nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒11‒16
23 papers chosen by
Russell Pittman
US Government

  1. A Model of Product Design and Information Disclosure Investments By Panos Markopoulos; Kartik Hosanagar
  2. Competition in Posted Prices With Stochastic Discounts By David Gill; John Thanassoulis
  3. On the Effects of Mergers on Equilibrium Outcomes in a Common Property Renewable Asset Oligopoly By Hassan BENCHEKROUN; Gérard GAUDET
  4. Defensive Strategies in the Quality Ladders By Ledezma, Ivan
  5. Cooperation vs. Collusion: How Essentiality Shapes Co-opetition By Rey, Patrick; Tirole, Jean
  6. Monopolistic Competition when Income Matters By Paolo Bertoletti; Federico Etro
  7. Comparative Statics for Oligopoly: A Generalized Result By Naoto Jinji
  8. Competition, Time Horizon and Corporate Social Performance By Graafland, J.J.; Smid, H.
  9. Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals? By Chaton, Corinne; Durand-Viel, Laure
  10. Industry Restructuring: A Case for Affirmative Action By Villeneuve, Bertrand; Zhang, Vanessa Yanhua
  11. Is there an Exclusionary Effect of Retroactive Price Reduction Schemes? By Lisa Bruttel
  12. Two-sided reputation in certification markets By Bouvard, Matthieu; Levy, Raphael
  13. Second-Degree Moral Hazard in a Real-World Credence Goods Market By Loukas Balafoutas; Rudolf Kerschbamer; Matthias Sutter
  14. Patent Value and Citations: Creative Destruction or Strategic Disruption? By David S. Abrams; Ufuk Akcigit; Jillian Popadak
  15. Network Neutrality, Access to Content and Online Advertising By Antonio Russo; Anna D’Annunzio
  16. Net Neutrality is Imperfect and Should Remain So! By Nicolas Curien
  17. A discrete choice approach for analysing the airport choice for freighter operations in Europe By KUPFER, Franziska; KESSELS, Roselinde; GOOS, Peter; VAN DE VOORDE, Eddy; VERHETSEL, Ann
  18. Moral Hazard and Economies of Scope in Physician Ownership of Complementary Medical Services By Brian K. Chen; Paul J. Gertler; Chuh-Yuh Yang
  19. Competition And Bank Risk: The Role Of Securitization And Bank Capital By Yener Altunbas; Michiel van Leuvensteijn; David Marques-Ibanez
  20. Pass-through of Emissions Costs in Electricity Markets By Natalia Fabra; Mar Reguant
  21. The Effect of Advertising and In-Store Promotion on the Demand for Chocolate By Jason C. Patalinghug
  22. Competition in the Portuguese economy: insights from a profit elasticity approach By Amador, João; Soares, Ana Cristina
  23. Product market policies in Romania : a comparison with EU partners By De Rosa, Donato; Iootty, Mariana; Pirlea, Florina; Aprahamian, Arabela; Stanescu, Alexandru

  1. By: Panos Markopoulos (Department of Business and Public Administration, University of Cyprus); Kartik Hosanagar (Department of Operations and Information Management, Wharton School, University of Pennsylvania)
    Abstract: As online information availability for products and services is increasing and as buyers engage in more online search prior to purchase decisions, it is becoming more important for firms to know when to invest to reduce buyer uncertainty. This article argues that today's firms should view product design and investments to reduce buyer uncertainty as an integrated process, which is in turn heavily influenced by how much information buyers can obtain independently, for example, by reading other buyers' reviews or by accessing third party infomediaries. Using a game-theoretic model of a competitive market, we explain how product quality decisions influence future investments to reduce buyer uncertainty, and demonstrate how firms should take this dependency into account to avoid over-investing in quality. We also show that firms, and especially lower quality firms, can free ride on the product information already available in the market, and reduce their own disclosure investments. Finally we show that firms can take further advantage of such ambient information availability to ease the intensity of competition among them, and specifically to reduce their product quality investments.
