nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒03‒09
twenty-one papers chosen by
Russell Pittman
US Government

  1. Comparative versus Informative Advertising in Oligopolistic Markets By Maria Alipranti; Evangelos Mitrokostas; Emmanuel Petrakis
  2. Price Formation in Consumer Markets By Farm, Ante
  3. Profitable Entry into an Unprofitable Market By Ahmad Reza Saboori Memar
  4. New and Improved? By Eric Schmidbauer
  5. Collusion Among Many Firms: The Disciplinary Power of Targeted Punishment By Catherine Roux; Christian Thöni
  6. R&D Incentives in Vertically Related Markets By Ahmad Reza Saboori Memar; Georg Götz
  7. Are Trade Marks and Patents Complementary or Substitute Protections for Innovation. By Patrick Llerena; Valentine Millot
  8. The Impact of Competition on Prices with Numerous Firms By Xavier Gabaix; David Laibson; Deyuan Li; Hongyi Li; Sidney Resnick; Casper G. de Vries
  9. Change at the Checkout: Price Effects of Barcode Scanners By Emek Basker
  10. Piracy in a two-sided software market By Rasch, Alexander; Wenzel, Tobias
  11. La gratuité peut-elle avoir des effets anticoncurrentiels ? Une perspective d'économie industrielle sur le cas Google By Estelle Malavolti; Frederic Marty
  12. Digital Content Strategies By Daniel Halbheer; Florian Stahl; Oded Koenigsberg; Donald R. Lehmann
  13. Competition and Antibiotics Prescription By Fogelberg, Sara; Karlsson, Jonas
  14. Open Access to the Resource of Antibiotic Treatment Efficacy Subject to Bacterial Resistance By Bruno Nkuiya; Markus Herrmann
  15. A shirking theory of referrals By Damien S.Eldridge
  16. Port Privatization in an International Oligopoly By Noriaki Matsushima; Kazuhiro Takauchi
  17. Integration and convergence in European electricity markets By Carlo Andrea Bollino; Davide Ciferri; Paolo Polinori
  18. The Market for Tractors in the EU: Price Differences and Convergence By Jörgensen, Christian; Persson, Morten
  19. Working Paper 168 - Competition and Market Structure in the Zambian Banking Sector By AfDB
  20. Mixed oligopoly in education By Helmuth Cremer; Dario Maldonado
  21. China's Competition and the Export Price Strategies of Developed Countries By Giorgia Giovannetti; Marco Sanfilippo

  1. By: Maria Alipranti (University of Crete); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper examines endogenously the firms ��incentives to invest in informative and comparative advertising, in an oligopolistic market with horizontally differentiated products where competition take place in quantities. We show that, in equilibrium the fi��rms undertake a mix advertising strategy that combines both informative and comparative advertising investments. We further compare our results over the equilibrium market outcomes and the social welfare obtained under the endogenous advertising con��figuration with the benchmark case, without firms' ��advertising activities, and the cases of mere informative and mere comparative advertising. We demonstrate that the equilibrium market outcomes, as well as, the welfare alter signifi��cantly depending on the type(s) of advertising that fi��rms have available in the market and the degree of the market competition.
    Keywords: Informative Advertising, Comparative Advertising, Oligopoly, Product Differentiation.
    JEL: L13 M37
    Date: 2013–02–13
  2. By: Farm, Ante (Swedish Institute for Social Research, Stockholm University)
    Abstract: .
    Keywords: Pricing; oligopoly; price leadership; market shares; marketing
    Date: 2013–02–05
  3. By: Ahmad Reza Saboori Memar (University of Giessen)
    Abstract: This paper shows how market entry into an unprofitable market can be profitable for a firm. A firm's expansion into a new market can have a beneficial feedback effect for that firm in its “old market”. By entering into a new market, the firm increases its produced quantity and has higher incentives to invest in process R&D. This is a credible signal to the competitors that the firm will be more aggressive in its R&D investments. This weakens the competitors since they scare off and invest less in process R&D. This feedback effect of expanding in foreign markets increases the profits of the expanding firm in its “old market” and if this profit gain exceeds the losses through market entry, then the market entry is profitable for the firm. I also consider how the results change under Bertrand vs Cournot regime and how results change if price discrimination is possible or not. Beside that I show how higher R&D costs or lower demand in a market can lead to lower profits of one firm, but higher profits of the other firm.
