nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒01‒24
nineteen papers chosen by
Russell Pittman
US Government

  1. We're Number 1: Price Wars for Market Share Leadership By Luis Cabral
  2. Cannibalization may Allow a Cost-inefficient Firm to Earn more than a Cost-effcient Firm in a Duopoly with Two Vertically Differentiated Goods By Ryoma Kitamura; Tetsuya Shinkai
  3. Why Branded Firm may Benefit from Counterfeit Competition By Ding, Yucheng
  4. Cooperation and competition in markets with network externalities or learning curves By Morasch, Karl
  5. The Kreps-Scheinkman game in mixed duopolies By Bakó, Barna; Tasnádi, Attila
  6. Price framing By Huck, Steffen; Schmid, Julia; Wallace, Brian
  7. Bargaining power in manufacturer-retailer relationships By Haucap, Justus; Heimeshoff, Ulrich; Klein, Gordon J.; Rickert, Dennis; Wey, Christian
  8. The Structure and Evolution of Buyer-Supplier Networks By Takayuki Mizuno; Wataru Souma; Tsutomu Watanabe
  9. The Recommendation Effect in the Hotelling Game - A New Result for an Old Model By Maximilian Conze; Michael Kramm
  10. Upstream Merger in a Successive Oligopoly: Who Pays the Price? By Nilsen, Øivind Anti; Sørgard, Lars; Ulsaker, Simen A.
  11. Innovation Markets, Future Markets, or Potential Competition: How Should Competition Authorities Account for Innovation Competition in Merger Reviews? By Benjamin Kern
  12. A primer on damages of cartel suppliers: Determinants, standing US vs. EU and econometric estimation By Bueren, Eckart; Smuda, Florian
  13. Do leniency policies facilitate collusion? Experimental evidence By Clemens, Georg; Rau, Holger A.
  14. The Industrial Organization of Health Care Markets By Martin Gaynor; Kate Ho; Robert Town
  15. Pharmaceutical regulation and health policy objectives By Birg, Laura
  16. Price Regulation and Parallel Imports of Pharmaceuticals By Kurt R. Brekke; Tor Helge Holmås; Odd Rune Straume
  17. Regulating Pharmaceutical Prices in the European Union By Csizmazia, Roland Attila
  18. The Relation between Inventory Investment and Price Dynamics in a Distributive Firm By Akiyuki Tonogi;
  19. Strategic timing of entry: Evidence from video games By Engelstätter, Benjamin; Ward, Michael R.

  1. By: Luis Cabral
    Date: 2014
  2. By: Ryoma Kitamura (Graduate School of Economics, Kwansei Gakuin University); Tetsuya Shinkai (School of Economics, Kwansei Gakuin University)
    Abstract: We consider cannibalization in a duopoly model in which firms with diffrent costs supply two vertically differentiated products in the same market. We find that an increase in the difference in quality between the two goods or a decrease in the marginal cost of the high-quality goods leads to cannibalization, such that the high-quality goods keep out the low-quality goods from the market. We show that, in equilibrium, cannibalization aspects the product line of firms. As a result, an inefficient firm may earn more than the efficient firm. If the difference in the quality of the two goods is small enough, an increase in the production costs of the inefficient firm improves social welfare.
    Keywords: Multi-product firm, Duopoly, Cannibalization, Vertical product differentiation
    JEL: D21 D43 L13 L15
    Date: 2014–01
  3. By: Ding, Yucheng
    Abstract: A durable good monopolist sells its branded product over two periods. In period 2, when there is entry of a counterfeiter, the branded firm may charge a high price to signal its quality. Counterfeit competition thus enables the branded firm to commit to high future price in period 2, alleviating the classic time-inconsistency problem under durable good monopoly. This can increase the branded firm's profit by encouraging consumer purchase without delay, despite the revenue loss to the counterfeiter. Total welfare can also increase, because early purchase eliminates delay cost and consumers enjoy the good for both periods.
    Keywords: Counterfeits, Coase Conjecture, Quality Signaling
    JEL: D82 L11 L13
    Date: 2014–01–10
  4. By: Morasch, Karl
    Abstract: The related phenomena of learning curve and network effects are quite common in oligopolistic markets. In this context the present paper discusses the incentives of a technological leader to share its exclusive technology with potential competitors. An alliance may be preferable because partner firms may be blocked. On the other hand compeition between the alliance partners will be intensied. It is shown that tha alliance solution will be chosen for medium values of learning curve or network effects. In almost all cases where firms decide to form an alliance this well enhance welfare. --
    Keywords: Alliances,Network externalities,Learning curve,Oligopoly
    JEL: L13 D43 L15
    Date: 2013
  5. By: Bakó, Barna; Tasnádi, Attila
    Abstract: In this paper we generalize the results of Kreps and Scheinkman (1983) to mixed-duopolies. We show that quantity precommitment and Bertrand competition yield Cournot outcomes not only in the case of private firms but also when a public firm is involved.
