nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒02‒08
nineteen papers chosen by
Russell Pittman
US Government

  1. Monopolistic competition and income dispersion By OSHARIN, Alexander; THISSE, Jacques-François; USHCHEV, Philip; VERBUS, Valery
  2. Market Size, Entrepreneurship, and Income Inequality By Pokrovsky Dmitry; Behrens Kristian; Zhelobodko Evgeny
  3. Endogenous product compatibility choice under Cournot competition with a network externality By Tsuyoshi Toshimitsu
  4. Information and consumer fraud in a signalling model By Silvia Martínez-Gorricho
  5. Managing Consumer Referrals in a Chain Network By Maria Arbatskaya; Hideo Konishi
  6. Very Simple Markov-Perfect Industry Dynamics By Abbring, Jaap H.; Campbell, Jeffrey R.; Tilly, Jan; Yang, Nan
  7. Equilibrium mergers in a composite good industry with efficiencies By PARDO-GARCIA, Christina; SEMPERE-MONERRIS, Jose J.
  8. PWYW Pricing ex post Consumption: A Sales Strategy for Experience Goods By Egbert, Henrik; Greiff, Matthias; Xhangolli, Kreshnik
  9. How the Value of Information Shapes the Value of Commitment Or: Why the Value of Commitment Does Not Vanish By Tanja Hörtnagl; Rudolf Kerschbamer
  10. Merger control procedures and institutions: A comparison of the EU and US practice By William E. Kovacic, Petros C. Mavroidis, Damien J. Neven
  11. Commitments or prohibition? The EU antitrust dilemma By Mario Mariniello
  12. Monopolistic competition beyond the constant elasticity of substitution By ZHELOBODKO, Evgeny; KOKOVIN, Sergey; Parenti, Mathieu; THISSE, Jacques-François
  13. Contemporary generic market in Japan – key conditions to successful evolution By Mihajlo B, Jakovljevic; Nakazono, S; Ogura, S
  14. Stock Exchange Mergers and Market Efficiency By Amélie Charles; Olivier Darné; Jae H. Kim; Etienne Redor
  15. Transmission constraints and strategic underinvestment in electric power generation By Léautier, Thomas-Olivier
  16. The impact of improved access to market information through mobile phones usage on selling prices: Evidence from rural areas in Cambodia By Daichi Shimamoto; Hiroyuki Yamada; Martin Gummert
  17. Multi-payer health insurance systems in Central and Eastern Europe: lessons from the Czech Republic, Slovakia, and Russia By Galina Besstremyannaya; Jaak Simm
  18. Verti-zontal differentiation in export markets By DI COMITE, Francesco; THISSE , Jacques; ,
  19. Compulsory Disclosure of Private Information Theoretical and Experimental Results for the "Acquiring-a-Company" Game By Werner Güth; Kerstin Pull; Manfred Stadler; Alexandra Zaby

  1. By: OSHARIN, Alexander (NRU-Higher School of Economics, Russia); THISSE, Jacques-François (Université catholique de Louvain, CORE, Belgium); USHCHEV, Philip (NRU-Higher School of Economics, Russia); VERBUS, Valery (NRU-Higher School of Economics, Russia)
    Abstract: We develop a model of monopolistic competition that accounts for consumers' heterogeneity in both incomes and preferences. This model makes it possible to study the implications of income redistribution on the toughness of competition. We show how the market outcome depends on the joint distribution of consumers' tastes and incomes and obtain a closed-form solution for a symmetric equilibrium. Competition toughness is measured by the weighted average elasticity of substitution. Income redistribution generically affects the market outcome, even when incomes are redistributed across consumers with different tastes in a way such that the overall income distribution remains the same.
    Keywords: heterogenous consumers, income redistribution, toughness of competition, monopolistic competition
    JEL: D43 L11 L13
    Date: 2014–01–13
  2. By: Pokrovsky Dmitry; Behrens Kristian; Zhelobodko Evgeny
    Abstract: We develop a monopolistic competition model with two sectors and heterogeneousagents who self-select into entrepreneurship, depending on entrepreneurial ability. Theeffect of market size on the equilibrium share of entrepreneurs crucially hinges on propertiesof the lower-tier utility function for differentiated varieties – its elasticity of substitutionand its Arrow-Pratt index of relative risk aversion. We show that the share of entrepreneurs,and the cutoff for self-selection into entrepreneurship, can increase or decrease with marketsize. The properties of the underlying ability distribution largely determine how incomeinequality changes with market size.
