nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒08‒31
seventeen papers chosen by
Russell Pittman
US Government

  1. Strategic Positioning of Goods in a Market with a Niche By Eleftherios Zacharias
  2. Incentive to Reduce Cost under Incomplete Information By Aditi Sengupta
  3. The Cournot-Bertrand profit differential: A Reversal result in network goods duopoly By Rupayan Pal
  4. Judo Economics in Markets with Multiple Firms By Daniel Cracau; Benjamin Franz
  5. Bargaining order and delays in multilateral bargaining with asymmetric sellers By Amit Kumar Maurya; Shubhro Sarkar
  6. R&D cooperation and industry cartelization By Prokop, Jacek; Karbowski, Adam
  7. Revealing Bargaining Power through Actual Wholesale Prices By Carlos Noton; Andrés Elberg
  8. Industry Differences in the Firm Size Distribution By Halvarsson, Daniel
  9. Low Pricing Regulation: Remaining issues (Japanese) By KAWAHAMA Noboru
  10. Industry Concentration, Excess Returns and Innovation in Australia By David R. Gallagher; Katja Ignatieva; James McCulloch
  11. First Degree Price Discrimination Using Big Data By Benjamin Reed Shiller
  12. Measuring bank competition in China: a comparison of new versus conventional approaches applied to loan markets By Bing Xu; Adrian Van Rixtel; Michiel Van Leuvensteijn
  13. Measuring Market Power in the Banking Industry in the Presence of Opportunity Cost By Antonis Michis
  14. Strategic Generation Capacity Choice under Demand Uncertainty: Analysis of Nash Equilibria in Electricity Markets By Gürkan, G.; Ozdemir, O.; smeers, Y.
  15. Generation Capacity Investments in Electricity Markets: Perfect Competition By Gürkan, G.; Ozdemir, O.; smeers, Y.
  16. The effect of regulatory scrutiny asymmetric cost pass-through in power wholesale and its end By Mokinski, Frieder; Wölfing, Nikolas
  17. Optimal Pricing and Quality of Academic Journals and the Ambiguous Welfare Effects of Forced Open Access: A Two-sided Model By Mueller-Langer, Frank; Watt, Richard

  1. By: Eleftherios Zacharias (Department of Economics, Athens University of Economics and Bussiness, Greece; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We use the Hotelling's model allowing for a "gap" in the consumers' preferences. As a result, the characteristics space is divided in two separate intervals. The largest one represents the main market, and the smallest represents a niche. We find that in this set up the principle of maximum differentiation may not hold. We also, examine the incentives of a firm to adopt a niche marketing strategy. That is, to relocate and price its product so that to maximize its profits from the niche market only. We show that, as the reservation value of the consumers for the product increases, it is more profitable for a firm to adopt a nich marketing strategy.
    Keywords: Hotelling model, niche marketing, market segmentation
    JEL: M31 M21 L13
    Date: 2013–07
  2. By: Aditi Sengupta
    Abstract: I examine how ex ante symmetric firms that compete in prices strategically decide to invest in research and development of cost-reducing technology when the rival firm and the consumers are not aware of the actual outcome of the investment. I also compare the strategic incentive to invest and market outcomes under incomplete information with that of the full information. I find that equilibrium investment under incomplete information with unobservable investment is same as that of (symmetric) full information equilibrium and is also socially optimal.
    Keywords: Cost-reducing technology; Duopoly; Incomplete information; Price competition; Strategic investment
    JEL: D43 D82 L13
    Date: 2013–08
  3. By: Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: We revisit the classic profit-ranking of Cournot and Bertrand equilibria and the issue of endogenous choice of a price or a quantity contract, but for a network goods duopoly. We show that, if network externalities are strong (weak), each firm earns higher (lower) profit under Bertrand competition than under Cournot competition. Therefore, unless network externalities are weak, the classic profit-ranking is reversed. When modes of product market competition are endogenously determined, Cournot equilibrium always constitutes the subgame perfect Nash equilibrium (SPNE). However, a prisoners's dilemma type of situation arises and the SPNE is Pareto inefficient, unless network externalities are weak.
