nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒09‒28
nine papers chosen by
Russell Pittman
US Government

  1. Cartel Formation With Endogenous Capacity and Demand Uncertainty By Johannes Paha
  2. Quantifying the Coordinated Effects of Partial Horizontal Acquisitions By Brito, Duarte; Ribeiro, Ricardo; Vasconcelos, Helder
  3. Inference of Bidders’ Risk Attitudes in Ascending Auctions with Endogenous Entry By Hanming Fang; Xun Tang
  4. Relationship-specific Investment as a Barrier to Entry By Hiroshi Kitamura; Akira Miyaoka; Misato Sato
  5. Investment under uncertainty, competition and regulation By Adrien Nguyen Huu
  6. Corruption, Entry and Pollution By Eleni Stathopoulou; Dimitrios Varvarigos
  7. Efficiencies Brewed: Pricing and Consolidation in the U.S. Beer Industry By Orley C. Ashenfelter; Daniel Hosken; Matthew C. Weinberg
  8. Strategic Search Diversion, Product Affiliation and Platform Competition By Hagiu, Andrei; Jullien, Bruno
  9. Innovation and Leapfrogging in the Chinese Automobile Industry: Examples from Geely, BYD and Shifeng By Hua Wang; Chris Kimble

  1. By: Johannes Paha (University of Giessen)
    Abstract: This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can facilitate cartel formation despite lowering collusive profits. This is because lower demand reduces capacity utilization and makes competition more intense especially when capacities are durable and when demand falls much within a short time. The model also shows that firms with a low discount rate strive for a dominant position in the market which results in asymmetric capacity distributions. These obstruct collusive strategies. This is interesting because a low discount rate is usually considered a facilitating factor for collusion.
    Keywords: Asymmetric firms, capacity investments, cartel formation, demand shocks, excess capacity
    JEL: D21 D43 L11 L13 L41
    Date: 2013
  2. By: Brito, Duarte; Ribeiro, Ricardo; Vasconcelos, Helder
    Abstract: The growth of private-equity investment strategies in which firms often hold partial ownership interests in competing firms has led competition agencies to take an increased interest in assessing the competitive effects of partial horizontal acquisitions. We propose a methodology to evaluate the coordinated effects of such acquisitions in differentiated products industries. The acquisitions may be direct and indirect, and may or not correspond to control. The methodology, that nests full mergers, evaluates the impact on the range of discount factors for which coordination can be sustained. We provide an empirical application to several acquisitions in the wet shaving industry.
    Keywords: Antitrust; Coordinated Effects; Demand Estimation; Differentiated Products; Oligopoly; Partial Acquisitions
    JEL: C54 D12 L13 L41 L66
    Date: 2013–07
  3. By: Hanming Fang; Xun Tang
    Abstract: Bidders' risk attitudes have key implications for choices of revenue-maximizing auction formats. In ascending auctions, bid distributions do not provide information about risk preference. We infer risk attitudes using distributions of transaction prices and participation decisions in ascending auctions with entry costs. Nonparametric tests are proposed for two distinct scenarios: first, the expected entry cost can be consistently estimated from data; second, the data does not report entry costs but contains exogenous variations of potential competition and auction characteristics. In the first scenario, we exploit the fact that the risk premium required for entry – the difference between ex ante expected profits from entry and the certainty equivalent – is strictly positive if and only if bidders are risk averse. Our test is based on identification of bidders' ex ante profits. In the second scenario, our test builds on the fact that risk attitudes affect how equilibrium entry probabilities vary with observed auction characteristics and potential competition. We also show identification of risk attitudes in a more general model of ascending auctions with selective entry, where bidders receive entry-stage signals that are correlated with private values.
    JEL: C12 C14 D44
    Date: 2013–09
  4. By: Hiroshi Kitamura (Faculty of Economics, Kyoto Sangyo University); Akira Miyaoka (Graduate School of Economics, Osaka University); Misato Sato (Department of Economics, The George Washington University)
    Abstract: In this paper, we construct an interregional trade model that has en- dogenous fertility rates in the manner of Helpman and Krugman (1985). The presented model shows that fertility rates in a large region become lower than those in a small region because of the agglomeration of man- ufacturing firms in the former. The agglomeration of firms in a region lowers the relative price of manufactured goods to child rearing costs, which raises the fertility rates. We also find that a decline in transportation costs results in the ag- glomeration of manufacturing firms, which lowers fertility rates in both large and small regions. Finally, we extend our two-region model to a multi-region model and find that the number of manufacturing firms in larger regions is always greater than that in smaller regions, meaning that fertility rates in the former are always lower than those in the latter.
    Keywords: Vertical Relation; Entry Deterrence; Relationship-Specific Investment; Switch- ing Costs
