nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒12‒15
sixteen papers chosen by
Russell Pittman
US Government

  1. Market Power in Bilateral Oligopoly Markets with Nonexpendable Infrastructure By Funaki, Y.; Houba, H.E.D.; Motchenkova, E.
  2. Noncooperative Oligopoly in Markets with a Continuum of Traders: A Limit Theorem By Francesca Busetto; Giulio Codognato; Sayantan Ghosal
  3. Reputation and Entry By Jeffrey V. Butler; Enrica Carbone; Pierluigi Conzo; Giancarlo Spagnolo
  4. Certification and Minimum Quality Standards when Some Consumers are Uninformed By Buehler, B.; Schuett, F.
  5. Consumer Absenteeism, Search, Advertising, and Sticky Prices By Arthur Fishman
  6. Managing Spillovers: An Endogenous Sunk Cost Approach By Olena Senyuta; Kresimir Zigic
  7. A note on bargaining power and managerial delegation in multimarket oligopolies By Ciarreta Antuñano, Aitor; García Enríquez, Javier; Gutiérrez Hita, Carlos
  8. Buy-it-now or Take-a-chance: Price Discrimination through Randomized Auctions By L. Elisa Celis; Gregory Lewis; Markus M. Mobius; Hamid Nazerzadeh
  9. Ad-valorem platform fees and efficient price discrimination By Zhu Wang; Julian Wright
  10. Identifcation in auctions with selective entry By Matthew Gentry; Tong Li
  11. A Frontier Measure of U.S. Banking Competition By Wilko Bolt; David Humphrey
  12. The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data By Erwan Gautier; Ronan Le Saout
  13. Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context By Patricia M. Danzon; Adrian K. Towse; Jorge Mestre-Ferrandiz
  14. The economics of two-sided payment card markets: pricing, adoption and usage By James McAndrews; Zhu Wang
  15. Consumer confusion over the profusion of eco-labels: lessons from a double differentiation model. By Dorothée Brécard
  16. Broadband Internet and Firm Entry: Evidence from Rural Iowa By Kim, Younjun; Orazem, Peter

  1. By: Funaki, Y.; Houba, H.E.D.; Motchenkova, E. (Tilburg University, Tilburg Law and Economics Center)
    Abstract: Abstract: We consider price-fee competition in bilateral oligopolies with perfectly-divisible goods, non-expandable infrastructures, concentrated agents on both sides, and constant marginal costs. We define and characterize stable market outcomes. Buyers exclusively trade with the supplier with whom they achieve maximal bilateral joint welfare. Prices equal marginal costs. Threats to switch suppliers set maximal fees. These also arise from a negotiation model that extends price competition. Competition in both prices and fees necessarily emerges. It improves welfare compared to price competition, but consumer surpluses do not increase. The minimal infrastructure achieving maximal aggregate welfare differs from the one that protects buyers most.
    Keywords: Assignment Games;Infrastructure;Negotiations;Non-linear pricing;Market Power.
    JEL: C78 L10 L14 D43 R10
    Date: 2012
  2. By: Francesca Busetto; Giulio Codognato; Sayantan Ghosal
    Abstract: In this paper, in an exchange economy with atoms and an atomless part, we analyze the relationship between the set of the Cournot-Nash equilibrium allocations of a strategic market game and the set of the Walras equilibrium allocations of the exchange economy with which it is associated. In an example, we show that, even when atoms are countably infinite, Cournot-Nash equilibria yield different allocations from the Walras equilibrium allocations of the underlying exchange economy. We partially replicate the exchange economy by increasing the number of atoms without affecting the atomless part while ensuring that the measure space of agents remains finite. We show that any sequence of Cournot-Nash equilibrium allocations of the strategic market game associated with the partially replicated exchange economies approximates a Walras equilibrium allocation of the original exchange economy.
    Keywords: Cournot-Nash equilibrium, strategic market games, limit theorem
    JEL: C72 D51
    Date: 2012
  3. By: Jeffrey V. Butler (EIEF); Enrica Carbone (University of Naples "SUN"); Pierluigi Conzo (CSEF); Giancarlo Spagnolo (Stockholm School of Economics-SITE, University of Rome "Tor Vergata" and CEPR)
    Abstract: This paper reports results from a laboratory experiment exploring the relationship between reputation and entry in procurement. There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new (smaller or foreign) firms in public procurement markets. Our results suggest that while some reputational mechanisms indeed reduce the frequency of entry, so that the concern is warranted, appropriately designed reputation mechanisms actually stimulate entry. Since quality increases but not prices, our data also suggest that the introduction of reputation may generate large welfare gains for the buyer.
