nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒06‒24
twenty-two papers chosen by
Russell Pittman
US Government

  1. The Dynamics of Bertrand Price Competition with Cost-Reducing Investments By Fedor Iskhakov; John Rust; Bertel Schjerning
  2. Price-Matching leads to the Cournot Outcome By Norovsambuu Tumennasan; Mongoljin Batsaikhan
  3. Driving Factors of Retail Price VariationLi By Li, Chenguang; Volpe, Richard
  4. Production Arrangements and Strategic Brand Level Competition in a Vertically Linked Market By Ahmad, Waseem; Anders, Sven; Marcoul, Philippe
  5. Selling Substitute Goods to Loss-Averse Consumers: Limited Availability, Bargains and Rip-offs By Rosato, Antonio
  7. Logit price dynamics By James Costain; Anton Nakov
  8. Endogenous firm creation and destruction over the business cycle By Masashige Hamano
  9. The Cross-Price Effect on Willingness-to-pay Estimates in Open-ended Contingent Valuation By Shi, Lijia; Chen, Xuqi; Gao, Zhifeng
  10. Networks, proximities and inter-firm knowledge exchanges By S. Usai; E. Marrocu; R. Paci
  11. A Formal Theory of Firm Boundaries: A Trade-Off between Rent Seeking and Bargaining Costs By Yusuke Mori
  12. Do cartel breakdowns induce mergers? Evidence from EC cartel cases By Hüschelrath, Kai; Smuda, Florian
  13. Do pay-as-bid auctions favor collusion? Evidence from Germany's market for reserve power By Heim, Sven; Götz, Georg
  14. Analysis of Retailer Pricing in the Presence of Coupons: An Examination of Breakfast Cereal Industry By Zheng, Hualu; Berning, Joshua
  15. Why Do Distilleries Produce Multiple Ages of Whisky? By Page, Ian B.
  16. How Market Structure Affects Firm Entry in Rural and Urban Communities: Evidence from Rural Iowa By Artz, Georgeanne M.; Kim, Younjun; Orazem, Peter F.
  17. Inter-firm R&D networks in pharmaceutical biotechnology: What determines firm's centrality-based partnering capability By Krogmann, Yin; Riedel, Nadine; Schwalbe, Ulrich
  18. Innovation and Antibiotic Use within Antibiotic Classes: Market Incentives and Economic Instruments By Herrmann, Markus; Nkuiya, Bruno; Dussault, Anne-Renée
  19. Spatial Price Discrimination and Transportation Ineciency: A Study of the Wisconsin Milk Hauling Industry By Hueth, Brent; Taylor, Christopher W.
  20. Concentration in Mortgage Lending, Refinancing Activity and Mortgage Rates By David S. Scharfstein; Adi Sunderam
  21. Agency costs, vertical integration and ownership structure: the case of wine business in France. By Cadot, Julien
  22. Vertical Integration or Contract Farming on Biofuel Feedstock Production: A Technology Innovation Perspective By Du, Xiaoxue; Lu, Liang; Zilberman, David

  1. By: Fedor Iskhakov (CEPAR, University of New South Wales); John Rust (Georgetown University); Bertel Schjerning (University of Copenhagen)
    Abstract: We present a dynamic extension of the classic static model of Bertrand price competition that allows competing duopolists to undertake cost-reducing investments in an attempt to “leapfrog” their rival to attain low-cost leadership—at least temporarily. We show that leapfrogging occurs in equilibrium, resolving the Bertrand investment paradox., i.e. leapfrogging explains why firms have an ex ante incentive to undertake cost-reducing investments even though they realize that simultaneous investments to acquire the state of the art production technology would result in Bertrand price competition in the product market that drives their ex post profits to zero. Our analysis provides a new interpretation of “price wars”. Instead of constituting a punishment for a breakdown of tacit collusion, price wars are fully competitive outcomes that occur when one firm leapfrogs its rival to become the new low cost leader. We show that the equilibrium involves investment preemption only when the firms invest in a deterministically alternating fashion and technological progress is deterministic. We prove that when technological progress is deterministic and firms move in an alternating fashion, the game has a unique Markov perfect equilibrium. When technological progress is stochastic or if firms move simultaneously, equilibria are generally not unique. Unlike the static Bertrand model, the equilibria of the dynamic Bertrand model are generally inefficient. Instead of having too little investment in equilibrium, we show that duopoly investments generally exceed the socially optimum level. Yet, we show that when investment decisions are simultaneous there is a “monopoly” equilibrium when one firm makes all the investments, and this equilibrium is efficient. However, efficient non-monopoly equilibria also exist, demonstrating that it is possible for firms to achieve efficient dynamic coordination in their investments while their customers also benefit from technological progress in the form of lower prices.