    Keywords: Buyer uncertainty, information disclosure, product quality, infomediaries
    JEL: C72 D43 D82 D83 L13 L15
    Date: 2013–10
  2. By: David Gill; John Thanassoulis
    Abstract: We study price competition between firms over public list or posted prices when a fraction of consumers (termed 'bargainers') can subsequently receive discounts with some probability.� Such stochastic discounts are a feature of markets in which some consumers bargain explicitly; of markets in which sellers use the marketing practice of couponing; and of markets in which sellers offer both simple-to-understand tariffs (the posted prices) alongside complex or opaque tariffs that might offer a discount.� Even though bargainers receive reductions off the posted prices, the potential to discount dampens competitive pressure in the market by reducing the incentive to undercut a rival's posted price, thus raising all prices and increasing profits.� Welfare falls because of the stochastic nature of the discounts, which generates some misallocation of products to consumers.� We also find that stochastic discounts facilitate collusion by reducing the market share that can be gained from a deviation.
    Keywords: Posted prices, list prices, collusion, bargaining, negotiation, haggling, discounting, coupons, obfuscation, flat rate bias, price takers
    JEL: C78 D43 L13
    Date: 2013–10–30
  3. By: Hassan BENCHEKROUN; Gérard GAUDET
    Abstract: This paper examines a dynamic game of exploitation of a common pool of some renewable asset by agents that sell the result of their exploitation on an oligopolistic market. A Markov Perfect Nash Equilibrium of the game is used to analyze the effects of a merger of a subset of the agents. We study the impact of the merger on the equilibrium production strategies, on the steady states, and on the profitability of the merger for its members. We show that there exists an interval of the asset's stock such that any merger is profitable if the stock at the time the merger is formed falls within that interval. That includes mergers that are known to be unprofitable in the corresponding static equilibrium framework.
    Keywords: Mergers, dynamic games, oligopoly, common property, renewable resources
    JEL: C73 D43 L13 Q20
    Date: 2013
  4. By: Ledezma, Ivan
    Abstract: This paper analyses the potentially defensive behaviour of patent race winners and its effect on aggregate R&D effort. It proposes a quality-ladders model that endogenously determines leaders technology advantages and who innovates. Product market regulation can have either a positive or a negative effect on R&D intensity. The negative effect is likely to be observed in highly deregulated economies. The positive influence arises in more regulated environments and it is stronger for larger innovative jumps. These steady-state equilibrium outcomes are consistent with puzzling and contrasting patterns stemming from data on manufacturing industries for 14 OECD countries during the period 1987-2003.
    Keywords: réglementation; modèle à échelles de qualité; leaders innovants; R&D; product market regulation; quality ladders; Innovative Leaders;
    JEL: O33 O31 L13
    Date: 2013–01
  5. By: Rey, Patrick; Tirole, Jean
    Abstract: The paper makes two related contributions. First, and in contrast with the rich body of literature on collusion with (mainly perfect) substitutes, it derives general results on the sustainability of tacit coordination for a class of nested demand functions that allows for the full range between perfect substitutes and perfect complements. Second, it studies the desirability of joint marketing alliances, an alternative to mergers. It shows that a combination of two informationfree regulatory requirements, mandated unbundling by the joint marketing entity and unfettered independent marketing by the firms, makes joint-marketing alliances always socially desirable, whether tacit coordination is feasible or not.
    Keywords: tacit collusion, cooperation, substitutes and complements, essentiality, joint marketing agreements, patent pools, independent licensing, unbundling, co-opetition.
    JEL: D43 L24 L41 O34
    Date: 2013–10–23
  6. By: Paolo Bertoletti (Department of Economics and Management, University of Pavia); Federico Etro (Department of Economics, University of Venice Ca' Foscari)
    Abstract: We study monopolistic competition with preferences over differentiated goods characterized by a separable indirect utility rather than a separable direct utility as in the Dixit-Stiglitz model, with the CES case as the only common ground. Examples include linear and log-linear direct demands. In equilibrium with free entry, an increase of the number of consumers is neutral on prices, but increases proportionally the number of firms, just creating pure gains from variety. Contrary to the Dixit-Stiglitz model, an increase in consumer income increases prices and more than proportionally the number of varieties if and only if the price elasticity of demand is increasing. We also discuss extensions to an outside good, heterogeneous consumers, heterogeneous firms à la Melitz and endogenous quality. Finally, we provide an application to international trade generating pricing to market in a generalized Krugman model.
