nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒04‒17
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Price Competition with Consumer Confusion By Ioanna Chioveanu; Jidong Zhou
  2. Dynamic Quality Signaling with Moral Hazard By Francesc Dilmé
  3. Consumer Behavioural Biases in Competition: A Survey By Steffen Huck; Jidong Zhou
  4. On Cournot Markets By Khadidja Benallou; Daniel Danau; Abderrahmane Ziad
  5. The Effect of Salvage Market on Strategic Technology Choice and Capacity Investment Decision of Firm under Demand Uncertainty By Kashefi, Mohammad Ali
  6. Exploding Offers and Buy-Now Discounts By Mark Armstrong; Jidong Zhou
  7. Competitive Targeted Marketing By Hang-Hyun Jo; Jeoung-Yoo Kim
  8. Persuasive Silence By Toru Suzuki
  9. Patent Protection with a Cooperative R&D Option By Che, XiaoGang; Yang, Yibai
  10. Experience Benefits and Firm Organization By Ching-to Albert MA; Ingela Alger; Regis Renault
  11. Antitrust Enforcement and Marginal Deterrence By Harold Houba; Evgenia Motchenkova; Quan Wen
  12. Information Disclosure and the Equivalence of Prospective Payment and Cost Reimbursement By Ching-to Albert MA; Henry Y. Mak
  13. Informative Advertising in Directed Search By Gomis-Porqueras, Pedro; Julien, Benoit; Chengsi, Wang
  14. The industrial organization of competition in local bus services By Philippe Gagnepain; Marc Ivaldi; Catherine Vibes
  15. Effect of Mergers and Acquisitions on Market Concentration and Interest Spread By Khan, Mehwish Aziz; Kayani, Ferheen; Javid, Attiya Yasmin

  1. By: Ioanna Chioveanu; Jidong Zhou
    Date: 2011
  2. By: Francesc Dilmé (Department of Economics, University of Pennsylvania)
    Abstract: Asymmetric information is an important source of inefficiency when assets (like firms) are transacted. The two main sources of this asymmetry are unobserved idiosyncratic characteristics of the asset (for example, quality) and unobserved idiosyncratic choices (actions done by the current owners). We introduce moral hazard in a dynamic signaling model where heterogeneous sellers exert effort to affect the distribution of a stochastic signal (for example sales or profits) of their firms. Buyers observe the signal history and make price offers to the sellers. High-quality sellers try to separate themselves from the less quality ones in order to receive high price offers, while the latter try to pool with the first group to avoid receiving a low price. We characterize the competitive equilibria of the model, and we propose an adaptation of existing refinements to the incorporation of moral hazard in dynamic signaling that implies uniqueness of equilibria. We find that similar individual characteristics across types of sellers make everyone worse off, since competition increases signaling waste. Also, due to the new intensive margin (effort), non-trivial signaling will take place even when the cost of signaling is large. In particular cases, we find analytical solutions, that allow transparent comparative statics analysis. The model can be applied to education where grades depend not only on the students’ skills, but also on their effort.
    Keywords: Dynamic Signaling, Dynamic Moral Hazard, Endogenous Effort
    JEL: D82 D83 C73 J24
    Date: 2012–03–19
  3. By: Steffen Huck; Jidong Zhou
    Date: 2011
  4. By: Khadidja Benallou (Phd student - UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211); Daniel Danau (UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211); Abderrahmane Ziad (UFR de sciences économiques et de gestion, Université de Caen Basse-Normandie, CREM-CNRS, UMR 6211)
    Abstract: This paper focuses on the existence of a Cournot equilibrium in a n- firm Cournot market for a single homogeneous commodity. Using a simple argument and proof, it shows that a Cournot equilibrium exists if each firm's marginal revenue declines with its own output and some weak non-decreasing incremental cost condition is satisfied.
