nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒06‒02
34 papers chosen by
Russell Pittman
US Government

  1. We're Number 1: Price Wars for Market Share Leadership By Cabral, Luís M B
  2. Collusion at the Extensive Margin By Martin C. Byford; Joshua S. Gans
  3. Interpersonal Bundling By Chen, Yongmin; Zhang, Tianle
  4. Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing By Miravete, Eugenio J; Seim, Katja; Thurk, Jeff
  5. A Theory of Price Adjustment under Loss Aversion By Ahrens, Steffen; Pirschel, Inske; Snower, Dennis J.
  6. Can competition reduce quality? By Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
  7. Heterogenous switching costs By Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
  8. Efficient Competition through Cheap Talk: Competing Auctions and Competitive Search without Ex Ante Price Commitment By Kim, Kyungmin; Kircher, Philipp
  9. Cartel Size and Collusive Stability with Non-Capitalistic Players By F. Delbono; L. Lambertini
  10. Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy By Mermelstein, Ben; Nocke, Volker; Satterthwaite, Mark; Whinston, Michael
  11. Fight Cartels or Control Mergers? On the Optimal Allocation of enforcement Efforts within Competition Policy By Andreea Cosnita; Jean-Philippe Tropeano
  12. Mergers between regulated firms with unknown efficiency gains By Fiocco, Raffaele; Guo, Gongyu
  13. Institutional Authority and Collusion By Axel Sonntag; Daniel John Zizzo
  14. The Economics of Margin Squeeze By Jullien, Bruno; Rey, Patrick; Saavedra, Claudia
  15. The Strength of the Waterbed Effect Depends on Tariff Type By Steffen Hoernig
  16. On discrimination in procurement auctions By Jehiel, Philippe; Lamy, Laurent
  17. Transparency in Buyer-Determined Auctions: Should Quality be Private or Public? By Stoll, Sebastian; Zöttl, Gregor
  18. Reputation and Entry in Procurement By Butler, Jeff; Carbone, Enrica; Conzo, Pierluigi; Spagnolo, Giancarlo
  19. Profiting from Innovation: Firm Level Evidence on Markups By Cassiman, Bruno; Vanormelingen, Stijn
  20. Market Outcomes and Dynamic Patent Buyouts By Galasso, Alberto; Mitchell, Matthew; Virag, Gabor
  21. Competition, firm size and returns to skills : evidence from currency shocks and market liberalizations By Michele Raitano; Francesco Vona
  22. R&D Networks: Theory, Empirics and Policy Implications By König, Michael; Liu, Xiaodong; Zenou, Yves
  23. Weak Versus Strong Net Neutrality By Joshua S. Gans
  24. Mobile Computing: The Next Platform Rivalry By Timothy Bresnahan; Shane Greenstein
  25. Pricing Internet Traffic: Exclusion, Signalling and Screening By Jullien, Bruno; Sand-Zantman, Wilfried
  26. The Market for Keywords By Eliaz, Kfir; Spiegler, Rani
  27. Net Neutrality with Competing Internet Platforms By Bourreau, Marc; Kourandi, Frago; Valletti, Tommaso
  28. Dynamic Oligopoly Pricing: Evidence from the Airline Industry By Siegert, Caspar; Ulbricht, Robert
  29. Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals By Dubois, Pierre; Lasio, Laura
  30. The Effects of Banning Advertising on Demand, Supply and Welfare: Structural Estimation on a Junk Food Market By Dubois, Pierre; Griffith, Rachel; O'Connell, Martin
  31. Going beyond Duopoly: Connectivity Breakdowns under Receiving Party Pays By Steffen Hoernig
  32. Facilitating Consumer Learning in Insurance Markets—What Are the Welfare Effects? By Lagerlöf, Johan N. M.; Schottmüller, Christoph
  33. Monopoly Insurance with Endogenous Information By Lagerlöf, Johan N. M.; Schottmüller, Christoph

  1. By: Cabral, Luís M B
    Abstract: I examine the dynamics of oligopolies when firms derive subjective value from being the market leader. In equilibrium, prices alternate in tandem between high levels and occasional price wars, which take place when market shares are similar and market leadership is at stake. The stationary distribution of market shares is typically multi-modal, that is, much of the time there is a stable market leader. Even though shareholders do not value market leadership per se, a corporate culture that values market leadership may increase shareholder value. From a competition policy point of view, the paper implies that price regime change dynamics and parallel pricing are consistent with competitive behavior -- in fact, hyper-competitive behavior.