    Keywords: Monopolistic competition, Indirect additivity, Non-homotheticity, Pricing to market, Krugman model, Melitz model
    JEL: D11 D43 L11 F12
    Date: 2013–11
  7. By: Naoto Jinji
    Abstract: We perform comparative statics for a general model of asymmetric oligopoly and derive a concise formula for the response of one firm to a marginal change in its rival’s strategic variable, taking into account the responses of all other firms. We obtain the conditions under which the sign of this response coincides with that of the mixed second-order partial derivative of the firm’s payoff function. We then propose a distinction between gross and net strategic relationships (i.e., strategic substitute and complement).
    Keywords: comparative statics, asymmetry, stability conditions
    JEL: L13 D43 C62
  8. By: Graafland, J.J.; Smid, H. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper develops and tests a conceptual framework on the relationships between competition, time horizon and corporate social performance (CSP). We hypothesize that more intense competition discourages CSP by lowering the time horizon of companies. We test the hypothesis on a sample of 4696 of mainly small and medium-sized companies from twelve European countries. We distinguish between price competition, market position and technological competition. We find that companies with a longer time horizon have a higher CSP and that price competition and a ‘level playing field’ market position shorten the time horizon. The intensity of technological competition has a positive effect on time horizon, but also exerts a direct positive influence on CSP. Test results show that time horizon significantly mediates the influence of price competition, the market position and technological competition on CSP. The analysis implies that, from the perspective of CSP, the economic policy of the government should not focus on fostering price competition, but rather on strengthening competition in innovation.
    Keywords: Corporate social performance;time horizon;price competition;SMEs;technological competition
    JEL: L1 M14
    Date: 2013
  9. By: Chaton, Corinne; Durand-Viel, Laure
    Abstract: Real assets are usually valued by computing the stream of profits they can bring to a price-taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two-period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price-taking valuation reveals a systematic bias that tends to induce underinvestment.
    Keywords: Assets (accounting); profit; gas industry; spot prices; suppliers; natural gas;
    JEL: L16 G14 G12
    Date: 2013
  10. By: Villeneuve, Bertrand; Zhang, Vanessa Yanhua
    Abstract: We analyze the trade-off faced by authorities envisaging a one-shot structural re-form in a capitalistic industry. A structure is modeled as (1) a sharing of productive capital at some time and (2) a sharing of scarce sites or any other non-reproducible assets. These two distinct dimensions of policy illustrate the importance of a dy-namic theory in which firms durably differ in several respects. Though equalization of endowments and rights is theoretically optimal, realistic constraints force com-petition authorities to adopt second-best solutions. Affirmative action here is the policy that recognizes the fact that, under certain circumstances, helping the dis-advantaged contributes maximally to social surplus.
    Keywords: Politique de la concurrence; accumulation de capacité; concurrence de Cournot; duopole asymétrique; régulation cohérente dans le temps; Competition policy; capacity accumulation; Cournot competition; asymmetric duopoly; regulatory consistency;
    JEL: C73 L13 L40
    Date: 2013–01
  11. By: Lisa Bruttel (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper presents an experiment on the loyalty enhancing effect potentially created by retroactive price reduction schemes. Such price reductions are applied to all units bought in a certain time frame if the total quantity passes a given threshold. Close to the threshold, the marginal price the buyer pays for the missing units up to the threshold is very low. A dominant firm can use this effect to exclude potential rivals from competition, which is why some jurisdictions consider retroactive discounts as unlawful. This study shows that there in fact is a loyalty enhancing effect of retroactive discounts and how it relates to risk preferences and loss aversion.
