nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒05‒29
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Switching Costs and Equilibrium Prices By Cabral, Luís M B
  2. The Impact of Integration on Productivity and Welfare Distortions Under Monopolistic Competition By Swati Dhingra; John Morrow
  3. The effect of Stackelberg cost reductions on spatial competition with heterogeneous firms By Matthew Beacham
  4. Menu Costs and Dynamic Duopoly By Kano, Kazuko
  5. Strategic loyalty reward in dynamic price Discrimination By Bernard Caillaud; Romain De Nijs
  6. Vertical Exclusion with Endogenous Competiton Externalities By Hansen, Stephen; Motta, Massimo
  7. Pricing and Signaling with Frictions By Alain Delacroix; Shouyong Shi
  8. Bargaining failures and merger policy By Roberto Burguet; Ramon Caminal
  9. Cartel Pricing Dynamics, Price Wars and Cartel Breakdown By Manganelli, Anton-Giulio
  10. A Simple Theory of Predation By Chiara Fumagalli; Massimo Motta
  11. Access Pricing, Competition, and Incentives to Migrate From "Old" to "New" Technology By Bourreau, Marc; Cambini, Carlo; Dogan, Pinar
  12. Compulsory licensing, price controls, and access to patented foreign products By Eric Bond; Kamal Saggi
  13. Patents Wars (3ème partie) : Les pools, du cartel à l'abolition partielle du système des patents By Pierre-André Mangolte
  14. Market power in the global economy: the exhaustion and protection of intellectual property By Kamal Saggi
  15. The iPhone goes downstream: mandatory universal distribution By Karp, Larry; Perloff, Jeffrey
  16. Mergers and Innovation in the Pharmaceutical Market By Comanor, William S.; Scherer, Frederic Michael
  17. Push-Me Pull-You: Comparative Advertising in the OTC Analgesics Industry By Anderson, Simon P; Ciliberto, Federico; Liaukonyte, Jura; Renault, Régis
  18. The Adoption Process of Payment Cards -An Agent- Based Approach By Biliana Alexandrova-Kabadjova; Sara Gabriela Castellanos Pascacio; Alma L. García-Almanza
  19. The Pricing of Art and the Art of Pricing: Pricing Styles in the Concert Industry By Courty, Pascal; Pagliero, Mario
  20. Incorporating Prior Information into a GMM Objective for Mixed Logit Demand Systems By Charles Romeo
  21. The Consistency of Merger Decisions in a Developing Country: The South African Competition Commission By Sunel Grimbeek; Steven F. Koch; Richard J. Grimbeek
  22. Diverse Degrees of Competition within the EMU and their Implications for Monetary Policy By Patrick Brämer; Horst Gischer; Toni Richter; Mirko Weiß
  23. Agglomeration and Markup By Lu, Yi; Tao, Zhigang; Yu, Linhui

  1. By: Cabral, Luís M B
    Abstract: In a competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase competition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the suggest that, if markets are very competitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where the sellers' discount factor is very high.
    Keywords: price competition; switching costs
    JEL: L13
    Date: 2012–05
  2. By: Swati Dhingra; John Morrow
    Abstract: A fundamental question in monopolistic competition theory is whether the market allocates resources efficiently. This paper generalizes the Spence-Dixit-Stiglitz framework to heterogeneous firms, addressing when the market provides optimal quantities, variety and productivity. Under constant elasticity of demand, each firm prices above its average cost, yet we show market allocations are efficient. When demand elasticities vary, market allocations are not efficient and reflect the distortions of imperfect competition. After determining the nature of market distortions, we investigate how integration may serve as a remedy to imperfect competition. Both market distortions and the impact of integration depend on two demand side elasticities, and we suggest richer demand structures to pin down these elasticities. We also show that integration eliminates distortions, provided the post-integration market is sufficiently large.
    Keywords: Selection, Monopolistic competition, Efficiency, Productivity, Social welfare, Demand elasticity
    JEL: F1 L1 D6
    Date: 2012–05
  3. By: Matthew Beacham
    Abstract: This article extends the theory of spatial competition by allowing firms to endogenously select their operating costs within a Hotelling (1929) framework. A three-stage duopoly model is examined in which the firms compete in cost reduction, locations and finally prices. Furthermore, it is assumed that firms are identical except with respect to their cost reducing technologies and one firm has a Stackelberg leadership advantage in the cost-reduction stage. The model implies two results that are unique within the literature. First, if a firm possesses both an efficieny and investment timing advantage, it always becomes the dominant firm in the product market in all relevant respects. Second, if an ex ante inefficient firm has an investment timing advantage it can only become the ex post market leader if and only if the a priori efficiency gap is not too large. Consequently, these results suggest that a firm's ability to innovate - in terms of both efficiency and timing - play a large part in determining the composition of the final product market.
