nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒07‒28
fifteen papers chosen by
Russell Pittman
US Government

  1. Search Deterrence By Mark Armstrong; Jidong Zhou
  2. Is there an exclusionary effect of retroactive price reduction schemes? By Lisa Bruttel
  3. Quantitative Comparative Statics for a Multimarket Paradox By Tobias Harks; Philipp von Falkenhausen
  4. How to Commit to a Future Price By Keisuke Hattori; Amihai Glazer
  5. Patent protection under endogenous product differentiation By Arijit Mukherjee
  6. Empirical studies of trade marks - the existing economic literature By Christine Greenhalgh; Philipp Schautschick
  7. Optimal R&D Subsidies with Heterogeneous Firms in a Dynamic Setting By Hall, Joshua; Laincz, Christopher
  8. Cobb-Douglas preferences in bilateral oligopoly By Dickson Alex
  9. Export price adjustments under financial constraints. By Angelo Secchi; Federico Tamagni; Chiara Tomasi
  10. The effects of industry structure and yardstick design on strategic behavior with yardstick competition: an experimental study By Mulder, Machiel; Haan, Marco A.; Dijkstra, Peter T.
  11. The fight against cartels: a transatlantic perspective By E. Dargaud; A. Mantovani; C. Reggiani
  12. Competition in the Audit Market: Policy Implications By Joseph J. Gerakos; Chad Syverson
  13. Port Competition and Welfare Effect of Strategic Privatization By Czerny, Achim; Höffler, Felix; Mun, Se-il
  14. Universal Service Obligation and Loyalty Effects: An Agent-Based Modelling Approach By Bakhtieva, Dilyara; Kiljański, Kamil
  15. Investment Coordination in Network Industries: The Case of Electricity Grid and Electricity By Höffler, Felix; Wambach, Achim

  1. By: Mark Armstrong; Jidong Zhou
    Abstract: A seller wishes to prevent the discovery of rival offers by its prospective customers.  We study sales techniques which serve this purpose by making it harder for a customer to return to buy later after a search for alternatives.  These include making an exploding offer, offering a "buy-now" discount, or requiring payment of a deposit in order to buy later.  It is unilaterally profitable for a seller to deter search under mild conditions, but sellers can suffer when all do so.  In a monopoly setting where the buyer has an uncertain outside option, the optimal selling mechanism features both buy-now discounts and deposit contracts.  When a seller cannot commit to its policy, it exploits the inference that those consumers who try to buy later have no good alternative.  In many cases the outcome then involves exploding offers, so that no consumers return to buy after search.
    Keywords: Consumer search, sales techniques, price discrimination, sequential search
    JEL: D18 D83 L13 L80
    Date: 2013–06–27
  2. By: Lisa Bruttel
    Abstract: This paper presents an experiment on the loyalty enhancing effect potentially created by retroactive price reduction schemes. Such price reductions are applied ex post to all units bought in a certain time frame if the total quantity passes a given threshold. Close to the threshold, the marginal price for the missing units up to the threshold is very low. A dominant firm can use this effect to exclude potential rivals from competition, which is why some jurisdictions consider retroactive discounts as unlawful. This study considers whether there in fact is a loyalty enhancing effect of retroactive discounts and shows how it relates to risk preferences and loss aversion.
    Keywords: consumer behavior, risk aversion, loss aversion, experiment
    Date: 2013
  3. By: Tobias Harks; Philipp von Falkenhausen
    Abstract: Comparative statics is a well established research field where one analyzes how changes in parameters of a strategic game affect the resulting equilibria. Examples of such parameter changes include tax/subsidy changes or production cost shifts in oligopoly models. While classic comparative statics is mainly concerned with qualitative approaches (e.g., deciding whether a marginal parameter change improves or hurts equilibrium profits or welfare), we aim at quantifying the possible extend of such an effect. We apply our quantitative approach to the multimarket oligopoly model introduced by Bulow, Geanakoplos and Klemperer (1985). In this model, there are two firms competing on two markets with one firm having a monopoly on one market. Bulow et al. describe the counterintuitive example of a positive price shock in the firm's monopoly market resulting in a reduction of the firm's equilibrium profit. We quantify for the first time the worst-case profit reduction for the case of two markets with affine price functions and firms with convex cost technologies. We show that the relative loss of the monopoly firm is at most 25% no matter how many firms compete on the second market. In particular, we show for the setting of Bulow et al. involving affine price functions and only one additional firm on the second market that the worst case loss in profit is bounded by 6.25%. We further investigate a dual effect: How much can a firm gain from a negative price shock in its monopoly market? Our results imply that this gain is at most 33%. We complement our bounds by concrete examples of markets where these bounds are attained.
