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on Industrial Competition |
| By: | Mariana Cunha (FEP-UP, School of Economics and Management); Paula Sarmento (CEF.UP, Research Center in Economics and Finance, University of Porto and FEP-UP) |
| Abstract: | This paper analyzes the impact of vertical integration on the static and dynamic stability of downstream incomplete collusion. It is shown that a vertical merger between an upstream firm and a downstream cartel or fringe firm promotes downstream collusion, under certain conditions on the market size. However, for low market concentration, a vertical merger with a cartel firm hinders collusion. Moreover, a welfare analysis shows that consumer surplus increases with the vertical merger because the merger partially eliminates the double marginalization problem. |
| Keywords: | Vertical integration, Collusion, Cartel Stability |
| JEL: | L12 L13 L42 D43 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:465&r=com |
| By: | João Correia-da-Silva (CEF.UP e Faculdade de Economia do Porto.); Joana Pinho (CEF.UP e Faculdade de Economia do Porto.); Hélder Vasconcelos (Autoridade Nacional de Comunicações (ANACOM). CEF.UP e Faculdade de Economia do Porto.) |
| Abstract: | We study sustainability of collusion with optimal penal codes, in markets where demand growth may trigger the entry of a new firm. In contrast with grim trigger strategies, optimal penal codes make collusion easier to sustain before entry than after. We compare different reactions of the incumbents to entry in terms of: sustainability of collusion, incumbent’s profits, entrant’s profits, consumer surplus and social welfare. Surprisingly, the incumbent firms may prefer competition to collusion. |
| Keywords: | Collusion; Demand growth; Optimal penal codes; Reactions to entry. |
| JEL: | K21 L11 L13 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:487&r=com |
| By: | Moraga-González, José-Luis; Petrikaite, Vaiva |
| Abstract: | We study the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search sequentially for satisfactory deals. In the pre-merger symmetric equilibrium, consumers visit firmsrandomly. However, after a merger, because insiders raise their prices more than the outsiders, consumers start searching for good deals at the non-merging stores, and only when they do not find a satisfactory product there they visit the merging firms. As search costs go up, consumer traffic from the non-merging firms to the merged ones decreases and eventually mergers become unprofitable. This new merger paradox can be overcome if the merged entity chooses to stock each of its stores with all the products of the constituent firms, which generates sizable search economies. We show that such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the non-merging firms. In that situation, consumers start searching for a satisfactory good at the merged entity and the firms outside the merger lose out. When search economies are sufficiently large, a merger is beneficial for consumers too, and overall welfare increases. |
| Keywords: | consumer search; demand-side economies; economies of search; insiders; long-run; mergers; orders of search; outsiders; prominence; sequential search; short-run |
| JEL: | D40 D83 L13 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9374&r=com |
| By: | Sahuguet, Nicolas; Walckiers, Alexis |
| Abstract: | This model describes the working of hub-and-spoke collusion that has been discussed recently by competition policy authorities. We develop a model of tacit collusion between a manufacturer and two retailers, competing a la Rotemberg and Saloner (1986). The best collusive equilibrium between retailers is inefficient and it is in the interest of the supplier to help retailers reach a more efficient collusive equilibrium. The hub and spoke conspiracy reduces double marginalization, but raises the ability of retailers to collude. The impact of a hub-and-spoke cartel on consumer's welfare depends on the bargaining power in the relationship. If the supplier has the bargaining power, the agreement, comparable to a vertical restraint, can be welfare improving in reducing double marginalization. When retailers have the bargaining power, the agreement is closer to an horizontal agreement in which retailers use the supplier to improve their collusive scheme, which leads to a loss of welfare. The result has important implications for competition policy and antitrust enforcement which are further developed in our companion paper Sahuguet and Walckiers (2013). |
| Keywords: | collusion; competition policy; horizontal relations; hub-and-spoke; vertical relations |
| JEL: | D43 L41 L42 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9385&r=com |
| By: | Daria Onori (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS; Université catholique de Louvain, IRES; University of Rome “La Sapienza”, Departement of Economics and Law, Faculty of Economics) |
| Abstract: | In this paper we modify a standard quality ladder model by assuming that R&D is driven by outsider firms and the winners of the race sell licenses over their patents, instead of entering directly the intermediate good sector. As a reward they get the aggregate profit of the industry. Moreover, in the intermediate good sector firms compete à la Cournot and it is assumed that there are spillovers represented by strategic complementarities on costs. We prove that there exists an interval of values of the spillover parameter such that the relationship between competition and growth is an inverted-U-shape. |
| Keywords: | quality ladder; Cournot oligopoly; strategic complementarities; competition |
| JEL: | L13 L16 O31 O52 |
| Date: | 2013–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1324&r=com |