    Keywords: Mixed duopoly, Cournot, Bertrand-Edgeworth.
    JEL: D43 L13
    Date: 2014–01–15
  6. By: Huck, Steffen; Schmid, Julia; Wallace, Brian
    Abstract: We present a laboratory experiment on the impact of price framing on consumer decision making. Consumer subjects face a search market where two sellers offer a homogenous good. We examine six different price frames with linear per-unit pricing (that is displayed as such) serving as a benchmark. We find that all frames deviating from the benchmark have some negative impact on consumer decision making. The most striking result concerns drip pricing (where prices are decomposed into three elements and dripped in during the purchasing process). While leaving the actual decision problem unchanged, drip pricing wipes out 25% of consumer surplus. -- Anhand eines Laborexperiments überprüfen wir den Einfluss verschiedener 'price frames' auf das Entscheidungsverhalten von Konsumenten. Die Konsumenten entscheiden über den Kauf von gleichartigen Gütern, die von zwei Verkäufern auf einem Suchmarkt angeboten werden. Es werden sechs verschiedene Arten, die Preise der Güter zu präsentieren, untersucht, wobei der lineare Stückpreis als Benchmark dient. Es zeigt sich, dass alle Preisrahmungen, die von dem Benchmark abweichen, einen negativen Einfluss auf das Entscheidungsverhalten haben. Das augenfälligste Resultat ist der Effekt des sogenannten drip pricing. Hier ist der Endpreis in drei Bestandteile geteilt, die während des Kaufprozesses nach und nach offenbart werden. Obwohl das eigentliche Entscheidungsproblem unverändert bleibt, sinkt die Konsumentenrente unter 'drip pricing' um 25%.
    JEL: C72 C92 D21 D43
    Date: 2013
  7. By: Haucap, Justus; Heimeshoff, Ulrich; Klein, Gordon J.; Rickert, Dennis; Wey, Christian
    Abstract: Research on bargaining power in vertical relationships is scarce. It remains particularly unclear which factors drive bargaining power between the two negotiating parties in a vertical structure. We use a demand model where the consumer demand determines the total pie of industry profits. Moreover, we apply a bargaining concept on the supply side to analyze how profit is split between retailers and manufacturers. Estimates show that bargaining power can be explained by several decision variables for retailers and manufacturers. Options for both indicate that any analysis of bargaining power has to consider a dynamic view on the relevant parameters. --
    Keywords: Bargaining Power,Buyer Power,Antitrust,Discrete Choice,Demand Estimation
    JEL: L1 L4
    Date: 2013
  8. By: Takayuki Mizuno (National Institute of Informatics); Wataru Souma (Nihon University); Tsutomu Watanabe (The University of Tokyo)
    Abstract: In this paper, we investigate the structure and evolution of customer-supplier networks in Japan using a unique dataset that contains information on customer and supplier linkages for more than 500,000 incorporated non-financial firms for the five years from 2008 to 2012. We find, first, that the number of customer links is unequal across firms; the customer link distribution has a power-law tail with an exponent of unity (i.e., it follows Zipf’s law). We interpret this as implying that competition among firms to acquire new customers yields winners with a large number of customers, as well as losers with fewer customers. We also show that the shortest path length for any pair of firms is, on average, 4.3 links. Second, we find that link switching is relatively rare. Our estimates indicate that the survival rate per year for customer links is 92 percent and for supplier links 93 percent. Third and finally, we find that firm growth rates tend to be more highly correlated the closer two firms are to each other in a customer-supplier network (i.e., the smaller is the shortest path length for the two firms). This suggests that a non-negligible portion of fluctuations in firm growth stems from the propagation of microeconomic shocks – shocks affecting only a particular firm – through customer-supplier chains.
