nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒06‒09
fifteen papers chosen by
Russell Pittman
US Government

  1. A theory of search with recall and uncertain deadlines By Brennan Platt; Nuray Akin
  2. Reputation-Driven Industry Dynamics By Bernardita Vial; Felipe Zurita
  3. Asking Prices and Inspection Goods By Ronald Wolthoff; Lodewijk Visschers; Benjamin Lester
  4. (Q,S,s) Pricing Rules By Kenneth Burdett; Guido Menzio
  5. Firm R&D units and outsourcing partners: A matching story By Barge-Gil, Andrés; Conti, Annamaria
  6. What drives firm growth? The role of demand and TFP shocks By Fabiano Schivardi; Andrea Pozzi
  7. Technological Diversification and Innovation Performance By Thomas Bolli; Martin Wörter
  8. Industry - and firm-specific factors of innovation novelty By Natália Barbosa; Ana Paula Faria; Vasco Eiriz
  9. The Impact of Persistent Shocks and Concave Objective Functions on Collusive Behavior By Johannes Paha
  10. The Distortive Effects of Antitrust Fines Based on Revenue By Spagnolo, Giancarlo; Bageri, Vasiliki; Katsoulacos, Yannis
  11. Demand externalitites and price cap regulation: Learning from a two-sided market By Zhu Wang
  12. Environmental Policy to Foster a Green Differentiated Energy Market By Gutierrez-Hita, Carlos; Martinez-Sanchez, Francisco
  13. Impact of Liner Shipping Trade and Competition Regulations on The Market Structure, Maritime Transport Costs and Seaborne Trade Flows: Regulations on The Market Structure, Maritime Transport Costs and Seaborne Trade Flows. Les réglementations commerciales et concurrentielles dans le secteur du transport maritime de ligne: Impact sur la structure du marché, les coûts de transport et les flux de commerce maritime. By Bertho, Fabien
  14. Innovation and Antibiotic Use within Antibiotic Classes: Market Incentives and Economic Instruments By Markus Herrmann; Bruno Nkuiya; Anne-Renée Dussault
  15. “Broadband prices in the European Union: competition and commercial strategies” By Joan Calzada; Fernando Martínez

  1. By: Brennan Platt (Brigham Young University); Nuray Akin (University of Miami)
    Abstract: We analyze an equilibrium search model where buyers seek to purchase a good before a deadline and face uncertainty regarding the availability of past price quotes in the future. Sellers cannot observe a potential buyer's remaining time until deadline nor his quote history, and hence post prices that weigh the probability of sale versus the profit once sold. The model's equilibrium can take one of three forms. In a late equilibrium, buyers initially forgo purchases, preferring to wait until the deadline. In an early equilibrium, any equilibrium offer is accepted as soon as it is received. In a full equilibrium, higher prices are turned down until near the deadline, while lower prices are immediately accepted. Equilibrium price and sales dynamics are determined by the time remaining until the deadline and the quote history of the consumer.
    Date: 2012
  2. By: Bernardita Vial; Felipe Zurita
    Abstract: This paper studies the entry-exit dynamics of an experience good industry. Consumers observe noisy signals of past ï¬rm behavior and hold common beliefs regarding their types, or reputations. There is a small chance that ï¬rms may independently and unobservably be exogenously replaced. The market is perfectly competitive: entry is free, and all participants are price-takers. Entrants have an endogenous reputation uE. In the steady-state equilibrium, uE is the lowest reputation among active ï¬rms: ï¬rms that have done poorly leave the market, and some re-enter under a new name. This endogenous replacement of names drives the industry dynamics. In particular, exit probabilities are higher for younger ï¬rms, for inept ï¬rms, and for ï¬rms with worse reputations. Competent ï¬rms have stochastically larger reputations than inept ï¬rms both in the population as a whole and within each cohort, and thus are able to live longer and charge higher prices.
    Keywords: reputation, industry dynamics, free entry, exit and entry rates
    JEL: C7 D8 L1
    Date: 2013
  3. By: Ronald Wolthoff (University of Toronto); Lodewijk Visschers (Universidad Carlos III); Benjamin Lester (Federal Reserve Bank of Philadelphia)
    Abstract: When a seller with a single, indivisible good meets with potential buyers sequentially, the process of price determination often involves an asking price: the seller quotes a price at which he is willing to sell immediately, but he also allows bids below this price and can recall such bids after meeting with other buyers. In most models of trade, this pricing mechanism is either infeasible or sub-optimal. In this paper, we consider an environment where asking prices are a simple, yet natural trading mechanism that allows buyers and sellers to cope with certain trading frictions. We characterize equilibrium asking prices and allocations, establish that this allocation is constrained efficient, and then derive a rich set of testable implications that emerge from our theory.
