nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒08‒09
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Social Learning and Delay in a Dynamic Model of Price Competition By Masaki Aoyagi; Manaswini Bhalla; Hikmet Gunay
  2. Nonlinear Pricing and Exclusion : I. Buyer Opportunism By Philippe Choné; Laurent Linnemer
  3. Nonlinear Pricing and Exclusion : II. Must-Stock Products By Philippe Choné; Laurent Linnemer
  4. The Kreps-Scheinkman game in mixed duopolies By Bakó, Barna; Tasnádi, Attila
  5. One-seller assignment markets with multiunit demands By Francisco Robles; Marina Núñez
  6. Nothing so certain as your anchors? A consumer bias that might lower prices By Bakó, Barna; Kálecz-Simon, András
  7. Theoretical Perspectives on Localised Knowledge Spillovers and Agglomeration By Leppälä, Samuli
  8. On patent strength, litigation costs, and patent disputes under alternative damage rules By Bertrand Chopard; Thomas Cortade; Eric Langlais
  9. Innovation, innovation strategy and survival By Stephen Roper; Helen Xia
  10. The legacy of public subsidies for innovation: input, output and behavioural additionality effects By Stephen Roper; Nola Hewitt-Dundas
  11. Search, Price Dispersion, and Local Competition: Estimating Heterogeneous Search Costs in Retail Gasoline Markets By Mitsukuni Nishida; Marc Remer
  12. Who should pay for two-way interconnection? By Sjaak Hurkens; Angel L. López
  13. Economic replicability tests for next-generation access networks By Marc Lebourges
  14. The determinants and profitability of switching costs in Chinese banking By Yin, Wei; Matthews, Kent
  15. European Networking and Training for National Competition Enforcers (ENTRANCE 2012). Selected Case Notes By Pier Luigi Parcu
  16. A Simple Model of Competition Policies, Trade, and the Skill Premium By Yoshinori Kurokawa

  1. By: Masaki Aoyagi; Manaswini Bhalla; Hikmet Gunay
    Abstract: This paper studies dynamic price competition over two periods between two firms selling differentiated durable goods to two buyers who are privately informed about their types, but have valuations of the two goods dependent on the other buyer's type. The firms' pricing strategy in period 1 must take into account the buyers' incentive to wait and learn from the other buyer's decision. We construct an equilibrium based on the key observation that the expected price of either good in period 2 is the same as its price in period 1 on and off the path of play. The equilibrium is shown to be non-preemptive in the sense that even if either firm fails to make a sale in period 1, it still makes a sale with positive probability in period 2. A characterization of the equilibrium is given in terms of the probability of delay as a function of the degree of interdependence between the two buyers.
    Date: 2014–07
  2. By: Philippe Choné (CREST-LEI); Laurent Linnemer (CREST-LEI)
    Abstract: We study the exclusionary properties of nonlinear price-quantity schedules in an Aghion-Bolton style model with elastic demand and product differentiation. We distinguish three regimes depending on whether and how the price of the incumbent good is linked to the quantity purchased from the rival firm. We find that the supply of rival good is distorted downwards. Moreover, given the quantity supplied from the rival, the buyer may opportunistically purchase inefficiently many units from the incumbent to pocket quantity rebates. We show that the possibility for the buyer to dispose of unconsumed units attenuates the opportunism problem and limits the exclusionary effects of nonlinear pricing.
    Keywords: Inefficient exclusion; buyer opportunism; disposal costs; quantity rebates; incomplete information
    JEL: L12 L42 D82 D86
    Date: 2014–06
  3. By: Philippe Choné (CREST-LEI); Laurent Linnemer (CREST-LEI)
    Abstract: We adapt the exclusion model of Choné and Linnemer (2014) to reflect the notion that dominant firms are unavoidable trading partners. In particular, we introduce the share of the buyer’s demand that can be addressed by the rival as a new dimension of uncertainty. Nonlinear price-quantity schedules allow the dominant firm to adjust the competitive pressure placed on the rival to the size of the contestable demand, and to distort the rival supply at both the extensive and intensive margins. When disposal costs are sufficiently large, this adjustment may yield highly nonlinear and locally decreasing schedules, such as “retroactive rebates”.
