nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒05‒05
eighteen papers chosen by
Russell Pittman
US Government

  1. Differential Pricing When Costs Differ: A Welfare Analysis By Yongmin Chen and Marius Schwartz
  2. Keeping it Fresh: Strategic Product Redesigns and Welfare By Bruce A. Blonigen; Christopher R. Knittel; Anson Soderbery
  3. More is Less: Why Parties May Deliberately Write Incomplete Contracts By Maija Halonen-Akatwijuka; Oliver D. Hart
  4. Business Groups as Hierarchies of Firms: Determinants of Vertical Integration and Performance By Carlo Altomonte; Armando Rungi
  6. Market run-ups, market freezes, inventories, and leverage By Philip Bond; Yaron Leitner
  7. Innovation, Reallocation and Growth By Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William R. Kerr
  8. The Relation between Inventory Investment and Price Dynamics in a Distributive Firm By Tonogi, Akiyuki
  9. Investment under uncertainty and regulation of new access networks By Inderst, Roman; Peitz, Martin
  10. Individual roles to achieve knowledge integration in Mergers and Acquisitions: Completing the Knowledge Broker concept with Knowledge Developer's roles By Elvira Périac; Sébastien Gand; Jean-Claude Sardas
  11. Arrow's paradox and markets for nonproprietary information By Leppälä, Samuli
  12. Estimation of Unobserved Attributes Using a Control Function Approach, Modeling the Demand for Mint Flavored Gum By Daniel Toro-Gonzalez; Jia Yan; R. Karina Gallardo; Jill J. McCluskey
  13. The Effects of a Megabank Merger on Firm-Bank Relationships and Borrowing Costs By Iichiro Uesugi; Taisuke Uchino
  14. A game theoretical analysis of the design options of the real-time electricity market By Haikel Khalfallah; Vincent Rious
  15. Does One Design Fit All? On The Transferability Of The PJM Market Design To The German Electricity Market By Katrin Schmitz; Christoph Weber
  16. Word-of-Mouth in Movies with Platform Release: Theory and Evidence By Yijuan Chen; Xiaojing Ma; Qiang Pan
  17. Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry By Guy Meunier; Jean-Pierre Ponssard; Catherine Thomas
  18. Long-Run Diversion Effects of Changes in Truck Size and Weight (TS&W) Restrictions: An Update of the 1980 Friedlaender Spady Analysis By McCullough, Gerard J.

  1. By: Yongmin Chen and Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: This paper analyzes the welfare effects of monopoly differential pricing in the important but largely neglected case where marginal costs of service differ across consumer groups. Compared to uniform pricing, cost-based differential pricing generally raises total welfare. Although total output may fall or even its allocation across consumer groups may worsen, under a minor demand curvature condition at least one of these changes must be beneficial and dominate if the other is not. Aggregate consumer welfare also rises (under a mildly tighter condition). The source of consumer gains is not cost savings from output reallocation, which flow to the firm. Rather, to induce output reallocation the firm must vary its prices, thereby creating price dispersion without an upward bias in the average price. This improves consumer welfare even in cases where output falls. We contrast these results with those in the extensive literature on third-degree price discrimination and, furthermore, provide sufficient conditions for beneficial differential pricing when both demand elasticities and costs differ.
