nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒08‒05
seventeen papers chosen by
Russell Pittman
US Government

  1. Endogenous timing in quality choices and price competition By Lambertini, Luca; Tampieri, Alessandro
  2. Platform Competition under Dispersed Information By Bruno Jullien; Alessandro Pavan
  3. The value of switching costs. By Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
  4. Export price adjustments under financial constraints By Angelo Secchi; Federico Tamagni; Chiara Tomasi
  5. The Buyer Margins of Firms' Exports By Jerónimo Carballo; Gianmarco I. P. Ottaviano; Christian Volpe Martincus
  6. The strategic use of fuzziness in patent specifications By Zaby, Alexandra K.; Heger, Diana
  7. Optimal Licensing of Uncertain Patents in the Shadow of Litigation By Rabah Amir; David Encaoua; Yassine Lefouili
  8. Actions Speak Louder than Words: Econometric Evidence to Target Tacit Collusion in Oligopolistic Markets By Andreoli-Versbach, Patrick; Franck, Jens-Uwe
  9. The text for legality under EU competition rules: What guidance do the commission's guidelines provide? By Behrens, Peter
  10. Price Differentiation and Menu Costs in Credit Card Payments By Marcos Valli Jorge; Wilfredo Leiva Maldonado
  11. Search Engine Optimization: What Drives Organic Traffic to Retail Sites? By Michael R. Baye; Babur De los Santos; Matthijs R. Wildenbeest
  12. The dynamics of pharmaceutical regulation and R&D investments By Rosella Levaggi; Michele Moretto; Paolo Pertile
  13. A nonlinear product differentiation model à la Cournot: a new look to the newspapers industry By Mercedes Esteban Bravo; José Manuel Vidal-Sanz
  14. Endogenous Price Commitment, Sticky and Leadership Pricing: Evidence from the Italian Petrol Market By Andreoli-Versbach, Patrick; Franck, Jens-Uwe
  15. Joint Design and Pricing of Intermodal Port - Hinterland Network Services: Considering Economies of Scale and Service Time Constraints By Ypsilantis, P.; Zuidwijk, R.A.
  16. Greasing the Wheels of Rural Transformation? Margarine and the Competition for the British Butter Market By Markus Lampe; Paul Sharp
  17. Endogenous Shifts in OPEC Market Power: A Stackelberg Oligopoly with Fringe By Daniel Huppmann

  1. By: Lambertini, Luca; Tampieri, Alessandro
    Abstract: The authors modify the price-setting version of the vertically differentiated duopoly model by Aoki (Effect of Credible Quality Investment with Bertrand and Cournot Competition, 2003) by introducing an extended game in which firms noncooperatively choose the timing of moves at the quality stage. Their results show that there are multiple equilibria in pure strategies, whereby firms always select sequential play at the quality stage. They also investigate the mixed-strategy equilibrium, revealing that the probability of generating out-of-equilibrium outcomes is higher than its complement to one. In the alternative case with full market coverage, the authors show that the quality stage is solved in dominant strategies and therefore the choice of roles becomes irrelevant as the Nash and Stackelberg solutions coincide. --
    Keywords: Endogenous timing,product quality,market coverage
    JEL: C72 L13
    Date: 2013
  2. By: Bruno Jullien; Alessandro Pavan
    Abstract: We study monopolistic and competitive pricing in a two-sided market where agents have incomplete information about the quality of the product provided by each platform. The analysis is carried out within a global-game framework that offers the convenience of equilibrium uniqueness while permitting the outcome of such equilibrium to depend on the pricing strategies of the competing platforms. We first show how the dispersion of information interacts with the network effects in determining the elasticity of demand on each side and thereby the equilibrium prices. We then study "informative" advertising campaigns that increase the agents’ ability to estimate their own valuations and/or the distribution of valuations on the other side of the market.
    Date: 2013–05–01
  3. By: Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
    JEL: D43 L12 L13
    Date: 2013–05
  4. By: Angelo Secchi (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Laboratory of Economics and Management (LEM) - Scuola Superiore Sant'Anna); Federico Tamagni (Laboratory of Economics and Management (LEM) - Scuola Superiore Sant'Anna); Chiara Tomasi (Laboratory of Economics and Management (LEM) - Scuola Superiore Sant'Anna, Università di Trento - Dipartimento di Economia e Management)
    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
    Date: 2013–07
  5. By: Jerónimo Carballo; Gianmarco I. P. Ottaviano; Christian Volpe Martincus
    Abstract: We use highly disaggregated firm-level export data from Costa Rica, Ecuador, and Uruguay over the period 2005-2008 to provide a precise characterization of firms' export margins, across products, destination countries, and crucially customers. We show that a firm's number of buyers and the distribution of sales across them systematically vary with the characteristics of its destination markets. While most firms serve only very few buyers abroad, the number of buyers and the skewness of sales across them increases with the size and the accessibility of destinations. We develop a simple model of selection with heterogeneous buyers and sellers consistent with these findings in which tougher competition induces a better alignment between consumers' ideal variants and firms' core competencies. This generates an additional channel through which tougher competition leads to higher productivity and higher welfare and hints at an additional source of gains from trade as long as freer trade fosters competition.
