nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒11‒17
twenty-two papers chosen by
Russell Pittman
United States Department of Justice

  1. Bertrand and the Long Run By Roberto Burguet; József Sákovics
  2. The collusion incentive constraint By Huric Larsen, Jesper Fredborg
  3. Prices, Product Differentiation, and Heterogeneous Search Costs By Jos� L. Moraga-Gonz�lez; Zsolt S�ndor; Matthijs R. Wildenbeest
  4. Product differentiation and entry timing in a continuous time spatial competition model By Takeshi Ebina; Noriaki Matsushima; Daisuke Shimizu
  5. Penalizing Cartels: The Case for Basing Penalties on Price Overcharge By Yannis Katsoulacos; Evgenia Motchenkova; David Ulph
  6. The EU Leniency Programme and Recidivism By Marvao, Catarina
  7. Heterogeneous Penalties and Private Information By Marvão, Catarina
  8. Nationalization as credible threat against tacit collusion By F. Delbono; L. Lambertini
  9. An Experimental Approach to Merger Evaluation By Christopher T. Conlon; Julie Holland Mortimer
  10. Import competition, productivity and multi-product firms By Emmanuel Dhyne; Amil Petrin; Valerie Smeets; Frederic Warzynski
  11. Strategic trade policy for network goods oligopolies By Anomita Ghosh; Rupayan Pal
  12. The Impact of the Internet on Advertising Markets for News Media By Susan Athey; Emilio Calvano; Joshua S. Gans
  13. A note on the effect of consumer protection requirements on firm strategy By Huric Larsen, Jesper Fredborg
  14. International competition and firm performance : Evidence from Belgium By Jan De Loecker; Catherine Fuss; Johannes Van Biesebroeck
  15. Integration Contracts and Asset Complementarity: Theory and Evidence from US Data By Di Giannatale, Paolo; Passarelli, Francesco
  16. Bank Industry Structure and Public Debt By Varelas, Erotokritos
  17. Consumer Search: Evidence from Path-tracking Data By Fabio Pinna; Stephan Seiler
  18. The Impact of Maximum Markup Regulation on Prices By Christos Genakos; Pantelis Koutroumpis; Mario Pagliero
  19. Defining and measuring the “Market for Brands”: Are emerging economies catching up? By Carl Benedikt Frey; Atif Ansar; Sacha Wunsch-Vincent
  20. Patents and the Global Diffusion of New Drugs By Iain Cockburn; Jean O. Lanjouw; Mark Schankerman
  21. Acquisitions of Start-ups by Incumbent Businesses A market selection process of “high-quality” entrants? By Andersson, Martin; Xiao, Jing
  22. Privatization Policies by National and Regional Governments By Martínez-Sánchez, Francisco

  1. By: Roberto Burguet; József Sákovics
    Abstract: We propose a new model of simultaneous price competition, based on firms offering 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
  2. By: Huric Larsen, Jesper Fredborg
    Abstract: The collusion incentive constraint is an important economic measure of cartel stability. It weighs the profits of being in a cartel with those of cheating and punishment of the remaining cartel members. The constraint places no restrictions on firm cartel, cheating and punishment pricing, but is usually considered in a restricted competitive set up characterized by either Cournot or Bertrand competition. This paper examines the constraint under Bertrand competition and homogenous goods when assuming that cartel members have the same market power and then continues to examine if this is not so.
    Keywords: Collusion, firm incentives, market power
    JEL: C71 L2 L4
    Date: 2014–03
  3. By: Jos� L. Moraga-Gonz�lez (VU University Amsterdam, the Netherlands); Zsolt S�ndor (Sapientia University, Rumania); Matthijs R. Wildenbeest (Indiana University, United States)
    Abstract: We study price formation in the standard model of consumer search for differentiated products but allow for search cost heterogeneity. In doing so, we dispense with the usual assumption that all consumers search at least once in equilibrium. This allows us to analyze the manner in which prices affect the decision to search rather than to not search at all, which is an important but often neglected aspect of the price mechanism. Recognizing the role the equilibrium price plays in consumers' participation decisions turns out to be critical for understanding how search costs affect market power. This is because the two margins that determine prices|the intensive search margin, or search intensity, and the extensive search margin, or search participation|may be affected in opposing directions by a change in search costs. When search costs go up, fewer consumers decide to search, which modifies the search composition of demand such that demand can become more elastic. At the same time, the consumers who choose to search reduce their search intensity, which makes demand less elastic. Whether the effect on the extensive or the intensive search margin dominates depends on the range and shape of the search cost density. We identify conditions for higher search costs to result in higher, constant, or lower prices. Similar results are obtained when the marginal gains from search vary across consumers.
