nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒09‒22
sixteen papers chosen by
Russell Pittman
US Government

  1. A Simple Model of Bertrand Duopoly with Noisy Prices By Kaminski, Bogumil; Latek, Maciej
  2. Inventories and Endogenous Stackelberg Leadership in Two-period Cournot Oligopoly By Mitraille, Sébastien; Moreaux, Michel
  3. ‘Everything must go!’- Cournot as a Stable Convention within Strategic Supply Function Competition By Michal Król
  4. Price Competition and Consumer Confusion By Ioana Chioveanu; Jidong Zhou
  5. Loyalty Discounts By Ugur Akgun; Ioana Chioveanu
  6. Explicit vs. tacit collusion: The impact of communication in oligopoly experiments By Fonseca, Miguel A.; Normann, Hans-Theo
  7. Second-Price Auctions with Different Participation Costs By Cao, Xiaoyong; Tian, Guoqiang
  8. R&D Determinants: accounting for the differences between research and development By Barge-Gil, Andrés; López, Alberto
  9. On the strategic value of risk management By Léautier, Thomas-Olivier; Rochet, Jean-Charles
  10. Congestion Pricing and Net Neutrality By Jullien, Bruno; Sand-Zantman, Wilfried
  11. Competitive Effects of Merger Remedies in Europe's High-Tech Industry By Petar Angelov; Stephanie Rosenkranz; Hans Schenk
  12. Profitability, uncertainty and multi-product firm product proliferation: The Spanish car industry By Xosé-Luís Varela-Irimia
  13. Ex-ante margin squeeze tests in the telecommunications industry: What is a reasonably efficient operator? By Gaudin, Germain; Saavedra Valenzuela, Claudia
  14. Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks By Naoaki Minamihashi
  15. Regulation and electricity market integration: When trade introduces inefficiencies By Billette de Villemeur, Etienne; Pineau, Pierre-Olivier
  16. Antidumping and market competition: implications for emerging economies By Bown, Chad P.; McCulloch, Rachel

  1. By: Kaminski, Bogumil; Latek, Maciej
    Abstract: We examine a market in which consumers are forced to rely on noisy price signals to select between homogeneous products. The noise originates either from firms' price obfuscation or consumers' bounded information processing capabilities. Standard models and empirical experiments of markets with noise or price obfuscation show that it leads to higher prices detrimental to consumers' welfare. This paper identifies conditions under which an opposite result can be expected. In particular, it shows that a moderate level of noise is beneficial to consumers in a market with a cost leader.
    Keywords: noisy pricing; bounded rationality; Bertrand oligopoly; game theory
    JEL: L13 C02 D43 C72
    Date: 2012–09–14
  2. By: Mitraille, Sébastien (Université de Toulouse, Toulouse Business School); Moreaux, Michel (Toulouse School of Economics (IDEI and LERNA))
    Abstract: Two-period Cournot competition between n identical firms producing at constant marginal cost and able to store before selling has pure strategy Nash-perfect equilibria, in which some firms store to exert endogenously a leadership over rivals. The number of firms storing balances market share gains, obtained by accumulating early the output, with losses in margin resulting from increased sales and higher operation costs. This number and the industry inventories are non monotonic in n. Concentration (HHI) and aggregate sales increase due to the strategic use of inventories.
    JEL: D43 L13
    Date: 2012–02
  3. By: Michal Król
    Date: 2012
  4. By: Ioana Chioveanu; Jidong Zhou
    Abstract: This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). Frame choices affect the comparability of price offers, and may cause consumer confusion and lower price sensitivity. In equilibrium, firms randomize their frame choices to obfuscate price comparisons and sustain positive profits. The nature of equilibrium depends on whether frame differentiation or frame complexity is more confusing. Moreover, an increase in the number of competitors induces firms to rely more on frame complexity and this may boost industry profits and lower consumer surplus.
    Date: 2012–07
  5. By: Ugur Akgun; Ioana Chioveanu
    Abstract: This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide a comparison of market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market share discounts (MS). We show that retailer ís risk attitude affects manufacturer's preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk- averse, 2PT performs the worst from manufacturer's perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting the retailer's product substitution possibilities MS makes the demand for manufacturer's product more inelastic. This reduces the amount (share of total profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme.
