nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒10‒02
twenty-two papers chosen by
Russell Pittman
US Government

  1. Endogenous Price Leadership - A Theoretical and Experimental Analysis By Werner Güth; Kerstin Pull; Manfred Stadler; Alexandra Zaby
  2. Issues on Integrating Real and Financial Decisions By Leonard J. Mirman; Egas M. Salgueiro; Marc Santugini
  3. Fixed cost, variable cost, markups and returns to scale. By Xi Chen; Bertrand M. Koebel
  4. A theory of markets with return-seeking firms By Murray, Cameron
  5. Financing Experimentation By Macchiavello, Rocco
  6. Information Provision in Procurement Auctions By Daniel García; Joaquím Coleff
  7. Procurement Auctions with Renegotiation and Wealth Constraints By Chang, Wei-Shiun; Salmon, Timothy C.; Saral, Krista Jabs
  8. Maverick – Making Sense of a Conjecture of Antitrust Policy in the Lab By Christoph Engel; Axel Ockenfels
  9. The distortive effects of antitrust fines based on revenue By Vasiliki Bageri; Yannis Katsoulacos; Giancarlo Spagnolo
  10. Piracy as an ethical decision By Martyna Kobus; Michał Krawczyk
  11. Price setting practices in Greece: evidence from a small-scale firm-level survey By Daphne Nicolitsas
  12. Industrial dynamics and clusters: a survey By Koen Frenken; Elena Cefis; Erik Stam
  13. Integration Contracts and Asset Complementarity: Evidence from US Data By Paolo Di Giannatale; Francesco Passarelli
  14. Royalties, Entry and Spectrum Allocation to Broadcasting By Amnon Levy; Michael R. Caputo; Benoît Pierre Freyens
  15. Asymmetric Information and Imperfect Competition in the Loan Market By Crawfordy, Gregory S; Pavaniniz, Nicola; Schivardi, Fabiano
  16. Regulating Consumer Financial Products: Evidence from Credit Cards By Sumit Agarwal; Souphala Chomsisengphet; Neale Mahoney; Johannes Stroebel
  17. Bank risk taking and competition: Evidence from regional banking markets By Kick, Thomas; Prieto, Esteban
  18. A game theoretical analysis of the design options of the real-time electricity market By Haikel Khalfallah; Vincent Rious
  19. A stochastic generalized Nash-Cournot model for the northwestern European natural gas markets: The S-GaMMES model By Ibrahim Abada; Pierre-André Jouvet
  20. New strategies of industrial organization: outsourcing and consolidation in the mobile telecom sector in India By Sumangala Damodaran
  21. Financial fair play in European football By Peeters, Thomas; Szymanski, Stefan
  22. The zero-fee tour: price competition and network downgrading in Chinese tourism By Dev Nathan; Yang Fuquan; Yu Yin

  1. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Kerstin Pull (University of Tübingen); Manfred Stadler (University of Tübingen); Alexandra Zaby (University of Tübingen)
    Abstract: We present a model of price leadership on homogeneous product markets where the price leader is selected endogenously. The price leader sets and guarantees a sales price to which followers can adjust according to their individual supply functions. The price leader then clears the market by serving the residual demand. Firms with different marginal costs would induce different prices if they were price leaders. Somewhat counter-intuitively, lower marginal costs of the leader imply higher prices. We compare two mechanisms to determine the price leader in a between-subjects design, majority voting and competitive bidding. The experimental data of later rounds support our theoretical finding that experienced price leaders with lower marginal costs choose higher prices. In the majority voting treatment, participants with higher marginal costs more often establish the lowest cost competitor as price leader in order to induce a higher sales price.
    Keywords: Price leadership, majority voting, bidding, experimental economic
    JEL: D43 D74 L11
    Date: 2013–09–20
  2. By: Leonard J. Mirman; Egas M. Salgueiro; Marc Santugini
    Abstract: We study the issue of integrating real and financial decisions in the monopoly framework. To that end, we combine the decisions of the firm with the decisions of the shareholders. When the managing shareholder chooses production, risk allocation, and the total number of shares for the risky asset, we show that there is no Nash equilibrium with a competitive financial market. Existence is reestablished under various restrictions on the set for the total number of shares. Moreover, there exists a Stackelberg equilibrium when the managing shareholder is the leader. In addition to discussing the issue of existence, we compare the equilibrium outcomes for each restriction we impose.
