nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒10‒13
twenty papers chosen by
Russell Pittman
US Government

  1. Monopolistic Location Choice in Two-Sided Industries By Böhme, Enrico; Müller, Christopher
  2. Does Inpu Purchase Cooperation Foster Downstream Collusion? By Aldo González; Loreto Ayala
  3. Excess Liquidity against Predation By Dai Zusai
  4. Dynamic markets for lemons : performance, liquidity, and policy intervention By Diego Moreno; John Wooders
  5. Mobility Barriers and the Speed of Market Selection By Werner Hölzl
  6. Allaz-Vila competition with non-linear costs or demands By Breitmoser, Yves
  7. Excess capacity and pricing in Bertrand-Edgeworth markets: Experimental evidence By Fonseca, Miguel A.; Normann, Hans-Theo
  8. Agent-Based Spatial Competition By Eveline Van Leeuwen; Mark Lijesen
  9. Design of Consumer Review Systems and Product Pricing By Yabing Jiang; Hong Guo
  10. Net Neutrality, Foreclosure and the Fast Lane: An empirical study of the UK By Laura Nurski
  11. Two-Sided Platform Competition in the Online Daily Deals Promotion Market By Byung-Cheol Kim; Jeongsik "Jay" Lee; Hyunwoo Park
  12. Competitive Dynamics, IP Litigation and Acquisitions - The Struggle for Positional Advantage in the Emerging Mobile Internet By Timo Seppälä; Martin Kenney
  13. The Effects of Introducing Advertising in Pay TV: A Model of Asymmetric Competition between Pay TV and Free TV By Helmut M. Dietl; Markus Lang; Pannlang Lin
  14. Using Spectrum Auctions to Enhance Competition in Wireless Services By Peter Cramton; Evan Kwerel; Gregory Rosston; Andrzej Skrzypacz
  15. Does Regulation Drive Competition? Evidence from the Spanish Local TV Industry By Ricard Gil; Mitsukuni Nishida
  16. Reducing Healthcare Costs Requires Good Market Design By Peter Cramton
  17. Auction Design for Medicare Durable Medical Equipment By Peter Cramton
  18. Size and Density Economies in Refuse Collection By Graziano Abrate; Fabrizio Erbetta; Giovanni Fraquelli; Davide Vannoni
  19. Explaining Port Size: Accessibility, Hinterland Competition and a Semi-Endogenously Determined W. By Thomas Vanoutrive
  20. Welfare Effects of Water Pricing in Germany By Müller, Christopher

  1. By: Böhme, Enrico; Müller, Christopher
    Abstract: We analyze the optimal location choice of a monopolistic firm that operates two platforms on a two-sided market. We show that the optimal platform locations are equivalent to the one-sided benchmark if both sides are either restricted to single- or multi-homing. In the mixed case (one side single-homes, the other one multi-homes), the optimal platform locations are determined by the relative profitability of both market sides. Our results indicate that modeling mergers on two-sided markets with fixed locations is often inappropriate.
    Keywords: two-sided markets; location choice; monopoly; merger simulation
    JEL: K20 L51 L12 D42
    Date: 2012–10–05
  2. By: Aldo González; Loreto Ayala
    Abstract: We set up a model where two retailers compete downstream and buy their inputs from a single producer. Retailers may collude downstream, when fixing the retail price and cooperate upstream by jointly negotiating the wholesale price with the producer. We find that purchase cooperation renders downstream collusion more likely. First it expands the range of differentiation where downstream collusion is a profitable strategy. Second it makes more stable the agreement downstream since the punishment becomes harsher due to the increase in the wholesale price coming from the breakdown of common upstream negotiation. The results are robust to a scenario of upstream price rigidity where the wholesale price cannot be immediately renegotiated after a deviation downstream has occurred.
    Date: 2012–06
  3. By: Dai Zusai (Department of Economics, Temple University)
    Abstract: We consider precautionary liquidity holding as counter-strategy for the entrant to protect himself from predation. Threat of predation, even if avoided in equilibrium, affects the financial contract to raise precautionary liquidity and the equilibrium outcome in the product market competition. When the incumbent's strategy is unverifiable, the entrant with small start-up capital cannot raise large enough precautionary liquidity; consequently, he shrinks his business so as to avoid predation. Predation evolves in the model only as perturbation from equilibrium strategy. We provide the revelation principle for a sequential equilibrium to select a sensible outcome by imposing robustness to such perturbation.
