nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒03‒14
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Endogenous Timing in Quality Investments and Price Competition By L. Lambertini; A. Tampieri
  2. Asymmetric R&D alliances and coopetitive games By Carfì, David; Bagileri, Daniela; Dagnino, Gianbattista
  3. The strategic interplay between bundling and merging in complementary markets By A. Mantovani; J. Vandekerckhove
  4. Endogenous Product Choice : A Progress Report By Crawford, Gregory S.
  5. Multiproduct search By Zhou, Jidong
  6. The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition By Swati Dhingra; John Morrow
  7. Asymmetric Cournot duopoly: game complete analysis By Carfì, David; Perrone, Emanuele
  8. Coarse Correlated Equilibria and Sunspots By Indrajit Ray; Sonali Sen Gupta
  9. Private and public incentive to reduce seasonality: A theoretical model By Cellini, Roberto; Rizzo, Giuseppe
  10. Does Reducing Spatial Differentiation Increase Product Differentiation? Effects of Zoning on Retail Entry and Format Variety By Sumon Datta; K. Sudhir
  11. Innovation in EU merger control: walking the talk By Reinhilde Veugelers
  12. The evolvability of business and the role of antitrust By Ian Wilkinson
  13. The Impact of “Rollover” Contracts on Switching Costs in the UK Voice Market : Evidence from Disaggregate Customer Billing Data By Crawford, Gregory S.; Tosini, Nicola; Waehrer, Keith

  1. By: L. Lambertini; A. Tampieri
    Abstract: We modify the price-setting version of the vertically differentiated duopoly model by Aoki (2003) by introducing an extended game in which firms noncooperatively choose the timing of moves at the quality stage. Our results show that there are multiple equilibria in pure strategies, in which firms always select sequential play at the quality stage. We also investigate the mixed-strategy equilibrium, revealing that the probability of generating outcomes out of equilibrium is higher than its complement to one. In the alternative of full market coverage, we show that the quality stage is solved in dominant strategies and therefore the choice of roles becomes irrelevant as the Nash and Stackelberg solutions coincide.
    JEL: C73 L13
    Date: 2012–03
  2. By: Carfì, David; Bagileri, Daniela; Dagnino, Gianbattista
    Abstract: In this paper we show how the study of asymmetric R\&D alliances, that are those between young and small firms and large and MNEs firms for knowledge exploration and/or exploitation, requires the adoption of a coopetitive framework which consider both collaboration and competition. We draw upon the literature on asymmetric R&D collaboration and coopetition to propose a mathematical model for the coopetitive games which is particularly suitable for exploring asymmetric R&D alliances.
    Keywords: R&D alliances; coopetitive games
    JEL: D7 M1 D74 C7 O32 M54 O3 J5
    Date: 2012
  3. By: A. Mantovani; J. Vandekerckhove
    Abstract: In this paper, two pairs of complementors have to decide whether to merge and eventually bundle their products. Depending on the degree of competitive pressure in the market, either both pairs decide to merge (with or without bundling), or only one pair merges and bundles, while rivals remain independent. The latter case can very harmful for consumers as it brings surge in prices. We also consider the case in which one pair moves first. Interestingly, we find a parametric region where first movers merge but refrain from bundling, to not induce rivals to merge as well.
    JEL: D43 L13 L41
    Date: 2012–03
  4. By: Crawford, Gregory S. (Department of Economics, University of Warwick)
    Abstract: Empirical models of differentiated product demand are widely used by both academics and practitioners. While these methods treat carefully the potential endogeneity of price, until recently they have assumed the number and characteristics of the products o.ered by firms are exogenous. This paper presents a progress report on an ongoing research agenda to address this issue. First, it summarizes how the appropriate choice of “orthogonal” instruments can yield consistent estimates of own and cross-price elasticities in the presence of endogenous product characteristics. Second, it summarizes how to measure “quality markups” and the welfare consequences of endogenous product quality in U.S. cable television markets. Related papers and extensions to consider multiple product characteristics and dynamics are also discussed.
