nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒08‒28
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Bertrand and the long run By Roberto Burguet (Institute for Economic Analysis, CSIC, and Barcelona GSE) and József Sákovics (The University of Edinburgh)
  2. Entry-Deterring Nonlinear Pricing with Bounded Rationality By Meng, Dawen; Tian, Guoqiang
  3. A General Theory of Endogenous Market Structures By Federico Etro; Paolo Bertoletti
  4. Search and Ripoff Externalities By Armstrong, Mark
  5. Robust Equilibria in Location Games By Berno Buechel; Nils Roehl
  6. On the Multiplicity of Equilibrium Strategies in a Non-Renewable Natural Resource Duopoly By Rémi Morin-Chassé; Markus Herrmann
  7. R&D partnerships and innovation performance: Can there be too much of a good thing? By Hottenrott, Hanna; Lopes-Bento, Cindy
  8. Direct and cross-scheme effects in a research and development subsidy program By Hottenrott, Hanna; Lopes-Bento, Cindy; Veugelers, Reinhilde
  9. Intellectual property rights protection in the presence of exhaustible resources By Hori, Takeo; Yamagami, Hiroaki
  10. Determinants of self-reporting under the European corporate leniency program By Hoang, Cung Truong; Hüschelrath, Kai; Laitenberger, Ulrich; Smuda, Florian
  11. Asymmetric and nonlinear pass-through of crude oil prices to gasoline and natural gas prices By Ahmed Atil; Amine Lahiani; Duc Khuong Nguyen
  12. Asymmetric Price Transmission in Indonesia’s Wheat Flour Market By Varela, Gonzalo J.; Taniguchi, Kiyoshi
  13. Price Asymmetry in Farm-Retail Price Transmission in the Turkish Dairy Market By Bor, Özgür; İsmihan, Mustafa; Bayaner, Ahmet
  14. Screening instruments for monitoring market power in wholesale electricity markets: Lessons from applications in Germany By Bataille, Marc; Steinmetz, Alexander; Thorwarth, Susanne
  15. The competition assessment framework for the retail energy sector: some concerns about the proposed interpretation By Stephen Littlechild
  16. Supply function equilibria in transportation networks By Pär Holmberg; Andy Philpott
  17. Programmatic Procurement: A Political Economy Review of the Transnet Freight Rail Competitive Supplier Development Programme By Ayabonga Cawe
  18. Meeting Technologies and Optimal Trading. Mechanisms in Competitive Search Markets By Benjamin Lester (Federal Reserve Bank of Philadelphia), Ludo Visschers (The University of Edinburgh & Universidad Carlos III, Madrid), Ronald Wolthoff (University of Toronto)
  19. Raising Awareness of Anticompetitive Behavior in the Financial Sector of the PRC By Asian Development Bank (ADB); ; ;
  20. Competition in the Cryptocurrency Market By Neil Gandal; Hanna Halaburda

  1. By: Roberto Burguet (Institute for Economic Analysis, CSIC, and Barcelona GSE) and József Sákovics (The University of Edinburgh)
    Abstract: We propose a new model of simultaneous price competition, based on firms offer personalized prices to consumers. In a market for a homogeneous good and decreasing returns, the unique equilibrium leads to a uniform price equal to the marginal cost of each firm, at their share of the market clearing quantity. Using this result for the short-run competition, we then investigate the long-run investment decisions of the firms. While there is underinvestment, the overall outcome is more competitive than the Cournot model competition. Moreover, as the number of firms grows we approach the competitive long-run outcome.
    Keywords: price competition, personalized prices, marginal cost pricing
    JEL: D43 L13
    Date: 2014–08–12
  2. By: Meng, Dawen; Tian, Guoqiang
    Abstract: This paper considers an entry-deterring nonlinear pricing problem faced by an incumbent firm of a network good. The analysis recognizes that the installed user base/network of incumbent monopolist has preemptive power in deterring entry if the entrant’s good is incompatible with the incumbent’s network. This power is, however, dramatically weakened by the bounded rationality of consumers in the sense that it is vulnerable to small pessimistic forecasting error when the marginal cost of entrants falls in some medium range. These findings provide a formal analysis that helps reconcile two seemingly contrasting phenomena: on one hand, it is very difficult for a new, incompatible technology to gain a footing when the product is subject to network externalities; on the other hand, new technologies may frequently escape from inefficient lock-in and supersede the old technologies even in the absence of backward incompatibility. Our results therefore shed light on how the market makes transition between incompatible technology regimes.
