nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒01‒17
twenty-one papers chosen by
Russell Pittman
US Government

  1. Heterogenous switching costs By Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
  2. Competitive Cross-Subsidization By Chen, Zhijun; Rey, Patrick
  3. A Kreps-Scheinkman állítás érvényessége lineáris keresletű vegyes duopóliumok esetén By Bakó, Barna; Tasnádi, Attila
  4. Second Degree Price Discrimination in a Market for Credence Goods By Dulleck, Uwe; Kerschbamer, Rudolf; Konovalov, Alexander
  5. Competition and Cooperation in Network Games By Konovalov, Alexander
  6. A Note on Networks of Collaboration in Multi-market Oligopolies By Pascal Billand; Christophe Bravard; Subhadip Chakrabarti; Sudipta Sarangi
  7. Not so demanding: Preference structure, firm behavior, and welfare By Peter Neary; Monika Mrazova
  8. Welfare Improving Discrimination based on Cognitive Limitations By Oktay Sürücü
  9. Shedding Some Light on the Dark Matter of Competition: Insights from the Strategic Management and Organizational Science Literature for the Consideration of Diversity Aspects in Merger Review By Benjamin Kern; Malte Ackermann
  10. Hub and spoke collusion by embargo By Patrick VAN CAYSEELE; Simon MIEGIELSEN
  11. Explicit Collusion under Antitrust Enforcement By Igor Mouraviev
  12. Cooperating with the Competition: Efficient Patent Pooling and the Choice of a New Standard By Gallini, Nancy
  13. Trademark or patent? The effects of market structure, customer type and venture capital financing on start-ups' IP decisions By de Vries, A.G.B.; Pennings, H.P.G.; Block, J.H.
  14. Inter-format competition among retailers: The role of private label products in market delineation By Haucap, Justus; Heimeshoff, Ulrich; Klein, Gordon J.; Rickert, Dennis; Wey, Christian
  15. Fixed-Mobile Integration By Steffen Hoernig; Marc Bourreau; Carlo Cambini
  16. Joint Design and Pricing of Intermodal Port - Hinterland Network Services: Considering Economies of Scale and Service Time Constraints By Ypsilantis, P.; Zuidwijk, R.A.
  17. Platform Markets and Energy Services By Claire M. Weiller; Michael G. Pollitt
  18. Competition, integration, substitution: Myths and realities concerning the relationship between high-speed rail and air transport in Europe By Frédéric Dobruszkes; Moshe Givoni
  19. Direct to Consumer Advertising of Pharmaceutical Drugs: Information and Persuasion By Talia Bar; Dean R. Lillard
  20. Auctioning vs. Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information By Francisco Alvarez; Francisco J. André
  21. Imperfect but Hard Competition: the Portuguese Banking Sector in the Golden Age (1950-1973) By Luciano Amaral

  1. By: Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
    Abstract: We consider a simple two period model where consumers have different switching costs. Before the market opens, there was an incumbent who sold to all consumers. We identify the equilibrium both with Stackelberg and Bertrand competition and show how the presence of low switching cost consumers benefits the incumbent, despite the fact that it never sells to any of them.
    Keywords: switching, cost
    JEL: D43 L13
    Date: 2013–12
  2. By: Chen, Zhijun; Rey, Patrick
    Abstract: This paper analyzes competitive pricing policies by multiproduct firms facing heterogeneous buying patterns. We show that cross-subsidization arises when firms have comparative advantages on different products but are equally efficient overall: Firms earn a profit from multi-stop shoppers by charging positive margins on their strong products but, as price competition for one-stop shoppers drives total margins down to zero, they price weaker products below cost. Banning below-cost pricing leads to higher profits and higher prices for one-stop shoppers, and may reduce consumer surplus as well as total social welfare.
    Keywords: Bertrand competition, cross-subsidization, buying patterns, one-stop and multi-stop shopping
    JEL: L11 L41
    Date: 2013–12–14
  3. By: Bakó, Barna; Tasnádi, Attila
    Abstract: In this paper we extend Kreps and Scheinkam's (1983) results to mixed-duopolies with linear demands and constant unit costs. We show that quantity precommitment and Bertrand competition yield to Cournot outcomes not only in the case of private firms but also when a public firm is involved.
