nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒12‒19
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Market Structure and the Competitive Effects of Vertical Integration By Simon Loertscher; Markus Reisinger
  2. Organizational structure, strategic delegation and innovation in oligopolistic industries By Evangelos Mitrokostas; Emmanuel Petrakis
  3. Dynamic product diversity By Ramon Caminal
  4. Non-Comparative versus Comparative Advertising of Quality By Winand Emons; Claude Fluet
  5. Entry deterrence through cooperative R&D over-investment By Christin, Clémence
  6. Procurement with specialized firms By Boone, Jan; Schottmüller, Christoph
  7. Platform Competition under Asymmetric Information By Hanna Halaburda; Yaron Yehezkel
  8. Cooperating firms in inventive and absorptive research By Ben Youssef, Slim; Breton, Michèle; Zaccour, Georges
  9. The protection of industrial inventions: analysis of the regulation and policy evaluation. By Daniele Sabbatini
  10. Innovation and monopoly: The position of Schumpeter By laino, antonella
  11. The economics of predation: What drives pricing when there is learning-by-doing? By Besanko, David; Doraszelski, Ulrich; Kryukov, Yaroslav
  12. Market Power, Resource Extraction and Pollution: Some Paradoxes and a Unified View By L. Lambertini; G. Leitmann
  13. Transparency, entry, and productivity By Gu, Yiquan; Wenzel, Tobias
  14. Media market concentration, advertising levels, and ad prices. By Anderson, Simon P.; Foros, Øystein; Kind, Hans Jarle; Peitz, Martin
  15. Assessing Unilateral Merger Effects in a Two-Sided Market: An Application to the Dutch Daily Newspaper Market By Filistrucchi, L.; Klein, T.J.; Michielsen, T.O.
  16. Competing on Speed By Emiliano Pagnotta; Thomas Philippon
  17. Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market By Naoki Wakamori
  18. Comparing three models for introduction of competition into railways – is a Big Wolf so Bad after all? By Nash, Chris; Nilsson, Jan-Eric; Link, Heike

  1. By: Simon Loertscher; Markus Reisinger
    Abstract: We analyze the competitive effects of backward vertical integration in a model with oligopolistic firms that exert market power upstream and downstream. In contrast to previous literature, we show that a small degree of vertical integration is always procompetitive because efficiency effects dominate foreclosure effects. Moreover, vertical integration even to monopoly can be procompetitive. With regard to market structure, we find, somewhat surprisingly, that vertical integration is more likely to be procompetitive if the industry is more concentrated. Our model thus suggests that antitrust authorities should be particularly wary of vertical integration in relatively competitive industries. We demonstrate that the quantitative welfare effects can be substantial there.
    Keywords: Vertical Integration; Market Structure; Downstream Oligopsony; Competitive Policy
    JEL: D43 L41 L42
    Date: 2011
  2. By: Evangelos Mitrokostas (University of Portsmouth); Emmanuel Petrakis (University of Crete; Economics, Universitat Jaume I (Castellón, Spain))
    Abstract: We endogenize firms’ organizational structures in a homogenous goods duopoly where firms invest in cost reducing R&D and compete in quantities, and examine their impact on R&D efforts, market performance and social welfare. Each firm’s owner can either delegate to a manager both market competition and R&D investment decisions (Full Delegation strategy) or delegate the market competition decision alone (Partial Delegation strategy). We show that when the initial marginal cost is relatively high, Universal Full Delegation emerges in equilibrium. Otherwise, an asymmetric equilibrium with one owner choosing a Full Delegation strategy and the other a Partial Delegation strategy arises. Welfare is always higher in the asymmetric equilibrium configuration, thus, market and societal incentives are not always aligned. Finally, Universal Partial Delegation can arise in equilibrium only if goods are poor substitutes or if competition is in prices.
    Keywords: Organizational Structure, Strategic Delegation, Innovation, Oligopolistic Industries
    JEL: L1 L22 O33
    Date: 2011
  3. By: Ramon Caminal
    Abstract: The goal of this paper is to study the frequency of new product introductions in monopoly markets where demand is subject to transitory saturation. We focus on those types of goods for which consumers purchase at most one unit of each variety, but repeat purchases in the same product category. The model considers infinitely-lived, forward-looking consumers and firms. We show that the share of potential surplus that a monopolist is able to appropriate increases with the frequency of introduction of new products and the intensity of transitory saturation. If the latter is sufficiently strong then the rate of introduction of new products is higher than socially desirable (excessive dynamic product diversity.)
