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on Industrial Competition |
| By: | Batlome Janjgava; Sergey Slobodyan |
| Abstract: | In this paper, we study an imperfect monitoring model of duopoly under similar settings as in Green and Porter (1984), but here firms do not know the demand parameters and learn about them over time though the price signals. We investigate how a deviation from rational expectations affects the decision making process and what kind of behavior is sustainable in equilibrium. We find that the more common information firms analyze to update their beliefs, the more room is for implicit coordination. This might propagate escapes from the Cournot- Nash Equilibrium and the formation of cartels without explicit cooperative motives. In contrast to Green and Porter (1984), our results show that in a model with learning, breakdown of a cartel happens even without a demand shock. Moreover, in this model an expected price serves as an endogenous price threshold, which triggers a price war. Finally, by investigating the durations of the cooperative and price war phases, we find that in industries with a higher Nash equilibrium output and a lower volatility of firm-specific shocks, it is easier to maintain a cartel and harder to break it down. |
| Keywords: | beliefs; escape dynamics; implicit collusion; self-confirming equilibrium; learning; |
| JEL: | D83 D43 L13 L40 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp445&r=com |
| By: | Marcel Boyer; Pierre Lasserre; Michel Moreaux |
| Abstract: | We model capacity-building investments in a homogeneous product duopoly facing uncertain demand growth. Capacity building is achieved through the addition of production units that are durable and lumpy and whose cost is irreversible. While building their capacity over time, firms compete à la Cournot in the product market given their installed capacity. There is no exogenous order of moves, no commitment regarding future decisions, and no finite horizon. We investigate Markov Perfect Equilibrium (MPE) paths of the investment game, which may include episodes during which firms invest at different times, a preemption pattern, and episodes in which firms invest simultaneously, a tacit collusion pattern. These episodes may alternate and are typically several. When firms have yet to invest in capacity, the sole pattern that is MPE-compatible is a preemption episode: firms invest at different times but have equal value. The first such investment may occur earlier and therefore be riskier than socially optimal. When both firms hold capacity, tacit collusion episodes may be MPE-compatible: firms invest simultaneously at a postponed time (hence holding back production in the meantime), thereby generating an investment wave in the industry. Such investment episodes are more likely with higher demand volatility, faster market growth, and lower cost of capital (discount rate). <P> |
| Keywords: | Real Options; Dynamic Duopoly; Lumpy Investments; Preemption; Investment Waves; Tacit Collusion, |
| JEL: | C73 D43 D92 L13 |
| Date: | 2011–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2011s-65&r=com |
| By: | Nathan Yang (Department of Economics, University of Toronto) |
| Abstract: | This paper advances our collective knowledge about the role of learning in retail agglomeration. Uncertainty about new markets provides an opportunity for sequential learning, where one firm's past entry decisions signal to others the potential profitability of risky markets. The setting is Canada's hamburger fast food industry from its early days in 1970 to 2005, for which simple analysis of my unique data reveals empirical patterns pointing towards retail agglomeration. The notion that uninformed potential entrants have an incentive to learn, but not informed incumbents, motivates an intuitive double-difference approach that separately identifies learning by exploiting differences in the way potential entrants and incumbents react to spillovers. This identification strategy confirms that information externalities are key drivers of agglomeration. Estimates from a dynamic oligopoly model of entry with information externalities provide further evidence of learning, as I show that common uncertainty matters. Counterfactual analysis reveals that an industry with uncertainty is initially less competitive than an industry with certainty, but catches up over time. Furthermore, there are many instances in which chains enter markets they would have avoided had they not faced uncertainty. Finally, consistent with the interpretation of uncertainty as an entry barrier, I find that chains place significant premiums on certainty at proportions beyond 2% of their total value from being monopolists. |
| Keywords: | Agglomeration, commercial real estate investment, dynamic discrete choice game, entry and exit, investment delay, market structure, retail competition. |
| JEL: | C73 D83 L13 L66 L81 R00 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1116&r=com |
| By: | Andrea Mantovani (Department of Economics, University of Bologna); Francisco Ruiz-Aliseda (Department of Economics, Ecole Polytechnique) |