    Keywords: Location model; Asymmetric firms; Stackelberg game; Endogenous cost selection
    JEL: L13 R32
    Date: 2012–05
  4. By: Kano, Kazuko
    Abstract: Scrutinizing a state-dependent pricing model in the presence of menu costs and dynamic duopolistic interactions, this paper claims that the assumption about market structure is crucial for identifying menu costs for price changes. Prices in a dynamic duopoly market can be more rigid than those in more competitive markets such as monopolistically competitive one. If so, estimates of menu costs under monopolistic competitions are potentially biased upwards due to the price rigidity from strategic interactions between dynamic duopoly rms. Developing and estimating a dynamic discrete-choice model with duopoly to correct this potential bias, this paper provides empirical evidence that not only menu costs but also dynamic strategic interactions play an important role to explain the observed degree of price rigidity in data of weekly retail prices.
    Keywords: Menu Cost; Dynamic Discrete Choice Game; Retail Price
    JEL: L13 L81 D43
    Date: 2011–12–14
  5. By: Bernard Caillaud (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA); Romain De Nijs (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: This paper proposes a dynamic model of duopolistic competition under behaviorbased price discrimination with the following property: in equilibrium, a firm may reward its previous customers although long term contracts are not enforceable. A firm can offer a lower price to its previous customers than to its new customers as a strategic means to hamper its rival to gather precise information on the young generation of customers for subsequent profitable behavior-based pricing. The result holds both with myopic and forward-looking, impatient enough consumers.
    Keywords: Price discrimination ; Dynamic pricing ; Loyalty reward
    Date: 2011–09
  6. By: Hansen, Stephen; Motta, Massimo
    Abstract: In a vertical market in which downstream firms have private information about their productivity and compete for consumers, an upstream firm posts public bilateral contracts. When downstream firms are risk-neutral without wealth constraints, the upstream firm offers the input to all retailers. When they are sufficiently risk averse it sells to one, thereby eliminating externalities among downstream firms that necessitate the payment of risk premia. By similar reasoning exclusion is also optimal with downstream wealth constraints. Thus exclusion arises when contracts are fully observable and downstream firms are ex ante symmetric. The result is robust to a number of extensions.
    Keywords: Adverse selection; Exclusive contracts; Limited liability; Risk
    JEL: D82 L22 L42
    Date: 2012–05
  7. By: Alain Delacroix; Shouyong Shi
    Abstract: We study a large market with directed search and signaling. Each seller chooses an investment that determines the quality of the good which is the seller's private information. A seller also chooses the price of the good and the number of selling sites. After observing sellers' choices of prices and sites, but not quality, buyers choose which price to search. The sites posting the same price and the buyers searching for that price match with each other randomly. In this environment, a seller's choices of prices and sites can direct buyers' search decisions and signal quality ex-ante. After matching, a buyer also receives an imperfectly informative signal about the quality of the good and decides whether to trade at the posted price. When the latter signal received is sufficiently accurate, we prove that there is a unique equilibrium. Moreover, when the quality differential is large, the equilibrium (under private information) implements the socially efficient allocation under public information. When the quality differential is small, the equilibrium is inefficient in the quality of goods produced or/and the number of sites created. This inefficiency is caused by a conflict between the search-directing role and the signaling role of a posted price. We also compare the price-posting equilibrium with the equilibrium under bargaining. The bargaining equilibrium features efficient quality, but inefficient entry. It is superior to the price-posting equilibrium when a seller's bargaining power is intermediate and the quality differential is small.
    Keywords: Directed search; Search, Signaling; Pricing; Efficiency
    JEL: D8 C78 E24
    Date: 2012–05–18
  8. By: Roberto Burguet; Ramon Caminal
    Abstract: Abstract In this paper we study the optimal ex-ante merger policy in a model where merger proposals are the result of strategic bargaining among alternative candidates. We allow for firm asymmetries and, in particular, we emphasize the fact that potential synergies generated by a merger may vary substantially depending on the identity of the participating firms. The model demonstrates that, under some circumstances, relatively inefficient mergers may take place. That is, a particular merger may materialize despite the existence of an alternative merger capable of generating higher social surplus and even higher profits. Such bargaining failures have important implications for the ex-ante optimal merger policy. We show that a more stringent policy than the ex-post optimal reduces the scope of these bargaining failures and raises expected social surplus. We use a bargaining model that is flexible, in the sense that its strategic structure does not place any exogenous restriction on the endogenous likelihood of feasible mergers.
