nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒02‒01
ten papers chosen by
Russell Pittman
US Department of Justice

  1. Signalling rivalry and quality uncertainty in a duopoly By Bester, Helmut; Demuth, Juri
  2. 24/7 By Miguel Flores
  3. Technical progress and product reliability under competition and monopoly By Donald A. R. George (University of Edinburgh)
  4. What If Marketers Put Their Customers ahead of Profits? By Shriver, Scott K.; Srinivasan, V. Seenu
  5. Reputation, Competition, and Entry in Procurement By Spagnolo, Giancarlo
  6. Once Beaten, Never Again: Imitation in Two-Player Potential Games By Duersch, Peter; Oechssler, Jorg; Schipper, Burkhard C.
  7. Resource-based theory and mergers & acquisitions success By Grill, Plina; Bresser, Rudi K. F.
  8. On price competition with market share delegation contracts By M. Kopel; L. Lambertini
  9. Regulating advertising in the presence of public service broadcasting By Stühmeier, Torben; Wenzel, Tobias
  10. Does self-regulation of advertisement length improve consumer welfare? By Taisuke Matsubae; Noriaki Matsushima

  1. By: Bester, Helmut; Demuth, Juri
    Abstract: This paper considers a market in which only the incumbent's quality is publicly known. The entrant's quality is observed by the incumbent and some fraction of informed consumers. This leads to price signalling rivalry between the duopolists, because the incumbent gains and the entrant loses when observed prices make the uninformed consumers more pessimistic about the entrant's quality. When the uninformed consumers' beliefs satisfy the intuitive criterion and the unprejudiced belief refinement, only a two-sided separating equilibrium can exist and prices are identical to the full information outcome. --
    Keywords: quality uncertainty,signalling,oligopoly
    JEL: D43 D82 L15
    Date: 2011
  2. By: Miguel Flores
    Abstract: This paper studies entry in a market where firms compete in shopping hours and prices. I show that an incumbent firm is able to choose its opening hours strategically to deter entry of a new firm. The potential effects of entry deterrence on social welfare depends on the degree of product differentiation. Entry deterrence increases social welfare when product differentiation is low, while it reduces social welfare when product differentiation is high. In terms of policy, the result of this model suggests that shopping hours deregulation is not always welfare enhancing. 
    Keywords: Entry; Product Differentiation; Shopping Hours
    JEL: D21 L51 L22
    Date: 2011–10
  3. By: Donald A. R. George (University of Edinburgh)
    Abstract: Technical progress lowers costs and prices but appears to have an ambiguous effect on product reliabilty. This paper presents a simple model which explains this observation.
    Date: 2011–12–09
  4. By: Shriver, Scott K. (Stanford University); Srinivasan, V. Seenu (Stanford University)
    Abstract: We examine a duopoly where one of the firms does not maximize profit, but instead maximizes customer surplus subject to a profit constraint. (Customer surplus for a firm is the sum of its customers' individual consumer surpluses, i.e., the dollar value the customer attaches to the product minus its price.) For the surplus-maximizing firm, profit is constrained to be at least X percent (where X% might be, say 80-90%) of the profit it would have obtained under a profit maximization objective. The model assumes customer willingness to pay for quality is uniformly distributed and that customers follow a simple decision rule: when presented with two products of known quality and price, purchase one unit of the product which maximizes surplus, or if surplus is negative for both products, elect not to purchase any product. We further assume that firms' marginal cost of production is convex (quadratic) in quality. Competition between firms is modeled as a two-stage game, which is solvable by backward induction. In the first stage, one of the firms, whose identity is exogenously specified, moves first and decides its quality level, fully anticipating the quality response of the second firm and the subsequent price competition. The second firm observes the first firm's quality level and then decides its own quality level, anticipating the subsequent price competition. In the second stage, firms take qualities as given and choose prices simultaneously in accordance with a Nash equilibrium. Two possibilities are considered: (a) the first mover is the profit-maximizing firm, and (b) the first mover is the customer surplus-maximizing firm. We compare the results to the corresponding base case of Moorthy (1988) where both firms are profit-maximizing. We find that firms can deliver significant additional value to their customers by forgoing small amounts of profit. However, the effectiveness of this strategy depends upon which firm is the first mover. When the surplus-maximizing firm moves first, a 1% increase in its customers' surplus "costs" the firm approximately 2% of its potential profits. By contrast, when the profit-maximizing firm chooses quality first, we find that sacrificing 20% of profits is sufficient for the surplus-maximizing firm to more than quadruple the customer surplus it would have provided under a profit-maximizing objective. This outcome results from the surplus-maximizing firm leap-frogging its competitor to become the high quality producer.
