nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒06‒05
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Discount pricing By Armstrong, Mark; Chen, Yongmin
  2. Economising, Strategising and the Decision to Outsource By Leahy, Dermot; Montagna, Catia
  3. On the Organizational Structure of Multinational Firms: Which Sourcing Mode for Which Input? By Suedekum, Jens; Nowak, Verena; Schwarz, Christian
  4. Bargaining Failures and Merger Policy By Roberto Burguet; Ramon Caminal
  5. Keep to sustain or keep to exploit? Why firms keep hard evidence By Agisilaou, Panayiotis
  6. Trade in bilateral oligopoly with endogenous market formation By Dickson, Alex; Hartley, Roger
  7. An Agent-Based Model of Schumpeterian Competition By Alessandro Caiani
  10. Adverse Effects of Patent Pooling on Product Development and Commercialization By Thomas D. Jeitschko; Nanyun Zhang
  11. Market Size, Competition, and the Product Mix of Exporters By Thierry Mayer; Marc J. Melitz; Gianmarco I. P. Ottaviano
  12. The proposed merger of AT&T and T-Mobile: Are there unexhausted scale economies in U.S. mobile telephony? By Li, Yan; Pittman, Russell
  13. Termination-Based Price Discrimination: Tariff-Mediated Network Effects and the Fat-Cat Effect By Claussen, Jörg; Trüg, Moritz; Zucchini, Leon
  14. How regulation affects network and service quality in related markets By Haucap, Justus; Klein, Gordon J.
  15. Platform Pricing at Sports Card Conventions By Marc Rysman; Ginger Zhe Jin
  16. Market Structure and Market Performance in E-Commerce By Franz Hackl; Michael E. Kummer; Rudolf Winter-Ebmer; Christine Zulehner
  17. Advertising Pricing Models in Media Markets: Lump-Sum versus Per-Consumer Charges By Helmut Dietl; Markus Lang; Panlang Lin
  18. Less pain at the pump? The effects of regulatory interventions in retail gasoline markets By Dewenter, Ralf; Heimeshoff, Ulrich
  19. Buyers Alliances as Countervailing Power in WIC Infant-Formula Auctions By Davis, David
  20. Reimbursement and Investment: Propsective Payment and For-Profit Hospitals' Market Share By Seungchul Lee; Robert Rosenman
  21. The roubstness of agent-based models of electricity wholesale markets By Newberry, D.

  1. By: Armstrong, Mark; Chen, Yongmin
    Abstract: This paper investigates "discount pricing", the common marketing practice whereby a price is listed as a discount from an earlier, or regular, price. We discuss two reasons why a discounted price---as opposed to a merely low price---can make a rational consumer more willing to purchase the item. First, the information that the product was initially sold at a high price can indicate the product is high quality. Second, a discounted price can signal that the product is an unusual bargain, and there is little point searching for lower prices. We also discuss a behavioral model in which consumers have an intrinsic preference for paying a below-average price. Here, a seller has an incentive to offer different prices to identical consumers, so that a proportion of its consumers enjoy a bargain. We discuss in each framework when a seller has an incentive to offer false discounts, in which the reference price is exaggerated.
    Keywords: reference dependence; price discounts; sales tactics; false advertising
    JEL: D18 M3 D83
    Date: 2012–05
  2. By: Leahy, Dermot; Montagna, Catia
    Abstract: We study the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Firms’ mode of operation decision depends on both the incentive to economize on costs and on strategic considerations. We explore the strategic incentives to outsource and show that asymmetric equilibria emerge, with firms choosing different modes of operation, even when they are ex-ante identical. With ex-ante asymmetries, higher cost firms are more likely to outsource. We apply our model to a number of different international trading setups.
    Keywords: Outsourcing, Vertical Integration, Trade Liberalisation, Oligopoly,
    Date: 2011
  3. By: Suedekum, Jens (University of Duisburg-Essen); Nowak, Verena (University of Duisburg-Essen); Schwarz, Christian (University of Duisburg-Essen)
    Abstract: Recent studies indicate that firms often outsource standard and simple tasks, while keeping complex and important inputs inside their boundaries. This observation is difficult to reconcile with the property rights approach of the firm, which suggests that important components should be outsourced in order to properly incentivize the respective suppliers. In this paper we introduce economies of scope into a property rights model where a producer contracts with two suppliers. The organizational decision is driven by two countervailing effects: the ownership rights effect favors outsourcing, while the "indirect" effect via the suppliers' costs favors vertical integration of both inputs. If production is highly component intensive, and if one input is much more important than the other, we show that vertical integration of the "more important" and outsourcing of the "less important" supplier is chosen in equilibrium. We also consider an open economy setup where the producer decides whether to offshore inputs.