    JEL: D43 L11 L13 L26
    Date: 2014–01–30
  3. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: We provide a simple model of endogenous product compatibility choice under Cournot competition with a network externality. Using the model, we consider how the degree of a network externality and product substitutability affects the choice regarding product compatibility. In particular, if the degree of the network externality is larger than that of the product substitutability, there exist multiple equilibria, involving imperfect, partial, and perfect compatibility. However, if another assumption formula regarding a spillover effect, which is a component of network size, is made, i.e., the converter case, there is a unique equilibrium, i.e., perfect compatibility, irrespective of the degree of the network effect versus product substitutability. Furthermore, we show that a perfectly compatible product standard is socially optimal and analyze, therefore, whether a social dilemma arises in the network products market.
    Keywords: product compatibility, network externality, fulfilled expectation; Cournot duopoly, horizontally differentiated product
    JEL: D21 D43 D62 L15
    Date: 2014–01
  4. By: Silvia Martínez-Gorricho (Dpto. Análisis Económico Aplicado)
    Abstract: This article considers a two-sided private information model. We assume that two exogenously given qualities are offered in a monopolistic market. Prices are ¿xed. A low quality seller chooses to be either honest (by charging the lower market price) or dishonest (by charging the higher price). We discuss the signaling role of the consumer’s private information on the equilibrium level of dishonesty, incidence of fraud and trade. We demonstrate that the equilibrium incidence of fraud is nonmonotonic in the buyer’s private information when the prior belief favors the low-quality seller strongly enough. This result holds as long as information is noisy and regardless of its private or public nature. Welfare consequences are ambiguous.
    Keywords: Consumer Fraud; Asymmetric Information; Price Signalling
    JEL: D42 D82 G14 L15 L51
    Date: 2014–01
  5. By: Maria Arbatskaya (Emory University); Hideo Konishi (Boston College)
    Abstract: We consider the optimal pricing and referral strategy of a monopoly that uses a simple consumer communication network (a chain) to spread product information. The first-best policy with fully discriminatory position-based referral fees involves standard monopoly pricing and referral fees that provide consumers with strictly positive referral incentives. Effective price discrimination among consumers based on their positions in the chain occurs in both the first-best solution and the second-best solution (with a common referral fee).
    Keywords: communication network, consumer referral policy, referral fee, price discrimination
    JEL: D4 D8 L1
    Date: 2014–01–10
  6. By: Abbring, Jaap H. (Tilburg University); Campbell, Jeffrey R. (Federal Reserve Bank of Chicago); Tilly, Jan (University of Pennsylvania); Yang, Nan (National University of Singapore)
    Abstract: This paper develops an econometric model of industry dynamics for concentrated markets that can be estimated very quickly from market-level panel data on the number of producers and consumers using a nested fixed-point algorithm. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be calculated from the fixed points of a finite sequence of low-dimensional contraction mappings. Our nested fixed point procedure extends Rust's (1987) to account for the observable implications of mixed strategies on survival. We illustrate the model's empirical application with ten years of County Business Patterns data from the Motion Picture Theaters industry in 573 Micropolitan Statistical Areas. The results are suggestive of fierce competition between theaters in the market for film exhibition rights.
    Keywords: demand uncertainty; dynamic oligopoly; firm entry and exit; Markov-perfect equilibrium; nested fixed point estimator; sunk costs; toughness of competition.