    Keywords: transitory saturation, product diversity, repeat purchases, demand cycles
    JEL: L12 L13
    Date: 2011–12–12
  4. By: Winand Emons; Claude Fluet
    Abstract: Two firms produce a good with a horizontal and a vertical characteristic called quality. The difference in the unobservable quality levels determines how the firms share the market. We consider two scenarios: in the first one, firms disclose quality; in the second one, they send costly signals thereof. Under non-comparative advertising a firm advertises its own quality, under comparative advertising a firm advertises the quality differential. In either scenario, under comparative advertising the firms never advertise together which they may do under non-comparative advertising. Moreover, under comparative advertising firms do not advertise when the informational value to consumers is small.
    Keywords: Quality, Advertising, Disclosure, Signalling
    JEL: D82 L15 M37
    Date: 2011
  5. By: Christin, Clémence
    Abstract: In this paper, we highlight new conditions under which R&D agreements may have anti-competitive effects. We focus on cases where two firms compete with each other and with a competitive fringe. R&D activities need a specific input available to all firms on a common market, the price of which increases with demand for the input. In such a context, if a firm increases its R&D expenses, it increases the cost of R&D for its rivals. This induces exit from the fringe and may increase the final price. Therefore, by contrast to the case where the cost of R&D for one firm is independent of its rivals' R&D decisions, cooperation between strategic firms on the upstream market may induce more R&D by strategic firms, in order to exclude firms from the fringe and increase the final price. --
    Keywords: Competition policy,Research and Development Agreements,Collusion,Entry deterrence
    JEL: L13 L24 L41
    Date: 2011
  6. By: Boone, Jan; Schottmüller, Christoph
    Abstract: This paper analyzes optimal procurement mechanisms in a setting where the procurement agency has incomplete information concerning the firms' cost functions and cares about quality as well as price. Low type firms are cheaper than high type firms in providing low quality but more expensive when providing high quality. Hence, each type is specialized in a certain quality level. We show that this specialization leads to a bunching of types on profits, i.e. a range of firms with different cost functions receives zero profits and therefore no informational rents. If first best welfare is monotone in the efficiency parameter, the optimal mechanism can be implemented by a simple auction. If first best welfare is U-shaped in type, the optimal mechanism is not efficient in the sense that types providing a lower second best welfare win against types providing a higher second best welfare.
    Keywords: deregulation; procurement; specialization
    JEL: H75 L51
    Date: 2011–12
  7. By: Hanna Halaburda (Strategy Unit, Harvard University); Yaron Yehezkel (The Recanati Graduate School of Business Administration, Tel Aviv University)
    Abstract: In the context of platform competition in a two-sided market, we study how ex-ante uncertainty and ex-post asymmetric information concerning the value of a new technology affects the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead to a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, we consider multi-homing. We find that multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which result in market inefficiency. Second, the model provides a new argument for why it is usually entrants, not incumbents, that bring major technological innovations to the market.
    Keywords: asymmetric information, platform competition, exclusive dealing, technology adoption
    JEL: L15 L41
    Date: 2011–09
  8. By: Ben Youssef, Slim; Breton, Michèle; Zaccour, Georges
    Abstract: We consider a duopoly competing in quantity, where firms can invest in both innovative and absorptive R&D to reduce their unit production cost, and where they benefit from free R&D spillovers between them. We analyze the case where firms act non cooperatively and the case where they cooperate by forming a research joint venture. We show that, in both modes of play, there exists a unique symmetric solution. We find that the investment in innovative R&D is always higher than in absorptive R&D. We also find that the value of the learning parameter has almost no impact on innovative R&D, firms profits, consumer's surplus and social welfare. Finally, differences in investment in absorptive research and social welfare under the two regimes are in opposite directions according to the importance of the free spillover.
    Keywords: Innovative R&D; Absorptive R&D; Learning Parameter; Spillover; Research Joint Venture
    JEL: C7 C61 O32
    Date: 2011–12
  9. By: Daniele Sabbatini (Banca d'Italia)
    Abstract: The Italian and European regulatory framework for patents would benefit from further improvements in order to foster dynamic competition between Italian firms. At the national level the exclusive allocation of the right to patent inventions to universities, rather than to researchers, would promote better commercial exploitation. At the European level a more integrated system of protection (provision of a single patent that is valid in all Member States, the abolition of translation requirements, a unitary system of fees, and the integration of the litigation system) is essential to lower costs and expand the geographic scope of the protection, thus fostering dynamic competition. Further improvements in the language requirements are needed. The objective of reducing the cost of patenting inventions without raising costs for competitors would be better achieved were English the sole official language of the system (instead of the present choice between English, French and German), to make it easier for competitors to know which is the valid version of the patent.
