nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒12‒29
33 papers chosen by
Russell Pittman
US Government

  1. Horizontal mergers and uncertainty By Le Pape, Nicolas; Zhao, Kai
  2. Do markets erode social responsibility? By Björn Bartling; Roberto A. Weber
  3. Entry and Welfare in Search Markets By Chen, Yongmin; Zhang, Tianle
  4. A Model of Recommended Retail Prices By Dmitry Lubensky
  5. Export or Merge? Proximity vs. Concentration in Product Space By Marc-Andreas Muendler
  6. Consumer Referrals By Maria Arbatskaya; Hideo Konishi
  7. A Theory of Consumer Referral: Revisited By Maria Arbatskaya; Hideo Konishi
  8. Consumer myopia, competition and the incentives to unshroud add-on information By Wenzel, Tobias
  9. Very Simple Markov-Perfect Industry Dynamics By Nan Yang; Jeffrey Campbell; Jan Tilly; Jaap Abbring
  10. To Block or not to Block? Network Competition when Skype enters the Mobile Market By Bipasa Datta; Yu-Shan Lo
  11. Generic-branded drug competition and the price for pharmaceuticals in procurement auctions By Arvate, Paulo; Barbosa, Klenio de Souza; Gambardella, Dante
  12. Market power issues in the reformed Russian electricity supply industry By Nadia Chernenko
  13. Assessing competition in the banking industry: A multi-product approach By Barbosa, Klenio de Souza; Rocha, Bruno; Salazar, Fernando
  14. Efficient Entry in Competitive Search with Nonrival Meetings and Asymmetric Information By James Albrecht
  15. The Impact of Retail Mergers on Food Prices: Evidence from France By Marie-Laure Allain; Claire Chambolle; Stéphane Turolla; Sofia Villas-Boas
  16. Merger regulation, firms, and the co-evolutionary process: An empirical study of internationalisation in the UK alcoholic beverages industry 1985-2005 By Julie Bower; Howard Cox
  17. On Cobb-Douglas Preferences in Bilateral Oligopoly By Dickson, Alex
  18. Optimal Sales Schemes for Network Goods By Alexei Parakhonyak; Nick Vikander
  19. Firm Dynamics: Firm Entry and Exit in the Canadian Provinces, 2000 to 2009 By Baldwin, John R. Liu, Huju Wang, Weimin
  20. Facilitating Consumer Learning in Insurance Markets - What Are the Welfare Effects? By Johan N. M. Lagerlöf; Christoph Schottmüller
  21. New Indicators of Competition Law and Policy in 2013 for OECD and non-OECD Countries By Enrico Alemani; Caroline Klein; Isabell Koske; Cristiana Vitale; Isabelle Wanner
  22. Who Becomes the Winner? Effects of Venture Capital on Firms’ Innovative Incentives - A Theoretical Investigation By Matthew Beacham; Bipasa Datta
  23. Pharmaceutical regulation at the wholesale level and parallel trade By Birg, Laura
  24. Innovation Determinants over Industry Life Cycle By Tavassoli, Sam
  25. Hub and spoke collusion by embargo. By Van Cayseele, Patrick; Miegielsen, Simon
  26. Efficient Nash Equilibrium under Adverse Selection By Diasakos, Theodoros M; Koufopoulos, Kostas
  27. Dynamic Commercialization Strategies for Disruptive Technologies: Evidence from the Speech Recognition Industry By Matt Marx; Joshua S. Gans; David H. Hsu
  28. Optimal Output for the Regret-Averse Competitive Firm Under Price Uncertainty By Broll, Udo; Ergozue, Martin; Welzel, Peter; Wong, Wing-Keung
  29. Overconfidence in the Markets for Lemons By Herweg, Fabian; Müller, Daniel
  30. Mortgage Market Concentration, Foreclosures and House Prices By Giovanni Favara
  31. Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience By Philipp Ager; Fabrizio Spargoli
  32. Monopoly Insurance with Endogenous Information By Rupert Sausgruber; Christoph Schotmüller
  33. The Influence of Ordoliberalism in European Integration Processes - A Framework for Ideational Influence with Competition Policy and the Economic and Monetary Policy as Examples By Nedergaard, Peter

  1. By: Le Pape, Nicolas; Zhao, Kai
    Abstract: Some path-breaking work on mergers takes efficiency gains for granted, or assumes that firms have perfect knowledge when taking merger decisions. In practice, firms and competition authorities cannot know exact future efficiency gains, prior to merger consummation. This paper analyzes horizontal mergers when the output decision-making process is sequential. A key assumption is that mergers create uncertainty on productivity and informational asymmetry between firms. The paper also studies whether the merged firm has interest to reveal the information about its own cost to competing firms. In terms of Merger Approval, the paper emphasizes the timing of regulatory intervention and distinguishes two different merger control interventions (ex ante or ex post enforcement). Since prudent competition authorities (using ex ante intervention) should take the restrictive policy, the framework illustrates why US Horizontal Merger Guidelines and EC Merger Regulation are biased in favor of the consumers' interests. --