| By: | Hyytinen, Ari; Steen, Frode; Toivanen, Otto |
| Abstract: | We study cartel contracts using data on 18 contract clauses of 109 legal Finnish manufacturing cartels. One third of the clauses relate to raising profits; the others deal with instability through incentive compatibility, cartel organization, or external threats. Cartels use three main approaches to raise profits: Price, market allocation, and specialization. These appear to be substitutes. Choosing one has implications on how cartels deal with instability. Simplifying, we find that large cartels agree on prices, cartels in homogenous goods industries allocate markets, and small cartels avoid competition through specialization. |
| Keywords: | antitrust; cartels; competition policy; contracts; industry heterogeneity |
| JEL: | K12 L40 L41 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9362&r=com |
| By: | Brito, Duarte; Ribeiro, Ricardo; Vasconcelos, Helder |
| Abstract: | Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose an empirical structural methodology to examine quantitatively the unilateral impact of partial acquisitions involving pure financial interests and/or effective corporate control on prices, market shares,firm profits and consumer welfare. The proposed methodology can deal with differentiated products industries, with both direct and indirect partial ownership interests and nests full mergers (100% financial and control acquisitions) as a special case. We provide an empirical application to several acquisitions in the wet shaving industry. |
| Keywords: | Antitrust; Demand Estimation; Differentiated Products; Oligopoly; Partial Acquisitions; Unilateral Effects |
| JEL: | C54 D12 L13 L41 L66 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9354&r=com |
| By: | Rhodes, Andrew |
| Abstract: | Consumers often incur costs when switching from one product to another. Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs. We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare. |
| Keywords: | Switching costs, Dynamic competition, Markov perfect equilibrium |
| JEL: | D21 D4 L0 L11 L13 |
| Date: | 2013–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:45982&r=com |
| By: | Bourreau, Marc; Cambini, Carlo; Hoernig, Steffen |
| Abstract: | Often, fixed-line incumbents also own the largest mobile network. We consider the effect of this joint ownership on market outcomes. Our model predicts that while fixed-to-mobile call prices to the integrated mobile network are more efficient than under separation, those to rival mobile networks are distorted upwards, amplifying any incumbency advantage. As concerns potential remedies, a uniform off-net pricing constraint leads to higher welfare than functional separation and even allows to maintain some of the efficiency gains. |
| Keywords: | Call externality; Integration; Network competition; On/off-net pricing |
| JEL: | L51 L92 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9361&r=com |
| By: | Ricardo Biscaia (CIPES - Centro de Investigação de Políticas de Ensino Superior); Paula Sarmento (FEP - Faculdade de Economia do Porto) |
| Abstract: | This paper analyzes the location patterns of firms in Cournot spatial discrimination setting. The innovation step is that firms are allowed to have different marginal costs of the production. When analyzing the two-stage location-quantity game, we conclude that firms choose the central agglomeration outcome whatever the marginal cost difference between them. When maximizing social welfare, the social planner chooses the central location for both firms as well if the marginal cost differences are not too big. When allowed to decide if the inefficient firm should be in the market or not, the social planner removes the inefficient firm from the market if its cost is too high. |
| Keywords: | Spatial Competition, Cournot Discrimination, Market Structure, Cost Differentials |
| JEL: | D21 L11 L13 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:462&r=com |
| By: | Gehrig, Thomas; Stenbacka, Rune |
| Abstract: | We apply a reduced form representation of product market competition, facilitating an explicit characterization of the equilibrium investments in consumer-specific screening. The effects of market structure on screening incentives depend on the microstructure of the imperfect screening technology and on the characteristics of the pool of consumers. We conduct a welfare analysis, which reveals that the microstructure of the screening technology and the characteristics of the pool of consumers determine whether there are private incentives for overinvestment or underinvestment in screening. Furthermore, we show that the introduction of screening competition amplifies market failures associated with screening investments. |
| Keywords: | imperfect competition; imperfect screening |
| JEL: | D43 L15 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9397&r=com |
| By: | Martin Obradovits |
| Abstract: | This article shows that entry of a more input-effcient, but lower quality downstream producer, compared to a high-quality downstream incumbent, might be detrimental to social welfare. In particular, if the entrant is extremely ecient, a monopolist upstream supplier reacts by charging an excessive price, driving the high-quality incumbent out of the market and reducing social welfare. However, despite the entrant's low input requirement, the supplier's profit increases for all but the most effcient entrant technologies. Enabling the supplier to engage in third degree price discrimination may increase social welfare. |
| JEL: | L11 L13 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1303&r=com |
| By: | Vermeulen A.J.; Bos A.M.; Letterie W.A. (GSBE) |