    Keywords: research and development, price discrimination, product differentiation, process innovation, interbrand competition, strategic commitment, separated markets
    JEL: L13 D43 O30
    Date: 2013
  4. By: Eric Schmidbauer (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Are new versions of products necessarily better? We analyze product innovation by a firm that engages in research and development designed to improve an existing product, the outcome of which is uncertain. If the firm adopts the innovation its modified product appears to consumers as new and improved, but consumers do not immediately know whether or how much the product is better. We find that new products are on average improved and therefore command a pricing premium. This induces some types to exploit the new product signal by selling new versions that are only trivially different from their older version or that require inefficiently high upgrade costs. Nevertheless, the incentive to show off by introducing a new product may improve total welfare by inducing more innovation adoption and thereby mitigating the standard monopoly underinvestment problem. Innovation signaling provides a rational explanation for consumer attraction to new versions of products without resort to behavioral assumptions such as a preference for "newness".
    Keywords: Asymmetric information, Signaling, Innovation
    JEL: L0 D82 O31
    Date: 2013–01
  5. By: Catherine Roux; Christian Thöni
    Abstract: We explore targeted punishment as an explanation for collusion among many firms. In a series of Cournot oligopoly experiments with various numbers of firms, we compare production decisions with and without the possibility to target punishment at specific market participants. We find strong evidence that targeted punishment enables firms to establish and maintain collusion. More so, we find that the collusive effect of targeted punishment is even stronger in markets with more competitors, suggesting a reversal of the conventional wisdom that collusion is easier the fewer the firms.
    Keywords: Cournot oligopoly; Experiments; Collusion; Targeted punishment
    JEL: L13 K21 C91
    Date: 2013–02
  6. By: Ahmad Reza Saboori Memar (University of Giessen); Georg Götz (University of Applied Science)
    Abstract: This paper focuses on incentives to invest in research and development (R&D) in vertically related markets. In a bilateral duopoly setup, we consider how process R&D incentives of the firms in both upstream and downstream market depend on the intensity of simultaneous interbrand and intrabrand competition. Among the results: both interbrand and intrabrand competition have twofold effects on R&D incentives. Existence of a vertically related market with imperfect competition lowers both the incentives to invest in process R&D and the competitive advantage through the R&D investment. We will show how the impact of a firm's R&D investments in either market on consumer surplus as well as on the profits of all firms in both markets depends on exogenous parameters.
    Keywords: research and development, vertical relations, bilateral oligopoly, product differentiation, process innovation, interbrand and intrabrand competition
    JEL: L13 D43 O30
    Date: 2013
  7. By: Patrick Llerena; Valentine Millot
    Abstract: The benefits of innovations for firms strongly depend on their ability to develop complementary appropriability means, including intellectual property (IP) rights. This paper aims at assessing the interrelated effects of two types of IP rights, namely patents and trade marks, considering them in their core function as legal protection devices. Based on a supermodularity analysis, we show that the complementary relationship between trade marks and patents is not straightforward. Depending on the levels of advertising spillovers and depreciation rate, trade marks are found to be either complementary or substitute to patents. Based on a data set encompassing the IP activity of a sample of French publicly traded firms, we find that patents and trade marks are complementary in chemical and pharmaceutical sectors, but substitute in high-tech business sectors (computer products and electrical equipment).