    Keywords: Nonlinear pricing, Entry deterrence, Network Externalities, Bounded rationality
    JEL: D42 D62 D82
    Date: 2013–08
  3. By: Federico Etro (Department of Economics, University Of Venice Cà Foscari); Paolo Bertoletti (Department of Economics, University Of Pavia)
    Abstract: We provide a unified approach to imperfect (monopolistic, Bertrand and Cournot) competition equilibria with demand functions derived from symmetric preferences over a large but finite number of goods. The equilibrium markups depend on the Morishima Elasticity of Substitution/Complementarity between goods, and can be derived directly from the utility functions and ranked unambiguously. We characterize the endogenous market structures, their dependence on market size, income and firms’ productivity and compare them with the optimal allocations. Finally, we apply our results to the case of preferences such as Generalized Leontief, Generalized linear and Generalized quadratic that we introduce in the literature on imperfect competition.
    Keywords: Monopolistic Competition, Imperfect Competition, Elasticity of Substitution, Free Entry
    JEL: J24 J31 I24
    Date: 2014
  4. By: Armstrong, Mark
    Abstract: This paper surveys models of markets in which some consumers are "savvy" while others are not. We discuss when the presence of savvy consumers improves the deals available to non-savvy consumers in the market (the case of search externalities), and when the non-savvy fund generous deals for savvy consumers (ripoff externalities). We also discuss when the two groups of consumers have aligned or divergent views about market interventions. The analysis covers two overlapping families of models: those which examine markets with price/quality dispersion, and those which exhibit forms of consumer hold-up.
    Keywords: Consumer protection, consumer search, price dispersion, hold-up, add-on pricing.
    JEL: D03 D18 D8 L13 M3
    Date: 2014–07
  5. 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
  6. By: Rémi Morin-Chassé; Markus Herrmann
    Abstract: We identify two possible equilibrium configurations for a non-renewable resource duopoly in a discrete-time framework. For the purpose of illustration, we suppose initial endowments of firms that allow for a maximum of two extraction periods. In the first possible equilibrium, the duopoly exists for two periods, while in the second possible equilibrium, the duopoly lasts only for one period and the firm with the higher initial endowment becomes a monopolist in the second and last period. As neither equilibrium configuration dominates the other for both firms at the same time, it is unclear whether firms acting simultaneously can coordinate on one particular configuration.
    Keywords: Open-loop equilibrium, closed-loop equilibrium, duopoly, non-renewable resource
    JEL: Q30 D43
    Date: 2014
  7. By: Hottenrott, Hanna; Lopes-Bento, Cindy
    Abstract: R&D collaboration facilitates pooling of complementary skills, learning from the partner as well as sharing risks and costs. Research therefore repeatedly stressed the positive relationship between collaborative R&D and innovation performance. Collaboration, however, involves transaction costs in form of coordination and monitoring efforts and requires knowledge disclosure. This study explicitly considers a firm's collaboration intensity, that is, the share of collaborative R&D projects in a firms' total R&D projects in a sample of mostly small and medium-sized firms (SMEs). We can confirm previous findings in terms of gains for innovation performance, but also show that collaboration has decreasing and even negative returns on product innovation if its intensity increases above a certain threshold. In particular, costs start outweighing benefits if a firm pursues more than about two thirds of its R&D projects in collaboration. --
    Keywords: innovation performance,product innovation,R&D partnerships,collaboration intensity,SMEs,transaction costs,selection model,endogenous switching
    JEL: O31 O32 O33 O34
    Date: 2014
  8. By: Hottenrott, Hanna; Lopes-Bento, Cindy; Veugelers, Reinhilde
    Abstract: This study investigates the effects of an R&D subsidy scheme on participating firms' net R&D investment. Making use of a specific policy design in Belgium that explicitly distinguishes between research and development grants, we estimate direct and cross-scheme effects on research versus development intensities in recipients firms. We find positive direct effects from research (development) subsidies on net research (development) spending. This direct effect is larger for research grants than for development grants. We also find cross-scheme effects that may arise due to complementarity between research and development activities. Finally, we find that the magnitude of the treatment effects depends on firm size and age and that there is a minimum effective grant size, especially for research projects. The results support the view that public subsidies induce higher additional investment particularly in research where market failures are larger, even when the subsidies are targeting development. --
    Keywords: R&D,Complementarity,Research Subsidies,Development Subsidies,Innovation Policy
    JEL: H23 O31 O38
    Date: 2014
  9. By: Hori, Takeo; Yamagami, Hiroaki
    Abstract: We construct a research and development (R&D) based endogenous growth model with exhaustible resources and investigate whether protection of intellectual property rights (IPR) can sustain perpetual growth. We show that relatively weak IPR protection is sufficient to sustain perpetual growth when goods production is more resource-intensive, whereas relatively strong IPR protection is needed for perpetual growth if production is less resource-intensive. If the resource intensity in goods production is medium, even the strictest IPR protection cannot sustain perpetual growth when the quality improvements brought about by innovations are small enough. In this case, we find that R&D subsidies can complement IPR protection in sustaining perpetual growth. We derive the socially optimal level of IPR protection, which is increasing in the resource intensity of goods production. Furthermore, we also consider a case where resource is essential for R&D activities and show a knife-edge condition for perpetual growth.