| Abstract: | The recent years have exhibited a burst in the amount of collaborative activities among firms selling complementary products. This paper aims at providing a rationale for such a large extent of collaboration ties among complementors. To this end, we analyze a game in which the two producers of a certain component have the possibility to form pairwise collaboration ties with each of the two producers of a complementary component. Once ties are formed, each of the four firms decides how much to invest in improving the quality of the match with each possible complementor, under the assumption that a firm with a collaboration link with a complementor puts some weight on the complementor's profit when making investment decisions. Once investment choices have taken place, all firms choose prices for their respective components in a noncooperative manner. In equilibrium, firms end up forming as many collaboration ties as it is possible, although they would all prefer a scenario where collaboration were forbidden. In addition, a social planner would also prefer such a scenario to the one arising in equilibrium. We show that the result that collaboration is inefficient for firms and society does not depend on whether collaboration ties are formed in an exclusive manner: in fact, exclusivity would only worsen the situation. |
| Keywords: | Systems Competition, Complementary Products, Interoperability, Collaboration Link, Co-opetition, Exclusivity. |
| JEL: | L13 M21 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1131&r=com |
| By: | Zhiyong Yao (Department of Industrial Economics, School of Management, Fudan University); Wen Zhou (School of Business, The University of Hong Kong) |
| Abstract: | We study merger waves in vertically related industries where firms can engage in both vertical and horizontal mergers. Even though any individual merger would have been profitable, firms may refrain from merging for fear of negative impacts from other mergers. When they do merge, however, they always merge in waves, which is either vertical or horizontal depending on the relative intensity of double markup and horizontal competitions in the two industries. Finally, merger waves may happen with or without any fundamental change in the underlying economic conditions. |
| Keywords: | merger wave, horizontal mergers, vertical mergers, stable market structure |
| JEL: | L13 L42 D43 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1134&r=com |
| By: | Joachim Kaldasch |
| 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: | Consumer Durables,Product Life Cycle,Product Diffusion,Bass Diffusion,Gompertz Diffusion,Replicator Dynamics,Logistic Growth,Evolutionary Economics,Monopoly,Gibrat's Rule,Juglar Cycles |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:50530&r=com |
| By: | Joachim Kaldasch |
| Abstract: | Presented is an evolutionary model of consumer non-durable markets, which is an extension of a previously published paper on consumer durables. The model suggests that the repurchase process is governed by preferential growth. Applying statistical methods it can be shown that in a competitive market the mean price declines according to an exponential law towards a natural price, while the corresponding price distribution is approximately given by a Laplace distribution for independent price decisions of the manufacturers. The sales of individual brands are determined by a replicator dynamics. As a consequence the size distribution of business units is a lognormal distribution, while the growth rates are also given by a Laplace distribution. Moreover products with a higher fitness replace those with a lower fitness according to a logistic law. Most remarkable is the prediction that the price distribution becomes unstable at market clearing, which is in striking difference to the Walrasian picture in standard microeconomics. The reason for this statement is that competition between products exists only if there is an excess supply, causing a decreasing mean price. When, for example by significant events, demand increases or is equal to supply, competition breaks down and the price exhibits a jump. When this supply shortage is accompanied with an arbitrage for traders, it may even evolve into a speculative bubble. Neglecting the impact of speculation here, the evolutionary model can be linked to a stochastic jump-diffusion model. -- |
| Keywords: | non-durables,evolutionary economics,economic growth,price distribution,Laplace distribution,replicator dynamics,firm growth,jump-diffusion model |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:50531&r=com |
| By: | Aghion, Philippe; Dewatripont, Mathias; Du, Liqun; Harrison, Ann; Legros, Patrick |
| Abstract: | The economic slowdown in the 70s in Latin America and Japan in the late 90s, generated a growing skepticism about the role of industrial policy in the process of economic development. Yet, new considerations have emerged over the recent period, which invite us to revisit the issue. This paper argues that sectoral state aids tend to foster productivity, productivity growth, and product innovation to a larger extent when it targets more competitive sectors and when it is not concentrated on one or a small number of firms in the sector. Using a theoretical framework in which two firms may choose either to operate in the same "higher-growth" sector or in different, "lower-growth" sector. We use a panel of medium and large Chinese enterprises for the period 1998 through 2007 to test for complementarity between competition and industrial policy. A main implication from our analysis is that the debate on industrial policy should no longer be for or against having such a policy. As it turns out, sectoral policies are being implemented in one form or another by a large number of countries worldwide, starting with China. Rather, the issue should be on how to design and govern sectoral policies in order to make them more competition-friendly and therefore more growth-enhancing. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8619&r=com |
