nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒09‒30
nineteen papers chosen by
Russell Pittman
US Government

  1. Countervailing power and input pricing: When is a waterbed effect likely? By Stephen P. King
  2. Brand Name and Private Label Price Setting by a Monopoly Store By Jeffrey M. Perloff; Jeffrey LaFrance; Hayley H. Chouinard
  3. Competition versus Collusion: The Impact of Consumer Inertia By Bos Iwan; Peeters Ronald; Pot Erik
  4. Welfare Analysis in Games with substitutabilities By Yann Rébillé; Lionel Richefort
  5. Toward an Ecology of Market Categories By Pontikes, Elizabeth G.; Hannan, Michael T.
  6. Quantity Competition vs. Price Competition under Optimal Subsidy in a Mixed Duopoly By Marcella Scrimitore
  7. On the strategic value of risk management By Léautier, Thomas-Olivier; Rochet, Jean-Charles
  8. Equilibrium Existence and Uniqueness In Network Games with Additive Preferences By Yann Rébillé; Lionel Richefort
  9. From Imitation to Collusion: Long-run Learning in a Low-Information Environment By Simon Weidenholzer; Daniel Friedman; Steffen Huck; Ryan Oprea
  10. Strategic product R&D investment policy under international rivalry in the presence of demand spillover effects By Tsuyoshi Toshimitsu
  11. Innovative Parents and Entrepreneurial Spawning By Lööf, Hans; Nabavi, Pardis; Bazzazian , Navid
  12. Two-part tariff licensing mechanisms By San Martín Lizarralde, Marta; Saracho de la Torre, Ana Isabel
  13. Non-linear price schedules, demand for health care and response behavior. By Helmut Farbmacher;; Joachim Winter
  14. Competition and the railroads: A European perspective By Knieps, Günter
  15. Strategic Behaviour in International Metallurgical Coal Markets By Trüby, Johannes
  16. Language, Internet and Platform Competition: the case of Search Engine By Jeon, Doh-Shin; Jullien, Bruno; Klimenko, Mikhail
  17. The effects of price regulation of pharmaceutical industry margins: A structural estimation for anti-ulcer drugs in France. By Pierre Dubois;; Laura Lasio;
  18. Testing the law of one price in retail banking: An analysis for Colombia using a pair-wise approach By Ana María Iregui; Jesús Otero
  19. Generating Tempered Stable Random Variates from Mixture Representation By Arijit Mukherjee; Piercarlo Zanchettin

  1. By: Stephen P. King
    Abstract: A downstream firm with countervailing power can extract a reduced price from an input supplier. A waterbed effect occurs if this price reduction leads the input supplier to raise the price that it charges another downstream firm. Policy makers have been concerned that this waterbed effect could undermine downstream competition, and it was considered in detail in the 2008 UK grocery inquiry. This paper presents a simple but parsimonious model to investigate if and when a waterbed effect may arise. It shows that the effect may arise through optimal pricing behaviour, but that this critically depends on the nature of upstream technology, downstream competition and consumer demand. In particular, downstream competition tends to work against a waterbed effect, but convex upstream costs support the effect. The analysis is complementary to recent academic work on the waterbed effect that focuses on bargaining constraints.
    Date: 2012–09
  2. By: Jeffrey M. Perloff; Jeffrey LaFrance; Hayley H. Chouinard
    Abstract: A monopoly that sells to brand-name loyal customers and to price-sensitive customers must decide whether to carry both name-brand and a private-label products and how much to charge. The monopoly may charge either more or less for the brand name if it carries a private label, and the price differential between the products is sensitive to cost and taste parameters.
    Keywords: brand name, private label, monopoly, pricing
    JEL: L2 D3 D4
    Date: 2012–09
  3. By: Bos Iwan; Peeters Ronald; Pot Erik (METEOR)
    Abstract: We consider a model of dynamic price competition to analyze the impact of consumer inertia on theability of firms to sustain high prices. Three main consequences are identified: (i) maintaininghigh prices does not require punishment strategies when firms are sufficiently myopic, (ii) ifbuyers are sufficiently inert, then high prices can be sustained for all discount factors, and(iii) the ability to maintain high prices may depend non-monotonically on the level of thediscount factor. These results provide a number of valuable insights with regard to competitiveand collusive pricing behavior. For example, our findings suggest that measures aiming at loweringthe degree of consumer inertia may in fact facilitate collusion in network industries.