    Keywords: merger,competition authorities,uncertainty,asymmetric information
    JEL: D21 D80 L20 L40
    Date: 2013
  2. By: Björn Bartling; Roberto A. Weber
    Abstract: This paper studies the stability of socially responsible behavior in markets. We develop a laboratory product market in which low-cost production creates a negative externality for third parties, but where alternative production with higher costs entirely mitigates the externality. Our data reveal a robust and persistent preference for avoiding negative social impact in the market, reflected both in the composition of product types and in a price premium for socially responsible products. Socially responsible behavior in the market is generally robust to varying market characteristics, such as increased seller competition and limited consumer information. Fair behavior in the market is slightly lower than that measured in comparable individual decisions.
    Keywords: Social responsibility, markets, externalities, competition, fairness
    JEL: C92 D03 D62
    Date: 2013–11
  3. By: Chen, Yongmin; Zhang, Tianle
    Abstract: The effects of entry on consumer and total welfare are studied in a model of consumer search. Potential entrants differ in quality, with high-quality sellers being more likely to meet consumer needs. Contrary to the standard view in economics that more entry benefits consumers, we find that consumer welfare has an inverted-U relationship with entry cost, and free entry is excessive for both consumer and total welfare when entry cost is relatively low. We explain why these results may arise naturally in search markets due to the variety and quality effects of entry, and discuss their business and policy implications.
    Keywords: entry cost, search, product variety, product quality
    JEL: D8 L1
    Date: 2013–12–14
  4. By: Dmitry Lubensky (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Consumers rely on a manufacturer's recommended price to help determine whether to accept a retailer's price or continue to search. This paper demonstrates that doing so can be rational even if the manufacturer's price recommendation is cheap talk. By incentivizing search, a manufacturer trades off reducing double marginalization and losing consumers to competitors. When the manufacturer's cost is low he induces low retail prices and benefits when consumers search more. When the manufacturer's cost is high he induces high retail prices and benefits when consumers search less. Since consumers prefer to search more when lower prices are available, their incentives are aligned with the manufacturer's and this allows informative cheap talk communication. Aside from costs, the manufacturer can inform consumers of other market parameters such as product quality.
    Keywords: consumer search, sequential search, search with uncertainty, manufacturer suggested retail prices, vertical markets, signaling, cheap talk
    JEL: L11 D82
    Date: 2013–12
  5. By: Marc-Andreas Muendler
    Abstract: This paper proposes a proximity-concentration tradeoff in product space as a determinant of horizontal foreign direct investment (FDI). Firms that enter a foreign market by exporting are able to capture consumer surplus from introducing a differentiated product with characteristics that the incumbent cannot match. In relatively globalized product space, in contrast, consumers perceive an entrant's difference to existing products as less pronounced, so a consumer's virtual distance costs in product space are lower and a merger with an incumbent (horizontal FDI) offers pricing power that allows the entrant to extract consumer rent. Lower physical trade costs of shipping make Bertrand price competition fiercer in differentiated product space and can provide an additional incentive for a merger. A basic product space model with a linear Hotelling setup can therefore explain why FDI has become more frequent in recent periods in the presence of falling trade costs. Cross-border merger and acquisitions data support the model's prediction that horizontal FDI grows relatively faster than exports in differentiated goods industries, compared to homogeneous-goods industries.