    Keywords: Network externalities, Cournot, Bertrand, Profit ranking, Endogenous mode of competition
    JEL: D43 L13
  4. By: Daniel Cracau (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Benjamin Franz (University of Oxford, Mathematical Institute)
    Abstract: We study a sequential Bertrand game with one dominant market incumbent and multiple small entrants selling homogeneous products. Whilst the equilibrium for the case of a single entrant is well-known from Gelman and Salop (1983), we derive properties of the N-firm equilibrium and present an algorithm that can be used to calculate this equilibrium. Using this algorithm we derive the exact equilibrium for the cases of two and three small entrants. For more than three entrants only approximate results are possible. We use numerical results to gain further understanding of the equilibrium for an increasing number of firms and in particular for the case where N diverges to infinity. Similarly to the two-firm Judo equilibrium, we see that a capacity limitation for the small rms is necessary to achieve positive profits.
    Keywords: Sequential Bertrand Competition, Judo Economics, N-firm oligopoly
    JEL: D43 L11
    Date: 2013–07
  5. By: Amit Kumar Maurya (Indira Gandhi Institute of Development Research); Shubhro Sarkar (Indira Gandhi Institute of Development Research)
    Abstract: In a multilateral bargaining problem with one buyer and two heterogeneous sellers owning perfectly complementary units, we find that there exists an equilibrium which leads to inefficient delays when the buyer negotiates with the higher-valuation seller first and where players are extremely impatient. We also find that the buyer prefers to negotiate with the lower-valuation seller first, except in an equilibrium where both the buyer and the lower-valuation seller choose to play strategies that lead negotiations between them to hold out.
    Keywords: Multilateral bargaining, Bargaining order, Asymmetric sellers, Complete information, Subgame Perfection
    JEL: C72 C78
    Date: 2013–08
  6. By: Prokop, Jacek; Karbowski, Adam
    Abstract: The objective of this paper is to investigate the impact of R&D cooperation on cartel formation in the product market. The R&D investments that precede the production process are aimed at the reduction of the unit manufacturing costs, and could create positive externalities for the potential competitors. In contrast to the preceding literature, we assume that the competition between firms on the product market takes place according to the Stackelberg leadership model. For simplicity we focus on the case of duopoly. Numerical analysis shows that a closer cooperation at the R&D stage may strengthen the incentives to create a cartel in the product market. --
    Keywords: R&D cooperation of firms,industry cartelization,Stackelberg competition
    JEL: O31 L41 L13
    Date: 2013
  7. By: Carlos Noton; Andrés Elberg
    Abstract: In vertical relationships in which manufacturers and retailers bargain over a volatile surplus, negotiated wholesale prices determine both payoffs and risk-exposure. We use actual wholesale prices to study the profit-sharing and risk-sharing behavior of manufacturers and retailers in the industry in Chile. We find that small manufacturers are able to earn a sizable fraction of the pie and that most cost shocks are absorbed by upstream manufacturers. Thus, our results do not support the standard assumption that bargaining firms deal equally well with risk. Calibration of a Nash bargaining model confirms small manufacturers' substantial bargaining power. Key words:
    Date: 2013
  8. By: Halvarsson, Daniel (Ratio)
    Abstract: This paper empirically examines industry determinants of the shape of Swedish firm size distributions at the 3-digit (NACE) industry level between 1999-2004 for surviving firms. Recent theoretical studies have begun to develop a better understanding of the causal mechanisms behind the shape of firm size distributions. At the same time there is a growing need for more systematic empirical research. This paper therefore presents a two-stage empirical model, in which the shape parameters of the size distribution are estimated in a first stage, with firm size measured as number of employees. In a second stage regression analysis, a number of hypotheses regarding economic variables that may determine the distributional shape are tested. The result from the first step are largely consistent with previous statistical findings confirming a power law. The main finding, however, is that increases in industry capital and financial constraint exert a considerable influence on the size distribution, shaping it over time towards thinner tails, and hence fewer large firms.
