippe Cyrenne
  2. Advance Selling in the Presence of Experienced Consumers By Oksana Loginova; X. Hnery Wang; Chenhang Zeng
  3. Precautionary price stickiness By James Costain; Anton Nakov
  4. Temptation, horizontal differentiation and monopoly pricing By Joaquín Gómez Miñambres
  5. Stability in a Cournot duopoly under asymmetric unionism By Fanti, Luciano; Gori, Luca
  6. The dynamics of a Bertrand duopoly with differentiated products and bounded rational firms revisited By Luciano Fanti; Luca Gori
  7. Information revelation in procurement auctions with two-sided asymmetric information By Nicola Doni; Domenico Menicucci
  8. Naked exclusion in the lab: The case of sequential contracting By Jan Boone; Wieland Müller; Sigrid Suetens
  9. Equilibrium parallel import policies and international market structure By Roy, Santanu; Saggi, Kamal
  10. The Private and Social Costs of Patent Trolls By James Bessen; Jennifer L. Ford; Michael J. Meurer
  11. EU Enlargement, Parallel Trade and Price Competition in Pharmaceuticals - What’s to Blame? Derogation or Perception? By Granlund, David; Yesim Köksal, Miyase
  12. Cost Incentives for Doctors: A Double-Edged Sword By Schottmuller, C.
  13. Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts By Benjamin R. Handel
  14. Access Regulation, Entry, and Investment in Telecommunications By Fabio Manenti; Antonio Scialà
  15. Energy Liberalization in Antitrust Straitjacket: A Plant Too Far? By Malgorzata Sadowska
  16. The interaction between emissions trading and energy and competition policies By Francesco Gullì

  1. By: Philippe Cyrenne
    Abstract: This paper develops an approach to analyzing the equilibrium in markets where firms selling differentiated products can choose dual distribution to sell their products. Dual distribution involves a firm selling its product both through company owned stores and through independently operated franchises. In choosing the proportion of company owned versus franchise stores, in equilibrium, the firms have no incentive to alter this ratio given the proportions chosen by rival firms. The approach taken here in analyzing dual distribution is quite general and can be applied in a variety of settings.
    Date: 2011–09
  2. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Hnery Wang (Department of Economics, University of Missouri-Columbia); Chenhang Zeng
    Abstract: The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present theoretical study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may or may not be at a discount to the regular selling price.
    Keywords: advance selling, the Newsvendor Problem, demand uncertainty, experienced consumers, inexperienced consumers.
    JEL: C72 D42 L12 M31
    Date: 2011–06–30
  3. By: James Costain (Banco de España); Anton Nakov (Banco de España)
    Abstract: This paper proposes two models in which price stickiness arises endogenously even though fi rms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our fi rst specifi cation, fi rms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specifi cation derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since fi rms making suffi ciently large errors choose to adjust, both versions generate a strong “selection effect” in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fi ts microdata better than their specifi cation.
    Keywords: Nominal rigidity, logit equilibrium, state-dependent pricing, (S,s) adjustment, near-rational behavior
    JEL: E31 D81 C72
    Date: 2011–09
  4. By: Joaquín Gómez Miñambres
    Abstract: We study the implications for pricing strategies and product offerings of consumers’ temptation when the differentiation of the product is horizontal. With horizontal differentiation, the temptation state is represented by a change in the consumers’ ideal product on the Hotelling line, so that consumers have two (possibly distinct) ideal products: one when committed and another when tempted. The firm faces the following trade-off: for the consumer who diverge the most between the ideal product with temptation and commitment, if the firm positions a product close to the consumer’s temptation ideal product, it increases the consumer’s surplus when tempted but decreases surplus with commitment, which lowers the consumer’s incentive to participate. This paper shows that, because of this trade-off, the firm may exclude products that are too close to the temptation preferences in the optimal menu. Moreover, it is shown that product diversity and firm’s profits decrease with the probability of temptation and with the consumers’ awareness of their dynamic inconsistency
    Keywords: Temptation; Commitment; Price discrimination
    JEL: D11 D42 D82 L11 L12 L15
    Date: 2011–07
  5. By: Fanti, Luciano; Gori, Luca
    Abstract: We analyse the stability issue in a Cournot duopoly with heterogeneous players. We show that labour market institutions matter for the stability of the unique interior Cournot-Nash equilibrium. Interestingly, the role played by the existence of firm-specific unions on stability, when the degree of unionism is asymmetric between the two firms, is at all different depending on whether the unionised firm has bounded rational or naive expectations. Indeed, a shift in the union’s preference from employment towards wages acts as an economic (de)stabiliser when workers are paid with the (competitive) unionised wage by the bounded rational firm and with the (unionised) competitive wage by the naïve firm.
