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on Industrial Competition |
| By: | Menzio, Guido (University of Pennsylvania and NBER); Trachter, Nicholas (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 seller 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 nonmonotonic 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: | 2014–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-08&r=com |
| By: | Roig, Guillem |
| Abstract: | Product design and advertisement strategy have been theoretically studied as separate firms decisions. In the present paper, we look at the link between advertisement and product design and we analyze how firms' advertising decisions influence the market effect of product design. We consider a model of informative advertisement where two firms produce a bundle of complementary products which are partially compatible. A product design with more compatible components is associated with a larger intensity of advertisement. Higher compatibility reduces competition between firms, which incentivizes them to give factual information about their bundle. Like Matutes and Regibeau (1988), industry profit and total welfare is maximized with full product compatibility. However, contrary to them, we obtain that consumer surplus is not monotone with the level of product compatibility and its maximum is attained with partial compatibility. Moreover, because consumer surplus not only depends on the equilibrium prices but also on the intensity of advertisement, we find that for intermediate equilibrium levels of advertising, consumers prefer fully compatible components rather than full incompatibility. As a result, a more compatible product design benefits all the agents in the economy. |
| Keywords: | Informative advertisement; product design; partial compatibility; welfare. |
| JEL: | D21 D43 L13 L15 |
| Date: | 2014–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28044&r=com |
| By: | Seungjin Han |
| Abstract: | This paper studies competition among multiple sellers in frictional markets. Ex-post equilibrium is tractable in terms of market information revelation. Applying the sufficient condition for equilibrium robustness (with respect to a seller's deviation to any arbitrary selling mechanism) to ex-post equilibrium yields comparative statics on the distribution of trading prices and profits. |
| Keywords: | ex-post equilibrium, market frictions, robust equilibrium, comparative statics, competing mechanism desgin |
| JEL: | C71 D82 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2014-05&r=com |
| By: | Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J. |
| Abstract: | We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers' perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers' rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers' reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks. -- |
| Keywords: | price sluggishness,loss aversion,state-dependent pricing |
| JEL: | D03 D21 E31 E50 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201405&r=com |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, Princeton University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out "third degree price discrimination." We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade. |
| Keywords: | First degree price discrimination, Second degree price discrimination, Third degree price discrimination, Private information, Privacy, Bayes correlated equilibrium, Concavification |
| JEL: | C72 D82 D83 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1896rr&r=com |
| By: | Roig, Guillem |
| Abstract: | In a common agency setting, where the common buyer undertakes cooperative investment with her suppliers, we obtain a direct link between the level of ex-post competition and investment which affects the market structure of the supply side of the market. We show that more competitive equilibria are associated with a larger and more homogeneous distribution of investment among active suppliers, and an equilibrium with no investment might occur when competition is mild. In our model, buyer's investment works as a mechanism to incentivize competition, and its effectiveness is positively related to the level of competition ex-post. In general, the equilibrium investment profile is lower than efficiency, and we surprisingly find that higher competitive markets may sustain a larger number of suppliers. |
| Keywords: | cooperative investment; investment distribution; competition. |
| JEL: | C72 D43 D44 |
| Date: | 2014–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28043&r=com |
| By: | Kauffeldt, Florian; Wiesenfarth, Boris |
| Abstract: | We analyze a Hotelling location-then-price duopoly game under demand uncertainty with uniformly distributed consumers in a standard quadratic costs scenario. The novelty of our approach consists of assuming that firms' beliefs are represented by non-extreme-outcome-additive (neo-additive) capacities. We derive firms' subgame-perfect product design decisions under ambiguity. Furthermore, we investigate the influence of ambiguity and ambiguity attitude on equilibrium product differentiation and contrast our results with an environment of risky firms. We find that the impact of the degree of confidence or ambiguity is particularly significant when it comes to delivering accurate explanations for a wide range of phenomena related to observed product design behavior. |