    Date: 2013–07
  4. By: Keisuke Hattori (Osaka University of Economics); Amihai Glazer (Department of Economics, University of California-Irvine)
    Abstract: Consider a monopolist which sells a durable good and also consumables that require use of the durable good. After the firm sells the durable good, it has an incentive to charge a price greater than marginal cost for the consumables. Realizing that they will have to pay a high price for consumables, consumers would be willing to pay only a low price for the durable good, reducing the firm's profits. The paper considers three mechanisms which would induce the firm to charge a low price for the consumables. First, it can enter into a financial contract paying a lump-sum fee in return for a per-unit subsidy for the selling the consumable. Second, the seller can allow entry into the market for the consumable. Third, the firm may sell the durable good at a low price to consumers who little value the durable and consumable, so that it will have an incentive to later set a low price for the consumable.
    Keywords: Pricing commitment; Durable goods
    JEL: L14
    Date: 2013–07
  5. By: Arijit Mukherjee (School of Business and Economics, Loughborough University, UK)
    Abstract: It is generally believed that patent pools by complementary input suppliers make the consumers, final goods producers and the society better off by reducing the complements problem. We show that this may not be the case under endogenous technology choice. Although a patent pool reduces input price, it may make the consumers and the society worse off by reducing innovation. We also show that a patent pool makes the input suppliers better off, but it may not make all final goods producers better off compared with non-cooperation between the input suppliers.
    Keywords: Complementary inputs; Patent pool; Innovation; Welfare
    JEL: L13 O31
    Date: 2013–07
  6. By: Christine Greenhalgh; Philipp Schautschick
    Abstract: This paper surveys empirical studies employing trade mark data that exist in the economic literature to date.  Section 1) documents the use of trade marks by firms in several advanced countries including Australia, the United Kingdom and the United States, 2) reviews different attempts to gauge the function of a trade mark as indicator of innovation and product differentiation, and 3) provides an overview of the association of trade marks with dimensions of firm performance and productivity.  Sections 4) and 5) give accounts of studies that focus on the social costs and value of trade marks, namely their importance for firm survival, their impact on demand, and firms' incentives to innovate but also to raise rivals' costs.  Section 6) covers first endeavours to investigate the interplay between different types of intellectual property rights, while 7) briefly concludes.
    Keywords: Intellectual property, trade marks, empirical studies
    JEL: O33 O34
    Date: 2013–06–21
  7. By: Hall, Joshua (University of Tampa); Laincz, Christopher (Department of Economics & International Business LeBow College of Business Drexel University)
    Abstract: When firms engaged in R&D are observably heterogeneous (in size) and policymakers are able to condition policy on the observed heterogeneity, what is the optimal policy? This paper starts with a static two-stage duopoly model of R&D competition with uncertainty and finds it welfare enhancing to subsidize the larger firms, with no subsidies for (or taxes on) the smaller firm (extending existing results, Lahiri and Ono, 1999). This result follows because marginal cost reductions by the largest firm have larger net effects on consumer and producer surplus. The policymaker's goal is effectively to minimize the average cost of production. However, when we move to a dynamic setting, the optimal policy is less clear. When firms compete repeatedly, the degree of competition becomes an endogenous variable over the infinite horizon. The optimal policy depends on the nature of long-run competition. In some situations, the optimal policy remains the same, subsidize the larger firm. However, in other scenarios, the policymaker optimally chooses to subsidize the smaller firm more heavily to promote more intense competition which lowers the long-run deadweight loss and long run costs through increased R&D competition.
