nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒04‒18
sixteen papers chosen by
Russell Pittman
US Government

  1. Rationalizability and Efficiency in an Asymmetric Cournot Oligopoly By Gabriel Desgranges; Stéphane Gauthier
  2. Do Consumers' Preferences Really Matter? - A Note on Spatial Competition with Restricted Strategies By Buechel, Berno; Klein, Jan
  3. Learning in Advance Selling with Heterogeneous Consumers By Oksana Loginova; X. Hnery Wang; Chenhang Zeng
  4. Are Cartel Fines Optimal? Theory and Evidence from the European Union By Marie-Laure Allain; Marcel Boyer; Rachidi Kotchoni; Jean-Pierre Ponssard
  5. The "consumer choice" paradigm in German ordoliberalism and its impact upon EU competition law By Behrens, Peter
  6. The Divergent Effects of Long-Term and Short-Term Entry Investments on Home Market Cartels By Daniel Cracau; Abdolkarim Sadrieh
  7. Evolution of Standards and Innovation By Aoki, Reiko; Arai, Yasuhiro
  8. What is Wrong with Moral Hazard and Adverse Selection Problems in the Conventional Economic Theory By Bertrand Lemennicier
  9. Doing R&D in a Closed or Open Mode: Dynamics and Impacts on Productivity By Julio Rosa; Pierre Mohnen
  10. “Are R&D collaborative agreements persistent at the firm level? Empirical evidence for the Spanish case” By Erika Raquel Badillo; Rosina Moreno
  11. Simultaneous Allocation of Bundled Goods Through Auctions: Assessing the Case for Joint Bidding By Daniel Rondeau; Pascal Courty; Maurice Doyon
  12. Port pricing: Principles, structure and models By MEERSMAN, Hilde; STRANDENES, Siri Pettersen; VAN DE VOORDE, Eddy
  13. The Welfare Impact of Parallel Imports: A Structural Approach Applied to the German Market for Oral Anti-diabetics By Tomaso Duso; Annika Herr; Moritz Suppliet
  14. Complements and Substitutes in Sequential Auctions: The Case of Water Auctions By Donna, Javier; Espin-Sanchez, Jose
  15. Economic analysis of the European cement industry By Marcel Boyer; Jean-Pierre Ponssard
  16. Asymmetric Information and Imperfect Competition in the Loan Market By Crawfordy, Gregory S; Pavaniniz, Nicola; Schivardi, Fabiano

  1. By: Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We study rationalizable solutions in a linear asymmetric Cournot oligopoly. We show that symmetry across firms favors multiplicity of rationalizable solutions: A merger (implying a greater asymmetry across firms) makes out-of-equilibrium behavior less likely and should dampen &lquo;coordination&rquo; volatility. The market structure maximizing consumers' surplus at a rationalizable solution is not always the competitive one: This may be a symmetric oligopoly with few firms. An empirical illustration to the airlines industry shows that a reallocation of 1% of market share from a small carrier to a larger one yields a 1.3% decrease in volatility, measured by the within carrier standard error of the number of passengers.
    Keywords: Competition policy; Cournot oligopoly; dominance solvability; efficiency; rationalizability; stability; airline industry
    Date: 2014–03
  2. By: Buechel, Berno; Klein, Jan
    Abstract: In the framework Hotelling-Downs competition two players can freely choose a position along a one-dimensional market. We introduce restrictions of feasible strategies and analyze the consequences for players and consumers. In equilibrium players may minimally differentiate away from the center of the market and even locate completely independently of consumers' preferences. We provide conditions for these novel cases as well as for the standard result that players locate on the median of the distribution of consumers. In addition to the short run, where restrictions are fixed, we elaborate on the long run by studying the players' choice of restrictions under (potential) market entry. In both settings, we find an inefficient outcome, in which a firm is capable of offering a product at the center of the market, but instead chooses a position that is worse for most of the consumers.
    Keywords: duopoly; product differentiation; Hotelling-Downs; median voter; market entry
    JEL: D43 D49 L13 P16
    Date: 2014–04–12
  3. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Hnery Wang (Department of Economics, University of Missouri-Columbia); Chenhang Zeng
    Abstract: The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance, while inexperienced consumers learn their valuations only in the regular selling season. The presence of experienced consumers yields new insights. Specifically, pre- orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.
