nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒08‒25
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Robust Equilibria in Location Games By Berno Buechel; Nils Roehl
  2. Deterrence Effects of Korean Antitrust Enforcement on Producer Prices and Profit Margins By Robert M. Feinberg; Minsoo Park
  3. Patent Trolls: Evidence from Targeted Firms By Lauren Cohen; Umit Gurun; Scott Duke Kominers
  4. Option Pricing in an Oligopolistic Setting By Villena, Marcelo; Villena, Mauricio
  5. Firms’ Heterogeneity and Incomplete Pass-Through By STEFANIA GARETTO
  6. The Impact of Mergers on Quality Provision: Evidence from the Airline Industry By Jeffrey T. Prince; Daniel H. Simon
  7. Fixed and mobile broadband; Are they substitutes or complements? By Jong-Hee Hahn; Yun Jeong Choi; Jinsoo Bae
  8. Examining the Number of Competitors and the Cost of Medicare Part D: Working Paper 2014-04 By Andrew Stocking; James Baumgardner; Melinda Buntin; Anna Cook
  9. Competition and the Cost of Medicare’s Prescription Drug Program By Congressional Budget Office
  10. Screening instruments for monitoring market power in wholesale electricity markets: Lessons from applications in Germany By Bataille, Marc; Steinmetz, Alexander; Thorwarth, Susanne
  11. Limited Deposit Insurance Coverage and Bank Competition By Shy, Oz; Stenbacka, Rune; Yankov, Vladimir
  12. Market Regulations and USO in the Revised Swiss Postal Act: Provisions and Authorities By Christian Jaag; Martin Maegli
  13. The levelling effect of product market competition on gender wage discrimination By Hirsch, Boris; Oberfichtner, Michael; Schnabel, Claus
  14. Adverse Effects of Competition and Rents on Collective Bargaining Status – Evidence from Germany By Finn Martensen
  15. New-Keynesian Phillips Curve with Bertrand Competition and Endogenous Entry By Federico Etro; Lorenza Rossi

  1. By: Berno Buechel (University of Hamburg); Nils Roehl (University of Paderborn)
    Abstract: In the framework of spatial competition, two or more players strategically choose a location in order to attract consumers. It is assumed standardly that consumers with the same favorite location fully agree on the ranking of all possible locations. To investigate the necessity of this questionable and restrictive assumption, we model heterogeneity in consumers' distance perceptions by individual edge lengths of a given graph. A profile of location choices is called a ``robust equilibrium'' if it is a Nash equilibrium in several games which differ only by the consumers' perceptions of distances. For a finite number of players and any distribution of consumers, we provide a full characterization of all robust equilibria and derive structural conditions for their existence. Furthermore, we discuss whether the classical observations of minimal differentiation and inefficiency are robust phenomena. Thereby, we find strong support for an old conjecture that in equilibrium firms form local clusters.
    Keywords: spatial competition, Hotelling-Downs, networks, graphs, Nash equilibrium, median, minimal differentiation
    JEL: C72 D49 P16 D43
    Date: 2013–02
  2. By: Robert M. Feinberg; Minsoo Park
    Date: 2014
  3. By: Lauren Cohen; Umit Gurun; Scott Duke Kominers
    Abstract: We provide theoretical and empirical evidence on the evolution and impact of non-practicing entities (NPEs) in the intellectual property space. Heterogeneity in innovation, given a cost of commercialization, results in NPEs that choose to act as "patent trolls" that chase operating firms' innovations even if those innovations are not clearly infringing on the NPEs' patents. We support these predictions using a novel, large dataset of patents targeted by NPEs. We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks). Furthermore, NPEs target firm profits arising from exogenous cash shocks unrelated to the allegedly infringing patents. We next show that NPEs target firms irrespective of the closeness of those firms' patents to the NPEs', and that NPEs typically target firms that are busy with other (non-IP related) lawsuits or are likely to settle. Lastly, we show that NPE litigation has a negative real impact on the future innovative activity of targeted firms.
    JEL: D2 K1 O31
    Date: 2014–08
  4. By: Villena, Marcelo; Villena, Mauricio
    Abstract: Option valuation models are usually based on frictionless markets. This paper extends and complements the literature by developing a model of option pricing in which the derivative and/or the underlying asset have an oligopolistic market structure, which produces an expected return on these assets that exceeds (or goes below) their fundamental value, and hence affects the option valuation. Our formulation begins modeling a capital asset pricing model that takes into account an oligopolistic setting, and hence the standard option pricing formula is derived, but this time considering the level of market power into the model. Our results show that higher levels of market power will lower the required expected return, in comparison to the perfectly competitive CAPM model. Similarly, simulations show that higher levels of market power in the derivative markets tend to increase the call option values in comparison to those values given by the standard Black and Scholes formulation, while the impact of market power in the underlying asset market tends to lower the option price.
    Keywords: Capital Asset Pricing, Option Pricing, Oligopolistic Markets.
