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on Industrial Competition |
| By: | Lapo Filistrucchi (CentER, TILEC, Tilburg University and Department of Economics, University of Florence); Tobias J. Klein (CentER, TILEC, Tilburg University) |
| Abstract: | We model a two-sided market with heterogeneous customers and two heterogeneous network effects. In our model, customers on each market side care differently about both the number and the type of customers on the other side. Examples of two-sided markets are online platforms or daily newspapers. In the latter case, for instance, readership demand depends on the amount and the type of advertisements. Also, advertising demand depends on the number of readers and the distribution of readers across demographic groups. There are feedback loops because advertising demand depends on the numbers of readers, which again depends on the amount of advertising, and so on. Due to the difficulty in dealing with such feedback loops when publishers set prices on both sides of the market, most of the literature has avoided models with Bertrand competition on both sides or has resorted to simplifying assumptions such as linear demands or the presence of only one network effect. We address this issue by first presenting intuitive sufficient conditions for demand on each side to be unique given prices on both sides. We then derive sufficient conditions for the existence and uniqueness of an equilibrium in prices. For merger analysis, or any other policy simulation in the context of competition policy, it is important that equilibria exist and are unique. Otherwise, one cannot predict prices or welfare effects after a merger or a policy change. The conditions are related to the own- and cross-price effects, as well as the strength of the own and cross network effects. We show that most functional forms used in empirical work, such as logit type demand functions, tend to satisfy these conditions for realistic values of the respective parameters. Finally, using data on the Dutch daily newspaper industry, we estimate a flexible model of demand which satisfies the above conditions and evaluate the effects of a hypothetical merger and study the effects of a shrinking market for offline newspapers. |
| Keywords: | two-sided markets, indirect network effects, merger simulation, equilibrium, competition policy, newspapers |
| JEL: | L13 L40 L82 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1320&r=com |
| By: | Hanna Halaburda (Bank of Canada); Bruno Jullien (Toulouse School of Economics); Yaron Yehezkel (Tel Aviv University) |
| Abstract: | This paper considers a dynamic platform competition in a market with network externalities. We ask two research questions. The first one asks how the beliefs advantage carries over in time, and whether a low-quality platform can maintain its focal position along time. We show that for very high and very low discount factors it is possible for the low-quality platform to maintain its focal position indefinitely. But for the intermediate discount factor the higher quality platform wins and keeps the market. The second question asks what drives changes in the market leadership along time (observed in many markets, like smartphones and video-game consoles), and how such changes can be supported as a dynamic equilibrium outcome. We offer two explanations. The first explanation relies on intrinsic equilibrium uncertainty. The second explanation relies on the adoption of technology. One could expect such change in the market leader to be a sign of intense competition between platforms. However, we find that changes in leadership indicate softer price competition. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1310&r=com |
| By: | Sagit Bar-Gill (Tel Aviv University) |
| Abstract: | Online platforms, such as Google, Facebook, or Amazon, are constantly expanding their activities, while increasing the overlap in their service offering. In this paper, we study the scope and overlap of online platforms' activities, when they are endogenously determined. We model an expansion game between two online platforms offering two different services to users for free, while selling user clicks to advertisers. At the outset, each platform offers one service, and users may subscribe to one platform or both (multihoming). In the second stage, each platform decides whether to expand by adding the service already offered by its rival. Platforms' expansion decisions affect users' mobility, and thus the partition of users in the market, which, in turn, affects platform prices and profits. We analyze the equilibrium of the expansion game, demonstrating that, in equilibrium, platforms may decide not to expand, even though expansion is costless. Such strategic "no expansion" decisions are due to quantity and price effects of changes in user mobility, brought on by expansion. Both symmetric expansion and symmetric no-expansion equilibria may arise, as well as asymmetric expansion equilibria, even for initially symmetric platforms. |
| Keywords: | Two-sided markets, Platforms, Entry, Online advertising |
| JEL: | L11 L13 L14 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1312&r=com |
| By: | Catherine Gendron-Saulnier; Marc Santugini |
