nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒11‒22
twenty papers chosen by
Russell Pittman
US Government

  1. Modeling Preference Change through Brand Satiation By Nobuhiko Terui; Shohei Hasegawa
  2. Auctions with Limited Commitment By Qingmin Liu; Konrad Mierendorff; Xianwen Shi
  3. Second-Degree Moral Hazard in a Real-World Credence Goods Market By Balafoutas, Loukas; Kerschbamer, Rudolf; Sutter, Matthias
  4. The generalized network problem By Andre DE PALMA; Fay DUNKERLEY; Stefan PROOST
  5. Anatomy of cartel contracts. By Hyytinen, Ari; Steen, Frode; Toivanen, Otto
  6. Coalitional Approaches to Collusive Agreements in Oligopoly Games By Sergio Currarini; Marco A. Marini
  7. Close encounter with the hard discounter: A multiple-store shopping perspective on the impact of local hard-discounter entry. By Vroegrijk, Mark; Gijsbrechts, Els; Campo, Katia
  8. Experience pays heavily in a PPP environment, but government has the power to increase competition. By De Clerck, Dennis; Demeulemeester, Erik
  11. Does competitive pressure spur or hinder corporate basic research?. By Ṧaljanin, Salem; Thorwarth, Susanne
  12. Sources of spillovers for imitation and innovation. By Cappelli, Riccardo; Czarnitzki, Dirk; Kraft, Kornelius
  13. Patent Value and Citations: Creative Destruction or Strategic Disruption? By David S. Abrams; Ufuk Akcigit; Jillian Popadak
  14. Internationalization of R&D activities by multinational firms.. By Suzuki, Shinya
  15. Pharmaceutical regulation and innovative performance: a decision-theoretic model By Tannista Banerjee; Stephen Martin
  16. The Impact of R&D Cooperation on Drug Variety Offered on the Market: Evidence from the Pharmaceutical Industry By Tannista Banerjee; Ralph Siebert
  17. Profiting from innovation: Firm level evidence on markups. By Cassiman, Bruno; Vanormelingen, Stijn
  18. What types of firms tend to be more innovative: A study on Germany By Stephan Brunow; Valentina Nafts
  19. Product Market Reforms and Incentives to Innovate in Sweden By Edquist, Harald; Henrekson, Magnus
  20. Reaching for the Stars: Exclusivity in Firm-University Links in the Pharmaceutical Industry. By Kelchtermans, Stijn; Belderbos, Rene; Leten, Bart; Desair, Steven

  1. By: Nobuhiko Terui; Shohei Hasegawa
    Abstract: In this study, we develop structural models of preference change due to consumer state dependence through satiation by purchase experience. A dynamic factor model with switching structure is proposed to explain consumer preference changes. Two types of dynamic factor models are separately applied to baseline and satiation parameters in a direct utility model that accommodates multiple discreteness data. The first dynamic factor model has a switching structure for consumer preference, and decomposes brand baselines into time-invariant factor loadings for the coordinates of brand positions and time-varying factor scores for consumer preference directions. The second dynamic factor model applied to satiation parameters extracts the consumer level of satiation in a product category, and this is used as a causal variable in a switching equation to show when and how preferences change over time according to the level of brand satiation. The brand positions and temporal changes of heterogeneous preferences are jointly depicted in a dynamic joint space map. The empirical analysis of a panel dataset shows that our proposed dynamic model, implying that consumers change their preferences when previous brand satiation exceeds the admissible level and preference directions are determined by the previous level of satiation, performs better than alternative specifications, such as a static model with no preference change and a dynamic model without structures which imply that preference changes whenever a consumer purchases a product.
    Date: 2013–04
  2. By: Qingmin Liu; Konrad Mierendorff; Xianwen Shi
    Abstract: We study auction design in the standard symmetric independent private values environment, where the seller lacks the commitment power to withhold an unsold object off the market. The seller has a single object and can conduct an infinite sequence of standard auctions with reserve prices to maximize her expected profit. In each period, the seller can commit to a reserve price for the current period but cannot commit to future reserve prices. We analyze the problem with limited commitment through an auxiliary mechanism design problem with full commitment, in which an additional constraint reflects the sequential rationality of the seller. We characterize the maximal profit achievable in any perfect Bayesian equilibrium in the limit as the period length vanishes. The static full commitment profit is not achievable but the seller can always guarantee the profit of an efficient auction. If the number of buyers exceeds a cutoff which is small for many distributions, the efficient auction is optimal. Otherwise, the efficient auction is not optimal, and we give conditions under which the optimal solution consists of an initial auction with a non-trivial reserve price followed by a continuously decreasing price path. The solution is described by a simple ordinary differential equation. Our analysis combines insights from bargaining, auctions, and mechanism design.