    Keywords: Firm size distribution; Zipf's law; Gibrat's law
    JEL: D22 L11 L25
    Date: 2013–08–21
  9. By: KAWAHAMA Noboru
    Abstract: Regulating excessive low pricing, which is a key function of competition law, is considered important in order to maintain competition. At the same time, however, it has also been pointed out that the regulation should be restricted to such an extent as not to suppress price competition excessively. In the late 1970s when the Chicago school of economics began to have a significant impact on competition policy, concerns about excessive regulations became the main focus for the competition law community, and the problem of excessive regulations appeared to have been resolved by adopting the average variable cost (AVC) as the threshold of excessiveness and applying some additional criteria to narrow down the scope of low pricing practices that are potentially illegal and thus subject to regulations. More recently, however, there has been doubt over the appropriateness of the AVC as the threshold in certain industrial sectors. Specifically, in those sectors that have experienced significant deregulation, privatization, and/or digitization, there has been an increase in the number of cases in which prices are not below the AVC threshold, yet are likely to be anti-competitive. These cases have triggered discussions (in the United States and Europe) as to i) whether the AVC threshold actually results in insufficient regulation and ii) whether setting the threshold criteria based on costs is appropriate to begin with. In Japan, efforts have been made recently to clarify the rules on low pricing in the form of case laws and the relevant guidelines of the Japan Fair Trade Commission. However, the issue of how to regulate gray cases—such as those described above—has been seldom examined and the criteria for the regulation remain unclear. In this article, I examine the rationale of the cost-based criteria and consider what regulation should be used in the above mentioned industries, where insufficient regulation is the issue.
    Date: 2013–08
  10. By: David R. Gallagher (Macquarie Graduate School of Management); Katja Ignatieva (Australian School of Business, University of New South Wales); James McCulloch (Quantitative Finance Research Centre, University of Technology, Sydney)
    Abstract: This paper examines market concentration and stock returns on the Australian Securities Exchange. We find that dominant companies operating in concentrated industries in Australia are able to generate significant risk-adjusted excess stock returns and excess profits on sales (monopoly rents). Our results for Australian data are opposite to that found by Hou and Robinson (2006) for United States market data. Hou and Robinson reason that U.S. firms which operate in concentrated industries are insulated from competitive pressures, have lower levels of innovation (Arrow (1962)) and therefore experience lower profitability and stock returns. The high stock returns of dominant companies in Australia is consistent with Schumpeter?s (1942) theory of innovation where monopoly excess profits are necessary to fund corporate innovation. We hypothesize that the apparent contradiction of our results compared with Hou and Robinson (2006) for the United States market is resolved by an examination of the differences in size and competition in U.S. and Australian industries and the consequent differential ability of dominant companies in the two countries to generate monopoly rents.
    Date: 2013–07–01
  11. By: Benjamin Reed Shiller (Economics Department, Brandeis University)
    Abstract: Second and 3rd degree price discrimination (PD) receive far more attention than 1st degree PD, i.e. person-speci?c pricing, because the latter requires previously unobtainable information on individuals’ willingness to pay. I show modern web behavior data reasonably predict Net?ix subscription, far outperforming data available in the past. I then present a model to estimate demand and simulate outcomes had 1st degree PD been implemented. The model is structural, derived from canonical theory models, but resembles an ordered Probit, allowing methods for handling massive datasets. Simulations show using demographics alone to tailor prices raises pro?ts by 0.14%. Including web browsing data increases pro?ts by much more, 1.4%, increasingly the appeal of tailored pricing, and resulting in some consumers paying twice as much as others do for the exact same product.
    Date: 2013–08
  12. By: Bing Xu; Adrian Van Rixtel; Michiel Van Leuvensteijn
    Abstract: Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar-Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not suffer from these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996–2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these firstly are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumed.
    Keywords: Competition, banking industry, China, lending markets, marginal costs, regulation, deregulation
    Date: 2013–08
  13. By: Antonis Michis (Central Bank of Cyprus)
    Abstract: A conjectural variations model is developed to measure market power in the banking industry. Unlike previous studies, which use complete cost function specifications in the modelling framework, this study defines marginal cost based on an opportunity cost, which is represented by the interest rate on minimum reserves offered by the monetary authorities in a country. Deposits with the monetary authorities are considered to be an alternative use of available funds that are usually allocated to loans. The estimates of market power in the banking industry in Cyprus, using the proposed model, reject the monopoly hypothesis.
    Keywords: market power, conjectural variations, interest rates, opportunity cost.
    JEL: G21 L11
    Date: 2013–06
  14. By: Gürkan, G.; Ozdemir, O.; smeers, Y. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We analyze a two-stage game of strategic firms facing uncertain demand and exerting market power in decentralized electricity markets. These firms choose their generation capacities at the first stage while anticipating a perfectly competitive future electricity spot market outcome at the second stage; thus it is a closed loop game. In general, such games can be formulated as an equilibrium problem with equilibrium constraints (EPEC) and examples have been posed in the literature that have multiple or no equilibria. Therefore, it is of interest to define general sets of conditions under which solutions exist and are unique, which would enhance the value of such models for policy andmarket intelligence purposes. In this paper, we consider various types of such a closed loop model regarding the underlying price-demand relations (elastic and inelastic demand), the assumed demand uncertainty with a broad class of continuous distributions, and any finite number of players with symmetric or asymmetric costs. We establish sufficient conditions for the random demand’s probability distribution which guarantee existence and uniqueness of equilibria in most of the cases of this closed loop model. We identify a broad class of commonly used continuous probability distributions satisfying these conditions.
