nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒11‒03
nineteen papers chosen by
Russell Pittman
US Government

  1. Communication in Cournot Oligopoly By Maria Goltsman; Gregory Pavlov
  2. Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application By Nathan H. Miller; Conor Ryan; Marc Remer; Gloria Sheu
  3. Using Cost Pass-Through to Calibrate Demand By Nathan H. Miller; Marc Remer; Gloria Sheu
  4. Calibrating the AIDS and Multinomial Logit Models with Observed Product Margins By Gloria Sheu; Charles Taragin
  5. Managerial delegation schemes in a duopoly with endogenous production costs: a comparison By Nicola Meccheri; Luciano Fanti
  6. Profits and competition in a unionized duopoly model with product differentiation and labour decreasing returns By Luciano Fanti; Nicola Meccheri
  7. Informal incentive labour contracts and product market competition By Nicola Meccheri; Luciano Fanti
  8. Game Theory in Oligopoly By Marx Boopathi
  9. Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity By Snir, Avichai; Levy, Daniel; Gotler, Alex; Chen, Haipeng (Allan)
  10. Asymmetries in Price-Setting Behavior: New Microeconometric Evidence from Switzerland By Bo E. Honoré; Daniel Kaufmann; Sarah Marit Lein
  11. Reference Prices and Bidder Heterogeneity in Secondary Market Online B2B Auctions By Wedad Elmaghraby; Anandasivam Gopal; Ali Pilehvar
  12. Customer Service Quality and Incomplete Information in Mobile Telecommunications: A Game Theoretical Approach to Consumer Protection By Rafael López Zorzano; Teodosio Pérez-Amaral; Teresa Garín-Muñoz; Covadonga Gijón Tascón
  13. The Breakdown of Connectivity Breakdowns By Hoernig, Steffen
  14. Price Differentiation and Menu Costs in Credit Card Payments By Marcos Valli Jorge; Wilfredo Leiva Maldonado
  15. The dynamics of a banking duopoly with capital regulations. By Luciano Fanti
  16. Asymmetric Price Adjustments in Airlines By Escobari, Diego
  17. The optimal short-term management of flexible nuclear plants in a competitive electricity market as a case of competition with reservoir. By Maria Lykidi; Jean-Michel Glachant; Pascal Gourdel
  18. The rising Chinese pharmaceutical industry: local champions vs global players By Francesca Spigarelli
  19. SPATIAL RETAIL PRICING STRATEGIES FOR BEER IN GERMANY By Empen, Janine; Glauben, Thomas; Loy, Jens-Peter

  1. By: Maria Goltsman (University of Western Ontario); Gregory Pavlov (University of Western Ontario)
    Abstract: We study communication in a static Cournot duopoly model under the assumption that the firms have unverifiable private information about their costs. We show that cheap talk between the firms cannot transmit any information. However, if the firms can communicate through a third party, communication can be informative even when it is not substantiated by any commitment or costly actions. We exhibit a simple mechanism that ensures informative communication and interim Pareto dominates the uninformative equilibrium for the firms.
    Keywords: Cournot oligopoly; communication; information; cheap talk; mediation
    JEL: C72 D21 D43 D82 D83
    Date: 2012
  2. By: Nathan H. Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Conor Ryan (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Marc Remer (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Gloria Sheu (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We analyze the accuracy of first order approximation, a method developed theoretically in Jaffe and Weyl (2012) for predicting the price effects of mergers, and provide an empirical application. Approximation is an alternative to the model-based simulations commonly employed in industrial economics. It provides predictions that are free from functional form assumptions, using data on either cost pass-through or demand curvature in the neighborhood of the initial equilibrium. Our numerical experiments indicate that approximation is more accurate than simulations that use incorrect structural assumptions on demand. For instance, when the true underlying demand system is logit, approximation is more accurate than almost ideal demand system (AIDS) simulation in 79.1 percent of the randomly-drawn industries and more accurate than linear simulation in 90.3 percent of these industries. We also develop, among other results, (i) how accuracy changes across a variety of economic environments, (ii) how accuracy is affected by incomplete data on cost pass-through, and (iii) that a simplified version of approximation provides conservative predictions of price increases.