| By: | Carlos Canon (Toulouse School of Economics) |
| Abstract: | This paper studies a "market creating" firm (platform) that offers a matching environment by charging an access fee to a population of high and low type users who wish to form a match. We focus on an environment where users only observe a signal of their randomly assigned partner's type and where the informativeness of the signal is controlled by the firm. We study how both tools, access fee and signal informativeness, can be used to screen particular segments of the population. We finish by characterizing the set of optimal menus. The paper proposes three results. We show that information provision has a screening role when network effects are heterogeneous because a platform cannot induce every level of participation using only the access fee. Secondly, any platform will optimally offer a menu such that only high types participate, or where every user participates. In the former the signal is perfectly informative; in the latter it is partially informative. Lastly, the profit maximizing firm will over-provide information in relation to the surplus maximizing firm, and the higher the heterogeneity in the population, the higher the chance of the optimal menu excluding low type users. |
| Keywords: | Pricing; Market Design; Matching; Information Provision; Heterogeneous Network Effects |
| JEL: | L11 L15 D42 D83 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1120&r=com |
| By: | Eric Overby (College of Management, Georgia Institute of Technology); Chris Forman (College of Management, Georgia Institute of Technology) |
| Abstract: | Imbalances in supply and demand often cause the price for the same good to vary across geographic locations. Economic theory suggests that if the price differential is greater than the cost of transporting the good between locations, then buyers will shift demand from high-price locations to low-price locations, while sellers will shift supply from low-price locations to high-price locations. This should make prices more uniform and cause the overall market to adhere more closely to the “law of one price.” However, this assumes that traders have the information necessary to shift their supply/demand in an optimal way. We investigate this using data on over 2 million transactions in the wholesale used vehicle market from 2003 to 2008. This market has traditionally consisted of a set of non-integrated regional markets centered on market facilities located throughout the United States. Supply / demand imbalances and frictions associated with trading across distance created significant geographic price variance for generally equivalent vehicles. During our sample period, the percentage of transactions conducted electronically in this market rose from approximately 0% to approximately 20%. We argue that the electronic channel reduces buyers’ information search costs and show that buyers are more sensitive to price and less sensitive to distance when purchasing via the electronic channel than via the traditional physical channel. This causes buyers to be more likely to shift demand away from a nearby facility where prices are high to a more remote facility where prices are low. We show that these “cross-facility” demand shifts have led to a 25% reduction in geographic price variance during the time frame of our sample. We also show that sellers are reacting to these market shifts by becoming less strategic about vehicle distribution, given that vehicles are increasingly likely to fetch a similar price regardless of where they are sold. |
| Keywords: | electronic commerce, markets, price dispersion, variance, wholesale automotive, auctions, buyer reach, search costs, choice model |
| JEL: | C23 C25 D44 D83 L62 R12 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1130&r=com |
| By: | Yao Luo (Department of Economics, Penn State University) |
| Abstract: | This paper proposes to incorporate product customization in the Maskin and Riley (1984) nonlinear pricing model in order to capture major features of mobile service data. In particular, consumers are characterized by a two-dimensional type. One dimension is observed by the provider and integrates product customization, while the other is a standard parameter of adverse selection, which is unobserved by the provider and makes it necessary for the provider to discriminate among consumers with different tastes through nonlinear pricing. We then propose a novel method to aggregate the multiple-dimensional voice consumption into one-dimensional index. We show that the model structure is identified under the following conditions: The marginal utility function is multiplicatively separable in consumers' tastes, and consumers' observed and unobserved heterogeneity are independent. Empirical results show that both dimensions of heterogeneity are important. Due to asymmetric information, 50% of the "second-best" social welfare is left "on the table" in order to screen heterogeneous consumers. Moreover, if costly product customization does not affect subscribers' utility, 20% of subscribers would not be served. |