    Keywords: Inefficient exclusion; buyer opportunism; disposal costs; quantity rebates; incomplete information.
    JEL: L12 L42 D82 D86
    Date: 2014–06
  4. By: Bakó, Barna; Tasnádi, Attila
    Abstract: In this paper we extend the results of Kreps and Scheinkman (1983) to mixedduopolies. We show that quantity precommitment and Bertrand competition yield Cournot outcomes not only in the case of private firms but also when a public firm is involved.
    Keywords: Mixed duopoly, Cournot, Bertrand-Edgeworth
    JEL: D43 H44 L13 L32
    Date: 2014–07–15
  5. By: Francisco Robles (Facultat d'Economia i Empresa; Universitat de Barcelona (UB)); Marina Núñez (Facultat d'Economia i Empresa; Universitat de Barcelona (UB))
    Abstract: We consider one-seller assignment markets with multi-unit demands and prove that the associated game is buyers-submodular. Therefore the core is non-empty and it has a lattice structure which contains the allocation where every buyer receives his marginal contribution. We prove that in this kind of market, every pairwise-stable outcome is associated to a competitive equilibrium and vice versa. We study conditions under which the buyers-optimal and the seller-optimal core allocations are competitive equilibrium payoff vectors. Moreover, we characterize the markets for which the core coincidences with the set of competitive equilibria payoff vectors. When agents behave strategically, we introduce a procedure that implements the buyers-optimal core allocation as the unique subgame perfect Nash equilibrium outcome.
    Keywords: Many-to-many assignment markets, Core, Pairwise-stability, Competitive equilibrium.
    JEL: C71 C78
    Date: 2014
  6. By: Bakó, Barna; Kálecz-Simon, András
    Abstract: Anchoring is a well-known decision-making bias: original guesses for a certain question could act as anchors and could influence our final answers. Reference prices - in a similar fashion - can lead to a bias in consumer valuations, and thus consumer demand will be coherent but not one derived from a utility framework. In our paper we investigate the effect of the existence of anchoring on how oligopolistic firms might change their pricing strategy. More specifically, we analyze the effect of anchoring on pricing when differentiated firms compete in Bertrand fashion. We show that if the anchoring effect is smaller than a threshold the average price is lower compared to the no-anchoring case.
    Keywords: anchoring, consumer bias, Bertrand competition
    JEL: C72 D11 D43
    Date: 2014–06–29
  7. By: Leppälä, Samuli (Cardiff Business School)
    Abstract: There is substantial empirical evidence that innovation is geographically concentrated. Unlike what is generally assumed, however, it is not clear that localised knowledge spillovers provide a theoretically valid explanation for this. Studying spillovers of cost-reducing technology between Cournot oligopolists we show that 1) localised knowledge spillovers of any level do encourage agglomeration, but 2) whether this leads to higher levels of effective R&D depends on the type and level of knowledge spillovers, the number of firms, and the industry's R&D efficiency.
    Keywords: knowledge spillovers; agglomeration economies; innovation; location
    JEL: O33 R32 L13
    Date: 2014–07
  8. By: Bertrand Chopard; Thomas Cortade; Eric Langlais
    Abstract: This paper analyzes the effects of two damage rules (Lost Profi…t vs Unjust Enrichment) mainly used by Courts in patent litigations. In our model, the Infringer either is a mere imitator of the Patentee or introduces incremental innovations, and litigation costs are private information such that a pretrial settlement may be better for both litigants. We show that the Unjust Enrichment rule yields less trials than the Lost Pro…fit one. But regarding three main objectives, Patentee's protection, incentives to invest in R&D, and social welfare maximization,we …find that no rule is better than the other generally speaking. Our model also allows to emphasize how the combination between the size of litigation costs, the negotiation gains and the IPR strength, shapes the incentives to enforce as well infringe a IPR, although in a way specifi…c to each rule.
