nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒09‒16
nineteen papers chosen by
Russell Pittman
US Government

  1. Product quality, competition, and multi-purchasing By Anderson, Simon P.; Foros, Øystein; Kind, Hans Jarle
  2. Entanglement between Demand and Supply in Markets with Bandwagon Goods By Mirta B. Gordon; Jean-Pierre Nadal; Denis Phan; Viktoriya Semeshenko
  3. Large shocks in menu cost models By Peter Karadi; Adam Reiff
  4. Upward Pricing Pressure in Two-Sided Markets By Affeldt, P.; Filistrucchi, L.; Klein, T.J.
  5. Performance in distribution systems : What is the influence of the upstream firm's organizational choices ? By Muriel Fadairo; Cintya Lanchimba Lopez
  6. Contracting under asymmetric holding cost information in a serial supply chain with a nearly profit maximizing buyer By Guido Voigt
  7. The Cyclical Response of Advertising Refutes Counter-Cyclical Profit Margins in Favor of Product-Market Frictions By Robert E. Hall
  8. Patents versus R&D subsidies in a Schumpeterian growth model with endogenous market structure By Chu, Angus C.; Furukawa, Yuichi
  9. Transaction costs can encourage Coasean bargaining By Alex Robson
  10. An experimental study of mixed strategy equilibria in simultaneous price-quantity games By Daniel Cracau; Benjamin Franz
  11. Markups and Agglomeration: Price Competition versus Externalities By Liqiu Zhao
  12. “Do intra- and inter-industry spillovers matter? CDM model estimates for Spain” By Esther Goya; Esther Vayá; Jordi Suriñach
  13. Perpetual leapfrogging in international competition By Furukawa, Yuichi
  14. On the Emergence of Overcompliance with Endogenous Environmental Standards and Patronising Consumers By L. Lambertini; A. Tampieri
  15. Consolidation and merger sctivity in the United States banking industry from 2000 through 2010 By Robert M. Adams
  16. Generic substitution policy, prices and market structure: evidence from a quasi-experiment in Finland By Aki Kangasharju; Joni Hokkanen; Ismo Linnosmaa; Hannu Valtonen
  17. Consumer Inertia and Firm Pricing in the Medicare Part D Prescription Drug Insurance Exchange By Keith M. Marzilli Ericson
  18. Empirical evidence on the relationship between mobile termination rates and firms’ profit By Andersson, Kjetil; Foros, Øystein; Hansen, Bjørn
  19. Auctions for Private Congestible Infrastructures By Vincent A.C. van den Berg

  1. By: Anderson, Simon P. (Dept. of Economics, University of Virginia); Foros, Øystein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics)
    Abstract: In a Hotelling duopoly model, we introduce quality that is more appreciated by closer consumers. Then higher common quality raises equilibrium prices, in contrast to the standard neutrality result. Furthermore, we allow consumers to buy one out of two goods (single-purchase) or both (multi-purchase). Prices are strategically independent when some consumers multi-purchase because suppliers price the incremental benefit to marginal consumers. In a multi-purchase regime, there is a hump-shaped relationship between equilibrium prices and quality when quality functions overlap. If quality is sufficiently good, it might be a dominant strategy for each supplier to price high and eliminate multi-purchase.
    Keywords: Hotelling model with quality; multi-purchase; incremental pricing; content competition
    JEL: D00 D40
    Date: 2012–08–28
  2. By: Mirta B. Gordon; Jean-Pierre Nadal; Denis Phan; Viktoriya Semeshenko
    Abstract: Whenever customers' choices (e.g. to buy or not a given good) depend on others choices (cases coined 'positive externalities' or 'bandwagon effect' in the economic literature), the demand may be multiply valued: for a same posted price, there is either a small number of buyers, or a large one -- in which case one says that the customers {\it coordinate}. This leads to a dilemma for the seller: should he sell at a high price, targeting a small number of buyers, or at low price targeting a large number of buyers? In this paper we show that the interaction between demand and supply is even more complex than expected, leading to what we call the {\it curse of coordination}: the pricing strategy for the seller which aimed at maximizing his profit corresponds to posting a price which, not only assumes that the customers will coordinate, but also lies very near the critical price value at which such high demand no more exists. This is obtained by the detailed mathematical analysis of a particular model formally related to the Random Field Ising Model and to a model introduced in social sciences by T C Schelling in the 70's.