    Date: 2014–01
  9. By: Maximilian Conze; Michael Kramm
    Abstract: Hotelling’s famous "Principle of Minimum Differentiation" suggests that two firms engaging in spatial competition will decide to locate at the same place. Interpreting spatial competition as modeling product differentiation, firms will thus offer products that are not differentiated and equally share the market demand. We extend (a fixed price version of) Hotelling’s model by introducing sequential consumer purchases and a second dimension of variation of the goods, quality. Consumers have differential information about the qualities of the goods and uninformed consumers observe the decision of their predecessors. With this extension a rationale for differentiating products emerges: Differentiation makes later consumers’ inference from earlier consumers’ purchases more informative, so that firms are confronted with two offsetting effects. On the one hand, differentiating one’s product decreases the likelihood that it is bought in earlier periods, but on the other hand, by making inference more valuable, it increases the likelihood that later consumers buy the differentiated good. We show that the second effect, the recommendation effect, can dominate, leading to an equilibrium with differentiated products. Our model thus introduces an aspect similar to the herding literature in that consumers might base their decisions on observable actions of others and thus potentially on "wrong" decisions.
    Keywords: Hotelling; herding; principle of minimum differentiation; consumer learning
    JEL: L13 L15 D83
    Date: 2013–12
  10. By: Nilsen, Øivind Anti (Dept. of Economics, Norwegian School of Economics and Business Administration); Sørgard, Lars (Dept. of Economics, Norwegian School of Economics and Business Administration); Ulsaker, Simen A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This study develops and uses a successive oligopoly model, with an unobservable non-linear tariff between upstream and downstream firms, to analyze the possible anti-competitive effects of an upstream merger. We nd that an upstream merger may lead to higher average prices paid by downstream firms, but that there is no change in the prices paid by consumers. The model is tested empirically on data for an upstream merger in the Norwegian food sector (specifically, the market for eggs). Consistent with the theoretical predictions of the model, we find that the merger had no effect on consumer prices, but led to higher average prices from the downstream to the upstream firm.
    Keywords: Upstream merger; non-linear prices; Vertical con- tracts.
    JEL: K21 L41
    Date: 2013–12–13
  11. By: Benjamin Kern (University of Marburg)
    Abstract: The relevant competitors in regard to innovation might, but not necessarily do, correspond to the identified competitors on actual product markets. Hence, the conventional analysis of product markets, in order to assess the potential anticompetitive effects of mergers, is insufficient to capture innovation competition in its full extent. As a consequence, the aim of this article is to introduce and compare the existing alternative approaches which can, in principle, be used for the assessment of anticompetitive innovation effects in merger review. By focusing on the applied U.S. Antitrust, it turns out that none of the existing approaches seems to be appropriate to fully account for innovation competition. However, the ‘Innovation Market Analysis’, the first framework especially designed for the assessment of innovation aspects, might still serve as a good starting point for the development of a revised assessment framework.
    JEL: B52 K21 L12 L41 O31
    Date: 2014
  12. By: Bueren, Eckart; Smuda, Florian
    Abstract: While private actions for damages by customers against price-cartels receive much attention, the treatment of other groups affected by such conspiracies is largely unresolved. This article narrows the research gap with respect to suppliers to a downstream price cartel. First, we show that such suppliers incur losses driven by a direct quantity, a price and a cost effect. We then analyze whether suppliers are entitled to claim these losses as damages in the two leading competition law regimes. We find that, while the majority view in the US denies standing, the emerging position in the EU and important member states is to grant supplier standing. We argue that this can indeed be justified in view of the different institutional context and the goals assigned to the right to damages in the EU. We finally present an econometric approach based on residual demand estimation that allows to quantify all determinants of cartel suppliers' damages, thereby showing that supplier damage claims are a viable option in practice that can contribute to full compensation and greater cartel deterrence. --
    Keywords: competition policy,cartels,suppliers,damage quantification,standing,private enforcement,comparative law
    JEL: L41 K21
    Date: 2013
  13. By: Clemens, Georg; Rau, Holger A.
    Abstract: This paper experimentally analyzes the cartel coordination challenge induced by the discrimination of cartel ringleaders in leniency policies. Ringleaders often take a leading role in the coordination and formation of a cartel. A leniency policy which grants amnesty to all whistleblowers except for ringleaders may therefore reduce the incentive to become a ringleader and may disrupt cartel formation. We analyze discriminatory and non-discriminatory leniency policies in a multi-stage cartel formation experiment where multiple ringleaders may emerge. Although theory predicts that cartels will always be reported, whistleblowing rarely occurs. Paradoxically the discriminatory leniency policy induces more firms to become ringleaders, which ultimately facilitates coordination in the cartel. --
    Keywords: Cartels,Leniency Programs,Ringleader Discrimination,Experiment
    JEL: C92 K21 L41
    Date: 2014
  14. By: Martin Gaynor; Kate Ho; Robert Town
    Abstract: The US health care sector is large and growing – health care spending in 2011 amounted to $2.7 trillion and 18% of GDP. Approximately half of health care output is allocated via markets. In this paper, we analyze the industrial organization literature on health care markets focusing on the impact of competition on price, quality and treatment decisions for health care providers and health insurers. We conclude with a discussion of research opportunities for industrial organization economists, including opportunities created by the US Patient Protection and Affordable Care Act.