    Date: 2012–10
  3. By: Nathan H. Miller (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Marc Remer (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Gloria Sheu (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We demonstrate that cost pass-through can be used to inform demand calibration, potentially eliminating the need for data on margins, diversion, or both. We derive the relationship between cost pass-through and consumer demand using a general oligopoly model of Nash-Bertrand competition and develop specic results for four demand systems: linear demand, logit demand, the Almost Ideal Demand System (AIDS), and log-linear demand. The methods we propose may be useful to researchers and antitrust authorities when reliable measures of margins or diversion are unavailable.
    Date: 2012–10
  4. By: Gloria Sheu (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Charles Taragin (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: We show how observed product margins may be used in lieu of an observed market elasticity to calibrate parameters for two commonly used demand forms: the Almost Ideal Demand System (AIDS) and the multinomial logit. This technique is useful for antitrust practitioners interested in simulating the e ects of a merger, since estimates of product margins are often easier to obtain than estimates of market elasticities.
    Keywords: demand calibration, multinomial logit, almost ideal demand system, AIDS
    JEL: L40 K21
    Date: 2012–10
  5. By: Nicola Meccheri; Luciano Fanti
    Abstract: In this paper we study how managerial delegation schemes in a duopoly product market interact with wage decisions taken by a monopoly central (industry-wide) union in the labour market. We analyse a model where, at the first stage, firms’ owners optimally choose for their managers a delegation contract that can be “sales delegation” or “relative profit delegation”; at the second stage, the union fixes the wage for all (non-managerial) workers in the industry; and finally, at the third stage, managers compete in the product market. Interestingly, our results prove to be more varied with respect to findings by the managerial delegation literature with exogenous production costs for firms. Most notably, it is pointed out that, in equilibrium, both firm profitability and welfare outcomes can be superior under both sales delegation and relative profit delegation, depending on various factors such as the degree of product differentiation and the competition regime.
    Keywords: sales delegation, relative profit delegation, unionised duopoly, endogenous wage.
    JEL: J33 J51 L13
    Date: 2012–06–01
  6. By: Luciano Fanti; Nicola Meccheri
    Abstract: In this paper, we aim at investigating if the conventional wisdom, that an increase of competition linked to a decrease in the degree of product differentiation always reduces firms’ profits, remains true in a unionized duopoly model with labour decreasing returns. In this context, mixed results emerge. In particular, we show that a decrease in the degree of product differentiation may affect wages, hence profits, differently, depending on both the mode of competition in the product market Cournot or Bertrand competition) and the particular unionization structure (firm-specific or industry-wide union(s)). Interestingly, it is shown that the conventional wisdom can actually be reversed, even if under Bertrand competition only.
    Keywords: unionized duopoly, labour decreasing returns, product differentiation, profits.
    JEL: J43 J50 L13
    Date: 2012–03–01
  7. By: Nicola Meccheri; Luciano Fanti
    Abstract: This paper studies the dynamic interaction between product market competition and incentives against shirking. It is shown that efficiency wages can both increase and decrease when competition becomes fiercer. Instead, discretionary bonuses do not vary with competition but there exists an upper threshold for the number of competing firms, over which such schemes are no longer sustainable as equilibrium. Finally, industry profits under bonuses are generally higher than under eciency wages, but the reverse actually applies when information about firms’ misbehaviour flows at a low rate and the number of firms exceeds the critical threshold.
    Keywords: eciency wages, discretionary bonuses, competition, industry profits
    JEL: J33 J41 L13
    Date: 2012–06–01
  8. By: Marx Boopathi
    Abstract: The game theory techniques are used to find the equilibrium of a market. Game theory refers to the ways in which strategic interactions among economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents. The oligopolistic market structures are taken and how game theory applies to them is explained.
