nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒05‒22
twenty-one papers chosen by
Russell Pittman
US Government

  1. Cournot is more competitive than Bertrand! Upstream Monopoly with Two-part Tariffs By Maria Alipranti; Emmanuel Petrakis
  2. Monopolistic Competition and Optimum Product Selection: Why and How Heterogeneity Matters By Antonella Nocco; Gianmarco I. P. Ottaviano; Matteo Salto
  3. Shrinking Goods By Daniel Levy; Avichai Snir
  4. Dynamic Screening with Limited Commitment By Rahul Deb; Maher Said
  5. Observable Implications of Nash and Subgame- Perfect Behavior in Extensive Games By Indrajit Ray; Susan Snyder
  6. Stable Commitment in an Intertemporal Collusive Trade By Romeo Balanquit
  7. The speed of technological adoption under price competition: two-tier vs. one-tier industries By Maria Alipranti; Emmanuel Petrakis
  8. Comparative Advertising in Markets with Network Externalities By Maria Alipranti; Emmanuel Petrakis
  9. Multiproduct Multinationals and the Quality of Innovation By S. Bakhtiari; A. Minniti; A. Naghavi
  10. On the Origins of the Worldwide Surge in Patenting: An Industry Perspective on the R&D-Patent Relationship By Jérôme Danguy; Gaétan de Rassenfosse; Bruno van Pottelsberghe de la Potterie
  11. Not All Price Endings Are Created Equal: Price Points and Asymmetric Price Rigidity By Avichai Snir; Daniel Levy; Alex Gotler; Haipeng (Allen) Chen
  12. Auctions Versus Negotiations: The Role of Price Discrimination By Chia-Hui Chen; Junichiro Ishida
  13. INNOVATION, REALLOCATION AND GROWTH By Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William Kerr
  14. Exploration for Nonrenewable Resources in a Dynamic Oligopoly: An Arrovian Result By Luca Lambertini
  15. Price Regulation and the Financing of Universal Services in Network Industries By Christian Jaag
  16. Competition for attention in the information (overload) age By S. Anderson; André De Palma
  17. Intellectual Property Rights and the Future of Universal Service Obligations in Communications By Christian Jaag
  18. Elasticidad de la demanda por medicamentos en el mercado farmacéutico privado en Colombia By Johanna Vásquez Velásquez; Karoll Gómez Portilla, Elkin Castaño Vélez; José Vicente Cadavid Herrera; Andrés Ramírez Hassan
  19. The Impact of a Public Option in the Health Insurance Market By Andrei Barbos; Yi Deng
  20. Bank competition, concentration, and credit reporting By Bruhn, Miriam; Farazi, Subika; Kanz, Martin
  21. Strategic Clustering and Competition by Alcohol Retailers: An Emperical Anlysis of Entry and Location Decisions By Yi Deng; Gabriel Picone

  1. By: Maria Alipranti (University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper compares the Cournot and Bertrand equilibrium outcomes and social welfare in vertically related markets with upstream monopolistic market structure, where the trade between the upstream monopolist and the downstream firms is conducted via two-part tariffs contracts. We show that the equilibrium quantities, the profits of the downstream firms, the consumers' surplus and the social welfare are always higher under Cournot final market competition than under Bertrand final market competition. On the contrary the equilibrium profits of the upstream monopolist under Bertrand market competition always exceed those obtained under Cournot market competition.
    Keywords: Vertical relations, Betrand, Cournot, Two-part tariffs
    JEL: L13 L22 D43
    Date: 2012–08–29
  2. By: Antonella Nocco; Gianmarco I. P. Ottaviano; Matteo Salto
    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 heterogeneous firms is needed most, that is, when there are relatively many firms with low productivity and relatively few firms with high productivity.
