nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒11‒17
thirteen papers chosen by
Russell Pittman
US Government

  1. Capacity Choice under Uncertainty with Product Differentiation By Christiaan Behrens; Mark Lijesen
  2. Standing on the Shoulders of Babies: Dominant Firms and Incentives to Innovate By Luis Cabral; Ben Polak
  3. Strategic Bypass Deterrence By Francis Bloch; Axel Gautier
  4. Merger Efficiencies and Competition Policy By Scherer, F. M.
  5. Advantaged Bidders in Franchise Auctions By Vincent van den Berg
  6. An Empirical Investigation of the Determinants of Asymmetric Pricing By Marc Remer
  7. “Entry Regulation Asymmetries and Gasoline Competition in a Mixed Motorway Network” By Daniel Albalate; Jordi Perdiguero
  8. Estimating consumer lock-in effects from firm-level data By Gábor Kézdi; Gergely Csorba
  9. Hospital Quality Competition Under Fixed Prices By Hugh Gravelle; Rita Santos; Luigi Siciliani; Rosalind Goudie
  10. Competition and Price Discrimination in the Parking Garage Industry By Haizhen Lin; Yijia Wang
  11. Competition before sunset: The case of the Finnish ATM market By Kopsakangas-Savolainen, Maria; Takalo, Tuomas
  12. Competition in Multi-Modal Transport Networks: A Dynamic Approach By Adriaan Hendrik van der Weijde; Erik T. Verhoef; Vincent van den Berg
  13. 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