    Keywords: duopoly, Bertrand-Nash price competition, Bertrand paradox, Bertrand investment paradox, leapfrogging, cost-reducing investments, technological improvement, dynamic models of competition, Markov-perfect equilibrium, tacit collusion, price wars, coordination and anti-coordination games, strategic preemption
    JEL: D92 L11 L13
    Date: 2013–03–15
  2. By: Norovsambuu Tumennasan (Department of Economics and Business, Aarhus University); Mongoljin Batsaikhan (Georgetown University)
    Abstract: We study the effects of price-matching in a duopoly setting in which each firm selects both its price and output, simultaneously. We show that the availability of a pricematching option leads to the Cournot outcome in this setting. This result is a stark contrast to the one obtained in the standard Bertrand competition that the market price in the presence of a price-matching option ranges from the monopolistic price to the Bertrand price. Our result suggests that the effect of price-matching depends on whether the output is a choice variable for the firms.
    Keywords: Price matching
    JEL: L00 D4
    Date: 2013–06–18
  3. By: Li, Chenguang; Volpe, Richard
    Abstract: This study explores the strategic pricing behaviors across retail chains for produce products. We adopt a Panel-VAR model to identify the driving factors of retail price variation and find that retail price history, competition, product cost are among the key drivers of retail price change. Forecast Error Variance Decomposition (FEVD) is used to quantify the relative impact of driving factors to retail price changes and show how they affect prices differently across retail chains. We also find that higher responsiveness to competition may indicate superior management ability in price setting that associates with better profitability in practice.
    Keywords: Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Research Methods/ Statistical Methods,
    Date: 2013
  4. By: Ahmad, Waseem; Anders, Sven; Marcoul, Philippe
    Abstract: This paper develops and tests different theoretical models of competition in a vertically linked market assuming different production arrangements for retailer private label brands (PL). We then empirical estimate retailer manufacturer competitive behavior based on best-fit games and determine the impact of PL production arrangements on pricing strategies for PLs and NBs. Retailers are using different production arrangements to produce PL products. In fact, a retailer may own a production facility, a national brand manufacturer (NB) produces the PL product exclusively for the retailer or the retailer outsources PL production to a non-NB manufacturer. These possible, different production arrangements can have significant implications for the competitive interactions and market outcomes between retailers and NB manufacturers. Existing economic literature has identified a significant degree of variation in the type of competitive interactions across grocery product categories. However, the majority empirical studies in IO have typically imposed assumptions about the nature of vertical production arrangement without formally and explicitly investigating the nature of PL-NB competitive interaction under different production arrangements. The analysis builds on the Non-Nested Model Comparison (NNMC) approach and employs weekly store-level retail scanner data, for a major North American retail chain. The findings from different theoretical models and their empirical application reveal that no consistent pattern of competitive interactions exists between PLs and NBs across different food product categories. Competitive patterns and outcomes vary depending on the nature of the PL production arrangement. Our study contributes to the IO literature by being the first to consistently derive and estimate the impact of PL production arrangement on brand-level competition.