    JEL: I11 L1 L10
    Date: 2014–01
  15. By: Birg, Laura
    Abstract: This paper analyzes a maximum price system and a reference price system in a vertical differentiation model with a brand-name drug and a generic. In particular, both instruments are compared with respect to their performance in reducing public expenditure, limiting financial exposure of patients, improving access to pharmaceuticals, and stimulating competition. For identical regulatory prices, free pricing under the reference system tends to result in a higher price for the brand-name drug. For identical price reductions of the brand-name drug, the lower reimbursement amount under the reference price system results in lower health expenditure, but higher financial exposure of patients. Total welfare is higher under the maximum price system. --
    Keywords: pharmaceutical regulation,reference price,maximum price,price cap,health,policy objectives
    JEL: I18 L50 H51
    Date: 2013
  16. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics); Tor Helge Holmås (Uni Rokkan Centre); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: This paper studies the effects of price regulation and parallel imports in the onpatent pharmaceutical market. First, we develop a theory model in which a pharmacy negotiates producer prices with a brand-name firm and then sets retail prices. We show that the effects of price regulation crucially depend on whether the producer faces competition from parallel imports. While parallel imports improve the bargaining position of the pharmacy, price regulation counteracts this effect and may even be profitable for the producer. Second, we use a unique dataset with information on sales and prices at both producer and retail level for 165 substances over four years (2004-7). Exploiting exogenous variation in the regulated price caps, we show that stricter price regulation reduces competition from parallel imports. While the effect is clearly negative on producer profits for substances without parallel imports, the effect is not significant for substances with parallel imports. Finally, we show that stricterprice regulation reduces total expenditures, but the effect is much stronger for substances with parallel import. Thus, our results suggest that price regulation may promote both static and dynamic efficiency in the presence of parallel imports.
    Keywords: Pharmaceutical market; Price regulation; Parallel imports
    JEL: I11 I18 L13 L51 L65
    Date: 2014
  17. By: Csizmazia, Roland Attila
    Abstract: This case study aims to provide a better understanding of the necessity for regulation in the market for pharmaceuticals and to reveal the impacts of parallel trades in the European Union and how they may affect markets in the future. The pharmaceutical industry up to now has largely been regulated. Although the EU is a single market, it still has variable prices for pharmaceuticals. Consequently, the price gap and other EU-specific factors have created a great environment for parallel trades. The author has confined this study to the price regulations inside the EU before the enlargement in 2004.
    Keywords: Regulation, pharmaceutical market, European Union, parallel trade
    JEL: D40
    Date: 2013–12–01
  18. By: Akiyuki Tonogi (Institute of Innovation Research, Hitotsubashi University);
    Abstract: In this paper, we examine the role of inventory in the price-setting behavior of a distributive firm. Empirically, we show the 5 empirical facts relating to pricing behavior and selling quantity of a certain consumer goods based on daily scanner data to examine the relation between store properties and pricing behavior. These results denote that price stickiness varies by the retailers’ characteristics. We consider that the hidden mechanism of price stickiness comes from the retailer’s policy for inventory investment. A partial equilibrium model of the retailer’s optimization behavior with inventory is constructed so as to replicate the five empirical facts. The results of the numerical experiments in the constructed model suggest that price change frequency depends on the retailer’s order cost, storage cost, and menu cost, not on the price elasticity of demand.
    Keywords: Inventory; Price Stickiness; Numerical Experiment; (S, s) Policy
    JEL: D22 E27 E31
    Date: 2013–08
  19. By: Engelstätter, Benjamin; Ward, Michael R.
    Abstract: This paper investigates how video game publishers' choice of game release date is affected by the expected level of competition within the game's product niche. We identify game niches by genre, age-appropriateness, a four week window cohort, publisher and console system. Our analysis is based on two different video game data sets, one based on industry sales data and the other featuring extensive consumer usage information. We show that consumer substitution across games is stronger within most of the dimensions describing product niches. Sales volumes decay quickly after the opening weekend, so at any point in time, a niche willtypically be served by few current titles. Thus, publishers have incentives to avoid releasing during periods of fierce intra-niche competition. We show that games are more likely to be released so as to avoid weeks when their niche is relatively well served. --
    Keywords: Product Entry,Non-Price Competition,Niche,Strategy,Submarkets,Entertainment Goods,Video Games
    JEL: D43 L13 L96
    Date: 2013

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