    Keywords: behavioral IO; dynamic oligopoly; market shares; ordinal rankings; price wars
    JEL: L13 L21
    Date: 2014–02
  2. By: Martin C. Byford; Joshua S. Gans
    Abstract: We augment the multi-market collusion model of Bernheim and Whinston (1990) by allowing for firm entry into, and exit from, individual markets. We show that this gives rise to a new mechanism by which a cartel can sustain a collusive agreement: Collusion at the extensive margin whereby firms collude by avoiding entry into each other’s markets or territories. We characterise parameter values that sustain this type of collusion and identify the assumptions where this collusion is more likely to hold than its intensive margin counterpart. Specifically, it is demonstrated that Where duopoly competition is fierce collusion at the extensive margin is always sustainable. The model predicts new forms of market sharing such as oligopolistic competition with a collusive fringe, and predatory entry. We also provide a theoretic foundation for the use of a proportional response enforcement mechanism.
    JEL: C73 L41
    Date: 2014–05
  3. By: Chen, Yongmin; Zhang, Tianle
    Abstract: This paper studies a model of interpersonal bundling, in which a monopolist offers a good for sale under a regular price and a group purchase discount if the number of consumers in a group---the bundle size---belongs to some menu of intervals. We find that this is often a profitable selling strategy in response to demand uncertainty, and it can achieve the highest profit among all possible selling mechanisms. We explain how the profitability of interpersonal bundling with a minimum or maximum group size may depend on the nature of uncertainty and on parameters of the market environment, and discuss strategic issues related to the optimal design and implementation of these bundling schemes. Our analysis sheds light on popular marketing practices such as group purchase discounts, and offers insights on potential new marketing innovation.
    Keywords: Interpersonal bundling, bundling, group purchase, group discount, demand uncertainty
    JEL: D4 L1 M3
    Date: 2014–05–23
  4. By: Miravete, Eugenio J; Seim, Katja; Thurk, Jeff
    Abstract: The Pennsylvania Liquor Control Board administers the purchase and sale of wine and spirits across the state and is legally mandated to charge a uniform 30% markup on all products. We use an estimated discrete choice model of demand for spirits, together with information on wholesale prices, to assess the welfare and redistribution implications of the chosen uniform markup rule. We find that it reduces welfare significantly, but mimics the optimal behavior of a multi-product monopolist. Relative to product-specific prices, the uniform prices do not exploit the observed heterogeneity of consumption across products and demographic groups reflected in relative spirit demand elasticities. They implicitly tax high-income and educated households by overpricing their favored spirit varieties. Our estimated returns to very sophisticated pricing strategies are small indicating the use of more complex pricing mechanisms as being neither socially desirable nor privately profitable.
    Keywords: Complex Pricing; Multi-Product Price Discrimination; Taxation by Regulation
    JEL: L12 L21 L32
    Date: 2013–09
  5. 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: loss aversion; price sluggishness; state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014–05
  6. By: Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
    Abstract: In a spatial competition setting there is usually a non-negative relationship between competition and quality. In this paper we offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. We show that the negative relationship between competition and quality is robust to any given number of fims in the market and whether quality and price decisions are simultaneous or sequential. We also show that competition may improve social welfare despite the adverse effect on quality. Our proposed mechanism can help explain empirical findings of a negative effect of competition on quality in markets such as health care, long-term care, and higher education.
    Keywords: Motivated providers; Quality and price competition; Risk-averse providers
    JEL: D21 D43 L13 L30
    Date: 2014–02
  7. By: Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
    Abstract: We consider a simple two period model where consumers have different switching costs. Before the market opens, there was an incumbent who sold to all consumers. We identify the equilibrium both with Stackelberg and Bertrand competition and show how the presence of low switching cost consumers benefits the incumbent, despite the fact that it never sells to any of them.