    Keywords: advance selling, the Newsvendor Problem, demand uncertainty, experienced consumers, inexperienced consumers, learning
    JEL: C72 D42 L12 M31
    Date: 2014–04–14
  4. By: Marie-Laure Allain; Marcel Boyer; Rachidi Kotchoni; Jean-Pierre Ponssard
    Abstract: Deterring the formation or continuation of cartels is a major objective of antitrust policy. We develop a dynamic framework to characterize the compensation and deterrence properties of fines, based on the fact that cartel stability depends on the ability to prevent deviation, which itself depends in part on fines imposed in case of detection and conviction. We show that the proper consideration of cartel dynamics plays a major role in determining optimal deterrent fines. Our results suggest that a majority of fines imposed by the European Commission in recent years meet the deterrence objective. Dissuader la formation ou le maintien des cartels est un objectif important de la politique antitrust. Nous développons un cadre analytique dynamique pour caractériser le niveau de dissuasion des amendes et indemnisation, fondé sur le fait que la stabilité d’un cartel dépend de la capacité à prévenir les déviations, qui elle-même dépend en partie des amendes infligées en cas de détection et de conviction. Nous montrons que la prise en compte appropriée de la dynamique des cartels joue un rôle clé dans la détermination du niveau des amendes optimales. Nos résultats suggèrent que les amendes imposées par la Commission Européenne au cours des dernières années sont dissuasives, du moins en majorité
    Keywords: Cartels, fines, antitrust policy, Cartels, amendes, politique antitrust, concurrence
    JEL: L13 L41 L42
    Date: 2013–07–01
  5. By: Behrens, Peter
    Abstract: This paper explores the origin and development of the consumer choice paradigm as the core concept of German ordoliberal thought which has had a strong impact on EU competition policy and law. Outside Germany, ordoliberal thought is often identified exclusively with the learning of the original Freiburg School which represents the formative period of German ordoliberalism after the Second World War. Major developments since then have remained largely unrecognized. This paper sets out the important insights that have markedly changed some of the basic concepts of the Freiburg School so as to bring ordoliberalism into line with modern economic learning. The core tenets, however, remain: the crucial role attributed to consumers' choice as the driving force behind producers' rivalry, the dependence of consumers' freedom of choice upon an open market structure, efficiency (consumer welfare) as the result of competition rather than of an individual entrepreneurial market strategy. The core elements of this approach are traced back to classical liberalism and it is shown how they have been enriched and developed beyond the Freiburg School toward the contemporary version of ordoliberalism. This approach is still reflected and should continue to be reflected by the jurisprudence of the ECJ, because it avoids the kind of consumer welfare (or consumer harm) fallacy by which the more economic approach risks to be caught. --
    Keywords: EU competition law,antitrust law,ordoliberalism,neoliberalism,laisser,faire liberalism,Freiburg School,Chicago School,consumer choice paradigm,consumer welfare paradigm,more economic approach,efficiency,competition as rivalry,competition as a dynamic process of discovery,economic freedom,economic order,economic system,economic planning,centrally directed economy,decentralized exchange economy,social market economy,control of market power,perfect competition,workable competition,system of undistorted competition,public goods,institutional economics,behavioural economics,post-Chicago,economics
    Date: 2014
  6. By: Daniel Cracau (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Abdolkarim Sadrieh (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: Positive effects of multimarket activities on cooperation between firms are widely acknowledged. We study these effects in a setting with home market asymmetries as is typical for global competition. In our multimarket duopoly experiment each firm has a home market but may also enter the other firm's market. Without entry barriers, we observe a high level of mutual forbearance with firms serving their home markets exclusively. With short-term entry barriers, the competition rates decrease significantly, as expected. Surprisingly, with long-term entry barriers, firms exhibit higher levels of competition, entering each other's market more often. We conjecture that in the latter case, bearing the cost of entry is perceived as a signal for the intention to compete and has an adverse effect on cooperation.
    Keywords: Market Entry Barriers, Mutual Forbearance, Prisoner's Dilemma, Experimental Economics
    JEL: D4 L1
    Date: 2014–04
  7. By: Aoki, Reiko; Arai, Yasuhiro
    Abstract: We develop a framework to examine how a standard evolves when a standard consortium or firm (incumbent) innovates either to improve the standard or to strengthen the installed base, which increases switching costs. Both investments make it more difficult for another firm (entrant) to introduce a standard by investing in technology improvement. Our analysis shows that that incumbent’s strategy depends on whether the technology is in its infancy or has matured, and that entrants cannot supplant the existing standard. A standard consortium brings dynamic benefits by preventing replacement by an entrant. When the technology is in its infancy, the incumbent deters entry, but when the technology is mature, entry and the coexistence of two standards are tolerated. The dominance of a single standard, even for well-established technologies, suggests that incumbents have market power. Our results also suggest that having superior technology is not enough to enable entrants to supplant an existing standard.