| Abstract: | We study collusion in an infinitely repeated prisoners' dilemma when firms' discount factor is private information. If tacit collusion is not feasible, firms that are capable of sustaining high prices may still be willing and able to collude explicitly. Firms eager to collude may signal their intentions when forming the agreement is costly, but not too costly. As antitrust makes explicit collusion costly in expected terms, it may in fact function as a signaling device. We show that there always exists a cost level for which explicit collusion is viable. Moreover, our analysis suggests that antitrust enforcement is unable to fully deter collusion. |
| Keywords: | Market Structure, Firm Strategy, and Market Performance: General; |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013011&r=com |
| By: | Knieps, Günter; Zenhäusern, Patrick |
| Abstract: | International mobile roaming cartel agreements prompted the EU to intervene, firstly encompassing competition law measures by a cartel exemption, then ini-tiating several competition proceedings based on the accusation of abuse of a dominant market position, and finally applying price regulations of increasing scope. The paper exposes the temporary market power regulations, including the designated local break out measures, as insufficient and misleading. The solu-tion is to solve the cartel problem at its root, permitting visiting customers the freedom of choosing between their home operator and alternative carriers from the visited country by the implemention of carrier portability. -- |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:aluivr:144&r=com |
| By: | Armstrong, Mark; Chen, Yongmin |
| Abstract: | We investigate the marketing practice of framing a price as a discount from an earlier price. We discuss two reasons why a discounted price---rather than a merely low price---can make a consumer more willing to purchase. First, a high initial price can indicate the product is high quality. Second, a high initial price can signal a bargain relative to other options, and there is less incentive to search. We also discuss a behavioral model where the propensity to buy increases when others pay more. A seller has an incentive to offer false discounts, where the initial price is exaggerated. |
| Keywords: | consumer protection; consumer search; false advertising; price discrimination; Reference dependence |
| JEL: | D03 D18 D83 M3 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9327&r=com |
| By: | Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune |
| Abstract: | We study the incentives for hospitals to provide quality and expend cost-reducing effoort when their budgets are soft, i.e., the payer may cover deficits or confiscate surpluses. The basic set up is a Hotelling model with two hospitals that differ in location and face demand uncertainty, where the hospitals run deficits (surpluses) in the high (low) demand state. Softer budgets reduce cost efficiency, while the effect on quality is ambiguous. For given cost efficiency, softer budgets increase quality since parts of the expenditures may be covered by the payer. However, softer budgets reduce cost-reducing effort and the profit margin, which in turn weakens quality incentives. We also find that profit confiscation reduces quality and cost-reducing effort. First best is achieved by a strict no-bailout and no-profit-confiscation policy when the regulated price is optimally set. However, for suboptimal prices a more lenient bailout policy can be welfare improving. When we allow for heterogeneity in costs and qualities, we also show that a softer budget can raise quality for high-cost patients (and therefore reduce 'skimping' on such patients). |
| Keywords: | Cost efficiency; Hospital competition; Quality; Soft budgets |
| JEL: | I11 I18 L13 L32 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9302&r=com |
| By: | Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Hnery Wang (Department of Economics, University of Missouri-Columbia) |
| Abstract: | We study mass customization in a duopoly game in which the firms' products have different qualities. Whether customization choices are made simultaneously or sequentially is endogenously determined. Specifically, the customization stage of the game involves two periods. Each firm either selects its product type in period 1 or postpones this decision to period 2. We show that customization by one or both firms occurs only if the quality difference is sufficiently large. Flexibility of timing in the customization stage sometimes enables the firms to achieve an outcome that is Pareto superior to that if they were constrained to simultaneous customization choices. Although the high quality firm is more likely to customize, in some circumstances the low quality firm can obtain an advantage by becoming the first and only firm to adopt customization. |
| Keywords: | customization, horizontal differentiation, vertical differentiation, endogenous timing |
| JEL: | D43 L13 C72 |
| Date: | 2013–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1304&r=com |
| By: | Mrázová, Monika; Neary, J Peter |
| Abstract: | We characterize how firms select between alternative ways of serving a market. ``First-order" selection effects, whether firms enter or not, are extremely robust. "Second-order" ones, how firms serve a market conditional on entry, are less so: more efficient firms will select into the entry mode with lower market-access costs, if and only if firms' maximum profits are supermodular in production and market access costs. Supermodularity holds in many cases but not in all. Exceptions include FDI (both horizontal and vertical) when demands are "sub-convex" (i.e., less convex than CES), fixed costs that vary with access mode, and R&D with threshold effects. |
