nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒03‒30
sixteen papers chosen by
Russell Pittman
US Government

  1. Large and Small Sellers: A Theory of Equilibrium Price Dispersion with Sequential Search By Guido Menzio; Nicholas Trachter
  2. Strategic Transfer Pricing and Intensity of Competition By Nathan Berg; Chun-Yu Chen; Barry J. Seldon
  3. Price Cutting and Business Stealing in Imperfect Cartels By B. Douglas Bernheim; Erik Madsen
  4. On the effects of mergers on equilibrium outcomes in a common property renewable asset oligopoly By BENCHEKROUN, Hassan; GAUDET, Gérard
  5. Robust Competitive Auctions: A Theory of Stable Markets By Seungjin Han
  6. The Causal Effects of Competition on Innovation: Experimental Evidence By Philippe Aghion; Stefan Bechtold; Lea Cassar; Holger Herz
  7. A supervised market mechanism for efficient airport slot allocation By Alessandro Avenali; Tiziana D'Alfonso; Claudio Leporelli; Giorgio Matteucci; Alberto Nastasi; Pierfrancesco Reverberi
  8. Multiproduct airport competition and e-commerce strategies By Valentina Bracaglia; Tiziana D'Alfonso; Alberto Nastasi
  9. Are restrictions of competition by sports associations horizontal or vertical in nature? By Budzinski, Oliver; Szymanski, Stefan
  10. The competition economics of financial fair play By Budzinski, Oliver
  11. Network externalities between carriers or machines:How they work in the smartphone industry By Ryoma Kitamura
  12. Estimating Platform Market Power in Two-Sided Markets with an Application to Magazine Advertising By Minjae Song
  13. Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market By Eric Helland; Darius Lakdawalla; Anup Malani; Seth A. Seabury
  14. Defining Hospital Markets – An Application to the German Hospital Sector By Corinna Hentschker; Andreas Schmid; Roman Mennicken
  15. Advertising and concentration in the brewing industry By Erik Strøjer Madsen; Yanqing Wu
  16. Switching Cost and Deposit Demand in China By Chun-Yu Ho

  1. By: Guido Menzio (Department of Economics, University of Pennsylvania); Nicholas Trachter (Federal Reserve Bank of Richmond)
    Abstract: The paper studies equilibrium pricing in a product market for an indivisible good where buyers search for sellers. Buyers search sequentially for sellers, but do not meet every sellers with the same probability. Specifically, a fraction of the buyers’ meetings lead to one particular large seller, while the remaining meetings lead to one of a continuum of small sellers. In this environment, the small sellers would like to set a price that makes the buyers indifferent between purchasing the good and searching for another seller. The large seller would like to price the small sellers out of the market by posting a price that is low enough to induce buyers not to purchase from the small sellers. These incentives give rise to a game of cat and mouse, whose only equilibrium involves mixed strategies for both the large and the small sellers. The fact that the small sellers play mixed strategies implies that there is price dispersion. The fact that the large seller plays mixed strategies implies that prices and allocations vary over time. We show that the fraction of the gains from trade accruing to the buyers is positive and non-monotonic in the degree of market power of the large seller. As long as the large seller has some positive but incomplete market power, the fraction of the gains from trade accruing to the buyers depends in a natural way on the extent of search frictions.
    Keywords: Imperfect competition, Search frictions, Price dispersion.
    JEL: D21 D43
    Date: 2014–03–01
  2. By: Nathan Berg (Department of Economics, University of Otago, New Zealand); Chun-Yu Chen (Department of Economics, University of Texas–Dallas); Barry J. Seldon (Florida State University, Republic of Panama)
    Abstract: Our model describes optimal transfer prices as a function of the number of multi-divisional firms. Decentralized firms imperfectly observe downstream pricing and quantity decisions. Therefore, transfer prices have two strategic functions requiring a trade-off: limiting affiliated downstream divisions' discounting and production, and making credible threats to induce soft responses from competitors. Depending on which motive dominates (i.e., number of competitors, external upstream markets, and ability to keep "two sets of books"), optimal transfer prices switch from above-marginal-cost to below. The model describes how entry affects equilibrium transfer price, output and profits while causing non-monotonic and discontinuous inter-firm upstream trade flows.
