nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒02‒16
seventeen papers chosen by
Russell Pittman
US Government

  1. The Antitrust Analysis of Multi-Sided Platform Businesses By David S. Evans; Richard Schmalensee
  2. Competing with Asking Prices By Lester, Benjamin R.; Visschers, Ludo; Wolthoff, Ronald P.
  3. Income Distribution in Network Markets By Corrado Benassi; Marcella Scrimitore
  4. Untangling Searchable and Experiential Quality Responses to Counterfeits By Yi Qian; Qiang Gong; Yuxin Chen
  5. Managerial delegation under network effects By Trishita Bhattacharjee; Rupayan Pal
  6. Identification and Counterfactuals in Dynamic Models of Market Entry and Exit By Victor Aguirregabiria; Junichi Suzuki
  7. Testing Market Power with Profit Functions: a Dual Approach with Normalized Quadratic By Gao, Zhifeng; Moss, Charles B.
  8. Approximate Nash equilibrium under the single crossing conditions By Kukushkin, Nikolai S.
  9. Silence is golden: communication, silence, and cartel stability By Basuchoudhary, Atin; Conlon, John R.
  10. European antitrust control and standard setting By Mario Mariniello
  11. Standard-setting abuse: the case for antitrust control By Mario Mariniello
  12. Procurement Auctions with General Price-Quality Evaluation By Makoto HANAZONO; Jun NAKABAYASHI; Masanori TSURUOKA
  13. Multi-Object Auctions with Resale: An Experimental Analysis By Marco Pagnozzi; Krista Jabs Saral
  14. Do Banks Price Discriminate Spatially? Evidence from Small Business Lending in Local Credit Markets By Andrea Bellucci; Alexander V. Borisov; Alberto Zazzaro
  15. Price and quality dispersion in an offshoring market: evidence from semiconductor production services By David M. Byrne; Brian K. Kovak; Ryan Michaels
  16. Elemente der räumlichen Preistheorie By Klaus Schöler
  17. Competition vs. Monopoly in the Religious Marketplace: Judaism in the United States and Israel By Chiswick, Carmel U.

  1. By: David S. Evans; Richard Schmalensee
    Abstract: This Chapter provides a survey of the economics literature on multi-sided platforms with particular focus on competition policy issues, including market definition, mergers, monopolization, and coordinated behavior. It provides a survey of the general industrial organization theory of multi-sided platforms and then considers various issues concerning the application of antitrust analysis to multi-sided platform businesses. It shows that it is not possible to know whether standard economic models, often relied on for antitrust analysis, apply to multi-sided platforms without explicitly considering the existence of multiple customer groups with interdependent demand. It summarizes many theoretical and empirical papers that demonstrate that a number of results for single-sided firms, which are the focus of much of the applied antitrust economics literature, do not apply directly to multi-sided platforms.
    JEL: L19 L40
    Date: 2013–02
  2. By: Lester, Benjamin R. (Federal Reserve Bank of Philadelphia); Visschers, Ludo (Universidad Carlos III de Madrid); Wolthoff, Ronald P. (University of Toronto)
    Abstract: In many markets, sellers advertise their good with an asking price. This is a price at which the seller is willing to take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers' revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the positive implications of this pricing mechanism for transaction prices and allocations.
    Keywords: asking prices, competing mechanism design, auctions with entry, competitive search
    JEL: C78 D21 D44 D82 D83 L11 R31
    Date: 2013–01
  3. By: Corrado Benassi (Dipartimento di Scienze Economiche, Alma Mater Studiorum - Università di Bologna, Italy; The Rimini Centre for Economic Analysis, Italy); Marcella Scrimitore (Dipartimento di Scienze dell’Economia, Università del Salento, Italy; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We enquiry about the effects of first and second order stochastic dominance shifts of the distribution of the consumers’ willingness to pay, within the standard model of a market with network externalities and hump-shaped demand curve. This issue is analyzed in the polar cases of perfect competition and monopoly. We find that, while under perfect competition both types of distributional changes result in higher output, provided marginal costs are low enough, in the monopoly case the final outcome depends on the way income distribution and the network externality interact in determining market demand elasticity.