    Keywords: pice-setting, Kreps and Scheinkman's result, Cournot, Bertrand-Edgeworth
    JEL: D43 L13
    Date: 2014–01–06
  4. By: Dulleck, Uwe (QUT School of Economics and Finance); Kerschbamer, Rudolf (Dept of Economics, University of Innsbruck and CEPR); Konovalov, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This article studies second-degree price-discrimination in markets for credence goods. Such markets are affected by asymmetric informationbecause expert sellers are better informed than their customers about the quality that yields the highest surplus from trade. We show that discrimination regards the amount of advice offered to customers and that it leads to a different equilibrium distortion depending on the main source of heterogeneity among consumers. If consumers differ mainly in the expected cost needed to generate consumer surplus, the inefficiency occurring at the bottom of the type distribution involves overprovision of quality. By contrast, if consumers differ in the surplus generated whenever the consumer’s needs are met, the inefficiency involves underprovision of quality.
    Keywords: Price Discrimination; Credence Goods; Experts; Discounters; Distribution Channels
    JEL: D40 D82 L15
    Date: 2014–01
  5. By: Konovalov, Alexander (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We consider games where agents are embedded in a network of bilateral relationships and have multivariate strategy sets. Some components of their strategies correspond to individual activities, while the other strategic components are related to joint activities and interaction with the partners. We introduce several new equilibrium concepts that account for the possibility that players act competitively in individual components of their strategy but cooperate on the components corresponding to joint activity or collaboration. We apply these concepts to the R&D collaboration networks model where firms engage in bilateral joint projects with other firms. The analysis shows that investments are highest under bilateral cooperation and lowest under full cooperation because the spillovers associated to bilateral collaboration are bound to the partnership. This leads to welfare being maximized under bilateral collaboration when there are a few firms in the market and under non-cooperation in markets with many firms; full cooperation is never social welfare maximizing. Investigating the issue of endogenous network formation, we find that bilateral cooperation increases (lowers) the profits of more (less) connected firms. However, this does not always lead to a denser stable network of R&D collaboration under bilateral cooperation.
    Keywords: network games; bilateral cooperation; hybrid equilibrium; R&D collaboration networks
    JEL: L13 L14 L22 O31 O32
    Date: 2014–01
  6. By: Pascal Billand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon); Christophe Bravard (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon); Subhadip Chakrabarti (Finance and economics research group. School of management. Queen's University. Belfast - Queen's University); Sudipta Sarangi (Department of Economics, Louisiana State University - Department of Economics, Louisiana State University)
    Abstract: In this note, we extend the Goyal and Joshi's model of network of collaboration in oligopoly to multi-market situations. We examine the incentive of firms to form links and the architectures of the resulting equilibrium networks in this setting. We also present some results on efficient networks.
    Keywords: R&D Collaborations; Network Formation; Multi-market Oligopolies
    Date: 2014–01–07
  7. By: Peter Neary; Monika Mrazova
    Abstract: We introduce two new tools for relating preferences and demand to firm behavior and economic performance.� The "Demand Manifold" links the elasticity and convexity of an arbitrary demand function; the "Utility Manifold" links the elasticity and concavity of an arbitrary utility function.� Along the way we present some new families of demand functions; show how the structure of demand and preferences determine the responses of monopoly firms and monopolistically competitive industries to exogenous shocks; characterize the efficiency of a�monopolistically competitive equilibrium; and present a quantitative framework for predicting the welfare effects of exogenous shocks.
    Keywords: Heterogeneous Firms, Quantifying Gains from Trade, Super- and Sub-Convexity, Supermodularity
    JEL: F23 F15 F12
    Date: 2013–12–31
  8. By: Oktay Sürücü (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper is concerned with the situation in which a profit-maximizing monopolist faces consumers that are diverse not only in their preferences but also in their levels of bounded rationality. The behavioral phenomenon considered here is the attraction effects when choices are made across categories. Using the standard second-degree price discrimination model, the optimal menu of contracts that screens consumers' types is characterized. The benefit of discriminating consumers based on their preference and cognitive limitation is always higher than its cost. In other words, the monopolist can exploit consumers and increase his profit with this contract. The model provides a possible explanation for the apparent puzzle why one may observe that the same quality products are priced differently under different labels. Moreover, this contract is welfare improving.