    Keywords: monopolistic competition, product diversity, heterogeneity, selection, welfare
    JEL: D4 D6 F1 L0 L1
    Date: 2013–04
  3. By: Daniel Levy (Emory University, USA; Bar-Ilan University, Israel; RCEA, Italy); Avichai Snir (Department of Banking and Finance, Netanya Academic College, Israel)
    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: L11 L15 L16 M21 M31 M37 M38 K20 E31 D21 D22 D40 D83
    Date: 2013–04
  4. By: Rahul Deb; Maher Said
    Abstract: We examine a model of dynamic screening and price discrimination in which the seller has limited commitment power. Two cohorts of anonymous, patient, and risk-neutral buyers arrive over two periods. Buyers in the first cohort arrive in period one, are privately informed about the distribution of their values, and then privately learn the value realizations in period two. Buyers in the second cohort are ``last-minute shoppers'' that already know their values upon their arrival in period two. The seller can fully commit to a long-term contract with buyers in the first cohort, but cannot commit to the future contractual terms that will be offered to second-cohort buyers. The expected second-cohort contract serves as an endogenous type-dependent outside option for first-cohort buyers, reducing the seller's ability to extract rents via sequential contracts. We derive the seller-optimal equilibrium and show that the seller mitigates this effect by inducing some first-cohort buyers to strategically delay their time of contracting---the seller manipulates the timing of contracting in order to endogenously generate a commitment to maintaining high future prices. The seller's optimal contract pools low types, separates high types, and induces intermediate types to delay contracting.
    Keywords: Asymmetric information, Dynamic mechanism design, Limited commitment, Sequential screening, Type-dependent participation
    JEL: C73 D82 D86
    Date: 2013–05–09
  5. By: Indrajit Ray; Susan Snyder
    Abstract: We provide necessary and sufficient conditions for observed outcomes in extensive game forms, in which preferences are unobserved, to be rationalized first, weakly, as a Nash equilibrium and then, fully, as the unique subgame-perfect equilibrium. Thus, one could use these conditions to find that play is (a) consistent with subgame-perfect equilibrium, or (b) not consistent with subgame-perfect behavior but is consistent with Nash equilibrium, or (c) consistent with neither.
    Keywords: Revealed Preference, Consistency, Subgame- Perfect Equilibrium
    JEL: C72 C92
    Date: 2013–04
  6. By: Romeo Balanquit (School of Economics, University of the Philippines Diliman)
    Abstract: This study presents a more general collusive mechanism that is sustainable in an oligopolistic repeated game. In this setup, firms can obtain average payoffs beyond the cooperative profits while at the same time improve consumer welfare through a lower market price offer. In particular, we introduce here the notion of intertemporal collusive trade where each oligopolist, apart from regularly producing the normal cooperative output, is also allowed in a systematic way to earn higher than the rest at some stages of the game. This admits subgame- perfection and is shown under some conditions to be Pareto-superior to the typical cooperative outcome.
    Keywords: game theory
    Date: 2013–02
  7. By: Maria Alipranti (University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper examines the firms' incentives to adopt a new cost reducing technology in vertically related markets, as well as, the effects of the vertical relations on the firms' timing of adoption. It demonstrates that in vertically related industries, independently of the upstream market structure (either upstream separate firms or upstream monopoly), downstream firms always have strong incentives to adopt the new technology, while in equilibrium there is technology diffusion. Further, comparing the speed of the firms' technology adoption in one-tier and two-tier industries, we show that, independently of the upstream market structure, technology adoption may occurs earlier in two-tier than in one-tier industries depending on the intensity of the final market competition, the drasticity of the new technology and the bargaining power distribution in the market.
    Keywords: Technology adoption, Vertical relations, Two-part tariffs, Product Differentiation
    JEL: L13 O31 L22 L41
    Date: 2012–12–01
  8. By: Maria Alipranti (University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper investigates the firms' incentives to invest in comparative advertising in a spatially differentiated duopoly market characterized by network externalities. We show that for a wide range of locations, determined by the interaction between the transportation cost, the network effects and the effectiveness of advertising, firms have incentives to invest in comparative advertising with their investment levels to be positively related to the transportation cost and negatively related to the network effects. Further, comparing the equilibrium results of our model with the benchmark case without advertising activities and the case without network externalities, we show that the firms' location distance increases in the presence of network externalities, while it decreases in the presence of comparative advertising.