| Abstract: | A monopoly decides whether to segment two separate markets. Demand depends on stochastic shocks and some buyers are uninformed about the quality of the good. Contrary to the case of complete information, we show that it is not always more profitable for the firm to segment the markets in an environment in which some buyers have incomplete information. The reason is that the presence of uninformed buyers provides the firm with the incentive to engage in noisy price-signaling. Indeed, if the benefit from price flexibility (through market segmentation) is offset by the cost of signaling quality through two distinct prices, then it is optimal not to segment the markets and to use uniform pricing. |
| Keywords: | Market integration, market segmentation, learning, monopoly, profits, noisy signaling, third-degree price discrimination |
| JEL: | D82 D83 L12 L15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1335&r=com |
| By: | Andrea Caggese (Pompeu Fabra University) |
| Abstract: | This paper develops the model of an industry with heterogeneous firms, and studies the effect of financing frictions and bankruptcy risk on innovation and aggregate productivity growth. The model has two main features: i) the technology of firms gradually becomes obsolete. Firms can counter this process by innovating, but the innovation outcome is risky. ii) Financial frictions cause the inefficient default of financially fragile firms, deter entry, and reduce competitive forces in the industry. I calibrate and solve the model and simulate several industries, and show that financing frictions have two distinct effects on innovation: a "direct effect", for firms that cannot innovate because of lack internal funds to invest, and an "indirect effect", where the changes in competition and profitability change also the incentives to innovate. Simulation results first show that, for realistic parameter values, the indirect effect of financing frictions is much more important than the direct effect in determining the innovation decisions. Second, they show that "Safe innovation" (where firms invest to upgrade their technology and are certain to increase their productivity) is increased by the presence of financing frictions, because the reduction in competition increases the return on innovation. Conversely "Risky innovation" (where firms invest to improve their productivity, but with some probability fail to do so and end up reducing their productivity instead), is discouraged by financing frictions. This happens because the reduction in competition implies that firms remain profitable for a longer time and therefore they wait longer before attempting a risky innovation process. I test these predictions and their implications for productivity growth on a sample of Italian manufacturing firms, and I find that the life cycle and innovation decisions of firms are fully consistent with the model with risky innovation. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:300&r=com |
| By: | Doh-Shin Jeon (Toulouse School of Economics); Yassine Lefouili (Toulouse School of Economics) |
| Abstract: | We study bilateral cross-licensing agreements among N(> 2) firms that engage in competition after the licensing phase. It is shown that the most collusive cross-licensing royalty, i.e. the one that allows the industry to achieve the monopoly profit, is sustainable as the outcome of bilaterally efficient agreements. When the terms of the agreements are not observable to third parties, the monopoly royalty is the unique symmetric bilaterally efficient royalty. However, when the terms of the agreements are public, the most competitive royalty (i.e. zero) can also be bilaterally efficient. Policy implications regarding the antitrust treatment of cross-licensing agreements are derived from these results. |
| Keywords: | Cross-Licensing, Collusion, Antitrust and Intellectual Property |
| JEL: | L44 O33 O34 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1311&r=com |
| By: | Sarah Parlane (University College Dublin); Ying-Yi Tsai (National University of Kaohsiung) |
| Abstract: | This paper characterizes the optimal contracts issued to suppliers when delivery is subject to disruptions and when they can invest to reduce such a risk. When investment is contractible dual sourcing is generally optimal because it reduces the risk of disruption. The manufacturer (buyer) either issues symmetric contracts or selects one supplier as a major provider who invests while the buffer supplier does not. An increased reliance on single sourcing or on a major supplier is optimal under moral hazard. Indeed, we show that order consolidation increases the manufacturer’s profits because it serves as an incentive device in inducing investment. |
| Keywords: | Moral Hazard; Vertical Organization; Supply Base Management;Contract Order Size; Relationship-specific Investment; Strategic Outsourcing |
| JEL: | D23 D86 L24 |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201316&r=com |
| By: | Benjamin Eden (Vanderbilt University) |
| Abstract: | I use a flexible price version of the Prescott (1975) hotels model to explain variations in price dispersion across goods sold by supermarkets in Chicago. The main finding is that price dispersion measures are positively correlated with proxies for demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good. |
| JEL: | D4 L0 |
| Date: | 2013–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-13-00015&r=com |