    Keywords: R&D; subsidies; duopoly; dynamics; heterogeneous firms
    JEL: L11 L16 O31
    Date: 2012–06–26
  8. By: Dickson Alex (Department of Economics, University of Strathclyde)
    Abstract: Bilateral oligopoly is a simple model of exchange in which a finite set of sellers seek to exchange the goods they are endowed with for money with a finite set of buyers, and no price-taking assumptions are imposed. If trade takes place via a strategic market game bilateral oligopoly can be thought of as two linked proportional-sharing contests: in one the sellers share the aggregate bid from the buyers in proportion to their supply and in the other the buyers share the aggregate supply in proportion to their bids. The analysis can be separated into two ‘partial games’. First, fix the aggregate bid at B; in the first partial game the sellers contest this fixed prize in proportion to their supply and the aggregate supply in the equilibrium of this game is X˜ (B). Next, fix the aggregate supply at X; in the second partial game the buyers contest this fixed prize in proportion to their bids and the aggregate bid in the equilibrium of this game is ˜B (X). The analysis of these two partial games takes into account competition within each side of the market. Equilibrium in bilateral oligopoly must take into account competition between sellers and buyers and requires, for example, ˜B (X˜ (B)) = B. When all traders have Cobb-Douglas preferences ˜ X(B) does not depend on B and ˜B (X) does not depend on X: whilst there is competition within each side of the market there is no strategic interdependence between the sides of the market. The Cobb-Douglas assumption provides a tractable framework in which to explore the features of fully strategic trade but it misses perhaps the most interesting feature of bilateral oligopoly, the implications of which are investigated.
    Keywords: strategic market game, bilateral oligopoly, Cobb-Douglas preferences
    JEL: C72 D43 D50
    Date: 2013–06
  9. By: Angelo Secchi (Centre d'Economie de la Sorbonne - Paris School of Economics and LEM Scuola Superiore Sant'Anna); Federico Tamagni (Institute of Economics, LEM Scuola Superiore Sant'Anna); Chiara Tomasi (Università di Trento and LEM Scuola Superiore Sant'Anna)
    Abstract: By exploring a rich dataset that links international trade transactions to a panel of Italian manufacturing firms, this paper provides new evidence on the role of financial constraints on price variations across exporting firms. After controlling for relevant firm characteristics and potential endogeneity of financial constraints, we find that constrained firms charge higher prices than unconstrained firms exporting in the same product-destination market. The positive price difference increases with the degree of horizontal differentiation of products, while it is smaller for vertically differentiated products, where there is more scope for quality adjustment. Our results are consistent with a scenario where constrained firms exploit demand rigidities to push up their prices to sustain revenues and keep operations going in the attempt to escape the constraints.
    Keywords: Financial constraints, export prices, horizontal and vertical differentiation, quality adjustment.
    JEL: F10 F14 F36 G20 G32 L25
    Date: 2013–07
  10. By: Mulder, Machiel; Haan, Marco A.; Dijkstra, Peter T. (Groningen University)
    Abstract: We present an experiment on yardstick competition. Experimental firms set cost levels in each period and can communicate with each other in an attempt to increase the regulated price. We find that when market shares are heterogeneous, collusion is least frequent and prices are lowest. The number of players on a market also infuences prices, but to a lesser extent. Comparing across yardsticks, the discriminatory yardstick yields the lowest prices, while a best-practice yardstick yields the highest prices.
    Date: 2013
  11. By: E. Dargaud; A. Mantovani; C. Reggiani
    Abstract: The fight against cartels is a priority for antitrust authorities on both sides of the Atlantic. What differs between the EU and the US is not the basic toolkit for achieving deterrence, but to whom it is targeted. In the EU, pecuniary sanctions against the firm are the only instruments available to the Commission, while in the US criminal sanctions are also widely employed. The aim of this paper is to compare two different types of fines levied on managerial firms when they collude. We consider a profit based fine as opposed to a delegation based fine, with the latter targeting the manager in a more direct way. Under the assumption of revenue equivalence, we find that the delegation based fine, although distortive, is more effective in deterring cartels than the profit based one. When evaluating social welfare, a trade-off between deterrence and output distortion can arise. However, if the antitrust authority focuses on consumer surplus, then the delegation based fine is to be preferred.