    Date: 2012
  4. By: Kenneth Burdett (Department of Economics, University of Pennsylvania); Guido Menzio (Department of Economics, University of Pennsylvania and NBER)
    Abstract: We study the effect of menu costs on the pricing behavior of sellers and on the cross-sectional distribution of prices in the search-theoretic model of imperfect competition of Burdett and Judd (1983). We find that, when menu costs are small, the equilibrium is such that sellers follow a (Q, S, s) pricing rule. According to a (Q, S, s) rule, a seller lets inflation erode the real value of its nominal price until it reaches some point s. Then, the seller pays the menu cost and changes its nominal price so that the real value of the new price is randomly drawn from a distribution with support [S,Q], where Q is the buyer’s reservation price and S is some price between s and Q. Only when the menu cost is relatively large, the equilibrium is such that sellers follow a standard (S; s) pricing rule. We argue that whether sellers follow a (Q, S, s) or an (S, s) rule matters for the estimation of menu costs and seller-specific shocks.
    Keywords: Search frictions, Menu costs, Sticky prices
    JEL: D11 D21 D43 E32
    Date: 2013–05–29
  5. By: Barge-Gil, Andrés; Conti, Annamaria
    Abstract: We present a theory that examines the optimal match between firm R&D units and external partners for projects that involve problem solving. We have a firm selecting an external partner conditional on the learning costs of its internal R&D unit. We show that there exists a matching equilibrium with property that external partners with low learning costs for a project work with R\&D units that also have low learning costs for the same project. Empirically, we use a dataset of Spanish R\&D firms and relate their share of R&D outsourcing to universities to the composition of their R&D units, described by the presence of staff with a PhD. Our main finding is that, controlling for endogeneity, firms that employ R\&D staff with a PhD outsource relatively more to universities than to firms. We interpret this result as evidence that R&D units with relatively low learning costs for basic projects tend to match with external partners, universities, with relatively low learning costs for the same projects.
    Keywords: Firm R&D Units; Outsourcing; External Partners; Optimal Matching
    JEL: D23 O32 L24
    Date: 2013–05
  6. By: Fabiano Schivardi (University of Cagliari); Andrea Pozzi (Einaudi Institute for Economics and Fina)
    Abstract: We disentangle the contribution of unobserved heterogeneity in idiosyncratic demand and productivity to firm growth. We use a model of monopolistic competition with Cobb-Douglas production and a dataset of Italian manufacturing firms containing unique information on firm-level prices to reach three main results. First, demand is at least as important for firm growth as productivity. Second, firms' responses to shocks are lower than those predicted by our frictionless model, suggesting the existence of adjustment frictions. Finally, the deviation is more substantial for TFP shocks. We provide direct evidence that sluggish price adjustment influences responses to shocks, magnifying the effect of market appeal and dampening that of TFP. Moreover, organizational rigidity within the firm also contributes to reducing the response to TFP shocks, while it has no effects on that to demand shocks. These findings emphasize the importance of considering both dimensions of unobserved heterogeneity. They also imply that it is more difficult to fully adjust to TFP shocks.
    Date: 2012
  7. By: Thomas Bolli (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Martin Wörter (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyzes the impact of technological diversity on innovation inputs and success using Swiss firm-level panel data. While we do not find any impact of diversity on R&D intensity, we confirm a positive impact of diversity on patent applications as suggested by the literature. However, since patent applications reflect an intermediate innovation input rather than output, we extend the analysis to the share of sales generated by new products. We find a significant negative effect of diversity on the sales share of new products. Hence, technologically more specialized firms have a lower propensity to patent and greater shares of new products. We find neither a direct nor indirect effect of diversity on the sales share generated by improved products. These results suggest that specialization pays-off through more drastic innovations that yield greater market success through a passing monopoly status.