    JEL: C25 C73 L13
    Date: 2013–11–30
  7. By: PARDO-GARCIA, Christina (Department of Applied Economics, University of Valencia, Spain); SEMPERE-MONERRIS, Jose J. (Department of Economic Analysis and ERI-CES, University of Valencia, Spain; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    Abstract: This paper studies equilibrium merging behavior in composite good industries. Component producers face the option to either merge with a similar component producer (horizontal merger) or a complementary one (complementary merger) of a composite good. Focusing only on strategic reasons, complementary mergers arise at equilibrium only when composite goods are very differentiated while horizontal mergers otherwise. Next, when efficiencies are considered, the level of marginal cost saving required for a horizontal merger in a composite industry to result in a non- increase in the upward price pressure index (UPPI) is greater as compared with the one in a regular industry. This result can be used by antitrust authorities to be more demanding when dealing with horizontal mergers in composite goods industries.
    Keywords: composite goods, substitutes, complements, horizontal merger, complementary merger, efficiency effects, UPPI, diversion ratio
    JEL: L13 L41
    Date: 2014–01–13
  8. By: Egbert, Henrik; Greiff, Matthias; Xhangolli, Kreshnik
    Abstract: Pay What You Want (PWYW) pricing has received considerable attention recently. Empirical studies show that a PWYW pricing mechanism is able to increase a seller’s turnover and profit. This paper addresses PWYW pricing for bundles of experience goods. The paper shows that a PWYW pricing mechanism, if applied ex post consumption, separates the decision to buy from the decision how much to pay. Information asymmetries about the quality of the good are reduced during the act of consumption so that buyers are informed about the product’s quality when they decide how much to pay. As a consequence, risk-averse buyers who would otherwise refrain from purchasing under a fixed price mechanism, can be attracted to purchase under a PWYW pricing ex post consumption (PWYW-EPC) mechanism. In this case, the pricing mechanism itself constitutes a signal. The paper concludes that a PWYW pricing mechanism, applied ex post consumption, can be a profitable strategy for a seller if she sells bundles of experience goods and if she wants to attract risk-averse buyers for realizing economies of scale in production.
    Keywords: PWYW pricing, PWYW-EPC, asymmetric information, economies of scale, experience good, bundling, ex post consumption
    JEL: D4 D49 D8 M31
    Date: 2014–02–03
  9. By: Tanja Hörtnagl; Rudolf Kerschbamer
    Abstract: This paper challenges recent results on the fragility of the value of commitment. It introduces a specific notion of the ’value of information’ for a later-moving player about the action choice of a previously-moving player, gives conditions under which this value is positive and shows that a positive value of information for the latermoving player is sufficient for a positive value of commitment for the previouslymoving player. It then argues that the value of information for a later-moving player is unlikely to vanish in real-world applications, implying that the value of commitment for the previously-moving player does not vanish either.
    Keywords: Value of Information, Value of Commitment, Sequential Move Game, Imperfect Observability, Stackelberg Duopoly, First-Mover Advantage
    JEL: C72 D82 D83 L13
    Date: 2014–02
  10. By: William E. Kovacic, Petros C. Mavroidis, Damien J. Neven (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The objective of this paper is to discuss and compare the role that different constituencies play in US and EU procedures for merger control. We describe the main constituencies (both internal and external) involved in merger control in both jurisdictions and discuss how a typical merger case would be handled under these procedures. At each stage, we consider how the procedure unfolds, which parties are involved, and how they can affect the procedure. Our discussion reveals a very different ecology. EU and US procedures differ in terms of their basic design and in terms of the procedures that are naturally associated with these alternative designs. On the one hand, there is a single investigator and decision maker operating under a symmetric mandate in the EU and on the other hand, an investigation and settlement operating under the threat of a court decision in case of challenge only in the US. The EU has developed numerous procedures and has granted extensive rights to the parties in the context of these procedures in order to provide some guarantee that the Commission’s role as investigator and decision maker at first instance is not abused. By contrast, the US procedures appear to be rather informal, the balance in the investigation and evaluation of the merger being provided by the credible threat of a court decision. With a strong federal government that has extensive competences for regulation, merger control on competition grounds is subject to the additional public interest test of regulators in the US. Such additional control is weak in the EU, which has more limited competences for regulation. In addition, both the executive and the legislative powers are more fully developed at the federal level in the US. Both the executive power and the legislative seem to be in position to wield greater influence on enforcement in the US than is the case in the EU.