| Keywords: | Hotelling; Confidence; Optimism; Pessimism; Degree of Ambiguity; Choquet Expected Utility; Neo-additive Capacities; Product Differentiation |
| Date: | 2014–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0562&r=com |
| By: | Roig, Guillem |
| Abstract: | This work studies how the introduction of competition to the side of the market offering trading contracts affects the equilibrium investment profile in a bilateral investment game. By using a common agency framework, where contracts are not exclusive, we find that the equilibrium investment profile depends on the competitiveness of the equilibrium outcome. Full efficiency can only be implemented when the trading outcome is the most competitive. Moreover, lowering the outcome competitiveness is not always Pareto dominant for the parties offering the contracts, and larger social welfare can be obtained with low competitive equilibria. |
| Keywords: | bilateral investment; hold-up; competition; Pareto dominance; social surplus. |
| JEL: | D44 L11 |
| Date: | 2014–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28042&r=com |
| By: | Carlos Noton (Centro de Economía Aplicada, Universidad de Chile); Andres Elberg (Facultad de Economía y Empresa, Universidad Diego Portales) |
| Abstract: | In vertical relationships in which manufacturers and retailers bargain over a volatile surplus, negotiated wholesale prices determine both payoffs and risk-exposure. We use actual wholesale prices to study the profit-sharing and risk-sharing behavior of manufacturers and retailers in the coffee industry in Chile. We find that small manufacturers are able to earn a sizable fraction of the pie and that most cost shocks are absorbed by upstream manufacturers. Thus, our results do not support the standard assumption that bargaining firms deal equally well with risk. Calibration of a Nash bargaining model confirms small manufacturers’ substantial bargaining power. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:51&r=com |
| By: | Andres Elberg (Facultad de Economía y Empresa, Universidad Diego Portales) |
| Abstract: | This paper uses a novel scanner data set to study price setting decisions of major retailers in an emerging market economy. I find evidence of heterogeneous pricing dynamics across retail chains. Heterogeneity is especially pronounced in the case of posted (as opposed to reference) prices. Furthermore, retail chains appear to set prices in a centralized fashion: most barcode-store level prices coincide with the intra-chain modal price. The relationship between reference and chain-wide prices reveals that deviations from reference prices cannot be solely attributed to shocks to local market conditions. In line with results on retail chain pricing, I find strong evidence of synchronization of price changes across stores within chains but weaker evidence of synchronization across retail chains. The evidence is also consistent with synchronization of price changes within retail stores. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:52&r=com |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:14023&r=com |
| By: | Maurer, Stephen M.; Scotchmer, Suzanne |
| Abstract: | The growing importance of shared networks, shared platforms and shared standards leads to a renewed discussion of the essential facilities doctrine of antitrust. This is an area where European law and American law have diverged. In Trinko (2007), the U.S. Supreme Court came close to abolishing it. At the same time, it was reinvigorated by the European Commission, which asserted it successfully in E.C. v. Microsoft, and then, facing criticism, clarified the doctrine in a Guidance document. We harmonize the main cases around the doctrine’s original but often forgotten purpose namely, harvesting economic synergies through sharing. We argue that, absent such a doctrine, these synergies could be lost as firms either avoid sharing to avoid antitrust liability, or create sharing arrangements that undermine competition. We show how and why the original purpose of the doctrine has become entangled with other antitrust issues, in particular, leveraging. We systematize the sharing rules that have been imposed or allowed, with an emphasis on how to harvest synergies while mitigating any harm to competition. |
| Keywords: | Competitions policy, antitrust, Sherman Act, essential facility |
| JEL: | K21 L40 L41 |
| Date: | 2014–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:27978&r=com |
| By: | Natalia Pavlova (National Research University Higher School of Economics); Andrey Shastitko (National Research University Higher School of Economics) |
| Abstract: | The article focuses on the effects that type I errors can have on the incentives of firms to compete, collude or engage in efficiency promoting socially beneficial cooperation. Our results confirm that in the presence of type I errors the introduction of a leniency program can have ambiguous effects, including the destruction and prevention of welfare enhancing horizontal cooperation agreements. The obtained results help understand the negative impact the hostility tradition resulting in type I enforcement errors can have on social welfare when applied to the regulation of horizontal agreements. |
| Keywords: | antitrust, competition, collusion, cooperation agreements, leniency, enforcement errors |
