nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒03‒28
thirty-one papers chosen by
Russell Pittman
US Department of Justice

  1. A more general theory of commodity bundling By Armstrong, Mark
  2. Entry, Imperfect Competition, and Future Market for the Input By Georges Dionne; Marc Santugini
  3. Backwards Integration and Strategic Delegation By Hunold, Matthias; Röller, Lars-Hendrik; Stahl, Konrad O
  4. Dynamic Price Competition with Switching Costs By Fabra, Natalia; García, Alfredo
  5. Does Cost Uncertainty in the Bertrand Model Soften Competition? By Lagerlöf, Johan N. M.
  6. Stackelberg equilibria in a multiperiod vertical contracting model with uncertain and price-dependent demand By Sandal, Leif K.; Ubøe, Jan
  7. Financing Constraints, Product Market Competition, and Business Cycle Sensitivity. By Pontuch, Peter
  8. Endogenous Product Choice: A Progress Report By Crawford, Gregory S
  9. Flexibility and Collusion with Imperfect Monitoring By Bigoni, Maria; Potters, Jan; Spagnolo, Giancarlo
  10. A paradox of little pre-purchase search for durables: the trade-off between prices, product lifecycle, and savings on purchases. By Malakhov, Sergey
  11. Price setting with menu cost for multi-product firms By Alvarez, Fernando E; Lippi, Francesco
  12. Who Benefits from Misleading Advertising? By Keisuke Hattori; Keisaku Higashida
  13. When the Baby Cries at Night: Uninformed and Hurried Buyers in Non-Competitive Markets By Calzolari, Giacomo; Ichino, Andrea; Manaresi, Francesco; Nellas, Viki
  14. The advertising mix for a search good By Anderson, Simon P.; Renault, Régis
  15. Verti-zontal Differentiation in Monopolistic Competition By Di Comite, Francesco; Thisse, Jacques-François; Vandenbussche, Hylke
  16. Can the Failing Firm Defense Rule be Counterproductive? By Vasconcelos, Helder
  17. Upstream R&D networks By Constantine Manasakis; Dusanee Kesavayuth; Vasileios Zikos
  18. Product-market competition, corporate governance and innovation: evidence on US-listed firms By Hashem, Nawar; Ugur, Mehmet
  19. Mass Retailers’ Advertising Strategies Faced with Different Competitor Store Formats: Commodity Stores or Hard Discounts. By Bergès, Fabian; Monier-Dilhan, Sylvette
  20. Deal or No Deal? Licensing Negotiations in Standard-Setting Organizations By Gilbert, Richard J.
  21. Complementary assets, patent thickets and hold-up threats: Do transaction costs undermine investments in innovation? By Schwiebacher, Franz
  22. Exclusive dealing as a barrier to entry? Evidence from automobiles By Nurski, Laura; Verboven, Frank
  23. The Relationship between Market Structure and Innovation in Industry Equilibrium: A Case Study of the Global Automobile Industry By Hashmi, Aamir Rafique; Van Biesebroeck, Johannes
  24. The effects of rebate contracts on the health care system By Graf, Julia
  25. TV Wars: Exclusive Content and Platform Competition in Pay TV By Weeds, Helen
  26. Hospital competition with soft budgets By Kurt R. Brekke; Luigi Siciliani; Odd Rune Straume
  27. Spatial Competition and market Share: An Application to Motion Pictures. By Darlene C. Chisolm; George Norman
  28. Migration to the Cloud Ecosystem: Ushering in a New Generation of Platform Competition By Fershtman, Chaim; Gandal, Neil
  29. Price and Frequency Competition in Freight Transportation By Shah, Nilopa; Brueckner, Jan K.
  30. Consolidating the Water Industry: An Analysis of the Potential Gains from Horizontal Integration in a Conditional Efficiency Framework By Zschille, Michael
  31. Price competition in the spatial real estate market: Allies or rivals? By Iwata, Shinichiro; Sumita, Kazuto; Fujisawa, Mieko

  1. By: Armstrong, Mark
    Abstract: This paper extends the standard model of bundling as a price discrimination device to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand-alone products. Product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the model with additive preferences), while substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts. When separate sellers coordinate on an inter-firm discount, they can use the discount to overturn product substitutability and relax competition.
