nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒02‒15
eleven papers chosen by
Russell Pittman
US Government

  1. The Strategic Use of Download Limits by a Monopoly Platform By Nicholas Economides; Benjamin Hermalin
  2. Patents and innovation : Are the brakes broken, or how to restore patents’ dynamic efficiency ? By Christian Le Bas; Julien Pénin
  3. Vertical integration and supplier finance By Kersting, Erasmus K.; Gorg, Holger
  4. Gibrat's law redux: Think profitability instead of growth By Mundt, Philipp; Milakovic, Mishael; Alfarano, Simone
  5. Multiple Equilibria and Deterrence in Airline Markets By Ciliberto, Federico; Zhang, Zhou
  6. Price Discrimination through Refund Contracts in Airlines By Escobari, Diego; Jindapon, Paan
  7. Prices and Quantities in Health Care Antitrust Damages By Martha A. Starr
  8. Foreign Bidders Going Once, Going Twice... Protection in Government Procurement Auctions By Matthew T. Cole; Ronald B. Davies
  9. Transmission constraints and strategic underinvestment in electric power generation By Léautier, Thomas-Olivier
  11. Market Efficiency and the U.S. Market for Sulfur Dioxide Allowances: Working Paper 2014-01 By Claudia Hitaj; Andrew Stocking

