nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒05‒08
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Why Do Firms Own Production Chains? By Enghin Atalay; Ali Hortacsu; Chad Syverson
  2. Vertical relations and number of channels in quality-differentiated markets By E. Bacchiega; O. Bonroy
  3. Winning by Losing: Evidence on the Long-Run Effects of Mergers By Ulrike Malmendier; Enrico Moretti; Florian S. Peters
  4. A Model of Recommended Retail Prices By Dmitry Lubensky
  5. Optimal collusion with limited liability By Billette de Villemeur, Etienne; Flochel, Laurent; Versaevel, Bruno
  6. Mixed Oligopoly and Entry By John Bennett; Manfredi La manna
  7. Adam Smith on Monopoly Theory. Making good a lacuna By Salvadori, Neri; Signorino, Rodolfo
  8. Asymetric switching costs can improve the predictive power of shy's model By Evens Salies
  9. Sunk costs, extensive R&D subsidies and permanent inducement effects By Pere Arqué-Castells; Pierre Mohnen
  10. Abuse of Dominance and Licensing of Intellectual Property By Rey, Patrick; Salant, David
  11. Buyer power from joint listing decision By Caprice, Stéphane; Rey, Patrick
  12. Working Paper 13-11 - Concurrentie in België - Intensiteit en evolutie tegen een Europese achtergrond By Jan van der Linden
  13. Identifying and characterising price leadership in British supermarkets By Seaton, Jonathan S.; Waterson, Michael
  14. Designing Fees for Music Copyright Holders in Radio Services By Bombana, Roberto; Marchese, Carla
  15. "Impacts of Patent Expiry and Regulatory Policies on Daily Cost of Pharmaceutical Treatments: OECD Countries, 2004-2010" By Berndt, Ernst; Dubois, Pierre
  16. Competition Between Mail and Electronic Substitutes in the Financial Sector: A Hotelling Approach By Cremer, Helmuth; De Donder, Philippe; Dudley, Paul; Rodriguez, Frank
  17. Competition between clearing houses on the European market By Marie-Noëlle Calès; Laurent Granier; Nadège Marchand
  18. Dynamic Pricing, Advance Sales, and Aggregate Demand Learning in Airlines By Escobari, Diego
  19. Estimating market power in homogenous product markets using a composed error model: application to the California electricity market By Orea, L.; Steinbuks, J.
  20. Congestion management in electricity networks: Nodal, zonal and discriminatory pricing By Holmberg, P.; Lazarczyk, E.
  21. Collusion and the Political Differentiation of Newspapers By Filistrucchi, L.; Antonielli, M.

  1. By: Enghin Atalay; Ali Hortacsu; Chad Syverson
    Abstract: We use broad-based yet detailed data from the economy’s goods-producing sectors to investigate firms’ ownership of production chains. It does not appear that vertical ownership is primarily used to facilitate transfers of goods along the production chain, as is often presumed: Roughly one-half of upstream plants report no shipments to their firms’ downstream units. We propose an alternative explanation for vertical ownership, namely that it promotes efficient intra-firm transfers of intangible inputs. We show evidence consistent with this hypothesis, including the fact that upon a change of ownership, an acquired plant begins to resemble the acquiring firm along multiple dimensions.
    JEL: L0 L23 L24
    Date: 2012–04
  2. By: E. Bacchiega; O. Bonroy
    Abstract: Double marginalization causes inefficiencies in vertical markets. This paper argues that such inefficiencies may be beneficial to final consumers in markets producing vertically differentiated goods. The rationale behind this result is that enhancing efficiency in high-quality supply chains through vertical integration may drive out of the market low-quality ones, thus affecting market structure. As a consequence, restoring-efficiency vertical integration may reduce consumer surplus, even in the absence of foreclosure strategies by the newly integrated firms. From a policy standpoint, our paper suggests that input and/or customer foreclosure should not be considered as the only source of antitrust concern when assessing the effects of vertical integration.
    JEL: L13 L22 L4
    Date: 2012–04
  3. By: Ulrike Malmendier; Enrico Moretti; Florian S. Peters
    Abstract: Do acquirors profit from acquisitions, or do acquiring CEOs overbid and destroy shareholder value? We present a novel approach to estimating the long-run abnormal returns to mergers exploiting detailed data on merger contests. In the sample of close bidding contests, we use the loser's post-merger performance to construct the counterfactual performance of the winner had he not won the contest. We find that bidder returns are closely aligned in the years before the contest, but diverge afterwards: Winners underperform losers by 50 percent over the following three years. Existing methodologies, including announcement effects, fail to capture the acquirors' underperformance.
