nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒12‒22
fourteen papers chosen by
Russell Pittman
US Government

  1. The Robustness of Exclusion in Multi-dimensional Screening By Paulo Barelli; Suren Basov; Mauricio Bugarin; Ian King
  2. Productivity and the Product Scope of Multi-product Firms: A Test of Feenstra-Ma By Horst Raff; Joachim Wagner
  3. On the Optimal Number of Firms in the Commons: Cournot vs Bertrand By D. Dragone; L. Lambertini; A. Palestini; A. Tampieri
  4. Collusion through joint R&D: An empirical assessment By Duso, Tomaso; Röller, Lars-Hendrik; Seldeslachts, Jo
  5. Price Response, Asymmetric Information, and Competition By Joshua Sherman; Avi Weiss
  6. Market Structure and Exchange Rate Pass-Through By Raphael Anton Auer; Raphael S. Schoenle
  7. Optimal Access Regulation with Downstream Competition By Flavio Menezes; John Quiggin; Tina Kao
  8. Who gains and who loses from the 2011 debit card interchange fee reform? By Oz Shy
  9. Network effects, Customer Satisfaction and Recommendation on the Mobile Phone Market By Thomas Cadet; Sophie Larribeau; Thierry Pénard
  10. Minimum wages and competition: The case of the German roofing sector By Kraft, Kornelius; Rammer,Christian; Gottschalk, Sandra
  11. Who is Exposed to Gas Prices? How Gasoline Prices Affect Automobile Manufacturers and Dealerships By Meghan R. Busse; Christopher R. Knittel; Florian Zettelmeyer
  12. Price Dispersion, Search Costs and Spatial Competition: Evidence from the Austrian Retail Gasoline Market By Bernd Jost
  13. Audit Market Regulation and Supplier Concentration Around the World: Empirical Evidence By Benjamin Heß; Ulrike Stefani
  14. Why did the Dutch East India Co. outperform the British East India Co.? —A theoretical explanation based on the objective of the firm and limited liability— By Tetsuya Shinkai; Takao Ohkawa; Makoto Okamura; Kozo Harimaya

  1. By: Paulo Barelli (University of Rochester); Suren Basov (La Trobe University); Mauricio Bugarin (Insper Institute); Ian King (University of Melbourne)
    Abstract: We extend Armstrong’s result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result holds true in a large class of models and is applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to some oligopoly settings. We illustrate the results with several examples and applications.
    JEL: C72 D42 D43 D82
    Date: 2012–12
  2. By: Horst Raff (University of Kiel, Germany); Joachim Wagner (Leuphana University Lueneburg, Germany)
    Abstract: Feenstra and Ma (2008) develop a monopolistic competition model where firms choose their optimal product scope by balancing the profits from a new variety against the costs of “cannibalizing” sales of existing varieties. While more productive firms always have a higher market share, there is no monotonic relationship between firms’ productivity level and their choices of product scope. In the model having a higher market share means that firms are hurt more by the “cannibalization effect”. Therefore, the incentive to add more products weakens as productivity rises. This leads to Lemma 3 in Feenstra and Ma (2008): There is an inverted U-shaped relationship between firms’ productivities and the range of varieties they choose to produce. This empirical note takes this Lemma to the data for firms from German manufacturing industries. Empirical evidence is in line with the results from the theoretical model.
    Keywords: Multi-product firms, productivity, optimal product scope, Germany
    JEL: L1 L6
    Date: 2012–12
  3. By: D. Dragone; L. Lambertini; A. Palestini; A. Tampieri
    Abstract: We revisit the debate on the optimal number of firms in the commons in a differential oligopoly game in which firms are either quantity- or price-setting agents. Production exploits a natural resource and involves a negative externality. We calculate the number of firms maximising industry profits, finding that it is larger in the Cournot case. While industry structure is always inefficient under Bertrand behaviour, it may or may not be so under Cournot behaviour, depending on parameter values. The comparison of private industry optima reveals that the Cournot steady state welfare level exceeds the corresponding Bertrand magnitude if the weight of the stock of pollution is large enough.
