nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒07‒01
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Credence Goods, Consumer Misinformation, and Quality By Soham Baksi; Pinaki Bose; Di Xiang
  2. Dynamic Spatial Competition Between Multi-Store Firms By Victor Aguirregabiria; Gustavo Vicentini
  3. Tacit collusion in a non-repeated price competition game with a soft capacity constraint By Marie-Laure Cabon-Dhersin; Nicolas Drouhin
  4. Nonlinear Pricing as Exclusionary Conduct By Philippe Choné; Laurent Linnemer
  5. Information Disclosure in Open Non-Binding Procurement Auctions: an Empirical Study By Stoll, Sebastian; Zöttl, Gregor
  6. Screening for Collusion: A Spatial Statistics Approach By Pim Heijnen; Marco A. Haan; Adriaan R. Soetevent
  7. The Hold-up Problem Under Common Agency By Antonio Nicita; Simone Sepe
  9. Essays in microeconomic theory. By Schottmuller, C.
  10. Value Creation and Firm Integration: First Empirical Evidence for the Software Industry By Pussep, Anton; Harnisch, Stefan; Buxmann, Peter
  11. Launching prices for new pharmaceuticals in heavily regulated and subsidized markets By Jaume Puig; Beatriz González López-Valcárcel

  1. By: Soham Baksi; Pinaki Bose; Di Xiang
    Abstract: For certain products, consumers' misinformation about quality is more endemic at intermediate levels of the quality spectrum rather than at the top or the bottom levels of quality. Using an oligopoly model of vertical product differentiation with three quality levels - green, natural, and brown - we examine the consequences of consumers' overestimation of the quality of the natural (i.e. intermediate quality) product. There are three firms in the market, with each type of firm producing the corresponding type of the product. The firms choose the quality level of their product before choosing its price (Bertrand case) or quantity (Cournot case). Irrespective of the nature of second stage competition, we find that quality overestimation by consumers increases profit of the natural firm, and motivates it to raise its product’s quality. In response, the green firm improves its quality even further, but ends up with lower profit. Overall, average quality of the vertically differentiated product improves, which raises consumer surplus. Social welfare increases when firms compete in prices but falls when they compete in quantities.
    JEL: L13 L15 M30
    Date: 2012–06
  2. By: Victor Aguirregabiria; Gustavo Vicentini
    Abstract: We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store retailers. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We develop an algorithm to approximate a Markov Perfect Equilibrium in our model, and propose a procedure for the estimation of the parameters of the model using panel data on number of stores, prices, and quantities at multiple geographic locations within a city. We also present numerical examples to illustrate the model and algorithm.
    Keywords: Spatial competition; Store location; Industry dynamics; Sunk costs.
    JEL: C73 L13 L81 R10 R30
    Date: 2012–06–14
  3. By: Marie-Laure Cabon-Dhersin (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - Université de Rouen : EA4702); Nicolas Drouhin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: This paper analyses price competition in the case of two firms operating under constant returns to scale with more than one production factor. Factors are chosen sequentially in a two-stage game generating a soft capacity constraint and implying a convex short term cost function in the second stage of the game. We show that tacit collusion is the only predictable result of the whole game i.e. the unique payoff-dominant pure strategy Nash equilibrium. Technically, this paper bridges the capacity constraint literature on price competition and that of the convex cost function.
    Keywords: price competition; tacit collusion; convex cost; Bertrand Paradox; capacity constraint
    Date: 2012–06–12
  4. By: Philippe Choné (Crest-LEI); Laurent Linnemer
    Abstract: We study the exclusionary properties of nonlinear pricing by dominant firms in a static environment. Optimal price schedules are nonlinear when the rivals’ sensitivity to competitive pressure varies with the “contestable share” of the market. When buyers can dispose of unconsumed units at no cost, and thus might purchase units they do not need, dominant firms are prevented from placing too much pressure on rivals, which limits the extent of inefficient exclusion. When disposal costs are large and sensitivity to competitive pressure is not monotonic in the contestable share, optimal price schedules may be locally decreasing and highly nonlinear
    Keywords: Inefficient exclusion, buyer opportunism, disposal costs, quantity rebates, incomplete information
    JEL: L12 L42 D82 D86
    Date: 2012–06
  5. By: Stoll, Sebastian; Zöttl, Gregor
    Abstract: The outcome of non-binding reverse auctions critically depends on how information is distributed during the bidding process. We use data from a large European procurement platform to study the impact of different information structures, specifically the availability of quality information to the bidders, on buyers' welfare and turnover of the platform. First we show that on the procurement platform considered bidders indeed are aware of their rivals' characteristics and the buyers preferences over those non-price characteristics. In a counterfactual analysis we then analyze the reduction of non-price information available to the bidders. As we find, platform turnovers in the period considered would decrease by around 30%, and the buyers' welfare would increase by the monetary equivalent of around 45% of turnover of the platform.