    Keywords: patents, industrial inventions, judicial trial, European patent
    JEL: K11 K41 L51 O31 O32 O34
    Date: 2011–11
  10. By: laino, antonella
    Abstract: When it speaks of Schumpeterian hypothesis we refer to the close relationship that exists between the degree of innovation and market structure. The entrepreneur represented by Schumpeter's is strongly creative and innovative to condition to be able to get e/o to maintain a market power, and thus make a extra profit
    Keywords: Innovation; monopoly; Schumpeter; Market structure
    JEL: D42 L12 A11
    Date: 2011
  11. By: Besanko, David; Doraszelski, Ulrich; Kryukov, Yaroslav
    Abstract: Predatory pricing--a deliberate strategy of pricing aggressively in order to eliminate competitors--is one of the more contentious areas of antitrust policy and its existence and efficacy are widely debated. The purpose of this paper is to formally characterize predatory pricing in a modern industry dynamics framework. We endogenize competitive advantage and industry structure through learning-by-doing. We first show that predation-like behavior arises routinely in our model. Equilibria involving predation-like behavior typically coexist with equilibria involving much less aggressive pricing. To disentangle predatory pricing from mere competition for efficiency on a learning curve we next decompose the equilibrium pricing condition. Our decomposition provides us with a coherent and flexible way to develop alternative characterizations of a firm’s predatory pricing incentives, some of which are motivated by the existing literature while others are novel. We finally measure the impact of the predatory pricing incentives on industry structure, conduct, and performance. We show that forcing a firm to ignore these incentives in setting its price can have a large impact and that this impact stems from eliminating equilibria with predation-like behavior. Along with the predation-like behavior, however, a fair amount of competition for the market is eliminated. Overall, the distinction between predatory pricing and pricing aggressively to pursue efficiency is closely related to the distinction between the advantage-building and advantage-denying motives that our decomposition of the equilibrium pricing condition isolates and measures.
    Keywords: competition policy; industry dynamics; predatory pricing
    JEL: C73 L13 L44
    Date: 2011–12
  12. By: L. Lambertini; G. Leitmann
    Abstract: We adopt a stepwise approach to the analysis of a dynamic oligopoly game in which production makes use of a natural resource and pollutes the environment, starting with simple models where firms' output is not a function of the natural resource to end up with a full-fledged model in which (i) the resource is explicitly considered as an input of production and (ii) the natural resource and pollution interact via the respective state equations. This allows us to show that the relationship between the welfare properties of the economic system and the intensity of competition is sensitive to the degree of accuracy with which the model is constructed.
    JEL: C73 H23 L13 O31 Q2 Q3
    Date: 2011–11
  13. By: Gu, Yiquan; Wenzel, Tobias
    Abstract: This paper studies the relationship between transparency on the consumer side and productivity of firms. We show that more transparent markets are characterized by higher average productivity as firms with low productivity abstain from entering these markets. --
    Keywords: Market Transparency,Firm Productivity,Salop Model,Heterogeneous Firms
    JEL: D24 L13 L15
    Date: 2011
  14. By: Anderson, Simon P. (University of Virginia); Foros, Øystein (Department of Finance and Management Science); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Peitz, Martin (University of Mannheim)
    Abstract: Standard media economics models imply that increased platform competition decreases ad levels and that mergers reduce per-viewer ad prices. The empirical evidence, however, is mixed. We attribute the theoretical predictions to the combined assumptions that there is no advertising congestion and that viewers single-home. Allowing for crowding in viewer attention spans for ads may reverse standard results, as does allowing viewers to multi-home.
    Keywords: Media economics; pricing ads; advertising clutter; information congestion; mergers; entry.