    Keywords: Auctions, Commitment, Bargaining, Mechanism Design, Coase Conjecture
    JEL: D44 C73 C78
    Date: 2013–11–15
  3. By: Balafoutas, Loukas (University of Innsbruck); Kerschbamer, Rudolf (University of Innsbruck); Sutter, Matthias (European University Institute)
    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: 2013–11
  4. By: Andre DE PALMA; Fay DUNKERLEY; Stefan PROOST
    Abstract: Many transport and other service problems come down to simple network choices: what mode and/ or route to take, if some of the routes and modes are congested and their use can be priced or not priced by different operators. The operators can have different objective functions: public or private monopoly, private duopoly, etc.. This standard problem has been studied in many variants, mostly using the assumption of perfect substitutability between alternatives, so that in the deterministic Wardrop equilibrium, all routes that are used have the same generalized cost. This paper examines in more detail the role of the perfect substitutability assumption. Users of a network consume transport services, which are differentiated in two ways. There are objective differences in quality (length of route, congestion level) perceived by all users and there are individual idiosyncratic preferences for transport services. The resulting stochastic equilibrium is analysed on a simple parallel network for four types of ownership regimes: private ownership, coordinated public ownership, mixed public-private and public Stackelberg leadership. We find that, firstly, when total demand is fixed and there is congestion, then by controlling one route a government can achieve the First Best allocation, although the second route is privately operated or unpriced. This result holds whatever the level of substitutability and whatever the levels of congestion. Secondly, whenever imperfect substitutability is present, private supply of one of the two routes becomes relatively less efficient because the private supplier has an additional source of market power to exploit. If the better of the two routes is privately supplied it is always insufficiently used. However, if only one route can be privately operated, then this should always be the intrinsically better route.
    Date: 2013–11
  5. By: Hyytinen, Ari; Steen, Frode; Toivanen, Otto
    Abstract: We study cartel contracts using data on 18 contract clauses of 109 legal Finnish manufacturing cartels whose legal status is reminiscent of e.g. the U.S Sugar Institute. One third of the clauses relate to raising profits; the others deal with instability through incentive compatibility, cartel organization, or external threats. Cartels use three main approaches to raise profits: Price, market allocation, and specialization. These appear to be substitutes. Choosing one has implications on how cartels deal with instability. Simplifying, we find that cartels economize on contract clauses, cartels in homogenous goods industries allocate markets, and small cartels avoid competition through specialization.
    Keywords: cartels; contracts; antitrust; competition policy; industry heterogeneity;
    Date: 2013–11
  6. By: Sergio Currarini (University of Leicester, Universita' di Venezia and Euro-Mediterranean Center on Climate Change); Marco A. Marini (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza")
    Abstract: We study the welfare effects of parallel trade (PT) considering investment in quality. We thus revisit the case for allowing PT in research-intensive industries. We find that quality may be higher with than without PT, depending on how consumersÕ preferences for quality differ across countries. Conditional on quality, consumer surplus may rise in the source country, or fall in the destination country of PT. We find that PT reduces ex post welfare, and improving quality is a necessary (and sometimes sufficient) condition for PT to increase welfare ex ante.
    Keywords: Parallel trade; Price discrimination; R&D investment; Intellectual property rights
    Date: 2013
  7. By: Vroegrijk, Mark; Gijsbrechts, Els; Campo, Katia
    Abstract: “Hard-discounters” have become a considerable force within grocery retailing. With rock-bottom prices and minimal assortments, they strongly differ from “large-discounters” like Wal-Mart, and constitute complements rather than substitutes for more traditional supermarkets. Hence, we propose that their impact-of-entry on local incumbents is very different as well. Using a store choice and spending model that explicitly accounts for inter-store synergies and “multiple-store shopping” behavior, we study consumer responses to 194 hard-discounter openings. While we find that hard-discounters, like large-discounters, especially appeal to private label-prone shoppers and lead to sizable incumbent losses, the results confirm that the nature of these losses is strikingly different. First, hard-discounters do not make incumbent chains lose their best customers but, rather, shoppers who already visited other chains alongside the incumbent. Second, we find that chains located in close proximity of new hard-discounters do not suffer more from their entry. Third, losses are lower for upscale chains and incumbents that strongly complement the hard-discounter. Implications for proper response to hard-discounter entry are discussed.