| Keywords: | Foreign Direct Investment (FDI); Heterogeneous Firms; Proximity-Concentration Trade-Off; R\&D with Threshold Effects; Super- and Sub-Convexity; Supermodularity |
| JEL: | F12 F15 F23 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9288&r=com |
| By: | Lapo Filistrucchi (DISEI, Università degli studi di Firenze); Damien Geradin; Eric van Damme; Pauline Affeldt |
| Abstract: | Drawing from the economics of two-sided markets, we provide suggestions for the definition of the relevant market in cases involving two-sided platforms, such as media outlets, online intermediaries, payment cards companies and auction houses. We also discuss when a one-sided approach may be harmless and when instead it can potentially lead to a wrong decision. We then show that the current practice of market definition in two-sided markets is only in part consistent with the above suggestions. Divergence between our suggestions and practice is due to the failure to fully incorporate the lessons from the economic theory of two-sided markets, to the desire to be consistent with previous practice and to the higher data requirements and the higher complexity of empirical analysis in cases involving two-sided platforms. In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and non-transaction markets and have been misled by the traditional argument that where there is no price, there is no market. |
| Keywords: | two-sided markets, two-sided platforms, market definition, SSNIP test, Hypothetical Monopolist test |
| JEL: | L40 L50 K21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2013_05.rdf&r=com |
| By: | Oksana Loginova (Department of Economics, University of Missouri-Columbia) |
| Abstract: | Advance selling is a marketing strategy by a firm that allows consumers to submit pre-orders for a new to-be-released product. It helps the firm to reduce uncertainty about future demand and consumers to avoid stock-out risks. At the same time, consumers might be reluctant to place advance orders if they are uncertain about their valuations for the product or when they expect future price cuts. To induce early purchases, the firm may offer pre-order price guarantee. This paper examines the firm's profit-maximizing strategy in a two-period setting characterized by market size uncertainty, consumer valuation uncertainty, and consumer experience/inexperience with the product. I show that when consumers are less heterogeneous in their valuations, the firm should implement advance selling and offer pre-order price guarantee. For some parameter configurations pre-order price guarantee acts as a commitment device not to decrease the price in the regular selling season. In other situations, it enables the firm to react to the information obtained from pre-orders by increasing or decreasing the price. When consumers are more heterogeneous in their valuations and the market size uncertainty is small, or the fraction of experienced consumers in the population is high, the firm should not implement advance selling. |
| Keywords: | advance selling, price guarantee, price commitment, the Newsvendor Problem, demand uncertainty, experienced consumers, inexperienced consumers |
| JEL: | C72 D42 L12 M31 |
| Date: | 2013–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1303&r=com |
| By: | Crawford, Gregory S |
| Abstract: | The market for multi-channel video programming has undergone considerable change in the last 15 years. Direct-Broadcast Satellite service, spurred by 1999 legislation that leveled the playing field with cable television systems, has grown from 3% to 33% of the U.S. MVPD (cable, satellite, and telco video) market. Telephone operators have entered in some parts of the US and online video distributors are a growing source of television viewing. This chapter considers the merits of cable television regulation in light of these developments. It surveys the dismal empirical record on the effects of price regulation in cable and the more encouraging but incomplete evidence on the benefits of satellite and telco competition. It concludes with a consideration of four open issues in cable markets: horizontal concentration and vertical integration in the programming market, bundling by both cable systems and programmers, online video distribution, and temporary programming blackouts from failed carriage negotiations for both broadcast and cable programming. While the distribution market is clearly now more competitive, concerns in each of these areas remain. |
| Keywords: | bundling; cable television; competition; foreclosure; internet; pay television; regulation; satellite television |
| JEL: | L41 L42 L43 L50 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9316&r=com |
| By: | João Correia-da-Silva (CEF.UP and Faculdade de Economia, Universidade do Porto); Joana Pinho (FCT and RGEA, Universidad de Vigo) |
| Abstract: | We propose a profit-sharing rule that maximizes sustainability of cartel agreements. This rule is such that the critical discount factor is the same for all the firms. If a cartel applies this rule, then asymmetries among firms may not hinder collusion (contrarily to the typical finding in the literature). In the simplest case of a Cournot duopoly in which firms differ in their stocks of capital, we find that the cartel is the least sustainable when one of the firms is approximately two times bigger than the other. |
| Keywords: | Collusion sustainability, Profit-sharing rule. |
| JEL: | L11 L13 L41 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:463&r=com |