    JEL: F12 F23 L12 L13
    Date: 2013–12
  6. By: Maria Arbatskaya; Hideo Konishi
    Abstract: In many industries, firms reward their customers for making referrals. We analyze the optimal policy mix of price, advertising intensity, and a referral fee for monopoly when buyers choose to what extent to refer other consumers to the firm. We find that the firm advertises less under referrals, but does not change its price from the monopoly level in an attempt to manage consumer referrals. We show that referral programs are Pareto-improving and that the firm underprovides referrals while supporting the socially optimum level of advertising. We extend the analysis to the case where consumer referrals can be targeted.
    Date: 2013–10
  7. By: Maria Arbatskaya; Hideo Konishi
    Abstract: Jun and Kim (2008) consider the optimal pricing and referral strategy of a monopoly that uses a consumer communication network to spread product information. They show that for any finite referral chain, the optimal policy involves a referral fee that provides strictly positive referral incentives and effective price discrimination among consumers based on their positions in the chain. We revisit this problem to strengthen Jun and Kim's results by weakening their referral condition. Moreover, we characterize the first-best policy when individual-specific referral fees are available and show that it is qualitatively similar to the second-best solution of Jun and Kim (2008).
    Date: 2013–10
  8. By: Wenzel, Tobias
    Abstract: This paper studies unshrouding decisions in a framework similar to Gabaix and Laibson (2006), but considers an alternative unshrouding mechanism where the impact of advertising add-on information depends on the number of unshrouding firms. We show that shrouding becomes less prevalent as the number of competing firms increases. With unshrouding costs a non-monotonic relationship between the number of firms and unshrouding may arise. --
    Keywords: Bounded rationality,Add-on pricing,Shrouding
    JEL: D40 D80 L10
    Date: 2013
  9. By: Nan Yang (Business School, National University of); Jeffrey Campbell (Federal Reserve Bank of Chicago); Jan Tilly (University of Pennsylvania); Jaap Abbring (Tilburg University)
    Abstract: This paper develops an econometric model of firm entry, competition, and exit in dynamic oligopolistic markets. The model entertains market-level demand and cost shocks, sunk entry costs, and parameters that capture economic barriers to entry and the toughness of price competition. Nevertheless its analysis is very simple, because it takes firms to be homogenous. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be computed quickly by solving a finite- sequence of low-dimensional contraction mappings. We develop a nested fixed-point procedure for the model's maximum-likelihood estimation from market-level panel data and compare the procedure's performance to that of a mathematical programming with equilibrium constraints approach. The framework is rich enough for a range of applications, such as the welfare analysis of licensing requirements, start-up subsidies, and environmental laws. Moreover, its analysis provides a starting point for the solution of more general models.
    Date: 2013
  10. By: Bipasa Datta; Yu-Shan Lo
    Abstract: Voice over Internet Protocol (VoIP) such as Skype that enables users to make free internet-based calls to other users has been seen as a threat to voice revenues by traditional network operators. While some mobile network operators (MNOs) attempt to block Skype's entry on their networks, some actually welcome it even if it apparently conflicts with their interests in making calling profits. In this paper we develop a Hotelling-style model of network competition between two MNOs to analyse their incentives to accommodate or block Skype. We find that accommodation is the dominant strategy of an MNO whenever its equilibrium voice market share is at least 29%. Furthermore, the overall Nash equilibium of the game can be either symmetric (where Skype's entry is either accommodated or blocked by both MNOs) or asymmetric (where only one has the incentive to accommodate) depending upon the consumers' preference for a certain network and the quality of Skype-based interconnection. In a symmetric accommodation equilibrium, the MNO with a lower (higher) customer valuation is better-off (worse-off) relative to the one where entry is blocked.