    Keywords: Network externalities, income distribution, stochastic dominance
    JEL: D31 D40 L1
    Date: 2013–01
  4. By: Yi Qian; Qiang Gong; Yuxin Chen
    Abstract: In this paper, we untangle the searchable and experiential dimensions of quality responses to entry by counterfeiters in emerging markets with weak intellectual property rights. Our theoretical framework analyzes the market equilibria under competition with non-deceptive counterfeiting and deceptive counterfeiting, respectively, as well as under monopoly branding. A key theoretical prediction is that emerging markets can be self-corrective with respect to counterfeiting issues in the following sense: First, counterfeiters could earn positive profits by pooling with authentic brands only when consumers have good faith in the market (believe in a low probability that any product is a counterfeit). When the proportion of counterfeits in the market exceeds a cutoff value, brands would invest in self-differentiation from the competitive fringe counterfeiters. Second, to attain a separating equilibrium with counterfeiters, branded incumbents upgrade the searchable quality (e.g. appearance) of their products more and improve the experiential quality (e.g. functionality) less, as compared to monopoly equilibrium. This prediction uncovers the nature of product differentiation in the searchable dimension and helps in analyzing the real-world innovation strategies employed by authentic firms in response to entries by counterfeit entities. In addition, the welfare analyses hint at a non-linear relationship between social welfare and intellectual property enforcement.
    JEL: K42 O31 O34
    Date: 2013–02
  5. By: Trishita Bhattacharjee (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth)
    Abstract: This paper shows that network effects do not have any implication to the nature of the equilibrium strategic managerial delegation under Cournot type quantity competition, unlike as in the case of Bertrand type price competition a la Hoernig (2012). It also shows that delegation of output/price decision to the manager is optimal for the owner even in the case of monopoly in the product market, due to the existence of network effects. The monopolist offers sales-oriented incentive scheme to her manager in equilibrium, if there is network effect.
    Keywords: Strategic delegation, Network effects, Quantity competition, Monopoly
    JEL: D43 L20
    Date: 2013–01
  6. By: Victor Aguirregabiria; Junichi Suzuki
    Abstract: This paper addresses a fundamental identification problem in the structural estimation of dynamic oligopoly models of market entry and exit. Using the standard datasets in existing empirical applications, three components of a firm's profit function are not separately identified: the fixed cost of an incumbent firm, the entry cost of a new entrant, and the scrap value of an exiting firm. We study the implications of this result on the power of this class of models to identify the effects of different comparative static exercises and counterfactual public policies. First, we derive a closed-form relationship between the three unknown structural functions and the two functions that are identified from the data. We use this relationship to provide the correct interpretation of the estimated objects that are obtained under the `normalization assumptions' considered in most applications. Second, we characterize a class of counterfactual experiments that are identified using the estimated model, despite the non-separate identification of the three primitives. Third, we show that there is a general class of counterfactual experiments of economic relevance that are not identified. We present a numerical example that illustrates how ignoring the non-identification of these counterfactuals (i.e., making a `normalization assumption' on some of the three primitives) generates sizable biases that can modify even the sign of the estimated effects. Finally, we discuss possible solutions to address these identification problems.
    Keywords: Dynamic structural models; Market entry and exit; Identification; Fixed cost; Entry cost; Exit value; Counterfactual experiment; Land price.
    JEL: L10 C01 C51 C54 C73
    Date: 2013–02–02
  7. By: Gao, Zhifeng; Moss, Charles B.
    Abstract: The dual relationship between parameters of normalized quadratic cost and profit functions is determined when firms can implement market power on the output market. An approach is developed to test the market power by comparing the profits of a firm with and without market power. Simulations demonstrate the efficiency of this approach.
    Keywords: Normalized quadratic cost function, Normalized quadratic profit functions, Duality, Market power, Production Economics,
    Date: 2013–02–02
  8. By: Kukushkin, Nikolai S.
    Abstract: We consider strategic games where strategy sets are linearly ordered while the preferences of the players are described by binary relations. All restrictions imposed on the preferences are satisfied in the case of epsilon-optimization of a bounded-above utility function. A Nash equilibrium exists and can be reached from any strategy profile after a finite number of best response improvements if the single crossing conditions hold w.r.t.\ pairs [one player's strategy, a profile of other players' strategies], and the preference relations are transitive. If, additionally, there are just two players, every best response improvement path reaches a Nash equilibrium after a finite number of steps. If each player is only affected by a linear combination of the strategies of others, the single crossing conditions hold w.r.t.\ pairs [one player's strategy, an aggregate of the strategies of others], and the preference relations are interval orders, then a Nash equilibrium exists and can be reached from any strategy profile with a finite best response path.