    Keywords: multinational firms, outsourcing, intra-firm trade, property rights approach
    JEL: D23 F12 L23
    Date: 2012–05
  4. By: Roberto Burguet; Ramon Caminal
    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
  5. By: Agisilaou, Panayiotis
    Abstract: We develop a model wherein collusive firms' decisions to keep or to destroy the hard evidence is endogenous. Unlike previous literature, we assume that the administration of the cartel crucially depends on the existence of the hard evidence. Within this framework, we explore the impact of a leniency program on whether firms' incentives are to destroy or to keep the hard evidence. Moreover, we examine firms' incentives to report or not to report the hard evidence to the antitrust authority. We show that firms may willfully keep the hard evidence, even if a leniency program is not available, in order to enhance the stability of the cartel. Additionally, we prove that firms are more inclined to keep the hard evidence when a leniency program is available. Finally, we demonstrate that firms are more likely to destroy the hard evidence when the collusive profits-fine ratio increases.
    Keywords: antitrust; cartels; enforcement policy; hard evidence; leniency programs
    JEL: K21 L4 K4
    Date: 2011–05–17
  6. By: Dickson, Alex; Hartley, Roger
    Abstract: We study a strategic market game in which traders are endowed with both a good and money and can choose whether to buy or sell the good. We derive conditions under which a non-autarkic equilibrium exists and when the only equilibrium is autarky. Autarky is ‘nice’ (robust to small perturbations in the game) when it is the only equilibrium, and ‘very nice’ (robust to large perturbations) when no gains from trade exist. We characterize economies where autarky is nice but not very nice; that is, when gains from trade exist and yet no trade takes place.
    Keywords: Bilateral oligopoly, strategic market game, trade,
    Date: 2011
  7. By: Alessandro Caiani (Department of Economics and Business, University of Pavia)
    Abstract: The paper presents an Agent-Based extension of Nelson-Winter model of schumpeterian competition. The original version did not provide any insight about the direction of firms’ innovative activities and of technological change as a whole. As a result, it lacked an explicit structure governing firms interaction and the shape of externalities. We address these criticisms by taking explicitly into account the structure of technology in use in the industry, that we shape as a directed network of nodes and links: nodes represent technological skills to be learnt by firms looking for ’new combinations’ and links represent their reciprocal interdependencies. The network is created in order to reflect the defining properties of Technological Paradigms and Technological Trajectories, as they emerge by evolutive-neoschumpeterian literature. Firms’ ability to learn technological skills through imitation of competitors generates spillover effects related to the process of diffusion of innovation. The basic model presented here focuses on a particular aspect of schumpeterian competition: the relationship between industry initial concentration and its overall innovative performance and, vice-versa, between innovation process and the evolution of industry structure over time. In this same perspective we also analyze how firms’ interactions and the structure of technology concur in determining the success or failure of an innovative strategy. Finally we argue that the model presented here might constitute a flexible framework worthy of further applications in the study of innovation process and technological progress.
    Date: 2012–05
  8. By: Toro-Gonzalez, Daniel; Yan, Jia; Gallardo, Rosa Karina; McCluskey, Jill J.
    Abstract: This article estimates the demand for mint-flavored gum products using grocery store sales data and accounting for consumers’ valuation of quality. Unobserved product attributes, such as flavor quality, are important elements to consider when estimating the demand for gum. The estimation results suggest that gum is an inelastic product. A positive relationship between willingness to pay and unobserved quality was identified, implying that gum industry should be able to command a premium for higher quality mint flavored products.
    Keywords: Quality Differentiation, Unobserved Product Attributes, Demand Estimation, Gum, Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, Industrial Organization,
    Date: 2012
  9. By: Bakhtavoryan, Rafael; Capps, Oral, Jr.; Salin, Victoria
    Abstract: A 2007 foodborne illness incident involving peanut butter is linked with structural change in consumer demand. Compensated and uncompensated own- and cross-price elasticities and expenditure elasticities were calculated for leading brands before and after the product recall using the Barten synthetic model and weekly time-series data from 2006 through 2008. Statistically significant differences in price elasticities for the affected brand, Peter Pan, were absent. After a period of 27 weeks, this brand essentially recovered from the food safety crisis. Significant differences in price elasticities were evident among non-affected brands. Hence, spillover effects and heightened competition are associated with the recall.