    Keywords: Cournot Competition; existence of Cournot equilibrium; supermodular games
    JEL: L13 C72 C62
    Date: 2012–03
  5. By: Kashefi, Mohammad Ali
    Abstract: This paper examines the effect of salvage market on strategic technology choice and capacity investment decision of two firms that compete on the amount of output they produce under demand uncertainty. A game theoretic model applies such that in the first stage firms choose their production technology between two alternatives: modular production process (flexible technology) or unified production process (inflexible technology). Then at the second stage they decide on the amount of capacity investment: flexible firm makes decision about general and specific components’ capacity and inflexible firm just about unified component (final product). One stage forward both enter the primary market in which demand is uncertain and play a duopoly Cournot game on the amount of quantity they manufacture and finally at the last stage, flexible firm will be able to sell its unsold general components in the secondary market (salvage market) with a deterministic price. Solving optimization problems of the model results in intractable equations which lead us to employ numerical studies considering a specific probability distribution to observe equilibrium behavior of competing firms. Broad range of parameters with respect to established relationships among them have been examined in order to cover all the possible economically reasonable scenarios. Findings are expressed explicitly in the form of observations where we demonstrate that with symmetric parameterization there is a unique symmetric Nash equilibrium in which both firms choose inflexible technology while applying asymmetric parameters has the potential to form two types of equilibrium when 1. Both firms choose inflexible technology or 2. Only one firm chooses flexible technology. Moreover it is shown that there is a specific unified cost threshold that could shift the equilibrium of the game. Finally we discuss on the case that there is no equilibrium and mention some managerial implications of the model.
    Keywords: Salvage Market; Modular and Unified Production Process; Product Postponement; Demand Uncertainty; Investment Decision; Operation Management
    JEL: D21 M11 L13 C88 C61 C72
    Date: 2012–03–20
  6. By: Mark Armstrong; Jidong Zhou
    Date: 2011
  7. By: Hang-Hyun Jo; Jeoung-Yoo Kim
    Abstract: In this paper, we consider two firms diffusing incompatible technologies and their decision of consumer targeting. The technology adoption is made in two steps. First, once the firms sell their products to their respective targeted consumer, the technology is diffused successively by word-of-mouth communication from the initial consumer to other consumers linked along the network. Then, in the second step, each consumer imitates the technology distribution keeps evolving until it reaches the long-run steady state. We demonstrate that the early entrant chooses the minmax location when firms are myopic in the sense that they do not take the imitation possibility into account. If firms consider the possibility of imitation, the best target will tend towards a hub, although the minmax principle in general keeps valid in the sense that it should be the minmax location after considering imitation.
    Date: 2012–03
  8. By: Toru Suzuki (Max Planck Institute of Economics, Jena, Germany)
    Abstract: In the market where inattentive buyers can fail to notice some feasible choices, the key role of marketing is to make buyers aware of products. However, the eective marketing strategy is often subtle since marketing tactics can make buyers cautious. This paper provides a framework to analyze an eective marketing strategy to persuade an inattentive buyer in an adverse selection environment. We investigate how an attention-grabbing marketing can "backfire" and when it can be eective.
    Keywords: Signaling game, Consideration set, Counter signaling, Limited attention, Marketing, Advertising
    JEL: D03 D82 D83 L15
    Date: 2012–04–04
  9. By: Che, XiaoGang (University of Alberta, Department of Economics); Yang, Yibai (University of Sydney)
    Abstract: Patent protection may decrease R&D incentives due to the tournament effect. In this paper, we show that patent protection in the presence of a cooperative R&D option always increases the R&D incentive. In addition, this option dominates imitation to increase the R&D incentive under patent protection, and may also dominate royalty licensing depending on the R&D cost.
    Keywords: cooperative R&D; patent protection; R&D incentive
    JEL: O31 O34 O38
    Date: 2012–04–01
  10. By: Ching-to Albert MA (Department of Economics, Boston University.); Ingela Alger (TSE (LERNA, CNRS) and Economics Department, Carleton University); Regis Renault (Universite de Cergy-Pontoise, THEMA, Cergy-Pontoise Cedex FRANCE, and Institut Universitaire de France;)
    Abstract: A principal chooses between in-house production and outsourcing. An agent will be hired when production is in-house. An agent will be contracted upon when production is outsourced. In each case, the agent earns experience benefits: future monetary returns from managing production, reputation, and enjoyment. The principal would like to extract experience benets. He can do so when production is outsourced. But the external agent earns information rent from private information about production costs. The principal cannot fully extract experience benets when production is in-house because the internal agent must receive a minimum income, although the principal has full information on production costs. Our theory proposes a new trade-off, between information rent under outsourcing, and experience rent under in-house production. The principal chooses outsourcing when experience benefits are high. The principal's organizational choice may be socially inefficient.