    Keywords: sequential search, search cost heterogeneity, differentiated products, existence and uniqueness of equilibrium
    JEL: D43 D83 L13
    Date: 2014–07–03
  4. By: Takeshi Ebina; Noriaki Matsushima; Daisuke Shimizu
    Abstract: We extend the well-known spatial competition model (d'Aspremont et al., 1979) to a continuous time model in which two firms compete in each instance. Our focus is on the entry timing decisions of firms and their optimal locations. We demonstrate that the leader has an incentive to locate closer to the centre to delay the follower's entry, leading to a non-maximum differentiation outcome. We also investigate how exogenous parameters affect the leader's location and firms' values and, in particular, numerically show that the profit of the leader changes non-monotonically with an increase in the transport cost parameter.
    Date: 2014–10
  5. By: Yannis Katsoulacos (Athens University of Economics and Business, Greece); Evgenia Motchenkova (VU University Amsterdam); David Ulph (University of St Andrews, United Kingdom)
    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 tho se 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: D43 C73
    Date: 2014–09–26
  6. By: Marvao, Catarina (Trinity College Dublin)
    Abstract: The EU Leniency Programme (LP) aims to encourage the dissolution of existing cartels and the deterrence of future cartels, through spontaneous reporting and/or significant cooperation by cartel members during an investigation. However, the European Commission guidelines are rather vague in terms of the factors that influence the granting and scale of fine reductions. As expected, the results shown that the first reporting or cooperating firm receives generous fine reductions. More importantly, there is some evidence that firms can “learn how to play the leniency game”, either learning how to cheat or how to report, as the reductions given to multiple offenders (and their cartel partners) are substantially higher. These results have an ambiguous impact on firms’ incentives and major implications for policy making.
    Keywords: Cartels; competition policy; Leniency Programme; self-reporting
    JEL: K21 K42 L40 L51
    Date: 2014–09–07
  7. By: Marvão, Catarina (Trinity College Dublin)
    Abstract: The theoretical framework of the adequacy or otherwise of fine reductions under the EU and US Leniency Programmes has been explored widely. However, the characteristics of the reporting cartel members remain unexplained. This is the first paper to develop a model where cartel members are heterogeneous in terms of the cartel fine and have private information on the probability of conviction. It is shown that firms which receive higher fines, have a lower equilibrium threshold for reporting. To validate this result and analyze the sources of fine heterogeneity, data for EU and US cartels are used. Being the first reporter is shown to be correlated with recidivism, leadership and reductions received outside the Leniency Programme. Some characteristics of the cartels where reporting occurred are also unveiled. Identifying the characteristics of the reporting firms is vital to dissolve and dissuade cartels and the wider policy implications of these findings are discussed in the paper.
    Keywords: Cartels; competition policy; Leniency Programme; private information
    JEL: D43 K21 K42 L13 L51
    Date: 2014–09–18
  8. By: F. Delbono; L. Lambertini
    Abstract: Within a simple model of differentiated oligopoly, we show that tacit collusion may be prevented by the threat of nationalising a private firm coupled with the appropriate choice of the weight given to private profits in the maximand of the nationalised company. We characterise the properties of such a threat and prove that it may allow to credibly deter tacit collusion.
