nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒09‒26
eleven papers chosen by
Russell Pittman
US Government

  1. Information exchange in a Cournot duopoly with nonlinear demand function By Fabio Tramontana
  2. Effects of Increased Variety on Demand, Pricing, and Welfare By William Horrace; Rui Huang; Jeffrey M. Perloff
  3. The Limits of Price Discrimination By Dirk Bergemann; Benjamin A. Brooks; Stephen Morris
  4. Adverse Selection and Moral Hazard in Anonymous Markets By Klein, Tobias; Lambertz, Christian; Stahl, Konrad O
  5. Firm Entry Deregulation, Competition and Returns to Education and Skill By Fernandes, Ana; Ferreira, Priscila; Winters, L. Alan
  6. Optimal Patent Life in a Variety-Expansion Growth Model By Lin, Hwan C.
  7. Evaluating the law of one price using micro panel data By Gobillon, Laurent; Guillotreau, Patrice; Wolff, François-Charles
  8. Oblivious Equilibrium for Concentrated Industries By C. Lanier Benkard; Przemyslaw Jeziorski; Gabriel Y. Weintraub
  9. The Impact of the Internet on Advertising Markets for News Media By Susan Athey; Emilio Calvano; Joshua Gans
  10. Do we go shopping downtown or in the `burbs? Why not both? By Sloev, Igor; Thisse, Jacques-François; Ushchev, Philip
  11. Financial vs. Strategic Buyers By Marc Martos-Vila; Matthew Rhodes-Kropf; Jarrad Harford