    Keywords: strong acyclicity; single crossing; Cournot tatonnement; Nash equilibrium; aggregative game
    JEL: C72
    Date: 2013–02–10
  9. By: Basuchoudhary, Atin; Conlon, John R.
    Abstract: This paper studies how cartel stability is influenced by asymmetric information and communication about demand. Firms in a cartel face fluctuating demand in a repeated game framework. In each period, one randomly chosen firm knows current demand. In this context we consider two different equilibria -- one where the informed firm communicates its information to its partners and another where it does not. We show that cartels are extremely unstable when the informed firm communicates with the uninformed firms. However, when the informed firm does not communicate with the uninformed firms cartels can be as stable as when there are no demand fluctuations at all.
    Keywords: cartels; communication; stability;
    JEL: D82 C72 L00
    Date: 2013–01
  10. By: Mario Mariniello
    Abstract: Standards reduce production costs and increase productsâ?? value to consumers. Standards however entail risks of anti-competitive abuse. After the adoption of a standard, the chosen technology normally lacks credible substitutes. The owner of the patented technology might thus have additional market power relative to locked-in licensees, and might exploit this power to charge higher access rates. In the economic literature this phenomenon is referred to as â??hold-upâ??. To reduce the risk of hold-up, standard-setting organisations often require patent holders to disclose their standard-essential patents before the adoption of the standard and to commit to license on fair, reasonable and non-discriminatory (FRAND) terms. The European Commission normally investigates unfair pricing abuse in a standard-setting context if a patent holder who committed to FRAND ex-ante is suspected not to abide to it ex-post. However, this approach risks ignoring a number of potential abuses which are likely harmful for welfare. That can happen if, for example, ex-post a licensee is able to impose excessively low access rates (â??reverse hold-upâ??) or if a patent holder acquires additional market power thanks to the standard but its essential patents are not encumbered by FRAND commitments, for instance because the patent holder did not directly participate to the standard setting process and was therefore not required by the standard-setting organisations to commit to FRAND ex-ante. A consistent policy by the Commission capable of tackling all sources of harm should be enforced regardless of whether FRAND commitments are given. Antitrust enforcement should hinge on the identification of a distortion in the bargaining process around technology access prices, which is determined by the adoption of the standard and is not attributable to pro-competitive merits of any of the involved players.
    Date: 2013–02
  11. By: Mario Mariniello
    Abstract: Standards reduce production costs and increase the value of products to consumers; ultimately they significantly contribute to economic development. Standards however entail risks of anti-competitive abuse. After the adoption of a standard, the elimination of competition between technologies can lead to consumer harm. Fair, reasonable, nondiscriminatory (FRAND) commitments made by patent holders have been used to mitigate that risk. The European Commission recognises the importance of standards, but European Union competition policy is still seeking to identify well-targeted and efficient enforcement rules.
    Date: 2013–02
  12. By: Makoto HANAZONO (School of Economics, Nagoya University); Jun NAKABAYASHI (Institute of Social and Economic Research, Osaka University); Masanori TSURUOKA (Department of Economics, University of Tokyo)
    Abstract: We offer a general framework to study procurement auctions when quality matters. In this environment, sellers compete for a project by bidding a price-quality pair, and the winning bidder is determined by the score assigned to each bid. In contrast to the existing study in which only the quasilinear scoring rule is considered, our analysis allows a broad class of scoring rules including many other realistic ones. We focus on the analyses of the equilibrium bidding behavior of first-score (FS) and second-score (SS) auctions. We find that FS or SS auctions can be transformed into equivalent, single-dimensional score-bid auctions where the bidder's utility (payoff upon winning) is non-linear in the score-bid. Our analysis demonstrates that the ranking of the two auction formats, in terms of expected scores, depends on the scoring rule and that the equivalence fails unless scoring rules are quasilinear. FS auctions induce less aggressive bidding than SS auctions if, for example, the scoring rule is price-quality ratio (PQR).