    Keywords: endogenous mergers, merger policy, bargaining, synergies
    JEL: L13 L41
    Date: 2012–05–17
  9. By: Manganelli, Anton-Giulio
    Abstract: This paper gives an unified explanation of some of the most widely known facts of the cartel literature: prices gradually rise, then remain constant, there can be price wars and some cartels break down. In this model consumers are loss averse and efficiency of a competitive fringe is not publicly observable. In the best collusive equilibrium, the price expectation can be so low that loss aversion makes consumers not buy at the maximal collusive price: firms then set a lower price that rises in time with consumers’ expectations. This increasing price path is bounded from above by the presence of the fringe. If the fringe sets a low price during a sufficient number of periods, there can be price wars and collusion can eventually break down.
    Date: 2012–05
  10. By: Chiara Fumagalli; Massimo Motta
    Abstract: We propose a simple theory of predatory pricing, based on incumbency advantages, scale economies and sequential buyers (or markets). The prey needs to reach a critical scale to be successful. The incumbent (or predator) has an initial advantage and is ready to make losses on earlier buyers so as to deprive the prey of the scale the latter needs, thus making monopoly profits on later buyers. Several extensions are considered, including cases where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterized by common costs. Conditions under which predation may (or not) take place in actual cases are also discussed.
    Date: 2012
  11. By: Bourreau, Marc; Cambini, Carlo; Dogan, Pinar
    Abstract: In this paper, we analyze the incentives of an incumbent and an entrant to migrate from an "old" technology to a "new" technology, and discuss how the terms of wholesale access affect this migration. We show that a higher access charge on the legacy network pushes the entrant firm to invest more, but has an ambiguous effect on the incumbent's investments, due to two conflicting effects: the wholesale revenue effect, and the business migration effect. If both the old and the new infrastructures are subject to ex-ante access regulation, we also find that the two access charges are positively correlated.
    Date: 2011
  12. By: Eric Bond (Department of Economics, Vanderbilt University); Kamal Saggi (Department of Economics, Vanderbilt University)
    Abstract: Motivated by existing multilateral rules regarding intellectual property, we develop a North-South model to highlight the dual roles price controls and compulsory licensing play in determining Southern access to a patented Northern product. The Northern patent-holder chooses whether and how to work its patent in the South (either via entry or voluntarily licensing) while the South determines the price control and whether to issue a compulsory license. The threat of compulsory licensing benefits the South and also increases global welfare when the North-South technology gap is significant. The price control and compulsory licensing are complementary instruments from the Southern perspective.
    Keywords: Patented Goods, Compulsory Licensing, Price Controls, Quality, Welfare
    JEL: F13 F53 O34
    Date: 2012–04
  13. By: Pierre-André Mangolte (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)
    Abstract: Dans cette dernière partie sont analysés les différents pools de patents constitués dans les industries du cinéma, de l'automobile et de l'aviation, suite aux guerres des patents étudiées précédemment. L'analyse se concentre alors sur les Etats-Unis. Si les pools ou accords de licences croisées mis sur pied à l'époque relèvent bien d'une même nécessité, celle d'arrêter les litiges juridiques et d'assurer une certaine "paix des patents", leur nature et leurs buts sont bien différents. La Motion Pictures Patents Co prolonge et étend le principe du contrôle exclusif des activités de la loi des patents et constitue par ailleurs un cartel qui sera condamné au titre de la loi Sherman; ce procès étant une des premières confrontations entre la vieille loi des patents et la toute nouvelle législation antitrust. Les différentes expériences dans l'industrie automobile, comme la Manufacturers Aircraft Association de la construction des avions laissaient à l'inverse toutes les entreprises en concurrence, en mettant par contre en commun un certain nombre de techniques. Il y avait là, à l'échelle de toute une industrie, une abolition partielle et volontaire de l'institution des patents.
    Keywords: pool de brevet, Sherman Act, antitrust, abolition des patents, Motion Picture Patents Co, Manufacturers Aircraft Association
    Date: 2012–03–10
  14. By: Kamal Saggi (Department of Economics, Vanderbilt University)
    Abstract: We develop a North-South model in which a firm that enjoys monopoly status in the North (by virtue of a patent or a trademark) has the incentive to price discriminate internationally because Northern consumers value its product more than Southern ones. While North's policy regarding the territorial exhaustion of intellectual property rights (IPR) determines whether the firm can exercise market power across regions, Southern policy regarding the protection of IPR determines the firm's monopoly power within the South. In equilibrium, each region's policy takes into account the firm's pricing strategy, its incentive to export, and the other region's policy stance. Major results are: (i) the North is more likely to choose international exhaustion if the South protects IPR whereas the South is more willing to offer such protection if the North implements national exhaustion; (ii) the firm values IPR protection less than the freedom to price discriminate internationally if and only if its quality advantage over Southern imitators exceeds a certain threshold; and (iii) requiring the South to protect IPR increases global welfare iff such protection is necessary for inducing the firm to export to the South.