    Date: 2012–09
  3. By: Peter Karadi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany); Adam Reiff (Magyar Nemzeti Bank, 1054 Budapest, Szabadság tér 8-9, Hungary)
    Abstract: How do prices react to large aggregate shocks? Our new micro-data evidence on value-added tax changes shows that prices react (i) flexibly and (ii) asymmetrically to large positive and negative shocks. We use it to quantitatively evaluate the performance of prominent pricing models. We show that standard time-dependent models are unable to reproduce either of these facts. A realistically calibrated state-dependent menu cost model, in contrast, is successful in matching the observed price responses. Its success lies in its ability to capture the exploding fraction of price changes for large shocks. The evidence facilitates comparison of different menu cost models and raises doubts on alternative pricing models with information or search frictions as sole reasons for price rigidity. JEL Classification: E31, E52
    Keywords: Inflation asymmetry, state-dependent pricing, time-dependent pricing, value-added tax shock
    Date: 2012–07
  4. By: Affeldt, P.; Filistrucchi, L.; Klein, T.J. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Pricing pressure indices have recently been proposed as alternative screening devices for horizontal mergers involving differentiated products. We extend the concept of Upward Pricing Pressure (UPP) proposed by Farrell and Shapiro (2010) to two-sided markets. Examples of such markets are the newspaper market, where the demand for advertising is related to the number of readers, and the market for online search, where advertising demand depends on the number of users. The formulas we derive are useful for screening mergers among two-sided platforms. Due to the two-sidedness they depend on four sets of diversion ratios that can either be estimated using market-level demand data or elicited in surveys. In an application, we evaluate a hypothetical merger in the Dutch daily newspaper market. Our results indicate that it is important to take the two-sidedness of the market into account when evaluating UPP.
    Keywords: Merger evaluation;two-sided markets;network effects;UPP.
    JEL: L13 L40 L82
    Date: 2012
  5. By: Muriel Fadairo (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Cintya Lanchimba Lopez (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: This paper studies the performance of distribution networks as the result of a range of organizational choices made by the upstream firm. The analytical part of the paper surveys the vast literature devoted to franchising and to dual distribution. From this framework, several testable propositions are derived, linking the networks performance to the organizational choices. Three complementary criteria of performance are taken into account : the internationalization rate, the expansion rate, the market share. The paper provides evidence that these criteria are empirically related. Thus, a system of simultaneous equations is defined, free of endogeneity relating to the explanatory variables. The estimations on recent French data by means of the three-least squares method provide robust results, and show that the type of distribution network, the number of company-owned units in the network, the type of sector, and the choice to manage several networks simultaneously affect the performance in distribution systems.
    Keywords: Franchising; Organizational choices; Endogeneity; Simultaneous Equations
    Date: 2012–09–03
  6. By: Guido Voigt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Screening contracts (or non-linear "menu of contracts") are frequently used for aligning the incentives in supply chains with private information. In this context, it is assumed that all supply chain parties are strictly (expected) profit maximizing and, therefore, sensible to even arbitrarily small pay-off differences between contract alternatives. However, previous behavioral work on contracting under asymmetric information in supply chains shows that agents (buyers) are not always strictly profit maximizing. Instead, they sometimes tend to choose contracts that have only a minor impact on their own performance but a substantially negative impact on the principal's (supplier's) and the overall supply chain's performance. Thus, these studies indicate that the buyers are in fact not strictly but only nearly profit maximizing when making their contract choices. The present work relaxes the assumption of the strictly profit maximizing buyer in a serial supply chain for a lotsizing framework with asymmetrically distributed holding cost information and deterministic end-customer demand. The study provides researchers and managers an approach on how to account for the buyer's insensitivity to arbitrarily small pay-off differences while providing a solution method for the resulting non-linear mathematical program. A numerical study compares the advantages of the "behavioral robust" contract assuming only nearly profit maximizing buyers against the classical screening contract assuming strictly profit maximizing buyers. The results highlight that supply chain performance losses can be substantially reduced under the behavioral robust contract.