    JEL: K21 K40 K4
    Date: 2014–01–31
  11. By: Mario Mariniello
    Abstract: The issue: Excluding cartels, most investigations into suspected infringements of European Union competition law are resolved with â??commitment decisionsâ??. The European Commission drops the case in exchange for a commitment from the company under investigation to implement measures to stop the presumed anti-competitive behaviour. Commitment decisions are considered speedier than formal sanctions (prohibition decisions) in restoring normal competitive market conditions. They have a cost, however: commitments are voluntary and are unlikely to be subject to judicial review. This reduces the European Commissionâ??s incentive to build a robust case. Because commitment decisions do not establish any legal precedent, they provide for little guidance on the interpretation of the law. Policy challenge: The European Commission relies increasingly on commitment decisions. More transparency on the substance of allegations, and the establishment of a higher number of legal precedents, are however necessary. This applies in particular to cases that tackle antitrust issues in new areas, such as markets for digital goods, in which companies might find it difficult to assess if a certain behaviour constitutes a violation of competition rules. To ensure greater transparency and mitigate some of the drawbacks of commitment decisions, while retaining their main benefits, the full detail of the objections addressed by the European Commission to defendants should be published.
    Date: 2014–01
  12. By: ZHELOBODKO, Evgeny; KOKOVIN, Sergey; Parenti, Mathieu; THISSE, Jacques-François
  13. By: Mihajlo B, Jakovljevic; Nakazono, S; Ogura, S
    Abstract: Japanese pharmaceutical market, world’s 2nd largest in size, is traditionally renowned for its brands’ domination and weakest generics share among major established economies. An in depth observation of published evidence in Japanese/English language provided closer insight into current trends in Japanese domestic legislation and pharmaceutical market development. Recent governmental interventions have resulted in significant expansion of generic medicines market size. Substantial savings due to generic substitution of brand name drugs have already been achieved and are likely to increase in future. Nationwide population aging threatening sustainable health care funding is contributing to the relevance of generic policy success. Serious long-term challenge to the modest Japanese generic manufacturing capacities will be posed by foreign pharmaceutical industries particularly the ones based in emerging BRIC economies.
    Keywords: Japan, generic medicines, pharmaceuticals market, industry, health policy, patent protection, bioequivalence, attitudes, drug information, prescribing, dispensing
    Date: 2014–01
  14. By: Amélie Charles (Audencia Recherche - Audencia); Olivier Darné (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); Jae H. Kim (School of Economics and Finance - School of Economics and Finance); Etienne Redor (Audencia Recherche - Audencia)
    Abstract: The aim of this paper is to examine the positive and negative impacts of stock exchange mergers on the informational efficiency of the markets. We consider a range of factors in relation to the stock exchange merger, that can potentially affects market efficiency, after a merger. These factors include the maturity of the markets being merged, the size of the markets, and different types of mergers (developed markets versus developing markets; large stock exchange mergers versus small stock exchange mergers; and domestic stock exchange mergers versus cross-border stock exchange mergers). For this purpose, we use a time-varying return predictability test which allows us to detect periods of (in)efficiency, and thus to conduct a comparative analysis for pre-merger and post-merger periods. We find that increases in efficiency are less frequent than decreases in efficiency after a stock exchange merger. Finally, we provide the empirical evidence that the impact on efficiency depends on range of the characteristics of the merger: stock exchange's country's level of development, size, geographical diversification and industrial diversification.
    Keywords: Stock exchange mergers; Market efficiency; Martingale difference sequence.
    Date: 2014–01–31
  15. By: Léautier, Thomas-Olivier
    Abstract: This article is the first to examine electric power producers' investment decisions when competition is imperfect and the transmission grid congested. This analysis yields numerous original insights. First, congestion on the grid is transient, and may disappear when demand is highest. Second, transmission capacity increases have complex impacts on generation: they may increase, decrease, or have no impact on the marginal value of generation, and may have similar or opposite impacts on the marginal value of different technologies. Third, the true social value of transmission, including its impact on investment, may be significantly lower than is commonly assumed.