    Keywords: rebates and discounts, consumer behavior, risk aversion, loss aversion, experiment
    JEL: C91 D03 D81
    Date: 2013–08–31
  12. By: Bouvard, Matthieu; Levy, Raphael
    Abstract: We consider a market where privately informed sellers resort to certification to overcome adverse selection. There is uncertainty about the certifier's ability to generate accurate information. The profit of a monopolistic certifier is an inverted U-shaped function of his reputation for accuracy: being perceived as more precise allows to attract more good sellers but a high expected precision also deters bad sellers. Since the certifier tries to reach a balanced reputation to attract both types, reputation has a disciplining effect when the certifier is perceived as insufficiently accurate, but gives incentives to decrease precision when he is perceived as “too" accurate. The impact of competition depends on whether sellers “multihome" or “singlehome". Under singlehoming, certifiers compete to attract good sellers, which makes higher reputation more valuable. Multihoming makes higher reputations less desirable because the competitor exerts a negative externality by providing extra information. Therefore, singlehoming attenuates bad reputation effects, while multihoming exacerbates inefficiencies.
    Date: 2013–10
  13. By: Loukas Balafoutas; Rudolf Kerschbamer; Matthias Sutter
    Abstract: Empirical literature on moral hazard focuses exclusively on the direct impact of asymmetric information on market outcomes, thus ignoring possible repercussions. We present a field experiment in which we consider a phenomenon that we call second-degree moral hazard – the tendency of the supply side in a market to react to anticipated moral hazard on the demand side by increasing the extent or the price of the service. In the market for taxi rides, our moral hazard manipulation consists of some passengers explicitly stating that their expenses will be reimbursed by their employer. This has an economically important and statistically significant positive effect on the likelihood of overcharging, with passengers in that treatment being about 13% more likely to pay higher-than-justified prices for a given ride. This indicates that second-degree moral hazard may have a substantial impact on service provision in a credence goods market.
    Keywords: Natural field experiment, credence goods, asymmetric information, moral hazard, overcharging, overtreatment, taxi
    JEL: C93 D82
    Date: 2013
  14. By: David S. Abrams (Penn Law School & Wharton Business Economics & Public Policy Department, University of Pennsylvania,); Ufuk Akcigit (Department of Economics, University of Pennsylvania & NBER); Jillian Popadak (Wharton Business Economics & Public Policy Department, University of Pennsylvania)
    Abstract: Prior work suggests that more valuable patents are cited more and this view has become standard in the empirical innovation literature. Using an NPE-derived dataset with patent-specific revenues we find that the relationship of citations to value in fact forms an inverted-U, with fewer citations at the high end of value than in the middle. Since the value of patents is concentrated in those at the high end, this is a challenge to both the empirical literature and the intuition behind it. We attempt to explain this relationship with a simple model of innovation, allowing for both productive and strategic patents. We find evidence of greater use of strategic patents where it would be most expected: among corporations, in fields of rapid development, in more recent patents and where divisional and continuation applications are employed. These findings have important implications for our basic understanding of growth, innovation, and intellectual property policy.
    Keywords: productive innovation, defensive innovation, patents, creative destruction, citations, patent value, competition, intellectual property, entrepreneurship, strategic patenting, defensive patenting, patent thickets, fencing patents.
    JEL: O3 L2 K1
    Date: 2013–11–05
  15. By: Antonio Russo (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Anna D’Annunzio (Sapienza University of Rome, Italy)
    Abstract: We investigate the implications of Network Neutrality regulation for Internet fragmentation. We model a two-sided market, where Content Providers (CPs) and consumers interact through Internet Service Providers (ISPs) and CPs sell consumers’ attention to advertisers. Under Network Neutrality, CPs can have their traffic delivered to consumers by ISPs for free, while in the Unregulated Regime they have to pay a (non-discriminatory) termination fee. In our model multiple impressions of an ad on a consumer are partially wasteful. Thus, equilibrium ad rates decrease when the audiences of CPs overlap. We show that universal distribution of content is always an equilibrium when Network Neutrality regulation is in place. In contrast, when competition among CPs strongly reduces their profits, in the Unregulated Regime ISPs can use termination fees to induce fragmentation and extract CPs’ extra profits. This occurs when repeated impressions of an ad rapidly lose value and consumers care for content availability to a relatively small extent. Our results suggest that the Unregulated Regime is never superior to Network Neutrality from a consumer surplus and social welfare point of view.
