nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒11‒01
twenty-two papers chosen by
Russell Pittman
United States Department of Justice

  1. Sequential selling and information dissemination in the presence of network effects By Junjie Zhou; Ying-Ju Chen
  2. A Utility-Based Model of Sales with Informative Advertising By Sandro Shelegia; Chris M Wilson
  3. Bargaining Power and the Effects of Joint Negotiation: The “Recapture Effect” By Craig T. Peters
  4. Switching Costs in Two-sided Markets By Lam, Wing Man Wynne
  5. Supplier Fixed costs and Retail Market Monopolization By Caprice, Stéphane; von Schlippenbach, Vanessa; Wey, Christian
  6. Exclusive Dealing and Vertical Integration in Interlocking Relationships By Nocke, Volker; Rey, Patrick
  7. Bundling and Tying By Nicholas Economides
  8. Legal Uncertainty, Competition Law Enforcement Procedures and Optimal Penalties By Yannis Katsoulacos; David Ulph
  9. Penalizing Cartels: The Case for Basing Penalties on Price Overcharge By Yannis Katsoulacos; Evgenia Motchenkova; David Ulph
  10. There is a discrepancy between Europe and the United States on whether margin squeeze is a relevant question for competition law and policy. Beyond this question, it is unclear whether law and the Cartel Office can detect margin squeeze, assuming it is necessary to look into the matter. In Germany, politicians have decided the given rule against margin squeeze should not be abolished, especially because of problems in the gasoline market. This paper discusses a comprehensive microeconomic new explanation on margin squeeze, and discusses some of the problems used to detect margin squeeze in the gasoline market. After comparing theoretical shortcuts, practical challenges and efforts towards enforcement with expected benefits, this paper concludes competition law should ignore the margin squeeze problem.. By Thomas Wein
  11. Liberalizing the Gas Industry: Take-or-Pay Contracts, Retail Competition and Wholesale Trade By Michele Polo; Carlo Scarpa
  12. Altruism Heterogeneity and Quality Competition Among Healthcare Providers By Nadja Kairies-Schwarz
  13. Optimal Pricing of Access and Secondary Goods with Repeat Purchases: Evidence from Online Grocery Shopping and Delivery Fees By Ricard Gil; Evsen Korkmaz; Ozge Sahin
  14. Competition, Selectivity and Innovation in the Higher Educational Market By Lynne Pepall; Dan Richard
  15. The Effect of Subsidized Entry on Capacity Auctions and the Long-Run Resource Adequacy of Electricity Markets By Brown, David
  16. Banking competition and stability: The role of leverage By Xavier Freixas; Kebin Ma
  17. Price dispersion and demand uncertainty: Evidence from US scanner data By Benjamin Eden
  18. Dynamic Adverse Selection and the Supply Size By Ennio Bilancini; Leonardo Boncinelli
  19. Atomic Cournotian traders may be Walrasian By Giulio Codognato; Sayantan Ghosal; Simone Tonin
  20. Airport Capacity Expansion Strategies in the Era of Airline Multi-hub Networks By Guillaume Burghouwt
  21. Competition in the Market for Flexible Resources: an application to cloud computing By Lam, Wing Man Wynne
  22. Cloud Goliath Versus a Federation of Cloud Davids: Survey of Economic Theories on Cloud Federation By Kibae Kim; Songhee Kang; Jorn Altmann

  1. By: Junjie Zhou (School of International Business Administration, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai, 200433, China); Ying-Ju Chen (School of Business and Management & School of Engineering, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)
    Abstract: In this paper, we examine how a seller sells a product/service with a positive consumption externality, and customers are uncertain about the product's/service's value. Because early adopters learn this value, we consider the customers' intrinsic signaling incentives and positive feedback effects. Anticipating this, the seller commits to provide price discounts to the followers, and charges the leader a high price. Thus, the profit-maximizing pricing features the cream skimming strategy. We also show that the lack of seller's commitment is detrimental to the social welfare; nonetheless, the sequential selling still boosts up the seller's profit. Embedding a physical network with arbitrary payoff externality among customers, we investigate the optimal targeting strategy in the presence of information asymmetry. We provide precise indices for this leader selection problem. For undirected graphs, we should simply choose the player with the highest degree, irrespective of the seller's commitment power. Going beyond this family of networks, in general the seller's commitment power affects the optimal targeting strategy.
