nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒11‒14
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Price Discrimination in Input Markets: Quantity Discounts and Private Information By Herweg, Fabian; Müller, Daniel
  2. Product Quality in Different Markets and Cost Structure By Kiyoshi Matsubara
  3. Price Rigidity and Strategic Uncertainty An Agent-based Approach By Robert Somogyi; Janos Vincze
  4. Cross-ownership and stability in a Cournot duopoly By Fanti, Luciano; Gori, Luca
  5. Models of Spatial Competition: A critical review By Ricardo Biscaia; Isabel Mota
  6. Empirical analysis of countervailing power in business-to-business bargaining By Walter Beckert
  7. Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education By Kosfeld, Michael; Schüwer, Ulrich
  9. To surcharge or not to surcharge? A two-sided market perspective of the no-surchage rule By Nicholas Economides; David Henriques
  10. Fraud, Investments and Liability Regimes in Payment Platforms By Anna Creti; Marianne Verdier
  11. Patent Pools and the Direction of Innovation - Evidence from the 19th-century Sewing Machine Industry By Ryan L. Lampe; Petra Moser
  12. The effect of private road supply on the volume/capacity ratio when firms compete Stackelberg in Road Capacity By Vincent Van Den Berg
  13. Scale Economies in Nonprofit Provision, Technology Adoption and Entry By Scharf, Kimberley Ann
  14. Insider trading with different market structures. By Wassim Daher; Fida Karam; Leonard J. Mirman

  1. By: Herweg, Fabian; Müller, Daniel
    Abstract: We consider a monopolistic supplier’s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs. Under uniform pricing, the same wholesale tariff is offered to all downstream firms. In contrast to the extant literature on thirddegree price discrimination with nonlinear wholesale tariffs, we find that banning discriminatory wholesale contracts—the usual legal practice in the EU and US— often is beneficial for social welfare. This result is shown to be robust even when the upstream supplier faces competition in the form of fringe supply.
    Keywords: Asymmetric Information; InputMarkets; Quantity Discounts; Price Discrimination; Screening; Vertical Contracting
    JEL: D43 L11 L42
    Date: 2011–11
  2. By: Kiyoshi Matsubara
    Abstract: This paper analyzes the behavior of monopoly firm serving its products to two countries. The main focus of this paper is on how the product-quality choice in different markets are related with the cost structure of the firm. First, This paper examines the effects of production and R&D costs on the product quality separately, and then discusses the general case where the both costs exists. This paper shows that if only production costs exist, providing different levels of product quality is optimal and that if only R&D costs exist, providing the same level of quality is optimal. About the general case, this paper shows the conditions with which the same-quality strategy is optimal in terms of utility and other parameters. As an application, this paper discusses the firm’s decision on entry in a foreign market either by exports or FDI. The result is consistent with observations in emerging economies.
    Date: 2011–09
  3. By: Robert Somogyi (Paris School of Economics); Janos Vincze (Institute of Economics - Hungarian Academy of Sciences, Corvinus University of Budapest)
    Abstract: The phenomenon of infrequent price changes has troubled economists for decades. Intuitively one feels that for most price-setters there exists a range of inaction, i.e. a substantial measure of the states of the world, within which they do not wish to modify prevailing prices. However, basic economics tells us that when marginal costs change it is rational to change prices, too. Economists wishing to maintain rationality of price-setters resorted to fixed price adjustment costs as an explanation for price rigidity. In this paper we propose an alternative explanation, without recourse to any sort of physical adjustment cost, by putting strategic interaction into the center-stage of our analysis. Price-making is treated as a repeated oligopoly game. The traditional analysis of these games cannot pinpoint any equilibrium as a reasonable "solution" of the strategic situation. Thus there is genuine strategic uncertainty, a situation where decision-makers are uncertain of the strategies of other decision-makers. Hesitation may lead to inaction. To model this situation we follow the style of agent-based models, by modelling firms that change their pricing strategies following an evolutionary algorithm. Our results are promising. In addition to reproducing the known negative relationship between price rigidity and the level of general inflation, our model exhibits several features observed in real data. Moreover, most prices fall into the theoretical "range" without explicitly building this property into strategies.
