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on Industrial Competition |
| By: | Timothy F. Bresnahan; Jonathan D. Levin |
| Abstract: | Contractual theories of vertical integration derive firm boundaries as an efficient response to market transaction costs. These theories predict a relationship between underlying features of transactions and observed integration decisions. There has been some progress in testing these predictions, but less progress in quantifying their importance. One difficulty is that empirical applications often must consider firm structure together with industry structure. Research in industrial organization frequently has adopted this perspective, emphasizing how scale and scope economies, and strategic considerations, influence patterns of industry integration. But this research has paid less attention to contractual or organizational details, so that these two major lines of research on vertical integration have proceeded in parallel with only rare intersection. We discuss the value of combining different viewpoints from organizational economics and industrial organization. |
| JEL: | D23 L14 L22 M20 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17889&r=com |
| By: | Alessandro Avenali (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma); Anna D'Annunzio (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma); Pierfrancesco Reverberi (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma) |
| Abstract: | We show how a monopolist in a primary market uses mixed bundling to extract surplus from quality-enhancing investment by a single-product rival in a complementary market, or even force the rival to provide low quality. In our model, bundling does not hinge on commitment ability. Although we assume that bundling creates efficiency gains, we find that bundling reduces consumer surplus and may reduce social welfare, even if the rival is not foreclosed, and investment is not blockaded. Nonetheless, bundling improves welfare when prevents inefficient investment. We propose to check bundled offers via a price test that controls the monopoly component stand-alone price to preserve efficiencies from both bundling and investment. When the rival invests, the test improves consumer surplus and welfare compared with the 'do-nothing' scenario, or a ban on bundling. The test is not consistent with the predatory pricing framework. Qualitative results hold when we endogenize the bundling strategy. |
| Keywords: | Bundling, Vertical differentiation, Price discrimination, Price test |
| JEL: | L13 L41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:aeg:wpaper:2011-2&r=com |
| By: | Rabah Amir (Department of Economics, University of Arizona); Giuseppe De Feo (Department of Economics, University of Pavia) |
| Abstract: | This paper applies the framework of endogenous timing in games to mixed quantity duopoly, wherein a private – domestic or foreign – firm competes with a public, welfare maximizing firm. We show that simultaneous play never emerges as a subgame-perfect equilibrium of the extended game, in sharp contrast to private duopoly games. We provide sufficient conditions for the emergence of public and/or private leadership equilibrium. In all cases, private profits and social welfare are higher than under the corresponding Cournot equilibrium. From a methodological viewpoint we make extensive use of the basic results from the theory of supermodular games in order to avoid common extraneous assumptions such as concavity, existence and uniqueness of the different equilibria, whenever possible. Some policy implications are drawn, in particular those relating to the merits of privatization. |
| Keywords: | Mixed markets, endogenous timing, Cournot equilibrium, Stackelberg equilibrium, privatization. |
| JEL: | C72 D43 H42 L13 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:pav:wpaper:162&r=com |
| By: | Jose L. Moraga-Gonzalez (VU University Amsterdam); Vaiva Petrikaite (University of Groningen) |
| Abstract: | This paper studies the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search for satisfactory deals. In the pre-merger symmetric equilibrium, the probability that a firm is the next one to be visited by a consumer is equal across firms not yet visited. However, in the short-run after a merger, because insiders raise their prices more than what the outsiders do, consumers start searching for good deals at the non-merging stores. Only when they do not find any product satisfactory enough, they continue searching at the merging stores. When search costs are sufficiently large, consumer traffic from the non-merging firms to the merged ones is so small that mergers become unprofitable. This new merger paradox,which is more likely the higher the number of non-merging firms, can be overcome in the mediumto long-run if the merging firms choose to stock their shelves with all the products of the constituent firms, which generates sizable search economies. Such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the outsiders. In that case, consumers visit first the merged entity and the firms outside the merger lose out. Search cost economies may render a merger beneficial for consumers and so overall welfare may increase. |
| Keywords: | mergers; insiders; outsiders; short-run; long-run; consumer search; demand-side economies; economies of search; order of search; sequential search; prominence |
| JEL: | D40 D83 L13 |
| Date: | 2012–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120017&r=com |
| By: | Noemí Navarro (Département d’économique and GRÉDI, Université de Sherbrooke) |