    Keywords: Comparative Advertising, Network Effects, Location
    JEL: L13 D43 M37
    Date: 2012–08–29
  9. By: S. Bakhtiari; A. Minniti; A. Naghavi
    Abstract: This research sheds light on the role of product scope on the innovation activity of multinational multi-product firms. We use patent citation data to break down innovation into two types by measuring the degree to which innovation performed by firms is fundamental and the extent to which the output of the R&D can be spread across different product lines. We focus on two features in multinational production: (i) fundamental innovation is geographically more difficult to transfer abroad to foreign production sites, (ii) learning spillovers can occur from international operations. The results reveal that the second effect is more likely to dominate when a firm is active in more product lines. We argue that a more diversified portfolio of products increases a firm’s scope of learning from international operations, thereby enhancing its ability to engage in more fundamental research. In contrast, firms with less product lines that geographically separate production from innovation shift the innovation activities towards more specialized types of innovation.
    JEL: F12 F23 O31 O32
    Date: 2013–05
  10. By: Jérôme Danguy (Solvay Brussels School of Economics and Management, iCite and ECARES, Université libre de Bruxelles); Gaétan de Rassenfosse (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Intellectual Property Research Institute of Australia, The University of Melbourne); Bruno van Pottelsberghe de la Potterie (Solvay Brussels School of Economics and Management, iCite and ECARES, Université libre de Bruxelles)
    Abstract: This paper decomposes the R&D-patent relationship at the industry level to shed light on the sources of the worldwide surge in patent applications. The empirical analysis is based on a unique dataset that includes 5 patent indicators computed for 18 industries in 19 countries covering the period from 1987 to 2005. The analysis shows that variations in patent applications reflect not only variations in research productivity but also variations in the appropriability and filing strategies adopted by firms. The results also suggest that the patent explosion observed in several patent offices can be attributed to the greater globalization of intellectual property rights rather than to a surge in research productivity.
    Keywords: Appropriability, complexity, patent explosion, propensity to patent, research productivity, strategic patenting
    JEL: O30 O34 O38
    Date: 2013–04
  11. By: Avichai Snir; Daniel Levy; Alex Gotler; Haipeng (Allen) Chen
    Abstract: There is evidence that 9-ending prices are more common and more rigid than other prices. We use data from three sources: a laboratory experiment, a field study, and a large US supermarket chain, to study the cognitive underpinning and the ensuing asymmetry in rigidity associated with 9-ending prices. We find that consumers use 9-endings as a signal for low prices, and that this signal interferes with price information processing. Consequently, consumers are less likely to notice a bigger price when it ends with 9, or a price increase when the new price ends with 9, in comparison to a situation where the prices end with some other digit. We also find that retailers respond strategically to this consumer bias by setting 9-ending prices more often after price increases than after price decreases. 9-ending prices, therefore, usually increase only if the new prices are also 9- ending. Consequently, there is an asymmetry in the rigidity of 9-ending prices: they are more rigid than non 9-ending prices upward but not downward.
    Date: 2012–10
  12. By: Chia-Hui Chen; Junichiro Ishida
    Abstract: Auctions are a popular and prevalent form of trading mechanism, despite the restriction that the seller cannot price-discriminate among potential buyers. To understand why this is the case, we consider an auction-like environment in which a seller with an indivisible object negotiates with two asymmetric buyers to determine who obtains the object and at what price. The trading process resembles the Dutch auction, except that the seller is allowed to offer different prices to different buyers. We show that when the seller can commit to a price path in advance, the optimal outcome can generally be implemented. When the seller lacks such commitment power, however, there instead exists an equilibrium in which the seller's expected payoff is driven down to the second-price auction level. Our analysis suggests that having the discretion to price discriminate is not necessarily beneficial for the seller, and even harmful under plausible conditions, which could explain the pervasive use of auctions in practice.