    Keywords: electricity markets;strategic generation investment modeling;demand uncertainty;existence and uniqueness of equilibrium.
    JEL: C62 C68 C72 D43 L94
    Date: 2013
  15. By: Gürkan, G.; Ozdemir, O.; smeers, Y. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: In competitive electricity markets, markets designs based on power exchanges where supply bidding (barring demand-side bidding) is at the sole short run marginal cost may not guarantee resource adequacy. As alternative ways to remedy the resource adequacy problem, we focus on three different market designs in detail when demand is inelastic, namely an energy-only market with VOLL pricing (or a price cap), an additional capacity market, and operating-reserve pricing. We also discuss demand-side bidding (i.e., a price responsive demand) which can be seen as a categorically different alternative to remedy the resource adequacy problem. We consider a perfectly competitive market consisting of three types of agents: generators, a transmission system operator, and consumers; all agents are assumed to have no market power. For each market design, we model and analyze capacity investment choices of firms using a two-stage game where generation capacities are installed in the first stage and generation takes place in future spot markets at the second stage. When future spot market conditions are assumed to be known a priori (i.e., deterministic demand case), we show that all of these two-stage models with different market mechanisms, except operating-reserve pricing, can be cast as single optimization problems. When future spot market conditions are not known in advance (i.e., under demand uncertainty), we essentially have a two-stage stochastic game. Interestingly, an equilibrium point of this stochastic game can be found by solving a two-stage stochastic program, in case of all of the market mechanisms except operating-reserve pricing. In case of operatingreserve pricing, while the formulation of an equivalent deterministic or stochastic optimization problem is possible when operating-reserves are based on observed demand, this simplicity is lost when operatingreserves are based on installed capacities. We generalize these results for other uncertain parameters in spot markets such as fuel costs and transmission capacities. Finally, we illustrate how all these models can be numerically tackled and present numerical experiments. In our numerical experiments, we observe that uncertainty of demand leads to higher total generation capacity expansion and a broader mix of technologies compared to the investment decisions assuming average demand levels. Furthermore for the same VOLL (or price cap) level and under the assumptions of random demand with finite support and no forced outages, energy-onlymarkets with VOLL pricing tend to lead to total generation capacity below the peak load with a certain probability whereas energy markets with a forward capacity market or operating-reserve pricing result in higher investments. Finally, the regulator decisions (e.g., reserve capacity target) in capacity markets and operating-reserve pricing can be chosen in such a way that results in very similar investment levels and fuel mix of generation capacities in b
    Date: 2013
  16. By: Mokinski, Frieder; Wölfing, Nikolas
    Abstract: We find an asymmetric pass-through of European Emission Allowance (EUA) prices to wholesale electricity prices in Germany and show that this asymmetry has disappeared in response to a report on investigations by the competition authority. The asymmetric pricing pattern, however, was not detected at the time of the report, nor had it been part of the investigations. Our results therefore provide evidence of the deterring effect of regulatory monitoring on firms which exhibit non-competitive pricing behavior. We do not find any asymmetric pass-through of EUA prices in recent years. Several robustness checks support our results. --
    Keywords: asymmetric price adjustment,regulatory monitoring,wholesale electricity markets,emission trading
    JEL: L4 L94 Q41 Q52
    Date: 2013
  17. By: Mueller-Langer, Frank; Watt, Richard
    Abstract: We analyse optimal pricing and quality of a monopolistic journal and the optimality of open access in a two-sided model. The predominant aspect of the model that determines the quality levels at which open access is optimal is the nature of the (non-linear) externalities between readers and authors in a journal. We show that there exist scenarios in which open access is a feature of high-quality journals. Besides, we find that the removal of copyright (and thus forced open access) will likely increase both readership and authorship, will decrease journal profits, and may increase social welfare.
    Keywords: Two-sided markets; academic journals; open access; removal of copyright; welfare effects
    JEL: L11 L82 O34
    Date: 2013–08–21

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