    Keywords: Price discrimination; bundling; oligopoly
    JEL: L13 D82 D4
    Date: 2012–03
  2. By: Georges Dionne; Marc Santugini
    Abstract: We analyze firms’ production and hedging decisions under imperfect competition with potential entry. Specifically, we consider an oligopoly industry producing a homogeneous output in which risk-averse firms incur a sunk cost upon entering the industry, and, then, compete in Cournot with one another. Each firm faces uncertainty in the input cost when making production decision, and has access to the futures market to hedge its random cost. We provide two sets of results. First, we show that there exists a unique equilibrium in which, in contrast to previous results in the literature, production and output price depend on the distribution of the spot price and risk aversion, i.e., there is no separation when the firms have access to the futures market. Second, we study the effect of access to the futures market on entry, production, and prices. The effect of access to the futures market on the number of firms is ambiguous depending on the value of the futures price and the parameters of the model. We also show that hedging induces the risk-averse firm to produce more, while speculating reduces production.
    Keywords: Cournot, Entry, Futures, Hedging, Imperfect competition
    JEL: D21 D43 D80 G32 L13
    Date: 2012
  3. By: Hunold, Matthias; Röller, Lars-Hendrik; Stahl, Konrad O
    Abstract: We analyze the effects of one or more downstream firms’ acquisition of pure cash flow rights in an efficient upstream supplier when firms compete in prices in both markets. With such an acquisition, downstream firms internalize the effects of their actions on that supplier’s and thus, their rivals’ sales. Double marginalization is enhanced. While vertical integration would lead to decreasing downstream prices, passive backwards ownership in the efficient supplier leads to increasing downstream prices and is more profitable, as long as competition is sufficiently intensive. Downstream acquirers strategically abstain from vertical control, inducing the efficient upstream firm to commit to a high price. Forbidding upstream price discrimination is then pro-competitive. All results are sustained when upstream suppliers are allowed to charge two part tariffs.
    Keywords: common agency; double marginalization; partial cross ownership; strategic delegation; vertical integration
    JEL: L22 L40
    Date: 2012–03
  4. By: Fabra, Natalia; García, Alfredo
    Abstract: We develop a continuous-time dynamic model with switching costs. In a relatively simple Markov Perfect equilibrium, the dominant firm concedes market share by charging higher prices than the smaller firm. In the short-run, switching costs might have two types of anti-competitive effects: first, higher switching costs imply a slower transition to a symmetric market structure and a slower rate of decline for average prices; and second, if firms are sufficiently asymmetric, an increase in switching costs also leads to higher current prices. However, as market structure becomes more symmetric, price competition turns fiercer and in the long-run, switching costs have a pro-competitive effect. From a policy perspective, we conclude that switching costs should only raise concerns in concentrated markets.
    Keywords: continuous-time model; firms' asymmetries; Markov-perfect equilibrium; switching costs
    JEL: C61 L13 L41
    Date: 2012–02
  5. By: Lagerlöf, Johan N. M.
    Abstract: Although naive intuition may indicate the opposite, the existing literature suggests that uncertainty about costs in the homogeneous-good Bertrand model intensifies competition: it lowers price and raises total surplus (but also makes profits go up). Those results, however, are derived under two assumptions that, if relaxed, conceivably could reverse the results. The present paper first shows that the results hold also if drastic innovations are possible. Next, the paper assumes asymmetric cost distributions, a possibility that is empirically highly plausible but which has been neglected in the previous literature. Using numerical methods it is shown that, under this assumption, uncertainty lowers price and raises total surplus even more than with identical distributions. However, if the asymmetry is large enough, industry profits are lower under uncertainty; this is in contrast to the known results and reinforces the notion that uncertainty intensifies competition rather than softens it.
    Keywords: asymmetric auctions; asymmetric firms; auctions with endogenous quantity; Bertrand competition; boundary value method; Hansen-Spulber model; information sharing; oligopoly; private information
    JEL: D43 D44 L13
    Date: 2012–02
  6. By: Sandal, Leif K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Ubøe, Jan (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In this paper, we consider Stackelberg games in a multiperiod vertical contracting model with uncertain demand. Demand has a distribution with a mean and variance that depend on the current retail price, and this dependence may vary from period to period. We focus on a class of problems in which the market has a memory-based scaling of demand, and the mean scaling is a function of previous retail prices. This leads to a strategic game in which the parties must balance high immediate profits with reduced future earnings. We propose a complete solution to this multiperiod Stackelberg game, covering cases with finite and infinite horizons. The theory is illustrated by using a Cobb-Douglas demand function with an additive, normally distributed random term, but the theory applies to more general settings.