    Keywords: Competition, Bertrand Nash, Stackelberg leader follower, Non-Nested Model Comparison, Canadian retail level, Private label, National brand, Production arrangements, Consumer/Household Economics, Marketing, Production Economics,
    Date: 2013
  5. By: Rosato, Antonio
    Abstract: Why are some sale items subject to limited availability while other substitute items are available in large quantities and are priced relatively high at the same point in time? Can such a retail strategy lure consumers into purchasing the more expensive item? This paper characterizes the profit-maximizing pricing and product-availability strategies for a retailer selling two substitute goods to loss-averse consumers and shows that limited-availability sales can manipulate consumers into an ex-ante unfavorable purchase. Consumers have unit demand, are interested in buying only one good, and their reference point is given by their recent rational expectations about what consumption value they would receive and what price they would pay. The seller maximizes profits by raising the consumers' reference point through a tempting discount on a good available only in limited supply (the bargain) and cashing in with a high price on the other good (the rip-off), which the consumers buy if the bargain is not available to minimize their disappointment. The seller might prefer to offer a deal on the more valuable product, using it as a bait, because consumers feel a larger loss, in terms of forgone consumption, if this item is not available. I also show that the bargain item can be a loss leader, that the seller's product line is not welfare-maximizing and that she might supply a socially wasteful product. The model suggests that the current FTC Guides Against Bait Advertising, by allowing retailers to employ limited-availability sales, could reduce consumer and social welfare.
    Keywords: Retail Pricing; Reference-Dependent Preferences; Loss Aversion; Limited Availability; Bait and Switch; Loss Leaders.
    JEL: D11 D42 L11
    Date: 2013
  6. By: Hovhannisyan, Vardges; Stiegert, Kyle W.; Bozic, Marin
    Abstract: The endogeneity of retail market power arises in the retail pricing equation due to the correlation between margins and unobserved cost components. Nevertheless, it has long been ignored in the equilibrium analysis of retail behavior. We address the issue via a control function approach in a new conceptual framework with consumer preferences represented by a benefit function. We further offer three test procedures to evaluate the endogeneity of retail market power. The empirical value of the model is illustrated in an application to the US yogurt industry. Outcomes from endogeneity tests provide strong evidence for market power endogeneity. Moreover, ignoring the issue results in downward bias in retail market power.
    Keywords: Market power endogeneity, control function, conjectural variation, retail conduct, benet function, Agribusiness, Agricultural and Food Policy, Consumer/Household Economics, Demand and Price Analysis, Industrial Organization, Marketing, D22, L13,
    Date: 2013
  7. By: James Costain (Banco de España); Anton Nakov (Banco de España)
    Abstract: We propose a near-rational model of retail price adjustment consistent with microeconomic and macroeconomic evidence on price dynamics. Our framework is based on the idea that avoiding errors in decision making is costly. Given our assumed cost function for error avoidance, the timing of firms’ price adjustments is determined by a weighted binary logit, and the prices they choose are determined by a multinomial logit. We build this behavior into a DSGE model, estimate the decision cost function by matching microdata, and simulate aggregate dynamics using a tractable algorithm for heterogeneous-agent models. Both errors in the prices firms set, and errors in the timing of these adjustments, are relevant for our results. Errors of the first type help make our model consistent with some puzzling observations from microdata, such as the coexistence of large and small price changes, the behavior of adjustment hazards, and the relative variability of prices and costs. Errors of the second type increase the real effects of monetary shocks, by reducing the correlation between the value of price adjustment and the probability of adjustment, (i.e., by reducing the\selection effect»). Allowing for both types of errors also helps reproduce the effects of trend inflation on price adjustment behavior. Our model of error-prone pricing in many ways resembles a stochastic menu cost (SMC) model, but it has less free parameters than most SMC models have, and unlike those models, it does not require the implausible assumption of i.i.d. adjustment costs. Our derivation of a weighted logit from control costs oers an alternative justication for the adjustment hazard derived by Woodford (2008). Our assumption that costs are related to entropy is similar to the framework of Sims (2003) and the subsequent\rational inattention» literature. However, our setup has the major technical advantage that a firm’s idiosyncratic state variable is simply its price level and productivity, whereas under rational inattention a firm’s idiosyncratic state is its prior (which is generally an infinite-dimensional object).