| By: | Giammario Impullitti; Omar Licandro |
| Abstract: | The availability of rich ?rm-level data has led researchers to uncover new evidence on the effects of trade liberalization. First, trade openness forces the least productive fi?rms to exit the market; secondly, it induces surviving fi?rms to increase their innovation efforts; thirdly, it increases the degree of product market competition. In this paper, we propose a model aimed at providing a coherent interpretation of these ?ndings, and use it to asses the role of fi?rm selection in shaping the aggregate welfare gains from trade. We introduce ?firm heterogeneity into an innovation-driven growth model where incumbent fi?rms operating in oligopolistic industries perform cost-reducing innovation. In this environment, trade liberalization leads to lower markups level and dispersion, tougher fi?rm selection, and more innovation. Calibrated to match US aggregate and fi?rm-level statistics, the model predicts that moving from a 13% variable trade costs to free trade increases the stationary annual rate of productivity growth from 1:19 to 1:29% and increases welfare by about 3% of steady state consumption. Selection accounts for about 1/4th of the overall growth increase and 2/5th of the welfare gains from trade. |
| Keywords: | International Trade, Heterogeneous Firms, Oligopoly, Innovation, Endogenous Markups, Welfare, Competition. JEL codes: F12, F13, O31, O41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:not:notecp:13/04&r=com |
| By: | Itai Ater (Recanati Business School, Tel Aviv University); Eugene Orlov (Compass Lexecon); |
| Abstract: | How did the diffusion of the Internet affect performance and product quality in the airline industry? We argue that the shift to online distribution channels has changed the way airlines compete for customers - from an environment in which airlines compete for space at the top of travel agents’ computer screens by scheduling the shortest flights, to an environment where price plays the dominant role in selling tickets. Using flight-level data between 1997 and 2007 and geographical growth patterns in Internet access, we find a positive relationship between Internet access and scheduled flight times. The magnitude of the effect is larger in competitive markets without low-cost carriers and for flights with shortest scheduled times. We also find that despite longer scheduled flight times, flight delays increased as passengers gained Internet access. More generally, these findings suggest that increased Internet access may adversely affect firms' performance and firms’ incentives to provide high quality products. |
| Keywords: | Internet, Search, Air Travel, Quality |
| JEL: | D83 L15 L93 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1307&r=com |
| By: | Volodymyr Bilotkach (Newcastle University, Department of Economics); Nicholas G. Rupp (East Carolina University, Department of Economics); Vivek Pai (University of California, Irvine, and KBB Department of Economics) |
| Abstract: | We approach the issue of the value of a platform to a seller in a two-sided market where both buyers and sellers multi-home. A seller that loses access to a major buyer platform can potentially incur substantial financial losses. We exploit a recent conflict between American Airlines and two leading online travel agencies (Expedia and Orbitz), which dropped American Airlines fare quotes during the first quarter of 2011. We present a simple model of airline ticket distribution. This model provides a framework to analyze the events that happened in the American Airlines – online travel agency conflict. We analyze price data for the first quarter of 2010 and 2011, employing a simple difference-in-differences identification strategy to evaluate changes in American Airlines’ fares. After controlling for across-market heterogeneity, carrier-specific time-invariant effects, and time-specific carrier-invariant effects, American Airlines’ fares during the conflict were 2.7-4.2 percent lower than similar fares charged by American’s main competitors (United, Continental, Delta, and US Airways). The fare effect is most pronounced in the sub-sample of one-stop itineraries, where competition is stronger, and customers are more likely to have to rely on travel agents – rather than carriers’ own web-sites – for flight bookings. In sum, our findings indicate that access to major buyer platforms is considerably valuable to a seller. We estimate that during the first quarter of 2011 the loss of access to the Expedia/Orbitz platforms resulted in over $50 million reduction in revenue for American Airlines. |
| Keywords: | two-sided markets, value of platforms, online travel agents Length: 31 pages |
| JEL: | D4 L4 L93 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1308&r=com |
| By: | Francesco Decarolis (Department of Economics and Hariri Institute, Boston University); Maris Goldmanis (Department of Economics, Royal Holloway, University of London); Antonio Penta (Department of Economics, University of Wisconsin at Madison) |