    Keywords: Mobile network competition; Hotelling model, Voice over IP and Skype; entry; voice and network market shares
    JEL: D43 L13 L96
    Date: 2013–12
  11. By: Arvate, Paulo; Barbosa, Klenio de Souza; Gambardella, Dante
    Abstract: This paper studies the effects of generic drug’s entry on bidding behavior of drug suppliers in procurement auctions for pharmaceuticals, and the consequences on procurer’s price paid for drugs. Using an unique data set on procurement auctions for off-patent drugs organized by Brazilian public bodies, we surprisingly find no statistically difference between bids and prices paid for generic and branded drugs. On the other hand, some branded drug suppliers leave auctions in which there exists a supplier of generics, whereas the remaining ones lower their bidding price. These findings explain why we find that the presence of any supplier of generic drugs in a procurement auction reduces the price paid for pharmaceuticals by 7 percent. To overcome potential estimation bias due to generic’s entry endogeneity, we exploit variation in the number of days between drug’s patent expiration date and the tendering session. The two-stage estimations document the same pattern as the generalized least square estimations find. This evidence indicatesthat generic competition affects branded supplier’s behavior in public procurement auctions differently from other markets.
    Date: 2013–12–05
  12. By: Nadia Chernenko
    Abstract: The paper examines long-run and short-run levels of market power in the liberalised Russian electricity market. We observe that despite potential for market power abuse, actual exercise of market power as measured by price-cost markups remained low. We attribute the result to the bid-at-cost rule implemented as a part of a special unit commitment procedure on the day-ahead market. We first look at the restructured industry and discuss the mergers and acquisitions and their impact on competition in long term. The M&A were undertaken in different market zones and thus did not seem to increase concentration (HHI remains almost unchanged) although with future zone integration competition in long run is put at risk. We then examine short-run level of market power by estimating hourly price-cost mark-ups and assessing their dynamics in 2010 and 2011, a year preceeding and following the market liberalisation respectively. Using time series models (AR models) we reject hypothesis of actual market power abuse. Further, using a Tobit regression we find that the liberalisation decreased the mark-ups by about 1.66 percetage points.
    Keywords: Russian electricity market, liberalisation, market power, concentration, price-cost mark-ups
    JEL: L11 L13 L94
    Date: 2013–07–12
  13. By: Barbosa, Klenio de Souza; Rocha, Bruno; Salazar, Fernando
    Abstract: This paper investigates the competitive aspects of multi-product banking operations.Extending Panzar and Rosse (1987)’s model to the case of a multi-product bankingfirm, we show that the higher the economies of scope in multi-product banking are,the lower Panzar-Rosse’s measure of competition in the banking sector is. To test thisempirical implication and determine the impact of multi-production/conglomeration onmarket power, we use a new dataset on Brazilian banking conglomerates. Consistentwith our theoretical prediction, we find that banks offering classic banking products (i.e.,loans and credit cards) and other banking products (i.e., brokerage services, insuranceand capitalization bonds) have substantially higher market power than banks that offeronly classic products. These results suggest a positive bias in the traditional estimatesof competition in which multi-output actions are not considered.
    Date: 2013–12–06
  14. By: James Albrecht (Georgetown University)
    Abstract: In this paper, we consider the efficiency of entry in a model of competitive search. By "competitive search" we mean that we analyze a large market in which buyers (or sellers) can direct their search based on the terms of trade that are posted (with commitment) by their counterparts on the other side of the market. We consider in particular entry on the side of the market on which the terms of trade are advertised. We generalize this literature on efficiency entry on competitive search in two directions. First, we allow for many-on-one meetings; e.g., a seller may interact with two or more buyers at the same time. Second, we allow for asymmetric information; e.g., a seller may not know how much the buyers she is interacting with value her good.
    Date: 2013
  15. By: Marie-Laure Allain (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Claire Chambolle (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, INRA - Institut national de la recherche agronomique (INRA)); Stéphane Turolla (INRA - UMR 1302); Sofia Villas-Boas (UC Berkeley - University of California - University of California, Berkeley)
    Abstract: This paper analyzes the impact of a merger in the French retail sector on food prices, using a consumer panel data. We perform a di fference-in-diff erences analysis by comparing price changes in stores for which the local market structure is aff ected by the merger to unaff ected stores. In addition, we empirically investigate economic forces behind the observed price changes. On average, we fi nd that the merger signifi cantly raised competitors' prices contemporaneously with merging firms' price increases. Further, we show that competitor prices increase more in local markets that experience larger structural changes in concentration and chain diff erentiation.