    Date: 2012–06
  6. By: Fonseca, Miguel A.; Normann, Hans-Theo
    Abstract: We explore the difference between explicit and tacit collusion by investigating the impact communication has in experimental markets. For Bertrand oligopolies with various numbers of firms, we compare pricing behavior with and without the possibility to communicate among firms. We find strong evidence that talking helps to obtain higher profits for any number of firms, however, the gain from communicating is nonmonotonic in the number of firms, with medium-sized industries having the largest additional profit from talking. We also find that industries continue to collude successfully after communication is disabled. Communication supports fims in coordinating on collusive pricing schemes, and it is also used for conflict mediation. --
    Keywords: cartels,collusion,communication,experiments,repeated games
    JEL: C7 C9 L4 L41
    Date: 2012
  7. By: Cao, Xiaoyong; Tian, Guoqiang
    Abstract: This paper studies equilibria of second price auctions in independent private value envi- ronments with different participation costs. Two types of equilibria are identified: monotonic equilibria in which a bidder with a lower participation cost results in a lower cutoff for sub- mitting a bid, and non-monotonic equilibria in which a lower participation cost results in a higher cutoff. We show that there always exists a monotonic equilibrium, and further, that the monotonic equilibrium is unique for either concave distribution functions or strictly convex distribution functions with non-increasing reverse hazard rates. There exist non- monotonic equilibria when the distribution functions are strictly convex and the difference of the participation costs is sufficiently small. We also provide comparative static analysis and study the limiting properties of equilibria when the difference in bidders’ participation costs approaches zero.
    Keywords: Private Values; Differentiated Participation Costs; Second Price Auctions; Non-monotonic Equilibrium; Existence and Uniqueness of Equilibrium
    JEL: D44 D61 D82 C72 C62
    Date: 2012–02–01
  8. By: Barge-Gil, Andrés; López, Alberto
    Abstract: The determinants of R&D are an important topic of industrial economics. The classical Schumpeterian hypotheses about the influence of size and market power have been complemented with the role played by industry determinants, such as demand pull, technological opportunity and appropriability, in determining R&D investments. However, R&D has always been considered as a whole, even though research and development are different activities with different purposes, knowledge bases, people involved and management styles. We take advantage of a new panel database of innovative Spanish firms (PITEC) to distinguish between research and development efforts of firms. We analyze the role jointly played by traditional R&D determinants in driving research and development, accounting for the differences between both activities. Results show that demand pull and appropriability have a higher effect on development, while technological opportunity is more influential for research. Differences are statistically significant, important in magnitude, and robust to the use of different indicators for demand pull, technological opportunity and appropriability and to several robustness checks.
    Keywords: R&D Determinants; Schumpeterian hypotheses; Demand pull; Technological opportunity; Appropriability
    JEL: O3
    Date: 2012–09–12
  9. By: Léautier, Thomas-Olivier (TSE,IAE); Rochet, Jean-Charles (TSE, University of Zurich)
    Abstract: This article examines how firms facing volatile input prices and holding some degree of market power in their product market link their risk management and production or pricing strategies. This issue is relevant in many industries ranging from manufacturing to energy retailing, where risk averse firms decide on their hedging strategies before their product market strategies. We find that hedging modifies the pricing and production strategies of firms. This strategic effect is channelled through the expected risk-adjusted cost, i.e., the expected marginal cost under the measure induced by investors'risk aversion, and has diametrically opposed impacts depending on the nature of product market competition: hedging toughens quantity competition while it softens price competition. Finally, committing to a hedging strategy is always a best response to non committing, and is a dominant strategy if firms compete à la Hotelling.
    JEL: G32 L13
    Date: 2012–09–03
  10. By: Jullien, Bruno (Toulouse School of Economics (GREMAQ-CNRS and IDEI)); Sand-Zantman, Wilfried (Toulouse School of Economics (GREMAQ and IDEI))
    Abstract: We consider a network that intermediates traffic between content producers and consumers. The content is heterogenous in the cost of traffic. While, consumers do not know the traffic cost when deciding on consumption, a content producer knows his cost but may not con- trol the consumption. The network observes only the resulting total cost of traffic and can charge a congestion price to one or both of the parties, along with an ex-ante hook-up fee to consumers. We fi…rst show that, if the content is a paid content, the network charges only the content producers and capping congestion prices for content in this case is sub-optimal. In the case of free content, the network extracts some rent from content with congestion prices and may exclude some content. We show that there is efficient or excessive exclusion of traffic. We then endogenize the choice of business model by allowing the content producers to choose between a paid model and a free model. In this case, the network charges higher congestion prices to content but the cost is smaller as some content can stay under a paid model that would be excluded otherwise. At last, we characterize an optimal mechanism which consists in letting the content producers choose between di¤erent public cate- gories associated with different congestion prices for content and for consumers.
    Date: 2012–06
  11. By: Petar Angelov; Stephanie Rosenkranz; Hans Schenk
    Abstract: Using an event study methodology, this paper assesses the competitive effects of remedies implemented by the European Commission in 11 horizontal mergers in the ICT industry between 1990 and 2010. The estimates of merger announcement effects for both merging parties and competitors have predominantly insignificant residuals, suggesting that collusion and anti-competitive effects are not implied by the market reactions to merger announcements. Remedies, both behavioural and structural, appear to be largely ineffective in negating the competition concerns of the Commission, even if properly applied to anti-competitive mergers. Moreover, behavioural remedies appear to transfer rents from merging parties to competitors. These findings suggest that static economic models are ineffective in analysing dynamic markets, possibly as a result of inadequate market definitions.