| By: | Leonardo Becchetti (University of Rome "Tor Vergata"); Arsen Palestini (University of Rome "La Sapienza"); Nazaria Solferino (University of Calabria); M.Elisabetta Tessitore (University of Rome "Tor Vergata") |
| Abstract: | The increasing attention of profit maximising corporations to corporate social responsibility (CSR) is a new stylized fact of the contemporary economic environment. In our theoretical analysis we model CSR adoption as the optimal response of a profit maximising firm to the competition of a not for profit corporate pioneer in presence of a continuum of consumers with heterogeneous preferences toward the social and environmental features of the final good. CSR adoption implies a trade-off since, on the one side, it raises production costs but, on the other side, it leads to the accumulation of ethical capital. We investigate conditions under which the profit maximising firm switches from price to price and CSR competition by comparing monopoly and duopoly equilibria and their consequences on aggregate social responsibility and consumers welfare. Our findings provide a theoretical background for competition between profit maximising incumbents and not for profit entrants in markets such as fair trade, organic food, ethical banking and ethical finance. |
| Keywords: | Mixed Duopoly; Horizontal Differentiation; Corporate Social Responsibility |
| JEL: | L33 L21 L13 |
| Date: | 2013–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:268&r=com |
| By: | Akbar Ullah (Pakistan Institute of Development Economics, Islamabad); Ejaz Ghani (Pakistan Institute of Development Economics, Islamabad); Attiya Y. Javed (Pakistan Institute of Development Economics, Islamabad) |
| Abstract: | Using a panel of eight Pakistani manufacturing industries, we have examined the changes in price-cost margin (gross profitability) during 1998- 2009. In this study the traditional industrial organization approach of Structure- Performance has been applied to analyse the effects of concentration and import intensity on price-cost margins. It has been found that market concentration measured by four-firm concentration leads to high price-cost margin. Imports have the tendency to make the domestic firms more competitive, but their effect on more-concentrated firms is smaller as compared to non-concentrated firms. The minimum efficient scale and assets of industry have positive effects on margins while capital intensity has been found to reduce gross profitability. |
| Keywords: | Price-Cost Margin, Concentration, Manufacturing, Pakistan |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2013:88&r=com |
| By: | Halonen-Akatwijuka, Maija; Propper, Carol |
| Abstract: | In this paper we focus on the implications of consumer heterogeneity for whether competition will improve outcomes in health care markets. We show that competition generally favours the majority group as higher quality for the majority is an effective way to increase the quality signal and attract patients. A regulator who is concerned about equity may protect the minority group by not introducing competition. Alternatively, if the minority group is favoured by the providers under monopoly, competition can improve equity by forcing the providers to increase quality for the majority group. |
| Keywords: | competition; equity; hospitals; quality |
| JEL: | D63 H11 I11 I14 L31 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9325&r=com |
| By: | Lamiraud , Karine (ESSEC Business School) |
| Abstract: | In this paper we investigate the possible presence of switching costs when consumers are offered the opportunity to change their basic health insurance provider. We focus on the specific case of Switzerland which implemented a pure form of competition in basic health insurance markets. We identify several barriers to switching, namely choice overload, status quo bias, the possession of supplementary contracts for enrollees in bad health, firm’s pricing strategies based on providing low price supplementary products, poor regulation of reserves and the limitations of the previous risk-equalization mechanism which left room for risk selection practices. |
| Keywords: | Brand loyalty; Choice overload; Competition among health insurers; Status quo bias; Supplementary health insurance; Switching costs; The Swiss case |
| JEL: | D41 G22 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-13005&r=com |
| By: | Nocco, Antonella; Ottaviano, Gianmarco; Salto, Matteo |
| Abstract: | After some decades of relative oblivion, the interest in the optimality properties of monopolistic competition has recently re-emerged due to the availability of an appropriate and parsimonious framework to deal with firm heterogeneity. Within this framework we show that non-separable utility, variable demand elasticity and endogenous firm heterogeneity cause the market equilibrium to err in many ways, concerning the number of products, the size and the choice of producers, the overall size of the monopolistically competitive sector. More crucially with respect to the existing literature, we also show that the extent of the errors depends on the degree of firm heterogeneity. In particular, the inefficiency of the market equilibrium seems to be largest when selection among heterogenous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity. |
| Keywords: | heterogeneity; monopolistic competition; product diversity; selection; welfare |
| JEL: | D4 D6 F1 L0 L1 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9417&r=com |
| By: | L. Lambertini |