    Keywords: Predation, excess liquidity, revelation principle, sequential equilibrium, strategic uncertainty
    JEL: L12 D86 G30
    Date: 2012–06
  4. By: Diego Moreno; John Wooders
    Abstract: The inefficiency of competitive markets for lemons raises fundamental questions about market performance and the role of policy intervention. We study the performance of dynamic markets, and show that when the time horizon is finite decentralized markets perform better and high quality is more liquid than centralized ones. When frictions are small, decentralized markets become completely illiquid at all but the first and the last date. When the time horizon is infinite, decentralized markets yield the static competitive surplus, whereas centralized markets have separating equilibria that yield a greater surplus. Subsidizing low quality or taxing high quality tends to increase surplus in both decentralized and centralized markets.
    Keywords: Decentralized dynamic market for lemons, Adverse selection, Efficiency, Liquidity, Policy intervention
    Date: 2012–09
  5. By: Werner Hölzl (WIFO)
    Abstract: This paper studies the influence of mobility barriers on industry evolution using the stylised pure selection model developed by Metcalfe. It is shown that mobility barriers influence industry dynamics by reducing the speed of competitive selection. Based on the theoretical model, we argue that mobility barriers should lead to a reduction of market share reallocation dynamics in models that use replicator dynamics. We then test this prediction empirically, finding that industries with high mobility barriers have a larger share of stable firms that grow or decline only marginally, compared to industries with low mobility barriers. This has important implications for the interpretation of productivity decompositions. Our empirical results show that higher mobility barriers result in a lower contribution of reallocation to aggregate productivity growth in Austrian manufacturing industries.
    Keywords: Intensity of competition, mobility barriers, sunk costs, selection dynamics, firm growth, reallocation
    Date: 2012–10–01
  6. By: Breitmoser, Yves
    Abstract: If Cournot oligopolists may sell their output prior to its production (forward trading), competition intensifies. Potentially, it may intensify so far as to imply convergence to the Bertrand equilibrium, as shown by Allaz and Vila (1993) for the case of linear demand and costs. The present paper analyzes the limiting outcome if demand or costs are non-linear, which still are open problems. Specifically, I consider a general family of convex demands and increasing marginal costs. In both cases, the limiting outcomes are strictly between Cournot and Bertrand. This shows that competitive futures markets improve welfare (upon Cournot) also for non-linear costs or demands, but they do generally not imply social efficiency.
    Keywords: forward trades; duopoly; quantity competition; convergence; Bertrand
    JEL: D40 D43 C72
    Date: 2012–10–06
  7. By: Fonseca, Miguel A.; Normann, Hans-Theo
    Abstract: We conduct experiments testing the relationship between excess capacity and pricing in repeated Bertrand-Edgeworth duopolies and triopolies. We systematically vary the experimental markets between low excess capacity (suggesting monopoly) and no capacity constraints (suggesting perfect competition). Controlling for the number of firms, higher production capacity leads to lower prices. However, the decline in prices as industry capacity rises is less pronounced than predicted by Nash equilibrium, and a model of myopic price adjustments has greater predictive power. With higher capacities, Edgeworth-cycle behavior becomes less pronounced, causing lower prices. Evidence for tacit collusion is limited and restricted to low-capacity duopolies. --
    Keywords: tacit collusion,excess capacity,Edgeworth cycles
    JEL: C72 C90 D43
    Date: 2012
  8. By: Eveline Van Leeuwen; Mark Lijesen
    Abstract: Equilibrium in the Hotelling model of spatial competition is guaranteed if the distribution of consumers is log concave. In the real world, nothing guarantees such a log concave distribution however, rendering the analytical model unable to provide a primer as to what one might expect from empirical applications. We develop an agent-based model of spatial competition that is capable of reproducing the results of the analytical model and also provides meaningful results for some cases where the distribution of consumers is not log concave. Using numerous simulations, on randomly drawn distributions, we derive equilibrium locations and prices and test for uniqueness. Moreover, we check whether the relationships between characteristics of the distribution (e.g. concentration, skewness) and outcomes are consistent with the analytical model. Key-words: Hotelling, agent-based modelling, spatial competition
    Date: 2012–10
  9. By: Yabing Jiang (Lutgert College of Business, Florida Gulf Coast University); Hong Guo (Mendoza College of Business, University of Notre Dame)
    Abstract: Consumer review systems have become an important marketing communication tool through which consumers share and learn product information. Although there is abundant evidence that consumer reviews have significant impact on consumer purchasing decisions, the design of consumer review systems and its impact on review outcomes and product sales have not yet been well examined. This paper analyzes firms’ review system design and product pricing strategies. We formally model two design features of consumer review systems – rating scale and disclosure of specific product attribute information. We show that firms’ optimal strategies critically depend on contextual characteristics such as product quality, product popularity, and consumer misfit cost. Our results suggest that firms should choose a low rating scale for niche products and a high rating scale for popular products. Firms should disclose specific product attribute information to attract the desired consumer segment when product quality is low relative to misfit cost, and the resulting optimal size of the targeted consumer market increases in product popularity and product quality. Different pricing strategies should be deployed during the initial sale period for different product types. For niche products, firms are advised to adopt lower-bound pricing for high-quality products to take advantage of the positive word of mouth. For popular products, firms are advised to adopt upper-bound pricing for high-quality products to enjoy the direct profit from the initial sale period, even after taking into account the negative impact of high price on consumer reviews.