| Keywords: | Nonlinear Pricing, Product Customization, Mobile Service |
| JEL: | L11 L12 L25 L96 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1128&r=com |
| By: | Nicholas Economides (Stern School of Business, New York University); David Henriques (Nova School of Business and Economics) |
| Abstract: | In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same final good price regardless of the means of payment chosen by the customer. In this paper, we analyze a three-party model (consumers, merchants, and proprietary EPNs) to assess the impact of a NSR on the electronic payments system, in particular, on competition among EPNs, network pricing to merchants and consumers, EPNs’ profits, and social welfare. We show that imposing a NSR has a number of effects. First, it softens competition among EPNs and rebalances the fee structure in favor of cardholders and to the detriment of merchants. Second, we show that the NSR is a profitable strategy for EPNs if and only if the network effect from merchants to cardholders is sufficiently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are sufficiently weak (strong) and the merchants’ market power in the goods market is sufficiently high (low). Our policy advice is that regulators should decide on whether the NSR is appropriate on a market-by-market basis instead of imposing a uniform regulation for all markets. |
| Keywords: | Electronic Payment System, Market Power, Network Externalities, No-Surcharge Rule, Regulation, Two-sided Markets, MasterCard, Visa, American Express, Discover. |
| JEL: | L13 L42 L80 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1103&r=com |
| By: | Sjaak Hurkens (Institute for Economic Analysis (CSIC)); Ángel Luis López (Public-Private Sector Research Center, IESE Business School, University of Navarra) |
| Abstract: | We examine the effects of mobile termination rate regulation in asymmetric oligopolies. We do this by extending existing models of asymmetric duopoly and symmetric oligopoly where consumer expectations about market shares are passive. We ?first calibrate product differentiation parameters using detailed data from the Spanish market from 2010. Next, we predict equilibrium outcomes and welfare effects under alternative scenarios of future termination rates. Lowering termination rates typically lowers pro?fits of all networks and improves consumer and total surplus. |
| Keywords: | Mobile Termination Rates, Network Effects, Simulations, Telecommunications, Welfare |
| JEL: | D43 K23 L51 L96 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1109&r=com |
| By: | Ting Zhu (Booth School of Business, University of Chicago); Hongju Liu (University of Connecticut, School of Business); Pradeep Chintagunta (Booth School of Business, University of Chicago) |
| Abstract: | Since the Apple iPhone’s first launch in 2007 with an exclusive arrangement with AT&T, it has garnered overwhelmingly positive responses from consumers and from the media. With its success, exclusive contracts between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. Such practices have been criticized by regulators, by the media, and by “locked-out” consumers, due to the fact that a consumer has to subscribe to a particular service provider if he or she strongly prefers one handset to others. In this paper, we empirically examine the impact of handset exclusivity arrangements on consumer welfare. First we study consumers’ purchase decisions in mobile services that include the choice of a handset and of a service provider. We do so by combining survey data on consumers’ purchase decisions with supplemented data on prices and features of common handsets. Next, assuming a Stackelberg leader-follower relationship between the handset manufacturers and the service providers, and using our demand estimates, we recover the marginal costs for the players in the market. We then simulate what would have happened in the counterfactual scenario when the iPhone is available from all carriers. Our results suggest that, if we take into account price adjustments from handset manufacturers and service providers in response to the change in market structure, consumer welfare will increase by $326 million without the exclusive arrangement. We view our analysis as a starting point to a more complete characterization of consumer behavior and the complex relationships among players in this industry. |
| Keywords: | Exclusive Arrangement, Distribution Channels, Wireless Service |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1135&r=com |
| By: | Branstetter, Lee G.; Chatterjee, Chirantan; Higgins, Matthew |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_240&r=com |
| By: | GILSON GERALDINO SILVA JR (UNIVERSIDADE CATOLICA DE BRASILIA; UCB)) |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2010:180&r=com |