    Keywords: switching cost
    JEL: D43 L13
    Date: 2014–02
  8. By: Kim, Kyungmin; Kircher, Philipp
    Abstract: We consider a frictional two-sided matching market in which one side uses public cheap-talk announcements so as to attract the other side. We show that if the first-price auction is adopted as the trading protocol, then cheap talk can be perfectly informative, and the resulting market outcome is efficient, constrained only by search frictions. We also show that the performance of an alternative trading protocol in the cheap-talk environment depends on the level of price dispersion generated by the protocol: If a trading protocol compresses (spreads) the distribution of prices relative to the first-price auction, then an efficient fully revealing equilibrium always (never) exists. Our results identify the settings in which cheap talk can serve as an efficient competitive instrument, in the sense that the central insights from the literature on competing auctions and competitive search continue to hold unaltered even without ex ante price commitment.
    Keywords: cheap talk; commitment; competitive search; directed search
    JEL: C72 D82 D83
    Date: 2013–12
  9. By: F. Delbono; L. Lambertini
    Abstract: A well established belief both in the game-theoretic IO and in policy debates is that market concentration facilitates collusion. We show that this piece of conventional wisdom relies upon the assumption of profit-seeking behaviour, for it may be reversed when firms pursue other plausible goals. To illustrate our intuition, we investigate the incentives to tacit collusion in an industry formed by Labor-Managed (LM) enterprises. We characterize the perfect equilibrium of a supergame in which LM firms play an infinitely repeated Cournot game. We show that the critical threshold of the discount factor above which collusion is stable (i) is lower in the LM industry than in the capitalistic one; (ii) monotonically decreases with the number of firms.
    JEL: L1 L3 C7
    Date: 2014–05
  10. By: Mermelstein, Ben; Nocke, Volker; Satterthwaite, Mark; Whinston, Michael
    Abstract: We study optimal merger policy in a dynamic model in which the presence of scale economies implies that firms can reduce costs through either internal investment in building capital or through mergers. The model, which we solve computationally, allows firms to invest or propose mergers according to the relative profitability of these strategies. An antitrust authority is able to block mergers at some cost. We examine the optimal policy when the antitrust authority can commit to a policy rule and when it cannot commit, and consider both consumer value and aggregate value as possible objectives of the antitrust authority. We find that optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. We also find that the ability to commit can lead to a significant welfare improvement. In general, antitrust policy can greatly affect firms' optimal investment behavior, and firms' investment behavior can in turn greatly affect the antitrust authority's optimal policy.
    Keywords: antitrust; commitment; entry; investment; merger
    JEL: L13 L41
    Date: 2014–04
  11. By: Andreea Cosnita (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense); Jean-Philippe Tropeano (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper deals with the optimal enforcement of competition law between merger and anti-cartel policies. We examine the interaction between these two branches of antitrust, given the budget constraint of the public agency, and taking into account the ensuing incentives for firms in terms of choice between cartels and mergers. To the extent that a tougher anti-cartel action triggers more mergers and vice-versa, we show that the two antitrust branches are complementary. However, if the merger's coordinated effect is taken into account, then for a sufficiently large such effect the agency may optimally have to refrain from controlling mergers and instead spend all resources on fighting cartels.
    Date: 2013–06–01
  12. By: Fiocco, Raffaele; Guo, Gongyu
    Abstract: In an industry where regulated firms interact with unregulated suppliers, we investigate the welfare effects of a merger between regulated firms when cost synergies are uncertain before the merger and their realization becomes private information of the merged firm. The optimal merger policy trades off potential cost savings against regulatory distortions from informational problems. We show that, as a consequence of this trade-off, more intense competition in unregulated segments of the market induces a more lenient merger policy. The regulated firms' diversification into a competitive segment of the market can lead to a softer merger policy when competition is weaker.