    Date: 2012–10
  9. By: Snir, Avichai; Levy, Daniel; Gotler, Alex; Chen, Haipeng (Allan)
    Abstract: There is evidence that 9-ending prices are more common and more rigid than other prices. We use data from three sources: a laboratory experiment, a field study, and a large US supermarket chain, to study the cognitive underpinning and the ensuing asymmetry in rigidity associated with 9-ending prices. We find that consumers use 9-endings as a signal for low prices, and that this signal interferes with price information processing. Consequently, consumers are less likely to notice a bigger price when it ends with 9, or a price increase when the new price ends with 9, in comparison to a situation where the prices end with some other digit. We also find that retailers respond strategically to this consumer bias by setting 9-ending prices more often after price increases than after price decreases. 9-ending prices, therefore, usually increase only if the new prices are also 9-ending. Consequently, there is an asymmetry in the rigidity of 9-ending prices: they are more rigid than non 9-ending prices upward but not downward.
    Keywords: Price Points; Price Recall; Sticky Prices; Rigid Prices; Price Adjustment; 9-Ending Prices; Psychological Prices
    JEL: L16 D03 M31 E31 D80 C93 C91
    Date: 2012–10–26
  10. By: Bo E. Honoré; Daniel Kaufmann; Sarah Marit Lein
    Abstract: In this paper we follow the recent empirical literature that has specified reduced-form models for price setting that are closely tied to (S, s)-pricing rules. Our contribution to the literature is twofold. First, we propose an estimator that relaxes distributional assumptions on the unobserved heterogeneity. Second, we use the estimator to examine asymmetries in price-setting behavior. Using micro price data underlying the Swiss CPI we find that a substantial share of asymmetries in the frequency of price changes can be traced back to a rising aggregate price level. We show that asymmetries would be reduced substantially in the absence of aggregate inflation.
    Keywords: Asymmetric price setting, downward nominal price rigidity, front loading, menu-cost model, heterogeneity, CPI micro data, panel data
    JEL: E31 E4 E5 C3 C23
    Date: 2012
  11. By: Wedad Elmaghraby (Robert H. Smith School of Business, University of Maryland); Anandasivam Gopal (Robert H. Smith School of Business, University of Maryland); Ali Pilehvar (Robert H. Smith School of Business, University of Maryland)
    Abstract: Online auction environments provide several sources of information that can be used by bidders to form their bids. One such information set that has been relatively understudied in the literature pertains to reference prices available to the bidder from other concurrent and comparable auctions. In this paper, we study how reference prices from such auctions affect bidding behavior on the focal auction. We also study how the impact of these reference prices is moderated by bidder heterogeneity. Bidders are shown to be influenced by two sets of references prices: internal reference prices from their own historical bidding behavior and external reference prices, formed from other open and just-finished auctions relative to the focal auction. We measure bidder heterogeneity using bidder experience and level of participation in concurrent auctions. Our results show that external reference prices are significantly moderated by bidder heterogeneity. In a departure from current work, we use longitudinal data on auctions and bids in the B2B secondary markets, where goods represent salvage or returned items from big-box retailers and bidders are business buyers. The dataset comprises over 4000 auctions collected from a large liquidator firm in North America and is unique in its comprehensiveness. Our work provides theoretical insights that are complementary to the current set of results from B2C auctions as well as managerial implications for auctioneers in the B2B space.
    Keywords: Reference Prices, Bidder Heterogeneity, B2B Auctions, Secondary Markets, First Bid, Bidder Experience, Econometric Analysis
    Date: 2012–06
  12. By: Rafael López Zorzano (Universidad Complutense, Spain.); Teodosio Pérez-Amaral (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid.); Teresa Garín-Muñoz (UNED, Spain.); Covadonga Gijón Tascón (Universidad Complutense, Spain.)
    Abstract: There is growing evidence that low-quality customer service prevails in the mobile telecommunications industry. In this paper we provide theoretical support to this empirical observation by using simple game theoretical models where inefficient low-quality service levels are part of an equilibrium strategy for the firms. We also find that the inefficiency is due to a demand-side market failure generated by incomplete information, and that it does not necessarily vanish with competition or with repeated interaction. This is particularly important in terms of policy implications because it suggests that the inefficiency should be solved through regulation via consumer protection.