    Keywords: Endogenous growth; Exhaustible resource; Innovation; Intellectual property rights protection; Patent breadth
    JEL: L50 O30 P28
    Date: 2014–08
  10. By: Hoang, Cung Truong; Hüschelrath, Kai; Laitenberger, Ulrich; Smuda, Florian
    Abstract: We empirically investigate the determinants of self-reporting under the European corporate leniency program. Applying a data set consisting of 442 firm groups that participated in 76 cartels decided by the European Commission between 2000 and 2011, we find that the probability of a firm becoming the chief witness increases with its character as repeat offender, the size of the expected basic fine, the number of countries active in one group as well as the size of the firm's share in the cartelized market. Our results have important implications for an effective prosecution of anti-cartel law infringers. --
    Keywords: Competition policy,cartels,leniency,European Union
    JEL: L41 K21
    Date: 2014
  11. By: Ahmed Atil (ESC Rennes School of Business - ESC Rennes School of Business); Amine Lahiani (ESC Rennes School of Business - ESC Rennes School of Business, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Duc Khuong Nguyen (IPAG - IPAG Business School - Ipag)
    Abstract: In this article,we use the recently developed nonlinear autoregressive distributedlags (NARDL) model to examine the pass-through of crude oil prices into gasoline and natural gas prices. Our approach allowsus to simultaneously test the short-and long-run nonlinearities through positive and negative partial sum decompositions of the predetermined explanatory variables. It also offers the possibility to quantify the respective responses of gasoline and natural gas prices to positive and negative oil price shocks from the asymmetric dynamic multipliers. The obtained results indicate that oil prices affect gasoline prices and natural gas prices in an asymmetric and nonlinear manner, but the price transmission mechanism is not the same. Important policy implications can be learned from the empirical findings.
    Keywords: Energy price transmission ; NARDL model ; Asymmetric pass-through
    Date: 2014–10
  12. By: Varela, Gonzalo J. (World Bank); Taniguchi, Kiyoshi (Asian Development Bank)
    Abstract: Data indicate that its domestic price in Indonesia has been increasing regardless of movements in the international price of wheat. A test for asymmetric price transmission from international wheat to domestic wheat flour markets is conducted using an error correction model and find the presence of asymmetric price transmission. The upward adjustment in the domestic price of wheat flour is much faster than its adjustment downward when it deviates from long-run equilibrium. Our results are robust to use of disaggregated data as well as to inclusion of additional of control variables such as prices of other inputs. We argue that asymmetric transmission occurs due to market concentration of wheat flour milling. We offer some policy suggestions for correcting these.
    Keywords: spatial integration; asymmetric price transmission; monopolistic competition; commodity prices; agricultural market; wheat flour
    JEL: F12 L11 Q11 Q13 Q17
    Date: 2014–03–01
  13. By: Bor, Özgür (Atilim University/Department of Economics); İsmihan, Mustafa (Atilim University/Department of Economics); Bayaner, Ahmet (Akdeniz University/Department of Management)
    Abstract: This study investigates the price asymmetry in farm-retail price transmission in the Turkish milk market. An asymmetric error correction model is applied on the monthly price data, and the results suggest that there is a positive price asymmetry in the farm-retail price transmission in the Turkish dairy market. That is, the retail prices tend to adjust more quickly to the input price increases than to its decreases which yield welfare losses to the consumers. In addition, cointegration results imply that there is a significant market power in the dairy market.