    Keywords: bounded rationality, attraction effect, contract design, welfare
    JEL: D03 D42 D60 D82 D86
    Date: 2013–12
  9. By: Benjamin Kern (University of Marburg); Malte Ackermann (University of Marburg)
    Abstract: A merger between two innovation competitors is often suspected to reduce the variety of heterogeneous entities which are currently undertaking R&D or which are well situated to undertake R&D in a certain field. The consequential reduction of “diversity” can be detrimental to innovation because it reduces the number of independent sources for possible future innovations and might furthermore lead to an alignment of formerly different R&D programs. However, if “diversity” indeed benefits innovative performance, even merged firms should have an incentive to maintain it in-house. Therefore, this article aims to bring to light whether firms can indeed be expected to create or maintain “diversity” post-merger. By focusing on the strategic management and organizational science literature we will demonstrate that the creation/maintenance of independent entities is indeed considered as an important determinant for the innovativeness and general performance of firms. Nevertheless, we will also show that this strategy has several grave implementation problems and might be hampered by certain trade-offs. As a consequence, competition authorities cannot presume that a reduced “inter-firm diversity” will get substituted by an increased “intra-firm diversity” without fail.
    JEL: B52 K21 L4 M1 O31 O32
    Date: 2014
  10. By: Patrick VAN CAYSEELE; Simon MIEGIELSEN
    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
  11. By: Igor Mouraviev (Center for Mathematical Economics, Bielefeld University)
    Abstract: The article seeks to fill the gap between tacit and explicit collusion in a setting where firms observe only their own output levels and a common price, which includes a stochastic component. Without communication, firms fail to discriminate between random shocks and marginal deviations, which constrains the scope for collusion. By eliminating uncertainty about what has happened, communication facilitates detection of deviations but reduces collusive profi?ts due to the risk of exposure to legal sanctions. With the optimal collusive strategy, firms communicate only if the market price falls somewhat below the trigger price. Moreover, they tend to communicate more often as they become less patient, a cartel grows in size, or demand uncertainty rises.
    Keywords: Collusion, Communication, Imperfect Monitoring, Frequency of Meetings
    JEL: D82 L41
    Date: 2013–07
  12. By: Gallini, Nancy
    Abstract: I examine the private and social efficiency of patent pools in a setting in which owners of intellectual property (IP), are both vertically and horizontally related. The relationship is vertical through the ownership of complementary IP and horizontal in that at least one member owns a competing product. For this hybrid structure – referred to as overlapping ownership – I analyze the interplay between two organizational decisions: the standard-setting process in which participants choose a product type (indexed by its differentiation from the current standard), and the subsequent patent pooling decision. Consumers can be better off with patent pooling as a result of lower prices (the complements effect) and greater product variety (the differentiation effect), even when a pool member is also a competitor of the new standard. However, in comparing new product collaborations across ownership regimes, consumers prefer those that admit no overlapping ownership. These results yield insights for antitrust rules promoting efficient IP agreements.
    Keywords: Intellectual Property, Industrial Organization, Patent Pools, Standards, Antitrust
    JEL: L2 L44
    Date: 2014–01–06
  13. By: de Vries, A.G.B.; Pennings, H.P.G.; Block, J.H.
    Abstract: We analyze the initial intellectual property (IP) right of 4,703 start-up entrants in the US, distinguishing between trademark and patent applications. The results show that start-ups are more likely to file for a trademark instead of a patent when entering into more competitive market structures. Further, we find that start-ups with a focus on distribution that serves end-consumers are more likely to file for a trademark and that start-ups that operate upstream and sell to other businesses are more likely to file for a patent. Lastly, the external influences on a start-up‟s management, such as the involvement of a venture capitalist (VC), affect IP applications. The increased incentive of VC-backed start-ups to become operational on the market makes them more likely to file initial IP in the form of a trademark rather than a patent. Among other factors, we control for R&D and advertising intensity in the industry and distinguish between more technical and more service-driven industries.
