nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒03‒21
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Beyond the Need to Boast: Cost Concealment Incentives and Exit in Cournot Oligopoly By Jos Jansen
  2. Identification and estimation of dynamic games when players' beliefs are not in equilibrium By Victor Aguirregabiria; Arvind Magesan
  3. Timing of investments and third degree price discrimination in intermediate good markets By Li, Youping
  4. Deterministic versus Random Utility: Implied Patterns of Vertical Product Differentiation in a Multi-Product Monopoly By Christiaan Behrens; Mark Lijesen; Eric Pels; Erik Verhoef
  5. Competitive Pressure: Competitive Dynamics as Reactions to Multiple Rivals By Leon Zucchini; Tobias Kretschmer
  6. Intransparent Markets and Intra-Industry Trade By Christian Gormsen
  7. Contributions to oligopoly theory By Pavlopoulos, Antonios
  8. Certification of Corporate Social Responsibility Activities in Oligopolistic Markets By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  9. Insider Trading With Product Differentiation By Wassim Daher; Harun Aydilek; Fida Karam; Asiye Aydilek
  10. The Arm's Length Principle and Tacit Collusion By Choe, Chongwoo; Matsushima, Noriaki
  11. Commitments in Antitrust By Philippe Choné; Saïd Souam; Arnold Vialfont
  12. The institutional framework for doing sports business: Principles of EU competition policy in sports markets By Budzinski, Oliver
  13. Some comparative economics of the organization of sports: Competition and regulation in north American vs. European professional team sports leagues By Wladimir Andreff
  14. Quality choice and advertising regulation in broadcasting markets By Francisco Martínez-Sánchez; Miguel González-Maestre
  15. How does bank competition affect systemic stability ? By Anginer, Deniz; Demirguc-Kunt, Asli; Zhu, Min
  16. Paving the Way for Unfair Competition: The Imposition of EU Anti-Dumping Duties on Ceramic Tiles from China By Kasteng, Jonas
  17. Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry By Varela-Irimia, Xosé-Luís
  18. “Price differences between domestic and international air markets: an empirical application to routes from Gran Canaria” By Xavier Fageda; Juan Luis Jiménez; Carlos Díaz Santamaría

  1. By: Jos Jansen
    Abstract: This paper studies the incentives for production cost disclosure in an asymmetric Cournot oligopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitors from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firms is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit.
    Keywords: Cournot oligopoly, information disclosure, exit, cost asymmetry, precommitment
    JEL: D82 L13
    Date: 2012–02–10
  2. By: Victor Aguirregabiria; Arvind Magesan
    Abstract: This paper deals with the identification and estimation of dynamic games when players' beliefs about other players' actions are biased, i.e., beliefs do not represent the probability distribution of the actual behavior of other players conditional on the information available. First, we show that a exclusion restriction, typically used to identify empirical games, provides testable nonparametric restrictions of the null hypothesis of equilibrium beliefs. Second, we prove that this exclusion restriction, together with consistent estimates of beliefs at several points in the support of the special state variable (i.e., the variable involved in the exclusion restriction), is sufficient for nonparametric point-identification of players' payoff and belief functions. The consistent estimates of beliefs at some points of support may come either from an assumption of unbiased beliefs at these points in the state space, or from available data on elicited beliefs for some values of the state variables. Third, we propose a simple two-step estimation method and a sequential generalization of the method that improves its asymptotic and finite sample properties. We illustrate our model and methods using both Monte Carlo experiments and an empirical application of a dynamic game of store location by retail chains. The key conditions for the identification of beliefs and payoffs in our application are the following: (a) the previous year's network of stores of the competitor does not have a direct effect on the profit of a firm, but the firm's own network of stores at previous year does affect its profit because the existence of sunk entry costs and economies of density in these costs; and (b) firms' beliefs are unbiased in those markets that are close, in a geographic sense, to the opponent's network of stores, though beliefs are unrestricted, and potentially biased, for unexplored markets which are farther away from the competitors' network. Our estimates show significant evidence of biased beliefs.
    Keywords: Dynamic games; Rational behavior; Rationalizability; Identification; Estimation; Market entry-exit.
    JEL: C18 C51 C72 L13
    Date: 2012–03–14
  3. By: Li, Youping
    Abstract: We study third degree price discrimination in intermediate good markets, in which costs of production for the downstream firms are determined by their investment choices. We focus on the effect of the sequence of firm actions and analyze two models with different timing of investments, before or after the upstream monopolist sets the input prices. When investments are determined after the prices are set, an indirect effect of input prices on the derived demand from downstream firms must be taken into account, due to the change of investment incentives. This causes the upstream firm to possibly charge the more efficient downstream firm a lower price, a result contrasting previous findings. Using linear demand and quadratic investment costs, we show that not only the downstream firms but also the upstream monopolist prefers the sequence of play in the latter model, i.e., it benefits from committing to prices before investments are undertaken. A change of timing from the first model to the second constitutes a strict Pareto improvement.