| Abstract: | Zaccour (2008) investigates the behaviour of a marketing channel where firms invest in advertising to increase brand equity, showing that an exogenous twopart tariff cannot be used to replicate the vertically integrated monopolist’s performance. I revisit the same model proving the existence of a multiplicity of franchising contracts taht can do the job. In particular, I set out by illustrating an optimal two-part tariff specified as a linear function of the upstream firm’s advertising effort, performing this task both in the static and in the dynamic game. then, I show that an analogous result emerges (i) in the static game by writing the fixed component of the two-part tariff as a non-linear function of the manufacturer’s advertising effort; and (ii) by using a contract which is linear in the brand equity, in the dynamic case. |
| JEL: | L21 M31 M37 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp874&r=com |
| By: | Nan Yang (Tilburg University); Jeffrey Campbell (Federal Reserve Bank of Chicago); Jaap Abbring (Tilburg University) |
| Abstract: | This paper develops a tractable model for the computational and empirical analysis of infinite-horizon oligopoly dynamics. It features aggregate demand uncertainty, sunk entry costs, stochastic idiosyncratic technological progress, and irreversible exit. We develop an algorithm for computing a symmetric Markov-perfect equilibrium quickly by finding the fixed points to a finite sequence of low-dimensional contraction mappings. If at most two heterogenous firms serve the industry, the resuilt is the unique "natural" equilibrium in which a high protability firm never exits leaving behind a low protability competitor. With more than two firms, the algorithm always finds a natural equilibrium. We present a simple rule for checking ex post whether the calculated equilibrium is unique, and we illustrate the model's application by assessing the robustness of Fershtman and Pakes' (2000) finding that collusive pricing can increase consumer surplus by stimulating product development. The hundreds of equilibrium calculations this requires take only a few minutes on an off-the-shelf laptop computer. We also present a feasible algorithm for the model's estimation using the generalized method of moments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:506&r=com |
| By: | Wim BENOOT; Jan BRUECKNER; Stefan PROOST |
| Abstract: | This paper analyzes strategic interaction between intercontinental airports, each of which levies airport charges paid by airlines and chooses its own capacity under conditions of congestion. Congestion from intercontinental flights is common across the airports since departure and arrival airports are linked one to one, while purely domestic traffic also uses each airport. The paper focuses on five questions. First, if both continents can strategically set separate airport charges for domestic and intercontinental flights, how will the outcome differ from the first-best solution? Second, how is the impact of strategic airport behavior affected by the extent of market power of the airlines serving the intercontinental market? Third, what happens if one continent has several competing intercontinental airports, each with its own regulator, while the other has a single airport and regulator? Fourth, how effective is a non-discrimination clause for airport charges, which prevents independent strategic use of the intercontinental charge? Fifth, what is the effect of higher airport operating costs on one continent (a result of security or immigration procedures) on the strategic outcome? The questions are addressed with an algebraic model and results are illustrated numerically. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces12.03&r=com |
| By: | Mikhail Anufriev (Economics Discipline Group, University of Technology, Sydney); D?vid Kop?nyiz (CeNDEF, Amsterdam School of Economics, University of Amsterdam); Jan Tuinstra (CeNDEF, Amsterdam School of Economics, University of Amsterdam) |
| Abstract: | This paper stresses the importance of heterogeneity in learning rules. We introduce an evolutionary competition between different learning rules and demonstrate that, though these rules can coexist, their convergence properties are strongly affected by heterogeneity. We consider a Bertrand oligopoly with differentiated goods. Firms do not have full information about the demand structure and they want to maximize their perceived one-period profit by applying one of two different learning rules: OLS learning and gradient learning. We analytically show that the stability of gradient learning depends on the distribution of learning rules over firms. In particular, as the number of gradient learners increases, gradient learning may become unstable. We study evolutionary competition between the learning rules by means of computer simulations and illustrate that this change in stability for gradient learning may lead to cyclical switching between the rules. Stable gradient learning typically gives higher average profit than OLS learning, making firms switch to gradient learning. This however, destabilizes gradient learning which, because of decreasing profits, makes firms switch back to OLS learning. This cycle may repeat itself indefinitely. |
| Keywords: | Bertrand competition; heterogeneous agents; least squares learning; gradient learning; endogenous switching; learning cycle |
| JEL: | C63 C72 D43 |
| Date: | 2013–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:8&r=com |
| By: | Schliessler, Paula |
