nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒07‒20
sixteen papers chosen by
Russell Pittman
US Government

  1. Reputation and Entry By Butler, Jeffrey V.; Carbone, Enrica; Conzo, Pierluigi; Spagnolo, Giancarlo
  2. Price vs. Quantity in duopoly with strategic delegation: Role of network externalities By Trishita Bhattacharjee; Rupayan Pal
  3. Managerial delegation in monopoly under network effects By Trishita Bhattacharjee; Rupayan Pal
  4. Cooperative Transfer Price Negotiations under Incomplete Information By Sonja Brangewitz; Claus-Jochen Haake
  5. The Welfare Effects of Regulating the Number of Market Segments in Linear Demand Markets By Yann Braouezec
  7. Empire-building and Price competition By Pietri , Antoine; Tazdaït , Tarik; Vahabi , Mehrdad
  8. Competition and the Efficiency of Markets for Technology By Allain, Marie-Laure; Henry, Emeric; Kyle, Margaret
  9. The Role of the 'Equally Efficient Competitor' in the Assessment of Abuse of Dominance By Mandorff, Martin; Sahl, Johan
  10. Crime and punishment: When tougher antitrust enforcement leads to higher overcharge By Jensen, Sissel; Kvaløy, Ola; Olsen, Trond E.; Sørgard, Lars
  11. An Experimental Analysis of Single vs. Multiple Bids in Auctions of Divisible Goods By Rosen, Christiane; Madlener, Reinhard
  12. Merger Simulation with Nested Logit Demand - Implementation using Stata By Björnerstedt, Jonas; Verboven, Frank
  13. A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry By Vivienne Pham; David Prentice
  14. Reputation and Prices on the e-Market:Evidence from a Major French Platform By Jolivet, Grégory; Jullien, Bruno; Postel-Vinay, Fabien
  15. Non-rigid wages and merger profitability reversal under convex costs and centralised unionisation By Luciano Fanti; Nicola Meccheri
  16. Productivity dispersion and the roles of quality of labour input and competition: A case of Vietnamese manufacturing sector By Doan, Tinh; Nguyen, Ha

  1. By: Butler, Jeffrey V. (EIEF); Carbone, Enrica (Second University of Naples "SUN"); Conzo, Pierluigi (University of Turin); Spagnolo, Giancarlo (Stockholm School of Economics - SITE, University of "Tor Vergata" & CEPR)
    Abstract: There is widespread concern among regulators that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement model with reputation for quality and the possibility of entry in which the entrant may start off with positive reputation. Our results suggest that while some past-performance based reputational mechanisms can reduce the frequency of entry, appropriately designed mechanisms significantly stimulate it. We find that our reputational mechanism increases quality but not prices, so that the introduction of this kind of mechanism may generate large welfare gains for the buyer.
    Keywords: Cross-border procurement; Entry; Feedback mechanisms; Incomplete contracts; Limited enforcement; Incumbency; Multidimensional competition; Outsourcing; Past performance; Procurement; Quality assurance; Small business subsidies; Reputation; Vendor rating
    JEL: H57 L14 L15
    Date: 2013–05–15
  2. By: Trishita Bhattacharjee (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: This paper examines the implications of network externalities on equilibrium outcomes in a differentiated products duopoly under strategic managerial delegation through relative performance based incentive contracts. It shows that Miller and Pazgal (2001)'s equivalence result does not go through in the presence of network externalities. Instead, Singh and Vives (1984)'s rankings of equilibrium outcomes under Cournot and Bertrand hold true under relative performance based delegation contracts as well, if there are network externalities. However, when firms can choose whether to compete in price or in quantity, there are two pure strategy Nash equilibria and one mixed strategy Nash equilibrium. Interestingly, in pure strategy Nash equilibria asymmetric competition occurs, where a firm competes in price and its rival firm competes in quantity. Further, the mixed strategy Nash equilibrium probability of a firm to compete in terms of price increases with the strength of network effects and is always greater than the probability to compete in terms of price.