    JEL: L12 L41 L42
    Date: 2013–09
  5. By: Adrien Nguyen Huu (FiME Lab)
    Abstract: We investigate a randomization procedure undertaken in real option games which can serve as a raw model of regulation in a duopoly model of preemptive investment. We recall the rigorous framework of [Grasselli, M.R., Lecl\`ere, V. and Ludkovski, M. Priority option: the value of being a leader. Math. and Fin. Econ., 2013] and extend it to the presence of a random regulator. This model generalizes and unifies the different competitive frameworks proposed in the literature, and creates a new one similar to a Stackelberg leadership. We fully characterize strategic interactions in the several situations following from the parametrization of the regulator. Finally, we study the effect of the coordination game and uncertainty of outcome when agents are risk-averse, providing new intuitions for the standard case.
    Date: 2013–09
  6. By: Eleni Stathopoulou; Dimitrios Varvarigos
    Abstract: We model an economy where imperfectly competitive firms choose whether to employ a dirty technology and pay an emission tax or employ a clean technology and incur the cost of its adoption. Bureaucrats who are entrusted with the task of monitoring the emissions of each firm, are corruptible in the sense that they may accept bribes in order to mislead authorities on the firms’ actual emissions. Market entry is an important element in the relation between corruption and pollution. Particularly, the incidence of corruption increases the number of entrants in the market, while the bureaucrats’ incentives to be corrupt are higher in a market with more competitors. We find multiple equilibria where both corruption and pollution are either high or low.
    Keywords: Corruption; Pollution; Market entry
    JEL: L13 Q53 Q58
    Date: 2013–09
  7. By: Orley C. Ashenfelter; Daniel Hosken; Matthew C. Weinberg
    Abstract: Merger efficiencies provide the primary justification for why mergers of competitors may benefit consumers. Surprisingly, there is little evidence that efficiencies can offset incentives to raise prices following mergers. We estimate the effects of increased concentration and efficiencies on pricing by using panel scanner data and geographic variation in how the merger of Miller and Coors breweries was expected to increase concentration and reduce costs. All else equal, the average predicted increase in concentration lead to price increases of two percent, but at the mean this was offset by a nearly equal and opposite efficiency effect.
    JEL: K21 L1 L4
    Date: 2013–08
  8. By: Hagiu, Andrei; Jullien, Bruno
    Abstract: Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to products other than the ones that best fit their preferences. Our analysis yields three key and novel insights regarding search diversion incentives, which have direct implications for platforms’ strategies and empirical predictions. First, platforms that charge positive access fees to consumers have weaker incentives to divert search relative to platforms that cannot (or choose not to) charge such fees. Second, endogenizing the affiliation of products that consumers are not interested in (advertising) leads to stronger incentives to divert search relative to the exogenous affiliation (vertical integration) benchmark, whenever the marginal product yields higher profits per consumer exposure relative to the average product. Third, the effect of platform competition on search diversion incentives depends on the nature of competition. Competition for advertising leads to more search diversion relative to competition for consumers. Both types of competition lead to at least as much search diversion as a monopoly platform. Nevertheless, in the case of competing platforms, the equilibrium level of search diversion increases with the degree of horizontal differentiation between platforms.
    Keywords: Competition; Search platforms; Two-sided market
    JEL: L1 L2 L8
    Date: 2013–04
  9. By: Hua Wang (Euromed Marseille - École de management - Association Euromed Management - Marseille); Chris Kimble (Euromed Marseille - École de management - Association Euromed Management - Marseille, MRM - Montpellier Recherche en Management - Université Montpellier II - Sciences et techniques : EA4557 - Université Montpellier I - Université Paul Valéry - Montpellier III - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School)
    Abstract: History provides numerous examples of incumbent market leaders being leapfrogged by newcomers that have exploited the opportunities offered by new technologies. In light of the growing number of ecological threats linked to the use of the internal combustion engine, can Chinese auto manufacturers, which are newcomers to the industry, beat out the established Japanese, European, and North American automakers in the race to produce a less environmentally damaging form of transport? Three case studies from the Chinese automobile industry reveal the different ways in which this leapfrogging might take place and highlight the impact that such developments might have on automobile manufacturers in Japan and the West, both for conventional and electric vehicles.
    Keywords: china; Leapfrogging; catching-up; Automobile Industry; Innovation
    Date: 2013–08–23

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