    JEL: K21 L44 K42 L21
    Date: 2013–07
  12. By: Joseph J. Gerakos; Chad Syverson
    Abstract: The audit market's unique combination of features–its role in capital market transparency, mandated demand, and concentrated supply–means it receives considerable attention from policymakers. We explore the effects of two market scenarios that have been the focus of policy discussions: a) further supply concentration due to one of the "Big 4" auditors exiting and b) mandatory audit firm rotation. To do so, we first estimate publicly traded firms' demand for auditing services, treating services provided by each of the Big 4 as differentiated products. We then use those estimates to calculate how each scenario would affect client firms' consumer surplus. We estimate that, conservatively, exit by one of the Big 4 would reduce client firms' surplus by $1.2-1.8 billion per year. These estimates reflect only firms' lost options to hire the exiting auditor; they do not include the likely fee increases resulting from less competition among auditors. We calculate that the latter could result in audit fee increases between $0.3-0.5 billion per year. Such losses are substantial; by comparison, total audit fees for public firms were $11 billion in 2010. We find similarly large impacts from mandatory audit firm rotation, estimating consumer surplus losses at approximately $2.4-3.6 billion if rotation were required after ten years and $4.3-5.5 billion if rotation were mandatory after only four years.
    JEL: D43 G3 K22 L13 L84 M42
    Date: 2013–07
  13. By: Czerny, Achim ((WHU - Otto Beisheim School of Management)); Höffler, Felix (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Mun, Se-il (Kyoto University)
    Abstract: Private operation of port facilities is becoming increasingly common worldwide and many governments consider the privatization of public ports as a policy option. We investigate the effect of port privatization in a setting with two ports located in different countries, serving their home market but also competing for transshipment traffic from a third region. Each government chooses whether to privatize its port or to keep port operations public. We show that there exist equilibria in which the two governments choose privatization. In these equilibria, national welfare is higher relative to a situation where both ports are public. Since port charges are strategic complements, privatization can act as a valuable precommitment tool for the two governments and allows for a better exploitation of the third region. However, from the perspective of maximizing the joint national welfare of both port countries, there is an inefficiently low incentive to privatize. It is also shown that a country with a smaller home market has a larger incentive to choose private port operation.
    Keywords: Infrastructure competition; privatization; strategic delegation
    JEL: L11 L90 L98
    Date: 2013–01–24
  14. By: Bakhtieva, Dilyara; Kiljański, Kamil
    Abstract: In network industries, a Universal Service Obligation (USO) is often seen as a burden on an incumbent, which requires compensation for the net cost of such service provision. This paper estimates the effects of consumer loyalty as an intangible benefit of USO in the postal sector. In doing so, the agent-based modelling (ABM) approach is applied, which makes it possible to model the behaviour of boundedly rational consumers and is thus particularly appropriate for taking into account intangibles considerations. The analysis shows that loyalty is crucial to whether the USO uniform pricing constraint results in loss-making or profitability. Under certain conditions and in the presence of a loyalty parameter, uniform pricing gives a USO provider an advantage, when the size of the rural area is sufficiently big and a disadvantage, if its size is too small. This finding is counterintuitive as USO providers in countries with sparsely populated areas are typically expected to incur a significant net cost of USO.
    Keywords: agent-based modelling; liberalisation of the postal markets; postal sector; Universal Service Obligation (USO); USO provider
    JEL: K21
    Date: 2012
  15. By: Höffler, Felix (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Wambach, Achim (Department of Economics, University of Cologne)
    Abstract: Liberalization of network industries frequently separates the network from the other parts of the industry. This is important in particular for the electricity industry where private firms invest into generation facilities, while net- work investments usually are controlled by regulators. We discuss two regulatory regimes. First, the regulator can only decide on the network extension. Second, she can additionally use a "capacity market" with payments contingent on private generation investment. For the first case, we find that even absent asymmetric information, a lack of regulatory commitment can cause inefficiently high or inefficiently low investments. For the second case, we develop a standard handicap auction which implements the first best under asymmetric information, if there are no shadow costs of public funds. With shadow costs, no simple mechanism can implement the second best outcome.
    Keywords: Regulation; commitment; capacity markets; transmission system investment
    JEL: D44 K23 L51 L94
    Date: 2013–06–24

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