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

  1. Collusive market sharing with spatial competition By Kai Andree; Mike Schwan
  2. Learning in Advance Selling with Heterogeneous Consumers By Oksana Loginova; X. Henry Wang; Chenhang Zeng
  3. Competing for Customers in a Social Network By Pradeep Dubey; Rahul Garg; Bernard De Meyer
  4. Endogeneous Risk in Monopolistic Competition By Vladislav Damjanovic
  5. Monopolistic Competition: CES Redux? By Paolo Bertoletti; Paolo Epifani
  6. Inferior Factor in Cournot Oligopoly Revisited By Paolo Bertoletti; Pierre Von Mouche
  7. Selection Effects with Heterogeneous Firms By Monika Mrázová; J. Peter Neary
  8. On the Existence of Quality Measures in Random Utility Models By Szczygielski, Krzysztof; Komisarski, Andrzej
  9. Vertical Syndication-Proof Competitive Prices in Multilateral Markets By O. Tejada and M. Alvarez-Mozos
  10. Learning by Trading in Infinite Horizon Strategic Market Games with Default. By Sonja Brangewitz; Gaël Giraud
  11. Do Prices Determine Vertical Integration? Evidence from Trade Policy By Alfaro, Laura; Conconi, Paola; Fadinger, Harald; Newman, Andrew
  12. Unbundling the incumbent: Evidence from UK broadband By Nardotto, Mattia; Valletti, Tommaso; Verboven, Frank
  13. The Determinants of Supply and Demand for Mobile Applications By Michael Sinkinson
  14. First mover advantages in mobile telecommunications: Evidence from OECD countries By Muck, Johannes; Heimeshoff, Ulrich
  15. Consumer choice and local network effects in mobile telecommunications in Turkey By Karaçuka, Mehmet; Çatik, A. Nazif; Haucap, Justus
  16. The effect of pharmacies’ right to negotiate discounts on the market share of parallel imported pharmaceuticals By Granlund, David
  17. Controlling regional monopolies in the natural gas industry: The role of transport capacity By Farid Gasmi; Juan Daniel Oviedo
  18. Is mandating "smart meters" smart? By Léautier, Thomas-Olivier
  19. Bank Competition and Stability: Cross-country Heterogeneity (Revised version of CentER DP 2011-080) By Beck, T.H.L.; De Jonghe, O.G.; Schepens, G.
  20. A game-theoretic approach to non-life insurance markets By Christophe Dutang; Hansjoerg Albrecher; Stéphane Loisel

  1. By: Kai Andree; Mike Schwan
    Abstract: This paper develops a spatial model to analyze the stability of a market sharing agreement between two firms. We find that the stability of the cartel depends on the relative market size of each firm. Collusion is not attractive for firms with a small home market, but the incentive for collusion increases when the firm’s home market is getting larger relative to the home market of the competitor. The highest stability of a cartel and additionally the highest social welfare is found when regions are symmetric. Further we can show that a monetary transfer can stabilize the market sharing agreement.
    Date: 2012–10
  2. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Henry Wang (Department of Economics, University of Missouri-Columbia); Chenhang Zeng (Research Center for Games and Economic Behavior, Shandong University)
    Abstract: The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.
    Keywords: advance selling, the Newsvendor Problem, demand uncertainty, experienced consumers, inexperienced consumers.
    JEL: D43 L13 C72
    Date: 2012–09
  3. By: Pradeep Dubey (Department of Economics, Stony Brook University); Rahul Garg (Opera Solutions, INDIA); Bernard De Meyer (Cermsem, Univesit´e Paris 1, Paris, FRANCE)
    Abstract: There are many situations in which a customer’s proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. Under quite general circumstances, it turns out that customers’ influence on each other dynamically converges to a steady state. Thus we can model these situations as games in which firms compete for customers located in a “social network”. A canonical example is provided by competition for advertisement on the web. Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. Otherwise there is a tendency towards regionalization, with firms dominating disjoint territories. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous.
    Date: 2012–09
  4. By: Vladislav Damjanovic (Department of Economics, University of Exeter)
    Abstract: We consider a model of financial intermediation with a monopolistic competition market structure. A non-monotonic relationship between the risk measured as a probability of default and the degree of competition is established.
    Keywords: Competition and Risk, Risk in DSGE models, Bank competition; Bank failure, Default correlation, Risk-shifting effect, Margin effect.