    Keywords: Stackelberg game; multiperiod vertical contracting model; price-dependent demand
    JEL: C61 C73 D81
    Date: 2012–02–27
  7. By: Pontuch, Peter
    Abstract: We analyze the interactions between financing constraints and product market competition. Financially constrained firms face restricted access to external finance during economic downturns, precisely when their internal funds decrease. This leads to vicious circle dynamics. We argue that in competitive industries cash flows are particularly sensitive to aggregate shocks, and the adverse dynamics are amplified. We find significant support for this hypothesis in firms' operating profitability and fixed investment. The adverse effects of financing constraints are increasing in the level of product market competition. Market valuations do not take into account these differences in fundamental risk. Unconstrained firms in competitive industries earn positive abnormal returns (on average 24-40 bp per month), especially following periods of macroeconomic distress. Furthermore, financing constraints affect competitive mechanisms within industries. The industry-average level of financing constraints tends to reduce the intra-industry mean-reversion of firm profitability. Again, this regularity is not priced: highly profitable firms earn alphas of 20-29 bp per month if they operate in industries with many constrained firms, but virtually no alphas if their industries have few constrained firms.
    Keywords: Financing constraints; product market competition; industry concentration; business cycle; profitability; investment;
    JEL: L11 G32
  8. By: Crawford, Gregory S
    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 offered 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.
    Keywords: Cable television; Endogenous product characteristics; Endogenous product choice; Endogenous quality; Orthogonal instruments; Welfare
    JEL: C31 C52 L15 L40 L82
    Date: 2012–02
  9. By: Bigoni, Maria; Potters, Jan; Spagnolo, Giancarlo
    Abstract: Flexibility - the ability to react swiftly to others' choices - facilitates collusion by reducing gains from defection before opponents react. Under imperfect monitoring, however, flexibility may also hinder collusion by inducing punishment after too few noisy signals. The combination of these forces predicts a non-monotonic relationship between flexibility and collusion. To test this subtle prediction we implement in the laboratory an indefinitely repeated Cournot game with noisy price information and vary how long players have to wait before changing output. We find that (i) the facilitating role of flexibility is lost under imperfect monitoring, and (ii) with learning, collusion unravels with low or high flexibility, but not with intermediate flexibility.
    Keywords: Collusion; Cooperation; Flexibility; Imperfect monitoring; Oligopoly; Repeated games.
    JEL: C73 C92 D43 L13 L14
    Date: 2012–03
  10. By: Malakhov, Sergey
    Abstract: The paper describes the microeconomic trade-off between prices, savings on purchases, and the time horizon of the consumption-leisure choice during the search for different products. When marginal costs of the search are equal to its marginal benefit, the time of search is proportional to products’ lifecycles and it is inversely proportional to starting prices.
    Keywords: durables; time horizon; product lifecycle; saving on purchase; pre-purchase search
    JEL: D11 D01
    Date: 2012–03–11
  11. By: Alvarez, Fernando E; Lippi, Francesco
    Abstract: We model the pricing decisions of a multi-product firm that faces a fixed 'menu' cost: once the cost is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decision in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products that are sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The cumulative response of output to a monetary shock is the product of three terms: the steady state standard deviation of price changes, the average time elapsed between price changes, and a function of both the number of products and the size of the monetary shock. The size of the cumulative response of output and the length of the half-life of the response of aggregate prices to a monetary shock increase with the number of products, both of them more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model.
    Keywords: economies of scope in price changes; fixed costs; impulse responses; menu cost; monetary shocks; optimal control in multiple dimensions; quasi-variational inequalities
    JEL: E3 E5
    Date: 2012–02
  12. By: Keisuke Hattori (Faculty of Economics, Osaka University of Economics); Keisaku Higashida (School of Economics, Kwansei Gakuin University)
    Abstract: We develop a Hotelling model of horizontally and vertically differentiated brands with misleading advertising competition. We investigate the question of who benefits or loses from the misinformation created by advertising competition and related regulatory policies. We show that the quality gaps between two brands are crucial for determining the effect of misinformation on the firms’ profits, aggregate or individual consumer surplus, and national welfare. Although the misinformation tricks consumers into buying products that they would not have purchased otherwise, it may improve welfare even if the advertising does not expand the overall demand for the brands. We also show that, although endogenous advertising competition may lead to a prisoner’s dilemma for firms, it makes some consumers better off. We also consider the effects of several regulatory policies, such as advertising taxes, ad valorem and unit taxes on production, comprehensive and partial prohibitions of misleading advertising, government provisions of quality certification or counter-information, and the education of consumers.