    Keywords: intellectual property, probabilistic patents, patent litigations, incremental innovations, pretrial negotiations, legal costs, imperfect competition.
    JEL: L1 L4 D8 K2 K4
    Date: 2014
  9. By: Stephen Roper (Warwick University Business School); Helen Xia (Loughborough University)
    Abstract: Innovation has a recognised effect on survival. Undertaking more risky innovation, for example, may increase the risk of business failure, while more incremental innovation may reduce failure risk. Here, we investigate how firms’ innovation strategy choices – which may reduce the riskiness or costs of innovation and/or increase the innovation rewards – moderate the innovation-survival relationship. Our analysis is based on UK Community Innovation Survey data matched with survival data from firms’ published accounts. We are able to match nearly 80 per cent of UK CIS respondents. Contrary to expectations we find that innovation partnering and intellectual property protection have little or no moderating effect on the innovation-survival relationship. However, receiving public support for innovation has significant positive moderating effects. This suggests the notion of “survival additionality”, i.e. firms receiving public support derive more persistent benefits from innovation than firms which did not receive public support. Specifically, firms which receive public support for innovation are 2.7 per cent more likely to survive for eight years than firms which innovate but without public support. This result is strongest for product and service rather than process change, with implications for innovation policy design and evaluation.
    Keywords: Innovation, survival, strategy, public support, additionality, UK
    JEL: O32 L1 O38 Q34 L26
    Date: 2014–02–02
  10. By: Stephen Roper (Warwick University Business School); Nola Hewitt-Dundas (Queen's University Belfast)
    Abstract: In many countries significant amounts of public funding are devoted to supporting firms’ R&D and innovation projects. Here, using panel data on the innovation activities of Irish manufacturing firms we examine the legacy effects of public subsidies for new product development and R&D. We examine five alternative mechanisms through which such effects may occur: input additionality, output additionality, and congenital, inter-organisational and experiential behavioural additionality. Tests suggest contrasting legacy effects with R&D subsidies generating legacy output additionality effects while new product development subsidies have legacy congenital and inter-organisational behavioural additionality effects. Our results have implications for innovation policy design and evaluation.
    Keywords: innovation policy, additionality, evaluation, Ireland
    JEL: O32 L1 O38 Q34 L26
    Date: 2014–07–01
  11. By: Mitsukuni Nishida (The Johns Hopkins Carey Business School); Marc Remer (Economic Analysis Group, U.S. Department of Justice)
    Abstract: Information frictions play a key role in a wide array of economic environments and are frequently incorporated into formal models as search costs. Yet, as search costs are typically unobserved, little empirical work investigates the determinants of the distribution of consumer search costs and the implications for policy. This paper explores the sources of heterogeneity in consumer search costs and how this heterogeneity and market structure shape firms' equilibrium pricing and consumers' search behavior in retail gasoline markets. We estimate the distribution of consumer search costs using price data for a large number of geographically isolated markets across the United States. The results demonstrate that the distribution of consumer search costs varies significantly across geographic markets and that market and population characteristics, such as household income, explain some of the variation. Policy counterfactuals suggest that the shape of the consumer search cost distribution has important implications for both government policy and firms' strategic pricing behavior. The experiments reveal that (1) the search cost distribution needs to be sufficiently heterogeneous to generate equilibrium price dispersion, and (2) the market-level expected price paid decreases in the number of firms, but consumers with high search costs may be worse off from an increased number of firms.