    JEL: G14 G34
    Date: 2012–04
  4. By: Dmitry Lubensky (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Manufacturers frequently use list prices, suggested retail prices, or other similar forms of non-binding public price recommendations. Despite the prevalence of this practice, why manufacturers make these recommendations and what effect they have on actual prices is still not well understood. I present a model in which price recommendations convey information to consumers about aggregate market conditions. The manufacturer uses recommendations to directly affect consumers' search decisions and thus to indirectly affect the prices set by retailers. The manufacturer faces a tradeoff when influencing search: inducing lower reservation prices reduces retailer markups but also inhibits the manufacturer's ability to extract surplus from consumers with a high willingness to pay. I show that the manufacturer can credibly provide information through cheap talk. Furthermore, I find that a ban on recommendations can be welfare reducing, harming both consumers and the manufacturer. Lastly, I argue that price recommendations are not simply a substitute for price restraints and allow the manufacturer to achieve outcomes that are not attainable with resale price maintenance alone.
    JEL: L0 D83
    Date: 2011–08
  5. By: Billette de Villemeur, Etienne; Flochel, Laurent; Versaevel, Bruno
    Abstract: Collusion sustainability depends on firms' aptitude to impose sufficiently severe punishments in case of deviation from the collusive rule. We extend results from the literature on optimal collusion by investigating the role of limited liability. We examine all situations in which either structural conditions (demand and technology), financial considerations (a profitability target), or institutional circumstances (a regulation) set a lower bound, possibly negative, to firms' profits. For a large class of repeated games with discounting, we show that, absent participation and limited liability constraints, there exists a unique optimal penal code. It commands a severe single-period punishment immediately after a firm deviates from the collusive stage-game strategy. When either the participation constraint or the limited liability constraint bind, there exists an infinity of multi-period punishment paths that permit firms to implement the optimal collusive strategy. The usual front-loading scheme is only a specific case and an optimal punishment profile can take the form of a price asymmetric cycle. We characterize the situations in which a longer punishment does not perform as a perfect substitute for more immediate severity. In this case the lowest discount factor that permits collusion is strictly higher than without the limited liability constraint, which hinders collusion.
    Keywords: Collusion; Oligopoly; Limited Liability
    JEL: L13 D43 C72
    Date: 2012–04–30
  6. By: John Bennett; Manfredi La manna
    Abstract: We analyze a mixed oligopoly with free entry by private firms. It is assumed that a state-owned enterprise (SOE) maximizes an increasing function of output, subject to a break-even constraint. We first show that, because of instability, the industry cannot contain more than one SOE. Then we establish an irrelevance result: if the SOE's cost disadvantage relative to private firms is not too large, then aggregate output, aggreagte costs and welfare are the same with and without the SOE. However, for this range of cost disadvantage an SOE monopoly yields higher welfare. Implications for privatization policy are suggested.
    Date: 2012–02
  7. By: Salvadori, Neri; Signorino, Rodolfo
    Abstract: The paper analyzes Adam Smith’s views on monopoly focusing on Book IV and V of The Wealth of Nations and argues that Smith has left his analysis of monopoly in an embryonic form while the majority of scholars have assessed it starting from premises different from those, actually though implicitly, used by Smith to approach this subject. We show that Smith makes use of the word ‘monopoly’ to refer to a heterogeneous collection of market outcomes, besides that of a single seller market, and that Smith’s account of monopolists’ behavior is richer than that provided by later monopoly theorists.
    Keywords: Competition; Monopoly; Classical Economics; Adam Smith
    JEL: L51 B31 B12 L41 D42
    Date: 2012–04–27
  8. By: Evens Salies (Observatoire Francais des Conjonctures Economiques)
    Abstract: Economists Oz Shy introduced the definition of undercut-proof property (“UPP”) prices in a model of Bertrand competition involving loyal consumers (‘A quick-and-easy method for estimating switching costs’, International Journal of Industrial Organization, Vol. 20, pp. 71-87, 2002). Shy’s seminal paper allows applied researchers to measure the switching costs faced by locked-in consumers. Although there is increasing interest in demonstrating consumer inertia in retail markets opened up to competition, Shy’s approach has not received much attention. The present paper shows that the UPP’s lack of appeal in this context stems from a strong assumption of identical switching costs in the theoretical model, whereas real data are more likely to reveal asymmetric values for these costs. We revisit the UPP by considering asymmetric switching costs straight from the theoretical model. Doing so enables us to show that more rigorous conditions relating the values of switching costs to market shares are necessary in order for UPP prices to be valid predictions of these costs, which consequently increases the predictive power of Shy’s model. This improvement is illustrated with two examples borrowed from Shy’s paper.