    Keywords: Bifurcation; Cournot; Heterogeneous expectations; Monopoly union
    JEL: J51 L13 D43 C62
    Date: 2011–09–24
  6. By: Luciano Fanti; Luca Gori
    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: C62 D43 L13
    Date: 2011–01–09
  7. By: Nicola Doni (Università degli Studi di Firenze,); Domenico Menicucci (Dipartimento di Matematica per le Decisioni)
    Abstract: A buyer needs to procure a good from either of two potential suppliers offering differentiated products and with privately observed costs. The buyer privately observes the own valuations for the products and (ex ante) decides how much of this information should be revealed to suppliers before they play a first score auction. We show that the more significant is each supplier’s private information on the own cost, the less information the buyer should reveal. Part of our analysis is linked to the comparison between a first and a second price auction in an asymmetric setup with a distribution shift.
    Keywords: Asymmetric auctions
    JEL: D44 D82
    Date: 2011
  8. By: Jan Boone; Wieland Müller; Sigrid Suetens
    Abstract: In the context of the naked exclusion model of Rasmusen, Ramseyer and Wiley (1991) and Segal and Whinston (2000b), we examine whether sequential contracting is more conducive to exclusion in the lab, and whether it leads to lower exclusion costs for the incumbent, than simultaneous contracting. We find that an incumbent who proposes exclusive contracts to buyers sequentially, is better able to deter entry than an incumbent who proposes contracts simultaneously. In contrast to theory, this comes at a substantial cost for the incumbent.
    JEL: C91 L12 L42
    Date: 2011–08
  9. By: Roy, Santanu; Saggi, Kamal
    Abstract: In a North-South vertically differentiated duopoly, the analysis in this paper derives equilibrium government policies towards parallel imports. By incorporating strategic interaction at the policy-setting stage and the product market, the model sheds new light on (i) the effects of parallel import policies on pricing behavior of firms and (ii) the interdependence of national parallel import policies. If demand asymmetry across countries is sufficiently large, the North forbids parallel imports to ensure its firm sells in the South thereby generating international price discrimination -- the South's most preferred market outcome -- as the equilibrium. When demand structures are relatively similar across countries, the North permits parallel imports and uniform pricing -- its most preferred market outcome -- obtains.
    Keywords: Markets and Market Access,Access to Markets,Economic Theory&Research,Microfinance,Emerging Markets
    Date: 2011–09–01
  10. By: James Bessen (Research on Innovation, Boston University School of Law, Berkman Center for Internet and Society (Harvard)); Jennifer L. Ford; Michael J. Meurer
    Abstract: In the past, non-practicing entities (NPEs) — firms that license patents without producing goods — have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives.
    Keywords: patent, litigation, litigation cost, non-practicing entities, software patents
    JEL: O31 O34 K41
    Date: 2011
  11. By: Granlund, David (Department of Economics, Umeå University); Yesim Köksal, Miyase (Department of Economics, School of Business, Economics and Law, University of Gothenburg)
    Abstract: Given the cost of trade and availability of pharmaceuticals, the driving force for parallel trade is the price difference between the source (exporting) and the destination (importing) country. An increase in the price difference or in the availability of pharmaceuticals for parallel trade should increase price competition in the destination country. Using 2003-2007 data from Sweden we investigated whether EU enlargement in 2004, when new countries with low pharmaceutical prices joined the EU, increased competition from parallel imports. Drugs facing competition from parallel imports are found to have on average 17% to 21% lower prices than they would have had if they had never faced such competition. But, contrary to expectation, EU enlargement is not found to have increased this effect, which might be explained by derogations and changes in consumer perceptions of parallel imports.
    Keywords: EU enlargement; parallel trade; pharmaceuticals; price competition
    JEL: I11 L51 L65
    Date: 2011–09–16
  12. By: Schottmuller, C. (Tilburg University, Center for Economic Research)
    Abstract: Incentivicing doctors to take the costs of treatment into account in their prescription decision could lead to lower health care expenditures and higher welfare. This paper shows that also the opposite effects can result. The reason is a misalignment of doctor and patient incentives: Because of health insurance, the patient does not take the costs of treatment fully into account. This misalignment hampers communication between patient and doctor, e.g. the patient may overstate the intensity of symptoms. It is shown that cost incentives for doctors increase welfare if (i) the doctor's examination technology is sufficiently good or (ii) (marginal) costs of treatment are high enough. Optimal health care systems should implement different degrees of cost incentives depending on type of disease and/or doctor.
    Keywords: cheap talk;communication;health insurance;market design.
