nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒05‒22
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Market Power: How Does it Arise? How is it Measured? By Lawrence J. White
  2. Leaving the Door Ajar : Nonlinear Pricing by a Dominant Firm By Philippe Choné; Laurent Linnemer
  3. Intertemporal Price Discrimination in Infinite Horizon By Lionel Wilner
  4. Outsourcing with Heterogeneous Firms By Arghya Ghosh; Alberto Motta
  5. Horizontal Agreements and R&D Complementarities: Merger versus RJV By Ben Ferrett; Joanna Poyago-Theotoky
  6. Asymmetric R&D Alliances and Coopetitive Games By Daniela Baglieri; David Carf\`i; Giovanni Battista Dagnino
  7. Three essays on product differentiation: computational tools for applied research, evaluating model behavior, and geographic demand. By Skrainka, B.S.
  8. Communication and competition By Jacob K. Goeree; Jingjing Zhang
  9. Implicit Contracts and Price Stickiness: Evidence from Customer-Level Scanner Data By B. VERHELST; D. VAN DEN POEL
  10. Resale price maintenance and manufacturer competition for retail services By Hunold, Matthias; Muthers, Johannes
  11. How large is the magnitude of fixed-mobile call substitution? Empirical evidence from 16 European countries By Barth, Anne-Kathrin; Heimeshoff, Ulrich
  12. The iPhone Goes Downstream: Mandatory Universal Distribution∗ By Karp, Larry; Perloff, Jeffrey
  13. Demand shifting across flights and airports in a spatial competition model By Escobari, Diego; Lee, Sang-Yeob
  14. The Smart Grid, Entry, and Imperfect Competition in Electricity Markets By Hunt Allcott
  15. The importance of technology in the consolidation of hospital markets. The case of the United States By Mas, Nuria; Valentini, Giovanni
  16. Research Network Position and Innovative Performance: Evidence from the Pharmaceutical Industry By Maureen McKelvey; Bastian Rake
  17. The extent of European power markets By Böckers, Veit; Heimeshoff, Ulrich
  18. Banking Consolidation in Nigeria By Carlos P. Barros; Guglielmo M. Caporale
  19. Competition and regulation in Italy By Magda Bianco; Silvia Giacomelli; Giacomo Rodano
  20. Minimum Wages as a Barrier to Entry – Evidence from Germany By Ronald Bachmann; Thomas K. Bauer; Hanna Kröger

  1. By: Lawrence J. White
    Date: 2012
  2. By: Philippe Choné (CREST); Laurent Linnemer (CREST)
    Date: 2011–05
  3. By: Lionel Wilner (CREST)
    Keywords: intertemporal price discrimination, durable-good monopoly, nonlinear pricing, non-transferability
    JEL: C61 D21 D42
    Date: 2011–11
  4. By: Arghya Ghosh (School of Economics, The University of New South Wales); Alberto Motta (School of Economics, The University of New South Wales)
    Abstract: We look at imperfectly competitive markets where some consumers might be budget-constrained. We find that the equilibrium price under budget constrained demand (say, pB ) is often higher than the equilibrium price under standard demand (say, pA ). The relationship between pB and pA depends on the elasticity of the standard demand (at pA ), technology, and market structure. Lack of competition and inefficient technology make pB > pA more likely.
    Keywords: Budget-constrained; elasticity; oligopoly pricing
    JEL: D43 L13
    Date: 2011–05
  5. By: Ben Ferrett (School of Business and Economics, Loughborough University; GEP, University of Nottingham); Joanna Poyago-Theotoky (School of Economics, La Trobe University; CRIEFF, University of St Andrews; Rimini Centre for Economic Analysis (RCEA); SIERC, Massey University)
    Abstract: We study the decision of two firms within an oligopoly concerning whether to enter into a horizontal agreement to exploit complementarities between their R&D activities and, if so, whether to merge or form a research joint venture (RJV). In contrast to horizontal merger, there is a probability that an RJV contract will fail to enforce R&D sharing. We find that a horizontal agreement always arises. The insiders' merger/RJV choice involves a trade-off: While merger offers certainty that R&D complementarities will be exploited, it leads to a profit-reducing reaction by outsiders on the product market, where competition is Cournot. Greater brand similarity and contract enforceability ("quality") both favour RJV, while greater R&D complementarity favours merger. Interestingly, the insiders may choose to merge even when RJV contracts are always enforceable, and they may opt to form an RJV even when the likelihood of enforceability is negligible.