| JEL: | D43 K21 L41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:58/ec/2014&r=com |
| By: | Konstantin Yu. Totyev (National Research University Higher School of Economics) |
| Abstract: | This article is devoted to the legitimation and application of the standards of ex post and ex ante by courts and the executive authorities in the sphere of competition regulation. The postulates of ex post and ex ante are considered as legal principles. The principle of ex post is intended solely for judicial and administrative application; it has a deontological framework; it assumes that the legality of the activity of economic entities is assessed only on the basis of positive legal criteria in terms of the subjective rights violated; it is limited to a particular case. The traditional approach to the principle of ex post limits the scope of its application on the subjects and excessively expands its objects. The postulate of ex ante has a utilitarian basis which assumes the assessment of the application of relevant rules in the future. One of the main aims of the article is to refute the common view of lawyers and economists that a legislator applies principle of ex ante not being bound by principle of ex post, while it is the other way around for the courts and the executive authorities. The principle of ex ante may be applied not only in the process of the creation of new rules but also at the application stage for existing rules on economic competition. This is justified because the arguments of the courts and the executive authorities about a refusal to take into account the consequences of a decision in a particular case are not convincing. |
| Keywords: | antitrust law; competition; competition law; principles of ex post and ex ante; rights belonging to a person (legal rights); micro-level and macro-level consequences. |
| JEL: | K21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:37/law/2014&r=com |
| By: | Samà, Danilo |
| Abstract: | In order to fight collusive behaviors, the best scenario for competition authorities would be the possibility to analyze detailed information on firms' costs and prices, being the price-cost margin a robust indicator of market power. However, information on firms' costs is rarely available. In this context, a fascinating technique to detect data manipulation and rigged prices is offered by an odd phenomenon called Benford's Law, otherwise known as First-Digit Law, which has been successfully employed to discover the ``Libor Scandal'' much time before the opening of the cartel settlement procedure. Thus, the main objective of the present paper is to apply a such useful instrument to track the price of the aluminium traded on the London Metal Exchange, following the allegations according to which there would be an aluminium cartel behind. As a result, quick tests such as Benford's Law can only be helpful to inspect markets where price patterns show signs of collusion. Given the budget constraints to which antitrust watchdogs are commonly subject to, a such price screen could be set up, just exploiting the data available, as warning system to identify cases that require further investigations. |
| Keywords: | Benford's Law, Cartel Detection, Collusion Screening, Competition Authorities, Data Manipulation, Monopolization, Oligopolistic Markets, Price Fixing, Variance Screen |
| JEL: | C10 D40 L13 L41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55363&r=com |
| By: | Cassey LEE (University of Wollongong) |
| Abstract: | The enactment of the Competition Act 2010 represents a significant progress in the implementation of competition policy in Malaysia. The Malaysian Competition Commission has been fairly successful in its enforcement activities especially in price fixing cases involving trade associations. It has also investigated and issued proposed decisions in a number of high profile cases involving Malaysian Airlines, AirAsia, and Megasteel. Future challenges are likely to involve investigation of more complex anti-competitive cases, review of government regulations with impact on competition, possible introduction of merger controls and regional integration. |
| Keywords: | competition policy, competition law, malaysia. |
| JEL: | K21 L40 L41 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:era:wpaper:dp-2014-02&r=com |
| By: | Samà, Danilo |
| Abstract: | The ultimate objective of the present paper is to empirically investigate the effectiveness of competition policy in developed and developing countries. Although its importance is continuously increasing, the effectiveness of competition policy still seems to lack the attention that it would deserve. At the present state of art, the number of academic contributions that attempts to estimate its impact on relevant economic variables appears very limited, in particular for the less developed countries. However, an empirical literature aimed at measuring in objective terms the effect of competition policy on economic growth is emerging, starting from narrow variables of interest, such as Gross Domestic Product and Total Factor Productivity. As a result, the principal aim of the current work is to contribute to this branch of research, focusing on broader indicators of market performance, in order to understand whether the presence of an antitrust authority has a significant impact, thus an effective utility, on the level of competition of a country. |
