nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒03‒22
seventeen papers chosen by
Russell Pittman
US Government

  1. The strategic value of partial vertical integration By Fiocco, Raffaele
  2. Markets with Technological Progress: Pricing Quality, and Novelty By Ludwig von Auer; Mark Trede
  3. Bias in Reduced-Form Estimates of Pass-through By Alexander MacKay; Nathan H. Miller; Marc Remer; Gloria Sheu
  4. Industry structure and collusion with uniform yardstick competition: theory and experiments By Mulder, Machiel; Haan, Marco A.; Dijkstra, Peter T.
  5. PQ Strategies in Monopolistic Competition: Some Insights from the Lab By Tiziana Assenza; Jakob Grazzini; Cars Hommes; Domenico Massaro
  6. Information disclosure in optimal auctions By Juan-José Ganuza; José Penalva
  7. Nature of competition and new technology adoption By Krishnendu Ghosh Dastidar
  8. Patents as quality signals? The implications for financing constraints on R&D By Czarnitzki, Dirk; Hall, Bronwyn H.; Hottenrott, Hanna
  9. The Impact of Stronger Property Rights in Pharmaceuticals on Innovation in Developed and Developing Countries By Ming Liu; Sumner La Croix
  10. “Are R&D collaborative agreements persistent at the firm level? Empirical evidence for the Spanish case” By Erika Raquel Badillo; Rosina Moreno
  11. Direct and indirect effects of R&D cooperation on the innovation of Italian firms By Otello Ardovino; Luca Pennacchio; Giuseppe Piroli
  12. Why not all young firms invest in R&D By Audretsch, David B.; Segarra Blasco, Agustí, 1958-; Teruel, Mercedes
  13. Market Power Indices and Wholesale Price Elasticity of Electricity Demand By Talat Genc
  14. The Share of Nonprofit and For-profit Organizations in the Quasi-market: An Analysis of the Long-term Care Services Market in Japan By Junyi Shen; Nobuko Kanaya; Hiromasa Takahashi
  15. Market Power and Collusion on Interconnection Phone Market in Tunisia : What Lessons from International Experiences By Sami Debbichi; Walid Hichri
  16. Competition and Specialization: Evidence from Venture Capital By Cabolis, Christos; Dai, Mian; Serfes, Konstantinos
  17. The Bitcoin mining games By Nicolas Houy

  1. By: Fiocco, Raffaele
    Abstract: We investigate the incentive for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when the retailers are privately informed about their production costs and engage in differentiated good price competition. Partial vertical integration entails an “information vertical effectâ€: the partial misalignment of pro.t objectives within a partially integrated manufacturer-retailer hierarchy involves costs from asymmetric information that reduce the hierarchy’s profitability. This translates into an opposite “competition horizontal effectâ€: the partially integrated hierarchy commits to a higher retail price than under full integration, which strategically relaxes competition. The equilibrium degree of vertical integration trades o¤ the benefits of softer competition against the informational costs.
    Keywords: asymmetric information; partial vertical integration; product differentiation; vertical mergers; vertical restraints
    JEL: D82 L13 L42
    Date: 2014–03–09
  2. By: Ludwig von Auer; Mark Trede
    Abstract: New and old products differ in two respects: quality and newness. Whereas a higher quality of a new product always benefits consumers, the newness itself benefits some consumers, but not others, and for some, it is even a disadvantage. We capture these features in a Hotelling model of OverLapping Innovators (HOLI model), entailing a sequence of static Hotelling games of horizontal product dirrerentiation (newness), that we extend by vertical product differentiation (quality). In this model, the firms compete on quality and price. Using advanced dynamic hedonic regression methods, we empirically investigate the pricing policy of firms in the German laser printer market. We show that their pricing corresponds to our model with the entrant acting as the Stackelberg follower.
    Keywords: Hotelling, vertical product differentiation, hedonic regression, Stackelberg, laser printer
    JEL: L11 L63 C23
    Date: 2014–03
  3. By: Alexander MacKay (University of Chicago, Department of Economics); Nathan H. Miller (Georgetown University, McDonough School of Business); Marc Remer (Economic Analysis Group, U.S. Department of Justice); Gloria Sheu (Economic Analysis Group, U.S. Department of Justice)
    Abstract: We show that, in general, consistent estimates of cost pass-through are not obtained from reduced-form regressions of price on cost. We derive a formal approximation for the bias that arises even under standard orthogonality conditions. We provide guidance on the conditions under which bias may frustrate inference.