    Keywords: differential pricing, price discrimination, demand curvature, pass-through rate JEL Codes:
    Date: 2013–01–01
  2. By: Bruce A. Blonigen; Christopher R. Knittel; Anson Soderbery
    Abstract: Product redesigns happen across virtually all types of products. While there is substantial evidence that new varieties of goods increase welfare, there is little evidence on the effect of product redesigns. We develop a model of redesign and exit decisions in a dynamic oligopoly model (a la Bajari et al (2007)) and use it to analyse redesign activity in the U.S. automobile market. We find that automobile model designs become obsolete quickly in this market, leading to fairly frequent redesigns of models despite an estimated average redesign cost around $1 billion. Our model and estimates show that firm redesign decisions depend crucially on competition for market share through introductions of new redesigns, as well as internal incentives for planned obsolescence of the existing model design. Based on our structural model estimates and the simulated counterfactuals, we find that redesigns lead to large increases in welfare, as well as substantial profit for firms, due to the strong preferences consumers display for new model designs. We also show that welfare would be improved if redesign competition were reduced, allowing redesign activity to be more responsive to the planned obsolescence channel. The net effect of these changes would reduce total redesigns by roughly 10%, increasing total welfare by roughly 3%. While our model and welfare simulations are focused on the new automobile market, we provide some evidence that the gains from redesigns in the new automobile market are an order of magnitude larger than the losses in the secondhand automobile market.
    JEL: L11 L13 L62
    Date: 2013–04
  3. By: Maija Halonen-Akatwijuka; Oliver D. Hart
    Abstract: Why are contracts incomplete? Transaction costs and bounded rationality cannot be a total explanation since states of the world are often describable, foreseeable, and yet are not mentioned in a contract. Asymmetric information theories also have limitations. We offer an explanation based on “contracts as reference points”. Including a contingency of the form, “The buyer will require a good in event E”, has a benefit and a cost. The benefit is that if E occurs there is less to argue about; the cost is that the additional reference point provided by the outcome in E can hinder (re)negotiation in states outside E. We show that if parties agree about a reasonable division of surplus, an incomplete contract can be strictly superior to a contingent contract.
    JEL: D23 D86 K12
    Date: 2013–04
  4. By: Carlo Altomonte (Bocconi University and FEEM); Armando Rungi (Bocconi University and FEEM)
    Abstract: We explore the nature of Business Groups, that is network-like forms of hierarchical organization between legally autonomous firms spanning both within and across national borders. Exploiting a unique dataset of 270,474 headquarters controlling more than 1,500,000 (domestic and foreign) affiliates in all countries worldwide, we find that business groups account for a significant part of value-added generation in both developed and developing countries, with a prevalence in the latter. In order to characterize their boundaries, we distinguish between an affiliate vs. a group-level index of vertical integration, as well as an entropy-like metric able to summarize the hierarchical complexity of a group and its trade-off between exploitation of knowledge as an input across the hierarchy and the associated communication costs. We relate these metrics to host country institutional characteristics, as well as to the performance of affiliates across business groups. Conditional on institutional quality, a negative correlation exists between vertical integration and organizational complexity in defining the boundaries of business groups. We also find a robust (albeit non-linear) positive relationship between a group's organizational complexity and productivity which dominates the already known correlation between vertical integration and productivity. Results are in line with the theoretical framework of knowledge-based hierarchies developed by the literature, in which intangible assets are a complementary input in the production processes.
    Keywords: Production Chains, Hierarchies, Business Groups, Financial Development, Property Rights, Vertical Integration, Corporate Ownership, Organization of Production, Productivity
    JEL: F23 L22 L23 L25 D24 G34
    Date: 2013–04
  5. By: Gabrielsen, Tommy Staahl (Department of Economics, University of Bergen); Johansen, Bjørn Olav (Department of Economics, University of Bergen)
    Abstract: We consider a setting where an upstream producer and a competitive fringe of producers of a substitute product may sell their products to two differentiated downstream retailers. We investigate two different contracting games; one with seller power and a second game with buyer power. In each game we characterize the minimum set of vertical restraints that make the vertically integrated profit sustainable as an equilibrium outcome, and we also characterize sufficient conditions for having interlocking relationships (i.e. no exclusion). In line with the recent literature, we focus on the performance of simple two-part tariffs, upfront payments and RPM as facilitating devices for reducing competition under both buyer and seller power. With seller power we show that minimum RPM, possibly coupled with a quantity roof, will allow the manufacturer to induce industry wide monopoly prices. With buyer power we show that monopoly prices may be induced if the retailers may use an upfront fee together with a two-part tariff and a minimum RPM.