    Keywords: nominal rigidity, logit equilibrium, state-dependent pricing, near rationality, information-constrained pricing
    JEL: E31 D81 C72
    Date: 2013–02
  8. By: Masashige Hamano (CREA, University of Luxembourg)
    Abstract: This paper revisits Schumpeterian destruction in a DSGE model based on monopolistic competition. Firms enter the market through a free entry condition and exit endogenously depending on their specific productivity level. The mechanism of endogenous destruction among heterogeneous firms is based on the probabilistic argument discussed in Melitz (2003). The models in the paper are successful in reproducing observed business cycle patterns for creation and destruction and other major economic variables. The models also feature typical characteristics of Schumpeterian economies as found in literature.
    Keywords: entry and exit, firm heterogeneity, the Schumpeterian destruction, business cycles
    JEL: D24 E23 E32 L11 L60
    Date: 2013
  9. By: Shi, Lijia; Chen, Xuqi; Gao, Zhifeng
    Abstract: Pricing decisions for new product is always challenging due to limited information such as market needs and competition. Contingent valuation is a widely used technique to elicit value for new products or non-market goods. Previous literature has shown that potential buyers use a reference product to form their opinion about the value of a new product (Monroe and Della Bitta, 1978). Therefore, pricing decision is an interactive process. Based on the extensive marketing literature about cross-price effect, we investigate the impact of reference price on consumer willingness-to-pay (WTP) for multiple similar products in an open-ended contingent valuation context. Two properties of cross-price effect: the neighborhood price effect and the asymmetric price effect are examined. Our results show that the cross-price effect on WTP is prominent and the neighborhood price effect also holds in contingent valuation. However, we don’t reach any conclusion about the asymmetric price effect based on our limited information.
    Keywords: Consumer/Household Economics, Demand and Price Analysis, Research Methods/ Statistical Methods,
    Date: 2013
  10. By: S. Usai; E. Marrocu; R. Paci
    Abstract: Building on previous literature providing extensive evidence on flows of knowledge generated by inter-firm agreements, in this paper we aim to analyse how the occurrence of such collaborations is driven by the multi-dimensional proximity among participants and by their position within firms’ network. More specifically, we assess how the likelihood that two firms set up a partnership is influenced by their bilateral geographical, technological, organizational, institutional and social proximity and by their position within networks in terms of centrality and closeness. Our analysis is based on agreements in the form of joint ventures or strategic alliances, announced over the period 2005-2012, in which at least one partner is localised in Italy. We consider the full range of economic activities and this allow us to offer a general scenario and to specifically investigate the role of technological relatedness across different sectors. The econometric analysis, based on the logistic framework for rare events, yielded three noteworthy results. First, all the five dimensions of proximity jointly exert a positive and relevant effect in determining the probability of inter-firm knowledge exchanges, signalling that they are complementary rather than substitute channels. Second, the higher impact on probability is due to the technological proximity, followed by the geographical one, while the other proximities (social, institutional and organizational) have a limited effect. Third, we find evidence on the positive role played by networks, through preferential attachment and transitivity effects, in enhancing the probability of inter-firm agreements.
    Keywords: joint ventures, knowledge flows, networks, proximities, strategic alliances
    JEL: R12 O33 O31 L14
    Date: 2013
  11. By: Yusuke Mori (Research Fellow of Japan Society for the Promotion of Science, Institute of Social Science, The University of Tokyo, JAPAN)
    Abstract: We develop a theory of firm boundaries in the spirit of transaction cost analysis, in which trading parties engage in ex post value split. We show that ex post inefficient bargaining under non-integration creates a trade-off between rent seeking and bargaining costs: while non-integration incurs lower rent-seeking costs than integration, it suffers from bargaining delay and breakdown, which never occur under integration. This result explains why rent-seeking activities within firms are likely to be more costly than those between firms, and offers a formal justification for the "costs of bureaucracy" in Williamson (1985).
