nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒11‒07
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Vertical Integration as a Source of Hold-up By Allain, Marie-Laure; Rey, Patrick; Chambolle, Claire
  2. Exclusive Dealing and Vertical Integration in Interlocking Relationships By Nocke, Volker; Rey, Patrick
  3. Optimal Cartel Prices in Two-Sided Markets Access By Federico Boffa; Lapo Filistrucchi
  4. Choosing whether to compete: Price and format competition with consumer confusion By Crosetto, P.; Gaudeul, A.
  5. Do we see monopoly or duopoly? The influence of perception on entry deterrence By Edward John Dorrell Webb
  6. Dynamic Platform Design By Andre Veiga;
  7. To Adjust or not to Adjust after a Cost-Push Shock? A Simple Duopoly Model with (and without) Resilience By L. Lambertini; L. Marattin
  8. Hotelling meets Holmes : the importance of returns to product differentiation and distribution economies for the firm's optimal location choice By Anett Erdmann
  9. Optimal Goodwill Model with Consumer Recommendations and Market Segmentation By Dominika Bogusz; Mariusz Gorajski
  10. Effect of Alliance Experience on New Alliance Formations and Internal R&D Capabilities By Gunno Park; Jina Kang
  11. Detecting Collusion in Spatially Differentiated Markets By Matthias Firgo; Agnes Kügler
  12. E-book Pricing and Vertical Restraints By Babur De los Santos; Matthijs Wildenbeest
  13. Analysis of Multiple Discrete-Continuous Choices: Empirical Evidence of Biased Price Elasticities under Standard Discrete Choice models on the Soft Drink Market By Bonnet, Céline; de Mouzon, Olivier
  14. Abgrenzung zweiseitiger Märkte am Beispiel von Internetsuchmaschinen By Dewenter, Ralf; Rösch, Jürgen; Terschüren, Anna
  15. When Price Discrimination Fails - A Principal Agent Problem with Social Influence By Vlad Radoias
  16. Globalization of Brewing and Economies of Scale By Erik Strøjer Madsen; Yanqing Wu

  1. By: Allain, Marie-Laure; Rey, Patrick; Chambolle, Claire
    Abstract: While vertical integration is traditionally seen as a solution to the hold-up problem, this paper highlights instead that it can generate hold-up problems — for rivals. We first consider a successive duopoly where competition among suppliers eliminates any risk of hold-up; downstreamfirms thus obtain the full return from their investments. We then show that vertical integration creates hold-up concerns for the downstream rival, by affecting the integrated supplier’s incentives from both ex ante and ex post standpoints. We also provide illustrations in terms of standard industrial organization models and of antitrust cases, and discuss the robustness of the insights.
    Keywords: Vertical Integration, Hold-up, Incomplete contracts, Vertical foreclosure.
    JEL: L13 L41 L42
    Date: 2014–09
  2. 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
  3. By: Federico Boffa (Free University of Bolzano, Faculty of Economics and Management, Piazzetta dell’Università 1, I-39031 Brunico, Italy); Lapo Filistrucchi (University of Florence, Department of Economics and Management, Via delle Pandette 9, I - 50127 Firenze, Italy)
    Abstract: We study optimal cartel prices in a two-sided market. We present a simple model showing that prices above the two-sided monopoly price may prevail on one side of a two-sided market as a means to enhance the sustainability of the cartel. We prove that in such a case a higher benefit from the network effect may compensate customers on that side of the market for the higher prices they are charged. We then provide both sufficient and necessary conditions for these results to hold in more complex models of two-sided markets. Our analysis extends to cartels in two-sided markets a result previously known for cartels selling complementary products, despite the fact that products in a two-sided market are not complements for customers, since customers typically buy only one of the two products (e.g. in the case of newspapers, advertisers buy advertising slots while readers buy content) and products on each side are substitutes (e.g. newspapers publishers compete for readers and for advertisers).
