nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒02‒08
eleven papers chosen by
Russell Pittman
US Government

  1. Product development capability and marketing strategy for new durable products By Sumitro Banerjee; David A. Soberman
  2. Intertemporal Pricing with Unobserved Consumer Arrival Times By Philippe Choné; Romain De Nijs; Lionel Wilner
  3. Product Market Predatory Threats and the Use of Performance-sensitive Debt By Kjenstad, Einar; Su, Xunhua
  4. Nonparametric Analysis of Two-Sided Markets By Senay Sokullu
  5. The Value of a Right of First Refusal Clause in a Procurement First-Price Auction By Nathalie Chappe; Marie Obidzinski
  6. Cost Recovery from Congestion Tolls with Long-run Uncertainty By Robin Lindsey; André De Palma
  7. Infrastructure Upgrades and Foreclosure with Coexistence of Service-Based and Facility-Based Firms By Noriaki Matsushima; Keizo Mizuno
  8. Does a hospital’s quality depend on the quality of other hospitals? A spatial econometrics approach to investigating hospital quality competition By Hugh Gravelle; Rita Santos; Luigi Siciliani
  9. Drug launch timing and international reference pricing By Nicolas Houy; Izabela Jelovac
  10. Cross-border infrastructure constraints, regulatory measures and economic integration of the Dutch - German gas market By Mulder, Machiel; Kuper, Gerard
  11. Market Power, Governance and Innovation: OECD Evidence By Ugur, Mehmet

  1. By: Sumitro Banerjee (ESMT European School of Management and Technology); David A. Soberman (Rotman School of Management, University of Toronto)
    Abstract: Our objective is to understand how a firm’s product development capability (PDC) affects the launch strategy for a durable product that is sequentially improved over time in a market where consumers have heterogeneous valuations for quality. We show that the launch strategy of firms is affected by the degree to which consumers think ahead. However, only the strategy of firms with high PDC is affected by the observability of quality. When consumers are myopic and quality is observable, both high and low PDC firms use price skimming and restrict sales of the first generation to consumers with high willingness to pay (WTP). A high PDC firm, however, sells the second generation broadly while a low PDC firm only sells the second generation to consumers with low WTP. When consumers are myopic and quality is unobservable, a firm with high PDC signals its quality by offering a low price for the first generation, which results in broad selling. The price of the second generation is set such that only high WTP consumers buy. A firm with low PDC will not mimic this strategy. If a low PDC firm sells the first generation broadly, it cannot discriminate between the high and low WTP consumers. When consumers are forward looking, a firm with high PDC sells the first generation broadly. This mitigates the “Coase problem” created by consumers thinking ahead. It then sells the second generation product only to the high WTP consumers. In contrast, a firm with low PDC does the opposite. It only sells the first generation to high WTP consumers and the second generation broadly.
    Keywords: product development, marketing strategy, durable goods, quality, signaling game
    Date: 2013–01–28
  2. By: Philippe Choné (CREST); Romain De Nijs (CREST & UC Berkeley); Lionel Wilner (CREST-INSEE 104 rue de la Convention 75015 Paris Tél : 06 22 82 56 26)
    Abstract: We examine optimal selling mechanisms with ex-ante commitment for a nondurable good when the seller does not observe the times at which strategic consumers arrive on the market and how much they are willing to pay for the good. Assuming consumer risk neutrality, we demonstrate in this two-dimensional screening problem that stochastic mechanisms are suboptimal. In practice, this means that quantity rationing and behavior-based price discrimination do not improve the profit compared to a simple time-dependent price schedule. We explain how the optimal profit may be achieved with a first-come first-served policy
    Keywords: Intertemporal pricing, Strategic consumers, Arrival dates, Heterogeneous cohorts, two-dimensional screening
    JEL: D11 D42 D82
    Date: 2012–10
  3. By: Kjenstad, Einar; Su, Xunhua
    Abstract: We use a variant of the Hotelling (1929) model to illustrate that, when a firm faces hard payment constraint(s), financially strong rivals may adopt predatory strategies to drive the firm out of the product market and hence to obtain extra profit from enhanced market power later on. Predation is more likely to occur if the payment constraint is contingent on the firm’s performance. The model predicts that higher predatory threats in the product market reduce firm’s use of performance-sensitive debt and this effect should be more pronounced for small firms with large growth opportunities. Through a sample of over 16,000 bank loans to U.S. borrowers in 1997-2008, we find empirical evidence to support these model predictions.
