nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒10‒13
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. The Limits of Price Discrimination By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  2. Sequential Product Innovation, Competition and Patent Policy By George Norman; Lynne Pepall; Dan Richards
  3. A Utility-Based Model of Sales with Informative Advertising By Sandro Shelegia; Chris M. Wilson
  4. Quality Competition in Mobile Telecommunications: Evidence from Connecticut By Patrick Sun
  5. Market Power and Collusion on Interconnection Phone Market in Tunisia: What Lessons from International Experiences By Sami DEBBICHI; Walid HICHRI
  6. Competition in the Cryptocurrency Market By Neil Gandal; Hanna Halaburda
  7. The Network Effects of Air-Travel Demand By Yanhao Wei
  8. Unbundling the incumbent: Evidence from UK broadband By Mattia Nardotto; Tommaso Valletti; Frank Verboven
  9. Static and Dynamic Networks in Interbank Markets By Ethan Cohen-Cole; Eleonora Patacchini; Yves Zenou
  10. Better Together? Retail Chain Performance Dynamics in Store Expansion Before and After Mergers By Mitsukuni Nishida; Nathan Yang
  11. Modelling CO2 Price Pass-Through in Imperfectly Competitive Power Markets By Francesco Gulli; Liliya Chernyav´ska
  12. CSR in an Asymmetric Duopoly with Environmental Externalities By Luca Lambertini; Arsen Palestini; Alessandro Tampieri
  13. Impact of competition and business cycles on the behaviour of monopolistic markups in the Polish economy By Jan Hagemejer; Michal Gradzewicz
  14. A Risk Map of Markups: Why We Observe Mixed Behaviors of Markups By Seong-Hoon Kim; Seongman Moon

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Benjamin Brooks (Dept. of Economics, Princeton University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We analyze the welfare consequences of a monopolist having additional information about consumers' tastes, beyond the prior distribution; the additional information can be used to charge different prices to different segments of the market, i.e., carry out "third degree price discrimination." We show that the segmentation and pricing induced by the additional information can achieve every combination of consumer and producer surplus such that: (i) consumer surplus is non-negative, (ii) producer surplus is at least as high as profits under the uniform monopoly price, and (iii) total surplus does not exceed the surplus generated by efficient trade.
    Keywords: First degree price discrimination, Second degree price discrimination, Third degree price discrimination, Private information, Privacy, Bayes correlated equilibrium, Concavification
    JEL: C72 D82 D83
    Date: 2013–05
  2. By: George Norman; Lynne Pepall; Dan Richards
    Abstract: This paper examines the role of patent policy in a spatial model of sequential innovation. Initial entrepreneurs develop a new product market and anticipate that subsequent innovation may lead to a product line that consumers value more highly. The likelihood of sequential innovation increases with the number of initial early entrants in the market. Patent protection that encourages early entry can therefore raise the probability of both initial and subsequent innovation. We determine the optimal patent breadth as a function of key industry characteristics of both consumer taste and the new technology.
    Keywords: sequential innovation, patent policy, entry
    JEL: L5 O25
  3. By: Sandro Shelegia; Chris M. Wilson
    Abstract: This paper presents a generalised framework to understand mixed-strategy sales behaviour with informative advertising. By introducing competition in the utility space into a clearinghouse sales model, we oer a highly tractable framework that can i) provide a novel welfare analysis of intra-personal price discrimination in sales markets, ii) characterise sales in a range of new contexts including complex market settings and situations where rms conduct sales with two-part taris or non-price variables such as package size, and iii) synthesise past research and highlight its key forces and assumptions.
    JEL: L13 D43 M37 D83
    Date: 2014–09
  4. By: Patrick Sun (Columbia University, Department of Economics, 1022 International Affairs Building, 420 West 118th Street, New York City, NY 10027)
    Abstract: Signal quality is a significant contributor to the overall quality of wireless telephone service, which competitive analyses often overlooks. To understand the competitive impact of signal quality investment on further consolidation in this industry, I use a market research survey of choice of wireless service provider and a government database on transmission base stations in Connecticut. Dropped call rates and local coverage improve as base station density increases, so I treat base station density as an endogenous product characteristic and relate it to the local value of wireless services. I find a marginal base station contributes a median 0.15% increase in own market share and a median 0.03% decrease in rival market share. Marginal base station costs are implied to be substantial, so if these costs can be effectively reduced through network integration after a merger, the merging firms and consumers can both benefit through increased base station provision. If such integration is not possible, consumers lose due to either a loss in variety of products or reduced incentives of merged firms to produce quality. These results suggest that merger review must pay careful attention to the potential for network integration in wireless and related industries.
    Keywords: quality competition, merger analysis, telecommunications.
    JEL: L15 L40 L96
    Date: 2014–09
  5. By: Sami DEBBICHI; Walid HICHRI
    Abstract: We try in this paper to characterize the state of mobile phone market in Tunisia. Our study is based on a survey of foreign experience (Europe) in detecting collusive behavior and a comparison of the critical threshold of collusion between operators in developing countries like Tunisia. The market power is estimated based on the work of Parker Roller (1997) and the assumption of "Balanced Calling Pattern". We use then the model of Friedman (1971) to compare the critical threshold of collusion. We show that the “conduct parameter” measuring the intensity of competition is not null during the period 1993-2011. Results show also that collusion is easier on the Tunisian market that on the Algerian, Jordanian, or Moroccan one.
    Keywords: Termination rate; Market power; Competition; Mobile phone Market.