    Date: 2012
  5. By: Zhou, Jidong
    Abstract: This paper presents a sequential search model where consumers look for several products among competitive multiproduct …rms. In a multiproduct search mar- ket, both consumer behavior and …rm behavior exhibit di¤erent features from the single-product case: a consumer often returns to previously visited …rms before running out of options; and prices can decrease with search costs and increase with the number of …rms. The framework is then extended in two directions. First, by introducing both single-product and multiproduct searchers, the model can explain the phenomenon of countercyclical pricing, i.e., prices of many retail products decline during peak-demand periods. Second, by allowing …rms to use bundling strategies, the model sheds new light on how bundling a¤ects market performance. In a search environment, bundling tends to reduce consumer search intensity, which can soften competition and reverse the usual welfare assessment of competitive bundling in a perfect information setting.
    Keywords: consumer search; oligopoly; multiproduct pricing; countercyclical pricing; bundling
    JEL: D11 L13 D83 D43
    Date: 2011–12–01
  6. By: Swati Dhingra; John Morrow
    Abstract: A fundamental question in monopolistic competition theory is whether the market allocates resources efficiently. This paper generalizes the Spence-Dixit-Stiglitz framework to heterogeneous firms, addressing when the market provides optimal quantities, variety and productivity. Under constant elasticity demand, each firm prices above its average cost, yet we show market allocations are efficient. When demand elasticities vary, market allocations are not efficient and reflect the distortions of imperfect competition. After determining the nature of market distortions, we investigate how integration may serve as a remedy to imperfect competition. Both market distortions and the impact of integration depend on two demand side elasticities, and we suggest richer demand structures to pin down these elasticities. We also show that integration eliminates distortions, provided the post-integration market is sufficiently large.
    Keywords: Selection, monopolistic competition, efficiency, productivity, social welfare, demand elasticity
    JEL: F1 L1 D6
    Date: 2012–02
  7. By: Carfì, David; Perrone, Emanuele
    Abstract: In this paper we apply the Complete Analysis of Differentiable Games (introduced by D. Carfì in [3], [6], [8], [9]; already employed by himself and others in [4], [5], [7]) and some new algorithms using the software wxMaxima 11.04.0, in order to reach a total scenario knowledge (that is the total knowledge of the payoff space of the interaction) of the classic Cournot Duopoly (1838), viewed as a complex interaction between two competitive subjects, in a particularly interesting asymmetric case. The software wxMaxima is an interface for the computer algebra system Maxima. Maxima is a system for the manipulation of symbolic and numerical expressions, including differentiation, sets, vectors and matrices.
    Keywords: Asymmetric Cournot Duopoly; Normal-form Games; Software algorithms in Microeconomic Policy; Complete Analysis of a normal-form game; Pareto optima; valuation of Nash equilibriums; Bargaining solutions
    JEL: D2 C02 C7
    Date: 2012
  8. By: Indrajit Ray; Sonali Sen Gupta
    Abstract: For duopoly models, we analyse the concept of coarse correlated equilibrium using simple symmetric devices that the players choose to commit to in equilibrium. In a linear duopoly game, we provice that Nash-centric devices, involving a sunspot structure, are simple symmetric coarse correlated equilibria. Any small unilaterial perturbation from such a structure fails to be equilibrium.
    Keywords: Duopoly, Coarse correlation, Simple devices, Sunspots
    JEL: C72
    Date: 2012–02
  9. By: Cellini, Roberto; Rizzo, Giuseppe
    Abstract: This paper presents a theoretical model to investigate the incentive of private producer and policymaker to reduce seasonality in a given market, where consumers derive different utilities from the consumption of the good in different seasons. The (seasonal) product differentiation is modelled along the lines of the contributions of Gabszewicz and Thisse (Price Competition, Quality and Income Disparities, 1979) and Shaked and Sutton (Relaxing Price Competition through Product Differentiation, 1982). The authors take into consideration that investments are possible to reduce the degree of seasonality. They show that, for a wide set of parameter configuration, the policy maker finds it optimal to make more effort to reduce seasonality as compared to private producers. The theoretical conclusion is consistent with empirical and anecdotical evidence, especially in the field of tourism markets. --
    Keywords: seasonality,tourism,public spending
    JEL: D29 L12 L83
    Date: 2012
  10. By: Sumon Datta (Krannert School of Management, Purdue University); K. Sudhir (Cowles Foundation and Yale School of Management)
    Abstract: This paper investigates the impact of spatial zoning restrictions on retail market outcomes. We estimate a structural model of entry, location and format choice across a large number of markets in the presence of zoning restrictions. The paper contributes to the literature in three ways: First, the paper demonstrates that estimates of factors affecting market potential and competitive intensity in the extant literature on entry and location choice that do not account for zoning restrictions are significantly biased. Second, the cross-market variations in zoning regulations helps us test and provide evidence for the theory that constraints on spatial differentiation will lead to greater product differentiation. Finally, we provide qualitative insight on how zoning impacts retail entry and format variety; in particular we evaluate the impact of prototypical zoning arrangements such as "centralized," "neighborhood," and "outskirt" zoning on entry and format variety.