    Keywords: asymmetric information; competition; efficiency gains; mergers; regulation.
    JEL: D82 L43 L51
    Date: 2014
  13. By: Axel Sonntag (University of East Anglia); Daniel John Zizzo (University of East Anglia)
    Abstract: A `collusion puzzle' exists by which, even though increasing the number of firms reduces the ability to tacitly collude, and leads to a collapse in collusion in experimental markets with four or more firms, in natural markets there are such numbers of firms colluding successfully. We present an experiment showing that, if managers are deferential towards an authority, firms can induce more collusion by delegating production decisions to middle managers and providing suitable informal nudges. This holds not only with two but also with four firms. We are also able to distinguish compliance effects from coordination effects from the nudges.
    Date: 2014
  14. By: Jullien, Bruno; Rey, Patrick; Saavedra, Claudia
    Abstract: The paper discusses economic theories of harm for anti-competitive margin squeeze by unregulated and regulated vertically integrated firms. We review both predation and foreclosure theories, as well as the mere exploitation of upstream market power. We show that foreclosure provides an appropriate framework in the case of an unregulated firm, whereas a firm under tight wholesale regulation should be evaluated under the predation paradigm, with an adequate test that we characterize. Finally, although non-exclusionary exploitation of upstream market power may also induce a margin squeeze, banning such a squeeze has ambiguous effects on the competitive outcome; hence, alternative measures, such as a cap on the access price, may provide a better policy.
    Keywords: foreclosure; margin squeeze; predation; vertical integration
    JEL: K21 K23 L4 L42 L43
    Date: 2014–03
  15. By: Steffen Hoernig
    Abstract: We show that the waterbed effect, i.e. the pass-through of a change in one price of a firm to its other prices, is much stronger if the latter include subscription rather than only usage fees. In particular, in mobile network competition with a fixed number of customers, the waterbed effect is full under two-part tariffs, while it is only partial under linear tariffs. JEL codes: D43, L13, L51
    Keywords: Waterbed e¤ect, two-part tariff, linear tariff, mobile termination, two-sided platforms
    Date: 2014
  16. By: Jehiel, Philippe; Lamy, Laurent
    Abstract: With exogenous participation, strong bidders should be discriminated against weak bidders to maximize revenues (Myerson 1981). When participation is endogenous and the set of potential entrants is large, optimal discrimination if any takes a very different form. Without incumbents, there should be no discrimination even if entrants come from groups with different characteristics. With incumbents, those should be discriminated against entrants no matter how strong/weak they are even if some share of their surplus is internalized by the designer. The optimal reserve policy in standard auctions is also analyzed to shed light on situations in which discrimination is not permitted.
    Keywords: asymmetric buyers; auctions with endogenous entry; bid preference programs; cartels; favoritism; government procurement; incumbents; optimal auction design; Poisson games
    JEL: D44 H57 L10
    Date: 2014–01
  17. By: Stoll, Sebastian; Zöttl, Gregor
    Abstract: We study non-binding procurement auctions where both price and non-price characteristics of bidders matter for being awarded a contract. The outcome of such auctions critically depends on how information is distributed among bidders during the bidding process. As we show theoretically, whether it is in the buyer's interest to conceal or to disclose non-price information most importantly depends on how important the quality aspects of the good to be procured are to the buyer: The more important the quality aspects are to the buyer, the more interesting concealment becomes. We then empirically study the impact of a change in the information structure using data from a large European online procurement platform for different categories of goods. In a counterfactual analysis we analyze the reduction of non-price information available to the bidders. In the data we find that the choice of information structure indeed matters. Confirming the hypothesis obtained in our theoretical framework, we find that in auction categories where bidders' non-price characteristics are of little importance for the decisions of the buyers, concealment of non-price information decreases buyers' welfare by up to 6% due to reduced competitive pressure leading to higher bids. In contrast, for categories where bidders' non-price characteristics strongly influence buyers' decisions concealment of non-price information increases buyers' welfare by up to 15%.
