nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒09‒09
eleven papers chosen by
Russell Pittman
US Government

  1. Strategic delegation in price competition By Güth, Werner; Pull, Kerstin; Stadler, Manfred
  2. Price Stickiness in Customer Markets with Reference Prices By Nicolas Vincent
  3. Search with Learning By Babur De los Santos; Ali Hortacsu; Matthijs R. Wildenbeest
  4. Second-Degree Price Discrimination on Two-Sided Markets By Böhme, Enrico
  5. R&D and the Incentives from Merger and Acquisition Activity By Gordon M. Phillips; Alexei Zhdanov
  6. Patents and Licenses By Yair Tauman; Debrapiya Sen
  7. Buying frenzies in durable-goods markets By Ting Liu; Pasquale Schiraldi
  8. Quality Differentiation with Flavors: Demand Estimation of Unobserved Attributes By Daniel Toro-Gonzalez; Jia Yan; Karina Gallardo; Jill McCluskey
  9. A Spatial Econometric Analysis of the Effect of Vertical Restraints and Branding on Retail Gasoline Pricing By Stephen Hogg; Stan Hurn; Stuart McDonald; Alicia Rambaldi
  10. Industrial Espionage with a Noisy Intelligence By Yair Tauman; Alex Barrachina
  11. Coase meets Tarski: New Insights from Coase's Theory of the Firm By Tomoo Kikuchi; Kazuo Nishimura; John Stachurski

