nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒05‒15
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Switching Costs and Equilibrium Prices By Luis Cabral
  2. Vertical integration, knowledge disclosure and decreasing rival's cost By Chrysovalantou Liou; Emmanuel Petrakis
  3. Salience and Consumer Choice By Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
  4. Dynamic Product Diversity By Ramon Caminal
  5. Vulnerable Markets By David Mayer-Foulkes
  6. Firm Size Distribution under Horizontal and Vertical Innovation By Pedro Mazeda Gil; Fernanda Figueiredo
  7. Industrial Policy and Competition By Philippe Aghion; Mathias Dewatripont; Luosha Du; Ann Harrison; Patrick Legros
  8. Sunk costs, extensive R&D subsidies and permanent inducement effects By Pere Arqué-Castells; Pierre Mohnen
  9. Antitrust in Innovative Industries: the Optimal Legal Standards By Giovanni Immordino; Michele Polo
  10. Industry segment effects and firm effects on firm performance in single industry firms By Houthoofd, Noël; Hendrickx, Jef
  11. Spatial Competition in Quality, Demand Induced Innovation, and Schumpeterian Growth By Raphael Auer; Philip Sauré
  12. Product-Variety, Population, Competition, and Growth By Alberto Bucci
  13. Competing for Customers in a Social Network (R) By Pradeep Dubey; Rahul Garg; Bernard De Meyer
  14. The Telecommunications Industry and Economic Growth: How the Market Structure Matters By Vahagn Jerbashian
  15. Combined Effects of Load Factors and Booking Time on Fares: Insights from the Yield Management of a Low-Cost Airline By Marco Alderighi; Marcella Nicolini; Claudio A. Piga

  1. By: Luis Cabral
    Date: 2012
  2. By: Chrysovalantou Liou; Emmanuel Petrakis
    Abstract: We study vertical integration incorporating the fact that it creates the possibility of knowledge disclosure. We consider a setting where, through integrating, an upstream monopolist learns its downstream partner’s innovation, and can disclose it to its downstream rival. We show that a vertically integrated firm chooses to fully disclose its knowledge to its downstream rival. Knowledge disclosure intensifies downstream competition but, at the same time, expands the downstream market size. We also show that, due to knowledge disclosure, vertical integration increases firms’ innovation incentives, consumer and total welfare, and decreases, instead of raises, the rival’s cost.
    Keywords: Vertical integration, R&D investments, Market floreclosure, Knowledge disclosure
    JEL: L13 L22 L42
    Date: 2012–04
  3. By: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
    Abstract: We present a theory of context-dependent choice in which a consumer's attention is drawn to salient attributes of goods, such as quality or price. An attribute is salient for a good when it stands out among the good's characteristics, in the precise sense of being furthest away in that good from its average level in the choice set (or more generally, an evoked set). A local thinker chooses among goods by attaching disproportionately high weights to their salient attributes. When goods are characterized by only one quality attribute and price, salience tilts choices toward goods with higher ratios of quality to price. We use the model to account for a variety of disparate bits of evidence, including decoy effects in consumer choice, context-dependent willingness to pay, balance of qualities in desirable goods, and shifts in demand toward low quality goods when all prices in a category rise. We then apply the model to study discounts and sales, and to explain demand for low deductible insurance.
    Keywords: consumer choice, salience
    JEL: D03 D81
    Date: 2012–03
  4. By: Ramon Caminal
    Abstract: The goal of this paper is to study the frequency of new product introductions in monopoly markets where demand is subject to transitory saturation. We focus on those types of goods for which consumers purchase at most one unit of each variety, but repeat purchases in the same product category. The model considers in…finitely-lived, forward-looking consumers and …firms. We show that the share of potential surplus that a monopolist is able to appropriate increases with the frequency of introduction of new products and the intensity of transitory saturation. If the latter is sufficiently strong then the rate of introduction of new products is higher than socially desirable (excessive dynamic product diversity.)
    Keywords: transitory saturation, product diversity, repeat purchases, demand cycles
    JEL: L12 L13
    Date: 2011–12
  5. By: David Mayer-Foulkes
    Abstract: A production market with given preferences, technology and competition technology is vulnerable if it admits both perfect competition and monopoly or oligopoly. Under decreasing returns, the combination of sunk costs and a potential for monopoly profits can be sufficient basis for vulnerability, allowing a large agent to establish monopoly by installing enough productive capacity. The monopolist deters entry by threatening to oversupply the market. The threat is credible if the future discount rate is low enough and if reputation dynamics do not invite a slow loss of market power. Vulnerable markets allow financial institutions to concentrate ownership for profit.