    Keywords: Existence of Equilibrium, Financial sector, Firm behavior, Market power, Monopoly, Nash equilibrium, Perfect competition, Publicly-traded firm, Risk aversion, Risk taking, Shareholder behavior, Stackelberg equilibrium
    JEL: D21 D42 D82 D83 D84 L12 L15
    Date: 2013
  3. By: Xi Chen; Bertrand M. Koebel
    Abstract: This paper derives the structure of a production function which is necessary and sufficient for generating a fixed cost. We extend the classical production function in order to allow each input to have a fixed and a variable part. We characterize and estimates both fixed and variable components of the cost function and studies how fixed and variable costs interact and affect firms' behavior in terms of price setting and returns to scale.
    Keywords: identification, imperfect competition, returns to scale, unobserved heterogeneity.
    JEL: O3
    Date: 2013
  4. By: Murray, Cameron
    Abstract: Neoclassical theory erroneously makes the assumption that firms maximise profits on a fixed endowment of physical capital leading to the pervasive rule of thumb that firms produce at a level of output where marginal revenues equal marginal costs. However this is merely a special case of the general goal of firms maximising returns on all costs. Firms adopting a return-seeking strategy make decisions that are consistent with fundamental assumptions of financial analysis and outperform profit maximising firms. Introducing time and a measure of incremental capital unit into the model overcomes many limitations with mainstream analysis, particularly in relation to capital investment decisions. This new framework provides a more general model with which to consider market interactions and allows for observable pricing mechanisms, such as mark-up pricing, downward sloping cost curves at the firm level, and ignorance of marginal costs by firm managers. It also reveals that the leap between the positive descriptive model and the normative welfare implications of markets outcomes cannot be bridged by the fundamental welfare theorems.
    Keywords: Firm behaviour, pricing, return, profit, capital investment
    JEL: D0 D2 D20 D21
    Date: 2013–09–30
  5. By: Macchiavello, Rocco (Department of Economics, University of Warwick)
    Abstract: Entrepreneurs must experiment to learn how good they are at a new activity. What happens when the experimentation is financed by a lender? Under common scenarios, i.e., when there is the opportunity to learn by "starting small" or when "no-compete" clauses cannot be enforced ex-post, we show that financing experi- mentation can become harder precisely when it is more profitable, i.e., for lower values of the known-arm and for more optimistic priors. Endogenous collateral requirements (like those frequently observed in micro-credit schemes) are shown to be part of the optimal contract. JEL classification: Experimentation ; Moral Hazard ; Adverse Selection ; Starting Small ; Competition JEL codes: D81 ; D86 ; G30
    Date: 2013
  6. By: Daniel García; Joaquím Coleff
    Abstract: We analyze the optimal provision of information in a procurement auction with horizontally dierentiated goods. The buyer has private information about her preferred location on the product space and has access to a costless communication device. A seller who pays the entry cost may submit a bid comprising a location and a minimum price. We characterize the optimal information structure and show that the buyer prefers to attract only two bids. Further, additional sellers are inecient since they reduce total and consumer surplus, gross of entry costs. We show that the buyer will not nd it optimal to send public information to all sellers. On the other hand, she may prot from setting a minimum price and that a severe hold-up problem arises if she lacks commitment to set up the rules of the auction ex-ante.
    JEL: D44 D82 H57
    Date: 2013–09
  7. By: Chang, Wei-Shiun; Salmon, Timothy C.; Saral, Krista Jabs
    Abstract: Renegotiation is a common practice in procurement auctions which allows for post-auction price adjustments and is nominally intended to deal with the problem that sellers might underestimate the eventual costs of a project during the auction. Using a combination of theory and experiments, we examine the effectiveness of renegotiation at solving this problem. Our findings demonstrate that renegotiation is rarely successful at solving the problem of sellers misestimating costs. The primary effect of allowing renegotiation is that it advantages sellers who possess a credible commitment of default should they have underbid the project. Renegotiation allows these weaker types of sellers to win more often and it also allows them to leverage their commitment of default into higher prices in renegotiation from a buyer.