    Keywords: revenue management; signaling; information transmission; social networks;
    JEL: D82 L14 L15
    Date: 2014–10
  2. By: Sandro Shelegia (University of Vienna, Austria); Chris M Wilson (School of Business and Economics, Loughborough University)
    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.
    Keywords: Sales; Price Dispersion; Advertising; Clearinghouse; Utility Space; Intra-personal; Price Discrimination; Two-Part Taris; Bonus Packs; Package Size
    JEL: L13 D43 M37 D83
    Date: 2014–10
  3. By: Craig T. Peters (Economic Analysis Group, U.S. Department of Justice)
    Abstract: This paper considers the effects of joint negotiation when suppliers and intermediaries engage in bilateral negotiation over inclusion of a supplier’s product in an intermediary’s network. I identify conditions under which joint negotiation by two suppliers increases the suppliers’ bargaining power even when the suppliers’ products are not substitutes for each other. In particular, joint negotiation increases the suppliers’ bargaining power if suppliers face smaller losses from disagreement when they negotiate jointly. If joint negotiation causes an intermediary to lose more of its consumers to competing intermediaries in the event of disagreement, and if the suppliers sell their products through these competing intermediaries, the suppliers will be able to recapture more of the sales that they would otherwise have lost in the event of disagreement. As a result, joint negotiation reduces the suppliers’ losses from disagreement, and thus enhances their bargaining power. I show that these conditions arise under a wide range of assumptions about consumer preferences.
    Date: 2014–09
  4. By: Lam, Wing Man Wynne
    Abstract: This paper studies a dynamic two-sided market in which consumers face switching costs between competing products. I first show that, in a symmetric equilibrium, switching costs lower the first-period price if network externalities are strong. By contrast, switching costs soften price competition in the initial period if network externalities are weak and consumers are more patient than the platforms. Second, an increase in switching costs on one side decreases the first-period price on the other side. Finally, consumer heterogeneity such as the presence of more loyal and naive customers on one side intensifies first-period competition on this side but softens first-period competition on the other side.
    Keywords: switching costs, two-sided markets, network externality, naivety, loyalty
    JEL: D4 L1
    Date: 2014–08
  5. By: Caprice, Stéphane; von Schlippenbach, Vanessa; Wey, Christian
    Abstract: Considering a vertical structure with perfectly competitive upstream firms that deliver a homogenous good to a differentiated retail duopoly, we show that upstream fixed costs may help to monopolize the downstream market. We find that downstream prices increase in upstream firms'fixed costs when both intra- and interbrand competition exist. Our findings contradict the common wisdom that fixed costs do not affect market outcomes.
    Keywords: Fixed Costs, Vertical Contracting, Monopolization
    JEL: L13 L14 L42
    Date: 2014–07
  6. By: Nocke, Volker; Rey, Patrick
    Abstract: We develop a model of interlocking bilateral relationships between upstream manufacturers that produce differentiated goods and downstream retailers that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, at the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.
    Keywords: vertical relations, exclusive dealing, vertical merger, foreclosure, bilateral contracting
    JEL: D43 L13 L42
    Date: 2014–07
  7. By: Nicholas Economides (Stern School of Business, New York University. 44 West 4th Street, New York, NY 10012)
    Abstract: We discuss strategic ways that sellers can use tying and bundling with requirement conditions to extract consumer surplus. We analyze different types of tying and bundling creating (i) intra-product price discrimination; (ii) intra-consumer price discrimination; and (iii) inter-product price discrimination, and assess the antitrust liability that these practices may entail. We also discuss the impact on consumers and competition, as well as potential antitrust liability of bundling “incontestable” and “contestable” demand for the same good.