    Keywords: Symmetric competition, Price competition, Network externalities, Quantity competition, Relative performance contract, Strategic delegation
    JEL: D43 L22 L13 D21
    Date: 2013–05
  3. By: Trishita Bhattacharjee (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth)
    Abstract: This paper examines the possibility of emergence of incentive equilibrium in the case of monopoly, without relying on agency theory based arguments. It shows that, when there is network effect of consumption, it is optimal for a monopolist to offer sales-oriented incentive scheme to her manager. The extent of sales-orientation of the optimal incentive scheme is higher in the case of stronger network effect. It also shows that both the monopolist and consumers are better off under managerial delegation than in case of no delegation, unlike as in the case of usual oligopoly without network effect.
    Keywords: Incentive equilibrium, Managerial delegation, Monopoly, Network effects
    JEL: D42 L20 L12
    Date: 2013–05
  4. By: Sonja Brangewitz (University of Paderborn); Claus-Jochen Haake (University of Paderborn)
    Abstract: In this paper, we analyze a model in which two divisions negotiate over an intrafirm transfer price for an intermediate product. Formally, we consider bargaining problems under incomplete information, since the upstream division’s (seller's) costs and downstream division's (buyer's) revenues are supposed to be private information. Assuming two possible types for buyer and seller each, we first establish that the bargaining problem is regular, regardless whether incentive and/or efficiency constraints are imposed. This allows us to apply the generalized Nash bargaining solution to determine transfer payments and transfer probabilities. Furthermore, we derive general properties of this solution for the transfer pricing problem and compare the model developed here with the existing literature for negotiated transfer pricing under incomplete information. In particular, we focus on the models presented in Wagenhofer (1994).
    Keywords: Transfer Pricing, Negotiation, Generalized Nash Bargaining Solution, Incomplete Information
    JEL: C78 D82 M41
    Date: 2013–07
  5. By: Yann Braouezec (IESEG School of Management (LEM-CNRS))
    Abstract: We consider a model in which the monopolist faces N different markets while the regulator chooses the number k of prices, where k is an integer between 1 and N. The monopolist thus faces a combinatorial optimization problem, the solution of which is called the optimal profit policy. We show that the number of discriminatory prices that maximizes the social welfare is never higher than a threshold k < N. This result thus allows us to disentangle the good aspect of third-degree price discrimination, the so-called output effect, from the bad one, that we call the pure profit effect. Further results are provided for the specific case of parallel demands. Finally, non-linear demands are briefly considered.
    Keywords: Monopoly, third-degree price discrimination, market segmentation, mixed-integer programming problem, regulation, principle of optimal partitioning
    JEL: D42 L11 L50
    Date: 2013–06
  6. By: Ervik, Inger Sommerfelt (Department of Economics, University of Bergen); Soegaard, Christian (Department of Economics, University of Warwick)
    Abstract: Conventional economic theory stipulates that output in Cournot competition is too low relative to that which is attained in perfect competition. We revisit this result in a General Cournot-competitive Equilibrium model with two industries that dier only in terms of productivity. We show that in general equilibrium, the more ecient industry produces too little and the less ecient industry produces too much compared to an optimal scenario with perfect competition.
    Keywords: Cournot oligopoly; GOLE (General Oligopolistic Equilibrium); industrial policy
    JEL: D50 H21 L13
    Date: 2013–06–20
  7. By: Pietri , Antoine; Tazdaït , Tarik; Vahabi , Mehrdad
    Abstract: This paper is among the first to theoretically examine the relevance of price competition in the protection market by focusing on the competition between empires. By distinguishing absolute and differential protection rents, we first define coercive rivalry and price competition among empires and then establish three types of empires: early empires of domination (like Akkadian empire), territorial empires (like Russian empire), and merchant empires (like Venetian empire). Empires are structured on the basis of two types of hierarchies that determine their protection costs: ‘top-down’ and ‘bottom-up.’ We systematically study the impact of asymmetrical protection costs on price competition in the light of Bertrand equilibria. We provide an economic rationale for the use of violence throughout history in conformity with the findings of economic historians.