    Date: 2013–06
  12. By: Hüschelrath, Kai; Smuda, Florian
    Abstract: We investigate the impact of cartel breakdowns on merger activity. Merging information on cartel cases decided by the European Commission (EC) between 2000 and 2011 with a detailed data set of worldwide merger activity, we find that, first, the average number of all merger transactions increase by up to 51 percent when comparing the three years before the cartel breakdowns with the three years afterwards. Second, for the subset of horizontal mergers, merger activity is found to increase even more - by up to 83 percent - after the cartel breakdowns. Our results not only suggest that competition authorities should consider mergers as potential 'second-best' alternative to cartels but also imply that resource (re)allocations in competition authorities, law practices and economic consultancies may become necessary to handle the increase in merger cases. --
    Keywords: antitrust policy,cartels,mergers,cartel breakdown,European Union
    JEL: L41 K21
    Date: 2013
  13. By: Heim, Sven; Götz, Georg
    Abstract: We analyze a drastic price increase in the German auction market for reserve power, which did not appear to be driven by increased costs. Studying the market structure and individual bidding strategies, we find evidence for collusive behavior in an environment with repeated auctions, pivotal suppliers and inelastic demand. The price increase can be traced back to an abuse of the auction's pay-as-bid mechanism by the two largest firms. In contrast to theoretical findings, we show that pay-as-bid auctions do not necessarily reduce incentives for strategic capacity withholding and collusive behavior, but can even increase them. --
    Keywords: Auctions,Collusion,Market Power,Energy Markets,Reserve Power,Balancing Power
    JEL: D43 D44 L11 L13
    Date: 2013
  14. By: Zheng, Hualu; Berning, Joshua
    Abstract: A coupon is a ticket or document that can be exchanged for a direct financial discount when purchasing a specific product, or a total amount of goods in a certain store. Coupons are usually issued by manufacturers of packaged goods or by retailers, to be used as a part of sales promotions. As coupons are extensively adopted to enhance consumer demand and to compete for market share, they draw considerable in the food marketing and industrial organization literature. The objective of this study is to examine how coupons impact retailers’ pricing decisions. Specifically, this study explores how retailer pricing and couponing change based on competitor’s coupon issuance; and whether different types of coupons (manufacturer verses retailer) have different impacts on retailer’s pricing. Breakfast cereals are heavily purchased. The substantial diversity of cereal products makes it easy to compare prices across stores, and lead to intense price competitions. Regional markets may adopt various mechanisms to attract consumers and maximize own profits; instead, they may also observe others’ behaviors and make decisions of achieving a joint profit. Hence, firms’ profit maximization procedures are analyzed under two scenarios: non-cooperative, and cooperative. The data employed in this study are taken from the 2006-2008 ACNielsen Homescan data. We focus on the market of New York because coupons are mostly redeemed in this market. Economic theory indicates that prices and coupon levels influence each other. To account for the bidirectional causality between coupon values and prices, the determinants of prices and coupon values are simultaneously identified by a two-equation, fixed-effects, and panel-data system. The problem of endogeneity arises due to data availability and exclusion variables are included. Estimation results indicate that a retailer will decrease the cereal price by 6.685 cents if its competitor increases the retailer coupon by 1 cent. This suggests that because both cereal prices and retailer coupon values are close across stores, consumers may be better off comparing prices between stores if there are retailer coupons available in the market. The positive relation between own and cross retailer coupon values suggests that retailers compete over cereals, and they may also cooperatively decide prices and coupon values.
    Keywords: Manufacturer and Retailer Coupon, Pricing, Cereal, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Industrial Organization, Marketing, L1, D4,
    Date: 2013
  15. By: Page, Ian B.
    Abstract: Unlike many other vintage goods, distilleries often opt to mature their stocks to different ages, selling a heterogeneous line of products which vary in quality. We develop a theoretical model to examine the maturation decisions of a whisky distillery and find that it is possible for a profit-maximizing distillery to produce multiple ages of whisky under perfect competition. Based on an analysis of retail whisky prices, we find evidence suggesting that most distilleries that produce multiple ages of whisky do not operate under perfect competition. However, a hedonic estimation of whisky prices does not find any strong link between a distillery’s size and its ability to influence market prices, suggesting that distilleries may achieve market power through brand recognition.