    Keywords: Procurement; Non-Binding Auctions; Supply Chain Management
    Date: 2014–03–27
  18. By: Butler, Jeff; Carbone, Enrica; Conzo, Pierluigi; Spagnolo, Giancarlo
    Abstract: There is widespread concern that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement game with reputational incentives for quality and the possibility of entry. We allow also the entrant to start off with a positive reputational score. Our results suggest that while some past-performance based reputational mechanisms do reduce the frequency of entry, appropriately designed mechanisms can significantly increase it. Moreover, the reputational mechanism we investigate typically increases quality but not prices, suggesting that well designed mechanisms may generate very large gains for buyers and taxpayers.
    Keywords: bid preferences; entry; feedback mechanisms; outsourcing; past performance; procurement; quality assurance; reputation; vendor rating
    JEL: H57 L14 L15
    Date: 2013–09
  19. By: Cassiman, Bruno; Vanormelingen, Stijn
    Abstract: While innovation is argued to create value, private incentives of firms to innovate are driven by what part of the value created firms can appropriate. In this paper we explore the relation between innovation and the markups a firm is able to extract after innovating. We estimate firm-specific price-cost margins from production data and find that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the firm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the firm's patenting and promotion behavior, the age of the firm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the firm's markup.
    Keywords: markup; process innovation; product innovation; productivity
    JEL: D24 L11 O31
    Date: 2013–10
  20. By: Galasso, Alberto; Mitchell, Matthew; Virag, Gabor
    Abstract: Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify alternatives to patents that could lower prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government's innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent's life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives.
    Keywords: buyout; innovation; mechanism design; patents
    JEL: D82 L51 O31
    Date: 2014–02
  21. By: Michele Raitano (Sapienza University of Rome, Department of Economics and Law); Francesco Vona (Ofce sciences-po,Skema Business school)
    Abstract: The authors investigate the impact of exogenous product market competition shocks on returns to skills in Italy using a new longitudinal dataset on individual working histories. This impact is identified using three exogenous shocks affecting competition: the unforeseen devaluation of the Lira in 1992, its return to a fixed exchange regime in 1996 and the market liberalisation in the utility and transport sectors in the late 1990s-early 2000s. This paper extends the analysis of Guadalupe (2007) by investigating how firm heterogeneity and shocks of different types and signs affect the impact of competition on skill premia. The authors find that opposite shocks have opposite effects: an increase (resp. decrease) in international competition increases (resp. decreases) returns to skills. Moreover, international shocks have greater effects on medium-sized firms, while domestic liberalisation shocks have greater effects on large incumbents previously sheltered from any entry threat.
    Keywords: Skill premia, competition, currency shocks,product market regulation,firm size
    JEL: J31 L11 D41
    Date: 2014–04
  22. By: König, Michael; Liu, Xiaodong; Zenou, Yves
    Abstract: We study a structural model of R&D alliance networks in which firms jointly form R&D collaborations to lower their production costs while competing on the product market. We derive the Nash equilibrium of this game, provide a welfare analysis and determine the optimal R&D subsidy program that maximizes total welfare. We also identify the key firms, i.e. the firms whose exit would reduce welfare the most. We then structurally estimate our model using a panel dataset of R&D collaborations and annual company reports. We use our estimates to identify the key firms and analyze the impact of R&D subsidy programs. Moreover, we analyze temporal changes in the rankings of key firms and how these changes affect the optimal R&D policy.