    Keywords: price discrimination; intermediate good; investments; timing
    JEL: L10 D40
    Date: 2011–09
  4. By: Christiaan Behrens (VU University Amsterdam); Mark Lijesen (VU University Amsterdam); Eric Pels (VU University Amsterdam); Erik Verhoef (VU University Amsterdam)
    Abstract: In this article we study patterns of vertical product differentiation in a multi-product monopoly using a random utility model. Prior research shows that applying such a model in a multi-product setting implies symmetric patterns of product differentiation in which all product variants of a single firm have the same characteristics. Assuming that preferences differ across consumers and allowing for unobserved demand heterogeneity, we numerically show the existence of asymmetric, fully differentiated, patterns of vertical product differentiation in which the monopolist maximises profits by setting prices and qualities. In particular, we show that the patterns of vertical product differentiation depend crucially on the level of unobserved demand heterogeneity and the observed dispersion of willingness to pay for quality. Only if unobserved demand heterogeneity is small relative to the observed dispersion, asymmetric, fully differentiated, equilibriums exist. Furthermore, we find in our model that the level of unobserved heterogeneity and the dispersion of willingness to pay for quality do not affect the relative welfare efficiency of the monopolist.
    Keywords: Vertical product differentiation; market segmentation; multi-product monopoly; random utility models
    JEL: D21 D42 L11 L12
    Date: 2012–03–13
  5. By: Leon Zucchini; Tobias Kretschmer
    Abstract: Competitive dynamics research has focused primarily on interactions between dyads of firms. Drawing on the awareness-motivation-capability framework and strategic group theory we extend this by proposing that firms? actions are influenced by perceived competitive pressure resulting from actions by several rivals. We predict that firms? action magnitude is influenced by the total number of rival actions accumulating in the market, and that this effect is moderated by strategic group membership. We test this using data on the German mobile telephony market and find them supported: the magnitude of firm?s actions is influenced by a buildup of actions by multiple rivals, and firms react more strongly to strategically similar rivals.
    Keywords: Competitive rivalry ; competitive dynamics ; strategic groups ; mobile
    Date: 2012
  6. By: Christian Gormsen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Buyers are typically unaware of the full set of offers when making a purchase. This paper examines how international trade interacts with this problem of market intransparency. Sellers must communicate their offers through costly advertising, but cannot reach all buyers. Consequently, no market clearing price exists, and sellers randomize over an equilibrium price distribution. Sellers will wish to spread advertisement costs across markets, leading to international trade, which would not take place under complete information. Buyers then receive more offers, leading to lower prices and buyer surplus gains. Sellers in the model are identical, but appear heterogeneous due to their price randomization. If sellers differ slightly, these differences will be greatly magnified. Finally, the model rationalizes very infrequent exporters as firms offering disadvantageous, but profitable, deals to foreign buyers.
    Keywords: Advertising, intra-industry trade, firm heterogeneity, price dispersion.
    Date: 2012–03
  7. By: Pavlopoulos, Antonios
    Abstract: In the context of the Cournot model a demand function parameter is treated as the dual of the firm’s profit. Following the demand theory’s duality approach it’s possible to introduce the concept of the compensated reaction function (or compensated best-response function), as well as the concepts of net strategic complementarity/substitutability. The firm’s reaction function is analysed into a type-1 and a type-2 effect, which are the counterparts, respectively, of the demand theory substitution and income effects. Further, new results are obtained regarding Cournot equilibrium in the case of profit functions which are homogeneous in their arguments.
    Keywords: Cournot model; compensated reaction function; net strategic complementarity/substitutability
    JEL: L13 D43
    Date: 2012–02–25
  8. By: Constantine Manasakis (Department of Political Science, University of Crete); Evangelos Mitrokostas (Department of Economics, University of Portsmouth); Emmanuel Petrakis (Department of Economics, University of Crete)
    Abstract: We investigate the impact of alternative certifying institutions on firms’ incentives to engage in costly Corporate Social Responsibility (CSR) activities as well as their relative market and societal implications. We find that the CSR certification standard is the lowest under for-profit private certifiers and the highest under a Non Governmental Organization (NGO), with the standard of a welfare maximizing public certifier lying in between. Yet, regarding industry output, this ranking is reversed. Certification of CSR activities is welfare enhancing for consumers and firms and should be encouraged. Finally, the market and societal outcomes of CSR certification depend crucially on whether certification takes place before or after firms’ CSR activities.