    Keywords: Procurement auctions, renegotiation, bankruptcy, default, economic experiments
    JEL: C9 C91 D44 D82
    Date: 2013–08
  8. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Axel Ockenfels (Universität Köln, Staatswissenschaftliches Seminar)
    Abstract: Antitrust authorities all over the world are concerned if a particularly aggressive competitor, a "maverick", is bought out of the market. One plausible determinant of acting as a maverick is behavioral: the maverick derives utility from acting competitively. We test this conjecture in the lab. In a pretest, we classify participants by their social value orientation. Individuals who are rivalistic in an allocation task indeed bid more aggressively in a laboratory oligopoly market. Yet we also observe that the suppliers' willingness to pay to buy the maverick out of the market is much smaller than the gain from doing so. Again, rivalry contributes to the phenomenon: a supplier who buys out the maverick would fall behind the remaining competitor in terms of profits, which does not seem acceptable to most suppliers.
    Keywords: Oligopoly, aggressive sales, maverick, merger, buyout, social value orientation, rivalry
    JEL: D43 K21 L13 L41 C91 D03 D22
    Date: 2013–08
  9. By: Vasiliki Bageri (Athens University of Economics and Business); Yannis Katsoulacos (Athens University of Economics and Business); Giancarlo Spagnolo (SITE-Stockholm School of Economics, Tor Vergata University and CEPR)
    Abstract: In most jurisdictions, antitrust fines are based on affected commerce rather than on collusive profits, and in some others, caps on fines are introduced based on total firm sales rather than on affected commerce. We uncover a number of distortions that these policies generate, propose simple models to characterize their comparative static properties, and quantify them with simulations based on market data. We conclude by discussing the obvious need to depart from these distortive rules-of-thumb that appear to have the potential to substantially reduce social welfare.
    Keywords: Antitrust; Deterrence; Fines; Law Enforcement
    JEL: K21 L40
    Date: 2013–02
  10. By: Martyna Kobus (Faculty of Economic Sciences, University of Warsaw); Michał Krawczyk (Faculty of Economic Sciences, University of Warsaw)
    Abstract: We consider a monopolist producer of information goods that may be subject to unauthorized copying. The key feature of our model is that we allow consumers to have ethical concerns based on equity theory that may reduce their utility of such a copy. We derive the formulas describing demand for the product. We find that piracy reduces prices and producers' profit, an effect that can be limited by such measures as copyright enforcement (proxied by expected value of punishment for piracy) and anti-piracy campaigns. Welfare effects are also analyzed and generally turn out to be ambiguous.
    Keywords: digital piracy, copyright protection, equity theory
    JEL: D42 K42
    Date: 2013
  11. By: Daphne Nicolitsas (Bank of Greece)
    Abstract: The paper documents the price setting practices followed by some 400 or so firms operating in Greece. Survey replies reveal: a low percentage of firms changing prices with frequency higher than annual; staggering of price changes during the year; sluggish adjustment of prices to cost shocks; asymmetries in price adjustment across positive and negative cost shocks and a speedier adjustment to increases in costs than to reductions in demand. The data confirm cross-sectional variations in price setting practices also found for other countries. On the basis of the results reached the conjecture that the prevalence of small firms, of firms providing services to businesses and of firms active in tourism-related activities might lie behind the inflation persistence exhibited until recently in Greece appears plausible.
    Keywords: price setting; competition; survey data
    JEL: E31 C41 J31 J41
    Date: 2013–04
  12. By: Koen Frenken; Elena Cefis; Erik Stam
    Abstract: We review the literature on clusters and their effects on entry, exit and growth of firms as well on the evolutionary dynamics underlying the process of cluster formation. Our extensive review shows that there is strong evidence that clusters promote entry, but little evidence that clusters enhance firm growth and firm survival. The emergence of clusters is best understood as an evolutionary process of capability transmission between parent firms and their spinoffs, rather than as an outcome of localisation economies that would increase the performance firms in clusters compared to firms outside clusters. From a number of open questions we distil various future research avenues stressing the importance of understanding firm heterogeneity and the exact mechanisms underlying localisation economies.