    Keywords: competition, intellectual property, patents, trademarks, venture capital
    JEL: D21 L10 L20 M00 O34
    Date: 2013–04–09
  14. By: Haucap, Justus; Heimeshoff, Ulrich; Klein, Gordon J.; Rickert, Dennis; Wey, Christian
    Abstract: This paper analyses the extent of inter-format retail competition between supermarkets, discounters and drugstores in Germany, using data from the German market for diapers. We estimate a random coefficient logit model at the individual household level. Based on consumer substitution patterns, we calculate manufacturers' and retailers' estimated marginal costs and margins and, based on these margins, apply standard market delineation techniques which suggest that the strongest substitution patterns are between the leading manufacturer brand and private labels sold at drugstores and discounters. This finding contrasts with recent speculations by competition authorities that private label products may belong to a different antitrust market than manufacturers' brands. --
    Keywords: Discrete Choice,Demand Estimation,Market Delineation,Grocery Retail Markets,Antitrust
    JEL: L1 L4 L8 C5
    Date: 2013
  15. By: Steffen Hoernig; Marc Bourreau; Carlo Cambini
    Abstract: Often, fixed-line incumbents also own the largest mobile network. We consider the effect of this joint ownership on market outcomes. Our model predicts that while fixed-to-mobile call prices to the integrated mobile network are more efficient than under separation, those to rival mobile networks are distorted upwards, amplifying any incumbency advantage. As concerns potential remedies, a uniform off-net pricing constraint leads to higher welfare than functional separation and even allows to maintain some of the efficiency gains. JEL codes: L51, L92
    Keywords: Network competition, On/off-net pricing, Integration, Call externality
    Date: 2013
  16. By: Ypsilantis, P.; Zuidwijk, R.A.
    Abstract: Maritime container terminal operating companies have extended their role from node operators to that of multimodal transport network operators. They have extended the gates of their seaport terminals to the gates of inland terminals in their network by means of frequent services of high capacity transport modes such as river vessels (barges) and trains. These network operators face the following three interrelated decisions: (1) determine which inland terminals act as extended gates of the seaport terminal, (2) determine capacities of the corridors, i.e. capacity of the transport means and frequency of service, and (3) set the prices for the transport services on the network. We propose a bi-level programming model to jointly design and price extended gate network services for profit maximization. The network operator does so while anticipating the decisions of the customers who choose minimum cost paths to their final destinations, and who always have the option to choose direct trucking offered by the competition. The model in this paper extends existing bi-level models in a multimodal format by including service time constraints and economies of scale. Considering the special structure of our problem, we propose a heuristic that provides near optimal solutions to our problem in substantially less time. Through experimental results in some realistic instances, we study optimal network designs while comparing sea port-to-door and sea port to inland port services and situations where transit time requirements do and do not apply. Our results show that when demand is relatively low, there are significant differences in the optimal network design for port-to-door versus port-to-port services. In the case of port-to-door services, the prices of services are determined by the competition and not by the design of the network, so the network is designed against minimum costs, and economies of scale are achieved by consolidating flows through a limited number of extended gates. The case of port-to-port services is different, i.e. revenues are enhanced not so much by reducing costs through the exploitation of economies of scale, but by exploiting the possibilities to dedicate extended gates to market segments for which the competition leaves room for higher port-to-port tariffs.