| Abstract: | I analyze monopoly pricing and quality decisions under network effects. High quality premium and low quality punishment are found to depend on how the impact of marginal costs on quality relates to the intensity of the network effect and the optimism of the producer about final demand. More precisely, marginal costs have to be low enough (but not too low) with respect to the intensity of the network effects and/or the optimism about final demand so that higher prices reflect higher quality. A similar conclusion can be drawn about incentives for quality provision, whenever quality is considered endogenous together with price. |
| Keywords: | Network effects, optimal pricing, quality provision |
| JEL: | L12 L14 L15 D42 D82 D83 C7 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:12-01&r=com |
| By: | Bruce Ian Carlin; Florian Ederer |
| Abstract: | Consumer search is not only costly but also tiring. We characterize the intertemporal effects that search fatigue has on oligopoly prices, product proliferation, and the provision of consumer assistance (i.e., advice). These effects vary based on whether search is all-or-nothing or sequential in nature, whether learning takes place, and whether consumers exhibit brand loyalty. We perform welfare analysis and highlight the novel empirical implications that our analysis generates. |
| JEL: | D43 D83 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17895&r=com |
| By: | Juan Luis Jiménez (Facultad de Economía, Empresa y Turismo. Universidad de Las Palmas de Gran Canaria); Jordi Perdiguero (Faculty of Economics, University of Barcelona) |
| Abstract: | Difference-in-Difference (DiD) methods are being increasingly used to analyze the impact of mergers on pricing and other market equilibrium outcomes. Using evidence from an exogenous merger between two retail gasoline companies in a specific market in Spain, this paper shows how concentration did not lead to a price increase. In fact, the conjectural variation model concludes that the existence of a collusive agreement before and after the merger accounts for this result, rather than the existence of efficient gains. This result may explain empirical evidence reported in the literature according to which mergers between firms do not have significant effects on prices. |
| Keywords: | Mergers, Gasoline Market, Difference-in-Difference, Conjectural Variation. JEL classification: L12, L41, L44 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201205&r=com |
| By: | Caglayan, Mustafa; Filiztekin, Alpay |
| Abstract: | This paper examines the role of market structure on the persistence of price deviations from the LOP using monthly actual product prices of 47 items collected from three different types of markets in Istanbul over 1993:01-2008:12. After showing the importance of market structure on the distribution of relative prices, we implement threshold autoregressive models. We find significant differences in average threshold estimates across markets which we explain referring to differing menu costs in each market. Yet, we find no differences in average half-life estimates across markets. We argue that this is due to low search costs in Istanbul. Robustness checks verify our findings. |
| Keywords: | Law of one price; Nonlinearity; TAR models; Market segmentation; Menu and search costs |
| JEL: | E31 F30 C23 |
| Date: | 2012–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:36975&r=com |
| By: | O.A. Carboni |
| Abstract: | This paper employs individual firm data in order to check the existence of industry-spatial effects alongside other microeconomic determinants of R&D investment. Spatial proximity is defined by a measure of firms’ industry distance based on trade intensity between sectors. The spatial model specified here refers to the combined spatial autoregressive model with autoregressive disturbances (SARAR). In modelling the outcome for each location as dependent on a weighted average of the outcomes of other locations, outcomes are determined simultaneously. The results of the spatial two stage least square estimation suggest that in their R&D decision firms benefit from spillovers originating from neighbouring industries. |
| Keywords: | spatial weights; spatial dependence; spatial models; R&D |
| JEL: | O10 O31 R11 C31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cns:cnscwp:201204&r=com |
| By: | Stuart McDonald (School of Economics, The University of Queensland); Mohamad Alghamdi; Bernard Pailthorpe |
| Abstract: | In a seminal paper, Goyal and Moraga-Gonzalez (2001) use an undirected network to characterize knowledge flows between firms engaging in research in an oligopolistic market. In their paper, firms are regarded as inhabiting a research joint venture (RJV), if they share the same edge of the network. These firms are allowed an R&D spillover of 1; the outside firms (firms not sharing an edge in the network) are permitted a constant knowledge spillover that is less than one. We begin our paper by showing that this last assumption has important consequences when dealing with R&D networks of size greater than or equal to six firms. We present examples of topologically non-equivalent networks that have the same degree of connectivity and generate identical outcomes in terms of R&D effort, firm profits and total welfare. We then modify their model so that R&D spillovers decrease as the number of shortest paths increases between any two firms. We show that under product differentiated Cournot and Bertrand competition, we have different outcomes for all economic variables. We also show that R&D effort increases with respect to the number of collaborative links if firms are in a weakly competitive market, whereas it declines if firms are in a more competitive market where products are closer substitutes. We also find that in more competitive markets there is a conflict between the stability and the efficiency of RJVs. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:454&r=com |