| Abstract: | As auctions are becoming the main mechanism for selling advertisement space on the web, marketing agencies specialized in bidding in online auctions are proliferating. We analyze theoretically how bidding delegation to a common marketing agency can undermine both revenues and efficiency of the generalized second price auction, the format used by Google and Microsoft-Yahoo!. Our characterization allows us to quantify the revenue losses relative to both the case of full competition and the case of agency bidding under an alternative auction format (specifically, the VCG mechanism). We propose a simple algorithm that a search engine can use to reduce efficiency and revenue losses. |
| Keywords: | Online Advertising, Internet Auctions, Common Agency |
| JEL: | C71 D44 L41 L81 M37 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1319&r=com |
| By: | Lukasz Grzybowski (Telecom ParisTech, Department of Economics and Social Sciences, 46 rue Barrault, 75013 Paris, France); Frank Verboven (University of Leuven and CEPR (London), Naamsestraat 69, 3000 Leuven, Belgium) |
| Abstract: | We use rich survey data on 133,825 households from 27 EU countries during 2005-2011 to analyze substitution between fixed-line and mobile telecommunications services. We estimate a discrete choice model where households may choose between having mobile or fixed-line voice access only, or using both technologies at the same time. We obtain the following main findings. First, fixed-line and mobile connections are on average perceived as substitutes. But there is substantial heterogeneity across households and EU regions, with stronger substitution in Central and Eastern European countries. Second, there is strong complementarity between fixed-line and mobile connections that are offered by the fixed-line incumbent operator. This gives the incumbent a possibility to leverage its position in the fixed-line market into the mobile market. Third, fixed broadband technologies such as DSL and cable generate strong complementarities between fixed and mobile access, while mobile broadband strengthens substitution (at a smaller scale). The emergence of fixed broadband has thus been an important additional source through which incumbents leverage their strong position in the fixed-line network. |
| Keywords: | fixed-to-mobile substitution; incumbency advantage; broadband access |
| JEL: | L13 L43 L96 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1309&r=com |
| By: | Jorge Ale (Department of Economics, The Hebrew University of Jerusalem) |
| Abstract: | In this article I analyze the effects of a recent reform intended to decrease switching costs in the cellular industry. The reform, implemented in Chile in 2012, allowed cell phone users to switch operators without any contract restriction while keeping their wireless number. Its aim was the belief that lower switching costs would force incumbent companies to charge lower prices by introducing more competition among them. I test the empirical implications of models of switching costs using individual data on customers' bills and plans. I find that average price decreased by 7.2 percent. Moreover, my results provide evidence that the operators reacted primarily by decreasing the price of on-net plans and by offering handsets with data connectivity at a discounted rate. I also find a decrease in the introductory price discounts that operators offer to new customers. I interpret this result as due to the lower ability of the firms to lock-in customers. |
| Keywords: | Switching Costs, Price Discounts, Number Portability, Wireless Industry, Telecommunications. |
| JEL: | D22 L13 L14 L50 L96 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1317&r=com |
| By: | Charles Angelucci (Harvard University); Julia Cage (Harvard University); Romain de Nijs (Paris School of Economics) |
| Abstract: | We investigate theoretically and empirically the determinants of second-degree price discrimination in two-sided markets. We build a model in which a newspaper must attract both readers and advertisers. Readers are uncertain as to their future benefit from reading, and heterogeneous in their taste for reading. Advertisers are heterogeneous in their outside option, taste for subscribers, and taste for occasional buyers. To estimate empirically the effect of the advertisers' side of the industry on price discrimination on the readers' side, we use a "quasi-natural experiment". We exploit the introduction of advertisement on French Television in 1968, which we treat as a negative shock on advertisement revenues of daily national newspapers (treated group), but not on daily local newspapers (control group). We build a new dataset on French local newspapers between 1960 and 1974 and perform a Differences-in-Differences analysis. We find robust evidence of increased price discrimination as a result of a drop in advertisement revenues. |
| Keywords: | Newspaper Industry, Second-Degree Price Discrimination, Two-Sided Markets |
| JEL: | L11 M13 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1313&r=com |
| By: | Lucie Bottega (Toulouse School of Economics); Jenny De Freitas (Universitat de les Illes Balears) |
| Abstract: | In a Bertrand duopoly model, we study firms’ eco-labeling behavior when certification process imperfectly signals environmental product quality to consumers. The test is noisy in the sense that brown products may be labeled while green products may not. We study how strategic interaction shapes firms’ incentives to get certified, equilibrium demand, prices and social welfare. We find that the eco-labeling policy is welfare enhancing for all parameter values. Nevertheless, the separating testing equilibrium may be too costly to sustain when the green firm probability to pass the test is small. Moreover, if the certification technology is soft, meaning that both brown and green units are awarded the label with high probability, it would be easier to sustain a separating equilibrium. This is a consequence of price strategic interaction between firms that gives firms incentives to coordinate on a separating equilibrium. |