    Keywords: resale price maintenance; seller power; buyer power; horsizontal control
    JEL: L42
    Date: 2013–04–11
  6. By: Philip Bond; Yaron Leitner
    Abstract: This paper supersedes Working Paper No. 12-8.> We study trade between an informed seller and an uninformed buyer who have existing inventories of assets similar to those being traded. We show that these inventories may lead to prices that increase even absent changes in fundamentals (a .run-up.), but may also make trade impossible (a .freeze.) and hamper information dissemination. Competition may amplify the run-up by inducing buyers to enter loss-making trades at high prices to prevent a competitor from purchasing at a lower price and releasing bad news about inventory values. Inventories also prevent seller competition from delivering the Bertrand outcome, in which prices match sellers’ valuations. We discuss both empirical implications and implications for regulatory intervention in illiquid markets.
    Keywords: Mortgages ; Markets ; Inventories ; Trade
    Date: 2013
  7. By: Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William R. Kerr
    Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.
    JEL: E02 L1 O31 O32 O33
    Date: 2013–04
  8. By: Tonogi, Akiyuki
    Abstract: In this paper, we examine the role of inventory in the price-setting behavior of a distributive firm. Empirically, we show that probability of price change has a positive relation to the scale of the retailer’s storage and the frequency of its bargain sales. We also show a negative relation between the frequency of bargain sales and the price elasticity of demand. These results denote that price stickiness varies by the retailers’ characteristics. In this paper, we consider that the hidden mechanism of price stickiness comes from the retailer’s policy for inventory investment. We develop a partial equilibrium model of the retailer’s optimization behavior with inventory and financial restrictions. The results of the numerical experiments suggest that price change frequency depends on the retailer’s order cost, storage cost, and menu cost.
    Keywords: Inventory, Price Stickiness, Numerical Experiment, (S, s) Policy
    JEL: D22 E27 E31
    Date: 2013–04
  9. By: Inderst, Roman; Peitz, Martin
    Abstract: Contractual and regulatory provisions for access affect incentives to invest in an upgraded network and, in particular, a next-generation access network. Investment decisions are made under uncertainty and have to be made over time. This papers provides a framework for taking uncertainty, risk aversion, and the timing of investment explicitly into account. First, it evaluates various access price policies in a framework in which the incremental value over the legacy network is uncertain. Second, introducing risk aversion, the access price structure turns out to be critical for the risk profile of the investing telecom operator and of the access-seeking alternative operator. Third, some implications of the time structure of access payments are derived. --
    Keywords: NGA,investment under uncertainty,access price rule,telecommunications
    JEL: L1 L5
    Date: 2013
  10. By: Elvira Périac (CGS - Centre de Gestion Scientifique - MINES ParisTech - École nationale supérieure des mines de Paris); Sébastien Gand (CGS - Centre de Gestion Scientifique - MINES ParisTech - École nationale supérieure des mines de Paris); Jean-Claude Sardas (CGS - Centre de Gestion Scientifique - MINES ParisTech - École nationale supérieure des mines de Paris)
    Abstract: Among researches on knowledge issues in M&As, there has been a stream underlining the importance of knowledge integration process (i.e process of transfer or combination - within or between firms -, resulting in the production of a new/renewed form of knowledge) in post merger phases. In these researches, Knowledge integration appears as a key issue for the success of M&As. Our paper aims at contributing to understand knowledge integration processes in M&As, and more precisely, the way specific individual roles intervene in these processes: their action, their abilities and their specificities. Based on an empirical study of a merger between 3 French public administrations, we propose a framework to analyze individual roles in knowledge integration processes in M&As. Based on the concept of Knowledge Broker, we specify the existing view by proposing two sub-categories of individual roles: first, Knowledge Mediators who achieve knowledge integration both by mediating knowledge between actors to lead them to produce new/renewed knowledge and by producing a new/renewed knowledge themselves; second, Knowledge Developers who achieve knowledge integration by combining themselves several areas of knowledge to produce a new/renewed knowledge out of any action of mediation between actors or specific position in a network. Such a framework contributes to a better understanding of two issues for knowledge integration in M&As literature: the importance of the human factor and the diversity of the mechanisms to achieve knowledge integration.