    Date: 2012
  4. By: Buehler, B.; Schuett, F. (Tilburg University, Tilburg Law and Economics Center)
    Abstract: Abstract: We compare certification to a minimum quality standard (MQS) policy in a duopolistic industry where firms incur quality-dependent fixed costs and only a fraction of consumers observes the quality of the offered goods. Compared to the unregulated outcome, both profits and social welfare would increase if firms could commit to producing a higher quality. An MQS restricts the firms' quality choice and leads to less differentiated goods. This fuels competition and may therefore deter entry. A certification policy, which awards firms with a certificate if the quality of their products exceeds some threshold, does not restrict the firms' quality choice. In contrast to an MQS, certification may lead to more differentiated goods and higher profits. We find that firms are willing to comply with an ambitious certification standard if the share of informed consumers is small. In that case, certification is more effective from a welfare perspective than a minimum quality standard because it is less detrimental to entry.
    Keywords: Certification;minimum quality standard;unobservable quality;policy intervention.
    JEL: L15 L13 L51 D82
    Date: 2012
  5. By: Arthur Fishman (Bar-Ilan University)
    Abstract: This paper shows that prices may be sticky when buyers must search to determine the current market price and there is uncertainty about the expected duration of cost changes. Speci…cally, during periods when costs, and hence prices are high, low valuation consumers optimally stop searching and consequently are uninformed about price changes. Then, when costs go down, sellers must advertise to inform those consumers about price cuts. If advertising is costly, relative to single period profit, advertising is profitable only if the cost cut is likely to persist, but not if it is likely to be short lived. Thus, if sellers are initially uncertain about the expected longevity of a cost cut, they might adopt a ‘watch and wait’ strategy, delaying price reductions until better information becomes available. Importantly, it is shown that the same logic does not apply to cost increases. Thus the model is consistent with asymmetric price rigidity (e.g., Peltzman (2000) ).
    Keywords: search, advertising, asymmetric price adjustment, sticky prices, absentee consumers
    Date: 2012–01
  6. By: Olena Senyuta; Kresimir Zigic
    Abstract: We introduce spillover e¤ect into John Sutton's (1991,1998) concept of endogenous sunk costs. These sunk costs appear in the form of R&D investment into quality in our framework. We show that with spillovers increasing and the effectiveness of investment in raising quality decreas- ing, the Sutton lower bound on concentration for an industry decreases and ultimately collapses to zero when spillovers are large enough and/or effectiveness of investment in raising quality is low enough. In the second part, we allow firms to protect their investment against spillovers We focus on symmetric pure strategy Nash equilibria, where all firms either protect their investment or do not protect at all. Contrary to the result with exogenous spillovers assumed in the first part, in the second part of the paper we show that higher ex ante spillovers and/or lower effectiveness of investment in raising quality may induce firms to protect themselves against spillovers, leading to higher investment in quality, and to more concentrated market structure. Thus, the Sutton's result on the concentration bound is preserved, if we allow firms to manage spillovers via private protection.
    Keywords: endogenous sunk costs; knowledge spillovers; R&D, inno- vations; market concentration
    JEL: L13 O30
    Date: 2012–11
  7. By: Ciarreta Antuñano, Aitor; García Enríquez, Javier; Gutiérrez Hita, Carlos
    Abstract: In a two-stage delegation game model with Nash bargaining between a manager and an owner, an equivalence result is found between this game and Fershtman and Judd's strategic delegation game (Fershtman and Judd, 1987). Interestingly, although both games are equivalent in terms of profits under certain conditions, managers obtain greater rewards in the bargaining game. This results in a redistribution of profits between owners and managers.