    Keywords: Buyer margins, market segmentation, competition, markupsbuyer margins, market segmentation, competition, markups
    JEL: F12
    Date: 2013–07
  6. By: Zaby, Alexandra K.; Heger, Diana
    Abstract: Innovators seek to protect their intellectual assets by patenting them, at the same time trying to avoid any disclosure of critical knowledge. Given that a patent specification has to include a clear description of the patented matter so that anybody skilled in the art is enabled to reproduce the invention, the non-disclosure intention seems contradictory to patent law. This paper provides a model identifying the incentives for firms to deliberately obscure their inventive knowledge in a patent specification. --
    Keywords: patent specification,disclosure requirement,strategic firm behavior,fuzzy patents
    JEL: O31 O34 L24 D21
    Date: 2013
  7. By: Rabah Amir (University of Arizona - University of Arizona); David Encaoua (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Yassine Lefouili (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: The paper investigates the choice of a licensing mechanism by the holder of a patent whose validity may be challenged. Focusing fi…rst on weak patents, i.e. patents that have a high probability of being invalidated by a court if challenged, we show that the patent holder fi…nds it optimal to use a per-unit royalty contract if the strategic effect of an increase in a potential licensees unit cost on the equilibrium industry profi…t is positive. The latter condition ensures the superiority of the per-unit royalty mechanism independently of whether the patent holder is an industry insider or outsider, and is shown to hold in a Cournot (resp. Bertrand) oligopoly with homogeneous (resp. differentiated) products under general assumptions on the demands faced by fi…rms. We then examine the optimal licensing of patents that are uncertain but not necessarily weak. As a byproduct of our analysis, we contribute to the oligopoly literature by offering some new insights of independent interest regarding the effects of cost variations on Cournot and Bertrand equilibria.
    Keywords: Licensing mechanisms, Uncertain patents, Patent litigation, Cost comparative statics.
    Date: 2013–05–24
  8. By: Andreoli-Versbach, Patrick; Franck, Jens-Uwe
    Abstract: Tacit collusion reduces welfare comparably to explicit collusion but remains mostly unaddressed by antitrust enforcement which greatly depends on evidence of explicit communication. We propose to target specific elements of firms’ behavior that facilitate tacit collusion by providing quantitative evidence that links these actions to an anticompetitive market outcome. We apply our approach to incidents on the Italian gasoline market where the market leader unilaterally announced its commitment to a policy of sticky pricing and large price changes which facilitated price alignment and coordination of price changes. Antitrust policy has to distinguish such active promotion of a collusive strategy from passive (best response) alignment. Our results imply the necessity of stronger legal instruments which target unilateral conduct that aims at bringing about collusion.