    Keywords: Merger, Knowledge integration, knowledge broker, public administration
    Date: 2012–07–05
  11. By: Leppälä, Samuli (Cardiff Business School)
    Abstract: Arrow's information paradox asserts that demand for undisclosed information is undefined. Reassessing the paradox, I argue that the value of information for the buyer depends on its relevance, which can be known ex ante, and the uncertainty shifts to the capability of the seller to acquire the knowledge and her reliability in disclosing it. These three together form the buyer’s reservation price. Consequently, differences in capability and reliability between the sellers may revoke the appropriation problem of nonproprietary information, where the original source loses her monopoly after the first purchase.
    Keywords: Arrow’s information paradox; markets for information; knowledge; reliability; appropriability
    JEL: D83 L15 O31 O34
    Date: 2013–02
  12. By: Daniel Toro-Gonzalez; Jia Yan; R. Karina Gallardo; Jill J. McCluskey (School of Economic Sciences, Washington State University)
    Abstract: We analyze consumers’ demand for mint gum accounting for product heterogeneity and unobservable, to the econometrician, flavor quality. We use the control function (CF) approach in the context of a discrete choice logit model in an oligopolistic framework, where price-setting firms endogenously determine prices. We found that when using the control function approach, demand estimators are improved by reducing potential biases generated by endogeneity. We found that gum is price inelastic with respect to price and quality. Implications for the mint oil industry in the Pacific Northwest are cited.
    Keywords: Control Function Approach, Quality Differentiation, Unobserved Product Attributes, Demand Estimation, Gum
    JEL: L11 L13 L66
    Date: 2013–04
  13. By: Iichiro Uesugi; Taisuke Uchino
    Date: 2013–03
  14. By: Haikel Khalfallah (PACTE - Politiques publiques, ACtion politique, TErritoires - Institut d'Études Politiques [IEP] - Grenoble - CNRS : UMR5194 - Université Pierre Mendès-France - Grenoble II - Université Joseph Fourier - Grenoble I); Vincent Rious (Microeconomix - Microeconomix)
    Abstract: In this paper we study the economic consequences of two real-time electricity market designs (with or without penalties) taking into account the opportunistic behaviors of market players. We implement a two-stage dynamic model to consider the interaction between the forward market and the real-time market where market players compete in a Nash manner and rely on supply/demand function oligopoly competition. Dynamic programming is used to deal with the stochastic environment of the market and the mixed complementarity problem is employed to find a solution to the game. Numerical examples are presented to illustrate how the optimal competitor's strategies could change according to the adoption or no adoption of a balancing mechanism and to the level of the penalty imposed on imbalances, regarding a variety of producers' cost structures. The main finding of this study is that implementing balancing mechanisms would increase forward contracts while raising electricity prices. Moreover, possible use of market power would not be reduced when imbalances are penalized.
    Keywords: Electricity markets ; balancing mechanisms ; supply function equilibrium ; mixed complementarity problem
    Date: 2013–01
  15. By: Katrin Schmitz; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)
    Abstract: Germany’s nuclear phase out and an increasing share of fluctuating RES production amplifies the North-South congestion problem in the German electricity grid. But congestion management becomes a serious issue not only in the German but in the whole European electricity system as German wind production does not only affect the German grid. In theory it is well established that nodal pricing is the most efficient congestion management method. In literature the PJM well-established nodal market design often serves as a reference and is viewed as benchmark. To benefit from experiences made in the U.S. the transfer of the PJM market design to Germany could be advantageous. This article compares key elements of the generation mix, the network structure, the cross-border interconnection as well as the congestion situation of both electricity markets to assess potentials and impediments for an implementation of the PJM nodal market design in Germany. We show that both markets are less different in structure than expected but that large differences in performance respectively in congestion frequency lead probably to much lower welfare gains. Transfer of the PJM market design to Germany is possible in principle, but adjustments to RES would be ad-vantageous.