    Keywords: strategic delegation, bargaining, product substitutability, price
    JEL: C72 L13 M54
    Date: 2012–11
  8. By: L. Elisa Celis; Gregory Lewis; Markus M. Mobius; Hamid Nazerzadeh
    Abstract: Increasingly detailed consumer information makes sophisticated price discrimination possible. At fine levels of aggregation, demand may not obey standard regularity conditions. We propose a new randomized sales mechanism for such environments. Bidders can "buy-it-now" at a posted price, or "take-a-chance" in an auction where the top d > 1 bidders are equally likely to win. The randomized allocation incentivizes high valuation bidders to buy-it-now. We analyze equilibrium behavior, and apply our analysis to advertiser bidding data from Microsoft Advertising Exchange. In counterfactual simulations, our mechanism increases revenue by 4.4% and consumer surplus by 14.5% compared to an optimal second-price auction.
    JEL: D4 D44 D82
    Date: 2012–12
  9. By: Zhu Wang; Julian Wright
    Abstract: This paper investigates a puzzle and possible policy concern: Why do platforms such as eBay and Visa that enable the trade of goods of different unobserved costs and values rely predominantly on linear ad-valorem fees, that is, fees that increase in proportion to the sale price of the trades that they enable? Under a broad class of demand functions, we show that a linear ad-valorem fee schedule enables a platform to maximize its profit as if it could actually observe the costs and values of the goods traded and set a different optimal fee for each good. Surprisingly, we find for this class of demands, allowing the platform to set ad-valorem fees (i.e. price discriminate) increases social welfare, both when the platform is regulated to recover costs and when the platform is unregulated.
    Keywords: Financial markets ; Payment systems
    Date: 2012
  10. By: Matthew Gentry (Institute for Fiscal Studies and Vanderbilt University); Tong Li (Institute for Fiscal Studies and Vanderbilt University)
    Abstract: This paper considers nonparametric identification of a two-stage entry and bidding model for auctions which we call the Affiliated-Signal (AS) model. This model assumes that potential bidders have private values, observe imperfect signals of their true values prior to entry, and choose whether to undertake a costly entry process. The AS model is a theoretically appealing candidate for the structural analysis of auctions with entry: it accommodates a wide range of entry processes, in particular nesting the Levin and Smith (1994) and Samuelson (1985) models as special cases. To date, however, the model's identification properties have not been well understood. We establish identifcation results for the general AS model, using variation in factors affecting entry behaviour (such as potential competition or entry costs) to construct identified bounds on model fundamentals. If available entry variation is continuous, the AS model may be point identified; otherwise, it will be partially identified. We derive constructive identification results in both cases, which can readily be refined to produce the sharp identified set. We also consider policy analysis in environments where only partial identifcation is possible, and derive identified bounds on expected seller revenue corresponding to a wide range of counterfactual policies while accounting for endogenous and arbitrarily selective entry. Finally we establish that our core results extend to environments with asymmetric bidders and nonseperable auction-level unobserved heterogeneity.
    Date: 2012–11
  11. By: Wilko Bolt; David Humphrey
    Abstract: The three main measures of competition (HHI, Lerner Index, and H-Statistic) are uncorrelated for U.S. banks. We investigate why this occurs, propose a frontier measure of competition, and apply it to five major bank service lines using data only available since 2008. Fee-based banking services comprise 35% of bank revenues so assessing competition by service line is preferred to using a single measure for traditional activities extended to the entire bank. Academic-based competition measures explain only 1% of HHI variation. HHI merger/acquisition guidelines could be raised since current banking concentration seems unrelated to competition.
    Keywords: Competition; banks; frontier analysis
    JEL: L11 G21 C21
    Date: 2012–12
  12. By: Erwan Gautier (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Ronan Le Saout (ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE ParisTech)
    Abstract: Using millions of individual gasoline prices collected at a daily frequency, we examine the speed at which market refined oil prices are transmitted to consumer liquid fuel prices. We find that on average gasoline prices are modified once a week and the distribution of price changes displays a M-shape as predicted by an adjustment cost model. Using a reduced form statedependent pricing model with time-varying random thresholds, we find that the degree of pass through of wholesale prices to retail gasoline prices is on average 0:77 for diesel and 0:67 for petrol. The duration for a shock to be fully transmitted into prices is about 10 days. There is no significant asymmetry in the transmission of wholesale price to retail prices.
    Keywords: price stickiness ; adjustment costs ; (S,s) models ; gasoline price.