    Keywords: key firms; optimal subsidies; R&D networks
    JEL: D85 L24 O33
    Date: 2014–03
  23. By: Joshua S. Gans
    Abstract: This paper provides a framework to classify and evaluate the impact of net neutrality regulations on the allocation of consumer attention and the distribution of surplus between consumers, ISPs and content providers. While the model provided largely nests other contributions in the literature, here the focus is on including direct payments from consumers to content providers. With this additional price it is demonstrated that the type of net neutrality regulation (i.e., weak versus strong net neutrality) matters for such regulations to have real effects. In addition, we provide support for the notion that strong net neutrality may stimulate content provider investment while the model concludes that there is unlikely to be any negative impact from such regulation on ISP investment. Counter to many claims, it is argued here that ISP competition may not be a substitute for net neutrality regulation in bringing about these effects
    JEL: D04 D42 D43 K2 L1 L12 L13
    Date: 2014–05
  24. By: Timothy Bresnahan; Shane Greenstein
    Abstract: All modern information and communications technology (ICT) industries use the platform organization. A platform in computing is a reconfigurable base of compatible components on which firms and users build applications. Applications share the general purpose components, which leads to the exploitation of increasing returns at an industry-wide level (Bresnahan and Trajtenberg, 1995). Platforms compete for developers, who create applications which make the platform valuable for users. Distinct platforms serve different or/or overlapping customers. Platforms also compete in their governance structures, which determine what obligations a developer assumes, and what rights the platform leader reserves for itself. Governance serves a useful function, mediating the terms of transactions and assigning responsibilities to build complements. We consider governance in mobile computing, specifically. The market involves many highprofile companies, such as Microsoft, Google, Apple, Nokia, and Research in Motion, who employ different approaches to platform governance. That variance frames a seemingly simple question: why doesn’t one form of platform governance emerge as superior, dominating most markets in which platforms play an essential role? Our essay will stress the reasons for differentiation, and we propose an argument that is missing from the platform literature, about changes over time. Platform leaders commit to their approach to governance, but the governance that can help at one moment can get in the way at a later time. That opens up opportunities for differentiated platforms.
    Keywords: Keywords:
    Date: 2014–03
  25. By: Jullien, Bruno; Sand-Zantman, Wilfried
    Abstract: We consider a network that intermediates traffic between free content providers and consumers. While consumers do not know the traffic cost when deciding on consumption, a content provider knows his cost but may not control the consumption. We study how pricing consumers' and content providers' sides allows both profit extraction from the network and efficient information transmission. In the case of uniform tariff, we argue that a positive price-cap on the charge to content is optimal (with no constrain on the consumer side). Proposing menus helps signaling useful information to consumers and therefore adjusting consumption to traffic cost. In the case of menus, we show that optimal mechanisms consist in letting the content producers choose between different categories associated with different prices for content and consumers. Our results are robust to competition between ISPs and to competition between contents. We also show that when (competitive) content providers choose at small cost between a pay and a free business model, a price-cap at cost on the price for content improves efficiency.
    Keywords: information; intranet; net neutrality; traffic management
    JEL: D4 L1 L86 L96
    Date: 2014–03
  26. By: Eliaz, Kfir; Spiegler, Rani
    Abstract: Can a competitive market implement an ideal search engine? To address this question, we construct a two-sided market model in which consumers with limited, idiosyncratic vocabulary use keywords to search for their desired products. Firms get access to a keyword if they pay its competitive price-per-click. An underlying "broad match" function determines the probability with which a firm will enter the consumer's search pool as a function of the keyword it "buys" and the consumer's queried keyword. The main question we analyze is whether there exists a broad match function that gives rise to an efficient competitive equilibrium outcome. We provide necessary and sufficient conditions, in terms of the underlying search cost and the joint distribution over consumers' tastes and vocabulary, and characterize equilibrium keyword prices under such equilibria. The Bhattachayyara coefficient, a measure of closeness of probability distributions, turns out to play a key role in the analysis.
    Keywords: keywords
    Date: 2014–02
  27. By: Bourreau, Marc; Kourandi, Frago; Valletti, Tommaso
    Abstract: We propose a two-sided model with two competing Internet platforms, and a continuum of Content Providers (CPs). We study the effect of a net neutrality regulation on capacity investments in the market for Internet access, and on innovation in the market for content. Under the alternative discriminatory regime, platforms charge a priority fee to those CPs which are willing to deliver their content on a fast lane. We find that under discrimination investments in broadband capacity and content innovation are both higher than under net neutrality. Total welfare increases, though the discriminatory regime is not always beneficial to the platforms as it can intensify competition for subscribers. As platforms have a unilateral incentive to switch to the discriminatory regime, a prisoner's dilemma can arise. We also consider the possibility of sabotage, and show that it can only emerge, with adverse welfare effects, under discrimination.