    Keywords: antitrust law; tacit collusion; oligopolistic competition; gasoline market
    JEL: K21 K42 L13 L71 L41
    Date: 2013–07
  9. By: Behrens, Peter
    Abstract: Under the regime of Regulation 1/2003 on the implementation of the rules of competition laid down in Articles 101 and 102 TFEU undertakings are obliged to take care by themselves of their compliance with the competition rules. For practical purposes this is also true when it comes to the rules applicable to the the control of concentrations under Regulation 139/2004. In order to facilitate the task of undertakings, which has become even more difficult according to the more economic approach to competition law, the Commission has published a number of guidelines which are setting out the relevant criteria applied by the Commission itself. A closer look reveals, however, that the criteria defined in the various guidelines are far from reflecting a coherent, precise and consistent approach of the Commission. At least four distinct legal tests may be identified, such as a consumer harm-test, a negative market effects-test, a market power-test and a competitive process-test. This paper analyses the various guidelines in order to demonstrate how these different approaches are embedded in their wording. The unavoidable conclusion is that undertakings get much less guidance from the guidelines than they would be justified to expect. This is all the more deplorable, because the European cours' jurisdprudence continues to follow an approach which is considerably different from the Commission's. --
    Keywords: competition rules,merger control,competition guidelines,effects based approach,consumer harm,market power,market structure,competitive process,competitors' rivalry,consumer choice
    Date: 2013
  10. By: Marcos Valli Jorge; Wilfredo Leiva Maldonado
    Abstract: We build a model of credit card payments where the retailers are allowed to charge differential prices depending on the instrument of payment chosen by the consumer. We follow the Rochet and Wright (2010) approach, but assuming a credit card system without a no-surcharge rule or any type of price differentiation disincentive. In a Hotelling competition framework at the retailers level, the competitive equilibrium prices are computed assuming that the store credit provided by the retailer is less cost efficient than the one provided by the credit card. In accordance with the literature, we obtain that the interchange fee becomes neutral if we eliminate the no-surcharge rule, when the interchange fee loses its ability to distort the individual consumer’s decisions displacing the aggregated consumers’ welfare from its maximum. We prove that the average price obtained under price differentiation is smaller than the single retail price under the no-surcharge rule, despite the retailer’s margins being the same in both scenarios. Furthermore, we show how some cross subsidies are eliminated when price differentiation is allowed. In addition, we introduce menu costs to prove that there is a threshold value for the interchange fee such that price differentiation is equilibrium if that fee is above this value. The threshold may be interpreted as an endogenous cap for the interchange fee fixed by the credit card industry. Finally we conclude that, even with menu costs associated to price differentiation, the consumers’ welfare can be greater in the price differentiated equilibrium than in the single price equilibrium under the non-surcharge rule.
    Date: 2013–07
  11. By: Michael R. Baye (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Babur De los Santos (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Matthijs R. Wildenbeest (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: The lion’s share of retail traffic through search engines originates from organic (natural) rather than sponsored (paid) links. We use a dataset constructed from over 12,000 search terms and 2 million users to identify drivers of the organic clicks that the top 759 retailers received from search engines in August 2012. Our results are potentially important for search engine optimization (SEO). We find that a retailer’s investments in factors such as the quality and brand awareness of its site increases organic clicks through both a direct and an indirect effect. The direct effect stems purely from consumer behavior: The greater the brand equity of an online retailer, the greater the number of consumers who click its link rather than a competitor in the list of organic results. The indirect effect stems from our finding that search engines tend to place better-branded sites in better positions, which results in additional clicks since consumers tend to click links in more favorable positions. We also find that consumers who are older, wealthier, conduct searches from work, use fewer words or include a brand name product in their search are more likely to click a retailer’s organic link following a product search. Finally, the brand equity of a retail site appears to be especially important in attracting organic traffic from individuals with higher incomes. The beneficial direct and indirect effects of an online retailer’s brand equity on organic clicks, coupled with the spillover effects on traffic through other online and traditional channels, leads us to conclude that investments in the quality and brand awareness of a site should be included as part of an SEO strategy.
    Keywords: search engine optimization, organic clicks, search marketing
    JEL: L0 D43 D83 L13
    Date: 2013–05
  12. By: Rosella Levaggi (; Michele Moretto (; Paolo Pertile (Department of Economics (University of Verona))
    Abstract: The paper uses a real option approach to investigate the potential impact of performance-based risk-sharing agreements for the reimbursement of new drugs in comparison with standard cost-effectiveness thresholds. The results show that the exact definition of the risk-sharing agreement is key in determining its economic effects. In particular, despite the concerns expressed by some authors, the incentive for a firm to invest in R&D may be the same or even greater than under cost-effectiveness thresholds, if the agreement is sufficiently mild in defining the conditions under which the product is not (fully) reimbursed to the firm. In this case, patients would benefit from earlier access to innovations. The price for this is less value for money for the insurer at the time of adoption of the innovation.