    JEL: G21 G24 D43 E13 E43
    Date: 2012
  5. By: Paolo Bertoletti (Department of Economics and Management, University of Pavia); Paolo Epifani (Department of Economics, IGIER and Baffi Centre, Università Bocconi)
    Abstract: We investigate competitive, selection and reallocation effects in monopolistic competition trade models. We argue that departing from CES preferences in an otherwise standard Dixit-Stiglitz setup with additive preferences seems to involve implausible assumptions about consumer behavior and inconsistent competitive effects. In the presence of trade costs, selection effects à la Melitz (2003) are instead generally robust to the assumptions about preferences. However, they are unambiguously associated to aggregate productivity gains only when preferences are CES. We also study competitive effects in alternative monopolistic competition settings featuring non-additive preferences, strategic interaction and consumers’ preference for an ideal variety. We find that none of the these setups delivers a compelling pro-competitive mechanism. Overall, our results suggest that in monopolistic competition, consistent with CES preferences, larger markets select more aggressively on productivity rather than forcing firms to move down their average cost curves.
    Keywords: Monopolistic Competition; CES Preferences; International Trade; Competitive, Selection and Reallocation Effects.
    JEL: F1
    Date: 2012–10
  6. By: Paolo Bertoletti (Department of Economics and Management, University of Pavia); Pierre Von Mouche (Economics of Consumers and Households, Wageningen University)
    Abstract: We reconsider the recent work by [Oku10] on (possibly asymmetric) Cournotian firms with two production factors, one of them being inferior. It is shown there that an increase in the price of the inferior factor does raise equilibrium industry output. In addition of providing a simpler and more rigorous proof of such a result, we generalize it to the case of technologies with s = 2 factors and allow some firms not to use the inferior one.
    Date: 2012–10
  7. By: Monika Mrázová; J. Peter Neary
    Abstract: We provide a general characterization of which firms will select alternative ways of serving a market. If and only if firms' maximum profits are supermodular in production and marketaccess costs, more efficient firms will select into the activity with lower market-access costs. Our result applies in a range of models and under a variety of assumptions about market structure. We show that supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are "sub-convex" (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects.
    Keywords: Foreign direct investment (FDI), heterogeneous firms, proximity-concentration trade-off, R&D with threshold effects, super- and sub-convexity, supermodularity
    JEL: F23 F15 F12
    Date: 2012–10
  8. By: Szczygielski, Krzysztof; Komisarski, Andrzej
    Abstract: Random Utitly Models (RUMs) are a particularly convenient way of modelling product differentiation. In this paper we demonstrate that they can be used to examine the possibilities of creating quality measures from data on prices and sales volumes. We formulate conditions sufficient for the existence of quality measures in two broad families of RUMs: additive random utility models and pure vertical differentiation models.
    Keywords: quality measure; product differentiation; random utility models
    JEL: D43 L15 C60
    Date: 2012–10–30
  9. By: O. Tejada and M. Alvarez-Mozos (Universitat de Barcelona)
    Abstract: A multi-sided Bohm-Bawerk assignment game (Tejada, to appear) is a model for a multilateral market with a finite number of perfectly complementary indivisible com- modities owned by different sellers, and inflexible demand and support functions. We show that for each such market game there is a unique vector of competitive prices for the commodities that is vertical syndication-proof, in the sense that, at those prices, syndication of sellers each owning a different commodity is neither beneficial nor detri- mental for the buyers. Since, moreover, the benefits obtained by the agents at those prices correspond to the nucleolus of the market game, we provide a syndication-based foundation for the nucleolus as an appropriate solution concept for market games. For different solution concepts a syndicate can be disadvantageous and there is no escape to Aummans paradox (Aumann, 1973). We further show that vertical syndication- proofness and horizontal syndication-proofness in which sellers of the same commod- ity collude are incompatible requirements under some mild assumptions. Our results build on a self-interesting link between multi-sided Bohm-Bawerk as- signment games and bankruptcy games (ONeill, 1982). We identify a particular subset of Bohm-Bawerk assignment games and we show that it is isomorphic to the whole class of bankruptcy games. This isomorphism enables us to show the uniqueness of the vec- tor of vertical syndication-proof prices for the whole class of Bohm-Bawerk assignment market using well-known results of bankruptcy problems.