  1. By: Fabio Tramontana (Department of Economics and Management, University of Pavia)
    Abstract: We study information sharing in a Cournot duopoly with isoelastic demand function, when the elasticity is uncertain. This is one of the first attempts to analyze the role of nonlinearity in such a framework. We found important results about the profitability of sharing informations when marginal costs are high and/or the variance between elasticity values is low. From the point of view of welfare considerations, not sharing information seems to be the best scenario.
    Keywords: Information exchange, Cournot duopoly, Hyperbolic demand
    Date: 2013–09
  2. By: William Horrace (Center for Policy Research, Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244-1020); Rui Huang (Department of Agricultural & Resrouce Economics, University of Connecticut, Storrs, CT 06269-4021); Jeffrey M. Perloff (Department of Agricultural and Resource Economics, 207 Giannini Hall, MC 3310, University of California, Berkeley, CA 94720)
    Abstract: We use order statistics to analytically derive demand functions when consumers choose from among the varieties of two brands—such as Coke and Pepsi—and an outside good. Soft-drinks have no price variability across varieties within a brand, so traditional demand systems (e.g., mixed logit) are not identified. In contrast, our demand system is identified and can be estimated using a nonlinear instrumental variable estimator. Our demand functions are higher-order polynomials, where the polynomial order is increasing in variety. Because these demand curves have convex and concave sections around an inflection point, firms are more likely to respond and make large price adjustments to increases in cost than to comparable decreases in costs. We compare the profit-maximizing number of varieties within a grocery store to the socially optimal number and find that consumer surplus and welfare would increase with more variety. Key Words: Varieties, Product Line, Consumer Surplus, Welfare, Demand, Order Statistics JEL No. L11, L66, D11
  3. By: Dirk Bergemann; Benjamin A. Brooks; Stephen Morris
    Date: 2013–09–19
  4. By: Klein, Tobias; Lambertz, Christian; Stahl, Konrad O
    Abstract: We study the effects of improvements in eBay's rating mechanism on seller exit and continuing sellers' behavior. Following a large sample of sellers over time, we exploit the fact that the rating mechanism was changed to reduce strategic bias in buyer rating. That improvement did not lead to increased exit of poorly rated sellers. Yet, buyer valuation of the staying sellers – especially the poorly rated ones – improved significantly. By our preferred interpretation, the latter effect results from increased seller effort; also, when sellers have the choice between exiting (a reduction in adverse selection) and improved behavior (a reduction in moral hazard), then they prefer the latter because of lower cost.
    Keywords: adverse selection; anonymous markets; moral hazard; reputation building mechanisms
    JEL: D83 L15
    Date: 2013–06
  5. By: Fernandes, Ana; Ferreira, Priscila; Winters, L. Alan
    Abstract: This paper investigates the effects of firm entry deregulation. We exploit a recent reform that simplified business entry in Portugal as a quasi-natural experiment. We use cross-municipality-year variation in the implementation of the reform for identification. Using matched employer-employee data for the universe of workers and firms, we find that the reform is associated with increased firm entry and competition within industries and regions. The returns to a university degree increased by 5% while the returns to skills increased by 3%.
    Keywords: Entry Deregulation; Product Market Competition; Returns to Education; Wage Structure
    JEL: J3
    Date: 2013–07
  6. By: Lin, Hwan C.
    Abstract: This paper presents more channels through which the optimal patent life is determined in a R&D-based endogenous growth model that permits growth of new varieties of consumer goods over time. Its modeling features include an endogenous hazard rate facing incumbent monopolists, the prevalence of research congestion, and the aggregate welfare importance of product differentiation. As a result, a patent’s effective life is endogenized and less than its legal life. The model is calibrated to a global economy with a set of baseline parameter values. Under the benchmark patent length of 20 years, the calibrated model can deliver along the balanced growth path a plausible innovation rate of 2.84% per year and an economy-wide markup rate of 1.15. The optimal patent length is computed with the algorithm of Golden Search Section, ranging from 17 to 19 years. With the creative-destruction hazard, the world needs a longer patent term to maximize social welfare, but with the prevalence of research congestion, the world needs a shorter patent term. However, if the world’s aggregate welfare appreciates varieties of goods in a way strong enough, the optimal patent term can surprisingly extend beyond even 1,000 years!
    Keywords: patent length, innovation, creative destruction, endogenous hazard rate
    JEL: O31 O34
    Date: 2013–08–06
  7. By: Gobillon, Laurent; Guillotreau, Patrice; Wolff, François-Charles
    Abstract: This paper investigates spatial variations in product prices using an exhaustive micro dataset on fish transactions. The data record all transactions between vessels and wholesalers that occur on local fish markets in France during the year 2007. Spatial disparities in fish prices are sizable, even after fish quality, time, seller and buyer unobserved heterogeneity have been taken into account. The price difference between local fish markets can be explained to some extent by distance, but mostly by a coast effect (analogous to a border effect in the literature on the law of one price) related to separate location on the Atlantic and Mediterranean coasts. In particular, fish and crustacean prices are 34% higher on the Mediterranean coast. The law of one price is verified for almost all species when considering only local fish markets on the Atlantic coast.
    Keywords: commodity price; fish; local markets; panel data
    JEL: L11 Q22 R32
    Date: 2013–08
  8. By: C. Lanier Benkard; Przemyslaw Jeziorski; Gabriel Y. Weintraub
    Abstract: This paper explores the application of oblivious equilibrium to concentrated industries. We define an extended notion of oblivious equilibrium that we call partially oblivious equilibrium (POE) that allows for there to be a set of "dominant firms'', whose firm states are always monitored by every other firm in the market. We perform computational experiments that show that POE are often close to MPE in concentrated industries with characteristics similar to real world industries even when OE are not. We derive error bounds for evaluating the performance of POE when MPE cannot be computed. Finally, we demonstrate an important trade-off facing empirical researchers between implementing an equilibrium concept that is computationally light in a richer economic model, and implementing MPE in a simpler one.
    JEL: L0 L1 L13
    Date: 2013–08
  9. By: Susan Athey; Emilio Calvano; Joshua Gans
    Abstract: In this paper, we explore the hypothesis that an important force behind the collapse in advertising revenue experienced by newspapers over the past decade is the greater consumer switching facilitated by online consumption of news. We introduce a model of the market for advertising on news media outlets whereby news outlets are modeled as competing two-sided platforms bringing together heterogeneous, partially multi-homing consumers with advertisers with heterogeneous valuations for reaching consumers. A key feature of our model is that the multi-homing behavior of the advertisers is determined endogenously. The presence of switching consumers means that, in the absence of perfect technologies for tracking the ads seen by consumers, advertisers purchase wasted impressions: they reach the same consumer too many times. This has subtle effects on the equilibrium outcomes in the advertising market. One consequence is that multi-homing on the part of advertisers is heterogeneous: high-value advertisers multi-home, while low- value advertisers single-home. We characterize the impact of greater consumer switching on outlet profits as well as the impact of technologies that track consumers both within and across outlets on those profits. Somewhat surprisingly, superior tracking technologies may not always increase outlet profits, even when they increase efficiency. In extensions to the baseline model, we show that when outlets that show few or ineffective ads (e.g. blogs) attract readers from traditional outlets, the losses are at least partially offset by an increase in ad prices. Introducing a paywall does not just diminish readership, but it furthermore reduce advertising prices (and leads to increases in advertising prices on competing outlets).
    JEL: L11 L13 L82
    Date: 2013–09
  10. By: Sloev, Igor; Thisse, Jacques-François; Ushchev, Philip
    Abstract: We combine spatial and monopolistic competition to study market interactions between downtown retailers and an outlying shopping mall. Consumers shop at either marketplace or at both, and buy each variety in volume. The market solution stems from the interplay between the market expansion effect generated by consumers seeking more opportunities, and the ccompetition effect. Firms' profits increase (decrease) with the entry of local competitors when the former (latter) dominates. Downtown retailers swiftly vanish when the mall is large. A predatory but efficient mall need not be regulated, whereas the regulator must restrict the size of a mall accommodating downtown retailers.
    Keywords: monopolistic competition; retailers; shopping behavior; shopping mall; spatial comparison
    JEL: D43 L81 R10
    Date: 2013–08
  11. By: Marc Martos-Vila; Matthew Rhodes-Kropf; Jarrad Harford
    Abstract: This paper introduces the impact of debt misvaluation on merger and acquisition activity. Debt misvaluation helps explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). The effects of overvalued debt might seem limited since both acquirer types and target firms can access the debt markets. However, fundamental differences in governance and project co-insurance between the two types of acquirer interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.
    JEL: G24 G34
    Date: 2013–08

This nep-com issue is ©2013 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.