    Keywords: multi-national, multi-divisional, divisionalized, integrated firm, number, competitors, internal, external, market
    JEL: L22
    Date: 2014–03
  3. By: B. Douglas Bernheim; Erik Madsen
    Abstract: Though economists have made substantial progress toward formulating theories of collusion in industrial cartels that account for a variety of fact patterns, important puzzles remain. Standard models of repeated interaction formalize the observation that cartels keep participants in line through the threat of punishment, but they fail to explain two important factual observations: first, apparently deliberate cheating actually occurs; second, it frequently goes unpunished even when it is detected. We propose a theory of "equilibrium price cutting and business stealing" in cartels to bridge this gap between theory and observation.
    JEL: D43 L41
    Date: 2014–03
  4. By: BENCHEKROUN, Hassan; GAUDET, Gérard
    Abstract: This paper examines a dynamic game of exploitation of a common pool of some renewable asset by agents that sell the result of their exploitation on an oligopolistic market. A Markov Perfect Nash Equilibrium of the game is used to analyze the effects of a merger of a subset of the agents. We study the impact of the merger on the equilibrium production strategies, on the steady states, and on the profitability of the merger for its members. We show that there exists an interval of the asset's stock such that any merger is profitable if the stock at the time the merger is formed falls within that interval. That includes mergers that are known to be unprofitable in the corresponding static equilibrium framework.
    Keywords: Mergers; dynamic games; oligopoly; common property; renewable resources
    JEL: C73 D43 L13 Q20
    Date: 2013
  5. By: Seungjin Han
    Abstract: This paper shows that a competitive distribution of auctions (Peters 1997) is robust to the possibility of a seller's deviation to any arbitrary mechanism, let alone any direct mechanism because the sufficient condition for the robustness is embedded in its notion of equilibrium. This sufficient condition is generalized to examine the robustness of equilibrium in any decentralized market institution where competing principals (e.g. sellers) can offer mechanisms only from a set of mechanisms available in that market institution. The equivalence result (Gershkov et al. 2013) between Bayesian incentive compatible direct mechanisms and dominant strategy direct mechanism is also extended to express the generalized sufficient condition in terms of dominant strategy direct mechanisms.
    Keywords: competitive auctions, robust equilibrium, competing mechanism design
    JEL: C71 D82
    Date: 2014–03
  6. By: Philippe Aghion; Stefan Bechtold; Lea Cassar; Holger Herz
    Abstract: In this paper, we design two laboratory experiments to analyze the causal effects of competition on step-by-step innovation. Innovations result from costly R&D investments and move technology up one step. Competition is inversely measured by the ex post rents for firms that operate at the same technological level, i.e. for neck-and-neck firms. First, we find that increased competition leads to a significant increase in R&D investments by neck-and-neck firms. Second, increased competition decreases R&D investments by firms that are lagging behind, in particular if the time horizon is short. Third, we find that increased competition affects industry composition by reducing the fraction of sectors where firms are neck-and-neck. All these results are consistent with the predictions of step-by-step innovation models.
    JEL: C91 L10 O31
    Date: 2014–03
  7. By: Alessandro Avenali (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Tiziana D'Alfonso (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Claudio Leporelli (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Giorgio Matteucci (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Alberto Nastasi (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Pierfrancesco Reverberi (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza")
    Abstract: We provide a general procedure to deal with the airport slot allocation problem, which applies the principles underlying the Administered Incentive Pricing model for regulation of radio spectrum in electronic communications markets. In particular, we propose an incentive pricing mechanism that generates an efficient slot allocation, where prices are built on a measure of the best use of each slot in serving end users. Incentive prices are set by considering the structure of the air transport network (and thus interdependencies among slots at different airports) in a given region, and the effect on both quantity and quality of passenger air transport in the region. Therefore, incentive prices should better align private and social decisions over the use of slots compared with pure market mechanisms (auctions and trading).