    JEL: D82 D83 I10
    Date: 2011
  13. By: Benjamin R. Handel
    Abstract: This paper investigates consumer switching costs in the context of health insurance markets, where adverse selection is a potential concern. Though previous work has studied these phenomena in isolation, they interact in a way that directly impacts market outcomes and consumer welfare. Our identification strategy leverages a unique natural experiment that occurred at a large firm where we also observe individual-level panel data on health insurance choices and medical claims. We present descriptive results to show that (i) switching costs are large and (ii) adverse selection is present. To formalize this analysis we develop and estimate a choice model that jointly quantifies switching costs, risk preferences, and ex ante health risk. We use these estimates to study the welfare impact of an information provision policy that nudges consumers toward better decisions by reducing switching costs. This policy increases welfare in a naive setting where insurance plan prices are held fixed. However, when insurance prices change endogenously to reflect updated enrollee risk pools, the same policy substantially exacerbates adverse selection and reduces consumer welfare, doubling the existing welfare loss from adverse selection.
    JEL: D81 D82 D83 G22 I11 I18
    Date: 2011–09
  14. By: Fabio Manenti; Antonio Scialà
    Abstract: This paper presents a model of competition between an incumbent and an entrant firm in telecommunications. The entrant has the option to enter the market with or without having preliminary invested in its own infrastructure; in case of facility based entry, the entrant has also the option to invest in the provision of enhanced services. In case of resale based entry the entrant needs access to the incumbent network. Unlike the rival, the incumbent has always the option to upgrade the existing network to provide advanced services. We study the impact of access regulation on the type of entry and on firms' investments. Without regulation, we find that the incumbent sets the access charge to prevent resale based entry and this overstimulates rival's investment that may turn out to be socially inefficient. Access regulation may discourage welfare enhancing investments, thus also inducing a socially inefficient outcome. We extend the model to account for negotiated interconnection in case of facilities based entry.
    Keywords: telecommunications; ladder of investment; access regulation; interconnection
    Date: 2011–06–24
  15. By: Malgorzata Sadowska
    Abstract: The European Commission has launched a number of antitrust investigations against the major energy incumbents in the aftermath of the energy sector inquiry. Most of them have already been settled under Article 9 of the EC Regulation 1/2003 and the undertakings offered far-reaching, sometimes structural, commitments. This article studies the 2008 investigation into price manipulation in the German electricity wholesale market. In spite of no convincing evidence and flaws in the assessment, the Commission was able to negotiate from E.ON substantial capacity divestments. The Commission is straightforward about using antitrust rules to open up energy markets. Sector inquiries, commitment procedure and structural remedies allow for a quick intervention, flexible problem-solving and bring about decisive changes in the energy market setting. However, harnessing antitrust for the purpose of energy liberalization policy has an adverse impact on competition enforcement itself. First, it leads to a number of ‘weak’ cases, based on far-fetched arguments. Second, it results in remedies which are not tailored to the abuse at issue, but are in line with a wider objective of energy market liberalization, and as an outcome of negotiations, further swayed by the firm’s own interest in the ultimate shape of the commitment package.
    Keywords: energy policy; competition law; Germany
    Date: 2011–09–01
  16. By: Francesco Gullì
    Abstract: Emissions trading is a “cap and trade” regulation aimed at reducing the cost of meeting environmental targets. This paper studies how this regulation interacts with energy and competition policies. Two vertically related and imperfectly competitive markets are investigated: 1) the electricity market (output market); 2) the market for natural gas (input market). The effect of energy policy is simulated by assuming that the supporting scheme is able to improve the competitiveness of the low carbon technologies which are able, at the same time, to increase security of supply. The effect of the competition policy is accounted for by assuming that firms try to meet a profit target rather than to maximize profits, because of the regulatory pressure exerted by the competition and sector-specific authorities. By using the dominant firm model (in both markets) and the auction approach (in the output market), the paper highlights a trade-off between these policies. Without regulatory pressure, the result is ambiguous. Together, environmental and energy policies can lead to an increase in market power and its effects, but this in turn not necessarily amplifies their performances. However the worst case, the absolute increase in pollution in the short-run, is excluded. With regulatory pressure, the environmental and energy policies may imply a decrease in market power and this in turn can lessen their performance. In addition, this time the absolute increase in pollution in the short-run is not only possible but even likely. However this unfavourable effect would happen only if the pollution price is sufficiently low, that is if the environmental policy is rather modest. From the policy implications point of view, the analysis suggests what follows. If the models used to estimate performances and costs of environmental and energy policies ignore the full role of imperfect competition (the impact on prices combined with the strategic use of power capacity), this may induce incorrect estimations of the cost of the public action or may lead to incorrect policy calibrations, depending on how the policy targets are set. Finally, although the results are based on a series of simple assumptions about the operation and the structure of energy markets, they seem to be enough robust. Nevertheless the paper suggests caution in extending to other market structures the outcome of the dominant firm model.
    Keywords: emissions trading; pollution; imperfect competition; energy policy
    Date: 2011–03–31

This nep-com issue is ©2011 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.