    Keywords: grocery retailing; hard-discounters; multiple-store shopping; store entry;
    Date: 2013–10
  8. By: De Clerck, Dennis; Demeulemeester, Erik
    Abstract: Public-private partnerships are cutting edge long-term contractual arrangements between a private contractor and the government. The contractual complexity and the high pre-tender research cost are open sesames for inexperienced contractors to refrain from the opportunity. This study encompasses the bidding framework in a game-theoretical fashion while taking the bidders’ heterogeneity into account. A simulation captures the heterogeneous uncertainty of the project outcome. A Nash equilibrium method is proposed to arrive at an equilibrium strategy profile, while a strategy game serves as a competition context in order to find the best response in a particular environment. The dynamics reveal the importance of the controllable and uncontrollable project risk that could result in a reluctance for the inexperienced player and a constriction of the market. This occurrence of an oligopolistic situation might be overcome through the introduction of government compensation policies despite the fact that these could come at a fair price.
    Date: 2013–04
  9. By: Paul O'Sullivan (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)
    Abstract: This paper examines a one-shot game where two symmetric incumbents are faced with possible entry into an industry, where firms may differ in the efficiency of R&D in reducing marginal production costs. The decision facing the incumbents is whether to compete at the R&D stage or to form a RJV. R&D competition may imply that remaining in the market is not viable for the incumbents and the entrant is a monopolist. Conversely, RJV formation may make entry unprofitable and, possibly, increase welfare. The effect on welfare will depend on whether output is exported in its entirety or consumed domestically.
    JEL: D2 L2 L4
    Date: 2013
  10. By: Paul O'Sullivan (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)
    Abstract: This paper analyses the incentives of incumbent firms to form a first-mover RJV when faced with possible entry. If entry is accommodated, firms’ relative profits under R&D competition and RJV formation depend on R&D spillovers and firms’ R&D efficiency. RJV formation may make entry unprofitable if spillovers are sufficiently low. If entry is deterred, RJV formation may be more profitable. Similarly, whether accommodation or deterrence is more profitable under RJV formation depends on spillovers and the firms’ efficiency. How welfare is affected by RJV formation depends on whether output is exported or domestically consumed. There may be a role for active government policy to affect market outcomes.
    JEL: D2 L2 L4
    Date: 2013
  11. By: Ṧaljanin, Salem; Thorwarth, Susanne
    Abstract: Corporate basic research is of great economic relevance. However, since potential payoffs of basic research activities are so long-term, firms facing competitive pressure may focus on more near-term, hence more applied research and development projects. This paper addresses the effect of market competition on firms’ in-house R&D investment and on its components basic research as well as applied research and development. We use the stated number of competitors as an indicator for competitive pressure. Our results indicate that increasing competitive pressure leads to a reduction of basic research activities and boosts firms’ expenditures in applied research and development.
    Keywords: basic research; R&D; competition;
    Date: 2013–04
  12. By: Cappelli, Riccardo; Czarnitzki, Dirk; Kraft, Kornelius
    Abstract: We estimate the effect of R&D spillovers on sales realized by products new to the firm (imitation) and new to the market (innovation). It turns out that spillovers from rivals lead to more imitation, while inputs from customers and research institutions enhance original innovation.
    Keywords: innovation; imitation; spillovers;
    Date: 2013–09
  13. By: David S. Abrams; Ufuk Akcigit; Jillian Popadak
    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.
    JEL: K1 L2 O3
    Date: 2013–11
  14. By: Suzuki, Shinya
    Date: 2012–03–12
  15. By: Tannista Banerjee; Stephen Martin
    Abstract: In this paper we develop a model of the impact of the drug approval process on the terms of a contract between a pharmaceutical company that requires the services of a contract research organization (CRO) to carry out testing of new drug molecules. Results show that if the equilibrium contract includes a variable payment (royalty), the CRO gives more effort to create a more accurate result, the more strict the FDA approval process. We also find that given the royalty shares in the contract if the FDA demands more accuracy in results as a condition of approval, then the CRO will generate more accurate results from late stage tests. However, greater FDA stringency in the approval process benefits pharmaceutical companies because the greater is FDA stringency, the less is the risk of a drug recall. We also find that in order to employ a CRO in the testing process, the pharmaceutical company's prior probability that the drug is of high quality must be very high.