    JEL: D43 G13
    Date: 2011–03–01
  5. By: STEFANIA GARETTO (Department of Economics, Boston University)
    Abstract: A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass-through). The wedge between exchange rates and relative prices also varies a cross countries (pricing-to-market). I present a model of trade and international price-setting with heterogeneous firms, where firms’ strategic behavior implies that: 1) firm-level pass-through is incomplete and a U-shaped function of firm market share; 2) exchange rate fluctuations affect both the prices of traded goods and the prices of goods sold domestically; and 3) firm-level pass-through varies across destination countries. Estimates from a panel data set of cars prices support the predictions of the model.
    Keywords: Heterogeneous firms, incomplete pass-through, pricing to market
    JEL: F12 F31 L13
    Date: 2014–03
  6. By: Jeffrey T. Prince (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Daniel H. Simon (School of Public and Environmental Affairs, Indiana University)
    Abstract: We examine how mergers affect quality provision by analyzing five U.S. airline mergers, focusing on on-time performance (OTP). We find mild evidence that merging carriers’ OTP worsens in the short run. However, we find consistent evidence that in the long run, their OTP improves. Subsequent analyses indicate efficiency gains, not reduced load factor or passenger volume, underlie our long-run result. Additional analyses of quality provision (e.g., flight cancellations) show no long-run worsening in these areas by merging firms. In the long run, airline mergers do not result in worsening performance, at least along several measures, and provide some time-saving efficiencies.
    JEL: L0
    Date: 2014–01
  7. By: Jong-Hee Hahn (Yonsei University); Yun Jeong Choi (Yonsei University); Jinsoo Bae (Ohio State University)
    Abstract: This paper investigates whether fixed and mobile broadband services are substitutes or complements using firm-level panel data obtained from three major telecommunications operators in South Korea. We employ a multi-level demand model based on Hausman et al. (1994), which allow for the possibility of complementarity between differentiated services. The estimated price elasticities of demand indicate that mobile broadband is a (week) substitute for fixed broadband while fixed broadband is complementary to mobile broadband. This is in contrast with the previous studies based on logit models which essentially assume substitution between different technologies. This result implies that fixed and mobile internet services constitute distinctive antitrust markets at least in the early stage of mobile broadband development.
    Keywords: Mobile broadband, Fixed broadband, Substitution, Complementarity, Multi-level demand model.
    Date: 2014–07
  8. By: Andrew Stocking; James Baumgardner; Melinda Buntin; Anna Cook
    Abstract: Most beneficiaries of Medicare's Part D prescription drug insurance choose among private drug plans to receive their coverage. This paper is the first to examine the relationship between the number of competing plan sponsors and the cost of Part D during the program's first five years. Over the period from 2006 to 2010, regional Part D markets contained between 16 and 22 plan sponsors offering stand-alone plans. Consistent with economic theory, we find that increases in the number of plan sponsors within a market were associated with lower bids and lower overhead and profits of plans in that market. For example, among stand-alone plans that were not eligible to be assigned low-income beneficiaries, we find that each additional plan sponsor entering an 18-firm market was associated with a reduction in bids for a month of basic coverage to a beneficiary of average health of 0.4 percent—or $0.33 for a plan that bid $85—which corresponds to an elasticity of -0.071. (That result is an arithmetic average across six specifications in which estimates range from $0.20 to $0.50.) Because bids are used to directly determine government spending, we estimate that an additional plan sponsor nationwide was associated with a reduction in government spending of $7 million to $17 million each year.
    JEL: I10 I11 I13 I18 I38
    Date: 2014–07–30
  9. By: Congressional Budget Office
    Abstract: Spending for Medicare's prescription drug program (Part D) was $50 billion in 2013—about 50 percent less than CBO projected when the program was created. Lower growth rates in national drug spending and lower-than-expected enrollment primarily account for the difference. The competitive design of Part D has also constrained spending. CBO found that spending was lower in years when, and in areas of the country where, more plan sponsors competed for beneficiaries.
    JEL: I10 I11 I13 I18 I38
    Date: 2014–07–30
  10. By: Bataille, Marc; Steinmetz, Alexander; Thorwarth, Susanne
    Abstract: While liberalization in energy markets has been a widely successful process all over the world, incumbents often still hold a dominant position. Thus, electricity wholesale markets are subject to market surveillance. Nevertheless, consolidated findings on abusive practices of market power and their cause and effect in wholesale electricity markets are scarce and non-controversial market monitoring practices fail to exist. Our application of the established measure of market concentration RSI shows that it serves as a decent indicator for the rents that can be gained in the market but also reveals considerable weaknesses of the RSI. Therefore, we propose and apply the "Return on Withholding Capacity Index" (RWC) representing a measure of the firms' incentive of withholding capacity as a complementary index to the RSI. --
    Keywords: Market Power,Electric Power Markets,Measurement
    JEL: L11 L43 L94 K23 C13
    Date: 2014
  11. By: Shy, Oz (Federal Reserve Bank of Boston); Stenbacka, Rune (Hanken School of Economics); Yankov, Vladimir (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Deposit insurance schemes in many countries place a limit on the coverage of deposits in each bank. However, no limits are placed on the number of accounts held with different banks. Therefore, under limited deposit insurance, some consumers open accounts with different banks to achieve higher or full deposit insurance coverage. We compare three regimes of deposit insurance: No deposit insurance, unlimited deposit insurance, and limited deposit insurance. We show that limited deposit insurance weakens competition among banks and reduces total welfare relative to no or unlimited deposit insurance.