    Keywords: Financial constraints; PSD; Competition; Hotelling model; HHI
    JEL: L10 D20 G30 G20
    Date: 2012–10
  4. By: Senay Sokullu
    Abstract: This paper considers an empirical semiparametric model for two-sided markets. Contrary to existing empirical literature on two-sided markets, we do not rely on linear network effects. Instead, network effects and probability distribution functions of net benefits of two sides are specified nonparametrically. The demand functions and the network effect functions of readers and advertisers are estimated by nonparametric IV estimation using a data set from German magazine industry. The ill-posed inverse problem faced during the estimation is solved by Tikhonov Regularization. We show that semiparametric specification is supported by the data and the network effects on readers' side are neither linear nor monotonic. With a numerical illustration we demonstrate that the mark-up of the magazine on readers' side is 27% higher with the nonlinearly specified network effects than in the case with linear network effects.
    Keywords: Two-sided markets, Network externality, Nonparametric IV, Ill-posed inverse problems, Tikhonov Regularization
    JEL: C14 C30 L14
    Date: 2012–10
  5. By: Nathalie Chappe (CRESE, Université de Franche-comté); Marie Obidzinski (CRESE, Université de Franche-comté)
    Abstract: The recent reforms of the "judicial map" in Europe have drastically reduced the number of courts, raising fears of a decline in access to justice. This paper addresses this issue through a litigation model within a Salop (1979) model. We assume that victims of accidents differ both in terms of compensatory damages expected and in terms of distance from court. Due to distance costs, it might be too expensive to file cases for some victims with low expected awards. Therefore, the demand for trials is reduced by a decrease in the number of courts when the probability of an accident is exogenous. However, the link between the number of courts and the demand for trials is not clear cut when the probability of an accident occurring is determined by the defendant through his level of care. Furthermore, we determine the optimal number of courts.
    Keywords: litigation, number of courts, distance costs, access to justice
    JEL: K41 H40
    Date: 2013–01
  6. By: Robin Lindsey (Sauder - Sauder School of Business [British Columbia] - University of British Columbia); André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - École normale supérieure de Cachan - ENS Cachan)
    Abstract: According to the seminal Cost Recovery Theorem the revenues from congestion tolls pay for the capacity costs of an optimal-sized facility if capacity is perfectly divisible, and if user costs and capacity costs have constant scale economies. This paper extends the Theorem to long-run uncertainty about investment costs, user costs, and demand. It proves that if constant scale economies hold at all times and in all states, and if the toll can be varied freely over time and by state, then expected discounted toll revenues cover expected discounted investment costs over a facility's lifetime. If the marginal cost of investment is constant and investment is reversible, then expected cost recovery is also achieved for each investment. Cost recovery is quite sensitive to estimated initial demand, and moderately sensitive to the estimated growth rate of demand. Natural variability in demand can result in substantial surpluses or deficits over a facility's lifetime.