| By: | Miettinen, Paavo (Bank of Finland Research) |
| Abstract: | In this paper we consider equilibrium behavior in a Dutch (descending price) auction where the bidders are uninformed of their valuations with probability q and can acquire information about their valuation at a positive cost during the auction. We assume that the information acquisition activity is covert. We characterize the equilibrium behavior in a setting where bidders are ex ante symmetric and have independent private values. We show that, if the number of bidders is large, the Dutch auction produces more revenue than would a first price auction. |
| Keywords: | auctions; information acquisition |
| JEL: | D44 D82 D83 |
| Date: | 2012–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_008&r=com |
| By: | Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia) |
| Abstract: | We propose a model characterized by strategic interactions among an endogenous number of producers and search and matching frictions in the labor market. In line with U.S. data: (i) new firms account for a relatively small share of overall employment, but they create a relevant fraction of new jobs; (ii) firms’ entry is procyclical; (iii) price mark ups are countercyclical, while aggregate profits are procyclical. In response to a technology shock the labor share decreases on impact and overshoots its long run level. Also the propagation on labor market variables is stronger than in the standard search model. We argue that the countercyclicality of the price mark up is the key mechanism for our results. |
| Keywords: | Endogenous Market Structures, Job Creation, Firms’ Entry, Search and Matching Frictions |
| JEL: | E24 E32 L11 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:pav:wpaper:155&r=com |
| By: | Luciano Fanti (Department of Economics, University of Pisa, Italy); Nicola Meccheri (Department of Economics, University of Pisa, Italy) |
| Abstract: | In this paper, we aim at investigating if the conventional wisdom, that an increase of competition linked to a decrease in the degree of product differentiation always reduces firms’ profits, remains true in a unionized duopoly model with labour decreasing returns. In this context, mixed results emerge. In particular, we show that a decrease in the degree of product differentiation may affect wages, hence profits, differently, depending on both the mode of competition in the product market (Cournot or Bertrand competition) and the particular unionization structure (firm-specific or industry-wide union(s)). Interestingly, it is shown that the conventional wisdom can actually be reversed, even if under Bertrand competition only. |
| Keywords: | unionized duopoly, labour decreasing returns, product differentiation, profits |
| JEL: | J43 J50 L13 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:06_12&r=com |
| By: | Luciano Fanti (Department of Economics, University of Pisa, Italy); Nicola Meccheri (Department of Economics, University of Pisa, Italy) |
| Abstract: | Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex production costs) and centralised unionisation in a differentiated duopoly model. It is pointed out that the wage fixed by a monopoly central union in the post-merger case is higher than in the pre-merger/Cournot equilibrium, opening up the possibility that merger reduces profits. Indeed, it is shown that this “reversal result” actually applies when the central union is sufficiently little interested to wages with respect to employment. Moreover, the lower the degree of substitutability between firms’ products and the higher the workers’ reservation wage, the higher ceteris paribus the probability that profits decrease as a result of the merger. |
| Keywords: | merger profitability, unionised duopoly, convex costs |
| JEL: | D43 L13 J50 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:05_12&r=com |
| By: | L. Lambertini; A. Tampieri |
| Abstract: | We investigate the feasibility of horizontal mergers in a homogeneous triopoly where firms compete in quantities and production is polluting the environment. We show that the degree of alignment between private and social incentives increases in the intensity of pollution. |
| JEL: | L13 L41 Q51 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp813&r=com |
| By: | Wassim Daher (Gulf University for Science and Technology - Department of Mathematics and Natural Sciences et Centre d'Economie de la Sorbonne); Harun Aydilek (Gulf University for Science and Technology - Department of Mathematics and Natural Sciences); Fida Karam (Gulf University for Science and Technology - Department of Economics and Finance); Asiye Adydilek (Gulf University for Science and Technology - Department of Economics and Finance) |
| Abstract: | In this paper, we analyze the effect of Cournot competition with differentiated products on the real and financial decisions of a publicly-owned firm, with three different structures in the financial market : monopoly, duopoly and Stackelberg. We shows that the degree of product differentiation does not affect the results found in the literature on insider trading, concerning the effect of the financial market structure on firms' outputs, the revelation of information and the insiders' orders. Besides, firms' output, the amount of information revealed in the stock price, the insiders' trading orders and the owners' profits are independent of the degree of product differentiation. The real market structure through the degree of product differentiation is found to determine the level of the compensation scheme earned by the manager, the market makers' response to the total order flow signal as well as the managers' profits. |