    JEL: D41 L96 L71
    Date: 2014–09–25
  6. By: Neil Gandal (Tel Aviv University and CEPR); Hanna Halaburda (Bank of Canada, CESifo and INE PAN)
    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.
    Keywords: bitcoin, cryptocurrency, network effects
    JEL: L17 L86
    Date: 2014–09
  7. By: Yanhao Wei (Department of Economics, University of Pennsylvania)
    Abstract: As demand increases, airline carriers often increase flight frequencies to meet the larger flow of passengers in their networks, which reduces passengers' schedule delays and attracts more demand. Motivated by this, I study a structural model of the U.S. airline industry accounting for possible network effects of demand compared with previous studies, the model implies higher cost estimates, which seem more consistent with the unprofitability of the industry; below-marginal-cost pricing becomes possible and appears on many routes. I also study airline mergers and find that the network effects can be the main factor underlying their profitability.
    Keywords: Airlines, Network Effects, Flight Frequency, Merger, Networks
    JEL: L13 L93 D62 C31
    Date: 2014–09–21
  8. By: Mattia Nardotto (University of Cologne); Tommaso Valletti (Imperial College London, University of Rome “Tor Vergata” & CEPR); Frank Verboven (KU Leuven, Telecom ParisTech and CEPR)
    Abstract: We consider the impact of a regulatory process forcing an incumbent telecom operator to make its local broadband network available to other companies (local loop unbundling, or LLU). Entrants are then able to upgrade their individual lines and offer Internet services directly to customers. Employing a very detailed dataset covering the whole of the UK, we find that, over the course of time, many entrants have begun to take advantage of unbundling. LLU entry only had a positive effect on broadband penetration in the early years, and no longer in the recent years as the market reached maturity. In contrast, LLU entry continues to have a positive impact on the quality of the service provided, as entrants differentiate their products upwards compared to the incumbent. We also assess the impact of competition from an alternative form of technology (cable) which is not subject to regulation, and what we discover is that inter-platform competition has a positive impact on both penetration and quality.
    Keywords: regulation, competition, entry, telecommunications, broadband, local loop unbundling
    JEL: D22 K23 L43 L51 L96
    Date: 2014–10–03
  9. By: Ethan Cohen-Cole (Econ One Research); Eleonora Patacchini (Cornell University and EIEF); Yves Zenou (Stockholm University and IFN)
    Abstract: This paper proposes a model of network interactions in the interbank market. Our innovation is to model systemic risk in the interbank network as the propagation of incentives or strategic behavior rather than the propagation of losses after default. Transmission in our model is not based on default. Instead, we explain bank profitability based on competition incentives and the outcome of a strategic game. As competitors’ lending decisions change, banks adjust their own decisions as a result: generating a ‘transmission’ of shocks through the system. We provide a unique equilibrium characterization of a static model, and embed this model into a full dynamic model of network formation. We also determine the key bank, which is the bank that is crucial for the stability of the financial network.
    Date: 2014
  10. By: Mitsukuni Nishida (Johns Hopkins Carey Business School); Nathan Yang (Yale School of Management)
    Abstract: We study firm performance dynamics in retail growth using a dynamic model of expansion that allow these dynamics to operate through an unobserved serially correlated process. The model is estimated with data on convenience-store chain diffusion across Japanese prefectures from 1982 to 2012, whereby an actual merger between two chains takes place in 2001. Given the presence of serial correlation and selection biases in observed revenue, we combine particle filtering methods for dynamic games with control functions in revenue regressions. The estimated structural model provides us insights about how performance dynamics evolve before and after the merger. In particular, we demonstrate that the performance dynamics for the merged entity do not improve following the merger.
    Keywords: Dynamic discrete choice; Firm size spillovers; Industry dynamics; Learning-by-doing; Market Concentration; Merger analysis; Particle filter; Revenue regression; Serial correlation
    JEL: L10 L25 L81 G34
    Date: 2014–09
  11. By: Francesco Gulli; Liliya Chernyav´ska
  12. By: Luca Lambertini (Department of Economics, University of Bologna); Arsen Palestini (MEMOTEF, Sappienza university of Rome); Alessandro Tampieri (CREA, Université de Luxembourg)
    Abstract: We investigate a linear state differential game describing an asymmetric Cournot duo- poly with capacity accumulation à la Ramsey and a negative environmental externality (pollution), in which one of the firms has adopted corporate social responsibility (CSR) in its statute, and therefore includes consumer surplus and the environmental effects of production in its objective function. If the market is sufficiently large, the CSR firm sells more, accumulates more capital and earns higher profits than its profit-seeking rival.
    Keywords: Capital accumulation, asymmetric duopoly, dynamic games
    JEL: C73 H23 L13 O31
    Date: 2014
  13. By: Jan Hagemejer; Michal Gradzewicz
  14. By: Seong-Hoon Kim (University of St Andrews); Seongman Moon (Universidad Carlos III de Madrid)
    Abstract: This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels of risk internalization that arise when firms face uninsurable business risks. One channel is based on passive risk consideration, through which firms raise prices to abide by riskier business thereby associating higher production with higher prices. The other channel is based on active risk management, through which firms lower prices to handle riskier business thereby associating higher production with lower prices. The relative responsiveness of the two channels to a shock depends on each firm’s fundamental characteristics and leads to a sharp division of markup cyclicality across sectors.
    Keywords: markups, risk internalization, technology, market power, cost channel, hedging channel
    JEL: D21 E32
    Date: 2013–12–01

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