    Date: 2013–05
  13. By: Daron Acemoglu; Ufuk Akcigit; Nicholas Bloom; William 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 53 of GDP reduces welfare by about 1.53 because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 53 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.
    Keywords: entry, growth, industrial policy, innovation, R&D, reallocation, selection.
    JEL: E2
    Date: 2013–04
  14. By: Luca Lambertini (Department of Economics, University of Bologna and Rimini Centre for Economic Analysis, Italy)
    Abstract: The model proposed in this paper investigates a differential Cournot oligopoly game with nonrenewable resource exploitation, in which each firm may exploit either its own private pool or a common pool jointly with the rivals. Firms use a deterministic technology to invest in exploration activities. There emerges that (i) the individual exploration effort is higher when each firms has exclusive rights on a pool of its own, and (ii) depending on whether each firm has access to its own pool or all firms exploit a common one, the aggregate exploration effort is either increasing or constant in the number of firms.
    Keywords: di¤erential games, natural resources, oligopoly
    JEL: C73 L13 Q30
    Date: 2013–05
  15. By: Christian Jaag
    Abstract: The financing of universal service in network industries has traditionally relied on granting the universal service provider (USP) a reserved area. Liberalization policies promoting competitive entry put the traditional universal service at risk. Consequently, there is an increased interest in knowing the cost of the universal service obligation (USO) and an intensive policy debate about its financing. This paper explores the complementary roles of price regulation and universal service regulation in network industries. It analyzes compensation for the universal service provider by public finances and a USO fund. As long as the USP enjoys market power, also price regulation may serve as a means to finance universal services. This implies allowing for price increases to compensate for the net cost of the USO. It releases competing operators or the general budget from contributing to the financing of the USO but results in distorted pricing and reduced overall welfare due to inefficient entry. Generally, the analysis shows that current practices of costing and financing universal services may result in unintended market distortions. The paper quantifies these effects and demonstrates how such distortions can be avoided.
    Keywords: Universal service obligation, Postal sector, Net cost, Price regulation
    JEL: L51
    Date: 2013–04
  16. By: S. Anderson (Department of Economics, University of Virginia - Uniiversity of Virginia); André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - École normale supérieure de Cachan - ENS Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: Limited consumer attention limits product market competition: prices are stochastically lower the more attention is paid. Ads compete to be the lowest price in a sector but compete for attention with ads from other sectors: equilibrium ad shares follow a CES form. When a sector gets more proÞtable, its advertising expands: others lose ad market share. The "information hump" shows highest ad levels for intermediate attention levels. The Information Age takes off when the number of viable sectors grows, but total ad volume reaches an upper limit. Overall, advertising is excessive, though the allocation across sectors is optimal.
    Keywords: economics of attention, information age, price dispersion, advertising distribution, consumer attention, information Þltering, size distribution of Þrms, CES, information congestion.
    Date: 2012
  17. By: Christian Jaag
    Abstract: Network industries are traditionally strongly influenced by sector-specific regulation; especially universal service obligations (USO) play an important role. In these sectors, USO impact market forces by shaping competition asymmetrically. They also interfere with other regulations such as intellectual property laws which are of increasing importance in these industries. This interaction has recently become of interest in the postal sector due to its recent convergence with telecommunications and the emergence of innovative services at the interface of the two sectors. In free markets, the design of intellectual property right trades off investment incentives against market distortions due to (temporary) exclusive rights. USO distort competition and thereby affect the optimal solution of this trade-off. The paper discusses various aspects of the influence of patents on universal service provision. It also illustrates these effects by means of a simple model of an innovation race under asymmetric regulation and with forced licensing to derive regulatory and policy implications to safeguard a cost-effective and consumer-oriented provision of universal services.