    Keywords: Price competition, Switching costs, undercut-proof property
    JEL: D43 D83
    Date: 2012–04
  9. By: Pere Arqué-Castells; Pierre Mohnen
    Abstract: We study whether there is scope for using subsidies to smooth out barriers to R&D performance and expand the share of R&D firms in Spain. We consider a dynamic model with sunk entry costs in which firms’ optimal participation strategy is defined in terms of two subsidy thresholds that characterise entry and continuation. We compute the subsidy thresholds from the estimates of a dynamic panel data type-2 tobit model for an unbalanced panel of about 2,000 Spanish manufacturing firms. The results suggest that “extensive” subsidies are a feasible and efficient tool for expanding the share of R&D firms. <P>Est-il possible à l’aide de subsides à la recherche d’augmenter, non pas l’intensité de la recherche dans les firmes qui en font déjà, mais le nombre de firmes qui font de la recherche? Tel est l’objet de cet article. Nous élaborons un modèle dynamique avec des coûts irrécupérables dans lequel il y a deux seuils de subsides, un au-delà duquel les firmes s’engagent à faire de la recherche et un autre au-delà duquel les firmes continuent à faire de la recherche. Nous estimons ces seuils à l’aide d’un modèle tobit type II dynamique et des données d’un panel non-cylindré de 2000 firmes manufacturières espagnoles. Les résultats suggèrent que les subsides à la recherche forment un moyen efficace d’amener plus de firmes à faire de la recherche.
    Keywords: R&D, persistence, subsidies, dynamic models, R&D, persistance, subventions, modèles dynamiques
    Date: 2012–04–01
  10. By: Rey, Patrick (TSE); Salant, David (TSE)
    Abstract: We examine the impact of the licensing policies of one or more upstream owners of essential intellectual property (IP hereafter) on the variety offered by a downstream industry, as well as on consumers and social welfare. When an upstream monopoly owner of essential IP increases the number of licenses, it enhances product variety, adding to consumer value, but it also intensifies downstream competition, and thus dissipates profits. As a result, the upstream IP monopoly may want to provide too many or too few licenses, relatively to what maximizes consumer surplus or social welfare. With multiple owners of essential IP, royalty stacking increases aggregate licensing fees and thus tends to limit the number of licensees, which can also reduce downstream prices for consumers. We characterize the conditions under which these reductions in downstream prices and variety is beneficial to consumers or society.
    Keywords: Intellectual property, licensing policy, vertical integration, patent pools.
    JEL: L4 L5 O3
    Date: 2012–04
  11. By: Caprice, Stéphane; Rey, Patrick
    Abstract: We show that collective bargaining can enhance retailers’ buying power vis-àvis their suppliers. We consider a model of vertically related markets, in which an upstream leader faces a competitive fringe of less efficient suppliers and negotiates secretly with several firms that compete in a downstream market. We allow downstream firms to join forces in negotiating with suppliers, by creating a buyer group which selects suppliers on behalf of its members: each group member can then veto the upstream leader’s offer, in which case all group members turn to the fringe suppliers. Transforming individual listing decisions into a joint listing decision makes delisting less harmful for a group member; this, in turn enhances the group members’ bargaining position at the expense of the upstream leader. We also show that this additional buyer power can have an ambiguous impact on the upstream leader’s incentives to invest.
    Keywords: Collective bargaining position, buyer group, joint listing decision
    JEL: D43 L13 L22 L42
    Date: 2012–04
  12. By: Jan van der Linden
    Abstract: Competition is a complex and hard-to-measure phenomenon. Nevertheless, it is a central concept in the economy and should be adjusted in the event that its course appears to be problematic. This study aims at grasping the intensity and the evolution of competition in Belgium in relation to other EU Member States and is based on eight benchmarks, each of which measures one specific feature of competition. Approximately half of those benchmarks have evolved favourably over the past decade. That was also the case for other member states, as a result of which Belgium's relative position in terms of competition did not improve. For Belgium, two crucial benchmarks displayed an unfavourable evolution: prices, which strongly increased with regard to other Member States, and, in their wake, price/cost margins.