    Keywords: Misinformation, Advertising Competition, Regulation, Product Differentiation
    Date: 2012–03
  13. By: Calzolari, Giacomo; Ichino, Andrea; Manaresi, Francesco; Nellas, Viki
    Abstract: We study the entrance in a retail market of consumers who are less elastic because of hurriedness and lack of information. Theory predicts that firms react by increasing prices to expand surplus extraction, but this effect weakens as market competition increases. High frequency data from Italian pharmacies confirm these predictions. Monthly variation in the number of newborns at the city level generates exogenous changes in the number of less elastic buyers (the parents) who consume a basket of hygiene products demanded by more experienced and elastic consumers as well. We estimate that the number of newborns has a positive effect on the equilibrium price even if marginal costs are decreasing. We exploit exogenous variation in market competition generated by the Italian legislation concerning how many pharmacies should operate in a city as a function of the existing population. Using a Regression Discontinuity design we find that an increase in competition has a significant and negative effect on the capacity of sellers to extract surplus from less elastic buyers.
    Keywords: consumer's information; demand elasticity; pharmacies; price competition; regression discontinuity
    JEL: D43 D83 L13
    Date: 2012–02
  14. By: Anderson, Simon P.; Renault, Régis
    Abstract: We extend the persuasion game to bring it squarely into the economics of advertising. We model advertising as exciting consumer interest into learning more about the product, and determine a firm's equilibrium choice of advertising content over quality information, price information, and horizontal match information. Equilibrium is unique whenever advertising is necessary. The outcome is a separating equilibrium with quality unravelling. Lower quality firms need to provide more information. For a given quality level, as a function of consumer visit costs, first quality information is disclosed, then price information and then horizontal product information are added to the advertising mix. Some suggestive evidence is provided from airline ads in newspapers.
    Keywords: advertising; content analysis; information; persuasion game; search
    JEL: D42 L15 M37
    Date: 2012–01
  15. By: Di Comite, Francesco; Thisse, Jacques-François; Vandenbussche, Hylke
    Abstract: The pattern of trade observed from firm-product-country data calls for a new generation of models. To address the unexplained variation in the data, we propose a new model of monopolistic competition where varieties enter preferences non-symmetrically, capturing both horizontal and vertical differentiation in an unprecedented way. Together with a variable elasticity of substitution, competition effects, varying markups and prices across countries, this results in a tractable model that rationalizes the empirical finding that firm-product quantities show systematically more variability than prices across export destinations. Accounting for unexplained data variation, our model can thus be used to improve demand identification.
    Keywords: heterogenous firms; horizontal differentiation; monopolistic competition; non-symmetric varieties; vertical differentiation
    JEL: D43 F12 F14 L16
    Date: 2012–01
  16. By: Vasconcelos, Helder
    Abstract: This paper studies the role of the failing firm defense (FFD) concept in merger control in a Cournot setting where: (i) endogenous mergers are motivated by prospective efficiency gains; and (ii) mergers must be submitted to an Antitrust Authority which might require partial divestiture for approval. It is shown that when the FFD concept is available in merger control, firms can strategically embark on a merger which makes other firms fail and then buy over the exiting outsider firm(s), leading to complete monopolization of the industry. This in turn implies that, in some circumstances, the consumers'-surplus-maximizing market structure cannot be achieved if the FFD concept is available, whereas it would be achieved if the FFD concept were ruled out.
    Keywords: Efficiency gains; Endogenous mergers; Failing firm defense; Merger review
    JEL: D43 L13 L41 L51
    Date: 2012–03
  17. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Dusanee Kesavayuth (Research Institute for Policy Evaluation and Design, University of the Thai Chamber of Commerce, 126/1 Vibhavadee-Rangsit Road, Dindaeng, Bangkok, 104); Vasileios Zikos (School of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom; and Research Institute for Policy Evaluation and Design, Univer)
    Abstract: We study the endogenous formation of upstream R&D networks in a vertically related industry. We find that, when upstream firms set prices, the complete network that includes all firms emerges in equilibrium. In contrast, when upstream firms set quantities, the complete network will arise but only if within-network R&D spillovers are sufficiently low, while if R&D spillovers are sufficiently high, a partial network arises. Interestingly, when upstream firms set prices, the equilibrium network maximizes social welfare, while a conflict between equilibrium and socially optimal networks is likely to occur when upstream firms set quantities.