    Keywords: Universal service obligation, Communications, Intellectual Property
    JEL: L51 O34
    Date: 2013–05
  18. By: Johanna Vásquez Velásquez; Karoll Gómez Portilla, Elkin Castaño Vélez; José Vicente Cadavid Herrera; Andrés Ramírez Hassan
    Abstract: Introducción: Esta investigación estimó la elasticidad de la demanda intramolecular, marca y genérico, para tres patologías trazadoras, Hipertensión Esencial, Diabetes e Hiperlipidemia, en el mercado ético y privado colombiano, a partir de una especificación dinámica del modelo AIDS basado en técnicas de cointegración. La estimación de la elasticidad de la demanda intramolecular permite concluir que tanto medicamentos de marca como genéricos son inelásticos ante cambios en su precio, son bienes de lujo según elasticidad gasto y parece existir sustitución intramolecular por el signo obtenido de la elasticidad de sustitución. Abstract: This investigation estimated the elasticity of the intramolecular demand between generics and brand name in pharmaceutical private market in Colombia for three pathologies: Essential Hypertension, Diabetes and hyperlipidemia, from dynamic specification of the AIDS model based on cointegration techniques. The intramolecular price elasticity estimated shows that both generic and brand name drug are inelastic and does not respond to price changes, they are luxury goods from expenditure elasticity results and seems to exist intramolecular substitutability because of the coefficient sign in cross-price elasticity.
    Date: 2012–12–11
  19. By: Andrei Barbos (Department of Economics, University of South Florida); Yi Deng (Department of Economics, University of South Florida)
    Abstract: We develop a framework where to examine the implications of the introduction of a non- profit "public option" in the U.S. health insurance market. In this model, a continuum of heterogeneous consumers, each facing unknown medical expenditures, and differing in their expectations of such expenditures, have to choose between two competing plans. One plan is offered by a profit-maximizing private insurer; the other by social-welfare-maximizing public option. The model is calibrated based on data of U.S. medical expenditures and estimation of a Bayesian hierarchical model. The Nash Equilibrium of the resulting market structure is solved using a numerical algorithm. In equilibrium, the distinct objectives of the two insurers induce adverse selection in consumer choice: the public option covers the less healthy consumers, yielding the more profitable segment of market to the private insurer. However, our empirical results suggest that both insurers will capture significant parts of the health insurance market.
    Keywords: Public Health Insurance, Bayesian Hierarchial Model
    JEL: I11 L10 L21 L32
    Date: 2013–01
  20. By: Bruhn, Miriam; Farazi, Subika; Kanz, Martin
    Abstract: This paper explores the empirical relationship between bank competition, bank concentration, and the emergence of credit reporting institutions. The authors find that countries with lower entry barriers into the banking market (that is, a greater threat of competition) are less likely to have a credit bureau, presumably because banks are less willing to share proprietary information when the threat of market entry is high. In addition, a credit bureau is significantly less likely to emerge in economies characterized by a high degree of bank concentration. The authors argue that the reason for this finding is that large banks stand to lose more monopoly rents from sharing their extensive information with smaller players. In contrast, the data show no significant relationship between bank competition or concentration and the emergence of a public credit registry, where banks'participation is mandatory. The results highlight that policies designed to promote the voluntary creation of a credit bureau need to take into account banks'incentives to extract monopoly rents from proprietary credit information.
    Keywords: Access to Finance,Banks&Banking Reform,Bankruptcy and Resolution of Financial Distress,Debt Markets,Economic Theory&Research
    Date: 2013–05–01
  21. By: Yi Deng (Department of Economics, University of South Florida); Gabriel Picone (Department of Economics, University of South Florida)
    Abstract: We develop and estimate a spatial game-theoretic model of entry and location choices to examine firms’ strategic clustering decisions. The model identifies two contradictory effects that determine firms’ geographical location choices: a competition effect and a clustering effect. We also separate firms’ strategic clustering incentives from the observed clustering behavior due to exogenous factors such as population and topographic desirability or constraints. In particular, we examine two closely related industries that share similar location limitations but have different strategic incentives to cluster, jointly estimate the Bayesian Nash equilibrium of a two-industry entry and location game, and quantify the strategic clustering incentives.
    JEL: L13 L81 R12 R30
    Date: 2013–01

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