    Date: 2014–02
  4. By: Mulder, Machiel; Haan, Marco A.; Dijkstra, Peter T. (Groningen University)
    Abstract: We study cartel stability in an industry that is subject to uniform yardstick regulation. In a theoretical model, we show that the number of symmetric firms does not affect collusion. In a laboratory experiment, however, we do find an effect. If anything, increasing the number of firms facilitates collusion. Our theory suggests that an increase in heterogeneity increases the regulated price if firms do not collude, but also makes collusion harder, rendering the net effect ambiguous. Our experiment suggests that the effect of collusion is stronger.
    Date: 2014
  5. By: Tiziana Assenza (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore and CeNDEF, Amsterdam School of Economics, University of Amsterdam); Jakob Grazzini (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Cars Hommes (CeNDEF,Amsterdam School of Economics, University of Amsterdam and Tinbergen Institute); Domenico Massaro (CeNDEF, Amsterdam School of Economics, University of Amsterdam and Tinbergen)
    Abstract: We present results from 50-rounds experimental markets in which firms decide repeatedly both on price and quantity of a perishable good. The experiment is designed to study the price-quantity setting behavior of subjects acting as firms in monopolistic competition. In the implemented treatments subjects are asked to make both production and pricing decisions given different information sets. We investigate how subjects decide on prices and quantities in response to signals from the firms' internal conditions, i.e., individual profits, excess demand, and excess supply, and the market environment, i.e., aggregate price level. We find persistent heterogeneity in individual behavior, with about 46% of market followers, 28% profit-adjusters and 26% demand adjusters. Nevertheless, prices and quantities tend to converge to the monopolistically competitive equilibrium and we find that subjects' behavior is well described by learning heuristics.
    Keywords: Laboratory Experiments, Price-Quantity Competition, Monopolistically Competitive markets.
    Date: 2014–03
  6. By: Juan-José Ganuza; José Penalva
    Abstract: A celebrated result in auction theory is that the optimal reserve price in the standard private value setting does not depend on the number of bidders. We modify the framework by considering that the seller controls the accuracy with which bidders learn their valuations, and show that in such a case, the greater the number of bidders the more restrictive the reserve price. We also show that the auctioneer provides more information when using an optimal auction mechanism than when the object is always sold.
    Keywords: Auctions, Private values, Information disclosure
    JEL: C72 D44 D82 D83
    Date: 2014–03
  7. By: Krishnendu Ghosh Dastidar
    Abstract: This paper analyses the incentives to adopt cost-reducing technology by firms in a horizontally differentiated industry. In our model there are several suppliers of a new technology. The extent of the cost reduction depends on the quality of the new technology. A firm has to buy the technology in a 'scoring auction'. This means that both the price and the quality (which affects marginal cost of production) of this new technology are no longer given but depend on the equilibrium outcome in the 'scoring auction'. We show that the nature of competition (Cournot or Bertrand) has no effect on the equilibrium decision of the firms to adopt the new technology when the quality of the new technology offered by the suppliers lies in the interior of the feasible range of qualities. In this case, both firms adopt new technology. However, when there is a corner solution, then it is possible to have equilibria where only one firm (or no firm) adopts the new technology. With corner solution the nature of competition (Cournot or Bertrand) makes a difference to the equilibrium outcomes.
    Date: 2014–03
  8. By: Czarnitzki, Dirk; Hall, Bronwyn H.; Hottenrott, Hanna
    Abstract: Information about the success of a new technology is usually held asymmetrically between the research and development (R&D)-performing firm and potential lenders and investors. This raises the cost of capital for financing R&D externally, resulting in financing constraints on R&D especially for firms with limited internal resources. Previous literature provided evidence for start-up firms on the role of patents as signals to investors, in particular to Venture Capitalists. This study adds to previous insights by studying the effects of firms' patenting activity on the degree of financing constraints on R&D for a panel of established firms. The results show that patents do indeed attenuate financing constraints for small firms where information asymmetries may be particularly high and collateral value is low. Larger firms are not only less subject to financing constraints, but also do not seem to benefit from a patent quality signal. --
    Keywords: Patents,Quality Signal,Research and Development,Financial Constraints,Innovation Policy
    JEL: O31 O32 O38
    Date: 2014
  9. By: Ming Liu (Deptartment of Finance, Nankai University); Sumner La Croix (Department of Economics, University of Hawaii at Manoa)
    Abstract: We use dynamic panel data regressions to investigate whether the strength of a country’s patent protection for pharmaceuticals is associated with more pharmaceutical patenting by its residents and corporations in the United States. Using the Pharmaceutical Intellectual Property Protection (PIPP) Index to measure patent strength, we run dynamic probit and Poisson regressions on panels from 25 developing and 41 developed countries over the 1970-2004 period. Results vary, depending on whether we examine partial effects at the mean or average partial effects for the PIPP Index. APEs for the PIPP Index are positive but statistically insignificant in both developed and developing country samples.