    Keywords: Innovation; Investment; Net neutrality; Platform competition; Two-sided markets
    JEL: L13 L51 L52 L96
    Date: 2014–02
  28. 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, reflecting 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
  29. By: Dubois, Pierre; Lasio, Laura
    Abstract: We provide a method allowing to identify 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, which is heavily regulated in some countries, and particularly in France. We use data from the US, Germany and France to identify country-specific demand models and then recover price cost margins under the regulated price setting constraints on the French market. To do so, we estimate a structural model on the market for anti-ulcer drugs that allows us to explore the drivers of demand, to identify whether regulation in France truly affects margins and prices and to relate regulatory reforms to industry pricing equilibrium. 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. Empirical results show that margins have increased over time in France but that firms were especially constrained in price setting after the different reforms in price setting that occurred in 2004. Counterfactual simulations show that overall total spending has significantly increased over the 2004-2007 period because of new regulation of price setting that reduced branded drugs prices but increased sales quantities by displacing part of the demand from generics to branded drugs.
    Keywords: antiulcer drugs; Bertrand competition; empirical IO; pharmaceuticals; price constraints; regulation
    JEL: C18 I18 L10
    Date: 2014–03
  30. 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 flexible 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; dynamic oligopoly; welfare
    JEL: L13 M37
    Date: 2014–04
  31. By: Steffen Hoernig
    Abstract: We show that the prediction of strategic connectivity breakdowns under a receiving-party-pays system and discrimination between on and off-net prices does not hold up once more than two mobile networks are considered. Indeed, if there are at least three competing networks and enough utility is obtained from receiving calls, only equilibria with finite call prices and receiving prices exist. Private negotiations over access charges then achieve the efficient outcome. Bill & keep (zero access charges) and free outgoing and incoming calls are efficient if and only marginal costs of calls are zero. JEL codes: L13, L51
    Keywords: Mobile network competition, Receiving party pays, Connectivity breakdown, Termination rates
    Date: 2014
  32. By: Lagerlöf, Johan N. M.; Schottmüller, Christoph
    Abstract: What are the welfare effects of a policy that facilitates for insurance customers to privately and covertly learn about their accident risks? We endogenize the information structure in Stiglitz's classic monopoly insurance model. We first show that his results are robust: For a small information acquisition cost c, the consumer gathers information and the optimal contracts are close to the ones in the Stiglitz model. If c is so low that the consumer already gathers information (c c*, marginally reducing c hurts the insurer and weakly benefits the consumer. Paradoxically, a reduction in c that is “successful,” meaning that the consumer gathers information after the reduction but not before it, can hurt both parties. The reasons for this are that, after the reduction, (i) the cost is actually incurred and (ii) the contracts can be more distorted.
    Keywords: adverse selection; asymmetric information; information acquisition; insurance; screening
    JEL: D82 I13
    Date: 2013–11
  33. By: Lagerlöf, Johan N. M.; Schottmüller, Christoph
    Abstract: We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.
    Keywords: adverse selection; asymmetric information; information acquisition; insurance; screening
    JEL: D82 I13
    Date: 2013–12
  34. By: Allen Tran
    Abstract: To study the impact of online retail on aggregate welfare, I use a spatial model to calculate a new measure of store level retail productivity and each store's equilibrium response to increased competitive pressure from online retailers. The model is estimated on confidential store-level data spanning the universe of US retail stores, detailed local-level demographic data and shortest-route data between locations. From counterfactual exercises mimicking improvements in shipping and increased internet access, I estimate that improvements in online retail increased aggregate welfare from retail activities by 13.4 per cent. Roughly two-thirds of the increase can be attributed to welfare improvements holding fixed market shares, with the remainder due to reallocation. Surprisingly, 8.2 percent of firms actually benefit as they absorb market share from closed stores. Finally, I estimate that the proposed Marketplace Fairness Act would claw back roughly one-third of sales that would otherwise have gone to online retailers between 2007-12.
    Date: 2014–04

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