    Keywords: tying, ties, bundling, bundled rebates, loyalty discounts, loyalty requirement rebates, single monopoly surplus, monopolization, market power, foreclosure, antitrust
    JEL: C72 D42 D43 K21 L12 L40 L41 L42
    Date: 2014–10
  8. By: Yannis Katsoulacos (Athens University of Economics and Business); David Ulph (University of St Andrews)
    Abstract: In this paper we make three contributions to the literature on optimal Competition Law enforcement procedures. The first (which is of general interest beyond competition policy) is to clarify the concept of “legal uncertainty”, relating it to ideas in the literature on Law and Economics, but formalising the concept through various information structures which specify the probability that each firm attaches – at the time it takes an action – to the possibility of its being deemed anti-competitive were it to be investigated by a Competition Authority. We show that the existence of Type I and Type II decision errors by competition authorities is neither necessary nor sufficient for the existence of legal uncertainty, and that information structures with legal uncertainty can generate higher welfare than information structures with legal certainty – a result echoing a similar finding obtained in a completely different context and under different assumptions in earlier Law and Economics literature (Kaplow and Shavell, 1992). Our second contribution is to revisit and significantly generalise the analysis in our previous paper, Katsoulacos and Ulph (2009), involving a welfare comparison of Per Se and Effects- Based legal standards. In that analysis we considered just a single information structure under an Effects-Based standard and also penalties were exogenously fixed. Here we allow for (a) different information structures under an Effects-Based standard and (b) endogenous penalties. We obtain two main results: (i) considering all information structures a Per Se standard is never better than an Effects-Based standard; (ii) optimal penalties may be higher when there is legal uncertainty than when there is no legal uncertainty.
    Keywords: competition law enforcement, penalties, legal uncertainty, competition policy
    JEL: K4 L4 K21 K23
    Date: 2014–07–01
  9. By: Yannis Katsoulacos (Athens University of Economics and Business); Evgenia Motchenkova (VU University Amsterdam); David Ulph (University of St Andrews)
    Abstract: In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.
    Keywords: Antitrust Enforcement, Antitrust Law, Cartel, Oligopoly, Repeated Games
    JEL: L4 K21 D43 C73
    Date: 2014–09–24
  10. By: Thomas Wein (Leuphana University Lueneburg, Germany)
    Keywords: margin squeeze, gasoline market, market dominance
    JEL: K21 L13 L44
    Date: 2014–09
  11. By: Michele Polo; Carlo Scarpa
    Abstract: This paper examines retail competition in a liberalized gas market. Vertically integrated firms run both wholesale activities (buying gas from the producers under take-or-pay obligations) and retail activities (selling gas to final customers). The market is decentralized and the firms decide which customers to serve, competing then in prices. We show that TOP clauses limit the incentives to face-to-face competition and determine segmentation and monopoly pricing even when entry of new competitors occurs. The development of wholesale trade, instead, may induce generalized entry and retail competition. This equilibrium outcome is obtained if a compulsory wholesale market is introduced, even when firms are vertically integrated, or under vertical separation of wholesale and retail activites when firms can use only linear bilateral contracts.
    Keywords: Entry, Segmentation, capacity constraints, wholesale markets.
    JEL: L11 L13 L95
  12. By: Nadja Kairies-Schwarz
    Abstract: New empirical evidence shows substantial heterogeneity in the altruism of healthcare providers. Spurred by this evidence, we build a spatial quality competition model with altruism heterogeneity. We find that more altruistic healthcare providers supply relatively higher quality levels and position themselves closer to the center. Whether the social planner prefers more or less horizontal differentiation is in general ambiguous and depends on the level of altruism. The more altruistic healthcare providers are, the more likely it is that the social planner prefers greater horizontal differentiation to offset costly quality competition.