    Keywords: Patent; pharmaceutical; innovation; TRIPS; intellectual property
    JEL: O1 O31 O34
    Date: 2014–03
  10. By: Erika Raquel Badillo (Faculty of Economics, University of Barcelona); Rosina Moreno (Faculty of Economics, University of Barcelona)
    Abstract: We provide evidence on the dynamics in firms’ R&D cooperation behaviour. Our main objective is to analyse if R&D collaborative agreements are persistent at the firm level, and in such a case, to study what are the main drivers of this phenomenon. R&D cooperation activities at the firm level can be persistent due to true state dependence, this implying that cooperating in a given period enhances the probability of doing it in the subsequent period and it can also be a consequence of firms’ individual heterogeneity, so that certain firms have certain characteristics that make them more likely to carry out technological alliances. A second contribution of the paper deals with the differentiated persistence pattern of collaboration agreements for three different types of partners: customers and/or suppliers, competitors and institutions. We specifically explore the degree of the persistence in R&D collaborative activities when considering them separately as well as the possibility of finding crossed-persistence across these different partner types.
    Keywords: R&D cooperation; Persistence; Innovative Spanish firms; Technological partners. JEL classification: L24; O32; D22; C23
    Date: 2014–03
  11. By: Otello Ardovino; Luca Pennacchio; Giuseppe Piroli
    Abstract: Firm innovation capacity depends not only on internal capabilities, but also on external expertise and knowledge acquired through cooperation. This paper analyzes direct and indirect effect of R&D cooperation on the innovation of Italian firms. Using a multivariate probit model to account for the complementarity of four different types of innovation activity and the heterogeneity in the choice of cooperation partners, we find strong and positive direct effects of collaborations with some non-competitive partners (suppliers, clients, private research institutes and consultants). Also R&D cooperation with competitors shows a relevant direct effect on firm innovation. On the contrary, collaborations with university have weaker effects; this could perhaps be due to the short-term perspective adopted in the study. These findings suggest that it is important to look at the specific type of R&D collaborations because they have a different impact on the success of innovative activities. On the other hand, indirect effects are scant and restricted to cooperation with some non-competitive partners. Such a result suggests that absorptive capacity of firms and R&D spillovers are quite weak in Italian context. Lastly, firm size and sector-specific features also affect innovation propensity.
    Keywords: R&D collaboration, absorptive capacity, moderating variable, innovation, equation probit model, community innovation survey.
    JEL: L13 O30 O32
    Date: 2014–03–03
  12. By: Audretsch, David B.; Segarra Blasco, Agustí, 1958-; Teruel, Mercedes
    Abstract: This article aims to analyze the different impact that some factors may exert on the probability that a small young firm invests intensively in R&D. Recently, an increasing amount of the literature makes reference to the vital role played by a small number of young firms in generating jobs and increasing efficiency levels. However, not all new firms invest in R&D. Departing from the definition of YICs (firms younger than 6 years old, fewer than 250 employees and with more than 15% of their revenues invested in R&D activities), and with an extensive sample of the Spanish Community Innovation Survey between 2004- 2010, we try to determine: i) those factors that cause firms to become YICs (innovative young small firms) or YNICs (moderately innovative young small firms); ii) what is the difference in the impact of those factors between YICs and YNICs. Our results show that factors such as initial innovation capacity and cooperation in R&D projects enhance the probability of becoming a YIC. Nevertheless, factors such as export potential and market uncertainty may influence the decision to invest moderately and become a YNIC. Keywords: Innovation, Policy, YICs. JEL Classifications: O31, D21
    Keywords: Empreses -- Innovacions tecnològiques, Innovacions tecnològiques -- Política governamental, Investigació, Conducta organitzacional, Empreses petites i mitjanes, Empreses -- Creació, 65 - Gestió i organització. Administració i direcció d'empreses. Publicitat. Relacions públiques. Mitjans de comunicació de masses,
    Date: 2014
  13. By: Talat Genc (Department of Economics and Finance, University of Guelph)
    Abstract: We investigate price responsiveness of wholesale electricity customers in the hourly Ontario wholesale electricity market. We use detailed generator and market level data to calculate market power measures such as the Lerner Index, Residual Supplier Index, and Pivotal Supplier Index which are combined with the competition model to structurally estimate price elasticity of demand in peak hours of summer and winter seasons. We find that the hourly price elasticities are small and change over the peak hours of seasons and years. For instance, in 2008 the elasticity estimates are in the interval of (0.019, 0.083). Comparing high demand winter hours to summer hours indicates that consumers’ price responsiveness is lower in summer than in winter. We also employ these indices along with the estimated price elasticities to project the likely impacts of interconnection capacity expansions on market prices. Our calibrations show that even small amount of transmission investments (and hence trade activities) can result in substantial market price reductions.