    Keywords: pharmaceutical regulation, real options, R&D, risk-sharing
    JEL: I18 L51 C61
    Date: 2013–08
  13. By: Mercedes Esteban Bravo; José Manuel Vidal-Sanz
    Abstract: In this work, we develop a new model for competition in markets with differentiated products. In addition, we present a consumer model designed to produce a flexible nonlinear inverse demand system that resembles the classical Multinomial Logit model, and discuss several extensions. We characterize firms competition in quantities based on the inverse demand system. The model is applied to the Spanish newspaper industry. This is a highly competitive two-sided market whose revenues are generated from sales and to a larger extent from advertising driven by its circulation. We then characterize the Perfect Equilibrium by conditional moment conditions, and estimate the parameters using the Generalized Method of Moments
    Keywords: Newspapers, Differentiated products, Dynamic equilibrium, Generalized method of moments, Advertising expenditure, Time series, Persistence, Cointegration, Structural changes
    Date: 2013–07
  14. By: Andreoli-Versbach, Patrick; Franck, Jens-Uwe
    Abstract: This article studies dynamic pricing strategies in the Italian gasoline market before and after the market leader unilaterally announced its commitment to adopt a sticky-pricing policy. Using daily Italian firm level prices and weekly average EU prices, we show that the effect of the new policy was twofold. First, it facilitated price alignment and coordination on price changes. After the policy change, the observed pricing pattern shifted from cost-based to sticky-leadership pricing. Second, using a dif-in-dif estimation and a synthetic control group, we show that the causal effect of the new policy was to significantly increase prices through sticky-leadership pricing. Our paper highlights the importance of price-commitment by a large firm in order to sustain (tacit) collusion.
    Keywords: tacit collusion; leadership pricing; sticky pricing; endogenous commitment
    JEL: K21 K42 L13 L41 L71
    Date: 2013–07
  15. By: Ypsilantis, P.; Zuidwijk, R.A.
    Abstract: Maritime container terminal operating companies have extended their role from node operators to that of multimodal transport network operators. They have extended the gates of their seaport terminals to the gates of inland terminals in their network by means of frequent services of high capacity transport modes such as river vessels (barges) and trains. These network operators face the following three interrelated decisions: (1) determine which inland terminals act as extended gates of the seaport terminal, (2) determine capacities of the corridors, i.e. capacity of the transport means and frequency of service, and (3) set the prices for the transport services on the network. We propose a bi-level programming model to jointly design and price extended gate network services for profit maximization. The network operator does so while anticipating the decisions of the customers who choose minimum cost paths to their final destinations, and who always have the option to choose direct trucking offered by the competition. The model in this paper extends existing bi-level models in a multimodal format by including service time constraints and economies of scale. Considering the special structure of our problem, we propose a heuristic that provides near optimal solutions to our problem in substantially less time. Through experimental results in some realistic instances, we study optimal network designs while comparing sea port-to-door and sea port to inland port services and situations where transit time requirements do and do not apply. Our results show that when demand is relatively low, there are significant differences in the optimal network design for port-to-door versus port-to-port services. In the case of port-to-door services, the prices of services are determined by the competition and not by the design of the network, so the network is designed against minimum costs, and economies of scale are achieved by consolidating flows through a limited number of extended gates. The case of port-to-port services is different, i.e. revenues are enhanced not so much by reducing costs through the exploitation of economies of scale, but by exploiting the possibilities to dedicate extended gates to market segments for which the competition leaves room for higher port-to-port tariffs.
    Keywords: pricing;design;bi-level programming model;intermodal port - hinterland network services
    Date: 2013–07–23
  16. By: Markus Lampe (Universidad Carlos III Madrid); Paul Sharp (University of Southern Denmark)
    Abstract: We consider an example of the impact of a new good on producers of close substitutes: the invention of margarine and its rapid introduction into the British market from the mid-1870s. This presented a challenge to the traditional suppliers of that market, butter producers from different European countries. We argue that the capacity to react quickly to the appearance of this cheap substitute by improving quality and establishing product differentiation was critical for the fortunes of butter producers. We illustrate this by discussing the different reactions to margarine and quality upgrading in Ireland, Denmark and the Netherlands. A statistical analysis using monthly data for Britain from 1881-87 confirms that margarine had a greater impact on the price of poor quality butter than that of high quality butter, presumably because it was a stronger substitute.
    Keywords: Butter, margarine, dairies, new products, quality changes
    JEL: L66 N53 O31
    Date: 2013–07
  17. By: Daniel Huppmann
    Abstract: This article proposes a two-stage oligopoly model for the crude oil market. In a game of several Stackelberg leaders, market power increases endogenously as the spare capacity of the competitive fringe goes down. This effect is due to the specific cost function characteristics of extractive industries. The model captures the increase of OPEC market power before the financial crisis and its drastic reduction in the subsequent turmoil at the onset of the global recession. The two-stage model better replicates the price path over the years 2003-2011 compared to a standard simultaneous-move, onestage Nash-Cournot model with a fringe. This article also discusses how most large-scale numerical equilibrium models, widely applied in the energy sector, over-simplify and potentially misinterpret market power exertion.
    Keywords: crude oil, OPEC, oligopoly, Stackelberg market, market power, consistent conjectural variations, equilibrium model
    JEL: C61 C72 L71
    Date: 2013

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