    Keywords: Network Neutrality, two-sided markets, Internet, advertising, fragmentation
    JEL: L1 D43 L13 L51
    Date: 2013–11
  16. By: Nicolas Curien
    Abstract: Network neutrality is often mistakenly assimilated with the non-discrimination of Internet usage. Although this rough view is acceptable at first sight, as far as blocking of content or clearly anti-competitive discrimination are concerned, it becomes confusing at second sight, when the efficiency of traffic management, on the supply side, or the differentiation of consumers’ requests, on the demand side, are considered. A neutrality principle ignoring traffic efficiency and demand differentiation through enforcing a strict homogeneity in the treatment of data packets on the network would prove inappropriate as it would downgrade the quality of service while not meeting consumers’ needs.In order to clarify the on-going debates, an unambiguous and formal definition of the concept of neutrality is required. In this contribution, a tentative definition is proposed, based on the economic principle of efficiency. Perfect neutrality is first shown as being efficient, i.e. welfare maximizing, in an ideal context C*. Then, by definition, the efficient network design in some real context C distinct from C* is called “C-imperfect neutralityâ€. Depending on the specification of context C, neutrality may involve some form of efficient discrimination and becomes a flexible concept as it translates into different settings in various technological or political environments and as it may change overtime in a given environment.This approach of “the most efficient imperfection†provides an adequate framework to discuss the main net neutrality issues presently at stake in the North-American and European scenes. Among those, we shall emphasize traffic management, segmentation of demand, funding of the next generation access networks, interference of governmental policies with networks’ operations, regulation of neutrality.
    Keywords: regulation
    Date: 2013–03–27
  17. By: KUPFER, Franziska; KESSELS, Roselinde; GOOS, Peter; VAN DE VOORDE, Eddy; VERHETSEL, Ann
    Abstract: Airport competition is a topic which recently gained interest in transport research. However, many studies about airport competition focus on passengers or passenger operations. Research about airport competition for air cargo is still scarce. This paper contributes to the understanding of this topic by analyzing the airport choice for freighter operations in Europe. It first reveals the choice process that airports follow, as well as the different factors that play a role therein. Furthermore, using a discrete choice experiment, we analyzed six choice factors more in-depth. We collected completed questionnaires from 26 airlines and used the discrete choice data as input for a multinomial logit model. The results show that the presence of passenger operations at an airport is not a significant factor in explaining airlines’ choices, which, from an airline’s point of view, supports the idea of all-cargo airports and therefore the relocation of cargo operations to non-congested airports. The presence of forwarders, on the other hand, is the most important factor. This shows that, when trying to influence airlines in their airport choice, airports and policy makers also have to consider the preferences of forwarders.
    Keywords: Air cargo, Discrete choice analysis, Airport choice, Multinomial logit
    Date: 2013–11
  18. By: Brian K. Chen; Paul J. Gertler; Chuh-Yuh Yang
    Abstract: When physicians own complementary medical service facilities such as clinical laboratories and imaging centers, they gain financially by referring patients to these service entities. This situation creates an incentive for the physician to exploit the consumers’ trust by recommending more services than they would demand under full information. This moral hazard cost, however, may be offset by gains in economies of scope if the complementary services are integrated into the physician’s practice. We assess the extent of moral hazard and economies of scope using data from Taiwan, which introduced a “separating” policy, similar to the Stark Law in the US, that restricts physician ownership of pharmacies unless they are fully integrated into the physician’s practice. We find that physicians who own pharmacies prescribe 7.6% more drugs than those who do not own pharmacies. Overall, we find no evidence of economies of scope from integration in the treatment of patients with acute respiratory infections, diabetes, or hypertension. Overall the separating policy was ineffective at controlling drug costs as a large number of physicians choose to integrate pharmacies into their practices in order to become exempt from the policy.