    Keywords: Price elasticity of demand; market power measures; electricity market
    JEL: D22 D24 L13 L94 Q41
    Date: 2014
  14. By: Junyi Shen (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Nobuko Kanaya (Hiroshima City University, Hiroshima, Japan); Hiromasa Takahashi (Hiroshima City University, Hiroshima, Japan)
    Abstract: This paper aims to examine the factors which affect the market shares of several nonprofit and for-profit providers in the long-term care insurance system. We focus on the impact of market size and growth, demand heterogeneity and philanthropic activities, using a prefectural panel data set. The results indicate, though not in all cases, that the market shares of 1) the market shares of nonprofit organizations are relatively larger in the areas with more unprofitable market conditions, 2) the market shares of citizen-driven nonprofit organizations are larger in the areas with more heterogeneous demand and 3) the market shares of citizen-driven nonprofit organizations are larger in the areas with more active civic voluntarism.
    Keywords: quasi market, long-term care insurance system, nonprofit organization(NPO), market competition, elderly care, voluntarism, panel analysis.
    Date: 2014–03
  15. By: Sami Debbichi (AEDD - Analyse Economique et Développement Durable - Université de Tunis El Manar); Walid Hichri (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 - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)
    Abstract: We try in this paper to characterize the state of mobile phone market in Tunisia. Our study is based on a survey of foreign experience (Europe) in detecting collusive behavior and a comparison of the critical threshold of collusion between operators in developing countries like Tunisia. The market power is estimated based on the work of Parker Roller (1997) and the assumption of "Balanced Calling Pattern". We use then the model of Friedman (1971) to compare the critical threshold of collusion. We show that the "conduct parameter" measuring the intensity of competition is not null during the period 1993-2011. Results show also that collusion is easier on the Tunisian market that on the Algerian, Jordanian, or Moroccan one.
    Keywords: Termination rate; Market power; Competition; Mobile phone Market
    Date: 2014
  16. By: Cabolis, Christos (ALBA Graduate Business School); Dai, Mian (School of Economics LeBow College of Business Drexel University); Serfes, Konstantinos (School of Economics LeBow College of Business Drexel University)
    Abstract: Venture capital (VC) investments are characterized by stepwise infusion of capital to entrepreneurial (EN) companies in different development stages: early/seed, start-up, expansion and other stages. Stage specialization is crucial for the development and growth of the companies that receive VC funding, because each stage requires different skills and abilities on part of the VC firms. It is generally accepted in economics that more competition leads to more specialization. Does this hold in the VC market? To answer this question, we develop a market equilibrium model that captures many of the salient features of the VC market, such as two-sided heterogeneity, bilateral bargaining, endogenous matching and moral hazard. The theoretical model gives rise to two opposing effects on the incentives of VC firms to specialize as competition increases and hints to a non-monotonic relationship. Using panel data on VC investments in the U.S. between 1980 and 2006, we find robust empirical evidence of an inverse U-shape relationship between competition and stage specialization. Contrary to conventional wisdom, more competition (larger market) may discourage specialization.
    Keywords: Venture capital market; Stage specialization; Competition; Endogenous matching
    JEL: D21 L11 L14 L22
    Date: 2014–03–01
  17. By: Nicolas Houy (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 - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)
    Abstract: When processing transactions in a block, a miner increases his reward but also decreases his probability to earn any reward because the time needed for his block to reach consensus depends on its size. We show that this leads to a game situation between miners. We analytically solve this game for two miners. Then, we show that miners do not play a Nash equilibrium in the current Bitcoin mining environment, instead, they should not process any transaction. Finally, we show that the situation where no transaction is ever processed would stop being a Nash equilibrium if the transaction fee was multiplied or, equivalently, the fixed reward divided by a factor of about 12.
    Keywords: Bitcoin; mining; crypto-currency; game
    Date: 2014

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