    Keywords: Absolute and differential protection rents; Bertrand equilibrium; Empires of domination; Merchant empires; Territorial Empires
    JEL: D74 H11 H56 L13 P16
    Date: 2013–03
  8. By: Allain, Marie-Laure; Henry, Emeric; Kyle, Margaret
    Abstract: The sale of R&D projects through licensing facilitates the division of labor between research and development activities. This vertical specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: the buyer of an R&D project should assume development at the stage at which he has an efficiency advantage. We show that in an environment where the seller is overconfident about the value of the project, she may delay the sale to the more efficient firm in order to provide verifiable information about its quality, though this delay implies higher total development costs for the project. We obtain a condition for the equilibrium timing of licensing and examine how factors such as the intensity of competition between potential buyers influence it. We show that a wide array of different explanations, based on differences in information, beliefs or risk profiles, lead to the same qualitative results. We present empirical evidence from pharmaceutical licensing contracts that is consistent with our theoretical predictions.
    Date: 2013–07
  9. By: Mandorff, Martin (Swedish Competition Authority); Sahl, Johan (Swedish Competition Authority)
    Abstract: In a series of recent cases - most notably in TeliaSonera and Post Danmark - the equally efficient competitor principle has been explicitly recognised by the Court of Justice of the EU; more clearly so than by courts in the US, where the principle originates. However the exact scope of application of the principle in the EU remains to be defined. While its use in cases concerning predatory pricing and margin squeeze appears to be settled, it is still unclear to what extent the standard applies to other price-based forms of exclusion. And is the principle at all useful in the assessment of non-price-based exclusionary conduct? This article discusses the conceptual basis for the equally efficient competitor principle, and attempts to define its role in the assessment of exclusionary abuse in the EU.
    Keywords: equally efficient competitor; abuse of dominance; monopolization; exclusion; competition law; competition economics; antitrust
    JEL: K00 K21 L12 L40
    Date: 2013–05–15
  10. By: Jensen, Sissel (Dept. of Economics, Norwegian School of Economics); Kvaløy, Ola (UiS Business School, University of Stavanger); Olsen, Trond E. (Dept. of Business and Management Science, Norwegian School of Economics); Sørgard, Lars (Dept. of Economics, Norwegian School of Economics)
    Abstract: The economics of crime and punishment postulates that higher punishment leads to lower crime levels, or less severe crime. It is however hard to get empirical support for this rather intuitive relationship. This paper offers a model that can contribute to explain why this is the case. We show that if criminals can spend resources to reduce the probability of being detected, then a higher general punishment level can increase the crime level. In the context of antitrust enforcement, the model shows that competition authorities who attempt to fight cartels by means of tougher sanctions for all offenders may actually lead cartels to increase their overcharge when leniency programs are in place.
    Keywords: Antitrust enforcement; leniency programs; economics of crime
    JEL: K20 K21 L40
    Date: 2013–05–27
  11. By: Rosen, Christiane (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN)); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))
    Abstract: In this paper we report on an experiment we conducted that has been inspired by energy trading. Bidders with a portfolio consisting of three cost-quantity pairs bid into a market with a single buyer. Depending on the treatment, they are allowed to submit either one or two bids constructed from their endowments. The novelty of our study is the experimental examination of a procurement auction in the context of divisible goods and the evaluation of the effect of multiple bids in comparison to single bids in such an auction. We created both a low and a high competition scenario to evaluate the effects of competitive forces on each auction format. We find that multiple bids have a calming effect on the market, reducing volatility substantially. However, this comes at the cost of lower profits for bidders, whereas auctioneer’s revenue is maximized. At the same time, supply reduction, which is equivalent to demand reduction in demand auctions, is more pronounced in the multiple-bid setting. A reason for this might be that expensive units are driven out of the market more easily in the multi-bid setting, as they can no longer be offered without causing loss of market efficiency during dispatch.