    Keywords: microeconomics ;
    Date: 2012
  4. By: Yann Rébillé (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Lionel Richefort (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: This paper investigates the social optimum in network games of strategic substitutes and identifies how network structure shapes optimal policies. First, we show that the socially optimal profile is ob-tained through a combination of two opposite network effects, generated by the incoming and the outgoing weighted Bonacich centrality measures. Next, three different policies that restore the social optimum are derived, and the implications of the predecessor(s)-successor(s) relationship between the agents on each policy instrument are explored. Then, the link between optimal taxes and the density of the network is established.
    Keywords: network game ; social optimum ; Bonacich centrality ; opti- mal policy ; spectral radius.
    Date: 2012–09–17
  5. By: Pontikes, Elizabeth G. (University of Chicago); Hannan, Michael T. (Stanford University)
    Abstract: This paper proposes that social categorization is driven by an ecological dynamic that operates in two planes: feature space and category space. It develops a theoretical model that links positions in feature space to label assignments in category space. The first part of the model predicts that movements in feature space affect label assignments in category space, with proximity to labeled clusters affecting label adoption. The second part predicts that the structure of category space affects this relationship. For lenient labels, positions in feature space are more weakly related to label adoption in category space. An empirical analysis of software producers, based on their positions in a feature space of patents, and a category space of market-label affiliations, supports these predictions. The results imply that social classification is characterized by this coupled ecological dynamic. Further, our findings have implications for the evolution of categories, suggesting that lenient categories will become more lenient, while constraining categories will become more constraining.
    Date: 2012–07
  6. By: Marcella Scrimitore
    Abstract: This paper reconsiders the literature on the irrelevance of privatization in mixed markets, addressing both quantity and price competition in a duopoly with differentiated products. By allowing for partially privatizing a state-controlled firm, we explore competition under different timings of firms’ moves and derive the conditions under which an optimal subsidy allows to achieve maximum efficiency. We show that, while the ownership of the controlled firm is irrelevant when firms play simultaneously, it matters when firms compete sequentially, requiring the leader to be publicly-owned for an optimal subsidy to restore the first-best allocation, irrespective of the mode of competition. The paper also focuses on the extent to which a subsidy is needed to attain the social optimum, highlighting the equivalence between a price (quantity) game with public leadership or simultaneous moves and a quantity (price) game with private leadership.
    Keywords: Cournot, Bertrand, privatization, optimal subsidy.
    JEL: H21 H44 L13
    Date: 2012–09–15
  7. 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
  8. By: Yann Rébillé (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Lionel Richefort (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: A directed network game of imperfect strategic substitutes with heterogeneous players is analyzed. We consider concave additive separable utility functions that encompass the quasi-linear ones. It is found that pure strategy Nash equilibria verify a non-linear complementarity problem. By requiring appropriate concavity in the utility functions, the existence of an equilibrium point is shown and equilibrium uniqueness is established with a P -matrix. Then, it appears that previous findings on network structure and sparsity hold for many more games.
    Keywords: network game ; additive preferences ; complementarity problem ; P -matrix ;
    Date: 2012–09–17
  9. By: Simon Weidenholzer; Daniel Friedman; Steffen Huck; Ryan Oprea
    Abstract: We study long-run learning in an experimental Cournot game with no explicit information about the payo function. Subjects see only the quantities and payos of each oligopolist after every period. In line with theoretical predictions and previous experimental ndings, duopolies and triopolies both reach highly competitive levels, with price approaching marginal cost within 50 periods. Using the new ConG software, we extend the horizon to 1,200 periods, far beyond that previously investigated. Already after 100 periods we observe a qualitative change in behavior, and quantity choices start to drop. Without pausing at the Cournot-Nash level quantities continue to drop, eventually reaching almost fully collusive levels in duopolies and often reaching deep into collusive territory for triopolies. Fitted models of individual adjustment suggest that subjects switch from imitation of the most protable rival to other behavior that, intentionally or otherwise, facilitates collusion via eective punishment and forgiveness. Remarkably, subjects never learn the best-reply correspondence of the one-shot game. Our results suggest a new explanation for the emergence of cooperation.