    Date: 2011–12
  5. By: Spagnolo, Giancarlo (Stockholm Institute of Transition Economics)
    Abstract: Based on my recent work with several co-authors this paper explores the relationship between discretion, reputation, competition and entry in procurement markets. I focus especially on public procurement, which is highly regulated for accountability and trade reasons. In Europe regulation constrains the use of past performance information to select contractors while in the US its use is encouraged. I present some novel evidence on the benefits of allowing buyers to use reputational indicators based on past performance and discuss the complementary roles of discretion and restricted competition in reinforcing relational/reputational forces, both in theory and in a new empirical study on the effects restricted rather than open auctions. I conclude reporting preliminary results form a laboratory experiment showing that reputational mechanisms can be designed to stimulate rather than hindering new entry.
    Keywords: Accountability; Discretion; Entry; Incomplete contracts; Limited enforcement; Past performance; Procurement; Quality; Relational contracts; Reputation; Restricted auctions.
    JEL: H57 L14 L15 L24
    Date: 2012–01–07
  6. By: Duersch, Peter (University of Heidelberg); Oechssler, Jorg (University of Heidelberg); Schipper, Burkhard C. (University of CA, Davis)
    Abstract: We show that in symmetric two-player exact potential games, the simple decision rule "imitate-if-better" cannot be beaten by any strategy in a repeated game by more than the maximal payoff difference of the one-period game. Our results apply to many interesting games including examples like 2x2 games, Cournot duopoly, price competition, public goods games, common pool resource games, and minimum effort coordination games.
    JEL: C72 C73 D43
    Date: 2011–12
  7. By: Grill, Plina; Bresser, Rudi K. F.
    Abstract: Mergers & acquisitions (M&A) are most popular external growth strategies. While the number of M&A has been increasing during the past decades, on average, only the shareholders of target firms gain value during the acquisitions process, while acquirers do not receive abnormal positive returns. This paper analyses the impact of strategically valuable resources on the success of M&A decisions. We test complementary resource-based hypotheses regarding the value of M&A for the shareholders of both transaction partners. Our sample consists of transactions in the pharmaceutical and biotechnological industry. The results of our study show that the shareholders of both transaction partners will gain above average positive returns only when the acquirer and the target own and combine strategically valuable resources and capabilities. --
    Date: 2011
  8. By: M. Kopel; L. Lambertini
    Abstract: We identify a mistake in the specification of the demand system used in the strategic delegation model based on market shares by Jansen et al. (2007), whereby the price remains above marginal cost when goods are homogeneous. After amending this aspect, we perform a profit comparison with the alternative delegation scheme à la Fershtman and Judd (1987).
    JEL: L13
    Date: 2012–01
  9. By: Stühmeier, Torben; Wenzel, Tobias
    Abstract: Television advertising levels in Europe are regulated according to the Audiovisual Service Media Directive where member states of the European Union usually impose stricter regulation on their Public Service Broadcasting (PSB) channels. The present model evaluates the effects of symmetric and asymmetric regulation of ad levels on competition for viewers and advertisers in a duopoly framework where a public and a private broadcaster compete. If both broadcasters face the same advertising cap, regulation can be profit-increasing for both channels. If the public broadcaster is more strictly regulated, this may benefit the commercial rival if higher revenues in the advertising market outweigh the loss in viewership. --
    Keywords: media markets,two-sided markets
    JEL: L82 L13 D43
    Date: 2012
  10. By: Taisuke Matsubae; Noriaki Matsushima
    Abstract: In Japan, TV platforms regulate themselves as to the length of the advertisements they air. Using modified Hotelling models, we investigate whether such self-regulation improves consumer and social welfare or not. When all consumers choose a single TV program (the utility functions of consumers satisfy the standard "full-coverage" condition), self-regulation always reduces consumer welfare. It improves social welfare only if the advertisement revenue of each platform is not small and the cost parameter of investments in improving the quality of TV programs is small. When some consumers have outside options (the standard "full-coverage" condition is not satisfied), self-regulation can benefit consumers because it increases the number of consumers who watch TV programs.
    Date: 2012–01

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