    Keywords: Airport slot allocation; Congestion; Administered incentive pricing; Market mechanisms
    Date: 2014
  8. By: Valentina Bracaglia (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Tiziana D'Alfonso (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Alberto Nastasi (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza")
    Abstract: We study airport competition when vertically differentiated products may be strategically offered at the time of ticket purchase through the Internet: a base product Ð the flight Ð and a composite one Ð the flight plus some premium commercials (PCs), as car parking, car rental or hotel reservation. We model a two stages game: first airports decide whether to offer PCs online, thus making the purchasing decisions interact through observability of aviation and commercial prices. Then, they engage in Bertrand competition deciding on both prices. We find that airports set lower aviation charge than they would have levied absent concessions, when they are both competing on online offers. Nevertheless, when only one airport pursues the online offer, that facility sets a higher aviation charge than it would have levied absent concessions, as long as profits from retail earned at the facility on the travel day are not high enough. This suggests that the combined effect between airports competition on side business and demand complementarity does moderate airports market power in the core business. The Nash equilibrium of the game is such that both airports offer PCs on line, making travelers account for the surplus they would gain from both the sides of the business when they buy air tickets. This is welfare enhancing. Nevertheless, when profits from retail earned at the airports on the travel day are sufficiently high, the facilities are caught in a PrisonerÕs Dilemma.
    Keywords: Airports competition; e-commerce; concessions; vertical differentiation
    Date: 2014
  9. By: Budzinski, Oliver; Szymanski, Stefan
    Abstract: In this paper, we discuss from an economic perspective two alternative views of restrictions of competition by sports associations. The horizontal approach views such restrictions as an agreement among the participants of a sports league with the sports association merely representing an organization executing the horizontal cooperation. In contrast, the vertical approach views the sports association as being a dominant upstream firm enjoying a monopoly position on the market stage for competition organizing services, an important input for the actual product - the sports game. Taking the recent financial fair play (FFP) initiative by UEFA (the Union of European Football Associations) as an example, we demonstrate that the different views lead to different assessments of restrictive effects and, thus, matter for competition policy decisions. The economic story of the potential restrictive effect of FFP on players' and player agents' income may fit more plausibly to the horizontal approach, whereas the potentially anticompetitive foreclosure and deterrence effects of FFP may be economically more soundly reasoned by taking the vertical view. --
    Keywords: European competition policy,sports economics,financial fair play,horizontal agreements,vertical restrictions,European football,antitrust
    JEL: K21 L41 L42 L44 L83
    Date: 2014
  10. By: Budzinski, Oliver
    Abstract: This paper provides an economic analysis of the competition effects of UEFA's financial fair play regulations. It concludes that the restrictive effects of the break-even rule cannot be justified by a legitimate objective defense (according to European competition policy) because significant financial problems due to overinvestment are not inherent to European football. --
    Keywords: financial fair play,sports economics,competition economics,European competition policy,football, soccer,overinvestment,rat race
    Date: 2014
  11. By: Ryoma Kitamura (Graduate School of Economics, Kwansei Gakuin University)
    Abstract: In this paper, we consider a duopoly model where two firms sell two differentiated products and there is a network externality between either carriers or machines. We derive the equilibria of these games and illustrate the effects of a change in quality on the equilibrium quantity of each good. Furthermore, we compare fully compatible and incompatible equilibrium outcomes and discover some insights on relations between them. Such insights were not found in earlier studies that considered only the network externality between carriers.
    Keywords: Smartphone market, Multi-product firm, Duopoly, Cannibalization, Network externality
    JEL: D21 D43 L13 L15
    Date: 2014–03
  12. By: Minjae Song (University of Rochester)
    Abstract: In this paper I estimate platform markups in two-sided markets using structural models of platform demand. My models and estimation procedure are applicable to general two-sided market settings where agents on each side care about the presence of agents on the other side and platforms set two membership prices to maximize the sum of profits. Using data on TV magazines in Germany I show that the magazines typically set copy prices below marginal costs and earn profits from selling advertising pages. I also show that mergers are much less anticompetitive than in one-sided markets and could even be welfare enhancing.