    Keywords: Networks, R&D collaboration, upstream firms.
    JEL: L13 J50
    Date: 2012–03–15
  18. By: Hashem, Nawar; Ugur, Mehmet
    Abstract: The debate on competition and innovation has produced a wide range of theoretical and empirical findings. Recently, corporate governance quality has emerged as an additional factor that may complement or substitute for competition’s effect on innovation. We aim to contribute to the debate by investigating whether product-market competition and corporate governance quality affect firm-level innovation, utilising a dataset for 1,400 non-financial US-listed companies. Using two-way cluster-robust estimation, we report several findings. First, the relationship between industry-level competition and input as well as output measures of innovation is non-linear. Secondly, the non-linear relationship is of an inverted-U shape with respect to input measures of innovation, but the relationship has a U-shape when output measure of innovation is estimated. Third, corporate governance indicators such as anti-takeover defences and insider control tend to have a negative effect on input measures of innovation but their effect is positive with respect to the output measure. Finally, when interacted with market concentration, anti-takeover defences and insider control emerge as substitutes, leading to sign reversals in the relationship between competition and innovation. The results are obtained by using two-way cluster-robust estimation that controls for dependence within company/year and industry/year clusters, but they are robust to different estimation methods including fixed-effect and Fama-Macbeth procedure.
    Keywords: Innovation, competition, corporate governance, two-way cluster-robust estimation
    JEL: D21 G3 O31 L1
    Date: 2011–12
  19. By: Bergès, Fabian; Monier-Dilhan, Sylvette
    Abstract: This article analyzes the effects of international trade policies on an imperfect competitive domestic market, taking into account not only consumers but also upstream and downstream firms. We first study the impact of a classic import tax decrease and we find that upstream firms are harmed and domestic fiscal revenues may decrease with such a policy. We then look at the effect of an increase in non-tariff barriers, seen as the lowest degree of substitutability between the domestic good and the imported good. The result is an improvement in each agent’s situation, since international competition becomes less fierce. Last, we show that market conditions may exist such that a coupled policy (import tax decrease and non-tariff barrier increase) makes every agent better off. This can explain why we observe a proliferation of domestic standards at national level in order to back up lower tariff negotiations by governments.
    Keywords: Tariff, Manufacturers, Retailers, Tarde Policy, Non-Tariff Barriers
    JEL: L15 M37 L41
    Date: 2012–02
  20. By: Gilbert, Richard J.
    Abstract: Technical standards benefit consumers and producers by facilitating productadoption, promoting compatible solutions, and helping to create anecosystem of products and services in which competition can thrive. However,standards also may create opportunities for the exercise of market power. Owners of patents with claims that are essential to a standard may “hold up†firms or consumers that are “locked-in†to a standard by charging high royalties for the use of products that comply with the standard. This licensor (or seller) market power3 arises “ex post,†i.e., after firms and consumers have made investments that are specific to the standard.
    Keywords: Business, Management, Marketing, and Related Support Services, Legal Professions and Studies, Intellectual Property Law, Economics
    Date: 2011–12–01
  21. By: Schwiebacher, Franz
    Abstract: Innovation is commercialization of technology. Imperfections in markets for technology should leave marks on physical investments for innovation. Two types of transaction costs could affect innovative investments: royality stacking and hold-up threats. Backward references in firm's patent portfolio indicate potential technology suppliers. I find a negative effect of ownership fragmentation on investments related to innovation for firms with small patent portfolios. Hold-up threats are credible when upstream patentees have less specific capital sunk than innovating firms. Differences in fixed capital stocks between downstream firms and upstream patentees negatively affect investments in innovation for firms with large patent portfolios. These effects are specific to investments in innovation. There are no comparable effects on investments in R&D or residual physical investments. The effects of patent thickets on innovation are thus not uniform. They depend on the characteristics of the downstream firm. --
    Keywords: Market for Technology,Complementary Assets,Transaction Costs,Patent Thickets
    JEL: O31 O34
    Date: 2012
  22. By: Nurski, Laura; Verboven, Frank
    Abstract: Exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market. We ask whether such contracts may act as an entry barrier, and provide an empirical analysis of the European car market. We first estimate a demand model with product and spatial differentiation, and quantify the role of a dense distribution network in explaining the car manufacturers' market shares. We then perform policy counterfactuals to assess the profit incentives and entry-deterring effects of exclusive dealing. We find that there are no individual incentives to maintain exclusive dealing, but there can be a collective incentive by the industry as a whole, even absent efficiencies. Furthermore, a ban on exclusive dealing would shift market shares from the larger European firms to the smaller entrants. More importantly, consumers would gain substantially, mainly because of the increased spatial availability and less so because of intensified price competition. Our findings suggest that the European Commission's recent decision to facilitate exclusive dealing in the car market may not have been warranted.