    Keywords: Merger remedies; competition policy; industrial competitiveness; ICT; M&A; event study
    JEL: G34 L41 L43
    Date: 2012–09
  12. By: Xosé-Luís Varela-Irimia (Universitat Rovira i Virgili)
    Abstract: This article studies how product introduction decisions relate to profitability and uncertainty in the context of multi-product firms and product differentiation. These two features, common to many modern industries, have not received much attention in the literature as compared to the classical problem of firm entry, even if the determinants of firm and product entry are quite different. The theoretical predictions about the sign of the impact of uncertainty on product entry are not conclusive. Therefore, an econometric model relating firms’ product introduction decisions with profitability and profit uncertainty is proposed. Firm’s estimated profits are obtained from a structural model of product demand and supply, and uncertainty is proxied by profits’ variance. The empirical analysis is carried out using data on the Spanish car industry for the period 1990-2000. The results show a positive relationship between product introduction and profitability, and a negative one with respect to profit variability. Interestingly, the degree of uncertainty appears to be a driving force of entry stronger than profitability, suggesting that the product proliferation process in the Spanish car market may have been mainly a consequence of lower uncertainty rather than the result of having a more profitable market
    Keywords: Product introduction, entry, uncertainty, multiproduct firms, automobile.
    JEL: L11 L13
    Date: 2012–09
  13. By: Gaudin, Germain; Saavedra Valenzuela, Claudia
    Abstract: In this paper, we study the adjustments made by National Regulatory Authorities to simple margin squeeze tests, in order to model a reasonably efficient operator. More precisely, by inspecting the possible differences between an entrant and an incumbent that would cause a market disadvantage for the former, we provide a formal economic framework that translates these ex-ante disadvantages into practical test adjustments. We identify five possible adjustments relevant to ex-ante margin squeeze tests, on the cost, the access charge, or the price parameters. We then review the implementation of margin squeeze tests by European telecommunications National Regulatory Authorities according to these adjustments, as to build a comparable benchmark of implementation choices. --
    Keywords: Margin squeeze,Imputation test,Access regulation,Telecommunications.
    JEL: L51 L96
    Date: 2012
  14. By: Naoaki Minamihashi
    Abstract: Can regulation solve problems arising from a natural monopoly? This paper analyzes whether “unbundling,” referring to regulations that enforce sharing of natural monopolistic infrastructure, prevents entrants from building new infrastructure. It models and estimates a dynamic entry game to evaluate the effects of regulation, using a dataset for construction of fiber-optic networks in Japan. The counterfactual exercise shows that forced unbundling regulation leads to a 24% decrease in the incidence of new infrastructure builders. This suggests, therefore, that when a new technology is being diffused, regulation to remove a natural monopoly conversely involves risks that regulated monopolists’ shares will increase.
    Keywords: Market structure and pricing; Productivity
    JEL: K23 L43 L96
    Date: 2012
  15. By: Billette de Villemeur, Etienne; Pineau, Pierre-Olivier
    Abstract: Electricity markets vary greatly across jurisdictions, in terms of regulatory institutions, cost levels and environmental impacts. Integrating such different markets can lead to significant changes. This paper considers two jurisdictions - one with a regulated monopoly selling at average cost and one with a competitive market - and compares three different institutional regimes: autarky, a mixed-market structure with trade and a fully integrated market, where electricity is sold at marginal cost. We show that, in the second regime, the regulated monopoly always exports toward the jurisdiction pricing at marginal cost, up to inducing productive inefficiencies. By contrast, a shift from the second to the third regime, i.e. "integrated deregulation" yields a decrease in overall consumption. We identify the exact conditions under which the shift from one regime to the other results in environmental gains.
    Keywords: Market Integration; Regulation; Electricity Trade; Environmental Impacts
    JEL: F15 Q52 Q56 F14 L94 L50
    Date: 2012
  16. By: Bown, Chad P.; McCulloch, Rachel
    Abstract: While the original justification of the antidumping laws in the industrial economies was to protect domestic consumers against predation by foreign suppliers, by the early 1990s the laws and their use had evolved so much that the opposite concern arose. Rather than attacking anti-competitive behavior, dumping complaints by domestic firms were being used to facilitate collusion among suppliers and enforce cartel arrangements. This paper examines the predation and anti-competitiveness issues from the perspective of the"new users"of antidumping -- the major emerging economies for which antidumping is now a major tool in the trade policy arsenal. The paper examines these concerns in light of important ways in which the world economy and international trading system have been changing since the early 1990s, including more firms and more countries participating in international trade, but also more extensive links among suppliers and consumers through multinational firm activity and vertical specialization.
    Keywords: Free Trade,Markets and Market Access,Economic Theory&Research,Trade Law,Access to Markets
    Date: 2012–09–01

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