    Keywords: patent applications, innovative sales share, new products, improved products, technological diversity
    JEL: O3
    Date: 2013–06
  8. By: Natália Barbosa (Universidade do Minho - NIPE); Ana Paula Faria (Universidade do Minho - NIPE); Vasco Eiriz (Universidade do Minho - Departamento de Gestão)
    Abstract: This paper investigates the underlying factors that might shape the firm’s choices with respect to degrees of innovation novelty. Using a sample of 2983 firms observed under the Portuguese Community Innovation Survey, we assess the relative relevance of a set of firm- and industry-specific factors in explaining firms’ choices about incremental or radical innovation. The results indicate that both the firm’s idiosyncratic historical factors giving rise to heterogeneous R&D capabilities and the industry context have power to shape the firm’s innovation choices, even though firm-specific factors appear to be more powerful. The estimated impacts on firm’s innovation novelty are, nonetheless, significantly moderated by the type of firm and industry.
    Keywords: Radical and incremental innovation, competitive environment, R&D capabilities.
    JEL: L21 L10
    Date: 2013
  9. By: Johannes Paha (University of Giessen)
    Abstract: The model proposed in this paper explains three stylized facts derived from case evidence: Cartel formation is more likely (i) when the industry has been hit by a negative profitability shock under the condition that (ii) this shock is rather persistent. (iii) This pattern is independent from the type of the shock, i.e. cost shocks, demand shocks etc. The paper analyzes the incentive for cartel formation when the industry switches between a good state with high profits and a bad state with low profits. The transition between states is modeled by a Markov-process that allows for transitory or persistent shocks. The decision maker incurs opportunity costs of collusion and chooses the conduct of a firm in order to maximize the present value of a concave objective function. The model shows that depending on the value of the opportunity costs and the discount factor collusion can be stable in no, one, or both states of the industry. When collusion is stable in only one state, this is the good state when industry conditions are transitory. When industry conditions are persistent, collusion is stable in the bad state.
    Keywords: cartel formation, collusion, concavity, persistence
    JEL: D43 K21 L13 L41 M20
    Date: 2013
  10. By: Spagnolo, Giancarlo (Stockholm Institute of Transition Economics); Bageri, Vasiliki (Athens University of Economics and Business); Katsoulacos, Yannis (Athens University of Economics and Business)
    Abstract: In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterize their comparative static properties, and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules-of-thumb that appear to have the potential to substantially reduce social welfare.
    Keywords: Antitrust; Deterrence; Fines; Law Enforcement
    JEL: K21 L40
    Date: 2012–12–08
  11. By: Zhu Wang
    Abstract: This paper studies unintended consequences of price cap regulation in the presence of demand externalities in the context of payment cards. The recent U.S. debit card regulation was intended to lower merchant card acceptance costs by capping the maximum interchange fee. However, small-ticket merchants found their fees instead higher after the regulation. To address this puzzle, I construct a two-sided market model and show that card demand externalities across merchant sectors rationalize card networks’ pricing response. Based on the model, I study socially optimal card fees and an alternative cap regulation that may avoid the unintended consequence on small-ticket merchants.
    Keywords: Financial markets ; Payment systems ; Law and legislation
    Date: 2013
  12. By: Gutierrez-Hita, Carlos; Martinez-Sanchez, Francisco
    Abstract: Many products are made by technological processes that cause environmental damage. Current environmental concerns are affecting firms' technological processes as a result of government intervention in markets but also due to environmental awareness on the part of consumers. This paper assumes a spatial competition model where two firms sell a homogeneous product with input differentiation: the product is made by green and polluting inputs. In a two-stage game firms first decide what technology bundle to use (the ratio of green and polluting inputs) and then Bertrand competition takes place. First, it is shown that in the absence of government intervention both firms prefer to produce by using a bundle of green and polluting technologies which is not welfare maximizing. Second, the option of subsidizing green technology and the existence of a publicly-owned firm are analyzed. Overall, both policies yield a more environmentally-friendly technology bundle, except when costs of green energy technologies are high enough. Moreover, environmental social welfare is enhanced.