    Keywords: automotive industry; exclusive dealing; foreclosure; vertical restraints
    JEL: L14 L42 L62
    Date: 2012–01
  23. By: Hashmi, Aamir Rafique; Van Biesebroeck, Johannes
    Abstract: We first estimate a dynamic game for the global automobile industry and then compute a Markov Perfect equilibrium to study the equilibrium relationship between market structure and innovation. The key state variable in the model is the efficiency level of each firm and the market structure is characterized by the vector of efficiency levels across all firms. Efficiency is estimated to be stochastically increasing in the dynamic control--innovation--which is proxied by patenting behavior. Equilibrium innovation is a function of all state variables in the industry and the cost of R&D which includes a privately observed cost shock. We find that it exhibits the following patterns: 1) innovation by the industry leader is decreasing in the efficiency of other firms; 2) innovation is decreasing in the efficiency dispersion; 3) innovation is more concentrated that efficiency; 4) innovation is declining in the number of active firms; 5) the innovation gap between the leader and other firms increases with competition.
    Keywords: Competition; Dynamic game; Schumpeter
    JEL: C73 L13 L62 O31
    Date: 2012–01
  24. By: Graf, Julia
    Abstract: Group Purchasing Organizations (GPOs) increasingly gain in importance with respect to the supply of pharmaceutical products and frequently use multiple or exclusive rebate contracts to exercise market power. Based on a Hotelling model of horizontal and vertical product differentiation, we examine the controversy whether there exists a superior rebate scheme as far as consumer surplus, firms profits and total welfare are concerned. Accounting for horizontal and vertical differentiation, we find that firms clearly prefer multiple over exclusive rebate contracts. Contrary, there exists no rebate form that per se lowers total costs for the members of the GPOs or maximizes total welfare. --
    Keywords: GPOs,Rebate Contracts,Vertical Differentiation
    JEL: I11 L13 L42
    Date: 2012
  25. By: Weeds, Helen
    Abstract: The paper examines incentives for exclusive distribution of premium television content such as live sports and Hollywood movies. Static analysis shows that a pay TV operator with premium content always chooses to supply its retail rival, using per-subscriber fees to soften competition. Incorporating platform competition, however, exclusive content gives its holder a market share advantage that is amplified by dynamic effects. Under some conditions this benefit outweighs the opportunity cost of forgone wholesale fees, making exclusivity the equilibrium choice. The analysis explains the observed incidence of content exclusivity in pay TV. Specific dynamic mechanisms are explored, and welfare and policy implications are discussed.
    Keywords: exclusivity; foreclosure; pay TV
    JEL: D43 L13 L41 L82
    Date: 2012–01
  26. By: Kurt R. Brekke (Department of Economics and Centre and Health Economics Bergen, Norwegian School of Economics); Luigi Siciliani (Department of Economics and Centre for Health Economics, University of York, Heslington); Odd Rune Straume (Department of Economics, University of Minho)
    Abstract: We study the incentives for hospitals to provide quality and expend cost-reducing effort when their budgets are soft, i.e., the payer may cover deficits or confiscate surpluses. The basic set up is a Hotelling model with two hospitals that differ in location and face demand uncertainty, where the hospitals run deficits (surpluses) in the high (low) demand state. Softer budgets reduce cost efficiency, while the effect on quality is ambiguous. For given cost efficiency, softer budgets increase quality since parts of the expenditures may be covered by the payer. However, softer budgets reduce cost-reducing effort and the profit margin, which in turn weakens quality incentives. We also find that profit confiscation reduces quality and cost-reducing effort. First best is achieved by a strict no-bailout and no-profit-confiscation policy when the regulated price is optimally set. However, for suboptimal prices a more lenient bailout policy can be welfare improving.