    JEL: I11 I12 K23 L22
    Date: 2013–11
  19. By: Yener Altunbas (Bangor University); Michiel van Leuvensteijn (APG); David Marques-Ibanez (European Central Bank)
    Abstract: We find that the increased use of securitization activity in the banking sector augmented the effect of competition on realized bank risk during the 2007-2009 crisis. Our results suggest that securitization by itself does not lead to augmented risk while higher levels of capital do not buffer the impact of competition on realized risk. It follows that cooperation between supervisory and competition authorities would be beneficial when acting on the financial stability implications of financial innovation and the effects of bank capital regulation.
    Keywords: securitization; competition; bank risk
    JEL: G21 D22
    Date: 2013–10
  20. By: Natalia Fabra; Mar Reguant
    Abstract: We measure the pass-through of emissions costs to electricity prices and explore its determinants. We perform both reduced-form and structural estimations based on optimal bidding in this market. Using rich micro-level data, we estimate the channels affecting pass-through in a flexible manner, with minimal functional form assumptions. Contrary to many studies in the general pass-through literature, we find that emissions costs are almost fully passed-through to electricity prices. Since electricity is traded through high-frequency auctions for highly inelastic demand, firms have weak incentives to adjust markups after the cost shock. Furthermore, the costs of price adjustment are small.
    JEL: D44 L13 L94
    Date: 2013–11
  21. By: Jason C. Patalinghug (Wesleyan University)
    Abstract: This paper analyzes the effect of TV advertising and in-store displays on the sales of chocolates. I examine which method is more effective in gaining customers and in increasing total sales. Also, I look at the evidence to see whether the lack of advertising by a firm will hurt the industry as a whole. In this essay, I use a nested logit model on scanner data obtained by the Zwick Center for Food and Resource Policy at the University of Connecticut's Department of Agricultural and Resource Economics to examine the effect of TV advertising on chocolate sales. The results show that in-store displays and advertising both help increase the demand for chocolate.
    Keywords: nested logit, scanner data, advertising, in-store promotions
    JEL: D12 L25 L66 M37
    Date: 2013–10
  22. By: Amador, João; Soares, Ana Cristina
    Abstract: This article segments the Portuguese economy into fairly disaggregated markets and estimates a new competition measure suggested by Boone (2008), which draws on the concept of profit elasticity to marginal costs. In addition, robustness of results across econometric specifications is discussed, along with their consistency with classical competition indicators. The article concludes that the majority of Portuguese markets exhibited a reduction in competition in the period 2000-2009, though there is substantial heterogeneity. In addition, markets that faced competition reductions represent the large majority of sales, gross value added and employment in the Portuguese economy. The non-tradable sector shows lower competition intensity than the tradable sector. Moreover, reductions in competition are relatively widespread across markets in both sectors, but in terms of sales, gross value added and employment these reductions are more substantial in the non-tradable sector. In the majority of markets the assessment on the evolution of competition using profit elasticities is similar to that obtained with classical competition indicators. JEL Classification: L10, L60, O50
    Keywords: market competition, Portuguese economy
    Date: 2013–11
  23. By: De Rosa, Donato; Iootty, Mariana; Pirlea, Florina; Aprahamian, Arabela; Stanescu, Alexandru
    Abstract: Romania's European Union accession in 2007 has resulted in a substantial reduction of the formal barriers to integration with the European Union Single Market. This study takes stock of the progress by benchmarking product market policies in Romania to those of European Union countries, as measured by the OECD indicators of Product Market Regulation. These indicators allow for a comprehensive mapping of policies affecting competition in product markets. Comparison with European Union countries reveals that, for half of the policy areas covered by the study, Romania's product market policies are more restrictive of competition than most direct comparators in the region, whereas for other indicators Romania is on a par with the European Union average or has achieved best practice. Nonetheless, these results should be interpreted in light of the fact that the Product Market Regulation approach measures officially adopted policies and does not capture implementation. Future reforms should be directed both at improving official regulation and, where policies that favor competition are already in place, toward effective enforcement.
    Date: 2013–11–01

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