    Keywords: Differentiated inputs · Environmental policy · Green market · Mixed duopoly · Subsidy
    JEL: D11 D43 L11
    Date: 2013–05–29
  13. By: Bertho, Fabien
    Abstract: This dissertation aims at assessing the impact of liner shipping trade and competition regulations on the market structure, prices, and seaborne trade flows. To quantify the overall level of trade restrictions in the liner shipping sector, I construct an original Service Trade Restrictiveness Index (STRI). The original STRI is included in a two-stage econometric analysis. Since barriers to trade are likely to influence seaborne trade through maritime transport costs (MTCs), in a first stage, I assess the impact of trade restrictions on MTCs. And, in a second stage I assess the impact of MTCs on seaborne trade flows. I show that barriers to trade affect positively MTCs and that MTCs affect negatively seaborne trade flows. Thus, barriers to trade have an indirect and negative impact on seaborne trade flows. Furthermore, I show that distance affects positively MTCs. The results also suggest that besides affecting negatively seaborne trade through MTCs, distance affect directly and positively seaborne trade. I assess the impact of regulatory barriers to entry on the market structure and MTCs. In a first stage, I assess the impact of regulations on the market structure. In a second stage, I assess the impact of the market structure on MTCs. I show that the presence of maritime conferences does not affect the number of carriers on routes while the presence of discussion agreements does. Moreover, when they reach a critical level, barriers to trade limit the number of carriers. Furthermore, I show barriers to trade affect MTCs through the market structure and marginal costs. Finally, I show that shipping exercise a market power even though this effect is small.
    Abstract: J’évalue l’impact des réglementations commerciales et concurrentielles dans transport maritime de ligne sur la structure du marché, les coûts de transport et le commerce maritime. D’abord, je quantifie le niveau global des Barrières Commerciales (BC) dans le secteur du transport maritime de ligne en construisant un Indice de Restriction du Commerce des Services (IRCS). Cet indicateur est inclus dans une analyse économétrique en deux étapes. Les BC sont susceptibles d’influencer le commerce maritime à travers les Coûts de Transport Maritime (CTM). Ainsi, j’évalue l'impact des BC sur les CTM, puis l'impact des CTM sur le commerce maritime. Je montre que les BC ont un impact positif sur les CTM et que les CTM ont un impact négatif sur le commerce maritime. Ainsi, les BC ont un impact indirect négatif sur le commerce maritime. Je montre aussi qu’en plus d’affecter négativement le commerce maritime à travers les CTM, la distance a un impact positif direct sur le commerce maritime. Ensuite, j’évalue l'impact des barrières réglementaires à l'entrée sur la structure du marché et les CTM. D’abord, j’évalue l'impact de la réglementation sur la structure du marché. Puis, j’évalue l'impact de la structure du marché sur les CTM. Je montre que la présence de conférences maritimes n’a pas d’impact sur le nombre de compagnies sur les routes alors que la présence d'accords de discussion a un impact positif. De plus, lorsqu’elles atteignent un seuil, les BC ont un impact négatif sur le nombre de compagnies. En outre, je montre les BC affectent les CTM à travers la structure du marché et les coûts marginaux. Enfin, je montre que les compagnies maritimes de ligne exercent un pouvoir de march
    Keywords: Transport maritime, service, Coûts de transport, indicateur, commerce, réglementations, concurrence;
    Date: 2012–06
  14. By: Markus Herrmann; Bruno Nkuiya; Anne-Renée Dussault
    Abstract: We analyze a monopolist’s incentive to innovate a new antibiotic which is connected to the same pool of antibiotic treatment efficacy as is another drug produced by a generic industry. We outline the differences of antibiotic use under market conditions and in the social optimum. A time and state-dependent tax-subsidy mechanism is proposed to induce the monopolist and generic industry to exploit antibiotic efficacy optimally.
    Keywords: Economics of antibiotic resistance, antibiotic innovation, monopoly, generic industry, social optimum, economic instruments
    JEL: D21 D42 I18 Q38
    Date: 2013
  15. By: Joan Calzada (Faculty of Economics, University of Barcelona); Fernando Martínez (Competition Commission and Faculty of Economics, University of Barcelona)
    Abstract: This paper analyses the determinants of broadband Internet access prices in a group of 15 EU countries between 2008 and 2011. Using a rich panel dataset of broadband plans, we show the positive effect of downstream speed on prices, and report that cable and fibre-to-the-home technologies are available at lower prices per Mbps than xDSL technology. Operators’ marketing strategies are also analysed as we show how much prices rise when the broadband service is offered in a bundle with voice telephony and/or television, and how much they fall when download volume caps are included. The most insightful results of this study are provided by a group of metrics that represent the situation of competition and entry patterns in the broadband market. We show that consumer segmentation positively affects prices. On the other hand, broadband prices are higher in countries where entrants make greater use of bitstream access and lower when they use more intensively direct access (local loop unbundling). However, we do not find a significant effect of inter-platform competition on prices.
    Keywords: Telecommunications, Broadband prices, European Union, Competition, Regulation. JEL classification: L51, L86, L96.
    Date: 2013–05

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