    Keywords: Limited deposit insurance coverage; deposit rates; bank competition
    JEL: G21
    Date: 2014–08–06
  12. By: Christian Jaag; Martin Maegli
    Abstract: This paper analyzes the market regulations and USO as defined in the Swiss Postal Act and their interaction with competition law. Specifically, the paper covers the following aspects of the regulatory framework for the postal sector in Switzerland: First, the scope of the USO, consisting of provisions on the range of products to be offered and their prices, on the density and accessibility of the postal outlet network as well as the coverage and frequency of delivery. Second, it analyzes the financing of the USO, consisting of provisions on the calculation of the net cost, a residual monopoly for letters up to 50 grams and a regulatory cost allocation mechanism to ensure consistency of price regulation and the financing of the USO. Third, it presents the relevant regulatory authorities, consisting of the allocation of competences and the interfaces between the regulators (PostCom, OFCOM, ComCo, Price Supervisor).
    Keywords: Switzerland, Postal Regulation, Universal Service Obligation
    JEL: L43 L51
    Date: 2014–08
  13. By: Hirsch, Boris; Oberfichtner, Michael; Schnabel, Claus
    Abstract: Using linked employer-employee panel data for West Germany that include direct information on the competition faced by plants, we investigate the effect of product market competition on the gender pay gap. Controlling for match fixed effects we find that intensified competition significantly lowers the unexplained gap in plants with neither collective agreements nor a works council. Conversely, there is no effect in plants with these types of worker codetermination, which are unlikely to have enough discretion to adjust wages in the short run. We also document a larger competition effect in plants with few females in their workforces. Our findings are in line with Beckerian taste-based employer wage discrimination that is limited by competitive forces. -- Diese Studie nutzt verknüpfte Arbeitgeber-Arbeitnehmer-Paneldaten für Westdeutschland, welche ein direktes Maß des betrieblichen Wettbewerbsdrucks enthalten, um den Effekt von Wettbewerbsdruck auf Gütermärkten auf das geschlechtsspezifische Lohndifferential zu untersuchen. Bei Kontrolle für matchfixe Effekte finden wir, dass intensiverer Wettbewerb das unerklärte Geschlechterlohndifferential in Betrieben, die weder einen Betriebsrat haben noch tarifgebunden sind, signifikant reduziert. Im Gegensatz dazu zeigt sich kein Effekt in Betrieben mit einer dieser Mitbestimmungsformen, die vermutlich nicht genug Spielraum haben, um Löhne kurzfristig anzupassen. Wir zeigen außerdem, dass der Effekt von Wettbewerbsdruck in Betrieben mit einem geringen Frauenanteil in der Belegschaft stärker ausfällt. Unsere Ergebnisse sind mit Beckers Theorie präferenzbasierter Diskriminierung seitens der Arbeitgeber vereinbar, die durch Wettbewerbsdruck in Schranken gehalten wird.
    Keywords: gender pay gap,discrimination,product market competition
    JEL: J16 J31 J71
    Date: 2014
  14. By: Finn Martensen (Department of Economics, University of Konstanz, Germany)
    Abstract: Why do firms and workers bargain individually or collectively? I test the effect of product market competition and rents with German establishment data. Against intuition, competition and rents have opposite effects. Competition has a u-shaped effect on the probability of collective bargaining. This contradicts the existing theory (Ebell and Haefke 2006; Boeri and Burda 2009). By contrast, firms with higher rents are more prone to collective bargaining. For both competition and rents, the effect is stronger for sector-level than for firm-level collective bargaining. Indicators of higher productivity also matter: A higher export share drives firms into individual wage bargaining, while a higher share of workers with higher education drives firms into firm-level bargaining. Thus, the interplay between productivity, competition, and the wage setting regime is much more subtle than suggested by the existing theory.
    Keywords: Collective bargaining, Wage determinations, Productivity, Product market competition, Establishment data
    JEL: J24 J52 J64 C25
    Date: 2014–08–07
  15. By: Federico Etro (Department of Economics, University Of Venice Cà Foscari); Lorenza Rossi (Department of Economics, University Of Pavia)
    Abstract: We derive a New Keynesian Phillips Curve under Calvo staggered pricing and price competition. Firms strategic interactions induce price adjusters to change their prices less when there are more firms that do not adjust. This reduces the slope of the Phillips curve and generates an additional source of real rigidity that magnifies the impact of monetary shocks on the economic activity. Endogenous entry amplifies the impact of both monetary and real shocks. We study the design of the optimal Taylor rule in the case of a fixed number of firms and we characterize the optimal monetary policy to restore the social planner allocation and the optimal Ramsey steady state in the case of endogenous entry.
    Keywords: New Keynesian Phillips Curve, Real rigidities, Sticky prices, Optimal monetary policy, Inflation, Endogenous entry
    JEL: E3 E4 E5
    Date: 2014

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