    Keywords: Agent-based modeling, Evolutionary algorithm, Price rigidity, Social learning, Strategic Uncertainty
    JEL: L13 C63 B52
    Date: 2011–09
  4. By: Fanti, Luciano; Gori, Luca
    Abstract: This paper analyses the dynamics of a Cournot duopoly under cross-ownership participation when players have heterogeneous, i.e. bounded rational and naïve, expectations. We find that when the shareholder that owns firm also holds a percentage of firm , the parametric stability region of the unique Cournot-Nash equilibrium is larger than when every firm is owned by a unique shareholder, and an increase in the fraction of shares that the shareholder that owns firm has in firm tends to stabilise the market equilibrium. Moreover, when products are (horizontally) differentiated, a rise in the fraction of shares of firm held by the shareholder that owns firm acts as an economic (de)stabiliser when products of variety and are (complements) substitutes between each other. The policy implication is that, despite on the one hand, cross-ownership acts as an anti-competitive device that indeed tends to reduce social welfare with the corresponding anti-trust consequences, on the other hand, it acts as an economic stabiliser (except when products are complements).
    Keywords: Bifurcation; Cournot; Cross-ownership; Duopoly
    JEL: L13 D43 C62 L40
    Date: 2011–11–07
  5. By: Ricardo Biscaia; Isabel Mota
    Abstract: According to Duranton (2008), the main focus of spatial economics is the location choice of the economic agents. In order to explain the location and the agglomeration of agents in certain locations, one must relax the core assumptions of the neoclassic competitive framework. According to Fujita and Thisse (2002), three alternatives emerged and had huge attention in the literature: the assumption of heterogeneity of locations, as in comparative advantage models or in pioneering static location models; the externality models, in which economic activity endogenously generates spillovers that motivates the agglomeration of the agents; the assumption of imperfect markets, implying that the agents have to interact with each other, as in spatial competition models or in the monopolistic competition approach. This review will focus on the development of spatial competition models. Specifically, the main purpose is to study models in which the location choice by firms plays a major role. Therefore, after a brief review of the roots of spatial competition models, this paper intends to offer a critical analysis over the recent developments in spatial competition modeling. The starting point is the recognition of the increased importance of this topic through the quantification of the research in this field by using bibliometric tools. After that, this study proceeds by identifying the main research paths within spatial competition modeling. Specifically, the type of strategie (Bertrand vs. Cournot competition) and its implications over location equilibria are discussed. Additionally, it is presented a comparison of the impact of the most studied assumptions in literature, that respect to the market (linear vs. circular), production costs, transportation costs, as well as the number of firms. Finally, the type of information (complete vs. incomplete) and its effects over the equilibria are also discussed.
    Date: 2011–09
  6. By: Walter Beckert (Institute for Fiscal Studies and Birkbeck College London)
    Abstract: <p>This paper provides a comprehensive econometric framework for the empirical analysis of countervailing power. It encompasses the two main features of pricing schemes in business-to-business relationships: nonlinear price schedules and bargaining over rents. Disentangling them is critical to the empirical identification of countervailing power. Testable predictions from the theoretical analysis for a pragmatic reduced form empirical pricing model are delineated. This model is readily implementable on the basis of transaction data, routinely collected by antitrust authorities and illustrated using data from the UK brick industry. The paper emphasizes the importance of controlling for endogeneity of volumes and established supply chains and for heterogeneity across buyers and sellers due to intrinsically unobservable outside options.</p>
    Date: 2011–11
  7. By: Kosfeld, Michael (Goethe University Frankfurt); Schüwer, Ulrich (Goethe University Frankfurt)
    Abstract: Previous research shows that firms shroud high add-on prices in competitive markets with naive consumers leading to inefficiency. We analyze the effects of regulatory intervention via educating naive consumers on equilibrium prices and welfare. Our model allows firms to shroud, unshroud, or partially unshroud add-on prices. Results show that consumer education may increase welfare; however, it may also decrease welfare if education is insufficient to alter the equilibrium information and pricing strategy of firms. Educating consumers may do more harm than good and should thus only be considered if the regulator is sufficiently well informed about consumer and firm behavior.
    Keywords: bounded rationality, competition, regulation, welfare, consumer protection
    JEL: D40 D80 L50
    Date: 2011–10
  8. By: Alicia Barroso (Universidad Carlos III de Madrid); Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This article proposes a novel approach to assess the dynamic effect that advertising expenditures have regarding which products consumers include in their choice sets. In a discrete-choice model consumers face choice sets that evolve according to their awareness of each product. Advertising expenditures have a dynamic effect in the sense that they raise consumer awareness of a product, increasing present and future sales. To estimate this effect the authors explicitly model the firms' dynamic advertising decisions and illustrate the model using data from the Spanish automobile market. The results show that the effect of advertising on awareness is dynamic and that accounting for it is crucial in explaining the evolution of product sales over its life cycle. Furthermore, we show that the awareness process can be significantly sped up by advertising. Thus there is a great heterogeneity in the awareness process among products depending on the level of advertising expenditures and it may range from one to six years.