    Keywords: horizontal merger, research joint venture (RJV), contract enforceability, process R&D, R&D complementarity
    JEL: O30 L13 D43
    Date: 2012–05
  6. By: Daniela Baglieri; David Carf\`i; Giovanni Battista Dagnino
    Abstract: In this paper we show how the study of asymmetric R&D alliances, that are those between young and small firms and large and MNEs firms for knowledge exploration and/or exploitation, requires the adoption of a coopetitive framework which consider both collaboration and competition. We draw upon the literature on asymmetric R&D collaboration and coopetition to propose a mathematical model for the coopetitive games which is particularly suitable for exploring asymmetric R&D alliances.
    Date: 2012–05
  7. By: Skrainka, B.S.
    Abstract: This thesis develops computational and applied tools to study differentiated products. The core of the thesis focuses on Berry, Levinsohn, and Pakes’s [1995] (BLP hereafter) model of differentiated products. First, I examine how polynomial-based methods for multi-dimensional numerical integration improve the performance of the model. Unlike Monte Carlo integration, these rules produce reliable point estimates and standard errors as well as increasing the accuracy and execution speed of the estimation software. Next, I conduct a large scale simulation study to investigate both the asymptotic and finite sample behavior of the BLP model using the traditional instruments formed from characteristics of rival goods and also supply-side cost shifters, which are necessary for asymptotic identification. The final part of the thesis evaluates the 2003 merger of Morrisons and Safeway by combining a discrete/continuous choice model of demand with census data to construct a geographic distribution of demand. I use this distribution to model the interaction between the location of consumers and stores, focusing on the welfare implications of the merger.
    Date: 2012–02–28
  8. By: Jacob K. Goeree; Jingjing Zhang
    Abstract: Charness and Dufwenberg (American Economic Review, June 2011, 1211-1237) have recently demonstrated that cheap-talk communication raises efficiency in bilateral contracting situations with adverse selection. We replicate their finding and check its robustness by introducing competition between agents. We find that communication and competition act as "substitutes:" communication raises efficiency in the absence of competition but lowers efficiency with competition, and competition raises efficiency without communication but lowers efficiency with communication. We briefly review some behavioral theories that have been proposed in this context and show that each can explain some but not all features of the observed data patterns. Our findings highlight the fragility of cheap-talk communication and may serve as a guide to refine existing behavioral theories.
    Keywords: Cheap talk, adverse selection, competition, guilt aversion, lie aversion, inequality aversion, reciprocity
    JEL: C92
    Date: 2012–05
    Abstract: This paper uses scanner data at the individual customer level, compiled from the loyalty card database of a European retailer, to determine the importance of implicit contracts as a source of price stickiness. Drawing from Customer Relationship Management (CRM), we use segmentation techniques and cluster analysis to split up the customer base in three groups according to their behavioural loyalty to the retailer. We then perform a demand analysis on the loyal and nonloyal segments in parallel, discarding the large middle cluster. Our results from estimating a Behavioural Almost Ideal Demand System (B-AIDS) for numerous product categories reveal that loyal customers have a considerably more concave demand curve than non-loyals. This result holds true in the aggregate, and for all but some individual product categories. The more pronounced asymmetry in the price elasticity of demand for loyal customers is a major incentive for the retailer to commit to a sticky price.