| Keywords: | Imperfect Certification, Eco-label, Duopoly, Welfare Analysis, Environmental Quality, Credence Attribute |
| JEL: | C72 D21 D60 D82 L15 Q50 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ubi:deawps:62&r=com |
| By: | Zsolt Katona (Haas School of Business, UC Berkeley) |
| Abstract: | This paper studies the competition between firms for influencers in a network. Firms spend effort to convince influencers to recommend their products. The analysis identifies the offensive and defensive roles of spending on influencers. The value of an influencer only depends on the in-degree distribution of the influence network. Influencers who exclusively cover a high number of consumers are more valuable to firms than those who mostly cover consumers also covered by other influencers. Firm profits are highest when there are many consumers with a very low or with very high in-degree. Consumers with an intermediate level of in-degree contribute negatively to profits and high in-degree consumers increase profits when market competition is not intense. Prices are generally lower when consumers are covered by many influencers, however, firms are not always worse off with lower prices. The nature of consumer response to recommendations makes an important difference. When first impressions dominate, firm profits for dense networks are higher, but when recommendations have a cumulative influence profits are reduced as the network becomes dense. |
| Keywords: | Social Networks, Influencers, Competition |
| JEL: | M31 C72 D44 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1306&r=com |
| By: | Junjie Zhou (School of International Business Administration, Shanghai University of Finance and Economics); Ying-Ju Chen (University of California at Berkeley); |
| Abstract: | As a common practice, various firms initially make information and access to their products/services scarce within a social network; identifying influential players that facilitate information dissemination emerges as a pivotal step for their success. In this paper, we tackle this problem using a stylized model that features payoff externalities and local network effects, and the network designer is allowed to release information to only a subset of players (leaders); these targeted players make their contributions first and the rest followers move subsequently after observing the leaders' decisions. In the presence of incomplete information, the signaling incentive drives the optimal selection of leaders and can lead to a first-order materialistic effect on the equilibrium outcomes. We propose a novel index for the key leader selection (i.e., a single player to provide information to) that can be substantially different from the key player index in \ \cite{ballester2006s} and the key leader index with complete information proposed in \cite{zhou13benefit}. We also show that in undirected graphs, the optimal leader group identified in \cite{zhou13benefit} is exactly the optimal follower group when signaling is present. The pecking order in complete graphs suggests that the leader should be selected by the ascending order of intrinsic valuations. We also examine the out-tree hierarchical structure that describes a typical economic organization. The key leader turns out to be the one that stays in the middle, and it is not necessarily exactly the central player in the network. |
| Keywords: | social network, signaling, information management, targeted advertising, game theory |
| JEL: | D21 D29 D82 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:1304&r=com |
| By: | Ivanov, Alexey |
| Abstract: | In article emergence and development of concept of synergetic effect of M&A and ideas of it from 1960th to the present is considered. The author generalized data of a number of the researches proving that M&A not so surely lead to achievement of the positive synergetic effect which is usually determined by the formula «2+2=5» – the main myth about a synergy. |
| Keywords: | слияния и поглощения, синергетический эффект, интеграция, mergers and acquisitions, synergetic effect, integration |
| JEL: | L10 |
| Date: | 2013–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50307&r=com |
| By: | Ivanov, Alexey |
| Abstract: | In the article the situation on the Russian market of mergers and acquisitions in 2005-2012 is investigated. Also was produced its comparison with the world market for key indicators. The author based on extensive statistical analysis of the material revealed the specific features and tendencies of development of the domestic market of mergers and acquisitions, and emphasized the role of integrative synergetic effect in the expectations of investors. |
| Keywords: | слияния и поглощения, интеграция, синергетический эффект, mergers and acquisitions, integration, synergetic effect |
| JEL: | O30 |
| Date: | 2013–08–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:50304&r=com |