    Keywords: standards, innovation, technology, upgrades, standardization, replacement effect
    Date: 2014–03
  8. By: Bertrand Lemennicier
    Abstract: The purpose of this paper is to challenge the conventional theory of moral hazard and adverse selection. Moral hazard and adverse selection problems in contemporary economic theory are plagued with four major aws: 1) the alleged asymmetrical information between buyer and seller as a problem in the coordination process of the market; 2) the confusion between different concepts or denitions of probability: case or class probabilities, pure subjective beliefs on the occurrence of an event or relative prices on betting markets; 3) the presupposed inability of actors (sellers and buyers) to solve by themselves the problems they face, 4) the pretense of economists to be able to correct these so-called market failures with compulsory insurance without creating new moral hazard and/or adverse selection problems worse than the ones they want to cure. We center our paper mainly on the internal and theoretical inconsistency of the canonical model developed by Akerlof and Rothschild and Stiglitz's theory and their followers based on additive or non additive expected utility associated with the subjective versus frequency tradition in statistics. As an alternative, we propose to approach these phenomena through the eye glasses of betting markets an securitization of insurance contracts.
    Keywords: Moral hazard, adverse selection, uncertainty, risk, subjective probability, entrepreneurial judgment, asymmetrical information, contract incentives, compulsory insurance, betting market, free market competition as a discovery process
    JEL: B53 D23 D86 G22
    Date: 2014–04
  9. By: Julio Rosa; Pierre Mohnen
    Abstract: On the one hand, firms prefer to perform R&D in an open mode (letting R&D be performed extramurally or even selling their R&D services) to benefit from knowledge spillovers and complementarities between internal and external R&D. On the other hand, they may also like to perform R&D in a closed mode (funding and executing their R&D intramurally) to minimize outgoing externalities. We examine the dynamic process by which firms change the way of doing R&D and how these strategic choices of doing R&D affect their productivity growth. This study is based on the Statistics Canada Research and Development in Canadian Industry survey (RDCI), which collects data on R&D performed in the business sector in Canada. The paper is based on data for the period 1997 to 2006. The panel dimension of the data allows to control for unobserved characteristics of R&D performers by estimating a multinomial Logit model with unobserved heterogeneities using maximum simulated likelihood (MSL) method. Les firmes sont tiraillées entre deux façons de faire de la R-D. D’un côté, elles préfèrent faire la R-D de manière ouverte (en faisant faire de la R-D extramuros ou même en vendant des services de R-D) afin de bénéficier d’externalités de connaissance et de complémentarités entre la R-D interne et la R-D externe. D’un autre côté, elles préconisent de faire la R-D en mode fermé (en faisant de la recherche intramuros et en se finançant sur base de fonds propres ou de subventions) afin de minimiser les fuites de connaissance. Dans cette étude, nous examinons la dynamique des choix quant à la façon de faire de la recherche et l’effet de ces choix sur les rendements de celle-ci. Nous nous basons sur les données de l’enquête de Statistique Canada sur la recherche et développement dans l’industrie canadienne (RDIC) pour la période 1997-2006. La dimension panel de la base de données nous permet de contrôler pour l’hétérogénéité individuelle inobservée dans l’estimation d’un modèle Logit multinomial dynamique à partir de la méthode du maximum de vraisemblance simulé.
    Keywords: R&D; State Dependence; Dynamic Multinomial Logit; Panel-data; Maximum Simulated Likelihood; Open Innovation, persistance, modèle Logit multinomial dynamique, données panel, maximum de vraisemblance simulé, innovation ouverte
    Date: 2013–11–01
  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: Daniel Rondeau; Pascal Courty; Maurice Doyon
    Abstract: We use the experimental method to study the costs and benefits of allowing joint bidding in simultaneous multi-unit first price sealed bid auctions for bundled goods. The research has immediate applications to the sale of public forest stands that arbor a mixture of species. Joint bidding and communication raise the prospect of higher allocative efficiency, but also of collusive bidding through a reduction in the number of bidders and a greater scope for the formation of bidding rings. However, we find that allowing joint bidding has a significant positive impact on efficiency and reduces collusion significantly. We also explore the robustness of the results to characteristics of the auction environment that are relevant to timber auctions.