    Keywords: economic modeling, e-commerce, consumer reviews, online word of mouth, product uncertainty
    JEL: D42 L86 M15
    Date: 2012–09
  10. By: Laura Nurski (Center for Economic Studies, Faculty of Business and Economics, KU Leuven)
    Abstract: Consumers buy internet access from Internet Service Providers (ISPs) to reach online content providers. Under net neutrality, an ISP is not allowed to discriminate between content providers, even though it might have an incentive to do so. An ISP might want to sell a “fast lane” to content providers or use quality degradation to foreclose content providers that compete with the ISP's own content. Discarding net neutrality will have two effects on consumers: (i) consumers will reoptimize their choice of online content, at constant ISP choices; and (ii) consumers will reoptimize their choice of ISP. I empirically investigate whether an ISP has an incentive to break net neutrality, taking into account both channels of consumer response. I combine a novel data set on UK household content and ISP choices with data on ISP presence in local markets, as well as speeds and prices. Preliminary results indicate that a fast lane increases consumers' surplus, industry revenues and advertising revenues. In contrast, foreclosure seems an unlikely scenario since it reduces the foreclosing ISP's revenues from selling broadband by more than it can recuperate through advertising on online content.
    Keywords: Net neutrality, Foreclosure, Telecommunications
    JEL: L42 L86 L82
    Date: 2012–09
  11. By: Byung-Cheol Kim (School of Economics, Georgia Institute of Technology); Jeongsik "Jay" Lee (Scheller College of Business, Georgia Institute of Business); Hyunwoo Park (School of Industrial and System Engineering)
    Abstract: We empirically investigate the platform competition in the online daily deals promotion market that is characterized by intense rivalry between two leading promotion sites, Groupon and LivingSocial, that broker between merchants and consumers. We find that deals offered through Groupon, the incumbent, sell more and generate higher revenues than those offered by LivingSocial, the entrant. We show that the greater network size in the consumer side entirely explains the incumbent's lead in the merchant side performance, indicating the existence of cross-side network effects at the aggregated market level. However, this performance advantage is dampened by the entrant's competitive chasing at local markets through offers of greater discounts and lower prices. Moreover, the incumbent advantage quickly attenuates as the merchants repeat promotions over time. These countering forces appear to prevent this market from achieving a tipping equilibrium. Our findings thus help explain why different market structures arise in two-sided markets with network externalities.
    Keywords: two-sided market, platform competition, cross-side network effects, online daily deals, reputation effect
    JEL: D40 L10 M20
    Date: 2012–09
  12. By: Timo Seppälä; Martin Kenney
    Abstract: This article investigates how current global intellectual property (IP) litigation provides insight into the competitive landscape of mobile internet, the strategic thinking processes of firms, and the old mobile telecommunications incumbents and new entrants from internet that are vying for space in the new world of mobile internet. To understand the contemporary industry of smart devices, we used the latest IP litigation data from the U.S. to illustrate how the world of essential patents (i.e., the old incumbents in mobile telecommunications) and the world of platform patents (i.e., the new entrants into mobile internet) have become two complementary areas of technology. This analysis address the necessity for understanding the firms involved in IP litigation cases for smart devices in particular and the corresponding patents these firms use in current global IP litigation. This article provides evidence that elucidates the current turmoil in mobile telecommunications; identifies the valuable patents, corresponding patent categories and technology areas; and discusses and analyzes the competitive landscape of mobile internet through the eyes of IP litigation and IP acquisitions. Furthermore, we provide additional evidence that the patent acquisitions by Apple, Google, and Microsoft changed the nature of their ownership of different technologies and important patents in the world of essential patents.