    Keywords: entry, exit, industrial cluster, localisation economies, product lifecycle, industry lifecycle, evolutionary economic geography, firm heterogeneity
    JEL: L10 L20 L26 R10
    Date: 2013–09
  13. By: Paolo Di Giannatale; Francesco Passarelli
    Abstract: We study the effects of ownership and complementarity on the performance of bilateral contracts (M&A, Minority Stake purchase and Joint Venture). We derive profitability conditions based on how a contract changes the asset control between partners and how this affects their position against competitors. Then we test our predictions on a sample of US firms. We build a multiproduct and time varying complementarity index in order to estimate the link between firms’ relationships within industry, and performance over time.
    Date: 2013–09
  14. By: Amnon Levy (University of Wollongong); Michael R. Caputo (University of Central Florida); Benoît Pierre Freyens (University of Canberra)
    Abstract: Optimal control theory is employed to characterize the socially optimal trajectory of the royalty per channel and the number of royalty-paying users of state-owned spectrum for broadcasting. The spectrum royalty is set by an omniscient public planner to maximize the sum of the discounted consumers’ utilities over an infinite planning horizon. The number of broadcasters adjusts over time to profits, while the quality of the industry’s service is determined by variety and reception. The trade-off between the benefits of greater variety and the costs of intensified interferences associated with the number of broadcasters is central to the analysis. The convergence of the socially optimal trajectory of the royalty per channel and the number of broadcasters to a steady state and the comparative statics of the steady state are analyzed.
    Keywords: Broadcasting; Royalties; Spectrum; Optimal Control
    JEL: C61 C62 D61 K23 L52
    Date: 2013
  15. By: Crawfordy, Gregory S (University of Zurich, CEPR and CAGE); Pavaniniz, Nicola (zUniversity of Zurich); Schivardi, Fabiano (xLUISS, EIEF and CEPR)
    Abstract: We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects.
    Keywords: Italian, asymmetric information
    Date: 2013
  16. By: Sumit Agarwal; Souphala Chomsisengphet; Neale Mahoney; Johannes Stroebel
    Abstract: We analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act in the United States. Using a unique panel data set covering over 150 million credit card accounts, we find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 2.8% of average daily balances, with a decline of more than 10% for consumers with the lowest FICO scores. Consistent with a model of low fee salience and limited market competition, we find no evidence of an offsetting increase in interest charges or a reduction in access to credit. Taken together, we estimate that the CARD Act fee reductions have saved U.S. consumers $20.8 billion per year. We also analyze the CARD Act requirement to disclose the interest savings from paying off balances in 36 months rather than only making minimum payments. We find that this "nudge" increased the number of account holders making the 36-month payment value by 0.5 percentage points, with a similarly sized decrease in the number of account holders paying less than this amount.
    JEL: D0 D14 G0 G02 G21 G28 L0 L13 L15
    Date: 2013–09
  17. By: Kick, Thomas; Prieto, Esteban
    Abstract: This study investigates the bank competition-stability nexus using a unique regulatory dataset provided by the Deutsche Bundesbank over the period 1994 to 2010. First, we use outright bank defaults as the most direct measure of bank risk available and contrast the results to weaker forms of bank distress. Second, we control for a wide array of different time-varying characteristics of banks which are likely to influence the competition-risk taking channel. Third, we include different measures of competition, contestability and market power, each corresponding to a different contextual level of a bank's competitive environment. Our results indicate that political implications derived from empirical banking market studies must recognize the theoretical properties of the indicators for market power and competition. Using the Lerner Index as a proxy for bank-specific market power, our results support the view that market power tends to reduce banks' default probability. In contrast, using the Boone Indicator (derived on the state level) and/or the regional branch share as a measure of competition, we find strong support that increased competition lowers the riskiness of banks. --
    Keywords: bank risk,bank competition,instrumental variables models
    JEL: C35 G21 G32 L50
    Date: 2013
  18. By: Haikel Khalfallah (PACTE - Politiques publiques, ACtion politique, TErritoires - Institut d'Études Politiques [IEP] - Grenoble - CNRS : UMR5194 - Université Pierre-Mendès-France - Grenoble II - Université Joseph Fourier - Grenoble I); Vincent Rious (Microeconomix - Microeconomix)
    Abstract: In this paper we study the economic consequences of two real-time electricity market designs (with or without penalties) taking into account the opportunistic behaviors of market players. We implement a two-stage dynamic model to consider the interaction between the forward market and the real-time market where market players compete in a Nash manner and rely on supply/demand function oligopoly competition. Dynamic programming is used to deal with the stochastic environment of the market and the mixed complementarity problem is employed to find a solution to the game. Numerical examples are presented to illustrate how the optimal competitor's strategies could change according to the adoption or no adoption of a balancing mechanism and to the level of the penalty imposed on imbalances, regarding a variety of producers' cost structures. The main finding of this study is that implementing balancing mechanisms would increase forward contracts while raising electricity prices. Moreover, possible use of market power would not be reduced when imbalances are penalized.