  1. By: Christiaan Behrens (VU University Amsterdam); Mark Lijesen (VU University Amsterdam)
    Abstract: This article analyses the capacity-then-price game for a duopoly market. We add to the literature by explicitly taking product differentiation into account. We study the impact of capacity costs, demand uncertainty, and vertical and horizontal product differentiation on equilibrium capacities, efficiency, and price dispersion. We identify a minimum degree of vertical product differentiation, relative to horizontal product differentiation, for which the subgame perfect Nash equilibrium in pure strategies is guaranteed to exist. We find that if firms' quality differences exactly offset cost differences, asymmetric outcomes in the capacity stage arise, with the low-cost, low-quality firm providing more capacity than its competitor. We show that the highest level of efficiency is reached at the degree of vertical product differentiation where it would be optimal for welfare if firms had equal capacities. Furthermore, our model provides an explanation for ambiguous results in empirical research on price dispersion.
    Keywords: Price competition; Capacity choice; Demand uncertainty; Product differentiation; Price dispersion
    JEL: D43 L11 L13
    Date: 2012–10–26
  2. By: Luis Cabral; Ben Polak
    Date: 2012
  3. By: Francis Bloch (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Axel Gautier (HEC-University of Liège - Department of Economics, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain)
    Abstract: In liberalized network industries, entrants can either compete for service using the existing infrastructure (access) or deploy their own infrastructure capacity (bypass). In this paper, we demonstrate that, under the threat of bypass, the access price set by an unregulated and vertically integrated incumbent is compatible with productive effi ciency. This means that the entrant bypasses the existing infrastructure only if it can produces the network input more effi ciently. We show that the incumbent lowers the access price compared to the ex-post effi cient level to strategically deter ineffi cient bypass by the entrant. Accordingly, from a productive effi ciency point of view, there is no need to regulate access prices when the entrant has the option to bypass. Despite that, we show that restricting the possibilities of access might be profi table for consumers and welfare because competition is fi ercer under bypass.
    Keywords: Make-or-buy, Access price, Bypass
    Date: 2012–11–07
  4. By: Scherer, F. M. (Harvard University)
    Abstract: Since the United States changed its guidelines in 1984, many industrialized nations have included efficiencies defenses in their rules for judging whether mergers and other activities that might lessen competition are on balance desirable. This paper was written for an OECD competition policy conference in Paris October 25, 2012. It presents the standard Williamson "tradeoff" analysis and explores why consumer price benefits might be required in the current economic environment, with its substantial unemployment and Keynesian liquidity traps that limit the reinvestment of efficiency-based profits in additional output. It also explores the difficulty of assessing efficiency benefits in advance of mergers and suggests alternative approaches to the problem.
    Date: 2012–10
  5. By: Vincent van den Berg (VU University Amsterdam)
    Abstract: Consider a government that auctions a franchise for, e.g., an airport, telecommunication network, or utility. Consider an 'incumbent bidder' that owns a complement or substitute. With an auction on the transfer (i.e. payment) to the government, the incumbent is advantaged.If the government regulates the market with an auction on the price asked to consumers, it depends who is advantaged. With complements, the incumbent is advantaged: it can set a lower price on the new franchise, as this increases the profit of the other. With substitutes, the incumbent is disadvantaged. In many settings, the advantage bidder always wins.
    Keywords: Franchising; auctions; advantaged bidders; incumbent; private supply; regulatory auctions
    JEL: D43 L13 L51 R41 R42
    Date: 2012–11–02
  6. By: Marc Remer (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: This article empirically investigates the cause of asymmetric pricing: retail prices responding faster to cost increases than decreases. Using daily price data for over 11,000 retail gasoline stations, I nd that prices fall more slowly than they rise as a consequence of rms extracting informational rents from consumers with positive search costs. Premium gasoline prices are shown to fall more slowly than regular fuel prices but rise at the same pace, and this pricing pattern supports theories based upon competition with consumer search. Further testing also rejects focal price collusion as an important determinant of asymmetric pricing.
    Date: 2012–11
  7. By: Daniel Albalate (Faculty of Economics, University of Barcelona); Jordi Perdiguero (Departament d'Economia Aplicada. Universitat Autònoma de Barcelona)
    Abstract: Regulatory and funding asymmetries in the Spanish motorway network produce huge differences in the structure of gasoline markets by motorway type: free or toll. While competition is encouraged among gas stations on free motorways, the regulations for toll motorways allow private concessionaires to auction all gas stations to the same provider, thereby limiting competition and consolidating market power. This paper reports how this regulatory asymmetry results in higher prices and fewer gas stations. Specifically, we show that competition is constrained on toll motorways by the granting of geographical monopolies, resulting in a small number of rivals operating in close proximity to each other, and allowing gas stations to operate as local monopolies. The lack of competition would seem to account for the price differential between toll and free motorways. According to available evidence, deregulation measures affecting toll motorway concessions could help to mitigate price inefficiencies and increase consumer welfare.
    Keywords: Geographical competition, Regional Monopolies, Gasoline prices, Motorways JEL classification: L11, L12, L43
    Date: 2012–11
  8. By: Gábor Kézdi; Gergely Csorba
    Abstract: This paper proposes a practical method for estimating consumer lock-in effects from firm-level data. The method compares the behavior of already contracted consumers to the behavior of new consumers, the latter serving as a counterfactual to the former. In panel regressions on firms' incoming and quitting consumers, we look at the differential response to price changes and identify the lock-in effect from the difference between the two. We discuss the potential econometric issues and measurement problems and offer solutions to them. We illustrate our method by analyzing the market for personal loans in Hungary and find strong lock-in effects.
    Date: 2012–10–19
  9. By: Hugh Gravelle (Centre for Health Economics, University of York, UK); Rita Santos (Centre for Health Economics, University of York, UK); Luigi Siciliani (Centre for Health Economics and Department of Economics & Related Studies, University of York, UK); Rosalind Goudie (School of Social & Community Medicine, University of Bristol, UK)
    Abstract: The relationship between the quality of health care and the extent of competition amongst providers has been the subject of intense policy interest and debate. As part of the ESHCRU programme we are undertaking a set of related investigations into this relationship in the hospital sector, in primary care (general practices) and in social care.
    Date: 2012–11
  10. By: Haizhen Lin (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Yijia Wang (NERA Economic Consulting)
    Abstract: We study the relationship between competition and price discrimination through an empirical examination of hourly price schedules in the parking garage industry. We find that the degree of price schedule curvature decreases with competition, implying a greater proportionate drop in low-end prices than in high-end prices when competition intensifies. We provide an explanation for our findings using differences in search behaviors between short- and long-term customers.
    Keywords: competition, price curvature, price discrimination, consumer search, parking garage industry
    JEL: L0 L11 L12
    Date: 2012–10
  11. By: Kopsakangas-Savolainen, Maria (Finnish Environment Institute); Takalo, Tuomas (Bank of Finland Research)
    Abstract: We build a simple model to study service fee competition between an incumbent and an independent ATM deployer, and its optimal regulation. We use the model to analyze an actual regulation of such a market by competition authorities in Finland. We find that socially optimal first-best fees would imply negative profits for the independent deployer, calling for a Ramsey regulation. While the Finnish regulation pushes the foreign fee downwards towards its socially optimal level, the regulated fees are likely to remain too high from the welfare point of view. In contrast with the actual regulation, it would be essential to regulate the independent deployer's interchange fee, as the incumbent deployer internalizes the effect of its foreign fee on consumer usage of the rival's network and has little incentive for foreclosure.
    Keywords: ATM industry; regulation; competition policy; cash availability; retail payments
    JEL: G23 K21 L13 L41 L51
    Date: 2012–11–08
  12. By: Adriaan Hendrik van der Weijde (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam); Vincent van den Berg (VU University Amsterdam)
    Abstract: We analyse the behaviour of market participants in a multi-modal commuter network where roads are not priced, but public transport has a usage fee, which is set while taking the effects on the roads into account. In particular, we analyse the difference between markets with a monopolistic public transport operator, which operates all public transport links, and markets in which separate operators own each public transport link. To do so, we consider a simple transport network consisting of two serial segments and two parallel congestible modes of transport. We obtain a reduced form of the public transport operator's optimal fare setting problem and show that, even if the total travel demand is inelastic, serial Bertrand-Nash competition on the public transport links leads to different fares than a serial monopoly; a result not observed in a static model. This results from the fact that trip timing decisions, and therefore the generalized prices of all commuters, are influenced by all fares in the network. We then use numerical simulations to show that, contrary to the results obtained in classic studies on vertical competition, monopolistic fares are not always higher than duopolistic fares; the opposite can also occur. We also explore how different parameters influence the price differential, and how this affects welfare.
    Keywords: Public transport; congestion; market structure; market design
    JEL: L10 L92 R41 R48
    Date: 2012–11–01
  13. By: Maria Lykidi (ADIS - Analyse des Dynamiques Industrielles et Sociales - Département d'Economie - Université Paris XI - Paris Sud); Jean-Michel Glachant (ADIS - Analyse des Dynamiques Industrielles et Sociales - Département d'Economie - Université Paris XI - Paris Sud, EUI - European University Institute - Robert Schuman Center); Pascal Gourdel (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    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.
    Date: 2012–10

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