    Keywords: scoring auctions, non-quasilinear scoring rules, procurement
    JEL: D44 H57 L13
    Date: 2013–01
  13. By: Marco Pagnozzi (University of Napoli "Federico II" and CSEF); Krista Jabs Saral (Webster University)
    Abstract: We analyze the effects of resale through bargaining in multi-object uniform-price auctions with asymmetric bidders. The possibility of resale affects bidders’ strategies, and hence the allocation of the objects on sale and the seller’s revenue. Our experimental design consists of four treatments: one without resale and three resale treatments that vary both the bargaining mechanism and the amount of information available in the resale market. As predicted by theory: (i) without resale, asymmetry among bidders reduces demand reduction; (ii) resale increases demand reduction by high-value bidders; (iii) low-value bidders speculate by bidding more aggressively with resale. Therefore, resale induces speculation and demand reduction which reduce auction efficiency. In contrast to what is usually argued, resale does not necessarily increase final efficiency and may not reduce the seller’s revenue. Features of the resale market that tend to increase its efficiency also reduce the seller’s revenue.
    Keywords: multi-object auctions, resale, asymmetric bidders, bargaining, economic experiments
    JEL: D44 C90
    Date: 2013–01–28
  14. By: Andrea Bellucci (Universit… di Urbino); Alexander V. Borisov (Indiana University); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR)
    Abstract: In this paper we explore the effects of bank-borrower physical proximity on price and non-price aspects of small business lending in local credit markets. Along the price dimension, our analysis reveals that interest rates increase with bank-borrower distance and decrease with the distance between borrower and other competing banks. Along the quantity dimension, we observe that more distant borrowers are more likely to experience binding credit limits. We also show that the quantity effects of bank-borrower distance are concentrated among less transparent firms. Our findings are consistent with pricing based on marginal costs that reflect information-based factors, and are in contrast to the established paradigm, where banks adopt spatial discriminatory pricing rules when lending to small-sized enterprises.
    Keywords: Bank lending, Credit availability, Distance, Interest rate, Pricing
    JEL: G21 G32 L11
    Date: 2013–02
  15. By: David M. Byrne; Brian K. Kovak; Ryan Michaels
    Abstract: We study cross-country differences in price and quality in the market for semiconductor wafer manufacturing services. Using a proprietary transaction-level data set, we document i) substantial constant-quality price differences across suppliers, and ii) shifts toward lower priced suppliers. Chinese producers on average charged 17% less than leading Taiwanese producers for otherwise identical products and increased their market share by 14.7 percentage points. The extent of cross-country price dispersion is also diminishing over a product's life. A model with costs of switching suppliers is consistent with these pricing dynamics and can sustain realistic quality-adjusted price dispersion.
    Date: 2013
  16. By: Klaus Schöler
    Abstract: For a long period the models of spatial pricing were developed and connected with the famous names of Wilhelm Launhardt und August Lösch. These approaches take the spatial dimension of pricing into account in partial analytical models. This publication discusses monopoly, monopolistic competition, and international trade. The reader will get a greater insight into the basic models and more complex structures.
    Keywords: spatial pricing, spatial discriminatory pricing, spatial monopoly, international spatial trade
    Date: 2013–01
  17. By: Chiswick, Carmel U. (George Washington University)
    Abstract: Economic analysis is used to compare different paradigms for understanding the marketplace for religions and religious ideas. The "Sacred Canopy" paradigm views it necessary for social stability to grant monopoly power to an official state religion. The "New Paradigm" views separation of Church and State, leading to competition in the religious marketplace, as guarantor of freedom of conscience. Judaism in the United States illustrates the outcome in a competitive religious environment. Judaism in Israel illustrates the outcome in a monopoly experiencing potential competition, possibly leading to an oligopoly structure.
    Keywords: religion, religious marketplace, new paradigm, monopoly, competition, Judaism
    JEL: Z12 Y80 L00
    Date: 2013–01

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