    Keywords: Advertising, discrete choice models, consumer choice set, awareness process, new products.
    JEL: L13 L62 M11 M37
    Date: 2011–10
  9. By: Nicholas Economides (Stern School of Business, New York University, 70 Washington Square South, New York, NY 10012, USA.); David Henriques (Stern School of Business, New York University, 70 Washington Square South, New York, NY 10012, USA.)
    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 e¤ect 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. JEL Classification: L13, L42, L80.
    Keywords: Electronic payment system, market power, network externalities, no-surcharge rule, regulation, two-sided markets, MasterCard, Visa, American Express, Discover.
    Date: 2011–10
  10. By: Anna Creti; Marianne Verdier
    Abstract: In this paper, we discuss how fraud liability regimes impact the price structure that is chosen by a monopolistic payment platform, in a setting where merchants can invest in fraud detection technologies. We show that liability allocation rules distort the price structure charged by platforms or banks to consumers and merchants with respect to a case where such a responsibility regime is not implemented. We determine the allocation of fraud losses between the payment platform and the merchants that maximises the platform's profit and we compare it to the allocation that maximises social welfare.
    Keywords: payment card systems, interchange fees, two-sided markets, fraud, liability
    JEL: G21 L31 L42
    Date: 2011
  11. By: Ryan L. Lampe; Petra Moser
    Abstract: Patent pools allow a group of firms to combine their patents as if they were a single firm. Theoretical models predict that pools encourage innovation in pool technologies, albeit at the cost of innovation in substitutes. Empirical evidence is scarce because modern pools are too recent to allow empirical analyses. This article examines data on patents and innovations by new firms for a historical pool in the sewing machine industry (1856-1877) to examine effects on innovation. Contrary to theoretical predictions, this analysis suggests that pools may discourage innovation in pool technologies and shift R&D towards technologically inferior substitutes.
    JEL: D4 K21 L10 L24 L4 N61 N81 O3
    Date: 2011–11
  12. By: Vincent Van Den Berg
    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 the same volume/capacity ratio as a public operator would and thus have the same amount of congestion and travel time. We find that this result does not hold if capacity and toll setting are separate stages—as then firms want to limit the competition in the toll stage by setting lower capacities—or when firms set capacities one after the other 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 the public operator. The firms that act first care more about their competitors’ capacities they can influence: they set a lower ratio and have the largest capacities. The average volume/capacity ratio is below the public ratio, and hence the average private travel time is too short. Still, in our numerical model, for three or more firms, welfare is higher under Stackelberg competition than under Nash competition, because of the larger Stackelberg capacity expansion and lower tolls.
    Date: 2011–09
  13. By: Scharf, Kimberley Ann
    Abstract: We study competition between nonprofit providers supplying a collective service through increasing-returns-to-scale technologies. When providers adopt a not-for-profit mission, the absence of a residual claimant can impede entry, pro- tecting the position of an inefficient incumbent. Moreover, when the goods provided are at least partly public in nature, buyers face individual incentives to divert donations towards providers that adopt low-fixed cost technologies, and so providers may forgo the adoption of more efficient technologies that require fixed costs. In these situations, government grants in support of core costs can have a non-neutral effect on entry, technology adoption, and industry performance.
    Keywords: core funding; entry; not-for-profit organizations
    JEL: L1 L3
    Date: 2011–10
  14. By: Wassim Daher (Gulf University for Science and Technology - Department of Mathematics and Natural Sciences et Centre d'Economie de la Sorbonne); Fida Karam (Gulf University for Science and Technology - Department of Economics and Finance); Leonard J. Mirman (University of Virginia - Department of Economics)
    Abstract: We study an extension of Jain and Mirman (1999) with two insiders under three different market structures : (i) Cournot competition among the insiders, (ii) Stackelberg game between the insiders and (iii) monopoly in the real market and Stackelberg in the financial market. We show how the equilibrium outcomes are affected by each of the market structure. Finally we perform a comparative statics analysis between the models.
    Keywords: Insider trading, Cournot, Stackelberg, correlated signals, Kyle model.
    JEL: G14 D82
    Date: 2011–08

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