    Keywords: Customer loyalty, Clustering, Curvature of demand
    JEL: C33 C38 D12 L14
    Date: 2012–03
  10. By: Hunold, Matthias; Muthers, Johannes
    Abstract: We investigate the incentives of manufacturers to use resale price maintenance (RPM) when selling products through common retailers. In our model retailers provide product specific pre-sales services. If the competitive retail margins are low, each manufacturer fixes a minimum price to induce favorable retail services. With symmetric manufacturers, products are equally profitable in equilibrium and no product is favored as without RPM, but retail prices are higher. We show that minimum RPM can create a prisoner's dilemma for manufacturers without increasing, and possibly even decreasing the overall service quality. This challenges the service argument as an efficiency defense for RPM. --
    Keywords: biased sales advice,common agency,manufacturer dilemma,matching,retail service,RPM,vertical restraints
    JEL: D83 L42
    Date: 2012
  11. By: Barth, Anne-Kathrin; Heimeshoff, Ulrich
    Abstract: This paper investigates the degree of fixed-mobile call substitution (FMCS). We use quarterly data from 2004 to mid 2010 on 16 mainly Western European countries. By applying dynamic panel data techniques, we are able to estimate short-and long-run elasticities. The own-price and cross-price elasticities found give strong empirical evidence for substitutional effects towards mobile services. In particular, the estimated cross-price elasticities of the mobile price on the fixed line call demand are relatively large compared to other studies. --
    Keywords: Dynamic Panel Model,Fix-Mobile Substitution,Telecommunication markets
    Date: 2012
  12. By: Karp, Larry; Perloff, Jeffrey
    Abstract: Apple’s original decision to market iPhones using a single downstream vendor prompted calls for mandatory universal distribution (MUD), whereby all downstream vendors would sell the iPhone under the same contract terms. The upstream monopoly may want eitherone or more downstream vendors, and, in either case, consumer welfare may be higher with either one or more firms. If the income elasticity of demand for the new good is greater than the income elasticity of the existing generic good, the MUD requirements leads to a higherequilibrium price for both the new good and the generic, and therefore lowers consumer welfare.
    Keywords: Economics, vertical restrictions, mandatory universal distribution, new product oligopoly
    Date: 2011–12–15
  13. By: Escobari, Diego; Lee, Sang-Yeob
    Abstract: This paper investigates the nature of day-to-day competition between flights using a unique panel data set on prices and inventories. We use instrumental variables methods and several spatial autoregressive models (SAR) to estimate price reaction functions. The primary source of product differentiation is departure time. After controlling for flight-specific characteristics and various sources of price dispersion, we find important evidence of demand shifting between competing flights. Most of the shift is being captured by flights scheduled to depart within a 3-hour window. We find no evidence of demand shifting between airports.
    Keywords: Spatial Autoregressive Models; Competition; Demand Shifting; Airlines
    JEL: L93 D4 C21
    Date: 2012–04–17
  14. By: Hunt Allcott
    Abstract: Most US consumers are charged a near-constant retail price for electricity, despite substantial hourly variation in the wholesale market price. The Smart Grid is a set of emerging technologies that, among other effects, will facilitate "real-time pricing" for electricity and increase price elasticity of demand. This paper simulates the effects of this increased demand elasticity using counterfactual simulations in a structural model of the Pennsylvania-Jersey-Maryland electricity market. The model includes a different approach to the problem of multiple equilibria in multi-unit auctions: I non-parametrically estimate unobservables that rationalize past bidding behavior and use learning algorithms to move from the observed equilibrium counterfactual bid functions. This routine is nested as the second stage of a static entry game that models the Capacity Market, an important element of market design in some restructured electricity markets. There are three central results. First, I find that an increase in demand elasticity could actually increase wholesale electricity prices in peak hours, contrary to predictions from short run models, while decreasing Capacity Market prices and total entry. Second, although the increased demand elasticity from the Smart Grid reduces producers' market power, in practice this would be a small channel of efficiency gains relative to forestalled entry. Third, I find that the gross welfare gains from moving a typical consumer to the Smart Grid, under the assumed demand parameters and before subtracting out the initial infrastructure costs, are about 10 percent of the consumer's total wholesale electricity costs.
    JEL: D24 D43 D44 L10 L51 L94 Q4 Q41
    Date: 2012–05
  15. By: Mas, Nuria (IESE Business School); Valentini, Giovanni (Bocconi University)
    Abstract: Over the last years, technology has become a key element of competition in the hospital market. At the same time, this market in the US has experienced an enormous merger activity. In this study, we analyze the role that technology can play in this consolidation wave by focusing on how it can affect a hospital´s selection of a particular target. We analyze the selection of targets in mergers that took place in the US hospital market between 1985 and 2000. Our results show that technology is an important element for the competition in the hospital market and, as such, it plays a relevant role also in M&A strategies. We find that hospitals are more likely to choose targets that complement their technological holding, specifically when these are complex technologies and with favorable cost/benefits ratios. With this, the merged entity tends to become closer to a one-stop-shop hospital.