    Keywords: Ex-post merger evaluation, Retail grocery sector, Diff erence-in-diff erences.
    Date: 2013–12–18
  16. By: Julie Bower; Howard Cox
    Abstract: We present an historic industry study of the consolidation of the UK alcoholic beverages firms to inform debates in organisation studies relating to co-evolution and the dynamics of internationalisation. We distinguish behavioural and structural co-evolutionary factors in firms’ strategic intent, mirroring the two types of remedies that competition authorities can impose on merging firms. We test this theoretical construct in an empirical investigation of the consolidating UK alcoholic beverages firms between 1985 and 2005. In this era Diageo was formed from the landmark merger of Grand Metropolitan and Guinness. Subsequently Diageo acquired the former international spirits empire of Seagram in partnership with a major competitor. Successful implementation of Diageo’s merger strategy owed much to an ability to navigate the evolving multijurisdictional co-ordinated oversight of cross-border mergers and acquisitions. The formation of novel deal structures as well as co-operation with competitors to circumvent policy intervention were significant co-evolutionary mechanisms that have featured more generally in subsequent international mergers as others have copied these deal structures to achieve similar regulatory outcomes.
    Keywords: Alcoholic beverages; Co-evolution; Competition policy; Merger regulation
    JEL: K21 L22 L66
    Date: 2013–12
  17. By: Dickson, Alex
    Abstract: Bilateral oligopoly is a simple model of exchange in which a finite set of sellers seek to exchange the goods they are endowed with for money with a finite set of buyers, and no price-taking assumptions are imposed. If trade takes place via a strategic market game bilateral oligopoly can be thought of as two linked proportional-sharing contests: in one the sellers share the aggregate bid from the buyers in proportion to their supply and in the other the buyers share the aggregate supply in proportion to their bids. The analysis can be separated into two ‘partial games’. First, fix the aggregate bid at B; in the first partial game the sellers contest this fixed prize in proportion to their supply and the aggregate supply in the equilibrium of this game is X˜ (B). Next, fix the aggregate supply at X; in the second partial game the buyers contest this fixed prize in proportion to their bids and the aggregate bid in the equilibrium of this game is ˜B (X). The analysis of these two partial games takes into account competition within each side of the market. Equilibrium in bilateral oligopoly must take into account competition between sellers and buyers and requires, for example, ˜B (X˜ (B)) = B. When all traders have Cobb-Douglas preferences ˜ X(B) does not depend on B and ˜B (X) does not depend on X: whilst there is competition within each side of the market there is no strategic interdependence between the sides of the market. The Cobb-Douglas assumption provides a tractable framework in which to explore the features of fully strategic trade but it misses perhaps the most interesting feature of bilateral oligopoly, the implications of which are investigated.
    Keywords: strategic market game, bilateral oligopoly, Cobb-Douglas preferences, aggregative games,
    Date: 2013
  18. By: Alexei Parakhonyak (National Research University Higher School of Economics); Nick Vikander (Department of Economics, Copenhagen University)
    Abstract: This paper examines the optimal sequencing of sales in the presence of network externalities. A firm sells a good to a group of consumers whose payoff from buying is increasing in total quantity sold. The firm selects the order to serve consumers so as to maximize expected sales. It can serve all consumers simultaneously, serve them all sequentially, or employ any intermediate scheme. We show that the optimal sales scheme is purely sequential, where each consumer observes all previous sales before choosing whether to buy himself. A sequential scheme maximizes the amount of information available to consumers, allowing success to breed success. Failure can also breed failure, but this is made less likely by consumers’ desire to influence one another’s behavior. We show that when consumers differ in the weight they place on the network externality, the firm would like to serve consumers with lower weights first. Our results suggests that a firm launching a new product should first target independent-minded consumers who can serve as opinion leaders for those who follow.