    Date: 2011–09
  6. By: Pedro Mazeda Gil; Fernanda Figueiredo
    Abstract: This paper studies the firm size distribution arising from an endogenous growth model of quality ladders with expanding variety. The probability distribution function of a given cohort of firms is a Poisson distribution that converges asymptotically to a normal of log size. However, due to firm entry propelled by horizontal R&D, the total distribution – i.e., when the entire population of firms is considered – is a mixture of overlapping Poisson distributions which is systematically right skewed and exhibits a fatter upper tail than the normal distribution of log size. Our theoretical results qualitatively match the empirical evidence found both for the cohort and the total distribution, and which has been presented as a challenge for theory to explain. Moreover, by obtaining a total distribution with a gradually falling variance over a long time span, the model is able to address complementary empirical evidence that points to a total distribution subtly evolving over time.
    Keywords: Firm size distribution; Skewness; Heavy tails; Endogenous growth; Horizontal and vertical R&D
    Date: 2011–09
  7. By: Philippe Aghion; Mathias Dewatripont; Luosha Du; Ann Harrison; Patrick Legros
    Abstract: This paper argues that sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly. First, we develop a model in which two firms can operate either in the same (higher growth) sector or in different sectors. To escape competition, firms can either innovate vertically or differentiate by chosing a different sector from its competitor. By forcing firms to operate in the same sector, sectoral policy induces them to innovate "vertically" rather than differentiate in order to escape competition with the other firm. The model predicts that sectoral targeting enhances average growth and productivity more when competition is more intense within a sector and when competition is preserved by the policy. In the second part of the paper, we test these predictions using a panel of medium and large Chinese enterprises for the period 1998 through 2007. Our empirical results suggest that if subsidies are allocated to competitive sectors (as measured by the Lerner index) and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant. We address the potential endogeneity of targeting and competition by using variations in targeting across Chinese cities that are exogenous to the individual firm.
    JEL: D2 L5 L6 O2 O3
    Date: 2012–05
  8. By: Pere Arqué-Castells (Universitat Autònoma de Barcelona & IEB); Pierre Mohnen (University of Maastricht)
    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.
    Keywords: R&D, persistence, subsidies, dynamic models
    JEL: H2 O2 C1 D2
    Date: 2012
  9. By: Giovanni Immordino; Michele Polo
    Abstract: We study the interaction between a ?rm that invests in research and, if successful, undertakes a practice to exploit the innovation, and an enforcer that sets legal standards, ?nes and accuracy. In innovative industries deterrence on actions interacts with deterrence on research. A per-se legality rule prevails when the practice increases expected welfare, moving to a discriminating rule combined with type-I accuracy for higher probabilities of social harm. Moreover, discriminating rules should be adopted more frequently in traditional industries than in innovative environments; patent and antitrust policies are substitutes; additional room for per-se (illegality) rules emerges when ?nes are bounded. Keywords: legal standards, accuracy, antitrust, innovative activity, enforcement. JEL classi?cation: D73, K21, K42, L51.
    Date: 2012
  10. By: Houthoofd, Noël (Hogeschool-Universiteit Brussel (HUB)); Hendrickx, Jef (Hogeschool-Universiteit Brussel (HUB))
    Abstract: The purpose of the paper is to identify the sources of variation in firm performance. This is one of the cornerstones of strategy research, i.e. the relative importance of industry and firm level effects on firm performance. Multilevel analysis is well suited to analyze variance in performance when the data are hierarchically structured (industry segments consist of firms, firms operate within the context of industry segments). The Belgian industry studied is a service industry that consists of about 25 electrical wholesalers. Data were collected from 20 firms during the period 1998-2003 from responses to a questionnaire sent to all the firms in the market. The sample in the data set covers more than 95 percent of the market (in sales), as the missing firms were just fringe competitors. The results show that firm effects explain most of the variance in four performance variables. That bears out the importance of each firm having its own specific, idiosyncratic resources and competences. The explanatory power of firm effects varies by about 30 to 40 percent while the intra-industry effect explains around 10 percent of the variance. Even though firm effects are dominant, intra-industry effects explain a significant portion of the variance in firm level performance. The firm effect is smaller than in previous studies. The firm effect varies across the performance measures: firm effects are higher for returns on assets than for profit margins. The industry segment effect (or intra-industry effect) is more independent of the dependent variable. The industry segment effect is in line with previous studies on the strategic group effect. Top managers should carefully choose and monitor the intra-industry domain they are in.