    JEL: C73 L13 Q20 Q51
    Date: 2012–12
  4. By: Duso, Tomaso; Röller, Lars-Hendrik; Seldeslachts, Jo
    Abstract: This paper tests whether upstream R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the U.S. National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors - created through firms being members in several RJVs at the same time - are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing. --
    Keywords: Research Joint Ventures,Innovation,Collusion,NCRA
    JEL: K21 L24 L44 D22 O32
    Date: 2012
  5. By: Joshua Sherman; Avi Weiss (Bar-Ilan University)
    Abstract: We compare predictions from a theoretical model based on the structure of the main outdoor retail market in Jerusalem with the results of an empirical analysis of price response to changes in cost. We find that firms without adjacent competition exhibit both upward and downward price rigidity, an outcome we ascribe to asymmetric information between the consumer and the firm. Given that previous studies have focused on downward price rigidities of firms with market power, our findings highlight the importance of accounting for transitory information asymmetries between the consumer and the firm when studying price rigidity.
    Keywords: price response, price rigidity, information asymmetry, market power
    JEL: L11 L13
    Date: 2012–10
  6. By: Raphael Anton Auer; Raphael S. Schoenle
    Abstract: In this paper, we examine the extent to which market structure and the way in which it affects pricing decisions of profit-maximizing firms can explain incomplete exchange rate passthrough. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass and size distribution of firms affected by a particular exchange rate shock. In the first step of our analysis, we decompose bilateral exchange rate movements into broad US Dollar (USD) movements and trade-partner currency (TPC) movements. Using micro data on US import prices, we show that the pass-through rate following USD movements is up to four times as large as the pass-through rate following TPC movements and that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share. In the second step, we draw on the parsimonious model of oligopoly pricing featuring variable markups of Dornbusch (1987) and Atkeson and Burstein (2008) to show how the distribution of firms' market shares and origins within a sector affects the trade-partner specific pass-through rate. Third, we calibrate this model using our exchange rate decomposition and information on the origin of firms and their market shares. We find that the calibrated model can explain a substantial part of the variation in import price changes and pass-through rates across sectors, trade partners, and sector-trade partner pairs.
    Keywords: Exchange Rate Pass-Through, U.S. Import Prices, Market Structure, Price Complementarities
    JEL: E3 E31 F41
    Date: 2012
  7. By: Flavio Menezes (School of Economics, The University of Queensland); John Quiggin (School of Economics, The University of Queensland); Tina Kao
    Abstract: We analyze the setting of access prices for a bottleneck facility where the facility owner also competes in the deregulated downstream market. We consider a continuum of market structures from Cournot to Bertrand. These market structures are fully characterized by a single parameter representing the intensity of competition. We first show how the efficient component pricing rule (ECPR) should be modified as the downstream competitive intensity changes. We then analyse the optimal access price where a regulator trades off production efficiency and pro-competitive effects to maximize total surplus.
    Date: 2012–12–03
  8. By: Oz Shy
    Abstract: In October 2011, new rules governing debit card interchange fees became effective in the United States. These rules limit the maximum permissible interchange fee that an issuer can charge merchants for a debit card transaction. This paper provides simple calculations that identify the transaction values for which merchants pay higher and lower interchange fees under the new rules. The paper then uses new data from the Boston Fed’s 2010 and 2011 Diary of Consumer Payment Choice to identify the types of merchants who are likely to pay higher and lower interchange fees under the new rules.
    Keywords: Interchange fees (Banking) ; Debit cards
    Date: 2012
  9. By: Thomas Cadet (University of Rennes1 - CREM UMR CNRS 6211, France); Sophie Larribeau (University of Rennes1 - CREM UMR CNRS 6211, France Keywords: network effect, mobile operator, satisfaction, recommendation); Thierry Pénard (University of Rennes1 - CREM UMR CNRS 6211, France)
    Abstract: On mobile phone markets that have reached the maturity stage, customer recommendation becomes a critical focus for operators to attract subscribers from rival operators. Referral propensity is also an indicator of subscriber satisfaction and loyalty. The aim of this paper is to examine the factors that influence customer recommendation. Precisely, we want to know whether referral propensity is more driven by supply-side effects (i.e. characteristics of mobile services) or demand-side effects (i.e. network effects). We use data from French subscriber surveys. The main findings are that referrals depend primarily on supply-side effects: operators’ brand image, the price and quality of services, and customer relations. Price, however, is considered to be a less significant factor than the quality of service when it comes to recommending an operator. Also, information on services and the variety of offerings available, as well as network effects, do not seem to influence referral propensity.