    Keywords: Exhaustion of IPRs, Imitation, Market power, TRIPS, Welfare
    JEL: F13 F10 F15
    Date: 2012–03
  15. By: Karp, Larry (University of California, Berkeley. Dept of agricultural and resource economics); Perloff, Jeffrey (University of California, Berkeley. Dept of agricultural and resource economics)
    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 either one 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 higher equilibrium price for both the new good and the generic, and therefore lowers consumer welfare.
    Keywords: vertical restrictions, mandatory universal distribution, new product oligopoly
    JEL: L12 L13 L42
    Date: 2011–12
  16. By: Comanor, William S.; Scherer, Frederic Michael
    Abstract: The U.S. pharmaceutical industry has experienced in recent years two dramatic changes: stagnation in the growth of new molecular entities approved for marketing, and a wave of mergers linking inter alia some of the largest companies. This paper explores possible links between these two phenomena and proposes alternative approach to merger policy. It points to the high degree of uncertainty encountered in the discovery and development of new pharmaceutical entities and shows how optimal strategies entail the pursue of parallel research and development paths. Uncertainties afflict both success rates and financial gains contingent upon success. A new model simulating optimal strategies given prevalent market uncertainties is presented. Parallelism can be sustained both within individual companies’ R&D programs and across competing companies. The paper points to data showing little parallelism of programs within companies and argues that inter-company mergers jeopardize desirable parallelism across companies.
    Date: 2011
  17. By: Anderson, Simon P; Ciliberto, Federico; Liaukonyte, Jura; Renault, Régis
    Abstract: We model comparative advertising as brands pushing up own brand perception and pulling down the brand image of targeted rivals. We watched all TV advertisements for OTC analgesics 2001-2005 to construct matrices of rival targeting and estimate the structural model. These attack matrices identify diversion ratios and hence comparative advertising damage measures. We find that outgoing comparative advertising attacks are half as powerful as self-promotion in raising own perceived quality and cause more damage to the targeted rival than benefit to the advertiser. Comparative advertising causes most damage through the pull-down effect and has substantial benefits to other rivals.
    Keywords: advertising targets; analgesics; attack matrix; comparative advertising; diversion ratios; push and pull effects
    JEL: L13 L65 M37
    Date: 2012–05
  18. By: Biliana Alexandrova-Kabadjova; Sara Gabriela Castellanos Pascacio; Alma L. García-Almanza
    Abstract: We investigate the payment card's adoption rate under consumers' and merchants' awareness of network externalities, given two levels of Interchange Fees in a multiagent card market. For the purpose of our research, in multiple instances of the model (scenarios) the investigated effects are analyzed over the complete process of adoption, until the market's saturation point is achieved. For each scenario, a comparison is made between two different levels of Interchange Fees and different degrees of consumers' and merchants' awareness. We model explicitly the interactions between consumers and merchants at the point of sale. We allow card issuers to charge consumers with fixed fees and provide net benefits from card usage, whereas acquirers can charge fixed and transactional fees to merchants.
    Keywords: Two-sided markets, financial services, network formation.
    JEL: D7 D85 G28 L13
    Date: 2012–05
  19. By: Courty, Pascal; Pagliero, Mario
    Abstract: We document the existence of pricing styles in the concert industry. Artists differ in the extent to which they rely on second- and third-degree price discrimination and in how likely they are to sell out concerts. Most strikingly, artists who use multiple seating categories are more likely to vary prices across markets and less likely to sell out concerts. These patterns are difficult to explain under a standard profit maximization paradigm. The hypothesis that artists differ in their willingness to exploit market power provides a plausible framework for explaining these patterns in artist pricing style.