    Keywords: Product launch, Network externality, Sequencing of sales
    JEL: M31 D42 D82 L12
    Date: 2013–11–01
  19. By: Baldwin, John R. Liu, Huju Wang, Weimin
    Abstract: This paper describes the patterns of firm entry and exit across provinces in Canada, the relationship of these patterns to differences in industrial structure and the response of firm entry and exit to changes in the economic environment. Firm entry and exit play an important role in shaping industrial structure and dynamics. Although entry and exit are ubiquitous, new firms are often associated with new ideas and the provision of innovative goods and services that enhance competition and force incumbents to become more innovative and efficient. Studies have shown the considerable role played by entry and exit in resource reallocation and productivity improvement.
    Keywords: Business performance and ownership, Entry, exit, mergers and growth
    Date: 2013–12–10
  20. By: Johan N. M. Lagerlöf (Department of Economics, Copenhagen University); Christoph Schottmüller (Department of Economics, Tilburg University)
    Abstract: What are the welfare effects of a policy that facilitates for insurance customers to privately and covertly learn about their accident risks? We endogenize the information structure in Stiglitz's classic monopoly insurance model. We first show that his results are robust: For a small information acquisition cost c, the consumer gathers information and the optimal contracts are close to the ones in the Stiglitz model. If c is so low that the consumer already gathers information (c c*, marginally reducing c hurts the insurer and weakly benefits the consumer. Paradoxically, a reduction in c that is "successful," meaning that the consumer gathers information after the reduction but not before it, can hurt both parties. The reasons for this are that, after the reduction, (i) the cost is actually incurred and (ii) the contracts can be more distorted.
    Keywords: asymmetric information, information acquisition, insurance, screening, adverse selection
    JEL: D82 I13
    Date: 2013–11–11
  21. By: Enrico Alemani; Caroline Klein; Isabell Koske; Cristiana Vitale; Isabelle Wanner
    Abstract: This paper presents the new OECD competition law and policies (CLP) indicators which measure the strength and scope of competition regimes in 49 jurisdictions (OECD and non-OECD). The indicators cover areas for which there is a broad consensus among member countries on what constitutes ‘good’ practice for competition regimes. The results suggest that competition regimes are broadly similar across countries in these areas because most countries have adopted all or a large number of the ‘good’ policy settings captured by the indicators. On average, the design of competition laws and policies appears to be closer to best practice in OECD countries than in non-OECD countries. Jurisdictions differ relatively more on the enforcement of competition law than on the competition law itself. Nouveaux indicateurs des lois et politiques de la concurrence en 2013 pour les pays de l'OCDE et non-OCDE Cet article présente les nouveaux indicateurs des lois et politiques de la concurrence (CLP) de l'OCDE portant sur la solidité et la portée des régimes de concurrence dans 49 juridictions (OCDE et non-OCDE). Les indicateurs couvrent des domaines pour lesquels il existe un large consensus entre les pays membres sur ce qui constitue une «bonne» pratique pour les régimes de concurrence. Les résultats suggèrent que les régimes de concurrence sont globalement similaires dans ces domaines parce que la plupart des pays ont adopté la totalité ou une grande partie des « bonnes » pratiques captées par les indicateurs. En moyenne, la conception des lois et des politiques de la concurrence semble se rapprocher davantage des bonnes pratiques dans les pays de l'OCDE que dans les pays non membres. Les juridictions diffèrent relativement plus sur l'application du droit de la concurrence que sur le droit de la concurrence per se.
    Keywords: competition law and policy, indicators, lois et politiques de la concurrence, indicateurs
    JEL: K21 L4
    Date: 2013–12–12
  22. By: Matthew Beacham; Bipasa Datta
    Abstract: It is well established in the empirical literature that venture capital (VC) plays an important role in the promotion of innovation at industry level and the professionalisation of firms at micro-level. Whilst the VC-to-success link has been well explored, the mechanism behind how and why certain venture-backed firms are apparently more successful is an important question that has been largely ignored within the majority of the literature. In this paper, we fill this gap by specifically analysing firms' pre- and post-VC investment decisions. By considering a two period, multi-stage game, we analyse whether VC spurs innovation (i) directly after being granted; (ii) indirectly by incentivising firms to increase initial research efforts to increase their chances of receiving VC funding and its associated benefits; or (iii) a combination of both. Our results show that VC has both direct and indirect effects on firms' innovation decisions regardless of whether the firm is successful in securing VC funding or not. Furthermore, we find that the commonly held assertion that venture capital spurs success is too simplistic: whilst venture capital spurs innovation amongst the lucky, chosen few, it unambiguously suppresses innovation of non-VC-backed firms, a result that has been overlooked in the empirical literature. The issue of `who becomes the winner' in the final product market however is ultimately dependent upon the extent of heterogeneity amongst firms. Further, we show that VC funding, equity stake and value-adding services all have impacts upon firms' incentives to invest in the first stage.