    JEL: O32 O34 L10
    Date: 2013
  8. By: Xavier Gabaix (NYU Stern, CEPR and NBER); David Laibson (Harvard University and NBER); Deyuan Li (Fudan University); Hongyi Li (University of New South Wales); Sidney Resnick (Cornell University); Casper G. de Vries (Economic Science Institute, Chapman University, Erasmus University Rotterdam, Tinbergen Institute)
    Abstract: We use extreme value theory (EVT) to develop insights about price theory. Our analysis reveals "detail-independent" equilibrium properties that characterize a large family of models. We derive a formula relating equilibrium prices to the level of competition. When the number of firms is large, markups and prices are pinned down by the tail properties of the noise distribution and prices are independent of many other institutional details. The elasticity of the markup with respect to the number of firms is shown to be the EVT tail exponent of the distribution for preference shocks and in most leading cases is relatively insensitive to the number of firms. For example, for the Gaussian case asymptotic markups are proportional to one over the square root of log n, implying a zero asymptotic elasticity of the markup with respect to the number of firms. Thus competition only exerts weak pressure on prices. We also study applications of the model, including endogenizing the level of noise.
    Date: 2013
  9. By: Emek Basker (Department of Economics, University of Missouri-Columbia)
    Abstract: I use difference-in-difference specifications with city-level price data from 1972 to 1984 to estimate the effect of barcode scanners, an early process innovation in the supply chain, on grocery prices. I found that prices of groceries fell, on average, by about 0.6% by the time supermarkets' adoption rate reached 5%. Several specification tests confirm that the estimates are causal. A conservative estimate suggests that the short-run welfare gains from scanners were approximately $2.6billion per year in 2012 dollars.
    Keywords: barcode scanners, retail, supermarkets, technology, prices, item-pricing laws
    JEL: L81 D22 O33
    Date: 2013–02–06
  10. By: Rasch, Alexander; Wenzel, Tobias
    Abstract: This paper studies the impact of software piracy in a two-sidedmarket setting. Software platforms attract developers and users to maximize their profits. The equilibrium price structure is affected by piracy: license fees to developers are higher with more software protection but the impact on user prices is ambiguous. A conflict between platforms and software developers over software protection may arise: whereas one side benefits from better protection, the other party loses out. Under platform compatibility, this conflict is no longer present. --
    Keywords: developer,piracy,platform,software,two-sided markets
    JEL: L11 L86
    Date: 2013
  11. By: Estelle Malavolti (Toulouse School of economics enac-Leea); Frederic Marty (Ofce sciences-po)
    Abstract: Firms operating in two-sided markets have to integrate in their optimal pricing structure the existence of indirect externalities across groups of consumers. Beyond direct externalities network effects,such markets are characterized by the increasing value of the platform for the users on one side with the number on the other side. As for Internet search platforms such as Google, their value for advertisers depends on the number of users and especially of precisely targeted ones. As a consequence, the optimal price structure in a two-sided market cannot be symmetrical. In other words, the price structure is not neutral and has to take into account such linkages between these two groups of users. From an economic point of view, it may make sense to impose no charge for the group that generates the most valuable externalities. With antitrust inquiries, such specificity imposes to consider simultaneously both sides of the markets. Otherwise, the risk of false negative decisions may arise. On one side the pricing strategy might be interpreted as a predatory practice and on the other side as an exploitative abuse. As the number and the loyalty of users on one side is an essential input to competition between platforms on the other side, it might be rational to subsidize them by acquiring exclusive rights on some valuable contents and to implement bundling and tying strategies. The main risk lies in some market foreclosure. The market might evolve towards vertically integrated ecosystems, e.g. a silos model of competition. Furthermore, competition authorities have to define a sound economics-based theory of harm to disentangle practices that reduce consumer welfare (by increasing switching costs) from ones that might be finally welfare-enhancing. The issue of remedies arises inexorably from this point. Our paper sheds light on these industrial economics and competition law issues.
    Keywords: Two-sided markets, Internet search markets, exclusionary practices, market foreclosure, remedies
    JEL: K21 L12 L41 L86
    Date: 2013–01
  12. By: Daniel Halbheer (Department of Business Administration (IBW), University of Zurich); Florian Stahl (Department of Business Administration (IBW), University of Zurich); Oded Koenigsberg (Department of Marketing, London Business School); Donald R. Lehmann (Marketing, Columbia Business School)
    Abstract: This paper studies content strategies for online publishers of digital information goods. It examines sampling strategies and compares their performance to paid content and free content strategies. A sampling strategy, where some of the content is offered for free and consumers are charged for access to the rest, is known as a “metered model” in the newspaper industry. We analyze optimal decisions concerning the size of the sample and the price of the paid content when sampling serves the dual purpose of disclosing content quality and generating advertising revenue. We show in a reduced-form model how the publisher’s optimal ratio of advertising revenue to sales revenue is linked to characteristics of both the content market and the advertising market. We assume that consumers learn about content quality from the free samples in a Bayesian fashion. Surprisingly, we find that it can be optimal for the publisher to generate advertising revenue by offering free samples even when sampling reduces both prior quality expectations and content demand. In addition, we show that it can be optimal for the publisher to refrain from revealing quality through free samples when advertising effectiveness is low and content quality is high.