    Keywords: firm effect vs. industry effect, electrical wholesale sector, performance differences, multilevel analysis
    Date: 2012–03
  11. By: Raphael Auer; Philip Sauré
    Abstract: We develop a general equilibrium model of vertical innovation in which multiple firms compete monopolistically in the quality space. The model features many firms that each hold the monopoly to produce a unique quality level of an otherwise homogenous good and consumers who are heterogeneous in their valuation of the good’s quality. If the marginal cost of production is convex with respect to quality, multiple firms coexist and their equilibrium markups are determined by the degree of convexity and the density of quality-competition. To endogenize the latter, we nest this industry setup in a Schumpeterian model of endogenous growth. Each firm enters the industry as the technology leader and successively transits through the product cycle as it becomes superseded by further innovations. The intrinsic reason of why innovation happens in our economy is not one of displacing the incumbent, but rather, innovation is a means to differentiate oneself from existing firms and target new consumers. Aggregate growth arises if, on the one hand increasingly wealthy consumers are willing to pay for higher quality and on the other hand, private firms’ innovation generates income growth by enlarging the set of available technologies. Since the frequency of innovation determines the toughness of product market competition, in our framework the relation between growth and competition is reversed compared to standard Schumpeterian framework. Our setup does not feature business stealing in the sense that already marginal innovations grant non-negligible profits. Rather, innovators sell to a set of consumers that was served relatively poorly by pre-existing firms. Never the less, "creative destruction" prevails as new entrants make the set of available goods more differentiated, thereby exerting a pro-competitive effect on the entire industry.
    Date: 2011–09
  12. By: Alberto Bucci
    Abstract: This paper analyzes how population and product market competition (PMC) interact with each other in affecting productivity growth. We find that only a fully endogenous growth model with purposeful investment in human capital, an input in the production of intermediate goods, can simultaneously predict (as suggested by the available theoretical/empirical literature) that the relationships between population and economic growth rates and between PMC and economic growth are non-monotonic. The trade-off between specialization-gains and complexity-costs arising from an expansion of product-variety is crucial in determining the sign of these correlations, and the possible complementarity between two key variables in economic growth.
    Keywords: Endogenous and semi-endogenous growth, Population (size and growth), Human capital, Horizontal innovation, Scale effects, Monopolistic competition
    JEL: O41 O31 O33 J10 J24
    Date: 2011–09
  13. By: Pradeep Dubey (Center for Game Theory, Stony Brook University); Rahul Garg (Opera Solutions, India); Bernard De Meyer (CERMSEM, Universite Paris 1)
    Abstract: There are many situations in which a customer’s proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. Under quite general circumstances, it turns out that customers’ influence on each other dynamically converges to a steady state. Thus we can model these situations as games in which firms compete for customers located in a "social network." A canonical example is provided by competition for advertisement on the web. Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. Otherwise there is a tendency towards regionalization, with firms dominating disjoint territories. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valations of clients are anonymous.
    Keywords: Nash equilibrium, Social network, Advertisement on the web
    JEL: C7 D2 D4 L1
    Date: 2012–05
  14. By: Vahagn Jerbashian
    Abstract: This paper presents an endogenous growth model where, in line with the recent empirical evidence, the telecommunications industry (telecom) is an engine of growth. In such a framework, this paper analyzes the channels through which telecom contributes to economic growth and focuses on market structure analysis for telecom, in the light of the recent changes in it. This paper suggests how the market structure of telecom and the competition type in the telecom market can matter for its contribution to economic growth. It also proposes the optimal market structure for telecom from the social welfare perspective. In addition, it suggests the direction of telecom policies which can improve social welfare, and uses its theoretical results for qualitative evaluation of the Telecommunications Act of 1996 and similar policies.
    Keywords: Telecommunications industry; Market structure; Economic growth; Policy evaluation
    JEL: O41 O25 O38 L10
    Date: 2011–09
  15. By: Marco Alderighi (University of Valle d’Aosta); Marcella Nicolini (Department of Economics and Business, University of Pavia and Fondazione Eni Enrico Mattei, Milan); Claudio A. Piga (Department of Economics, Loughborough University and Rimini Centre Economic Analysis)
    Abstract: Based on two strands of theoretical research, this paper provides new evidence on how fares are jointly affected by in-flight seat availability and purchasing date. As capacity-driven theories predict, it emerges that fares monotonically and substantially increase with the flights occupancy rate. Moreover, as suggested in the literature on intertemporal price discrimination, the adoption of advance purchase discounts is widespread as the departure date nears, but it may be part of a U-shaped temporal profile, where discounts are preceded by periods of relatively higher fares. Finally, the intervention of yield management analysts appears to play a substantial role.
    Keywords: Pricing policy, Panel Data, Ryanair, Yield Management.
    JEL: D22 L11 L93
    Date: 2012–05
  16. By: Loy, Jens-Peter; Holm, Thore; Steinhagen, Carsten
    Keywords: Vertical Price Transmission, Threshold Error Correction Model, Dairy Products, Brands, Retail Market, Germany, Agribusiness, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Marketing, C32, D21, L11, L81,
    Date: 2012

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