    Keywords: Food safety, 2007 Peter Pan recall, demand system models, scanner data., Agribusiness, Consumer/Household Economics, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, D12,
    Date: 2012
  10. By: Thomas D. Jeitschko (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Nanyun Zhang (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: The conventional antitrust wisdom is that the formation of patent pools is welfare en- hancing when patents are complementary, since the pool avoids a double-marginalization problem associated with independent licensing. The focus of this paper is on (down- stream) product development and commercialization on the basis of perfectly comple- mentary patents. We consider development technologies that entail spillovers between rivals, and assume that nal demand products are imperfect substitutes. When pool formation facilitates information sharing and either increases spillovers in development or decreases the degree of product di erentiation, patent pools can adversely a ect welfare by reducing the incentives towards product development and product mar- ket competition|even with perfectly complementary patents. This modi es and even negates the conventional wisdom for some settings and suggests why patent pools are uncommon in science-based industries such as biotech and pharmaceuticals, despite there being frequent policy advocacy for them.
    Keywords: Patent Pools, Research and Development, Innovation, BioTechnology, Electronics
    JEL: L1 L2 L4 L6 D2 D4
    Date: 2012–04
  11. By: Thierry Mayer; Marc J. Melitz; Gianmarco I. P. Ottaviano
    Abstract: We build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large.
    Keywords: trading partners, multi product firms, trade models
    JEL: F0
    Date: 2012–05
  12. By: Li, Yan; Pittman, Russell
    Abstract: From the beginning, the debate on the likely results of the proposed acquisition of T-Mobile USA by AT&T focused more on the claims of the parties that “immense” merger efficiencies would overwhelm any apparent losses of competition than on the presence or absence of those losses, and the factors that might affect them, such as market definition. The companies based their “economic model” of the merger on estimates of efficiencies on AT&T’s “engineering model”, without addressing the credibility of the results of the latter in the context of the economics literature on the telecommunications sector. In this paper we first argue that the economics literature on economies of scale (especially) and economies of density in mobile telephony suggests caution in expecting such massive cost reductions from increasing the size of an already very large firm. We then present new econometric evidence from an international data base supporting the notion that most large mobile telephone service providers have reached the point of constant or even (rarely) declining returns to scale.
    Keywords: merger efficiencies; economies of scale; economies of density; mobile telephony; antitrust; stochastic frontier analysis
    JEL: L96 K23 K21 D24 L40
    Date: 2012–04
  13. By: Claussen, Jörg; Trüg, Moritz; Zucchini, Leon
    Abstract: Mobile telecommunications operators routinely charge higher prices for off-net than on-net calls. Previous research provides two alternative propositions on whether on-net / off-net price differentials (OOD) are more attractive for large or for small operators. On the one hand studies on tariff-mediated network effects suggest that large operators use OOD to damage smaller rivals. On the other hand research on consumer behavior suggests that small operators may use OOD to attract customers with low on-net prices, trapping large operators with the “Fat-cat effectâ€. We test the relative strength of the two effects using data on tariff setting in the German market for mobile telecommunications from 2004 to 2009. We find that large operators are more likely to offer tariffs with OOD but that there is no significant difference between large and small operators in the magnitude of the differentials. Our findings support the proposition that large firms use tariff-mediated network effects as a competitive instrument, but also suggest the alternative theory may have some merit.
    Keywords: Telecommunications; Competition; Network effects; Customers; Pricing
    JEL: D22 L11 L96
    Date: 2011–12
  14. By: Haucap, Justus; Klein, Gordon J.
    Abstract: We analyze how network regulation affects investment into network infrastructure and complementary services. While regulation negatively affcets investment incentives in the regulated network market, the effects of network regulation on investment in complementary services can be either negative or positive, depending on the relative weight consumers assign to infrastructure versus service quality. We also find constellations, where regulation can enhance perceived total quality. --
    JEL: D43 L13 L51 L96
    Date: 2012
  15. By: Marc Rysman (Department of Economics, Boston University); Ginger Zhe Jin (University of Maryland and NBER)
    Abstract: We study a new data set of US sports card conventions in order to evaluate the pricing theory of two-sided markets. Conventions are two-sided because organizers must set fees to attract both consumers and dealers. We have detailed information on consumer price, dealer price and, since most conventions are local, the market structure for conventions. We present several ndings: rst, consumer pricing decreases with competition at any reasonable distance, but pricing to dealers is insensitive to competition and in longer distances even increases with competition. Second, when consumer price is zero (and thus constrained), dealer price decreases more strongly with competition. These results are compatible with existing models of two-sided markets, but are dicult to explain without such models.
    Date: 2012–01
  16. By: Franz Hackl; Michael E. Kummer; Rudolf Winter-Ebmer; Christine Zulehner
    Abstract: We investigate the causal effect of market structure on market performance in the consumer electronics. We combine data from Austria’s largest online site for price comparisons with retail data on wholesale prices provided by a major hardware producer for consumer electronics. We observe input prices of firms, and all their moves in the entry and the pricing game over the whole product lifecycle. Using this information for 70 digital cameras, we generate instrumental variables for the number of firms in the market based on the shops’ entry decisions on other product markets in the past. We find that instrumenting is particularly important for estimating the effect of competition on the markup of the price leader.