    JEL: D40 L11 L51
    Date: 2011–12–12
  13. By: Seaton, Jonathan S. (Loughborough University); Waterson, Michael (University of Warwick)
    Abstract: Price leadership is a concept that lacks precision. We propose a deliberately narrow, falsifiable, definition and illustrate its feasibility using the two leading British supermarket chains. We find both firms engaging in leadership behaviour over a range of products, with the larger being somewhat more dominant but the smaller increasing leadership activity over time. Surprisingly, more price leadership events are price reductions than price increases, but the increases are of larger monetary amounts (so average price increases over time) and the events appear not necessarily related to cost changes. Price leadership appears to play some role in price increases.
    Date: 2012
  14. By: Bombana, Roberto; Marchese, Carla
    Abstract: This paper investigates which is the most desirable payment schedule, from a social welfare standpoint, for compensating IPR holders for music broadcast by radio stations. A model of a radio station that acts as a monopoly with respect to listeners and sells ads in a competitive market is presented. Two types of fees, ad valorem and per unit, are examined. Exploiting the similarity between taxes and fees, we extend results from taxation theory in two-sided markets to show that the case where only one side (i.e. advertisers) pays, while the other (the listeners) receives the service for free, di¤ers somewhat from the case thus far considered by the literature, in which both sides pay. The results mildly support the prevailing regulatory approach, based on ad valorem fees.
    Keywords: regulation, radio, collecting agencies, IPR fees
    JEL: H23 H44 L82
    Date: 2012–02
  15. By: Berndt, Ernst; Dubois, Pierre
    Abstract: Cross-country variability in regulatory frameworks, industrial policy, physician/pharmacy autonomy, brand/generic distinctions, and in the practice of medicine contributes to ambiguous interpretations of pharmaceutical cost comparisons. Here we report cross-country comparisons that: (i) focus on 11 therapeutic classes experiencing patent expiration and loss of exclusivity 2004-2010 in eight industrialized countries; (ii) convert revenues and unit sales to cost per day of treatment and number patient days treated using the World Health Organizations’ Defined Daily Dosage metrics; (iii) compare patterns in costs per day of treatment with price index measures based on average price per day of treatment for each molecule computed over all molecule versions; (iv) utilizing econometric methods, model and quantify various factors affecting variations in daily treatment price indexes such as national regulatory and reimbursement policy changes, physician/pharmacy autonomy, and other factors; and (v) simulate changes in expenditures by country and therapeutic class had counterfactual policies been implemented.
    JEL: D4 I11 I18 L11 L65 O34
    Date: 2012–03
  16. By: Cremer, Helmuth (Toulouse School of Economics (GREMAQ, IDEI and Institut universitaire de France)); De Donder, Philippe (Toulouse School of Economics (GREMAQ-CNRS and IDEI)); Dudley, Paul (Head of Regulatory Economics, Royal Mail Group); Rodriguez, Frank (Associate, Oxera)
    Abstract: We build a model where two banks compete for the patronage of consumers by offering them, among other services and products, two forms of transactional media: paper statements and electronic substitutes. Both banks and both products are horizontally di¤erentiated and modeled à la Hotelling(1929). Assuming symmetry of consumer preferences (over banks and, independently, over the two transactional media) and of bankss costs, we obtain that the unique pro…t-maximizing symmetrical prices reect both the transactional media marginal costs and the intensity of competition between banks. Most notably, the intensity of consumers preferences for one variant of transactional medium over another has no inuence on the pro…t-maximizing media prices. Also, there is total pass-through of increases in input prices (such as mail price for paper statements) into prices paid by …nal consumers.