    Keywords: Venture capital, innovation, firm heterogeneity, investment and effort, strategic substitutes and complements
    JEL: G24 L13 L2 O31
    Date: 2013–12
  23. By: Birg, Laura
    Abstract: This paper studies the effect of pharmaceutical regulation at the wholesale level, if markets are integrated by parallel trade, i.e. trade outside the manufacturer´s authorized distribution channel. In particular, maximum wholesale margins, a restriction of pricing by the intermediary, and mandatory rebates, a restriction of the pricing by the manufacturer, are analyzed with respect to their effect on drug prices, quantities, and public pharmaceutical expenditure. Maximum wholesale margins enhance the manufacturer´s ability to reduce competition from parallel trade in the destination country by increasing wholesale prices. In a symmetric equilibrium, maximum wholesale margins of both countries partly offset each other. Mandatory rebates may be a policy alternative, as they exhibit a reinforcing effect with respect to drug prices. --
    Keywords: parallel trade,regulation,maximum markups,spillovers,mandatory rebates
    JEL: F12 I11 I18
    Date: 2013
  24. By: Tavassoli, Sam (Industrial Economics, Blekinge Institute of Technology, Karlskrona, Sweden and CIRCLE, Lund University, Sweden)
    Abstract: This paper analyzes how the influence of firm-level innovation determinants varies over the industry life cycle. Two sets of determinants are distinguished: (1) determinants of a firm’s innovation propensity, i.e. the likelihood of being innovative and (2) determinants of its innovation intensity, i.e. innovation sales. By combining the literature emphasizing firms’ internal resources (micro level) with the research strand on the role of the industry context (meso-level), the paper develops hypotheses about the relative importance of firm-level innovation determinants over the industry life cycle. Estimation of a firm-level model of innovation in Sweden, while acknowledging the stage of the life cycle of the industry a firms belongs to, shows that the importance of the determinants of innovation propensity and intensity are not equal over the stages of an industry’s life cycle
    Keywords: Determinants of innovation; innovation intensity; innovation propensity; Industry Life Cycle (ILC); Community Innovation Survey (CIS4)
    JEL: F14 O31 O33
    Date: 2013–12–18
  25. By: Van Cayseele, Patrick; Miegielsen, Simon
    Abstract: A common supplier (the hub) could try to enforce a collusive outcome between his buyers (the spokes) if they are unable to sustain such an agreement among themselves. We derive necessary and sufficient conditions under which the hub is willing to assume the policing role in a cartel.
    Date: 2013–12
  26. By: Diasakos, Theodoros M; Koufopoulos, Kostas
    Abstract: This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz [28]. We propose a simple extension of the game-theoretic structure in Hellwig [14] under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson [22].
    Keywords: Insurance Market, Adverse Selection, Incentive Efficiency,
    Date: 2013
  27. By: Matt Marx; Joshua S. Gans; David H. Hsu
    Abstract: When startup innovation involves a potentially disruptive technology – initially lagging in the predominant performance metric, but with a potentially favorable trajectory of improvement – incumbents may be wary of engaging in cooperative commercialization with the startup. While the prevailing theory of disruptive innovation suggests that this will lead to (exclusively) competitive commercialization and the eventual replacement of incumbents, we consider a dynamic strategy involving product market entry before switching to a cooperative commercialization strategy. Empirical evidence from the automated speech recognition industry from 1952-2010 confirms the main prediction of the model.