    Keywords: Asymmetric information, Supply chain coordination, Contracting, Behavioral modeling
    Date: 2012–08
  7. By: Robert E. Hall
    Abstract: According to the standard model, advertising is remarkably sensitive to profit margins. Firms advertise to stimulate demand for their products. They advertise high-margin products aggressively and low-margin ones hardly at all. In macroeconomics, variations in profit margins over the business cycle have a key role. A widening of margins can explain the rise in unemployment in recessions. A higher margin implies a lower real wage. A variety of models ranging from Keynesian to search-and-matching map a decline in wages to higher unemployment. But a rise in profit margins should expand advertising by a lot. Really a lot. Advertising should be highly counter-cyclical. Instead, it is somewhat pro-cyclical. The ratio of advertising spending to private GDP falls when the economy contracts. I show that wages do decline in recessions. The labor share of income falls. On the other hand, the behavior of advertising refutes the hypothesis that profit margins rise. Hence there must be another factor that lowers the wage without raising profit margins. The only influence that fits the facts is a rise in a product-market friction that has the same effect as an increase in sales taxes.
    JEL: D43 E12 E32
    Date: 2012–09
  8. By: Chu, Angus C.; Furukawa, Yuichi
    Abstract: In this note, we explore the different implications of patent breadth and R&D subsidies on economic growth and endogenous market structure in a Schumpeterian growth model. We find that these two policy instruments have the same positive effect on economic growth when the model exhibits counterfactual scale effects under an exogenous number of firms. However, when the model becomes scale-invariant under an endogenous number of …firms, R&D subsidies increase economic growth but decrease the number of firms, whereas patent breadth expands the number of firms but reduces economic growth. Therefore, R&D subsidy is perhaps a more suitable policy instrument than patent breadth for the purpose of stimulating economic growth.
    Keywords: economic growth; endogenous market structure; patents; R&D subsidies
    JEL: O30 O40
    Date: 2012–08
  9. By: Alex Robson
    Keywords: Coase Theory, externalities, transaction costs, cooperatives games
    JEL: D23 K00 C71 C78 D62
    Date: 2012–08
  10. By: Daniel Cracau (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Benjamin Franz (Mathematical Institute, University of Oxford)
    Abstract: We study oligopoly games with firms competing in prices and quantities at the same time. We systematically compare our experimental results to the theoretical predictions using the mixed strategy equilibria for linear demand functions. For the duopoly game, we observe that the mixed strategy equilibrium predicts average outcomes better than Cournot and Bertrand do. Subjects' price choices are mainly between marginal cost and monopoly level but do not follow the equilibrium distribution. Although average prices and profits are above theoretical values, we do not observe a high level of collusion as expected in the literature. By comparing simulations based on the mixed strategy equilibrium to our experimental outcomes, we conclude that in this game price setting can be explained by strategic reaction to preceding round results. In contrast to the equilibrium prediction, we observe a decrease in prices and negative average profits for the triopoly game.