    Keywords: vertical integration, experience benets, experience rents, informational rents.
    JEL: D23 L22
    Date: 2012–01
  11. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University)
    Abstract: We study antitrust enforcement in which the fine must obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. We integrate these legal principles into an infinitely-repeated oligopoly model. Bankruptcy considerations ensure abnormal cartel profits. We derive the optimal fine schedule that achieves maximal social welfare under these legal principles. This optimal fine schedule induces collusion on a lower price making it more attractive than on higher prices. Also, raising minimum fines reduces social welfare and should never be implemented. Our analysis and results relate to the marginal deterrence literature by Shavell (1992) and Wilde (1992).
    Keywords: Antitrust enforcement; Antitrust Law; Cartel; Oligopoly; Repeated game
    JEL: L4 K21 D43 C73
    Date: 2011–11–22
  12. By: Ching-to Albert MA (Department of Economics, Boston University.); Henry Y. Mak (Department of Economics, European University Institute)
    Abstract: A health care provider chooses medical service quality and cost-reduction effort. Both choices are noncontractible. An insurer observes both quality and cost effort, and may credibly disclose them to consumers. In prospective payment, the insurer fully discloses care quality, and sets a prospective payment price. In cost reimbursement, the insurer discloses a value index, a weighted average of quality and cost effort, and pays a margin above cost. The first-best quality and cost effort can be implemented by prospective payment and by cost reimbursement.
    Keywords: prospective payment, cost reimbursement, fee for service, quality, cost reduction
    Date: 2012–01
  13. By: Gomis-Porqueras, Pedro; Julien, Benoit; Chengsi, Wang
    Abstract: We consider a directed search environment where capacity constrained sellers reach uncoordinated buyers through costly advertising while buyers observed all prices probabilistically. We show that: (i) the equilibrium advertising intensity has an inverted U-shape in market tightness, (ii) the equilibrium advertising intensity is higher under an auction mechanism than under posted pricing, and (iii) the equilibrium price and measure of informed buyers may {be positively correlated} even in large markets.
    Keywords: costly advertising; directed search; imperfect observability; sales mechanism
    JEL: M37 J64 D83
    Date: 2012–04–10
  14. By: Philippe Gagnepain (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); Marc Ivaldi (TSE - Toulouse School of Economics - Toulouse School of Economics); Catherine Vibes (TSE - Toulouse School of Economics - Toulouse School of Economics)
    Abstract: This article is aimed at deepening our understanding of the functioning of competition in the local bus transportation industry and to evaluate its effectiveness. It provides an overview of the competitive constraints that are at work in the industry as discussed in the economic literature, and sketches empirical tests to check whether the intuitions provided by the economists are in line with the reality of the industry.
    Date: 2011
  15. By: Khan, Mehwish Aziz; Kayani, Ferheen; Javid, Attiya Yasmin
    Abstract: This study investigates the relationship of mergers & acquisitions with the interest spread of the banking industry in Pakistan. To assess whether the merger of Pakistani banks were a success or otherwise, profitability, liquidity ratios, and net interest spread are computed which are considered essential to judge the financial performance of any bank. Data is taken for the period of 1997-2010 and this data have been used to calculate the interest spread and market concentration. Market Concentration is calculated by using Herfindahl-Hirschman Index or HHI. Findings show that the profitability and net interest spread of two merged banks declines as a result of mergers. It is also revealed that Concentration of the banking industry shows a rising trend during 2008 and 2009 after mergers occurred during 2007 as a result of merger. However, it shows the level that almost approaches the threshold i.e. 1000. One or two more mergers can push up threshold level of HH index. It means that it is the right time for banking industry of Pakistan to be reviewed by any antitrust authority to maintain the optimum level of competition.
    Keywords: Mergers & Acquisitions; Market Concentration; Banking industry; Interest Spread; and Profitability
    JEL: G1 A1 M2 G0
    Date: 2011

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