    Keywords: Hospital competition; Soft budgets; Quality; Cost efficiency
    JEL: I11 I18 L13 L32
    Date: 2012
  27. By: Darlene C. Chisolm; George Norman
    Abstract: This paper presents an empirical assessment of movie theatre attendance in two major metropolitan markets and provides strong support for the importance of spatial characteristics in determing attendance. We consider the hypothesis that attendance at particular movie theatres reflects a tension between two effects: a negative competion effect and a positive agglomeration effect. We find evidence that the competition effect dominates. Further, we identify a pattern of systematic spatial decay in the impact of this effect on demand.
    JEL: L11 D43 L82
    Date: 2011
  28. By: Fershtman, Chaim; Gandal, Neil
    Abstract: Cloud computing is defined to be Internet based computing technology, where the term 'cloud' simply means Internet -- and cloud computing refers to services that are accessed directly over the Internet. There are essentially three categories of cloud computing. (i) Iaas (Infrastructure as a Service) -- number crunching, data storage and management services (computer servers), (ii), SaaS (Software as a Service) -- ‘web based’ applications, and (iii) PaaS (Platform as a Service) -- essentially an operating system in the cloud. Much of the attention and literature has focused on the revolution in Iaas services provided via the cloud. Despite the major changes in technology in IaaS services, estimates indicate that more than 90% of the cloud computing market (in terms of revenues) will involve (virtual) operating systems and applications software services (i.e., PaaS and SaaS services.) In this paper, we examine how several key economic factors will likely affect competition in SaaS/PaaS services in the cloud.
    Keywords: cloud computing; network effects; platform competition; two-sided markets
    JEL: L13 L86
    Date: 2012–03
  29. By: Shah, Nilopa; Brueckner, Jan K.
    Abstract: This paper develops a simple analytical model of price and frequency competitionamong freight carriers. In the model, the full price faced by a shipper (a goodsproducer) includes the actual shipping price plus an inventory holding cost, whichis inversely proportional to the frequency of shipments offered by the freight carrier. Taking brand loyalty on the part of shippers into account, competing freightcarriers maximize profit by setting prices, frequencies and vehicle carrying capacities. Assuming tractable functional forms, long- and short-run comparative-staticresults are derived to show how the choice variables are affected by the model’sparameters. The paper also provides an efficiency analysis, comparing the equilibrium to the social optimum, and it attempts to explain the phenomenon of excesscapacity in the freight industry.
    Keywords: Social Sciences, Other
    Date: 2011–09–01
  30. By: Zschille, Michael
    Abstract: The German potable water supply industry is regarded as being highly fragmented, thus inhibiting high potentials for efficiency improvements through consolidation. Focusing on a hypothetical restructuring of the industry, we apply Data Envelopment Analysis (DEA) to analyze the potential efficiency gains from mergers between water utilities at the county level. A conditional efficiency framework is used to account for the operating environment. Highest efficiency improvement potentials turn out to result from reducing individual inefficiencies. The majority of the 84 merger cases is characterized by merger gains, which are decomposed into a technical efficiency effect, a harmony effect and a scale effect. The results suggest to improve incentives for efficient operations in water supply and a consolidation of the industry structure.
    Keywords: conditional efficiency; data envelopment analysis; horizontal integration; nonparametic estimation; water supply
    JEL: C14 L22 L25 L95
    Date: 2012–01
  31. By: Iwata, Shinichiro; Sumita, Kazuto; Fujisawa, Mieko
    Abstract: This paper examines real estate pricing featuring the price response curve, both theoretically and empirically. The Bertrand model with differentiated products suggests that the price response of real estate may differ when properties in the vicinity are priced by an affiliated firm or one's own firm. This is because the firm can maintain the collusive state if real estate prices in the neighborhood are priced by allies, whereas it loses it if prices are priced by rivals. To examine this prediction, a spatial autoregressive model with autoregressive and heteroskedastic disturbances, including a share of allies in the vicinity, is estimated using data on the residential condominium market in central Tokyo. Empirical results provide support for the model prediction.
    Keywords: Real estate prices; Strategic pricing; Spatial econometrics
    JEL: D21 L85 C31 D43 R31
    Date: 2012–03

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