    Keywords: Behavioral pricing; exploitation of market power; Fair pricing; Price discrimination; Pricing style; Rationing
    JEL: D42 D45 L21 L82 Z11
    Date: 2012–05
  20. By: Charles Romeo (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: It is well known that random parameters specifications can generate upward sloping demands for a subset of products in the data. Nevo (2001), for example, found 0.7 percent of demands to be upward sloping. Possibly less well known is that demand system estimates can imply margins outside of the theoretical bounds for profit maximization. If such violations are numerous enough, they can confound merger simulation exercises. Using Lerner indices for multiproduct firms playing static Bertrand games, we find that up to 35 percent of implied margins for beer are outside the bounds. We characterize downward sloping demand and the theoretical bounds for profit maximization as prior information and extend the GMM objective function, incorporating inequality moments for product-level own-elasticities and brand-level or product-level Lerner indices. These moments impose a cost when the inequality is violated, and equal zero otherwise. Very few violations remain when an inequality constrained estimator is used. Importantly, the unconstrained GMM objective has multiple minima, while the constrained objective has only one minimum when the product-level constraints are used in our illustration. This is valuable for policy purposes as it enables one to limit attention to a single theoretically consistent model. Inputs to merger simulations are likewise consistent with economic theory, and, as a result, confidence in the output is increased. In a second innovation, this paper introduces merger simulation for static Stackelberg price competition games. Our illustration uses beer data, a perfect vehicle for introducing Stackelberg games as the economics literature and industry trade press have long considered Anheuser-Busch to be the industry price leader. We find evidence of positive pre-merger price conjectures consistent with beer brands being strategic complements. Allowing the leader to update their conjectures in response to a merger provides dramatically different post-merger price and share changes relative to Bertrand. The Stackelberg conjectures are used as a strategic tool that allows post-merger product repositioning unavailable under Bertrand.
    Date: 2012–04
  21. By: Sunel Grimbeek; Steven F. Koch; Richard J. Grimbeek
    Abstract: The South African Competition Commission's merger decisions for FY2002 through FY2009 are analyzed to empirically identify the factors historically influencing prohibition, conditional approval and unconditional approval. The key explanatory variables are linked to provisions of the 1998 Competition Act, such that the analysis provides insight into the consistency of merger decisions with respect to the legal requirements specified in the Act. Although the legislation includes standard economic concerns, it also includes a provision for advancing public interests and development concerns. Initial results point to differing behaviour over the time period, which suggests that the Commission is inconsistent; however, those inconsistencies are removed, once additional measures of market contestibility are included in the analysis. The final results suggest that the Commission is less likely to approve mergers that they link to markets that are less contestable. In addition to protecting competition, the Commission is simultaneously protecting other public interests. Therefore, our research supports the hypothesis that the Commission consistently applies its legislative remit.
    Keywords: South African Competition Commission, Merger Decisions
    JEL: K21 L40 D78
    Date: 2012
  22. By: Patrick Brämer (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Horst Gischer (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Toni Richter (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Mirko Weiß (German Savings Banks Association)
    Abstract: Our paper calls attention to the heterogeneous levels of competition in EMU banking systems. We enhanced the ECB MFI interest rate statistics by calculating a lending rate average weighted by loan volumes for each EMU member country. Employing a modified Lerner Index, our unique data set enables us to calculate banks' price setting power in the national lending business alone, instead of measuring market power for banks' total business. For 12 countries, we ultimately show that market power in the exclusive segment of lending is greater than market power in total banking business. In an OLS regression model, we investigate to what extent loan rate variations can be explained by changing degrees of market power during the period 2003-2009. Significant cross-country differences can be observed. We find that changes in the national degree of competition considerably affect funding conditions in the individual countries and therefore hinder a homogeneous transmission of ECB monetary policy.
    Keywords: banking competition; European Monetary Union; Lerner Index; monetary policy
    JEL: E43 E52 E58 L16
    Date: 2012–03
  23. By: Lu, Yi; Tao, Zhigang; Yu, Linhui
    Abstract: Agglomeration brings costs (e.g., intensified local competition) as well as benefits (e.g., knowledge spillover). It is important to examine the net impact of agglomeration to understand the geographic distribution of economic activities. In this study, we use firm markup (defined as the ratio of price over marginal cost) to capture the net impact of agglomeration. Using data from Chinese manufacturing firms in the 1998-2005 period, we first recover the markup ratio for each firm following De Locker and Warzynski (2012), and then use changes in industrial affiliation as a quasi-experiment to identify the impact of agglomeration on firm markup. Our difference-in-differences (DID) estimation shows that agglomeration has a negative impact on firm markup, suggesting that the devastating competition effect dominates the beneficial spillover effect in Chinese context. Moreover, we find that the impact of agglomeration on firm markup varies across different industries and types of firms.
    Keywords: Agglomeration; Firm Markup; Difference-in-Differences Estimation; Spillover effect; Competition effect
    JEL: L25 D21 R11
    Date: 2011–06

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