    Keywords: Nodal Pricing, Market Design, Electricity Markets
    Date: 2013–04
  16. By: Yijuan Chen; Xiaojing Ma; Qiang Pan
    Abstract: We study the word-of mouth effect on movies with platform release, a common marketing strategy in the motion picture industry. We construct a theoretical model which shows that the word-of-mouth effect together with a sliding-percentage contract between the movie distributor and exhibitors gives rise to the usage of platform release. Using the data in the U.S. motion picture industry from 2000 to 2005, we quantify the word-of mouth sales and estimate the information transmission process in the movies featuring platform release.
    Keywords: Word-of-Mouth, Platform Release, U.S.Motion Picture Industry
    JEL: L82 M31
    Date: 2013–04
  17. By: Guy Meunier (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, INRA - Institut national de la recherche agronomique (INRA)); Jean-Pierre Ponssard (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Catherine Thomas (Columbia Business School - Finance and Economics Division)
    Abstract: Demand uncertainty is thought to influence irreversible capacity decisions. This paper examines the nature of this relationship in the U.S. cement industry. Firms in this sector deliver cement for local markets either from domestic plants or from imports. Since cement is costly to transport over land, the diff erence in marginal cost between local production and imports varies across markets. In the presence of uncertain demand, capacity choices are shown theoretically to depend on whether firms are located on the coast or inland. Industry data from 1994 to 2006 are consistent with the predictions of the model. There is a positive relationship between capacity investment and demand uncertainty only for landlocked areas. The results provide a new rationale to explain the coexistence of home production and imports in the U.S. cement market for large multinational fi rms, even in the long run.
    Date: 2013–04–22
  18. By: McCullough, Gerard J.
    Abstract: The purpose of this analysis is to estimate the effect that revised truck size and weight (TS&W) restrictions would have on competitive rail-truck markets in the United States. The analysis is based on a classic study of the intercity freight markets that Ann Friedlaender and Richard Spady (FS) published in the Review of Economics and Statistics in 1980.1 The FS study provided a macro-level perspective on the freight markets by focusing on transportation decisions in key industrial sectors—food, wood products, paper, chemicals, automobiles, and so on. The FS analysis and the current update of that analysis complement the short-run estimates of rail-truck competition levels that are commonly obtained using logit-based models of freight demand. For example, a logit model was a central component of the Intermodal Transportation and Inventory Cost (ITIC) Model used by the U.S. Department of Transportation (DOT) in the 2000 Comprehensive Truck Size and Weight Study. Logit models present a relatively fixed assessment of freight demand that is shipment focused and market specific with respect to both commodities and geographic pairs. The FS analysis is based on a more generalized economic framework in which shippers have the flexibility to choose a range of productive inputs that includes truck and rail freight transportation along with labor, materials and capital. The FS framework thus provides a broader and longer term perspective on the potential effect that changes in TS&W regulations would have on the freight markets. The logit estimates can be viewed as identifying the shorter term, lower bounds of the cross-price elasticities between truck and rail while the FS estimates identify long term, upper bounds. The diversion effects analyzed in the current study are based on a hypothetical ten percent decrease in truck prices. This assumption is based in turn on the TS&W cost effects projected by the DOT in its 2000 Comprehensive Truck Size and Weight Study. Though the projected reduction in truck costs is fairly conservative, the losses of rail market share are significant—on the order of 15 to 20 percent in several key competitive rail-truck markets. The impacts on highway users and on railroad shippers who remain on the rail network are also significant. The projected increase in heavy truck traffic is 3.05 billion vehicle miles per year and the projected loss in base year railroad net income is $750 million per year. Total railroad net income in the base year was just $3.2 billion.
    Keywords: Research Methods/ Statistical Methods,
    Date: 2013–04

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