| Abstract: | I analyse how patent litigation outcome in Germany affects the performance of the disputing firms by interpreting changes in a firm's credit rating as a proxy for changes in firm performance. The results match theoretical considerations on the functioning of the bifurcated German patent litigation system: The separation of litigation and invalidity decisions, resulting in invalidity decisions taking much longer than decisions on infringement, provides patent holders with a window of opportunity to enforce patents that may later be invalidated. This shifts a major share of the immediate risk to the defendant and allocates bargaining power to the plaintiff. The estimation results provide support for this incongruity. Plaintiffs on average profit from litigation while defendants agreeing upon a settlement deal lose as much as defendants losing in trial. I further show that small, inexperienced defendant firms are at a disadvantage when dealing with litigation. -- |
| Keywords: | Patent,Patent Litigation,Credit Rating,Firm Value |
| JEL: | O34 K41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:13015&r=com |
| By: | Aldo González; Alejandro Micco |
| Abstract: | This article measures the impact of the agency responsible for enforcing competition law, in the outcome of antitrust trials in Chile. Using statistics on lawsuits since the inception of the new Competition Tribunal in 2004, we find that the involvement of the public agency increases the probability of obtaining a guilty verdict in an antitrust lawsuit by 40 percentage points. Conditional to the issuance of a verdict, the participation of the prosecutor raises the likelihood of a conviction by 38 percentage points. The results are robust to possible selection bias by the public agency. The prosecutor is inclined to takes part in cases involving sensitive markets and in accusations of collusion. The State-related character of the accused entity, in addition to its size, does not affect the probability of intervention by the prosecutor in a lawsuit. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp378&r=com |
| By: | Levy, Daniel; Snir, Avichai |
| Abstract: | If producers have more information than consumers about goods’ attributes, then they may use non-price (rather than price) adjustment mechanisms and, consequently, the market may reach a new equilibrium even if prices don't change. We study a situation where producers adjust the quantity per package rather than the price in response to changes in market conditions. Although consumers should be indifferent between equivalent changes in goods' prices and quantities, empirical evidence suggests that consumers often respond differently to price changes and equivalent quantity changes. We offer a possible explanation for this puzzle by constructing and empirically testing a model in which consumers incur cognitive costs when processing goods’ price and quantity information. |
| Keywords: | Quantity Adjustment, Cognitive Costs of Attention, Information Processing |
| JEL: | E31 L11 L16 L42 |
| Date: | 2013–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46040&r=com |
| By: | Pedro Gonzaga (Faculdade de Economia da Universidade do Porto); António Brandão (Faculdade de Economia da Universidade do Porto); Hélder Vasconcelos (Faculdade de Economia da Universidade do Porto) |
| Abstract: | Despite the major concern of the competition authority to forbid and prosecute formal cartels who cooperatively fix prices, limit production or divide markets, there seems to be little regulation and investigation of collusive practices in the labor market. For that reason, this article analyzes the economic effects of cooperative wage fixing in industries that use one type of labor as the only input, while the other assumptions are kept as general as possible. Under the one input assumption it was found that collusion in the labor market and collusion in the product market have exactly the same results, which include the rise in prices and the fall in output, employment and wages. The higher prices and lower wages in cartelized industries are not only associated with the elimination of the well known business stealing effect, but also with the elimination of the labor force stealing effect. The conclusions in this paper can be generalized to industries that use more than one input, as long as the cartel is able to fix the prices of all the inputs. |
| Keywords: | Collusion, labor market, oligopoly, oligopsony, business stealing effect, labor force stealing effect. |
| JEL: | L11 L13 L41 L44 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:477&r=com |
| By: | Fabra, Natalia; Motta, Massimo |
| Abstract: | In a model in which firms can go bankrupt because of adverse market shocks or antitrust fines, we find that even large corporate fines may not be able to induce deterrence. Managerial penalties are thus needed. If the policy may be changed according to the state of the business cycle, then the optimal outcome can always be achieved through antitrust fines that are more severe in good times and more lenient in bad times. A time-independent policy may result in either too many bankruptcies or under-deterrence as compared to the optimal policy. |
| Keywords: | antitrust fines; business cycles; managing incentives |
| JEL: | K14 K42 L13 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9290&r=com |
| By: | Kenneth Flamm |