    Keywords: Timber auctions; forest industry; joint bidding; bidding rings; collusion; simultaneous auction; starting price; two bidder rule,
    JEL: Q23 Q28 D44
    Date: 2013–09–01
  12. By: MEERSMAN, Hilde; STRANDENES, Siri Pettersen; VAN DE VOORDE, Eddy
    Abstract: Price level and price transparency are input to shippers’ choice of supply chain and transport mode. In this paper, we analyse current port pricing structures in the light of the pricing literature and consider opportunities for improvement. We present a detailed overview of pricing criteria, who sets prices and who ultimately foots the bill for port-of-call charges, cargo-handling fees and congestion charges. Current port pricing practice is based on a rather linear structure and fails to incorporate modern pricing tools such as price differentiation or revenue management. Consequently, ports apply neither profit maximising pricing nor pricing designed to exploit available capacity more efficiently.
    Keywords: Infrastructure pricing, Pricing models, Seaports
    Date: 2014–04
  13. By: Tomaso Duso; Annika Herr; Moritz Suppliet
    Abstract: We investigate the welfare impact of parallel imports using a large panel data set containing monthly information on sales, ex-factory prices, and further product characteristics for all 700 anti-diabetic drugs sold in Germany between 2004 and 2010. We estimate a two-stage nested logit model of demand and, based on an oligopolistic model of multiproduct firms, we then recover the marginal costs and markups. We finally evaluate the effect of the parallel imports' policy by calculating a counter-factual scenario without parallel trade. According to our estimates, parallel imports reduce the prices for patented drugs by 11% and do not have a significant effect on prices for generic drugs. This amounts to an increase in the demand-side surplus by €19 million per year (or €130 million in total) which is relatively small compared to the average annual market size of around €227 million based on ex-factory prices. The variable profits for the manufacturers of original drugs from the German market are reduced by €18 million (or 37%) per year when parallel trade is allowed, yet only one third of this difference is appropriated by the importers.
    Keywords: Parallel imports, pharmaceuticals, structural models, anti-diabetic drugs
    JEL: I11 I18 L13 L51
    Date: 2014
  14. By: Donna, Javier; Espin-Sanchez, Jose
    Abstract: We use data on sequential water auctions to estimate demand when units are com- plements or substitutes. A sequential English auction model determines the estimating structural equations. When units are complements, one bidder wins all units by paying a high price for the first unit, thus deterring others from bidding on subsequent units. When units are substitutes, different bidders win the units with positive probability, paying prices similar in magnitude, even when the same bidder wins all units. We re- cover individual demand consistent with this stark pattern of outcomes and confirm it is not collusive, but consistent with non-cooperative behavior. Demand estimates are biased if one ignores these features.
    Keywords: Auctions, Structural Demand Estimation, Market Structure, Competition, Collusion
    JEL: C13 D44 L10 L40
    Date: 2014–02–17
  15. By: Marcel Boyer; Jean-Pierre Ponssard
    Abstract: We present a methodology to assess the profitability of a capital intensive industry over a business cycle and to make projections of profitability for different investment strategies under various hypothetical scenarios for environmental and competition policies. The methodology is applied to the European cement industry over the period 2004©\2012 (Part I) and over the next 10/15 years (Part II) using publicly available data, interviews of financial analysts and industry experts. Nous d¨¦veloppons une m¨¦thodologie pour ¨¦valuer la performance financi¨¨re ex©\post d¡¯un secteur ¨¤ forte intensit¨¦ en capital lors d¡¯un cycle ¨¦conomique et ¨¦tudier la rentabilit¨¦ future de diff¨¦rentes strat¨¦gies d¡¯investissements face ¨¤ diff¨¦rentes politiques de concurrence et environnementale. Cette m¨¦thodologie est appliqu¨¦e au secteur cimentier en Europe respectivement pour la p¨¦riode 2004©\2012 (Partie I) et pour les 10/15 prochaines ann¨¦es (Partie II). Les r¨¦sultats s¡¯appuient sur des donn¨¦es publiques et sur des interviews d¡¯analystes financiers et d¡¯experts du secteur
    Keywords: return on assets, capital intensive industry, business cycle, European cement industry, rentabilit¨¦ des actifs, secteur ¨¤ forte intensit¨¦ en capital, cycle ¨¦conomique, industrie cimenti¨¨re europ¨¦enne
    Date: 2013–12–01
  16. By: Crawfordy, Gregory S (University of Zurich, CEPR and CAGE); Pavaniniz, Nicola (zUniversity of Zurich); Schivardi, Fabiano (xLUISS, EIEF and CEPR)
    Abstract: We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects.
    Keywords: Italian, asymmetric information
    Date: 2013

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