    Keywords: Product Variety, Zoning, Entry, Location Choice, Retail Competition, Discrete Games, Multiple Equilibria, Structural Modeling
    Date: 2012–03
  11. By: Reinhilde Veugelers
    Abstract: European Union policymakers have in principle put innovation at the heart of competitiveness, in particular in the Europe 2020 strategy. But in merger control, assessments of the innovation effects of mergers are inadequate, even though mergers and acquisitions can have a significant impact on the development of the structure of an industry, and on its capability to innovate. EU merger control rules include scope for assessing the innovation effects of mergers, but in practice, the European Commission's directorate-general for competition (DG COMP) is not â??walking the talkâ??. Innovation effects are only assessed when claimed by parties to a merger, and this happens rarely. Where innovation effects have been claimed, they have not been decisive in any case, meaning DG COMP has not considered them important enough to influence its decision. A framework should be put in place that makes the reporting of efficiency-related information by the merging parties mandatory, so that innovation effects can be properly assessed for all mergers. In addition, models can be used to make an assessment of the longer-term innovation effects of a merger, and to help inform decision-making. The author acknowledges the excellent research assistance of Joan de Solà-Morales and Hendrik Meder, and would like to thank Lars-Hendrik Röller for discussing and commenting on earlier versions of the paper.
    Date: 2012–02
  12. By: Ian Wilkinson (The University of Sydney)
    Abstract: In this paper, based on theories of complex adaptive systems, I argue that the main case for antitrust policy should be extended to include the criteria of "evolvability." To date, the main case focuses on economizing, including market power as a key filter for identifying suspect cases. Both production and transaction costs are considered as part of economizing and other factors are use to consider the benefits of different industry structures. CAS analysis focuses attention on dynamics, evolution and networks. As I will show, the criteria of evolvability requires us to consider various types of direct and indirect network impacts in business that go beyond the traditional focus on production and transaction costs. These network impacts stem from the connections between transactions and relations over time and place, including how business arrangements at one time, limit or enable arrangements in the future. An assessment of the impacts, I argue, can and should be included in the rules of antitrust and in the processes of antitrust case analysis and decision making.
    Date: 2012–03
  13. By: Crawford, Gregory S. (Department of Economics, University of Warwick); Tosini, Nicola; Waehrer, Keith
    Abstract: In February 2008, British Telecommunications (BT) introduced automatically renewing, or “rollover”, contracts into the UK market for fixed-voice telephone service. These contracts included a 12-month Minimum Contract Period (MCP) with associated Early Termination Charges (ETCs). Unless customers opted out, at the end of the 12 months they would automatically be rolled over into a new MCP and face new ETCs if they later wished to leave BT. Using a unique, disaggregate, customer billing dataset, we measure the impact of rollover contracts on BT customers’ decision to switch to another provider. We find that, controlling for the effects of tenure, broadband purchase, price discounts, and self-selection, rollover households switch after their first MCP 34.8% (54.8%) less than comparable customers on standard plans (fixed-term contracts). These imply rollover contracts induce switching costs on the order of 33.0% of the monthly price of the average BT fixed-voice telephone service. This raises significant concerns about the competitive effects of such contracts n media and telecommunications markets.
    Date: 2012

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