    Keywords: Mobile telecommunications, Consumer protection, Game theory, Customer services, Competition, Oligopoly, Market failure, Experience goods, Incomplete information.
    JEL: D18 D43 D82 L15 L96
    Date: 2012–09
  13. By: Hoernig, Steffen
    Abstract: We show that the prediction of a strategic connectivity breakdown under a receiving-party-pays (RPP) system and discrimination between on- and off-net prices does not hold up once more than two networks are considered. Indeed, equilibria with finite call and receiving prices exist for a large and realistic range of call externality values. This allows regulation of termination rates to achieve the socially optimal retail pricing structure under RPP.
    Keywords: Connectivity breakdown; Mobile network competition; Receiving party pays; Termination rates
    JEL: L13 L51
    Date: 2012–10
  14. By: Marcos Valli Jorge; Wilfredo Leiva Maldonado
    Abstract: We build a model of credit card payments where the retailers are allowed to charge differential prices depending on the instrument of payment chosen by the consumer. We follow the approach in Rochet and Wright (2010) but assume a credit card system without any type of non-surcharge rule. In a Hotelling competition framework at the retailers level, the competitive equilibrium prices are computed assuming that the store credit provided by the retailer is less cost efficient than the one provided by the credit card. In accordance with the literature, we obtain that the interchange fee becomes neutral if we eliminate the no-surcharge rule, when the interchange fee loses its ability to distort the individual consumer’s decisions and displace the aggregate consumers’ welfare from its maximum level. We prove that the average price obtained under price differentiation is smaller than the single retail price under the non-surcharge rule, despite the retailer’s margins being the same in both scenarios. In addition, we introduce menu costs to prove that there is a value for the interchange fee such that there is equilibrium with price differentiation if and only if that fee is above this value. It must be interpreted as an endogenous cap for the interchange fee fixed by the credit card industry. Finally, we also obtain that under price differentiation with menu costs there is a non cooperative Nash equilibrium as in the well known “prisoner’s dilemma” game.
    JEL: L11 E42 G18
    Date: 2012–10
  15. By: Luciano Fanti
    Abstract: We analyse the dynamics of a banking duopoly game with heterogeneous players (as regards the type of expectations’ formation) ,to investigate the effects of the capital requirements introduced by international accords (Basel-I in 1988 and more recently Basel-II and Basel-III), in the context of the Monti-Klein model. This analysis reveals that the policy of introducing a capital requirement may stabilise the market equilibrium. Moreover, we show that when the capital standard is reduced the market stability is lost through a flip bifurcation and subsequently a cascade of flip bifurcations may lead to periodic cycles and chaos. Therefore, although on the one side the capital regulation is harmful for the equilibrium loans’ volume and profit, on the other side it is effective in keeping or restoring the stability of the Cournot-Nash equilibrium in the banking duopoly.
    Keywords: Bifurcation; Chaos; Cournot; Oligopoly; Banking; Capital regulation.
    JEL: C62 G21 G28 D43 L13
    Date: 2012–09–01
  16. By: Escobari, Diego
    Abstract: This paper uses a unique daily time series data set to investigate the asymmetric response of airline prices to capacity costs driven by demand fluctuations. We use a Markov regime-switching model with time-varying transition probabilities to capture the time variation in the response. The results show strong evidence of asymmetric price adjustments: positive cost shifts have a large positive effect, while negative cost shifts have no effect. The asymmetry is also explained by summer travel, but not by the size of cost shifts. The findings show the importance of consumer heterogeneity and capacity constraints as a source of asymmetric responses.