    Keywords: vintage goods, maturation, price analysis, whisky, whiskey, Demand and Price Analysis, Production Economics,
    Date: 2013
  16. By: Artz, Georgeanne M.; Kim, Younjun; Orazem, Peter F.
    Keywords: firm entry, specialization, local monopoly, industrial diversity, upstream and downstream firms, education, stand-alone versus expansion start-ups, Community/Rural/Urban Development, M13, R11, L26,
    Date: 2013
  17. By: Krogmann, Yin; Riedel, Nadine; Schwalbe, Ulrich
    Abstract: This paper analyses the inter-firm R&D network formed in the pharmaceutical biotechnology industry during the 1990s from different perspectives: theoretical network formation, firm's structural positions and its collaborations at the entire network level, and the determinants for firm's centrality-based partnering capability. The results indicate that pharmaceutical biotechnology industry has experienced a significant evolutional change in size and structure during 1991-1998. By considering individual structural positions, the descriptive statistics show that in the 1990s, established pharmaceutical companies developed into dominant star players with multiple partnerships while holding central roles in the R&D network. In the network analysis that emphasized aggregate network level, the degree-based and betweenness-based network centralization were not high implying that the distribution of overall positional advantages in the pharmaceutical biotechnology industry is, to a large degree, not unequal and even though most firms in this sector are linked to the R&D network, some of them are more active than others. The current analysis also shows that firm's efficiency, firm's dependency on its complementary resources and firm's experiences at managing partnerships are important determinants for firm's centrality-based partnering capability, which has important managerial implications for understanding firm's strategic partnering behaviour. --
    Keywords: Inter-firm cooperation,R&D partnerships,Network formation,Social network analysis,Instrumental variable
    JEL: C12 C36 D85 L24 L65 O32
    Date: 2013
  18. By: Herrmann, Markus; Nkuiya, Bruno; Dussault, Anne-Renée
    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, Health Economics and Policy, D21, D42, I18, Q38,
    Date: 2013–05
  19. By: Hueth, Brent; Taylor, Christopher W.
    Keywords: Consumer/Household Economics, Demand and Price Analysis, Livestock Production/Industries,
    Date: 2013–06–03
  20. By: David S. Scharfstein; Adi Sunderam
    Abstract: We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, increasing concentration by one standard deviation reduces the overall impact of a decline in MBS yields by approximately 50%. In the time series, a decrease in MBS yields today has a 40% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.
    JEL: E44 E52 G21 G23 L85
    Date: 2013–06
  21. By: Cadot, Julien
    Abstract: French Wine Business raises specific questions on organizational forms. Indeed, the pervasiveness of specific organizational forms such as family-controlled firms and cooperatives and the diversity of vertical integration strategies stress the question of agency costs and their effects on performance. In this paper, we use the Ang, Cole and Lin (2000) methodology to measure agency costs according to governance structure and vertical integration on a sample of 180 wine firms. The econometric analysis displays highly significant results which let think that (i) family-controlled firms may be subject to agency problems partly solved by the “outside equity” discipline, (ii) agency costs are not significantly higher for cooperative firms than for family-controlled firms, (iii) operating expenses increase with vertical integration for non-cooperative firms. One striking result is that contrary to non-cooperative firms, performance does not increase with vertical integration for cooperatives while agency costs remain low albeit vertical integration. One explanation is that agency costs may be seen as necessary expenses for success of vertical integration and cooperatives may not fill this requirement.
    Keywords: agency costs, vertical integration, governance, cooperatives, wine business, Agribusiness, G320, D230, Q130,
    Date: 2013–05
  22. By: Du, Xiaoxue; Lu, Liang; Zilberman, David
    Abstract: Both the goal of energy independence and the desire to lower greenhouse gas emission have triggered the search for alternate energy sources. For second generation biofuel production, a key question is which form of industrial organization should be adopted in order to stimulate stable feedstock production. Using a two-stage optimal control framework, we analyze the optimal form of industrial organization should be adopted where technology innovation is endogenous and biorefinery faces credit constraint. Our results show that, under certain assumptions, it is optimal to adopt vertical integration in the beginning and move to contract farming later. Moreover, the tighter credit constraint that a biorefinery faces, the sooner the biorefinery would adopt contract farming.
    Keywords: Contract Farming, Vertical Integration, Biofuel Feedstock, Technology In- novation, Environmental Economics and Policy, Production Economics, Resource /Energy Economics and Policy, Q16, Q42,
    Date: 2013–06–02

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