    Keywords: Apple, Google, Microsoft, Nokia, ICT, Intellectual Property (IP), IP Litigation, IP Acquisitions
    Date: 2012–10–04
  13. By: Helmut M. Dietl (Department of Business Administration (IBW), University of Zurich); Markus Lang (Department of Business Administration (IBW), University of Zurich); Pannlang Lin (Department of Business Administration (IBW), University of Zurich)
    Abstract: This paper develops a theoretical model of asymmetric competition between a pay TV and a free TV broadcaster. Our model shows that the pay TV broadcaster has incentives to place advertising on its channel if the marginal return on advertising exceeds the viewers' disutility from advertising. In this case, however, the pay TV advertising level is always below the corresponding level on free TV. The pay TV advertising level can increase with a higher viewer disutility from advertising but the pay TV channel will never attract a larger viewership than the free TV channel. Furthermore, we show that introducing advertising on pay TV induces a decrease of the subscription fees on this channel and a decrease in the advertising level of the free TV channel. Moreover, pay TV viewer demand can increase if the pay TV broadcaster places advertising on its channel. If the viewer disutility of advertising is suffciently large, aggregate broadcaster profits increase through the introduction of advertising in pay TV, while aggregate consumer surplus always increases.
    Keywords: Manufacturing network, Manufacturing plant, Global operations management, Lead factory, Knowledge transfer
    Date: 2012–01
  14. By: Peter Cramton (Economics Department, University of Maryland); Evan Kwerel; Gregory Rosston; Andrzej Skrzypacz
    Abstract: Spectrum auctions are used by governments to assign and price licenses for wireless communications. Effective auction design recognizes the importance of competition, not only in the auction, but in the downstream market for wireless communications. This paper examines several instruments regulators can use to enhance competition and thereby improve market outcomes.
    Keywords: Auctions, spectrum auctions, market design, package auction, clock auction, combinatorial auction
    JEL: D44 C78 L96
    Date: 2012
  15. By: Ricard Gil (Carey Business School, Johns Hopkins University); Mitsukuni Nishida (Carey Business School, Johns Hopkins University)
    Abstract: Although we have many tools to understand the effect of regulation on competition, we know little about the importance of enforcement in explaining the impact of regulation. For this purpose, this paper uses data from Spanish local television industry in Spain from 1995 through 2001, which provide an unique opportunity for examining how competition changes with the introduction of regulation and a posterior liberalization. During this period, the television industry transitioned from a state of alegality (no regulation in place) to being highly regulated and finally to being deregulated. Using a firm entry model from Bresnahan and Reiss (1990, 1991), we estimate local TV station entry thresholds by number of entrants across years. We decompose the ratio into the fixed costs and variable profits, and find both an increase in the fixed-costs ratios and decrease in the variable-profit ratios drive the departure in the entry threshold from the one in other years. We find the model parameters are informative about the nature of the regulation and how strongly the government enforces the regulation.
    Keywords: Regulation, Competition, Television, Liberalization
    JEL: L51 L82
    Date: 2012–05
  16. By: Peter Cramton (Economics Department, University of Maryland)
    Abstract: One sensible way to reduce healthcare costs is to harness market forces, where practical, to nurture competition and innovation. Lower prices and improved services should follow. However, the switch to market pricing is not an easy one. Medicare’s experience with medical supplies illustrates the challenges and offers some important lessons. The key lesson is that government programs can benefit from introducing market methods, but doing so requires good market design—something that may not come naturally to the implementing agency, especially in light of political forces and organizational inertia.