    Keywords: Price Asymmetry, Turkey, Milk, Error Correction Model
    JEL: Q11 C22
    Date: 2013
  14. 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
  15. By: Stephen Littlechild
    Abstract: The framework proposed by Ofgem, OFT and CMA invokes a well-functioning market, but the Competition Commission has not always used such a concept, and when it has done so it has been problematic. Here, the well-functioning market is Ofgem’s vision of a successful market, not anchored in any actual market. Ofgem’s indicators of a competitive market have changed since 2002: tariff variety and products tailored to different customer groups are now a harmful complexity rather than a potential benefit of competition. The proposed “theories of harm” ignore regulatory policy and coordinated conduct facilitated by regulation. The analysis of weak customer response fails to distinguish between competition as an equilibrium state and as the Competition Commission's rivalrous discovery process over time. The framework thus reflects Ofgem’s perspective, but the assessment needs to be independent because regulation is at issue, and because Ofgem is no longer capable of a competition assessment.
    Keywords: Well-functioning market, competition assessment, retail competition
    JEL: L97 L51
    Date: 2014–08–04
  16. By: Pär Holmberg; Andy Philpott
    Abstract: Transport constraints limit competition and arbitrageurs' possibilities of exploiting price differences between commodities in neighbouring markets. We analyze a transportation network where oligopoly producers compete with supply functions under uncertain demand, as in wholesale electricity markets. For symmetric networks with a radial structure, we show that existence of symmetric supply function equilibria (SFE) is ensured if demand shocks are sufficiently evenly distributed. We can explicitly solve for them for uniform multi-dimensional nodal demand shocks.
    Keywords: Spatial competition, Multi-unit auction, Supply Function Equilibrium, Trading network, Transmission network, Wholesale electricity markets
    JEL: D43 D44 C72 L91
    Date: 2014–08–04
  17. By: Ayabonga Cawe
    Abstract: Procurement policies in a country like South Africa have been targeted as a vehicle to achieve a range of social objectives. Public procurement allows the government to combine two functions, that of a purchaser in the market, and at the same time regulating the market through the use of its purchasing power to achieve social justice.
    Keywords: Politcal Economy, Freight Rail, Supplier Development Programme
    Date: 2014
  18. By: Benjamin Lester (Federal Reserve Bank of Philadelphia), Ludo Visschers (The University of Edinburgh & Universidad Carlos III, Madrid), Ronald Wolthoff (University of Toronto)
    Abstract: In many markets, sellers advertise their good with an asking price. This is a price at which the seller will take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers’ revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the positive implications of this pricing mechanism for transaction prices and allocations.
    Keywords: Asking Prices, Directed Search, Inspection Costs, Efficiency.
    JEL: C78 D44 D82 D83 L11 R31 R32
    Date: 2014–05–12
  19. By: Asian Development Bank (ADB); (East Asia Department, ADB); ;
    Abstract: The Anti-Monopoly Law, in effect since August 2008, seeks to encourage competition, maintain market order, and facilitates the allocation of resources through open markets in the People’s Republic of China (PRC). Studies on the impact of this law on the PRC’s financial industry have been limited in scope, hence, the research as published was conducted to fill the gap. This study examines the provisions of the law and the legislation process for them, followed by a discussion of the role of the PRC’s anti-monopoly authorities in enforcing the law in the banking, insurance, and securities industries. It looks at monopolistic practices in the financial industry and the mechanisms instituted for supervising and regulating those practices. It then makes conclusions about the current monopoly situation in the PRC’s financial industry and policy recommendations for a more effective and efficient enforcement of the said law.
    Keywords: asian development bank, adb, people's republic of china, prc, competition law, monopolistic behavior, china financial sector, antimonopoly, competition policy, antitrust, fair business practice, open markets
    Date: 2013–05
  20. By: Neil Gandal; Hanna Halaburda
    Abstract: We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining the changes over time in exchange rate data among cryptocurrencies. Specifically, we look at two aspects: (1) competition among different currencies, and (2) competition among exchanges where those currencies are traded. Our data suggest that the winner-take-all effect is dominant early in the market. During this period, when Bitcoin becomes more valuable against the U.S. dollar, it also becomes more valuable against other cryptocurrencies. This trend is reversed in the later period. The data in the later period are consistent with the use of cryptocurrencies as financial assets (popularized by Bitcoin), and not consistent with “winner-take-all” dynamics. For exchanges, we find little if any evidence of arbitrage opportunities. With no arbitrage opportunities, it is possible for multiple exchanges to coexist in equilibrium despite two-sided network effects.
    Keywords: E-Money
    JEL: L1
    Date: 2014

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