    Keywords: Electricity markets ; balancing mechanisms ; supply function equilibrium ; mixed complementarity problem
    Date: 2013
  19. By: Ibrahim Abada; Pierre-André Jouvet
    Abstract: This article presents a stochastic dynamic Generalized Nash-Cournot model to describe the evolution of the natural gas markets. The major gas chain players are depicted including: producers, consumers, storage, and pipeline operators, as well as intermediate local traders. Our economic structure description takes into account market power and the demand representation captures the possible fuel substitution that can be made between oil, coal, and natural gas in the overall fossil energy consumption. The demand is made random because of the oil price fluctuations and we take into account long-term contracts in an endogenous way. The model is applied to represent the European natural gas market and to forecast, until 2035, after a calibration process, patterns of consumption, prices, production, and long-term contract prices and volumes. In terms of policy implications, we show how the perception of the oil price’s uncertainty modifies the gas long-term contract volumes in Europe between the producers and the midstreamers. Finally, we define the value, gain and loss of the stochastic solution adapted to our model and calculate them for each market actor.
    Keywords: Energy markets modeling, Game theory, Generalized Nash-Cournot equilibria, Quasi-Variational Inequality, Equilibrium problems, Stochastic programming
    JEL: C61 C73 D24 D43 L13 Q41
    Date: 2013
  20. By: Sumangala Damodaran
    Abstract: Abstract The paper discusses the experience of the mobile telecom sector in India in terms of its business organization. There is a high level of outsourcing of activities, including those such as network management, which would usually be included within the core competence of mobile telecom companies. This outsourcing strategy, pioneered by Bharti Airtel, has resulted in considerable cost savings and increased profits for a small number of core employees of the lead firm. At the same time, in some outsourced activities, such as tower construction, there is a large incidence of casual and contract labour, all forms of precarious employment of the informal variety. However, because of the high level of oligopolistic competition among mobile telecom service providers, some of the benefits of lower cost have been passed on to consumers in the form of low-cost services. But the Bharti Airtel outsourcing strategy is important in pushing the limits of what could be called core competence in a business model dominated by outsourcing.
    Date: 2013
  21. By: Peeters, Thomas; Szymanski, Stefan
    Abstract: In 2010 UEFA, the governing body of European football, announced a set of financial restraints, which clubs must observe when seeking to enter its competitions, notably the UEFA Champions League. We analyze the financial and sporting impact of these “Financial Fair Play” (FFP) regulations in four major European football leagues. We first discuss the details of FFP and frame these regulations in the institutional setup of the European football industry. We then show how the break-even constraint imbedded in FFP could substantially reduce average payrolls and wage-to-turnover ratios, while strengthening the position of the traditional top teams. Since the benefits of the break-even rule to consumers remain unclear, we argue that these rent-shifting regulations might fall foul European competition law.
    Date: 2013–09
  22. By: Dev Nathan; Yang Fuquan; Yu Yin
    Abstract: Abstract This paper deals with the impact of competition on the tourism network in China. It identifies the supply and demand conditions among service providers, tour operators and tourists that have led to the zero-fee tour and then deals with the impact of this intense price competition in terms of the reduction in product quality and degrading of the whole network. The paper also deals with various attempts by local governments and others to curb the zero-fee tour. It points out that price restrictions have worked in a destination that has established a brand value and, thus, has become a differentiated product. In concluding, the paper deals with the supply reductions that are needed to reduce price competition in various segments of the tourism network.
    Date: 2013

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.