    Date: 2012–07–19
  10. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: This paper first presents the optimal conditions for strategic R&D investment policy in the cases of noncooperative and cooperative R&D investment policies with international rivalry. Then we deal with a model of strategic product (i.e., quality-improving) R&D investment competition. In particular, we analyze an optimal R&D investment policy with regard to the two cases in the presence of demand spillover effects associated with improving the quality of a product. We show how optimality depends on the strength of demand spillover effects. We also consider the same problems assuming heterogeneous consumers and alternative utility functions.
    Keywords: strategic R&D investment policy; quality choice; international rivalry; demand spillover effects
    JEL: F12 F13 L13
    Date: 2012–09
  11. By: Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Nabavi, Pardis (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Bazzazian , Navid (Strategy and Business Policy, HEC, Paris)
    Abstract: This paper analyzes how different innovation-strategies of incumbent firms affect the quantity and quality of their entrepreneurial spawning. Using a data set that comprises almost all patent applications by firms in Sweden for the period 1997-2008, we distinguishes between firms that are engaged in innovation activities persistently, occasionally and not at all. We do not find any statistically significant evidence that the chance of survival for a new firm can be linked back to the innovation strategy of the parent firm. In contrast, we provide strong evidence that employee start-ups from persistent innovators are more productive during the first five year on the market than other new ventures, everything else equal.
    Keywords: Patent; R&D; Spinoff; Productivity; Employment
    JEL: C23 O31 O32
    Date: 2012–09–17
  12. By: San Martín Lizarralde, Marta; Saracho de la Torre, Ana Isabel
    Abstract: Most of the patent licensing agreements that are observed include royalties, in particular per-unit or ad valorem royalties. This paper shows that in a differ entiated duopoly that competes á la Cournot the optimal contract for an internal patentee always includes a positive royalty. Moreover, we show that the patentee would prefer to use ad valorem royalties rather than per-unit royalties when goods are complements or when they are substitutes and the degree of differentiation is suffciently low. The reason is that by including an ad valorem royalty in the licensing contract the patentee can commit strategically to be more (less) aggressive when goods are complements (substitutes) since his licensing revenues become increasing with the price of output of his rival. As a result, licensing may hurt consumers although it always increases social welfare.
    Keywords: patent licensing, royalty, cournot duopoly, product differentiation
    JEL: D45
    Date: 2012–06
  13. By: Helmut Farbmacher;; Joachim Winter
    Abstract: When health insurance reforms involve non-linear price schedules tied to payment periods (for example, a quarter or a year), the empirical analysis of its effects has to take the within-period time structure of incentives into account. The analysis is further complicated when demand data are obtained from a survey in which the reporting period does not coincide with the payment period. We illustrate these issues using as an example a health care reform in Germany which imposed a perquarter fee of e10 for doctor visits and additionally set an out-of-pocket maximum. This co-payment structure results in an effective "spot" price for a doctor visit which decreases over time within each payment period. Using this variation, we find a substantial effect of the new fee, in contrast to earlier studies of this reform. Overall, the probability of visiting a physician decreased by around 2.5 percentage points in response to the new fee for doctor visits. We verify the key assumptions of our approach using a separate data set of insurance claims in which the reporting period effects are absent by construction.
    Keywords: health economics; non-linear pricing; response behavior; natural experiment
    JEL: I11 I18 D12
    Date: 2012–07
  14. By: Knieps, Günter
    Abstract: The reform of European railroads is a time-consuming process strongly charac-terized by its path-dependency. Firstly, a short outline of the historical roots of the controversial debates on the role of the state and the markets, and the organi-zation of competition in European railroad industries is provided. Secondly, the opening of the market for train services in the context of the liberalization of European transport markets since 1985 is characterized and the regulatory pre-conditions for competition on the tracks are presented. Thirdly, the evolution of track access regulation in Europe during the last decades is analyzed, differenti-ating between the period of negotiated third party access since 1991, the intro-duction of ex ante regulation by the first railroad infrastructure package in 2001, and the danger of overregulation posed by the recent Draft Directive of July 2012 establishing a single European railway area. Fourthly, the role of competi-tion on the markets for rail services and the reform process of interoperability requirements are considered. Finally, competition on the markets for rail ser-vices and public subsidies for rail infrastructures as well as subsidies for train services are evaluated. --
    Date: 2012
  15. By: Trüby, Johannes (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: This paper analyses whether prices and trade-flows in the international market for metallurgical coals were subject to non-competitive conduct in the period 2008 to 2010. To do so, I develop mathematical programming models – a Stackelberg model, two varieties of a Cournot model, and a perfect competition model – for computing spatial equilibria in international resource markets. Results are analysed with various statistical measures to assess prediction accuracy of the models. The results show that real market equilibria cannot be reproduced with a competitive model. However, real market outcomes can be accurately simulated with the non-competitive models suggesting that market equilibria in the international metallurgical coal trade were subject to strategic behaviour of coal exporters.