    Keywords: healthcare provider altruism and heterogeneity; quality competition
    JEL: H42 I11 I18 L13
    Date: 2014–10
  13. By: Ricard Gil (Johns Hopkins Carey Business School, 100 International Drive, Baltimore, MD 21202, USA); Evsen Korkmaz (University of Amsterdam, Amsterdam Business School, M2-07, Amsterdam 1018TV, The Netherlands); Ozge Sahin (Johns Hopkins Carey Business School, 100 International Drive, Baltimore, MD 21202, USA)
    Abstract: In this paper we investigate optimal pricing strategies for an online grocery retailer who derives its profits from delivery fees and grocery sales. We base our theoretical framework upon the well-established work of Schmalensee (1981) in two-part pricing, while allowing for repeat purchase occasions as in Phillips and Battalio (1983). We derive testable implications that we take to data using a unique dataset detailing transaction information from an online grocery retailer in a Western European country. We find that the number of transactions and the average size of grocery baskets purchased are positively correlated. We also observe two customer groups in our data that differ in their willingness to pay. This observation together with robust evidence that price-sensitive customers buy larger baskets are consistent with an optimal pricing strategy that offers discounts for B2B customers and charges higher prices to households for grocery delivery. We conclude that firms may increase profits by implementing alternative and simpler pricing strategies that combine second and third degree price discrimination schemes.
    Keywords: Metering, price discrimination, online grocery sales
    JEL: L11 L86 M20
    Date: 2014–09
  14. By: Lynne Pepall; Dan Richard
    Abstract: Recent innovations in digital learning and web-based technologies have enable scalability in educational services that has previously not been feasible presenting a potential disruption of traditional higher education markets. This paper explores the impact of these innovations in vertically differentiated market with network externalities. Students differ in their ability to benefit from educational services. We describe how selective and non-selective institutions compete for students through tuition price and admission criteria and consider how free non-credentialed educational services (MOOCs) affect the market equilibrium. Our model also helps explain why selective institutions are frequently also the proprietors of MOOCs.
    Keywords: Higher Education, Vertical Differentiation, Network Effects
    JEL: D43 I23
  15. By: Brown, David (University of Alberta, Department of Economics)
    Abstract: Motivated by recent government interventions in the form of mandated subsidies for new generation capacity, I examine the impact of subsidized entry of electricity generation capacity on the performance of centralized capacity auctions. Subsidized entry suppresses capacity prices and induces an inefficient allocation of capacity. It also alters the equilibrium generation portfolio determined by the capacity auction. In the short-run, altering the generation portfolio through subsidized entry may lead to lower expected electricity prices in subsequent market interactions. These effects reduce total industry profit, but may increase consumer surplus. Consequently, the effect of subsidized entry on short-run expected welfare is ambiguous. However, subsidized entry also has adverse long-run impacts. The suppressed capacity and electricity prices reduce the incentives of unsubsidized firms to invest in generation capacity. Further, subsidized entry may induce welfare-reducing boom and bust investment cycles and/or may be self-reinforcing. Regulatory policies such as PJM’s Minimum Offer Pricing Rule (MOPR) attempt to eliminate subsidized entry. Under plausible conditions, the long-run resource adequacy issues associated with insufficient capacity investment dominate the potential short-run benefits of subsidized entry such that the MOPR is welfare-enhancing.
    Keywords: electricity market design; subsidized entry; resource adequacy; regulatory policy; multi-unit auctions
    JEL: D44 L13 L50 L94
    Date: 2014–09–01
  16. By: Xavier Freixas; Kebin Ma
    Abstract: This paper reexamines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. By means of a simple model we show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on banks' liability structure, on whether banks are financed by insured retail deposits or by uninsured wholesale debts, and on whether the indebtness is exogenous or endogenous. In particular we suggest that, while in a classical originate-to-hold banking industry competition might increase financial stability, the opposite can be true for an originate-to-distribute banking industry of a larger fraction of market short-term funding. This leads us to revisit the existing empirical literature using a more precise classification of risk. Our theoretical model therefore helps to clarify a number of apparently contradictory empirical results and proposes new ways to analyze the impact of banking competition on financial stability.
    Keywords: Banking Competition, Financial Stability, Leverage
    JEL: G21 G28
    Date: 2014–08
  17. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Prescott (1975) hotels model to explain variations in price dispersion across goods sold by supermarkets in Chicago. I extend the theory to accounts for the monopoly power of chains and for non-shoppers. The main empirical finding is that the effect of demand uncertainty on price dispersion is highly significant and quantitatively important: More than 50% of the cross sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good.