    Keywords: bankruptcy problem, assignment problem, cooperative game, market, syndicate
    JEL: C71 D43
    Date: 2012
  10. By: Sonja Brangewitz (Department of Economics - University of Paderborn); Gaël Giraud (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: We study the consequences of dropping the perfect competition assumption in a standard infinite horizon model with infinitely-lived traders and real collateralized assets, together with one additional ingredient : information among players is asymmetric and monitoring is incomplete. The key insight is that trading assets is not only a way to hedge oneself against uncertainty and to smooth consumption across time : it also enables learning information. Conversely, defaulting now becomes strategic : certain players may manipulate prices so as to provoke a default in order to prevent their opponents from learning. We focus on learning equilibria, at the end of which no player has incorrect beliefs — not because those players with heterogeneous beliefs were eliminated from the market (although default is possible at equilibrium) but because they have taken time to update their prior belief. We prove a partial Folk theorem à la Wiseman (2011) of the following form : for any function that maps each state of the world to a sequence of feasible and strongly individually rational allocations, and for any degree of precision, there is a perfect Bayesian equilibrium in which patient players learn the realized state with this degree of precision and achieve a payoff close to the one specified for each state.
    Keywords: Strategic market games, infinite horizon, incomplete markets, collateral, incomplete information, learning, adverse selection.
    JEL: C72 D43 D52 G12 G14 G18
    Date: 2012–09
  11. By: Alfaro, Laura; Conconi, Paola; Fadinger, Harald; Newman, Andrew
    Abstract: This paper shows that product prices determine organizational design by studying how trade policy affects vertical integration. Property rights theory asserts that firm boundaries are chosen by stakeholders to mediate organizational goals (e.g., profits) and private benefits (e.g., operating in preferred ways). We present an incomplete-contracts model in which vertical integration raises output at the expense of lower private benefits. A key implication is that higher prices should result in more integration, since the organizational goal becomes relatively more valuable than private benefits. Trade policy provides a source of exogenous price variation to test this proposition: higher tariffs should lead to more vertical integration; moreover, ownership structures should be more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries and industries and exploit cross-section and time-series variation in import tariffs to examine the impact of prices on organizational choices. Our empirical results provide strong support for the predictions of the model.
    Keywords: incomplete contracts; organizational IO; property rights theory; theory of the firm; vertical integration
    JEL: D2 L2
    Date: 2012–10
  12. By: Nardotto, Mattia; Valletti, Tommaso; Verboven, Frank
    Abstract: We consider the impact of a regulatory process forcing an incumbent telecom operator to make its local broadband network available to other companies (local loop unbundling, or LLU). Entrants are then able to upgrade their individual lines and offer Internet services directly to customers. Employing a very detailed dataset covering the whole of the UK, we find that over the course of time, many entrants have begun to take advantage of LLU. However, unbundling has little or no effect on broadband penetration, compared to those areas where the loops are not unbundled. LLU entry instead has a strongly positive impact on the quality of the service provided. We also assess the impact of competition from an alternative form of technology (cable) which is not subject to regulation, and what we discover is that inter-platform competition has a positive impact on both penetration and quality.
    Keywords: broadband; competition; entry; local loop unbundling; regulation; telecommunications
    JEL: L51
    Date: 2012–10
  13. By: Michael Sinkinson (The Wharton School, University of Pennsylvania)
    Abstract: Since 2008, multiple smartphone platforms have launched versions of “app stores”, marketplaces where consumers can purchase and download software applications for their smartphone. This paper provides evidence for both demand and supply of “apps” using data on the size and composition of smartphone user bases and of the apps available for competing platforms. Results from the estimation of a structural model show that the composition of users on a platform is a key determinant of app supply, and counterfactual simulations show that this effect is greater than the effects of within-platform competition and multi-homing costs in explaining the observed market outcome.