    Keywords: Corporate Social Responsibility, Oligopoly, Vertical Differentiation, Certification
    JEL: L13 L5 M14
    Date: 2012
  9. By: Wassim Daher (Gulf University for Science and Technology (GUST) - Department of Mathematics and Natural Sciences, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Harun Aydilek (Gulf University for Science and Technology (GUST) - Department of Mathematics and Natural Sciences); Fida Karam (Gulf University for Science and Technology (GUST) - Department of Economics and Finance); Asiye Aydilek (Gulf University for Science and Technology (GUST) - 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.
    Date: 2012–02
  10. By: Choe, Chongwoo; Matsushima, Noriaki
    Abstract: The arm's length principle states that the transfer price between two associated enterprises should be the price that would be paid for similar goods in similar circumstances by unrelated parties dealing at arm's length with each other. This paper examines the effect of the arm's length principle on dynamic competition in imperfectly competitive markets. It is shown that the arm's length principle renders tacit collusion more stable. This is true whether firms have exclusive dealings with unrelated parties or compete for the demand from unrelated parties.
    Keywords: Transfer price; arm's length principle; tacit collusion; stability of collusion
    JEL: M41 L13 L41 D43
    Date: 2011–11–23
  11. By: Philippe Choné; Saïd Souam; Arnold Vialfont
    Abstract: Competition agencies have the power to close an antitrust case in return for the commitment to end the alleged infringement. We examine how such a procedure affects deterrence and consumer welfare. We first show that it lowers the deterrent effect of competition policy. However, under asymmetric information, commitments may enhance consumer surplus with shortened proceedings and avoidance of trial type-II errors. The variation of consumer harm w.r.t. the firm's gain from the practice determines the optimal usage frequency of this negotiation tool. Finally, we show that trial and commitments may be complements as the latter is not always an answer to a lack of efficiency of the agency.
    Keywords: Commitments in antitrust, Plea bargaining, Consumer Surplus
    JEL: K21 K42 L41
    Date: 2012
  12. By: Budzinski, Oliver
    Abstract: The competition rules and policy framework of the European Union represents an important institutional restriction for doing sports business. Driven by the courts, the 2007 overhaul of the approach and methodology has increased the scope of competition policy towards sports associations and clubs. Nowadays, virtually all activities of sports associations that govern and organize a sports discipline with business elements are subject to antitrust rules. This includes genuine sporting rules that are essential for a league, championship or tournament to come into existence. Of course, 'real' business or commercial activities like ticket selling, marketing of broadcasting rights, etc. also have to comply with competition rules. Regulatory activities of sports associations comply with European competition rules if they pursuit a legitimate objective, its restrictive effects are inherent to that objective and proportionate to it. This new approach offers important orientation for the strategy choice of sports associations, clubs and related enterprises. Since this assessment is done following a case-by-case approach, however, neither a blacklist of anticompetitive nor a whitelist of procompetitive sporting rules can be derived. Instead, conclusions can be drawn only from the existing case decisions - but, unfortunately, this leaves many aspects open. With respect to business activities, the focus of European competition policy is on centralized marketing arrangements bundling media rights. These constitute cartels and are viewed to be anticompetitive in nature. However, they may be exempted from the cartel prohibition on efficiency and consumer benefits considerations. Here, a detailed list of conditions exists that centralized marketing arrangements must comply with in order to be legal. Although this policy seems to be well-developed at first sight, a closer look at the decision practice reveals several open problems. Other areas of the buying and selling behavior of sports associations and related enterprises are considerably less well-developed and do not provide much orientation for business. --
    Keywords: sports business,competition policy,sporting rules,centralized marketing,sports economics
    JEL: L83 L41 K21 D02 M21
    Date: 2012
  13. By: Wladimir Andreff (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: The paper presents the differences between the design of a closed and an open team sports league. Then it compares the theoretical models of a closed league with profit maximizing clubs and an open league with win maximizing clubs. Both models are now outdated by a Nash equilibrium model which is briefly sketeched. In the case of open leagues, a disequilibrium model seems more appropriate and a first attempt at elaborating it are exhibited.
    Keywords: economics of sport, professional sports leagues, organization, competitive balance, competition, regulation, comparative economics
    Date: 2011
  14. By: Francisco Martínez-Sánchez (Universidad de Alicante); Miguel González-Maestre (Universitat Autònoma de Barcelona)
    Abstract: We consider the role of the endogenous choice of platform quality in a broadcasting duopoly market where competing media platforms choose also their level of advertising. We compare the equilibrium levels of quality, advertising and welfare under private and mixed duopoly competition. We show that the welfare comparison between the private and mixed duopoly regimes depends, crucially, on the interplay between the net direct effect of advertising on welfare and the degree of substitutability between platforms. We also consider the effects on quality and welfare of recent policies tending to eliminate advertising as a way of financing publicly-owned platforms.