    Keywords: hospital; technology; merger; acquisition; complexity;
    Date: 2012–03–07
  16. By: Maureen McKelvey (University of Gothenburg, Institute for Innovation and Entrepreneurship, School of Business, Economics and Law); Bastian Rake (Friedrich Schiller University Jena, Graduate College "The Economics of Innovative Change")
    Abstract: This paper explores how and why collaboration with different types of partners and the position within a research network can affect firms' innovative performance in terms of product innovations. A detailed empirical analysis is carried out in the biotechnology and pharmaceutical industry. This industry is characterized by a rapidly developing, complex, and dispersed knowledge base, where one would expect positive benefits from collaboration and the position within a network for innovative output. The paper uses a unique dataset in pharmaceutical cancer research based on scientific co-publications and new drug approvals. We apply social network analysis and count data regressions. We observe that collaboration with a diverse set of partners from academia and the network position in terms of eigenvector centrality is positively related to product innovation. However, we do not find a general positive association between collaboration, particularly with biotechnology companies, and product innovation or between central network positions and product innovation. Therefore, these results require a re-assessment of the role of scientific collaboration and biotechnology companies in the development of the pharmaceutical industry.
    Keywords: Research Networks, Research Collaboration, Innovative Performance, Pharmaceuticals
    JEL: L25 O31
    Date: 2012–05–11
  17. By: Böckers, Veit; Heimeshoff, Ulrich
    Abstract: This paper analyzes the convergence process of Central-West European wholesale electricity markets from 2004 to the beginning of 2011. Jevon's law of price indifference is scrutinized using price correlation, parametric and nonparametric tests of price-differences and cointegration analysis. As a unique identifaction strategy national bank holidays are used as exogenous system shocks to trace the degree of market integration before the advent of the so-called market coupling of European power markets. In order to avoid overestimation of the degree of market integration, we specifically control for seasonal effects and common input factors. While the overall degree of integration between Germany and its neighbours has increased in the course of time, results suggest that only Austria and Germany already constitute a joint price area and that market coupling increases the convergence of markets at least between its participants. --
    Keywords: Market Structure,Spatial Market Delineation,Time Series Econometrics,Energy Data, Electricity,Europe
    JEL: C32 L1 L40 L94 Q40
    Date: 2012
  18. By: Carlos P. Barros; Guglielmo M. Caporale
    Abstract: This study examines the Nigerian banking consolidation process using a dynamic panel for the period 2000-2010. The Arellano and Bond (1991) dynamic GMM approach is adopted to estimate a cost function taking into account the possible endogeneity of the covariates. The main finding is that the Nigerian banking sector has benefited from the consolidation process, and specifically that foreign ownership, mergers and acquisitions and bank size decrease costs. Directions for future research are also discussed.
    Keywords: Nigeria, banking consolidation, dynamic panels
    JEL: G21 C23 O55
    Date: 2012–01
  19. By: Magda Bianco (Banca d'Italia); Silvia Giacomelli (Banca d'Italia); Giacomo Rodano (Banca d'Italia)
    Abstract: Insufficient competition remains a major obstacle to growth in Italy. The main culprits include the institutional environment and the regulations governing some economic sectors subject to market failures. As to the former, relative neglect of economic efficiency has produced an unstable and inconsistent regulatory framework, excessive administrative burdens, and an inefficient system of contract enforcement. Past attempts to reform this area have yielded poor results. As to the latter, regulation was satisfactory only in some sectors. The excessive number of activities in which some operators enjoyed exclusive rights to provide services and restrictive regulation hindered competition in professional services. Growing awareness of the importance of competition policies to foster growth has given new impetus to the implementation of a wide programme of liberalization and institutional reform.
    Keywords: competition, regulation, antitrust, institutions
    JEL: K23 K40
    Date: 2012–04
  20. By: Ronald Bachmann; Thomas K. Bauer; Hanna Kröger
    Abstract: This study analyses employers‘ support for the introduction of industry-specific minimum wages as a cost-raising strategy in order to deter market entry. Using a unique data set consisting of 800 firms in the German service sector, we find some evidence that high-productivity employers support minimum wages. We further show that minimum wage support is higher in industries and regions with low barriers to entry. This is particularly the case in East Germany, where the perceived threat of low-wage competition from Central and Eastern European countries is relatively high. In addition, firms paying collectively agreed wages are more strongly in favour of minimum wages if union coverage is low and the mark-up of union wage rates is high.
    Keywords: Minimum wage; product market competition; service sector
    JEL: J38 J50 L41 L80
    Date: 2012–04

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