    Keywords: Congestion pricing; cost recovery; road capacity; cost uncertainty; demand uncertainty; irreversible investment
    Date: 2013–02–01
  7. By: Noriaki Matsushima; Keizo Mizuno
    Abstract: We investigate the incentives for facility-based firms to invest in infrastructure upgrades and to foreclose service-based firms. We focus on asymmetric regulation regarding service-based firms' access to the infrastructure held by a facility-based firm. Spillovers from the infrastructure upgrades made by a regulated facility-based firm on service-based firms play a key role in the incentives for making these upgrades. The spillover effect can enhance the incentives for the regulated facility-based firm to make upgrades if access prices are not regulated. The existence of rival facility-based firms strengthens the incentives for a regulated facility-based firm to make infrastructure upgrades, especially when the spillover effect is significant. Furthermore, if access prices are not regulated, the existence of rival facility-based firms weakens the incentives for a regulated facility-based firm to foreclose service-based firms.
    Date: 2012–12
  8. 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)
    Abstract: We examine whether a hospital’s quality is affected by the quality provided by other hospitals in the same market. We first set out a theoretical model with regulated prices which specifies conditions on demand and cost functions which determine whether a hospital will have higher quality when its rivals have higher quality. We then apply spatial econometric methods to a sample of English hospitals in 2009-10 and a set of 16 quality measures including mortality rates, readmission, revision and redo rates and three patient reported indicators to examine to examine the relationship between the quality of hospitals. We find that a hospital’s quality is positively associated with the quality of its rivals for seven out of the sixteen quality measures and that in no case is there a negative association. In those cases where there is a positive association, an increase in rivals’ quality by 10% increases a hospital’s quality by 1.7% to 2.9%.
    Keywords: Quality; regulated prices; hospitals; competition; spatial econometrics
    JEL: I1 L3
    Date: 2013–01
  9. By: Nicolas Houy (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon); Izabela Jelovac (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: This paper analyzes the timing decisions of pharmaceutical firms to launch a new drug in countries involved in international reference pricing. We show three important features of launch timing when all countries reference the prices in all other countries and in all previous periods of time. First, there is no withdrawal of drugs in any country and in any period of time. Second, there is no strict incentive to delay the launch of a drug in any country. Third, whenever the drug is sold in a country, it is also sold in all countries with larger willingness to pay. We then show that the three results do not hold when the countries only reference a subset of all countries. The first two results do not hold when the reference is on the last period prices only.
    Keywords: Drug launch timing; international reference pricing
    Date: 2013–01–29
  10. By: Mulder, Machiel; Kuper, Gerard (Groningen University)
    Abstract: We estimate to which extent regulatory measures in the Dutch market have reduced the vulnerability of this market to constraints in the cross-border infrastructure with Germany, which is the largest Dutch neighbouring market. We measure this vulnerability by the degree the markets are integrated, i.e. to which extent the gas prices differ between the Dutch market (Title Transfer Facility or TTF) and the German market (NetConnectGermany or NCG). The constraints are measured through the utilisation of the cross-border infrastructure. We find evidence that the introduction of a market-based balancing regime together with the obligation to deliver all gas on the TTF on 1 April 2011 reduced the impact of the utilisation the Dutch-German cross-border infrastructure on the differences in prices between these countries.
    Date: 2013
  11. By: Ugur, Mehmet
    Abstract: The aim of this paper is to investigate the relationship between market power, governance and patenting activity in a sample of 25 OECD countries from 1988-2007. Controlling for a wide range of innovation predictors, we report that governance quality is related positively with patenting activity in the full sample and in samples of countries with higher-than-average per-capita GDP, governance scores and economic openness. Secondly, the relationship between market power and innovation has a U-shape in the full sample, but inverted-U shape in split samples. Third, when interacted with governance, market power tends to have an offsetting effect that weakens the positive relationship between governance and innovation. These findings are robust to a range of control variables such as per-capita GDP, income inequality, depth of equity markets, labour share in national income, economic globalization and military expenditures. Our findings indicate that governance is a significant factor that explain innovation and that blanket statements about the relationship between competition and innovation as well as the kind of reforms necessary to foster innovation can be misleading.
    Keywords: Economic governance; innovation; patenting; market power
    JEL: E02 B52 O3
    Date: 2012–11

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