    Keywords: Asymmetric pricing; Airlines; Regime switching; Capacity costs
    JEL: L93 C22
    Date: 2012–10–21
  17. By: Maria Lykidi (ADIS-GRJM - Université Paris-Sud 11); Jean-Michel Glachant (Florence School of Regulation - European University Institute-Robert Schuman Center et Université Paris-Sud 11); Pascal Gourdel (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: In many countries, the electricity systems are quitting the vertically integrated monopoly organization for an operation framed by competitive markets. It therefore questions how nuclear plants should be operated in an open market framework. We address the medium-term horizon of management to take into account the fluctuations of demand according to the seasons of year. A flexible nuclear set (like the French) could be operated to follow a part of the demand variations. Since nuclear plants have to stop periodically to reload their fuel (every 12 or 18 months), we can analyze the nuclear fuel as a stock behaving like a reservoir. The flexible operation of the reservoir permits to get different nuclear fuel allocations according to the different levels of the seasonal demand. We then analyze it within a general deterministic dynamic framework with two types of generation : nuclear and thermal non-nuclear. We study the optimal management of the production in a perfectly competitive market. In this paper, we focus on the optimal short-term (monthly) production behaviour before moving to a yearly or multi-annual optimization. This constitutes a prudent research strategy of a flexible nuclear set leaving the monopoly organization and exploring how to reach a market equilibrium in a competitive market. Then, we set up a simple numerical model (based on data from the French market) given that the nuclear production set is managed in a flexible manner in order to follow the variations in demand (like the French nuclear set actually does). The marginal cost of nuclear production being (significantly) lower than the one of non-nuclear induces a discontinuity of producer's short-term profit. The problem of discontinuity makes the resolution of the optimal short-term production problem extremely complicated and even leads to a lack of solutions. That is why it is necessary to study an approximate problem (continuous problem) that constitutes a “regularization” of our economical problem (discontinuous problem). The simulations show why future demand has to be anticipated to manage the current use of the nuclear fuel reservoir. Moreover, to ensure the equilibrium between supply and demand, the management of the nuclear set has to take into account the thermal non-nuclear generation capacity.
    Keywords: Electricity market, nuclear generation, competition with reservoir, short-term optimal reservoir operation, electricity fuel mix, price discontinuity.
    JEL: C61 C63 D24 D41 L11
    Date: 2012–10
  18. By: Francesca Spigarelli (Università degli Studi di Macerata)
    Abstract: This paper is an exploratory study on main features and challenges of the Chinese pharmaceutical market. Dramatic changes in the market are due both to the Government policies, changing consumer habits and behaviour, and to the growing competition at firm level. From a demand side perspective, consumptions of pharmaceutical products are booming thanks to a combined effect of economic growth, aging population, urbanization and health system reforms. Key forces shaping the demand are examined in the chapter, with a specific attention to health care reforms as well as to new habits and confidence of Chinese people towards the Western medicine. In this regard, import and export trends, consumption, and expected evolution of the market are examined. From a supply side perspective, two main trends can be highlighted: the increasing interest of foreign investors, and the effort of Chinese pharmaceutical firms to compete in the national market. To better understand the ongoing changes we look at market characteristics, key players, as well as trends and motivation of inward FDI to China are examined. On the basis of this general picture, the paper focuses on IP related aspects, to understand who are the main actors of patenting trends (foreign vs local firms) and for which kind of products patents are registered (raw materials vs basic products vs drugs). Analyzing patent trends and the role of Chinese vs Western firms, we try to define how China is taking its role and position into the national and – potentially - international pharmaceutical market.
    Keywords: China, pharmaceutical industry, patents
    JEL: F23 L65 O34
    Date: 2012–10
  19. By: Empen, Janine; Glauben, Thomas; Loy, Jens-Peter
    Abstract: The market for beer in Germany is special for many reasons, e.g. the purity law, the large number of breweries, or consumers who are highly loyal to local brands. To what extent brand loyalty affects spatial pricing strategies, is the main question of this article. We employ weekly retail scanner data for Germany from 2000 to 2001. We find that discounts are higher and offered more often the closer the brands are sold to the brewery they originate from. In addition, average prices are also lower on home markets. According to Anderson and Kumar (2007) this strategy is chosen because promotions generate new loyal customers who repay in periods of regular prices. Thus, loyalty of consumers may be endogenous. Alternatively, retailers use local beer brands as loss leaders, which can also explain the observed regional pricing strategies.
    Keywords: Spatial Pricing, Regional Brands, Brand Loyalty, Beer, Germany, Räumliche Preissetzung, Regionale Marken, Markentreue, Bier, Deutschland, Agricultural Finance, Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, Marketing,
    Date: 2012

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