    Keywords: two-sided markets, indirect network effects, collusion, cartel, platform, TV, newspapers, media
    JEL: L12 L41 L81 L82 L86
    Date: 2014–10
  4. By: Crosetto, P.; Gaudeul, A.
    Abstract: We run a market experiment where subjects take the role of firms and can choose not only their price but also whether to present comparable offers. Firms are faced with artificial demand whereby consumers make mistakes in assessing the net value of products on the market. Some of those consumers are however able to identify the best of the comparable offers if some offers are comparable, and favor that offer vs. non-comparable offers. We vary the portion of such consumers and the strength of their preferences for the best of the comparable offers. In treatments where firms observe the past decisions of their competitors, firms learn to collude in not presenting comparable offers. This occurs after initial periods with strong competition. Collusion lowers welfare for all consumers and is most frequent when many consumers prefer comparable offers. In treatments where firms cannot monitor competitors however, firms respond to the preference of a portion of consumers for comparable offers. This leads to an improvement in welfare for all consumers.
    JEL: C92 D18 D43 L13 L15
    Date: 2014
  5. By: Edward John Dorrell Webb (Department of Economics, Copenhagen University)
    Abstract: Consumers have bounded perception and treat similar goods as homogeneous. The interaction between this bias and the structure of firms is studied in a vertically differentiated duopoly with market entry. With fixed costs of quality, natural monopoly and entry deterrence occurs at lower entry costs and incumbent profit is higher. With marginal costs of quality, natural monopoly occurs at higher entry costs or not at all. Deterrence occurs at higher entry costs for mild perceptual limitations and at lower costs for severe limitations. Incumbent profit is generally lower, although for a narrow range of parameter values it may be higher. The incumbent may opt not to enter and no market is created.
    Keywords: perception, similarity, bounded rationality, vertical differentiation, entry deterrence, oligopoly
    JEL: D03 D42 D43
    Date: 2014–10–08
  6. By: Andre Veiga (Nuffield College, Oxford University, 1 New Road, Oxford OX1 1NF, United Kingdom);
    Abstract: Abstract I model dynamic product design along price and non-price dimensions by a firm in a market with positive network externalities between consumers. In the case of a usage fee, I provide conditions under which the steady state (SS) is unique and show that the introductory price is negative and therefore below the positive SS price. Moreover, SS price increases with the size of demand frictions and is therefore higher than in a static model. A welfare maximizer's SS price is lower than a profit-maximizer's, and it is negative if demand frictions are low enough. If a platform chooses product scope (in the sense of Johnson and Myatt (2006)), it is optimal to begin as a niche platform and to broaden scope as market share increases. When the platform can target different groups of consumers with different prices, it caters to those consumers whose price-elasticity of demand is large relative to their valuation for network externalities. Finally, we show how the model can be extended to the case where consumers have multidimensional types and make heterogeneous contributions to the network's value.
    Keywords: Production, Pricing, and Market Structure; Networks; Network Formation and Analysis; Existence and Stability Conditions of Equilibrium; Dynamic Analysis; Firm Behavior: Theory; Monopoly
    JEL: L11 L14 D85 C62 C61 D21 D42
    Date: 2014
  7. By: L. Lambertini; L. Marattin
    Abstract: We characterize the equilibrium in a homogeneous good Cournot duopoly in which firms have the choice to react to a cost-push shock by paying a lump-sum adjustment cost in order to offset the initial rise in marginal cost. Our results show that the size of the shock and the size of the adjustment cost jointly determine the nature and the number of the equilibria generated in the game. In particular, if the adjustment cost is high enough, at least one firm decides not to adjust at the pure strategy equilibrium, and such a partial adjustment by the industry can be socially efficient as well. Some implications of this partial equilibrium analysis about an industry' resilience are outlined.
    JEL: D43 E30 L13
    Date: 2014–10
  8. By: Anett Erdmann
    Abstract: Inspired by the empirical work of Holmes (2011), which suggests the economic importance of distribution costs in the firm's optimal location decision, this paper introduces endogenous distribution costs in the model of Hotelling (1929). The proposed model shows an interesting trade-off between demand and cost considerations when a firm plays a hybrid location strategy. Given the location of local distribution centers and agents' displacement cost parameters, it is shown that, under certain conditions, the optimal location of the firms are in the interior of the Hotelling line rather than at the edges of the line. The supply cost effect which drives this result diminishes with the distance of the distribution center from the market so that the scale of the distribution area becomes also determinant for an optimal location strategy. The theoretical results are complemented with an empirical analysis for distribution intensive grocery retailers using location data for the two main conventional supermarket chains in the U.S. The data suggest that the firms consider distribution costs when differentiating from the competitor.