    Date: 2013
  13. By: Eric Helland; Darius Lakdawalla; Anup Malani; Seth A. Seabury
    Abstract: In a complex economy, production is vertical and crosses jurisdictional lines. Goods are often produced by an upstream national or global firm and improved or distributed by local firms downstream. In this context, heightened products liability may have unintended consequences on product sales and consumer safety. Conventional wisdom holds that an increase in tort liability on the upstream firm will cause that firm to (weakly) increase investment in safety or disclosure. However, this may fail in the real-world, where upstream firms operate in many jurisdictions, so that the actions of a single jurisdiction may not be significant enough to influence upstream firm behavior. Even worse, if liability is shared between upstream and downstream firms, higher upstream liability may mechanically decrease liability of the downstream distributor and encourage more reckless behavior by the downstream firm. In this manner, higher upstream liability may perversely increase the sales of a risky good. We demonstrate this phenomenon in the context of the pharmaceutical market. We show that higher products liability on upstream pharmaceutical manufacturers reduces the liability faced by downstream doctors, who respond by prescribing more drugs than before.
    JEL: H7 I1 I11 K13
    Date: 2014–03
  14. By: Corinna Hentschker; Andreas Schmid; Roman Mennicken
    Abstract: The correct definition of the product market and of the geographic market is a prerequisite for assessing market structures in antitrust cases. For hospital markets, both dimensions are controversially discussed in the literature. Using data for the German hospital market we aim at elaborating the need for differentiating the product market and at investigating the effects of different thresholds for the delineation of the geographic market based on patient flows. Thereby we contribute to the scarce empirical evidence on the structure of the German hospital market. We find that the German hospital sector is highly concentrated, confirming the results of a singular prior study. Furthermore, using a very general product market definition such as “acute in-patient care” averages out severe discrepancies that become visible when concentration is considered on the level of individual diagnoses. In contrast, varying thresholds for the definition of the geographic market has only impact on the level of concentration, while the correlation remains high. Our results underline the need for more empirical research concerning the definition of the product market for hospital services.
    Keywords: Hospital market; concentration; product market; geographic market; Germany
    JEL: L11 I11
    Date: 2014–02
  15. By: Erik Strøjer Madsen (Department of Economics and Business, Aarhus University, Denmark); Yanqing Wu (Department of Economics and Business, Aarhus University, Denmark)
    Abstract: The opening of the markets in East Asia and Eastern Europe in the 1990s changed the structure of the beer markets and in the following years a large wave of mergers and acquisitions took place. The paper tracks the development in industry concentrations from 2002 to 2012, discusses some of the main drivers behind this development and points to economies of scale in advertising as a main pay-off from mergers and acquisitions. Using firm-level data both from the American market and the world market, the estimations verify significant economies of scale in marketing and distribution costs. Based on information from the Annual Reports of the eight largest breweries, the estimation proved a reduction in these costs of ten percent when doubling the size of the brewing groups.
    Keywords: Advertising, mergers and acquisitions, brewing industry
    JEL: L11 L66 M37
    Date: 2014–03–20
  16. By: Chun-Yu Ho (Shanghai Jiao Tong University and Hong Kong Institute for Monetary Research)
    Abstract: This paper develops and estimates a dynamic model of consumer demand for deposits in which banks provide differentiated products and product characteristics that evolve over time. Existing consumers are forward-looking and incur a fixed cost for switching banks, whereas incoming consumers are forward-looking but do not incur any cost for joining a bank. The main finding is that consumers prefer banks with more employees and branches. The switching cost is approximately 0.8% of the deposit's value, which leads the static model to bias the demand estimates. The dynamic model shows that the price elasticity over a long time horizon is substantially larger than the same elasticity over a short time horizon. Counterfactual experiments with a dynamic monopoly show that reducing the switching cost has a comparable competitive effect on bank pricing as a result of reducing the dominant position of the monopoly.
    Keywords: Banks in China, Demand Estimation, Switching Cost
    JEL: G21 L10
    Date: 2014–03

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