    Keywords: endogenous quality, two-sided markets, broadcasting duopoly, publicly-owned platform, advertising regulation.
    JEL: L11 L33 L82 M37
    Date: 2012–02
  15. By: Anginer, Deniz; Demirguc-Kunt, Asli; Zhu, Min
    Abstract: Using bank level measures of competition and co-dependence, the authors show a robust positive relationship between bank competition and systemic stability. Whereas much of the extant literature has focused on the relationship between competition and the absolute level of risk of individual banks, they examine the correlation in the risk taking behavior of banks, hence systemic risk. They find that greater competition encourages banks to take on more diversified risks, making the banking system less fragile to shocks. Examining the impact of the institutional and regulatory environment on systemic stability shows that banking systems are more fragile in countries with weak supervision and private monitoring, with generous deposit insurance and greater government ownership of banks, and public policies that restrict competition. Furthermore, lack of competition has a greater adverse effect on systemic stability in countries with low levels of foreign ownership, weak investor protections, generous safety nets, and where the authorities provide limited guidance for bank asset diversification.
    Keywords: Banks&Banking Reform,Access to Finance,Debt Markets,Emerging Markets,Financial Intermediation
    Date: 2012–02–01
  16. By: Kasteng, Jonas
    Abstract: The report identifies concerns with the EU anti-dumping instrument, as applied today, regardless of the fact that the investigation procedures and methods might be in line with the current regulation and practice. The report's arguments are based on the recent anti-dumping investigation – and imposition of anti-dumping measures – on imports of ceramic tiles from China, but the observations and conclusions from the analysis are valid for most EU anti-dumping investigations. The report observes that price dumping is evaluated differently depending on whether the product is manufactured in the EU or imported from third countries. What is considered to be price dumping when imported is considered normal competition for a product manufactured in the EU. This is due to the fact that spatial price differentiation within the EU is covered by competition rules, and that competition rules have higher requirements for market share and price undercutting than the anti-dumping legislation. The report, accordingly, advocates that the criteria for imposing anti-dumping duties should be harmonized to the EU competition rules in order to ensure fair competition on the EU market. In the absence of a reformed anti-dumping regulation, the anti-dumping measures will most likely only contribute to a distorted competition where the complaining EU manufacturing industry will be protected to the detriment of the consumers.
    Keywords: anti-dumping; dumping; competition; anti-trust; competition law; China; EU; ceramic tiles; fair competition; protectionism; trade defence instruments; trade remedies; European Commission; Union interest test; public interest test; TDI
    JEL: F13 F23 L13 L61 H23 H32
    Date: 2012–02–14
  17. By: Varela-Irimia, Xosé-Luís
    Abstract: This article studies how product introduction decisions relate to profitability and uncertainty in the context of multi-product firms and product differentiation. These two features, common to many modern industries, have not received much attention in the literature as compared to the classical problem of firm entry, even if the determinants of firm and product entry are quite different. The theoretical predictions about the sign of the impact of uncertainty on product entry are not conclusive. Therefore, an econometric model relating firms’ product introduction decisions with profitability and profit uncertainty is proposed. Firm’s estimated profits are obtained from a structural model of product demand and supply, and uncertainty is proxied by profits’ variance. The empirical analysis is carried out using data on the Spanish car industry for the period 1990-2000. The results show a positive relationship between product introduction and profitability, and a negative one with respect to profit variability. Interestingly, the degree of uncertainty appears to be a driving force of entry stronger than profitability, suggesting that the product proliferation process in the Spanish car market may have been mainly a consequence of lower uncertainty rather than the result of having a more profitable market. Keywords: Product introduction, entry, uncertainty, multiproduct firms, automobile JEL codes: L11, L13
    Keywords: Diferenciació de productes, Automòbils Indústria i comerç, 334 - Formes d'organització i cooperació en l'economia,
    Date: 2012
  18. By: Xavier Fageda (Faculty of Economics, University of Barcelona); Juan Luis Jiménez (Department of Applied Economic Analysis. University of Las Palmas de Gran Canaria); Carlos Díaz Santamaría (Faculty of Economics, University of Barcelona)
    Abstract: In this paper we examine whether airline prices on national routes are higher than those charged on international routes. Drawing on a database prepared specifically for this study, we estimate a pricing equation for all routes originating from Gran Canaria (Canary Islands, Spain), differentiating between national and international routes. A key difference between these two route types is that island residents benefit from discounts on domestic flights. When controlling for variables related to airline characteristics, market structure and demand, we find that national passengers who are non-residents on the islands are paying higher prices than international passengers.
    Keywords: Air transport, discounts, prices. JEL classification: L93, H2, L13.
    Date: 2012–03

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