    Keywords: Price-Quantity Competition; Mixed Strategy Equilibria; Experimental Economics; Learning Direction Theory
    JEL: D43 L11
    Date: 2012–08
  11. By: Liqiu Zhao
    Abstract: Agglomeration can affect markups through two potential channels: agglom- erated regions toughen competition (price competition effect) and firms are more productive on average in agglomerated regions (agglomeration exter- nalities and firm selection effect). However, the literature is inconclusive on which force dominates. This paper models these two channels by in- troducing agglomeration economies to the model of Melitz and Ottaviano (2008). Under parameters from the empirical studies, I demonstrate that the price competition effect tends to dominate the others, i.e., firms in more agglomerated regions charge lower markups. Using a unique Chinese firm- level data from 2002 to 2004, I investigate the effect of spatial agglomeration on markups of firms. By addressing the potential endogeneity problems us- ing instrumental-variable method, I find that in China an increase in the number of own-industry firms in the same region has a negative causal ef- fect on markups of firms and a positive effect on productivity. But firms in agglomerated regions have higher output and profit.
    Date: 2011
  12. By: Esther Goya (Faculty of Economics, University of Barcelona); Esther Vayá (Faculty of Economics, University of Barcelona); Jordi Suriñach (Faculty of Economics, University of Barcelona)
    Abstract: This paper uses a structural model to analyse the impact of innovation activities, including intra- and inter-industry externalities, on the productivity of Spanish firms. To the best of our knowledge, no previous paper has examined spillover effects by adopting such an approach. Here, therefore, we seek to determine the extent to which the innovations carried out by others affect a firm’s productivity. Additionally, firm’s technology level is taken into account in order to ascertain whether there are any differences in this regard between high-tech and low-tech firms both in industrial and service sectors. The database used is the Technological Innovation Panel (PITEC) which includes 8,611 firms for the year 2009. We find that low-tech firms make the most of a range of factors, including funding and belonging to a group, to increase their investment in R&D. As expected, R&D intensity has a positive impact on the probability of achieving both product and, more especially, process innovations. Finally, innovation output has a positive impact on firm’s productivity, being greater in more advanced firms in the case of process innovations. Both intra- and inter-industry spillovers have a positive impact on firm’s productivity, but this varies with the firm’s level of technology. Thus, innovations made by firms from the same sector are more important for low-tech firms than they are for their high-tech counterparts, while innovations made by the rest of the sectors have a greater impact on high-tech firms.
    Keywords: Productivity, innovation, industry spillovers. JEL classification: D24, O33.
    Date: 2012–09
  13. By: Furukawa, Yuichi
    Abstract: Technological leadership has shifted at various times from one country to another. This analysis proposes a mechanism that endogenously explains this perpetual cycle of technological leapfrogging by incorporating international knowledge spillovers into a two-country dynamic model of innovation with the dynamic optimization of an infinitely-lived consumer. In the model, innovation productivity in each country endogenously increases over time because of domestic learning-by-doing and learning from foreign capital. The analysis shows that if international spillovers through learning from foreign capital are sufficiently large, technological leadership may first shift from one country to another, and then perpetually alternate between the two countries.
    Keywords: Perpetual leapfrogging; innovation; spillovers
    JEL: E32 O41 F12 F43
    Date: 2012–06
  14. By: L. Lambertini; A. Tampieri
    Abstract: We propose a model of environmental overcompliance in a duopoly setting where consumers are environmentally concerned and may patronise the product they buy, firms set their green investment to abate the impact of productivity on pollution and a government sets the environmental standard with the aim to maximise welfare. We show that, with no patronising consumers, overcompliance is unilateral by the firm with higher quality standard under Bertrand behaviour, whereas both firms may overcomply under Cournot competition if the environmental impact of production is sufficiently low. Conversely with patronising consumers, overcompliance is unilateral with low environmental impact of production under price competition, and both firm overcomply under quantity competition.
    JEL: L13 L51 Q50
    Date: 2012–09
  15. By: Robert M. Adams
    Abstract: This study investigates trends in consolidation and merger activity in the United States banking industry from 2000 through 2010. Over this period, the U.S. banking industry has consistently experienced over 150 mergers annually, with the largest banking organizations holding an increasing share of banking assets. While the industry has undergone considerable consolidation at the national level, local banking markets have not experienced significant increases in concentration. The dynamics of consolidation raise concerns about competition, output, efficiency, and financial stability. This study uses a comprehensive proprietary data set to examine mergers and acquisitions involving banks and thrifts. The methodology in this paper expands the definition of mergers to include more types of transactions than previous studies on bank mergers.