| Keywords: | Insider trading, product differentiation, correlated signals, Kyle model. |
| JEL: | G14 D82 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12014&r=com |
| By: | Giorgio Matteucci (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma); Pierfrancesco Reverberi (Dipartimento di Informatica e Sistemistica "Antonio Ruberti" Sapienza, Universita' di Roma) |
| Abstract: | It is widely argued that international arbitrage, or parallel trade (PT), trades off static against dynamic efficiency so that, compared with a national exhaustion regime of intellectual property rights, worldwide consumer surplus rises at the expense of R&D investment. We show that this common wisdom is rather the exception than the rule. Indeed, quality investment often rises under international exhaustion, since it strengthens vertical differentiation between the original product and parallel imports. In this case, there is no trade-off at all, so that encouraging PT improves welfare, or the reverse trade-off occurs where investment increases and consumer surplus declines, while PT has ambiguous welfare effects. We find that, when allowed to use dual pricing, the R&D firm artificially restores national exhaustion. We also find that the expected trade-off never occurs under non-linear pricing and when the foreign country is regulated, although in such cases welfare rises when PT is banned. |
| Keywords: | Parallel trade; Intellectual Property Rights; R&D investment; Vertical contract; Regulation |
| JEL: | L12 L43 F15 O34 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:aeg:wpaper:2011-5&r=com |
| By: | David Bartolini (Department of Economics, Università Politecnica delle Marche.); Alberto Gaggero (Department of Economics, University of Pavia) |
| Abstract: | This paper conducts an empirical analysis of the determinants of airline alliances. Well established airlines with large passengers' volumes are more likely to participate in an alliance and are also essential for alliance survivability. In line with this finding, older air-lines have a higher probability of being part of an alliance. Airlines operating with high load factors consider alliance participation as a significant alternative to fleet capacity expansion. As their market share grows, alliances become more appealing to airlines. Competitors' decision to enter an alliance tends to have a positive impact on alliance participation. The relatively similar magnitude and effect of the regressors' coefficients across different alliance choices, suggests that the airline's major decision is not to choose a specific alliance, but rather considering whether to enter into an alliance, as a possible strategy within its business model. |
| Keywords: | Discrete choice model, Oneworld, Sky Team, Star Alliance. |
| JEL: | C23 L10 L93 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:pav:wpaper:165&r=com |
| By: | Chong, T.T.L.; Lu, L.; Ongena, S. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: Banking competition may enhance or hinder the financing of small and medium enterprises. Using a survey on the financing of such enterprises in China, combined with detailed bank branch information, we investigate how concentration in local banking market affects the availability of credit. We find that lower market concentration alleviates financing constraints. The widespread presence of joint-stock banks has a larger effect on alleviating these constraints, than the presence of city commercial banks, while the presence of state-owned banks has a smaller effect. (83 words) |
| Keywords: | Banking Competition;SMEs Financing;Credit Constraints. |
| JEL: | D41 D43 G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012013&r=com |
| By: | Matthew Gaertner; Sarah Sanya |
| Abstract: | This paper is an empirical analysis of competitiveness in the banking system of four out of the five East African Community (EAC) countries2. The results show that the degree of competition is low due to a combination of structural and socio-economic factors. By way of preview, the analysis ranks the countries in terms of banking sector competitiveness in the following order: Kenya, Tanzania, Uganda and Rwanda. |
| Keywords: | Banking systems , Competition , Cross country analysis , East Africa , Markets , |
| Date: | 2012–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/32&r=com |
| By: | Lunn, Pete |
| Abstract: | This paper argues that telecommunications markets present the consumer with a decision-making environment that is particularly likely to be prone to established biases in consumer decision-making. The analysis identifies four properties of telecommunications markets, which in combination are probably unique and which may make the sector prey to biases identified by behavioural economics. The analysis offers a range of known behavioural phenomena that, first, may help to explain the generally low levels of switching between telecommunications providers and, second, could result in failure to select optimum contracts, because of inaccurate expectations of usage or time inconsistent preferences. While more research is required to assess the merit of these hypotheses, they raise the possibility that telecommunications markets may be inefficient and prone to less effective competition than many other consumer markets. Potential policy responses are also discussed. |
| Keywords: | Policy/Telecommunications/Decision-making biases/Behavioural economics/Regulation |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp417&r=com |