    Keywords: bi-level programming model, design, intermodal port - hinterland network services, pricing
    JEL: L15 O32
    Date: 2013–07–23
  17. By: Claire M. Weiller; Michael G. Pollitt
    Abstract: A structural shift from transaction-based, marginal cost pricing to fee-based service business models often accompanies the emergence of “platform” markets, i.e. multi-sided markets where an intermediary captures the value of the interaction between user groups. The many examples include telecommunications, data storage, cinema, music and media, and the automobile industry. Why not electricity? In this paper, we explore how the electricity supply industry can be conceived of as a platform-mediated, two-sided market and the consequences for pricing. Through two cases, a balancing services provider for smart home energy management systems and an electric vehicle charge manager, we show where a platform entrant could position itself in the retail electricity markets between supply companies and end-users. The drivers of such a transition include increased volatility due to renewable generation, the new complexity of roles for end-users, and the introduction of information and communication technologies. Conceiving of electricity as a platform market where new entrants provide an energy optimisation and management service may stimulate a competitive ecosystem and innovation. We suggest that fee-based pricing would enable the objectives of time-varying pricing to be achieved without adversely affecting the most vulnerable customers.
    Keywords: Platforms, balancing services, electric vehicles, retail electricity markets
    JEL: L81 L94 L10 D4
    Date: 2013–12–19
  18. By: Frédéric Dobruszkes; Moshe Givoni
    Abstract: Purpose – This chapter provides a critical discussion of air to rail mode substitution. Environmental impacts, intermodal competition and integration are considered, examining advantages and disadvantages as well as opportunities and constraints.Originality – Both operation and life-cycle analysis perspectives show that high-speed rail (HSR) is much ‘greener’ than air transport (per seat-km or per passenger-km) provided that the former achieves high load factors and the latter lower load factors and that freed runway capacity is not reused. HSR travel time is its main competitive advantage against air transport, and a 600-km flight is arguably the current limit for robust intermodal effects.Findings – The potential for air–HSR integration at the airport relies on various service, business and technical constraints. Even when it is successful, its environmental benefit appears to be marginal, if not negative, if airport capacity is reused for longer flights. In the current context, such integration appears more like a business opportunity for airlines, airports and train operators rather than a sustainable option. Yet the environmental benefit of integration may be larger within potential integrated transport policies.
    Keywords: High-speed rail; Mode substitution; Intermodal competition; Air–HSR competition; Air–HSR integration; Air–rail integration
    Date: 2013
  19. By: Talia Bar; Dean R. Lillard
    Abstract: We formally model direct to consumer advertising (DTCA) of prescription drugs and examine factors that determine a pharmaceutical firms DTCA strategy. We highlight how the profitability of DTCA varies with the characteristics of the condition that the advertised drug treats, the incidence of the condition, and the signal value of symptoms, and risk factors. We account for the potential information benefits from DTCA as well as its potential to persuade consumers. From a welfare perspective there can be too much or too little private investment in advertising. Welfare is more likely to increase when the population is uninsured.
    JEL: I18 L15 L65 M37
    Date: 2014–01
  20. By: Francisco Alvarez (Department of Fundamentos del Análisis Económico II, Universidad Complutense de Madrid, Spain); Francisco J. André (Department of Fundamentos del Análisis Económico II, Universidad Complutense de Madrid, Spain)
    Abstract: We compare auctioning and grandfathering as allocation mechanisms of emission permits when there is a secondary market with market power and the firms have private information. Based on real-life cases such as the EU ETS, we consider a multi-unit, multi-bid uniform auction, modelled as a Bayesian game of incomplete information. At the auction each firm anticipates his role in the secondary market, which affects the firms’ valuation of the permits (that are not common across firms) as well as their bidding strategies and it precludes the auction from generating a cost-effective allocation of permits, as it would occur in simpler auction models. Auctioning tends to be more cost-effective than grandfathering when the firms’ costs are asymmetric enough, especially if the follower has lower abatement costs than the leader and uncertainty about the marginal costs is large enough. If market power spills over the auction, the latter is always less cost-effective than grandfathering. One central policy implication is that the specific design of the auction turns out to be crucial for cost-effectiveness. The chances of the auction to outperform grandfathering require that the former is capable of diluting the market power that is present in the secondary market.
    Keywords: Cap-and-Trade Systems, Auctions, Grandfathering, Market Power, Bayesian Games of Incomplete Information
    JEL: D44 Q58 L13
    Date: 2013–11
  21. By: Luciano Amaral
    Abstract: JEL codes:
    Keywords: Network competition, On/off-net pricing, Integration, Call externality
    Date: 2013

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