    Keywords: Information Goods, Sampling, Content Pricing, Advertising, Dorfman-Steiner Condition, Pricing, Product Quality, Bayesian Learning, News Websites
    JEL: L11 L15 L21 M21 M30
    Date: 2013–02
  13. By: Fogelberg, Sara (Research Institute of Industrial Economics (IFN)); Karlsson, Jonas (The Institute for Social Research)
    Abstract: The introduction of antibiotics as a medical treatment after World War II helped to dramatically increase life expectancy in the industrialized world. As a consequence of over-prescription the last decades have however seen a sharp increase in prevalence of multi-resistant bacteria, disarming once powerful anti-pathogens. This paper investigates the effect of increased competition between healthcare providers on prescription of antibiotics. We make use of a competition-inducing reform implemented in different counties in Sweden at different points in time during 2007 to 2010. Our dataset contains monthly data on all prescribed antibiotics in Sweden which makes us able to estimate the effects on all antibiotics prescribed, as well as different subcategories of antibiotics. The results indicate that increased competition had a positive and significant effect on antibiotics prescription.
    Keywords: Healthcare; Competition; Competition reform; Antibiotics
    JEL: C23 H30 I11 I18
    Date: 2013–01–08
  14. By: Bruno Nkuiya; Markus Herrmann
    Abstract: In this paper, we are interested in how a pharmaceutical industry manages existing antibiotic drugs in the context of bacterial resistance. We consider a model based on an epidemiological framework where antibiotic recovery rates, and thus intrinsic qualities, may differ. Antibiotic efficacy is modeled as a common pool of a non-renewable resource to which antibiotic producers have open access. The paper derives antibiotic demands within a vertical differentiation model and characterizes the dynamics of infected individuals, antibiotic efficacy and treatment rates under the open-access and the socially optimal allocation. We show that the high-quality antibiotic drug loses its comparative advantage over time under both allocations, such that the low-quality drug should be used longer. This occurs at a later point of time in the social optimum and allows for a better control of infection in the longer run. In contrast with the ambiguous outcome reported in the literature, the socially optimal steady-state level of antibiotic efficacy is lower than that of the open-access allocation. We also extend our analysis to a strategic, duopolistic context.
    Keywords: Antibiotic management, Non-renewable resource, Open access, Social optimum, Public health
    JEL: L13 Q21 I18
    Date: 2013
  15. By: Damien S.Eldridge (School Economics, La Trobe University)
    Abstract: The health care industry in some countries displays a gated structure. Rather than approaching a specialist directly, a patient will first seek a referral from a general practitioner. We provide one possible explanation for such an industry structure. If the outcome of treatment depends on the effort exerted by the treating specialist, then a market failure might occur. By aggregating many patients, general practitioners can sometimes create an artificial long- run relationship between a patient and a specialist that otherwise would have a short-run relationship. Such an artificial long-run relationship reduces the incidence of shirking on the part of the specialist.
    Keywords: Gatekeepers, Reputation, Moral Hazard, Referral
    JEL: C73 D82 I11
    Date: 2013
  16. By: Noriaki Matsushima; Kazuhiro Takauchi
    Abstract: We investigate how port privatization affects port charges, firm profits, and welfare. Our model consists of an international duopoly with two ports and two markets. When the unit transport cost is large, privatization of ports decreases the prices for port usage, although neither government has an incentive to privatize its port. The equilibrium governmental decisions are inconsistent with the desirable outcome if the unit transport cost is not large enough. The smaller countryfs government is more likely to privatize its port, although the larger countryfs government is more likely to nationalize its port to protect its domestic market.