    Keywords: network effect, mobile operator, satisfaction, recommendation, customer referral
    JEL: D12 L96
    Date: 2012–12
  10. By: Kraft, Kornelius; Rammer,Christian; Gottschalk, Sandra
    Abstract: This paper analyses the effects of minimum wages on competition in the German roofing sector. The case is particularly interesting since this sector is faced with a uniform minimum wage despite significant regional disparities in productivity and wages. As a control industry we take the plumbing sector, which shows a similar market structure and demand trend but is not subject to a minimum wage. Employing a comprehensive firm panel data and using a difference-in-difference approach, we estimate the impacts of minimum wages on market entries and exits and firms' profitability. We find significant effects for East Germany which point to a substantial shift in industry structure. Minimum wages decreased both market entries and exits for roofing firms while they increased entries of sole traders. A decreasing number of non-sole traders lowered competition for this group of firms and helped them to increase profitability. The increasing share of sole traders may indicate some type of evasion strategy in eastern Germany, particularly since wages for skilled roofers declined towards the minimum wage. In the western part of the country minimum wages had no impact on competition. --
    Keywords: Minimum Wage,Competition,Firm Performance,Labour Market Policy,Evasion Strategy,Sole Traders
    JEL: D04 J21 J38 L11 L22 L74
    Date: 2012
  11. By: Meghan R. Busse; Christopher R. Knittel; Florian Zettelmeyer
    Abstract: Many consumers are keenly aware of gasoline prices, and consumer responses to gasoline prices have been well studied. In this paper, by contrast, we investigate how gasoline prices affect the automobile industry: manufacturers and dealerships. We estimate how changes in gasoline prices affect equilibrium prices and sales of both new and used vehicles of different fuel economies. We investigate the implications of these effects for individual auto manufacturers, taking into account differences in manufacturers' vehicle portfolios. We also investigate effects on manufacturers' affiliated dealership networks, including effects implied by the changes in used vehicle market outcomes.
    JEL: L1 L2 L9 Q4
    Date: 2012–12
  12. By: Bernd Jost
    Date: 2012–09–26
  13. By: Benjamin Heß (Department of Economics, University of Konstanz, Germany); Ulrike Stefani (Department of Economics, University of Konstanz, Germany)
    Abstract: In the ongoing discussions on audit regulation, the key issues of auditor independence and a high level of audit market concentration have become apparent. However, there is the concern that regulations intended to improve auditor independence (i.e., restrictions regarding the joint supply of audit and non-audit services, audit firm rotation, joint audits, etc.) might further increase audit market concentration. We address this issue with an empirical analysis. Based on a cross-country study for the years 2001–2010, we investigate whether a country's audit regulation is connected to the combined market share of the four largest audit firms (Concentration Ratio, CR<sub>4</sub>), the inequality in the market share distribution (Hirschmann-Herfindahl-Index, HHI), and the number of audit firms per client active in that country's audit market (Auditor Client Ratio). Our final sample consists of 141,190 firm-year observations of listed companies with a total of 2,439 audit firms, taken from 29 countries. The results of our country-fixed-effects models indicate that regulators should take the connections between potentially conflicting goals into account: Whereas the existence of a proportionate liability system and the prohibition of the joint supply of audit and non-audit services significantly decrease supplier concentration, joint audits and the mandatory audit firm rotation significantly increase audit market concentration. Thus, this study points to the need to take into account clients' and audit firms' adaptive strategies to new regulations.
    Keywords: Audit regulation, audit market concentration, empirical study, cross-country-study
    JEL: K22 L11 L84 M42
    Date: 2012–12–03
  14. By: Tetsuya Shinkai (School of Economics, Kwansei Gakuin University); Takao Ohkawa (Faculty of Economics, Ritsumeikan University); Makoto Okamura (Faculty of Economics, Hiroshima University and Ritsumeikan University); Kozo Harimaya (Faculty of Business Administration, Ritsumeikan University)
    Abstract: We examine the relationship between the objective of a monopolist and limited liability. We establish that the owners of a monopolistic firm are better off to choose profit maximization rather than sales maximization under both unlimited and limited liability. This is consistent with the fact that the Dutch East India Company, whose objective was profit maximization, was better off in the seventeenth century than the British East India Company, whose objective was sales maximization. We also show that a monopolist should choose to organize as a limited liability entity regardless of its objective.
    Keywords: limited liability, firm objective, managerial incentives, monopoly
    JEL: G32 L13 L12
    Date: 2012–12

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