    Keywords: electric power markets, imperfect competition, investment, transmission constraints
    JEL: D61 L11 L94
    Date: 2014–01–06
  16. By: Daichi Shimamoto (Graduate School of Economics, Osaka University, Japan. Research Fellow, Japan Society for the Promotion of Science, Japan); Hiroyuki Yamada (Osaka School of International Public Policy, Osaka University, Japan); Martin Gummert (International Rice Research Institution, Philippines)
    Abstract: Monopsony is often observed in local agricultural markets in developing countries because of the high entry cost to buyers; farmers in such markets therefore sell their agricultural products at a lower price. However, this situation seems to be changing with the diffusion of mobile phones. This paper investigates how access to market information through mobile phone usage impacts the selling price of rice in rural areas in Cambodia. We conducted a survey of farmersf households concerning agricultural production processes and rice sales in 20 villages in four provinces (Battambang, Prey Veng, Pursat, and Takeo). We find that farmers who have access to market information through the use of mobile phones are more likely to sell their rice at a higher price. In addition, we observe that the offers received by farmers with better access to market information through mobile phone usage tend to affect selling prices. The results imply that improved access to market information through the use of mobile phones improves farmersf bargaining power against traders, enabling them to sell their rice at a higher price.
    Keywords: Agricultural Prices, Mobile phone, Cambodia
    JEL: O12 D82 D83
    Date: 2014–02
  17. By: Galina Besstremyannaya (CEFIR); Jaak Simm (Tallinn University of Technology)
    Abstract: Transition countries in Central and Eastern Europe and the former Soviet Union introduced social health insurance (SHI) to foster universal coverage, stable financing revenues, and consumer euity through a principle of solidarity. In particular, the Czech Republic, Slovakia, and Russia emphasized managed between health insurance companies. Howevr, insufficient financing of the health care systems and excessive regulation led to deficienciesof the multi-payer SHI model in the three countries. The paper examines common trends in the development of the SHI systems in the Czech Republic, Slovakia, and Russia, and conducts empirical estimations with data for Russian regions.
    Keywords: Social health insurance, infant mortality, maternal mortality, managed competition, transition economies
    JEL: I13 I18
    Date: 2014–01
  18. By: DI COMITE, Francesco (Université catholique de Louvain, IRES, Belgium; European Commission, Sevilla); THISSE , Jacques (Université catholique de Louvain, CORE, Belgium; NRU Higher School of Economics, St Petersburg, Russia); ,
    Abstract: Many trade models of monopolistic competition identify cost efficiency as the main determinant of firm performance in export markets. To date, the analysis of demand factors has received much less attention. We propose a new model where consumer preferences are asymmetric across varieties and heterogeneous across countries. The model generates new predictions and allows for an identification of horizontal differentiation (taste) clearly distinguished from vertical differentiation (quality). Data patterns observed in Belgian firm-product level exports by destination are congruent with the predictions and seem to warrant a richer modelling of consumer demand.
    Keywords: heterogeneous firms, heterogeneous consumers, horizontal differentiation, vertical differentiation, asymmetric preferences, monopolistic competition
    JEL: D43 F12 F14 L16
    Date: 2013–12–11
  19. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Kerstin Pull (University of Tübingen, School of Business and Economics); Manfred Stadler (University of Tübingen, School of Business and Economics); Alexandra Zaby (University of Tübingen, School of Business and Economics)
    Abstract: Based on the "acquiring-a-company" game of Samuelson and Bazerman (1985), we theoretically and experimentally analyze the acquisition of a firm. Thereby we compare cases of symmetrically and asymmetrically informed buyers and sell- ers. This setting allows us to predict and test the effects of information disclosure as prescribed by two recently implemented directives of the European Union, the Transparency and the Takeover-Bid Directive. Our theoretical and experimental results suggest a welfare-enhancing effect of compulsory information disclosure. Hence, the EU Transparency and the EU Takeover-Bid Directive should both be welfare enhancing.
    Keywords: Acquisition of firms, disclosure of private information, experimental economics
    JEL: C91 D61 D82
    Date: 2014–02–04

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