    Date: 2013–02
  17. By: Carlo Andrea Bollino; Davide Ciferri; Paolo Polinori
    Abstract: In this paper we investigate wholesale electricity prices integration process in the main European markets. After reforms introduced in the last decades in Europe, wholesale electricity prices are now determined in regulated markets. However, while market institutional frameworks show several similarities, there are still differences in fuel mix, generation units technologies, market structure. Using multivariate cointegration techniques we test integration dynamics within four European markets (Austria, Germany, France and Italy) for which we have collected a novel dataset of spot prices from 2004 to 2010. We provide evidence that German market constitutes a common stochastic trend driving the long-run behavior of other markets. Our results are robust to causality test, to Granger causality test, to oil price relevance test and provide additional evidence to assess the efficient market hypothesis in European electricity markets.
    Keywords: European electricity markets, electricity spot prices, cointegration, structural MA representation
    JEL: C32 L16 Q41
    Date: 2013–01–14
  18. By: Jörgensen, Christian; Persson, Morten
    Abstract: This study evaluates the degree of segmentation of the market for agricultural machinery and equipment in the EU. We focus on agricultural tractors, the most common and biggest investment in machinery and equipment in the agricultural sector. By using country price data for individual tractor models, we test the law of one price, i.e. the existence of a common price for tractors across EU member states. We find that significant price differences exist, yet unlike most other studies we find that large price deviations are penalised within a short time. The study also shows that transport costs are an important source of price differences, as domestic production leads to lower prices on the domestic market and as price convergence is negatively correlated with distance. Finally, price differences should not solely be understood from a geographical perspective, as evidence supports the idea that farmers’ buying power is significant in explaining price differences within countries.
    Date: 2013–01
  19. By: AfDB
    Date: 2013–02–26
  20. By: Helmuth Cremer; Dario Maldonado
    Abstract: Abstract: This paper studies oligopolistic competition in education markets when schools can be private and public and when the quality of education depends on “peer group" effects. In the first stage of our game schools set their quality and in the second stage they fix their tuition fees. We examine how the (subgame perfect Nash) equilibrium allocation (qualities, tuition fees and welfare) is affected by the presence of public schools and by their relative position in the quality range. When there are no peer group effects, efficiency is achieved when (at least) all but one school are public. In particular in the two school case, the impact of a public school is spectacular as we go from a setting of extreme differentiation to an efficient allocation. However, in the three school case, a single public school will lower welfare compared to the private equilibrium. We then introduce a peer group e¤ect which, for any given school is determined by its student with the highest ability. These PGE do have a signi.cant impact on the results. The mixed equilibrium is now never efficient. However, welfare continues to be improved if all but one school are public. Overall, the presence of PGE reduces the e¤ectiveness of public schools as regulatory tool in an otherwise private education sector.
    Date: 2013–02–28
  21. By: Giorgia Giovannetti (DISEI, Università degli studi di Firenze); Marco Sanfilippo (Istituto Universitario Europeo)
    Abstract: This paper analyzes the impact of Chinese competition on developed countries export prices, with a focus on Italy. After a theoretical discussion of the channels affecting export prices in presence of competitors from low income countries, we estimate the pricing behavior of two major manufacturing sectors, consumer goods and machinery, distinguishing destination markets according to their income level. Results show that export competition from China has affected Italian price strategies over the period 2000-08, in an idiosyncratic way according to the income level of importers, sector and technology level of products exported. Contrary to what observed for other high-income countries, we find that Italy has followed a very specific strategy to face Chinese competition. Instead of changing “between sector”, moving up to the technology ladder, Italy has kept its specialization in traditional sectors and has upgraded the quality of its low-tech and labor-intensive products, when in direct competition with Chinese ones. For higher technology products, on the other hand, it has adjusted prices downward to reduce Chinese competitive pressure, especially in segments where it does not hold a comparative advantage, while it has fostered differentiation only for some niche products within the sectors with higher specialization.
    Keywords: China, export price competition, Italy
    JEL: F10 F14
    Date: 2013

This nep-com issue is ©2013 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.