    Keywords: metallurgical coal trade; market power; oligopoly; Stackelberg; Cournot
    JEL: C61 L11 L13 L71 Q31
    Date: 2012–09–20
  16. By: Jeon, Doh-Shin; Jullien, Bruno; Klimenko, Mikhail
    Abstract: The World Wide Web was originally a totally English-based medium due to its US origin. Although the presence of other languages has steadily risen, content in English is still dominant, which raises a natural question of how bilingualism of con- sumers of a home country a¤ects production of web content in the home language and domestic welfare? In this paper, we address this question by studying how bilingual- ism a¤ects competition between a foreign search engine and a domestic one within a small country and thereby production of home language content. We ?nd that bilingualism unambiguously softens platform competition, which in turn can induce a reduction in home language content and in home country?s welfare. In particular, it is possible that content in the foreign language crowds out so much content in the home language that consumers enjoy less content when they are bilingual than when they are monolingual.
    Keywords: anguage, Bilingualism, Platform, Search Engine, Two-sided Mar- ket, International Trade.
    Date: 2012–09–14
  17. By: Pierre Dubois;; Laura Lasio;
    Abstract: The objective of this paper is to study the effects of price regulation on competition in the pharmaceutical industry. We provide a method allowing to identify margins in an oligopoly price competition game even when prices may not be freely chosen by Â…firms. We use our identiÂ…cation strategy to study the effects of regulatory constraints on prices in the pharmaceutical industry which is heavily regulated in particular in France. We use data from the US, Germany and France to identify country speciÂ…c demand models and then recover price cost margins under the regulated price setting constraints on the French market. To do so, we estimate a structural model on the market for anti-ulcer drugs in France that allows us to explore the drivers of demand, to identify whether regulation really affects margins and prices and to relate regulatory reforms to industry pricing equilibrium. We provide the fiÂ…rst structural estimation of price-cost margins on a regulated market with price constraints and show how to identify unknown possibly binding constraints thanks to three different markets (US, German and France) with varying regulatory constraints. The identiÂ…ed margins show that margins have increased over time in France but that fiÂ…rms were specially constrained in price setting after 2004.
    Keywords: empirical IO, regulation, price constraints, pharmacy, antiulcer drugs.
    JEL: L10 I18
    Date: 2012–07
  18. By: Ana María Iregui; Jesús Otero
    Abstract: We apply a pair-wise approach to test the law of one price for deposit (lending) rates in Colombia. We find that when banks are of different size deposit rates adjust quickly, suggesting a competitive environment. By contrast, lending rates adjust rapidly when banks are of similar size, supporting market segmentation.
    Keywords: Law of one price; retail interest rates; Colombia. Classification JEL: G21.
    Date: 2012–09
  19. By: Arijit Mukherjee; Piercarlo Zanchettin
    Abstract: We study horizontal product differentiation as a strategic decision of downstream firms facing a threat of vertical integration and market foreclosure by an upstream monopolist. We model product differentiation either as pure market segmentation or as generating positive value to consumers. Because of the threat of vertical integration, the downstream firms prefer more differentiation when the latter merely yields the anticompetitive effects of market segmentation, while they may prefer less differentiation when the latter would generate additional social value. Therefore, instead of market foreclosure, we indicate market segmentation or under-investment in socially valuable activities, such as product innovation, design, and informative advertising, as possible social costs of a lenient antitrust policy towards vertical mergers.
    Keywords: Vertical integration; product differentiation; market foreclosure; market segmentation.
    JEL: D43 L13 L42
    Date: 2012–04

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