    Date: 2014–07
  12. By: Sjaak Hurkens; Angel L. López
    Abstract: European and the US mobile communication services markets have developed in rather different ways. There are striking differences in termination regulation and retail pricing models and one may wonder why this occurred and whether either of the markets outperforms the other in terms of efficiency and/or profitability. We address these issues by analyzing a symmetric oligopoly model in which firms are able, but not obliged, to charge subscribers for receiving and placing calls, may discriminate between on- and off-net calls and may request a monthly subscription fee. We show that a continuum of equilibria exist for any reciprocal termination rate, some of which resemble the European business model (with zero charges for reception) while others resemble the US business model (with equal prices for placing and receiving calls). We show that under neither of these business models full efficiency can be achieved. Comparing the European business model with termination regulated at cost to the US business model with voluntary Bill and Keep arrangements we show that the European scenario is more efficient when call externality is modest, and more profitable when either call externality is modest and call demand elasticity high or call externality high and call demand elasticity low. Our predictions are consistent both with observed network operators’ opposition to lowering termination rates in Europe and with voluntary agreements to Bill and Keep arrangements in the US.
    Keywords: access pricing, interconnection, regulation, telecommunications, networks, rational expectations
    JEL: D43 L13 L51 L96
    Date: 2014–07
  13. By: Marc Lebourges
    Abstract: This paper discusses the relevant cost standard for the economic replicability test for Next-Generation Access (NGA) networks, described in the Recommendation on Costing and Non-discrimination adopted by the European Commission. According to the Recommendation itself, in order to reconcile investment and competition, wholesale prices should have nonlinear characteristics and be only partly variable with the number of accesses. We demonstrate that a cost standard for the economic replicability test that implies fully fixed and variable cost recovery for the access seeker, including the total wholesale price, would be incompatible with the economics of NGA networks and that such a test would deter NGA investment. Therefore the cost standard for the economic replicability test should include only the variable part of the wholesale prices. However, we underline that during a transition phase, until competitors have secured access to NGA infrastructure, a temporary second test called the competition migration test should be added to ensure incumbent NGA retail prices do not foreclose copper-based efficient entrants. The tests we propose surpass the limits of the ladder of investment theory by including the business migration effect developed by Bourreau et al. (2012).
    Keywords: regulation
    Date: 2014–07–04
  14. By: Yin, Wei (Cardiff Business School); Matthews, Kent (Cardiff Business School)
    Abstract: Using a sample of 151 banks over the period 2003 to 2010, this paper estimates a model that examines the effect of switching costs in the Chinese loan market on banking profitability. In keeping with the extant empirical literature it reports a positive relationship between bank profitability and switching costs. Furthermore it reports the estimation of a systems model of switching costs and profitability. The main result is that bank size measured by total assets is has a complex relationship with switching costs. Competition between small banks creates the incentive for lock-in and increased switching costs whereas very large banks are less exercised by lock-in and switching costs. The study also finds that concentration has a negative relationship with switching costs and profitability, confirming the accepted view that the large state-owned banks are concerned with social as well as profit objectives.
    Keywords: Chinese banking; switching costs; bank profitability
    JEL: G21 C51 L14
    Date: 2014–07
  15. By: Pier Luigi Parcu
    Abstract: The working paper includes a collection of the case notes written by the national judges who attended the European Networking and Training for National Competition Enforcers (ENTraNCE 2012). The training program was organized by the RSCAS between September 2012 and June 2013 with the financial contribution of DG Competition of the European Commission. The case notes included in the working paper summarize judgments of new EU Member States and candidate countries related to different aspects of competition law enforcement. The working paper thus aims at increasing the understanding of the challenges faced by the national judiciary in enforcing national and EU competition in the context of the decentralized regime of competition law enforcement introduced by Reg. 1/2003.
    Date: 2014–06–04
  16. By: Yoshinori Kurokawa
    Abstract: This paper develops a simple, general equilibrium model in which competition policies--both entry and antitrust policies--can change the skill premium for wages. The model shows that under variety-skill complementarity, entry deregulation that reduces the fixed costs of entry increases the skill premium by increasing the number of firms and decreasing firm size. However, under variety-skill complementarity, an antitrust policy that reduces the size of cartels decreases the skill premium by decreasing the number of firms and increasing firm size. We also extend the model to a two-country model. The extended model shows that through trade, competition policies can have cross-country effects on the skill premium in multiple ways.
    Date: 2014–07

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