    Keywords: Firm strategy , product differentiation , distribution costs , price competition , location choice , retail competition
    JEL: L13 L22 L81 D43 R10 R30
    Date: 2014–10
  9. By: Dominika Bogusz (University of Lodz, Faculty of Economics and Sociology); Mariusz Gorajski (University of Lodz, Faculty of Economics and Sociology)
    Abstract: We propose a new dynamic model of product goodwill where a product is sold in many market segments, and where the segments are indicated by the usage experience of consumers. The dynamics of product goodwill is described by a partial differential equation of the Lotka–Sharpe– McKendrick type. The main novelty of this model is that the product goodwill in a segment of new consumers depends not only on advertising effort, but also on consumer recommendations, for which we introduce a mathematical representation. We consider an optimal goodwill model where in each market segment the control variable is the company’s advertising efforts in order to maximize its profits. Using the maximum principle, we numerically find the optimal advertising strategies and corresponding optimal goodwill paths. The sensitivity of these solutions is analysed. We identify two types of optimal advertising campaign: ‘strengthening’ and ‘supportive’. They may assume different shapes and levels depending on the market segment. These experiments highlight the need for both researchers and managers to consider a segmented advertising policy
    Keywords: Optimal Control, applications, deterministic, advertising and media, product policy, segmentation
    Date: 2014–09
  10. By: Gunno Park (Samsung SDS); Jina Kang (Technology Management, Economics, and Policy Program, College of Engineering, Seoul National University)
    Abstract: Although their advantages are well-known, technology alliance may not always positively affect innovative performance. Previous studies have found several explanations for this problem. Technology alliances often require excessive resources and capabilities to form and maintain relationships with partners. In addition, they cause a diversion of managerial attention and functions from internal R&D activities, yet many firms are often unequipped to deal with these problems. In this paper, we hypothesize that firms often execute an inefficient technology alliance strategy, thus negatively affecting their innovative capabilities and consequently reducing subsequent innovation performance. More specifically, we test whether firms with greater prior experience on technology alliances are more likely to execute inefficient technology alliance strategies. Second, we try to investigate negative effects of technology alliances on firms’ internal R&D capabilities. To test our hypotheses, we employ data from 9629 technology alliances in the US biotechnology and pharmaceutical industries. Implications from these analyses are offered for executives and technology alliance strategies. Specifically, we propose that firms should undertake technology alliances while considering the negative aspects and the firm’s limited resources.
    Keywords: Alliance Experience, Organizational Routine, Alliance Formation, Internal R&D Capability.
    JEL: D23 L22 L24 O32
    Date: 2014–09
  11. By: Matthias Firgo (WIFO); Agnes Kügler
    Abstract: The empirical literature on mergers, market power and collusion in differentiated markets has mainly focused on methods relying on output and/or panel data. In contrast to this literature we suggest a novel approach that allows for the detection of collusive behaviour among a group of firms making use of information on the spatial structure of horizontally differentiated products. By estimating best response functions using a spatial econometrics approach, we focus on differences in the strategic interaction in pricing between different groups of firms as well as on differences in price levels. We apply our method to the market for ski lift tickets using a unique data set on ticket prices and detailed resort-specific characteristics covering all ski resorts in Austria. We show that prices of ski resorts forming alliances are higher and increase with the size and towards the spatial center of an alliance. Strategic interaction in pricing is higher within than outside alliances. All results are in line with the findings of theoretical models on collusion in horizontally differentiated markets.
    Keywords: tacit collusion, strategic alliances, spatial differentiation, ski lift ticket prices
    Date: 2014–10–17
  12. By: Babur De los Santos (Indiana University, Kelley School of Business, 1309 E 10th St, Bloomington, IN 47405, USA); Matthijs Wildenbeest (Indiana University, Kelley School of Business, 1309 E 10th St, Bloomington, IN 47405, USA)
    Abstract: This paper empirically analyzes how the use of vertical price restraints has impacted retail prices in the market for e-books. In 2010 five of the six largest publishers simultaneously adopted the agency model of book sales, allowing them to directly set retail prices. This led the Department of Justice to file suit against the publishers in 2012, the settlement of which prevents the publishers from interfering with retailers' ability to set e-book prices. Using a unique dataset of daily e-book prices for a large sample of books across major online retailers, we exploit cross-publisher variation in the timing of the return to the wholesale model to estimate its effect on retail prices. We find that e-book prices for titles that were previously sold using the agency model decreased by 18 percent at Amazon and 8 percent at Barnes & Noble. Our results are robust to different specifications, placebo tests, and synthetic control groups. Our findings illustrate a case where upstream firms prefer to set higher retail prices than retailers and help to clarify conflicting theoretical predictions on agency versus wholesale models.