    JEL: O32
    Date: 2013–12
  28. By: Broll, Udo; Ergozue, Martin; Welzel, Peter; Wong, Wing-Keung
    Abstract: We study the optimal production of a competitive risk-averse firm under price uncertainty. We suppose that the firm is also regret-averse. For example, if market prices ex post turn out to be very high the firm might regret not producing more. If it turns out that the price is low the firm might regret an over-production. We find that optimal output under regret aversion might be higher than under risk aversion. We also prove that optimal production could increase or decrease when the regret-averse coefficient increases. In general, we show that the regret-avers firm tend to hedge their bets, taking into account the possibility that their decisions may turn out to be ex post not optimal. These predictions can help explain the fact the price uncertainty has not such an extreme impact than those would be derived from pure risk-averse preferences.
    Keywords: Firm, decision making, price uncertainty, regret aversion, risk aversion
    JEL: C02 G11
    Date: 2013–11–25
  29. By: Herweg, Fabian; Müller, Daniel
    Abstract: We extend Akerlof (1970)’s “Market for Lemons†by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is on display for sale. Overconfident buyers do not update according to Bayes’ rule but take the noisy signal at face value. We show that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection. This stabilization, however, comes at a cost: rational buyers are crowded out of the market.
    Keywords: Adverse Selection; Market for Lemons; Overconfidence
    JEL: D82 L15
    Date: 2013–12–17
  30. By: Giovanni Favara (Federal Reserve Board)
    Abstract: In mortgage markets with low concentration, lenders have an excessive propensity to foreclose defaulting mortgages. Though rational, foreclosure decisions by individual lenders may increase aggregate losses because they generate a pecuniary externality that causes house price drops and contagious strategic defaults. In concentrated markets, instead, lenders internalize the adverse effects of mortgage foreclosures on local house prices and are more inclined to renegotiate defaulting mortgages. Thus, negative income shocks do not trigger strategic defaults, foreclosure rates are lower, and house prices less volatile. We provide empirical evidence consistent with the theory using U.S. counties during the 2007-2009 housing market collapse.
    Date: 2013
  31. By: Philipp Ager (University of Southern Denmark); Fabrizio Spargoli (Erasmus University Rotterdam)
    Abstract: We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic growth. As governments were not concerned about systemic stability in this period, we are able to isolate the effects of bank competition from those of state implicit guarantees. We find that the introduction of free banking laws stimulated the creation of new banks and led to more bank failures. Our empirical evidence indicates that states adopting free banking laws experienced an increase in output per capita compared to the states that retained state bank chartering policies. We argue that the fiercer bank competition following the introduction of free banking laws might have spurred economic growth by (1) increasing the money stock and the availability of credit; (2) leading to efficiency gains in the banking market. Our findings suggest that the more frequent bank failures occurring in a competitive banking market do not harm long-run economic growth in a system without public safety nets.
    Keywords: Bank Deregulation, Bank Competition, Economic Growth, Financial Development, Dynamic Efficiency, Free Banking
    JEL: G18 G21 G28 N21
    Date: 2013–12
  32. By: Rupert Sausgruber (Department of Economics, Copenhagen University); Christoph Schotmüller (Department of Economics, Tilburg University)
    Abstract: We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.
    Keywords: asymmetric information, information acquisition, insurance, screening, adverse selection
    JEL: D82 I13
    Date: 2013–11–26
  33. By: Nedergaard, Peter
    Abstract: How can one study the ideational influence of ordoliberalism on European integration processes? This is the overarching question answered in this paper where I propose a refined methodology, taking into account that the influence of ordoliberalism can vary over time and, more importantly, that its influence has to be measured on the backdrop of a detailed specification of the characteristics of ordoliberalism itself compared to the strongest ideational alternatives. I have carefully identified these alternatives as interventionism (competition policy), laissez-faire liberalism (competition policy), and Keynesianism (economic and monetary policy). I show the usability of my framework; however, I also point to the fact that more analyses are needed, especially where traces of ordoliberal influence does not seem likely to find.
    Keywords: political economy, Europe, ordoliberalism, competition policy, economic policy
    JEL: B59 E61 G18 P16
    Date: 2013–12

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