    Date: 2012–03–13
  17. By: Marie-Noëlle Calès (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Laurent Granier (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Nadège Marchand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: For several years, European financial markets have been the place of important mutations. These mutations have hit both stock markets themselves as well as the infrastructures including all necessary services for the transactions on financial securities. Among the market services to which the investors appeal, is the clearing of the orders, the service which allows reducing exchanged flows while guaranteeing their safety. The market of clearing became strongly competitive with the arrival of new Pan European clearing houses. Confronted with aggressive pricing policies, "incumbent" clearing houses have to adopt new strategies : merger, simple or mutual links of interoperability. We develop a model of industrial organization to appreciate the consequences of these various strategies in terms of price and social welfare. The strategic incentives of clearing houses and their effects on their customers, i.e. investors, are observed by means of a sequential game. We show that the interoperability agreements are never reached at the equilibrium in spite of the fact that the "European code of good practice" of postmarkets incites them to accept this type of agreements. On the other hand, a merger between incumbent clearing houses can occur under some conditions. The merger is beneficial to these last ones as well as to the investors, but it is unfavourable to the Pan European clearing houses.
    Keywords: bundling; clearing house; interoperability; merger; post-market organization
    Date: 2012–04–24
  18. By: Escobari, Diego
    Abstract: This paper uses a unique U.S. airlines panel data set to empirically study the dynamic pricing of inventories with uncertain demand over a finite horizon. I estimate a dynamic pricing equation and a dynamic demand equation that jointly characterize the adjustment process between prices and sales as the flight date nears. I find that the price increases as the inventory decreases, and decreases as there is less time to sell. Consistent with aggregate demand learning and price adjustment, demand shocks have a positive and much larger effect on prices than the positive effect of anticipated sales.
    Keywords: pricing; demand uncertainty; demand learning; airlines
    JEL: L93 D84 C23 D83
    Date: 2011–12–17
  19. By: Orea, L.; Steinbuks, J.
    Abstract: This study contributes to the literature on estimating market power in homogenous product markets. We estimate a composed error model, where the stochastic part of the firm’s pricing equation is formed by two random variables: the traditional error term, capturing random shocks, and a random conduct term, which measures the degree of market power. Treating firms’ conduct as a random parameter helps solving the issue that the conduct parameter can vary between firms and within firms over time. The empirical results from the California wholesale electricity market suggest that realization of market power varies over both time and firms, and reject the assumption of a common conduct parameter for all firms. Notwithstanding these differences, the estimated firm-level values of the conduct parameter are closer to Cournot than to static collusion across all specifications. For some firms, the potential for realization of the market power unilaterally is associated with lower values of the conduct parameter.
    Keywords: market power, random conduct parameter, composed error model, asymmetric distributions, California electricity market
    JEL: C34 C51 L13 L94
    Date: 2012–04–25
  20. By: Holmberg, P.; Lazarczyk, E.
    Abstract: Wholesale electricity markets use different market designs to handle congestion in the transmission network. We compare nodal, zonal and discriminatory pricing in general networks with transmission constraints and loop flows. We conclude that in large games with many producers who are allowed to participate in the real-time market the three market designs result in the same efficient dispatch. However, zonal pricing with counter-trading results in additional payments to producers in exportconstrained nodes.
    Keywords: Congestion management, wholesale electricity market, transmission network, nodal pricing, zonal pricing with countertrading, discriminatory pricing, large game
    JEL: C72 D44 D61 L13 L94
    Date: 2012–04–25
  21. By: Filistrucchi, L.; Antonielli, M. (Tilburg University, Tilburg Law and Economics Center)
    Abstract: Abstract: We analyse a newspaper market where two editors first choose the political position of their newspaper, then set cover prices and advertising tariffs. We build on the work of Gabszewicz, Laussel and Sonnac (2001, 2002), whose model of competition among newspaper publishers we take as the stage game of an infinitely repeated game, and investigate the incentives to collude and the properties of the collusive agreements in terms of welfare and pluralism. We analyse and compare two forms of collusion: in the first, publishers cooperatively select both prices and political position; in the second, publishers cooperatively select prices only. We show that collusion on prices reinforces the tendency towards a Pensée Unique discussed in Gabszewicz, Laussel and Sonnac (2001), while collusion on both prices and the political line would tend to mitigate it. Our findings question the rationale for Joint Operating Agreements among US newspapers, which allow publishers to cooperate in setting cover prices and advertising tariffs but not the editorial line. We also show that, whatever the form of collusion, incentives to collude first increase, then decrease as advertising revenues per reader increase.
    Keywords: collusion;newspapers;two-sided markets;indirect network effects;pluralism;spatial competition.
    JEL: L41 L82 D43 K21
    Date: 2012

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