    Keywords: Pharmaceutical regulation; Food and Drug Administration; R&D outsourcing; contract research
    JEL: L24 L65
    Date: 2013–11
  16. By: Tannista Banerjee; Ralph Siebert
    Abstract: This study shows that R&D cooperation can be used as an instrument to coordinate drug development portfolios among participating firms, which has crucial implications on the number of drugs offered on the market. Our study puts special attention to the fact that R&D cooperation, formed at different stages throughout the drug development process, have different impacts on the technology and product markets. Using a comprehensive dataset on the pharmaceutical industry, our results show that R&D cooperation formed at the early stages increase the number of R&D projects and the number of drugs launched on the product market. Late stage R&D cooperation, however, have a positive impact on the drug development process and drug variety only in the short run. In the long run, late stage cooperation provoke that firms re-optimize their drug development portfolios which reduces the number of drugs offered on the market.
    Keywords: Drug development; Dynamics; Co-development; Pharmaceutical industry; Product variety; Product market competition; Research and Development cooperation
    JEL: L24 L25 L65 D22
    Date: 2013–11
  17. By: Cassiman, Bruno; Vanormelingen, Stijn
    Abstract: While innovation is argued to create value, private incentives of …rms to innovate are driven by what part of the value created …rms can appropriate. In this paper we explore the relation between innovation and the markups a …rm is able to extract after innovating. We estimate …rm-speci…c price-cost margins from production data and …nd that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the …rm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the …rms patenting and promotion behavior, the age of the …rm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the …rms markup.
    Date: 2013–10
  18. By: Stephan Brunow (Institute for Employment Research (IAB)); Valentina Nafts (Institute for Employment Research (IAB))
    Abstract: Innovation is a key driver of technological progress and growth in a knowledge-based economy. There are various motives for individual firms to innovate: improving quality secures market leadership, introducing new products leads the firm into new markets, adopting new technologies could be seen as a catch-up strategy within an industry or an improvement of the firm’s own products when the technology adopted is based on ideas from other industries. Firms can perform innovation activities in one or more of these areas or in none of them. We therefore raise the question of what types of firms tend to be more innovative, i.e. which firms innovate in more of these areas. For this purpose we employ firm-level survey data and combine it with administrative data from Germany’s social security system. An ordered logit model is estimated using a variety of characteristics which describe the workforce employed and other firm-related variables, the regional environment where the firm is located, as well as industry and region fixed effects.
    Keywords: firm innovation, labor diversity, ordered logit
    JEL: J44 O31 R12
    Date: 2013–11
  19. By: Edquist, Harald (Fores); Henrekson, Magnus (Research Institute of Industrial Economics (IFN))
    Abstract: The Swedish economy has developed rapidly since the mid-1990s relative to most comparable countries, in particular relative to almost all other EU-15 countries. We investigate two policy areas that are believed to have been important for the strong economic development in Sweden during the last two decades, namely product market reforms and incentives to innovate. The paper provides a short description of the policy changes that have taken place within these areas since the early 1990s and offers ideas for additional policy reforms that would pave the way for continued successful economic development.
    Keywords: Economic reforms; Entrepreneurship; Innovation; Institutions; Product market regulations; Sweden
    JEL: L53 O31 O52
    Date: 2013–11–13
  20. By: Kelchtermans, Stijn; Belderbos, Rene; Leten, Bart; Desair, Steven
    Abstract: This paper analyzes under which conditions joint basic research with academic ‘star’ scientists improves firms’ technological performance. Using data on 61 of the most R&D intensive firms in the biopharmaceutical sector in 1991-2003, we find that collaboration with academic stars for basic research increases inequality in technological performance across firms, with only the upper tail of the performance distribution benefiting from such partnerships. Further, we find that joint basic research with top academic scientists is more beneficial if the firm and the star also do joint applied work. Finally, we find a dual effect of firms’ exclusive access to academic stars, with a positive impact on technological performance for exclusive access to ‘translational’ stars versus a negative effect for exclusive access to ‘ivory tower’ stars.
    Keywords: innovation; Pharmaceutical Industry; Industry-science links; Star scientists;
    Date: 2013–03

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