    Keywords: Retailing, Product Lifecycle, Market Structure, Market Performance, Markup, Price Dispersion
    JEL: L11 L13 L81 D43
    Date: 2012–05
  17. By: Helmut Dietl (Department of Business Administration, University of Zurich); Markus Lang (Department of Business Administration, University of Zurich); Panlang Lin (Department of Business Administration, University of Zurich)
    Abstract: This paper develops a model of asymmetric competition between a pay and a free media platform. The pay media platform generates revenues from media consumers through subscription fees, while the free media platform generates revenues from charging advertisers either on a lump-sum basis (regime A) or on a per-consumer basis (regime B). The paper shows that the advertising level on the free platform is higher and this platform attracts more consumers in regime A than B even though advertisers have to pay more for an ad and consumers dislike ads. Moreover,\ the pay media platform faces a higher subscription fee and a lower consumer demand in regime A than B. Compared to regime B, the profit of the free (pay) media platform is higher (lower) in regime A, while aggregate profits are only higher if the consumers' disutility from ads is sufficiently low. The advertisers are better off in regime A than B, while the opposite is true for the media consumers. Finally, in small media markets, social welfare is lower in regime A than B, while this is true in large media markets only if the media consumers' disutility from advertising is sufficiently high.
    Keywords: Advertising, media platform, two-sided market, lump-sum charge, per-consumer charge, asymmetric competition
    JEL: D40 L10
    Date: 2012–05
  18. By: Dewenter, Ralf; Heimeshoff, Ulrich
    Abstract: Increasing price levels, high price volatility and the suspicion of collusive behavior are important topics of public debates on competition in retail gasoline markets in many countries. Several governments and competition authorities introduced fuel price regulations in form of restrictions on the frequencies of fuel price changes per day. We present empirical evidence of the effects of fuel price regulation in Austria and Western Australia using difference-in-differences methods to estimate treatment effects of the implementation of such pricing rules. Our estimates provide evidence that fuel price levels in Austria decreased after implementation of regulation. However, we cannot find robust significant effects of regulation on fuel price levels in Western Australia. --
    JEL: K2 K23 L5 L51 L71
    Date: 2012
  19. By: Davis, David
    Abstract: State WIC agencies in infant-formula procurement auctions receive lower bids and final prices when they are in buyer’s alliances than when they are unallied. The Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) uses an auction to procure infant formula. Manufacturers bid on the right to be an agency’s sole supplier by offering a rebate on formula sold through WIC. A theoretical model of rebates shows that bidders may shade their bids and extract surplus from agencies. An empirical estimation shows that bids are lower to alliances suggesting that alliances countervail the power of bidders to extract surplus.
    Keywords: auctions, food assistance, countervailing power, buyer concentration, oligopoly, WIC., Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, Industrial Organization, L13, D43, D44, Q18, I18,
    Date: 2011–12
  20. By: Seungchul Lee; Robert Rosenman (School of Economic Sciences, Washington State University)
    Abstract: This paper studies how the change from retrospective cost-based reimbursement to a prospective payment system shifted hospital investment strategies from quality-enhancing technologies to cost-saving technologies. A consequence of this change was the opportunity for for-profit hospitals to capture a larger share of the market. When all of a patient’s treatment costs are paid under a retrospective average cost-based program, not-for-profit hospitals invest only in the quality-enhancing technology. For-profit hospitals have no incentive to invest in either technology. As a result, most patients select not-for-profit hospitals and for-profit hospitals attract only those few patients who have extreme time preference. When hospitals are reimbursed prospectively, however, not-for-profit hospitals invest in both quality-improving and the costsaving technologies, as do for-profit hospitals, although at lesser amounts. Quality and market shares are more equal under prospective payment, helping to explain the increasing market share of for-profit hospitals as prospective payment has become the norm.
    Keywords: Prospective payment system; Hospital competition; Technology investment; hospital quality
    JEL: I11 O33 L33
    Date: 2012–05
  21. By: Newberry, D.
    Abstract: Agent-based modelling is an attractive way of finding equilibria in complex problems involving strategic behaviour, particularly in electricity markets with transmission constraints. However, while it may be possible to demonstrate convergence of learning behaviour to a Nash equilibrium, that is not sufficient to establish that the equilibrium is robust against more sophisticated strategy choices. This note examines two particular forms of agent-based modelling used in electricity market models, both variants of mark-up pricing, and demonstrates that they are robust against other strategies.Keywords: Electric utilities, industrial policy, political economy
    Keywords: agent-based modelling, electricity markets, mark-up equilibria, stability, oligopoly, learning
    JEL: C63 C73 D43 L10 L13 L94
    Date: 2012–05–28

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