    Date: 2012
  16. By: Aki Kangasharju; Joni Hokkanen; Ismo Linnosmaa; Hannu Valtonen
    Abstract: The present paper evaluates the quantitative impact of a pharmaceutical reform on pharmaceutical prices. A generic substitution policy was introduced in Finland in 2003 to contain rising pharmaceutical expenditure. After the reform pharmacists were obliged to propose a cheaper alternative to a prescribed pharmaceutical product whenever a substitutable product was available. There were three possible channels through which the price effect might have been transmitted.<br><br>First, the policy might have affected manufacturers? pricing behaviour for existing pharmaceutical products. Second, firms might have introduced new product variants of existing drugs to the market in the form of new generics or different package sizes. Third, the policy might have affected prices through the market structure, with more firms offering new product variants entering the market.
    Keywords: pharmaceuticals, generic substitution, difference-in-differences, pretreatment trends, therapeutic competition
    JEL: C23 L11 L65
    Date: 2012–08–24
  17. By: Keith M. Marzilli Ericson
    Abstract: I use the Medicare Part D prescription drug insurance market to examine the dynamics of firm interaction with consumers on an insurance exchange. Enrollment data show that consumers face switching frictions leading to inertia in plan choice, and a regression discontinuity design indicates initial defaults have persistent effects. In the absence of commitment to future prices, theory predicts firms respond to inertia by raising prices on existing enrollees, while introducing cheaper alternative plans. The complete set of enrollment and price data from 2006 through 2010 confirms this prediction: older plans have approximately 10% higher premiums than comparable new plans.
    JEL: H51 I1 I11 I18 I28 L11 L38 L51
    Date: 2012–09
  18. By: Andersson, Kjetil (Dept. of Economics and Business Administration, University of Agder); Foros, Øystein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Hansen, Bjørn (Telenor Research and Innovation (R&I))
    Abstract: The comprehensive theoretical literature on mobile termination rates (MTRs) is inconclusive on how the level of MTRs affects overall consumer charges and firms’ profit. In a theoretical model, well suited for econometric implementation, we show that where consumers buy a bundle with included usage, as we now observe in the market, the level of MTRs has no impact on retail prices and firms’ profit. We use a panel data set from saturated European markets and find that an identical change in MTRs does not have a significant impact on firms’ profit.
    Keywords: Mobile termination rates; consumer charges; firms’ profit
    JEL: C23 L21 L51 L96
    Date: 2012–08–28
  19. By: Vincent A.C. van den Berg (VU University Amsterdam)
    Abstract: This paper investigates regulation by auctions of private supply of congestible infrastructures in two networks settings: 1) two serial facilities, where the consumer has to use both in order to consume; and 2) two parallel facilities that are imperfect substitutes. There are four market structures: a monopoly and 3 duopolies that differ in how firms interact. The effects of an auction depend on what the bidders compete. With a bid auction, the bidders compete on how much money they transfer to the government. This auction leads to the same outcome as the unregulated game (for a given market structure), since this gives the maximum profit to transfer. An auction on the capacity of a facility leads to an even lower welfare than no regulation, because firms set very high capacities and usage fees. Conversely, an auction on generalised price or number of users leads to the first-best outcome. Moreover, these two auctions are robust: they attain the first-best regardless of whether the facilities are auctioned off to a single firm or to two firms, and for all market and network structures. On the contrary, the performances (relative to the first-best) of the bid and capacity auctions strongly depend on these considerations.
    Keywords: private supply; congestible facilities; auctions; serial facilities; parallel facilities; imperfect substitutes
    JEL: D43 L13 L51 R41 R42
    Date: 2012–08–31

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