  1. By: Nicholas Economides; Benjamin Hermalin
    Date: 2014
  2. By: Christian Le Bas; Julien Pénin
    Abstract: The standard view of patents emphasizes their dynamic efficiency. It considers that, by providing firms with incentives to invest in R&D and to disclose their knowledge, patents encourage innovation and increase social welfare in the long run. Yet, a growing body of literature opposes this view and asks for patent reform or even for the abolition of the patent system. In this work, which reviews the most recent literature on patents, we show that patents can have a negative impact on the dynamics of innovation. This is not due to some intrinsic properties of the patent system but to some of its recent evolutions which mean that, nowadays, too many patents are granted and that patent information is bad. The combination of those two elements explains most of the problems induced by modern patent systems such as hold-up (patent trolls), anti-commons (royalty stacking), and high transaction costs in markets for technology. We conclude by showing that realistic reforms can solve those problems and ensure that the patent system becomes again an instrument of dynamic efficiency.
    Keywords: Incentives, Patent, innovation policy, hold-up, trolls, anti-commons, markets for technology.
    Date: 2014
  3. By: Kersting, Erasmus K. (Federal Reserve Bank of Dallas); Gorg, Holger (Federal Reserve Bank of Dallas)
    Abstract: We investigate the financial implications of a multinational firm's choice between outsourcing and integration from the perspective of the supplier. Using a simple model, we explore the extent to which an integrated supplier's access to finance, as well as its sources of funding, change relative to a firm supplying a multinational at arm's-length. The model predicts that integrated firms have better access to finance and cover a larger share of their costs using internal funds. Furthermore, improvements in a host country's level of financial development have less of an impact on the financial situation of integrated suppliers. We present empirical evidence from firm-level data for over 60 countries broadly supporting the predictions.
    JEL: F23 G32
    Date: 2014–01–31
  4. By: Mundt, Philipp; Milakovic, Mishael; Alfarano, Simone
    Abstract: The basic philosophy behind Gibrat's rule of proportionate effect has been to find some common mechanism in the growth process of business firms, based on the idea that growth rates are independent of size and drawn from the same distribution. After decades of research, however, it seems fair to say that the 'law' fails to provide a universal mechanism for the growth of firms. Here we take the position that it is more plausible for Gibrat's approach to apply to firm profitability rather than firm growth, in line with the classical idea of economic competition as a dynamic process of capital reallocation. Considering a sample of more than five hundred long-lived US corporations from virtually all sectors, we compare the statistical properties of growth and profit rates over a time span of thirty years, and find that profit rates and their volatilities are independent of size, which is not true of growth rates. We also find that the empirical densities of both profitability and growth can be described by exponential power (or Subbotin) distributions, but there are pronounced differences in their parameterizations and autocorrelation structures. We argue that a recently proposed diffusion process not only reproduces the cross-sectional distribution of profit rates, but is also consistent with the empirical time series of individual firms and their autocorrelations. In the natural sciences such a situation is commonly referred to as a statistical equilibrium, while econometricians speak of ergodicity and stationarity. Our economic interpretation of this property is that all surviving firms are subject to the same competitive pressures of capital reallocation, irrespective of their industry or particular line of business. They all face the same profitability benchmark and volatility, while their idiosyncratic efforts merely have an effect on the persistence of abnormal profits. In other words, survivors have to participate in the same game and can only choose to do so at different 'speeds'. We conclude with the empirical observation that the speed of convergence from abnormal profits to the system-wide average depends negatively on firm size, diversification, and capital intensity. --
    Keywords: profit rates,diffusion process,statistical equilibrium,dynamic competition,persistence
    JEL: C16 L10 D21 E10
    Date: 2014
  5. By: Ciliberto, Federico; Zhang, Zhou
    Abstract: We use data from the US airline industry to estimate a model of entry deterrence. We model the interaction among airlines as a repeated static game, where we allow for a very general form of heterogeneity. We consider a menu of three alternative games that describe the strategic interaction among airlines: simultaneous and sequential move games, and a sequential move game with deterrence investments. Following Bernheim [1984], deterrence investments include all investment that raises barriers to entry, and for which the incumbent must incur some investment costs. We show that the profits that incumbents can make in the sequential game, both with and without deterrence investments, are larger than those that they can make if the game is played simultaneously. Thus, we find that on average it is profitable for all firms to deter new entrants, with the exception of United Airlines. Remarkably, United Airlines was under bankruptcy protection during the period of analysis, suggesting that its deterrence investments were not credible. Overall, we find that the data is explained better by a model where firms make deterrence investments. Thus, we cannot reject the hypothesis that incumbents deter entrants in the airline industry.
    Keywords: Multiple Equilibria, Entry Games, Heterogeneity, Deterrence, Airline Industry, Sequential Move Game, Simultaneous Move Game
    JEL: L1
    Date: 2014–01–26
  6. By: Escobari, Diego; Jindapon, Paan
    Abstract: This paper shows how an airline monopoly uses refundable and non-refundable tickets to screen consumers who are uncertain about their travel. Our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved. Using an original data set from U.S. airline markets, we find strong evidence supporting our model. Price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand.
    Keywords: Price discrimination; Refund contracts; Airlines; Individual demand learning
    JEL: C23 D42 D82 L93
    Date: 2014–02–10
  7. By: Martha A. Starr
    Abstract: Antitrust analysis conventionally assumes that illegal agreements among competitors raise prices and lower quantities, relative to lawful competition. However, markets for healthcare services have tendencies towards overprovision, which may increase when competition declines. This paper examines this possibility using data from a well-known antitrust case in Wisconsin. We find that, in parts of the state where physician groups illegally divided up markets, costs of physician services rose by about 10% more than they did elsewhere, with about half of this increase due to increased services. This suggests that higher quantities can contribute to healthcare antitrust damages, along with higher prices.
    Date: 2014
  8. By: Matthew T. Cole (Department of Economics, Florida International University); Ronald B. Davies
    Abstract: Until recently, government procurement bidding processes have generally favored domestic firms by awarding the contract to a domestic firm even if a foreign firm tenders a lower bid, so long as the difference between the two is sufficiently small. This has been replaced by an agreement abolishing this practice. However, the presence of other trade barriers, such as tariffs, can continue to disadvantage foreign firms. We analyze the bidding strategies in such a game and show that when domestic profits are valued,tariffs will be used to discriminate against foreign firms. Furthermore, we find that optimal tariffs can be more protectionist than the optimal price preference, resulting in lower expected domestic welfare and total surplus.
    Keywords: Government Procurement; Tariffs; Price Preference
    JEL: F13 H57 F12
    Date: 2014–02
  9. By: Léautier, Thomas-Olivier
    Abstract: This article is the first to examine electric power producers' investment decisions when com- petition 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 di¤erent 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
  10. By: Franscarelli, Angelo; Ciliberti, Stefano
    Abstract: In the last years European farmers have been facing two new phenomena: the asymmetric price transmission in agro-food sector and the decrease of agricultural value added. The European Commission denounced low transparency in trade relationships and frequent unfair commercial practices between firms and recognized the imperfect functioning of the agro-food supply chain. Economic theories consider contracts as means coordinating entrepreneurs’ decisions (e.g. times, quantity and quality of products, prices). Nevertheless, in some cases buyers may use them to improve and exercise their market power, for instance imposing vertical restraints. That is a typical situation in the European food supply chain, where highly concentrated sectors use their bargaining power against farmers. During that time antitrust authorities and EU Member States have sought to solve the situation by appropriate competition policy measures. The law No. 27/2012 of 24 March 2012 introduced in Italy new mandatory rules regarding contracts of sale of agriculture and food products, aimed at increasing transparency in trade and shortening terms of payment. Thanks to an holistic multiple-case study accomplished by interviews and direct observations, the article analyzes the effects that new rules caused in the Italian agrofood system.
    Keywords: contracts, antitrust, agro-food chain, vertical restraints., Agribusiness, Q13, Q18, L14,
    Date: 2014
  11. By: Claudia Hitaj; Andrew Stocking
    Abstract: Focusing on the U.S. sulfur dioxide (SO2) allowance market from its inception (in 1994) to 2009, we model allowance prices to determine the influence of market fundamentals—such as prices of high- and low-sulfur coal—on allowance price level and volatility. Our empirical analysis finds that the SO2 market, similar to other emission markets studied in the literature, had relatively weak influence of market fundamentals for several years after launch—that is, allowance prices did not reflect marginal abatement costs for the first several years of operation. However, we find evidence of increased influence of market fundamentals after the first few years of the program but before a court decision that introduced significant uncertainty into the market in mid-2008. We also find that market volatility increased in response to all types of communications from the administrator, suggesting that the development of a formal communication strategy, possibly similar to the strategy used by central banks, would reduce price volatility and increase the efficiency of the market.
    Date: 2014–01–27

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