    Date: 2012–09–18
  13. By: Patricia M. Danzon; Adrian K. Towse; Jorge Mestre-Ferrandiz
    Abstract: This paper analyzes pharmaceutical pricing between and within countries to achieve second best static and dynamic efficiency. We distinguish countries with and without universal insurance, because insurance undermines patients’ price sensitivity, potentially leading to prices above second-best efficient levels. In countries with universal insurance, if each payer unilaterally sets an incremental cost effectiveness ratio (ICER) threshold based on its citizens’ willingness to pay for health; manufacturers price to that ICER threshold; and payers limit reimbursement to patients for whom a drug is cost-effective at that price and ICER, then the resulting price levels and use within each country and price differentials across countries are roughly consistent with second best static and dynamic efficiency. These value-based prices are expected to differ cross-nationally with per capita income and be broadly consistent with Ramsey Optimal Prices. Countries without comprehensive insurance avoid its distorting effects on prices but also lack financial protection and affordability for the poor. Conditions for efficient pricing in these self-pay countries include that consumers are well-informed about product quality and firms can price discriminate between rich and poor subgroups within and between countries.
    JEL: I18
    Date: 2012–12
  14. By: James McAndrews; Zhu Wang
    Abstract: This paper provides a new theory for two-sided payment card markets. Adopting payment cards requires consumers and merchants to pay a fixed cost, but yields a lower marginal cost of making payments. Analyzing adoption and usage externalities among heterogeneous consumers and merchants, our theory derives the equilibrium card adoption and usage pattern consistent with empirical evidence. Our analysis also helps explain the card pricing puzzles, particularly the high and rising merchant (interchange) fees. Based on the theoretical framework, we discuss socially desirable payment card fees as well as the interchange fee cap regulation.
    Keywords: Financial markets ; Payment systems
    Date: 2012
  15. By: Dorothée Brécard (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: How are eco-label strategies affected by consumer confusion arising from the profusion of eco-labels? This article provides a theoretical insight into this issue using a double differentiation framework. We assume that consumers perceive a label as a sign of quality compared to an unlabeled product, but that they can't distinguish the environmental quality associated with each label. They only perceive each label as a particular variety of the product. We deduce preferences for two types of label: a health label and an eco-label. We analyze pricing strategies of three firms each providing one product: a health labeled, eco-labeled or an unlabeled product. We infer lessons for eco-labeling policies, through effects of ecolabeling on welfare components, according to the identity of the certifying organization: the regulator, who aims at enhancing welfare, an NGO, which attempts to enhance the quality of the environment, and the firms, which seek to maximize their profits. We show that the firm supplying the eco-labeled product is weakened by consumer confusion while the firms selling the unlabeled product suffers from strict labels, to the benefit of the firm supplying the health labeled product. All label policies imply, whatever the certifying organization, high identical environmental quality of the labeled products, which leads to a reduction in the market share of the unlabeled product or even to its extinction.
    Keywords: Eco-label; environmental quality; green consumer; product differentiation.
    Date: 2012–11–22
  16. By: Kim, Younjun; Orazem, Peter
    Abstract: The availability of broadband Internet service should have increased firm productivity and lowered firm entry costs.  However, validating the broadband effect is complicated by the rapid deployment of broadband Internet service across metropolitan areas, removing meaningful variation in broadband availability.  Deployment in rural markets was much more uneven, suggesting that the presence or absence of broadband service may have altered the site selection of firms targeting rural markets.  We investigate the effect of broadband availability on firm location decision in rural Iowa.  We establish a counterfactual baseline firm entry rate for each zip code area in rural counties by showing how the presence of broadband service in a ZIP code in 2001 affected firm entry in 1990-1992 before Broadband was available.  We then measure how the actual presence of broadband service in the same ZIP code affected firm entry in 2000-2002.  We show that the difference in estimated probability of entry between the counterfactual baseline and the actual response ten years later is the Difference-in-Differences estimate of the effect of broadband deployment on firm start-ups.  We find that broadband availability in a rural ZIP code has a positive and significant effect on firm entry in the ZIP code but only in rural markets adjacent to a metropolitan area or with a larger urban population.  Broadband access does not affect new firm entry in more remote rural markets
    Keywords: Internet; Rural; urban; : broadband; firm entry; metropolitan area
    JEL: M13 O33 R11
    Date: 2012–12–03

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