| Abstract: | The impact of patent pools on the rate and direction of technological change is an open question in both theoretical and empirical studies. Economic theory makes no unequivocal prediction. By contrast, empirical studies of patent pools, to date, have largely concluded that patent pools have been associated with reduced rates of technical innovation in the industries studied. This study differs from previous empirical studies of patent pools by focusing primarily on direct measures of innovation in product markets, rather than on indirect correlates of innovation (like patents), and by exploiting variation over time in how pools were organized in the same technology area. The paper analyzes the economic history of two successive sets of patent pools organized in substantially the same technological area -- the use of optical discs in data storage peripherals connected to computer systems. These two patent pool episodes differed significantly in their organizational and institutional details. These differences appear to have coincided with very different effects on the structure of product markets, and the rate of technical innovation in optical disc products. The analysis concludes that different approaches to pool organization and licensing policies implemented in these two patent pool examples were associated with very different outcomes. The clear implication is that organizational details matter: no single conclusion is likely to fit all cases. As theory seems to predict, the empirical effects of patent pools on innovation are likely to be ambiguous, dependent on the historical and institutional particulars of the pool and the industry it affects. |
| JEL: | O3 O31 O33 O34 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18931&r=com |
| By: | Sofronis Clerides; Manthos D. Delis; Sotirios Kokas |
| Abstract: | We estimate the degree of competition in the banking sectors of 148 countries worldwide over the period 1997-2010. We employ three methods, namely those of Lerner (1934), Koetter, Kolari and Spierdijk (2012) and Boone (2008a). For the estimation of marginal cost required under all methods, we use the semi-parametric methodology of Delis (2012) that allows increasing the flexibility of the functional form imposed on the cost function. All three indices show that the competitive conditions in banking have deteriorated on average during the period 1997-2006. This trend reverses until 2008, while in 2009 and 2010 market power again increases. Thus, we provide evidence that the competitive conditions are correlated with financial stability. The empirical results also highlight important differences between regional and income groups of countries. On average, the banking systems of Sub-Saharan Africa and subsequently of East Asia and Pacific are the least competitive, while the banking systems of Europe and Central Asia and South Asia seem to be the most competitive ones. Further, the non-OECD countries characterized by either high- or low-income levels have less competitive banking sectors, while middle-income countries have more competitive banking sectors. For the OECD countries the results of the Lerner-type indices and the method by Boone (2008a) give conflicting results. |
| Keywords: | Bank competition, Semi-parametric estimation, World sample |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:08-2013&r=com |
| By: | Vivek Farias (MIT); Bar Ifrach (Columbia Business School); Gabriel Weintraub (Columbia University) |
| Abstract: | We consider dynamic oligopoly models in the spirit of Ericson and Pakes (1995). We introduce a new computationally tractable model for industries with a few dominant firms and many fringe firms. This is a prevalent market structure in consumer and industrial goods. In our model, firms keep track of the detailed state of dominant firms and of few moments of the distribution that describes the states of fringe firms. Based on this idea we introduce a new equilibrium concept that we call moment-based Markov equilibrium (MME). MME is behaviorally appealing and computationally tractable. However, MME can suffer from an important pitfall. Because moments may not summarize all payoff relevant information, MME strategies may not be optimal. We propose different approaches to overcome this difficulty with varying degrees of restrictions on the model primitives and strategies. Our first approach introduces models for which moments summarize all payoff relevant history and therefore for which MME strategies are optimal. The second approach restrict fringe firm strategies so that again moments become sufficient statistics. The third approach does not impose such restrictions, but introduces a computational error bound to asses the degree of sub-optimality of MME strategies. This bound allows to evaluate whether a finer state aggregation is necessary, for example by adding more moments. We provide computational experiments to show that our algorithms and error bound work well in practice for important classes of models. We also show that, cumulatively, fringe firms discipline dominant firms to behave more competitively, and that ignoring fringe firms in counterfactual analysis may lead to incorrect conclusions. Our model significantly extends the class of dynamic oligopoly models that can be studied computationally. In addition, our methods can also be used to improve approximations in other contexts such as dynamic industry models with an infinite number of heterogeneous firms and an aggregate shock; stochastic growth models in the spirit of Krusell and Smith (1998); and dynamic models with forward-looking consumers. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:505&r=com |
| By: | Boone, Jan |
| Abstract: | Consumers, when buying health insurance, do not know the exact value of each treatment that they buy coverage for. This leads them to overvalue some treatments and undervalue others. We show that the insurance market cannot correct these mistakes. This causes research labs to overinvest in treatments that hardly add value compared to current best practice. The government can stimulate R&D in breakthrough treatments by excluding treatments with low value added from health insurance coverage. If the country is rich enough such a government intervention in a private health insurance market raises welfare. |
| Keywords: | cost effectiveness analysis; health insurance; pharmaceutical research and development |
| JEL: | D4 I18 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9420&r=com |