    Keywords: e-books, agency, vertical restraints, most favored nation, media economics, resale price maintenance, Amazon
    JEL: D43 D83 L13 L41 L42
    Date: 2014–09
  13. By: Bonnet, Céline; de Mouzon, Olivier
    Abstract: The New Empirical Industrial Organization (NEIO) literature allows to analyze competition, market power and welfare implications of public policies. This literature is based on the estimation of consumer substitution patterns, that is on the estimation of demand models. Standard discrete choice models are commonly used and assume that the consumer chooses only one unit of a single alternative. However, panelists are often shoppers making decisions for the entire household. A household is composed of several persons with various tastes. The current NEIO literature then often omits multiple brand choice and quantity choice of a product representing multiple tastes within the household. To tackle this point, we model multiple discrete/continuous choices of households following Bhat (2005a). Moreover, we deal with observed and unobserved household heterogeneity as well as omitted variable problem that occurs in this type of consumer choice model. Using French purchase data on the Soft Drink Market, we show that consumer substitution patterns could be biased if multiple brand and quantity choices are not taken into account. Indeed, our results suggest that own price elasticities could be significantly underestimated.
    Keywords: multiple purchases, discrete-continuous choices, soft drink market, price elasticities,household heterogeneity
    Date: 2014–08
  14. By: Dewenter, Ralf (Helmut Schmidt University, Hamburg); Rösch, Jürgen (Helmut Schmidt University, Hamburg); Terschüren, Anna (Goodgame Studios)
    Abstract: Google is supposed to be the dominant player in most search markets around the world. But what is a search market? To calculate a market share of 90% or more, it has to be clear what the denominator is: Does the search market also include product search and therefore Amazon and eBay or the search for private or personal contacts like on Facebook or LinkedIn? And is this relevant? Search engines do not charge users for their services, they earn money exclusively with advertisement. Hence, may the relevant market best be defined also through the advertisement market? In this paper we investigate those questions and find that the there is no general way to define “the search market”. The size of the market strongly depends on the question at hand. It may be very cumbersome to define the relevant market according to each problem. But the importance of search engines and the dynamics of the market leave no other choice. Claims against potentially strong players may be a popular way to generate attention but for a sound antitrust analysis, a detailed and rigorous market definition is essential.
    Keywords: search engines; market demarcation; two-sided markets; google
    JEL: D40 K00 L10 L40
    Date: 2014–10–16
  15. By: Vlad Radoias (Department of Economics, Towson University)
    Abstract: I develop a theoretical model of price discrimination under social influence. I find that social influence gives sellers the incentive to artificially create and maintain excess demand on the market. The rationing occurs mainly at the low end of the market, and sometimes results in full rationing of the low end. Furthermore, the incidence of price discrimination under social influence is much lower than in the absence of it. Social influence lowers the profitability of price discrimination and incentivizes sellers to reduce product variety and to only target the high end of the market, a fact that is consistent with many empirical observations.
    Keywords: Price Discrimination, Social Influence, Excess Demand.
    JEL: D4 L15 M31
    Date: 2014–10
  16. By: Erik Strøjer Madsen (Department of Economics and Business, Aarhus University, Denmark); Yanqing Wu (Department of Economics and Business, Aarhus University, Denmark)
    Abstract: The globalization of the brewing industry after the turn of the century through a large wave of mergers and acquisitions has changed the structure of the world beer markets. The paper tracks the development in industry concentrations from 2002 to 2012 and points to high transportation costs for beers and economies of scale in advertising and sales efforts as the main factors behind the wave of cross-country mergers and acquisitions. Using firm-level data from the largest breweries, the estimations verify significant economies of scale in marketing and distribution costs. Based on information from the Annual Reports of the eight largest breweries in the world, the estimation proved a reduction in these costs of more than ten percent when doubling the size of the brewing group. This finding verifies that the restructuring of the brewing industry creates significant scale benefits to be shared between the merging partners as marketing and distribution costs are very high in this industry.
    Keywords: Marketing, mergers and acquisitions, brewing industry
    JEL: L11 L66 M37
    Date: 2014–10–14

This nep-com issue is ©2014 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.