    Keywords: Procurement; Bidding; Reverse Auctions; Multi-Attribute Auctions; Non-Binding Auctions; Information Disclosure; Structural Estimation
    JEL: D44 D82 L11 L15
    Date: 2012–06
  6. By: Pim Heijnen (University of Groningen); Marco A. Haan (University of Groningen); Adriaan R. Soetevent (University of Amsterdam)
    Abstract: We develop a method to screen for local cartels. We first test whether there is statistical evidence of clustering of outlets that score high on some characteristic that is consistent with collusive behavior. If so, we determine in a second step the most suspicious regions where further antitrust investigation would be warranted. We apply our method to build a variance screen for the Dutch gasoline market.
    Keywords: collusion; variance screen; spatial statistics; K-function
    JEL: C11 D40 L12 L41
    Date: 2012–06–18
  7. By: Antonio Nicita; Simone Sepe
    Abstract: Many real world transactions occur in a common agency environment in which an agent interacts with several principals having competing interests. The hold-up literature, however, has so far neglected to investigate common agency transactions. In this paper, we consider the hold-up problem that arises in a context where there are a monopolistic seller and multiple buyers on the one side and all the parties on the other are required to make specific self-investments. Our contribution is twofold. First, we show that absent initial contracts (i.e., preliminary agreements) between the parties, total efficiency increases when the buyers act competitively using implicit contractual coordination, i.e., contractual menus. Second, we show that introducing initial simple contracts allows parties to reach the first best only under cooperative common agency. Absent this machinery, competition among the principals emerges as a more efficient governance structure for common agency in incomplete transactions.
    Keywords: incomplete contracts, common agency, mechanism design
    JEL: K12 L22 J41 C70
    Date: 2012–05
  8. By: Anne Layne-Farrar (Compass Lexecon); Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros); Jorge Padilla (Compass Lexecon)
    Abstract: This paper studies the effects of a Standard Setting Organization (SSO) imposing a licensing cap for patents incorporated into a standard. In particular, we evaluate the \Incremental Value" rule as a way to reward firms that contribute technology to a standard. This rule has been proposed as a means of avoiding patent hold-up of licensing firms by granting patent holders compensation equal to the value that their technology contributes to the standard on an ex-ante basis, as compared to the next best alternative. Our analysis shows that even in contexts where this rule is efficient from an ex-post point of view, it induces important distortions in the decisions of firms to innovate and participate in the SSO. Specifically, firms being rewarded according to this rule will inefficiently decide not to join the SSO, under the expectation that their technology becomes ex-post essential at which point they may negotiate larger payments from the SSO.
    Keywords: Intellectual property, standard setting organizations, licensing, incremental value.
    JEL: L15 L24 O31 O34
    Date: 2012–02
  9. By: Schottmuller, C. (Tilburg University)
    Abstract: The fourth paper explains why it might not be welfare maximizing to incentivize doctors to take costs of treatment into account in their prescription decisions. By extending the classic cheap talk model, it is shown that cost incentives reduce the information transmitted from patient to doctor which leads to a welfare loss.
    Date: 2012
  10. By: Pussep, Anton; Harnisch, Stefan; Buxmann, Peter
    Abstract: The value added created by a firm is a widely used figure. Major elements of a firm’s strategy and business model deal with how the firm creates value and brings it to the customer. This paper focuses on a particular measure which has been broadly applied to measure the degree of vertical integration: value added to sales (VA/S). To our best knowledge, this measure hasn’t been applied in software business research. We hence outline its application in other fields by conducting a broad and structured literature review. First empirical insights are gained by analyzing the VA/S development for 44,171 software firms in the period 2002-2009. These results indicate an increasing degree of vertical integration in the software industry. While practitioners can use the results as a benchmark for their own firms, researchers are provided with a comprehensive literature review, first empirical results on a large sample and avenues for research.
    Keywords: software industry, vertical integration, value added to sales, degree of vertical integration
    Date: 2012–06–18
  11. By: Jaume Puig; Beatriz González López-Valcárcel
    Abstract: This paper provides empirical evidence on the explanatory factors affecting introductory prices of new pharmaceuticals in a heavily regulated and highly subsidized market. We collect a data set consisting of all new chemical entities launched in Spain between 1997 and 2005, and model launching prices. We found that, unlike in the US and Sweden, therapeutically "innovative" products are not overpriced relative to "imitative" ones. Price setting is mainly used as a mechanism to adjust for inflation independently of the degree of innovation. The drugs that enter through the centralized EMA approval procedure are overpriced, which may be a consequence of market globalization and international price setting.
    Keywords: pharmaceuticals; price competition; price regulation
    JEL: L11 L65 I10 I18
    Date: 2012–05

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