    Keywords: Divisible good auction; laboratory experiment; discriminatory pricing; multiple bids
    JEL: C72 C91 D44
    Date: 2013–04
  12. By: Björnerstedt, Jonas (Swedish Competition Authority); Verboven, Frank (University of Leuven)
    Abstract: In this article we show how to implement merger simulation in Stata after estimating an aggregate nested logit demand system with a linear regression model. We also show how to implement merger simulation when the demand parameters are not estimated, but instead calibrated to be consistent with outside information on average price elasticities and profit margins.
    Keywords: mergersim; merger simulation; aggregate nested logit model; unit demand; constant expenditures demand
    JEL: C63 C87 D40 L10
    Date: 2013–04–15
  13. By: Vivienne Pham (School Economics, La Trobe University); David Prentice (School of Economics, La Trobe University)
    Abstract: In this paper we empirically analyse two counterfactual situations facing an antitrust au- thority following the merger of two of the largest international cigarette companies. First we estimate a random coecients model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are consistent with the independent estimates available. We then use the model to simulate the proposed merger and the partial divesti- ture that was accepted by the Australian antitrust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows that the model is partially successful in predicting the ranking of price changes across companies following the divestiture. This suggests structural econometric analysis us- ing a random coecients model can provide information for antitrust authorities assessing the implications of a potential merger and partial divestiture.
    Keywords: mergers, divestitures, cigarettes, tobacco, anti-trust policy, competition policy
    JEL: L41 L66
    Date: 2013
  14. By: Jolivet, Grégory (University of Bristol); Jullien, Bruno (TSE,IDEI); Postel-Vinay, Fabien (University of Bristol and Sciences Po)
    Abstract: The broad aim of this paper is to gain some insight into the quantitative importance of reputation in e-commerce. We use an exhaustive data set from one of France’s largest e-commerce platforms,, to estimate a statistical causal effect of a seller’s reputation (and size) on transaction prices for a uniquely large range of product categories (books, CDs, video games or DVDs), product conditions (used or new) and seller types (individual or professional sellers). We go beyond the results currently available in the empirical literature by tackling the issue of seller unobserved heterogeneity and the weak exogeneity of reputation (and size) in price equations. Our results show large-scale empirical evidence of a significant, positive and strong effect of seller reputation on prices
    Date: 2013–07
  15. By: Luciano Fanti; Nicola Meccheri
    Abstract: Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex costs) and centralised unionisation. Firstly, it is highlighted that a wage “non-rigidity” result applies: the post-merger wage is higher than in the pre-merger equilibrium. Secondly, it is shown that a “reversal result” in relation to merger profitability actually realises when the union is sufficiently oriented towards wages. Moreover, the higher the reservation wage, the degree of product differentiation and the union’s relative bargaining power, the higher the probability that merger reduces profits.
    Keywords: wage rigidity result, merger profitability, unionised duopoly, convex costs.
    JEL: D43 L13 J50
    Date: 2013–07–16
  16. By: Doan, Tinh; Nguyen, Ha
    Abstract: This paper examines the roles of cost of labour input and competition on productivity dispersion in the Vietnamese manufacturing sector. We look at the effect accounting for labour input quality has on explaining productivity dispersion. This paper tests the hypothesis that mismeasurement of labour input may play a role in large productivity dispersion. We use the cost of labour input of firms as a proxy measure of labour input quality to examine whether incorporating this measure accounts for a part of the productivity dispersion. The paper also examines the role of competition in the extent of productivity dispersion.
    Keywords: productivity dispersion, competition, labour input, transition economies
    JEL: J24 L1 L25 P27
    Date: 2013–07–16

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