    JEL: D11 D43 L13
    Date: 2011–12–15
  15. By: Filistrucchi, L.; Klein, T.J.; Michielsen, T.O. (Tilburg University, Center for Economic Research)
    Abstract: We compare different methods to assess unilateral merger effects in a two-sided market by applying them to a hypothetical merger in the Dutch newspaper industry. For this, we first specify and estimate a structural model of demand for differentiated products on both the readership and the advertising side of the market. This allows us to recover price elasticities and indirect network effects. Following Filistrucchi, Klein, and Michielsen (2010) marginal costs are then recovered from an oligopoly model of the supply side. We use these estimates of price elasticities, network effects and marginal costs to compare different methods that can be used to evaluate merger effects: We perform a concentration analysis based on the Herfindahl Hirschmann Index, a Small Significant Non-Transitory Increase in Price test, measure Upward Pricing Pressure, and conduct a full merger simulation.
    Keywords: Two-sided markets;newspapers;advertising;network effects;merger simulation;SSNIP;UPP;HHI.
    JEL: L13 L40 L82
    Date: 2011
  16. By: Emiliano Pagnotta; Thomas Philippon
    Abstract: Two forces have reshaped global securities markets in the last decade: Exchanges operate at much faster speeds and the trading landscape has become more fragmented. In order to analyze the positive and normative implications of these evolutions, we study a framework that captures (i) exchanges' incentives to invest in faster trading technologies and (ii) investors' trading and participation decisions. Our model predicts that regulation that protect prices will lead to fragmentation and faster trading speed. Asset prices decrease when there is intermediation competition and are further depressed by price protection. Endogenizing speed can also change the slope of asset demand curves. On normative side, we find that for a given number of exchanges, faster trading is in general socially desirable. Similarly, for a given trading speed, competition among exchange increases participation and welfare. However, when speed is endogenous, competition between exchanges is not necessarily desirable. In particular, speed can be inefficiently high. Our model sheds light on important features of the experience of European and U.S. markets since the implementation of Reg. NMS, and provides some guidance for optimal regulations.
    JEL: G12 L13 L15
    Date: 2011–12
  17. By: Naoki Wakamori
    Abstract: Consumers often purchase more than one differentiated product, assembling a portfolio, which might potentially affect substitution patterns of demand and, as a consequence, oligopolistic firms’ pricing strategies. This paper studies such consumers’ portfolio considerations by developing a structural model that allows for flexible complementarities/substitutabilities depending on consumer attributes and product characteristics. I estimate the model using Japanese household-level data on automobile purchasing decisions. My estimates suggest that complementarities arise when households purchase a combination of one small automobile and one minivan as their portfolio. Ignoring such effects leads to a overstated counterfactual analysis. Simulation results suggest that a policy proposal of repealing the current tax subsidies for small ecofriendly automobiles would decrease the demand for those automobiles by 9%; less than the 14% drop predicted by a standard single discrete choice model.
    Keywords: Economic models; Market structure and pricing
    JEL: D4 L5 Q5
    Date: 2011
  18. By: Nash, Chris (University of Leeds, UK); Nilsson, Jan-Eric (VTI); Link, Heike (DIW, Berlin, Germany)
    Abstract: This paper compares the experience of three European countries with long experience of competition in rail transport – Britain, Sweden and Germany. Britain is characterised by complete separation of infrastructure from operations, competition either for or in the market for the entire passenger network, open access for freight with two large operators and several smaller ones, strong regulation and careful attention to financial incentives. Sweden also has complete vertical separation, competitive tendering for all subsidised services, open access for freight and now also for commercial passenger services. Regulation, although now strengthened, is not as tight as in Britain. At the other extreme, Germany still has the dominant operator and the infrastructure company as subsidiaries to the same holding company, the regulator has had repeated disputes regarding their powers and – although there is some tendering of subsidised passenger services and open access for commercial passenger and freight – the incumbent still dominates the market. According to the general expectations of theoretical reasoning, we would expect the British approach to be the most successful in achieving an efficient, competitive rail system, with Sweden next and Germany least successful. But an examination of subsidy levels and trends in passenger and freight traffic finds that Germany has the slowest growth in public financial support for its railway as well as the lowest fares. Both Britain and Sweden have had faster growth in public financial support than Germany, although this has mainly been in infrastructure renewal and enhancement, and there has been debate as to the adequacy of current infrastructure spending in Germany. On most measures, Britain has lower absolute levels of financial support than Germany as well as faster traffic growth. Sweden clearly has much higher financial support, although this may be the result of low population density. Thus on balance it is not clear that the reform process has worked better in the other countries than in Germany, despite initial expectations. Further in depth research on the reasons for these changes in financial support and traffic levels would be needed to reach a more conclusive answer.
    Keywords: Deregulation; market opening; vertical separation; railway competition
    JEL: D02 H54
    Date: 2011–12–13

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