    Keywords: Price Dispersion, Demand Uncertainty, Sequential Trade
    JEL: D5 L0
    Date: 2014–10–06
  18. By: Ennio Bilancini; Leonardo Boncinelli
    Abstract: In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information while the realized distribution of qualities is public information. We show that in equilibrium all goods can be traded if the size of the supply is publicly available to market participants. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. We also identify circumstances under which only full trade equilibria exist. Further, we give conditions for full trade to obtain when the realized distribution of qualities is not public information and when new goods enter the market at later stages.
    Keywords: dynamic adverse selection; supply size; frequency of exchanges; asymmetric information
    JEL: D82 L15
    Date: 2014–04
  19. By: Giulio Codognato; Sayantan Ghosal; Simone Tonin
    Abstract: In a bilateral oligopoly, with large traders, represented as atoms, and small traders, represented by an atomless part, when is there a non-empty intersection between the sets of Walras and Cournot-Nash allocations? Using a two commodity version of the Shapley window model, we show that a necessary and sufficient condition for a Cournot- Nash allocation to be a Walras allocation is that all atoms demand a null amount of one of the two commodities. We provide two exam- ples which show that this characterization holds non-vacuously. When our condition fails to hold, we also confirm, through some examples, the result obtained by Okuno, Postlewaite, and Roberts (1980): small traders always have a negligible influence on prices, while the large traders keep their strategic power even when their behavior turns out to be Walrasian in the cooperative framework considered by Gabszewicz and Mertens (1971) and Shitovitz (1973).
    JEL: C71 C72 D51
    Date: 2014–08
  20. By: Guillaume Burghouwt
    Abstract: Many major airports are hubs for network carriers at the same time as serving a large local market. The complementarity between these functions is often seen as a prerequisite for viable hub operations, suggesting that spreading the hub network over multiple airports can be very costly and damages the corner stone of the hub operation: the creation of scope and density economies.
    Date: 2013–02–01
  21. By: Lam, Wing Man Wynne
    Abstract: This paper considers firms' incentives to invest in local and exible resources when demand is uncertain and correlated. Before demand is realized, two firms decide to invest in their local capacity. Provider(s) of exible resource observe these decisions and invest in their capacity. After demand is realized, firms buy exible resource if demand exceeds their local capacity. I find that market power of the monopolist providing exible resources distorts investment incentives, while competition mitigates them. The extent of improvement depends critically on demand correlation and the cost of capacity: under social optimum and monopoly, if the exible resource is cheap, the relationship between investment and correlation is positive, and if it is costly, the relationship becomes negative; under duopoly, the relationship is positive. The analysis also sheds light on some policy discussions in markets such as cloud computing.
    Keywords: capacity investment, cloud computing, competition, demand correlation
    JEL: D4 L8
    Date: 2014–08
  22. By: Kibae Kim (College of Engineering, Seoul National University); Songhee Kang (College of Engineering, Seoul National University); Jorn Altmann (College of Engineering, Seoul National University)
    Abstract: Cloud computing, which can be described as a technology for provisioning computing infrastructure as a service, runtime platform as a service, and software as a service, is considered as a keystone for innovation in the IT area. However, a limiting factor to innovation through cloud computing could be the economies of scale and network externalities that give more benefits to larger cloud providers. Due to the economies of scale and network externalities in an oligopolistic environment, a giant cloud provider can offer resources at lower cost than smaller providers. To overcome the disadvantage of small clouds, some research proposes architectures, in which small clouds can federate through common virtual interfaces. Therefore, academy and industry ask whether the federation of small cloud providers is economically feasible and can compete with a giant cloud provider. However, it is hard to solve those problems because the specifications of a cloud federation and the conditions of cloud market are unclear. To fill this gap, in this paper, we survey the conceptual background of cloud computing and the federation of small cloud providers. The results of this paper are expected to guide how to define the economic problems on cloud federation and provide constraints to the problems.
    Keywords: Cloud Computing, Economic Analysis, Infrastructure-as-a-Service, Platform-as-a-Service, Software-as-a-Service, Service Ecosystem, Economies of Scale, Cloud Federation.
    JEL: D01 D02 D24 D85 L23 L86 M15
    Date: 2014–07

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