    Keywords: Medicare auctions, health care auctions, procurement auctions
    JEL: D44 I18
    Date: 2012
  17. By: Peter Cramton (Economics Department, University of Maryland)
    Abstract: An auction design for Medicare Durable Medical Equipment is presented. The design addresses the flaws in the current program. Bids are binding commitments. Each bid binds the bidder to particular performance obligations depending on the auction outcome. The bids are made credible through a rigorous qualification one month before the auction. Each bidder provides a financial guarantee in the form of a bid bond or a deposit in proportion to the bidder’s capacity. Capacity is objectively estimated based on the bidder’s supply in recent years, with the most recent year given the most weight. Each winner provides a performance guarantee in proportion to the winner’s estimated volume won. The auction establishes a market clearing price for each product in each service area. The price paid to all suppliers is the clearing price that balances supply and demand. These prices are found in a simultaneous descending clock auction, a simple price discovery process that allows both substitution across items and complementarities. Competition in the auction comes from new entry or the expansion of existing suppliers into new product categories and service areas. After the auction, the winners compete for Medicare beneficiaries by offering quality products and services. Thus, beneficiary choice is used to further strengthen incentives to provide high quality products and services.
    Keywords: Medicare auctions, health care auctions, procurement auctions
    JEL: D44 I18
    Date: 2012
  18. By: Graziano Abrate (Department of Business Management and Environment, University of Eastern Piedmont); Fabrizio Erbetta (Department of Business Management and Environment, University of Eastern Piedmont); Giovanni Fraquelli (Department of Business Management and Environment, University of Eastern Piedmont); Davide Vannoni (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: The focus of the paper is to analyze the costs of solid waste collection by applying a well-behaved multiproduct cost function model to a sample of more than 500 Italian municipalities. Beyond shedding light on the presence and on the extent of size (or scale) economies, our aim is to investigate in depth the issue of economies of density, which is still an underexplored topic in the literature. Our cost function specification, by being able to estimate several measures of density economies (such as output density economies, vertical density economies and horizontal density economies), allows to capture the impact of different urbanization models on the costs of refuse collection and disposal. The results of the estimates highlight the presence of output density economies as well as horizontal density economies. Conversely, there is significant and robust evidence of the existence of vertical density diseconomies, which suggests that congestion problems in densely populated councils are severely affecting garbage collection costs. Finally, there is evidence of diseconomies of size, which suggests that aggregating the refusal collection operations of several municipalities would not bring savings in the average costs.
    Keywords: Solid waste, density economies, cost functions.
    JEL: D24 H42 L32 L99
    Date: 2012–07
  19. By: Thomas Vanoutrive
    Abstract: There is an ongoing debate on the concentration of container throughput in the European container port system. A particular feature is the dominant position of ports located in the Hamburg-Le Havre range. Some proponents of southern European ports argue that a shift in port traffic from the north to the south would be beneficial for the environment and the economy. Furthermore, some argue that concentration of ports might increase regional inequalities in Europe. For instance, the European White Paper on Transport argues that more entry points into European markets are needed on the coasts. In our paper we apply and compare several hinterland accessibility indices to explain the relative size of port regions. Besides standard measures that combine the size of hinterland regions with a distance decay function, we check whether the incorporation of the density of hinterland activities leads to better performing measures. As indicated in the literature, port size is strongly related to hinterland accessibility. The accessibility measures also allow to estimate hinterland overlap between ports which is relevant from a port competition perspective. These figures can also be employed to check the usefulness of commonly applied delimitations of port ranges and port regions like the Rhine-Scheldt Delta and the Hamburg-Le Havre range. To evaluate the robustness of the current distribution of port activities in Europe we investigate what the effect would be of changes in parameter values in the accessibility function and of policies that penalise north-western European ports. We conclude that major changes in the general port layout of Europe are not to be expected. Key words: accessibility, port, hinterland, Europe JEL codes: R12, R40
    Date: 2012–10
  20. By: Müller, Christopher
    Abstract: The observed two-part tariff price structure (consisting of a lump-sum price and a linear marginal price) for drinking water in Germany does not reflect the cost structure reported in the literature. Recovering marginal costs from a sample of 251 German counties, we see that there are positive price–cost margins, while lump-sum prices are too low. A price-structure readjustment along welfare-economic principles (marginal cost pricing; lump-sum price ensures cost recovery) would increase the mean consumer surplus by 0.037% of the local GDP or € 2.129 million per county, assuming a share of 15% variable costs in total costs.
    Keywords: residential water demand; welfare measurement; public water supply; equity– efficiency trade-off; marginal versus average price sensitivity; natural monopoly; public services
    JEL: L32 H42 O25 L95 Q21 D61
    Date: 2012–09–19

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