  1. By: Güth, Werner; Pull, Kerstin; Stadler, Manfred
    Abstract: We study price competition in heterogeneous markets where price decisions are delegated to agents. Principals implement a revenue sharing scheme to which agents react by commonly charging a sales price. The results of our model exemplify the importance of both intrafirm- and interfirm interactions of principals and agents in competition. We show that price delegation can increase or decrease the firms' surplus depending on the heterogeneity of the market and the number of agents employed by the firms. --
    Keywords: Strategic delegation,Agency theory,Revenue sharing
    JEL: C72 L22 M52
    Date: 2012
  2. By: Nicolas Vincent
    Abstract: Price rigidity is often modeled by assuming that firms face a fixed cost of price change. However, in surveys, firms report that the main reason they wish to keep prices stable is for fear of antagonizing customers. Moreover, marketing studies show that most consumers engage in very little product comparison on a typical shopping trip. In this paper, we explore the implications of these observations for price rigidity. In our model, comparing prices and characteristics of alternative brands is time-consuming. While some consumers behave as bargain hunters with zero opportunity cost form shopping, most are loyal to firms as long as posted prices are not raised. A price increase is interpreted as a signal that a better alternative may be available and triggers consumer search. Firms do not face menu costs and are free to change nominal prices, but understand that their pricing decisions will affect their customer base and hence future profits. We show that this micro-founded mechanism is akin to a nominal rigidity and naturally generates price stickiness. It is also compatible with the observation of frequent sales at the retail level and can rationalize the decreasing or flat hazard functions observed empirically.
    Keywords: Price stickiness, customer relations, nominal rigidities, consumer inattention
    JEL: E30 L16
    Date: 2012
  3. By: Babur De los Santos (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Ali Hortacsu (University of Chicago and NBER); Matthijs R. Wildenbeest (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This paper provides a method to estimate search costs in an environment in which consumers are uncertain about the price distribution. Consumers learn about the price distribution by Bayesian updating their prior beliefs. The model provides bounds on the search costs that can rationalize observed search and purchasing behavior. Using individual-specific data on web browsing and purchasing behavior for electronics sold online we show how to use these bounds to estimate search costs. Estimated search costs are sizable and are found to relate to consumer characteristics in intuitive ways. The model outperforms a standard sequential search model in which the price distribution is known to consumers.
    Keywords: consumer search, learning, electronic commerce
    JEL: D43 D83 L13
    Date: 2012–08
  4. By: Böhme, Enrico
    Abstract: The present paper provides a descriptive analysis of the second-degree price discrimination problem on a monopolistic two-sided market. By imposing a simple two-sided framework with two distinct types of agents on one of its market sides, it will be shown that under incomplete information, the extent of platform access for high-demand agents is strictly reduced below the benchmark level (complete information). In addition, the paper’s findings imply that it is feasible in the optimum to charge higher payments from low-demand agents if the extent of interaction with agents from the opposite market side is assumed to be bundle-specific.
    Keywords: two-sided markets; second-degree price discrimination; monopoly
    JEL: D82 L12 D42 L15
    Date: 2012–08–30
  5. By: Gordon M. Phillips; Alexei Zhdanov
    Abstract: We provide a model and empirical tests showing how an active acquisition market affects firm incentives to innovate and conduct R&D. Our model shows that small firms optimally may decide to innovate more when they can sell out to larger firms. Large firms may find it disadvantageous to engage in an "R&D race" with small firms, as they can obtain access to innovation through acquisition. Our model and evidence show that the R&D responsiveness of firms increases with demand, competition and industry merger and acquisition activity. All of these effects are stronger for smaller firms than for larger firms.
    JEL: G20 G3 G34 L11 L22 L25 O31 O34
    Date: 2012–08
  6. By: Yair Tauman (Department of Economics, Stony Brook University); Debrapiya Sen (Department of Economics, Ryerson University, Toronto, ON, Canada.)
    Abstract: This article considers the problem of patent licensing in a Cournot oligopoly under a class of general demand functions. We consider two cases, the case where the innovator is an outsider and the one where it is one of the incumbent rms. The licensing policies considered are upfront fees, royalties and combinations of the two. It is shown that (i) for generic values of magnitudes of the innovation, a royalty policy is better than fee or auction provided the industry size is relatively large, (ii) under combinations of fees and royalties, provided the innovation is relatively signicant (or the industry size is relatively large), (a) there is always an optimal policy where the innovation is licensed to practically all rms of the industry and (b) any optimal combination includes a positive royalty.
    Date: 2012–08
  7. By: Ting Liu (Department of Economics, Stony Brook University); Pasquale Schiraldi (Department of Economics,London School of Economic)
    Abstract: We explain why a durable-goods monopolist would like to create a shortage during the launch phase of a new product. We argue that this incentive arises from the presence of a second-hand market and uncertainty about consumers?willingness to pay for the good. Consumers are heterogeneous in their valuations. Some consumers are initially uninformed about their valuations and learn about them over time while others are informed through their lifetimes. Given demand uncertainty, first period sales may result in misallocation and lead to active trading on secondary market after the uncertainty is resolved. We characterize conditions under which the monopolist would like to restrict sales and generate a buying frenzy. We show how the monopolist may benefit from an active second-hand market.
    Date: 2012–08
  8. By: Daniel Toro-Gonzalez; Jia Yan; Karina Gallardo; Jill McCluskey (School of Economic Sciences, Washington State University)
    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
    JEL: C61 C62 D92
    Date: 2012–08
  9. By: Stephen Hogg (UQ); Stan Hurn (QUT); Stuart McDonald (UQ); Alicia Rambaldi
    Abstract: This paper builds an econometric model of retail gas competition to explain the pricing decisions of retail outlets in terms of vertical management structures, input costs and the characteristics of the local market they operate within. The model is estimated using price data from retail outlets from the South-Eastern Queensland region in Australia, but the generic nature of the model means that the results will be of general interest. The results indicate that when the cost of crude oil and demographic variations across different localities are accounted for, branding (i.e. whether the retail outlet is affiliated with one of the major brand distributers - Shell, Caltex, Mobil or BP) has a statistically significant positive effect on prices at nearby retail outlets. Conversely, the presence of an independent (non-branded) retailer within a locality has the effect of lowering retail prices. Furthermore, the results of this research show that service stations participating in discount coupon schemes with the two major retail supermarket chains have the effect of largely off-setting the price increase derived from branding affiliation. While, branding effects are not fully cancelled out, the overall effect is that prices are still higher than if branding did not occur.
    Keywords: Retail Gasoline Pricing, Vertical Restraints, Shop-a-Docket Discount Scheme, Spatial Econometrics, Australia
    JEL: C21 L13
    Date: 2012–08–27
  10. By: Yair Tauman (Department of Economics, Stony Brook University); Alex Barrachina (University of Valencia and ERI-CES.)
    Abstract: We analyze industrial espionage in a model of two firms: a monopoly incumbent, M, and a potential entrant, E, who owns a noisy intelligence system (IS) of a certain precision a . The IS generates a signal on M’s action and E decides whether or not to enter based on this signal. We show that if a is commonly known, M is the one who benefits from a perfect IS and E who spies on M prefers a less accurate IS. If however a is a private information of E, the opposite result is obtained. E is best off with a perfect IS and M with a less accurate one.
    Keywords: Espionage; Monopoly; Entry; Asymmetric information; Signaling game.
    JEL: C72 D82 L10 L12
    Date: 2012–08
  11. By: Tomoo Kikuchi (Department of Economics, National University of Singapore); Kazuo Nishimura (Institute of Economic Research, Kyoto University); John Stachurski (Research School of Economics, The Australian National University)
    Abstract: This paper formulates a model embedding the key ideas from Ronald Coase’s famous essay on the theory of the firm in a simple competitive equilibrium setting with anarbitrary number of firms. The model studies the structure of production when transaction costs and diminishing returns to management are treated as given. In addition to recovering Coase’s main insights as equilibrium conditions, the model yields many new predictions on prices, firm boundaries and division of the value chain.
    Keywords: Transaction costs, vertical integration, production chains
    JEL: D02 D21 L11 L23
    Date: 2012–08

This nep-com issue is ©2012 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.