| Keywords: | Competition Authorities, Competition Policy, Developed Countries, Developing Countries, Economic Development, Economic Growth, Law & Economics, Market Concentration, Market Efficiency, Market Performance, New Institutional Economics, Political Economy |
| JEL: | C21 C26 K21 L40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55360&r=com |
| By: | Dubois, Pierre; Lasio, Laura |
| Abstract: | We provide a method allowing identification of margins in an oligopoly price competition game when prices may not be freely chosen in some markets, for example due to regulation. We use our identification strategy to study the effects of regulatory constraints in the pharmaceutical industry. We provide the first structural estimation of price-cost margins on a regulated market with price constraints and show how to identify unknown possibly binding constraints thanks to three different markets (US, Germany and France) with varying regulatory constraints. We use the market for anti-ulcer drugs to identify whether regulation in France truly affects margins and prices and relate regulatory reforms to industry pricing equilibrium. Empirical results show that firms were especially constrained in price setting after the different reforms in 2004. Counterfactual simulations show that total spending significantly increased because of the new price regulation by displacing part of the demand from generics to branded drugs. |
| Keywords: | empirical IO, price constraints, Bertrand competition, regulation, pharmaceuticals, antiulcer drugs. |
| JEL: | I18 L10 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27918&r=com |
| By: | Zavelberg, Yvonne; Wieck, Christine; Heckelei, Thomas |
| Abstract: | In 2010, the European (EU) High Level Expert Group on milk proposed the introduction of standard contracts between raw milk producers and processors to improve the bargaining position of producers and to stabilize the market by balancing dairy supply and demand. However, contracts may distort competition and deter market entry of rival dairies. We analyze competitive effects of contracts between dairy producers and processors by constructing a game theoretic model. We show that an incumbent dairy can deter a rival dairy’s market entry by offering an exclusive contract to a risk averse producer. |
| Keywords: | entry deterrence, imperfect competition, buyer power, delivery contracts, dairy processing, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, Risk and Uncertainty, L13, L14, L41, |
| Date: | 2014–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:ags:ubfred:165088&r=com |
| By: | Siegert, Caspar; Ulbricht, Robert |
| Abstract: | We explore how pricing dynamics in the European airline industry vary with the competitive environment. Our results highlight substantial variations in pricing dynamics that are consistent with a theory of intertemporal price discrimination. First, the rate at which prices increase towards the scheduled travel date is decreasing in competition, supporting the idea that competition restrains the ability of airlines to price-discriminate. Second, the sensitivity to competition is substantially increasing in the heterogeneity of the customer base, reecting further that restraints on price discrimination are only relevant if there is initial scope for price discrimination. These patterns are quantitatively important, explaining about 83 percent of the total within flight price dispersion, and explaining 17 percent of the observed cross-market variation of pricing dynamics. |
| Keywords: | Airline industry, capacity constraints, dynamic oligopoly pricing, intertemporal price dispersion, price discrimination. |
| JEL: | D43 D92 L11 L93 |
| Date: | 2014–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28015&r=com |
| By: | Dubois, Pierre; Griffith, Rachel; O'Connell, Martin |
| Abstract: | Restricting advertising is one way governments seek to reduce consumption of potentially harmful goods. There have been increasing calls to apply a similar policy to the junk food market. The effect will depend on how brand advertising influences consumer demand, and on the strategic pricing response of oligopolistic firms. We develop a model of consumer demand and dynamic oligopoly supply in which multi-product firms compete in prices and advertising budgets. We model the impact of advertising on demand in a exible way, that allows for the possibility that advertising is predatory or cooperative, and we consider how market equilibria would be impacted by an advertising ban. In our application we apply the model to the potato chip market using transaction level data. The implications of an advertising ban for consumer welfare depend on the view one takes about advertising. In the potato chip market advertising has little informational content. The advertising may be a characteristic valued by consumers, or it may act to distort decision-making. We quantify the welfare impacts of an advertising ban under alternative views of advertising, and show that welfare conclusions depend on which view of advertising the policymaker adopts. |
| Keywords: | advertising, demand estimation, welfare, dynamic oligopoly |
| JEL: | L13 M37 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:28116&r=com |