    Keywords: network effects, telecommunications, software development, platform competition
    JEL: L1 L86 L96
    Date: 2012–10
  14. By: Muck, Johannes; Heimeshoff, Ulrich
    Abstract: We explore the existence of first mover advantages in mobile telecommunications markets. Building on a data set comprising monthly penetration rates, market concentration, number of active operators, and market shares of 90 followers from 33 OECD countries, we estimate a dynamic growth model. Our analysis delivers five key results. Regarding a follower's longrun market share, we observe that (1) the penetration rate at the time of market entry exerts an inverted u-shaped effect, suggesting the existence of an optimal time for issuing additional licenses for mobile network operation; (2) the concentration rate at market entry exerts a positive effect, implying that it is easier for followers to enter a more concentrated market; (3) both the number of active operators at market entry and the number of currently active operators have a negative impact. Furthermore, we find that a follower's rate of convergence to the long-run market share is (4) negatively influenced by the current market concentration and number of active operators; (5) negatively affected by changes in the penetration rate since market entry, which strongly indicates the presence of substantial first mover advantages for pioneering network operators. --
    Keywords: First mover advantages,Asymmetric regulation,Market share convergence,Mobile telecommunications
    JEL: L96 K23 O33
    Date: 2012
  15. By: Karaçuka, Mehmet; Çatik, A. Nazif; Haucap, Justus
    Abstract: Turkish consumer survey data is used to analyze the main factors that affect consumers' choice of different mobile telecommunications networks. The analysis shows that consumers' choice is significantly affected by the choices of other consumers with whom the consumer is more likely to interact. The results show that local network effects exist and consumer characteristics have significant effects on consumer choice. This finding means that consumers are more likely to be affected by the choices of other people within their local area than by the overall size of a network. The results also suggest that local effects may outweigh macro network effects at least in Turkey. --
    Keywords: mobile telecommunications,network effects,discrete choice analysis
    JEL: C23 L13 L9
    Date: 2012
  16. By: Granlund, David (Department of Economics, Umeå School of Business and Economics, Umeå University)
    Abstract: The market share for parallel imports when pharmacies can negotiate discounts with parallel traders and sellers of locally sourced products is analyzed both theoretically and empirically. The theoretical model shows that, with discount negotiations, pharmacies will sell locally sourced products to all consumers that prefer these or are indifferent between these and parallel imported products. The explanation is that the parallel traders have cost disadvantages because of their repacking and trading costs. Sellers of locally sourced products will therefore always underbid the marginal prices of parallel traders and this gives pharmacies an incentive to sell locally sourced products. The empirical results show that a reform allowing discount negotiations reduced the market share for parallel imports by about 11 percentage points to reach 31%. The most important mechanism is that the reform has reduced the probability that pharmacies offer consumers cheaper parallel imported substitutes.
    Keywords: Drugs; Margins; Parallel imports; Parallel trade; Pharmacies
    JEL: I11 I18 L13 L51 L65
    Date: 2012–11–01
  17. By: Farid Gasmi; Juan Daniel Oviedo
    Abstract: This paper analyzes some optimal fiscal, pricing, and capacity investment policies for controlling regional monopoly power in the natural gas industry. By letting the set of control instruments available to the social planner vary, we provide a characterization of the technological and demand conditions under which “excess” capacity in the transport network arises in response to the loss of the two other control instruments, namely, transfers and pricing. Hence, the analysis yields some insights on an economy’s incentives to invest in infrastructures for the purpose of integrating geographically isolated markets.
    Date: 2012–10–29
  18. By: Léautier, Thomas-Olivier (TSE,IAE)
    Abstract: The advent of "smart meters" will make possible Real Time Pricing of electricity: customers will face and react to wholesale spot prices, thus consumption of electric power will be aligned with its opportunity cost. This article determines the marginal value of a fraction of demand (or a consumer) switching to Real Time Pricing. First, it derives this marginal value for a simple yet realistic specification of demand. Second, using data from the French power market, it estimates that, for the vast majority of residential customers whose peak demand is lower than 6 kV A, the net surplus from switching to Real Time Pricing is lower than 1 euro/year for low demand elasticity, 4 euros/year for high demand elasticity. This finding casts a doubt on the economic value of rolling out smart meters to all residential customers, for both policy makers and power suppliers.
    Keywords: electric power markets, demand response, smart grid
    JEL: D61 L11 L94
    Date: 2012–10–08
  19. By: Beck, T.H.L.; De Jonghe, O.G.; Schepens, G. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper documents large cross-country variation in the relationship between bank competition and bank stability and explores market, regulatory and institutional features that can explain this variation. We show that an increase in competition will have a larger impact on banks’ fragility in countries with stricter activity restrictions, lower systemic fragility, better developed stock exchanges, more generous deposit insurance and more effective systems of credit information sharing. The effects are economically large and thus have important repercussions for the current regulatory reform debate.
    Keywords: Competition;Stability;Banking;Herding;Deposit Insurance;Information Sharing;Risk Shifting.
    JEL: G21 G28 L51
    Date: 2012
  20. By: Christophe Dutang (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429, IRMA - Institut de Recherche Mathématique Avancée - CNRS : UMR7501 - Université de Strasbourg); Hansjoerg Albrecher (UNIL - Université de Lausanne - Université de Lausanne); Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: In this paper, we formulate a noncooperative game to model a non-life insurance market. The aim is to analyze the e ects of competition between insurers through di erent indicators: the market premium, the solvency level, the market share and the underwriting results. Resulting premium Nash equilibria are discussed and numerically illustrated.
    Date: 2012–05

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