    JEL: L13 L32
    Date: 2014–10
  9. By: Christopher T. Conlon (Department of Economics, Columbia University); Julie Holland Mortimer (Boston College)
    Abstract: The 2010 Department of Justice and Federal Trade Commission Horizontal Merger Guidelines lay out a new standard for assessing proposed mergers in markets with differentiated products. This new standard is based on a measure of "upward pricing pressure," (UPP) and the calculation of a "gross upward pricing pressure index" (GUPPI) in turn relies on a "diversion ratio," which measures the fraction of consumers of one product that switch to another product when the price of the first product increases. One way to calculate a diversion ratio is to estimate own- and cross-price elasticities. An alternative (and more direct) way to gain insight into diversion is to exogenously remove a product from the market and observe the set of products to which consumers actually switch. In the past, economists have rarely had the ability to experiment in this way, but more recently, the growth of digital and online markets, combined with enhanced IT, has improved our ability to conduct such experiments. In this paper, we analyze the snack food market, in which mergers and acquisitions have been especially active in recent years. We exogenously remove six top-selling products (either singly or in pairs) from vending machines and analyze subsequent changes in consumers' purchasing patterns, firm profits, diversion ratios, and upward pricing pressure. Using both nonparametric analyses and structural demand estimation, we find significant diversion to remaining products. Both diversion and the implied upward pricing pressure differ significantly across manufacturers, and we identify cases in which the GUPPI would imply increased regulatory scrutiny of a proposed merger.
    Date: 2013–11–30
  10. By: Emmanuel Dhyne (NBB, UMons); Amil Petrin (U. Minnesota); Valerie Smeets (Aarhus U.); Frederic Warzynski (Aarhus U.)
    Abstract: Using detailed firm-product level quarterly data, we develop an estimation framework of a Multi-Product Production Function (MPPF) and analyse firm-product level TFP estimations at various levels (industries, products). After documenting our estimation results, we relate productivity estimates with import competition, using firm and product level measures of import competition. We find that if productivity at the firm level tends to positively react to increased import competition, the multi-product firms response varies according to the relative importance of the product that faces stronger import competition in the firm’s product portfolio. When import competition associated to the main product of a firm increases, the firm tend to increase its efficiency in producing that core product, in which it has a productivity advantage. However, when the degree of foreign competition increases for non core products of a firm, it tends to lower its efficiency in producing those goods.
    Keywords: multi-product production function, productivity, import competition
    JEL: D24 L22 L25
    Date: 2014–10
  11. By: Anomita Ghosh (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: We analyze strategic trade policy for differentiated network goods oligopolies under alternative scenarios, when there is export rivalry between two countries. We show that, under price competition without managerial delegation, it is optimal to tax (subsidize) exports, if network externalities are weak (strong). But, the oppos ite is true under price competition with relative performance based managerial delegation in firms. In contrast, under quantity competition, the optimal trade policy always involves subsidization of exports. Nonetheless, the optimal rate of export subsidy under quantity competition is always higher than that under price competition. We also show that, under quantity (price) competition without managerial delegation, trade policy interventions in the presence of sufficiently strong (weak or very strong) network externalities lead to higher social welfare of each exporting country compared to that under free trade. However, under quantity (price) competition with managerial delegation, trade policy interventions result in Pareto inferior outcomes always (unless network externalities are strong).
    Keywords: Strategic trade policy, network goods, relative performance based managerial delegation, price competition, quantity competition
    JEL: F12 F13 L13 L22 D21
    Date: 2014–09
  12. By: Susan Athey (Stanford University); Emilio Calvano (CSEF, Università di Napoli Federico II); Joshua S. Gans (University of Toronto and NBER)
    Abstract: We provide a model of online advertising display markets where consumer attention may be divided among multiple publishers and, consequently, their advertising attention may be allocated to different platforms. We demonstrate that this gives rise to a mixture of single- and multi-homing advertisers and some consequent matching inefficiency between advertisers and consumers. Thus, as the number of switching consumers expands (associated with, say, the internet’s impact on news publishers), ad prices fall and a number of other competitive effects arise. We demonstrate that increased switching leads advertisers to favor reach over frequency and creates an incentive for contracting and technology improvements that can guarantee impressions to advertisers. Finally, we analyze the strategic choice of ad capacity, showing that, in general, increased switching leads to greater equilibrium ad capacity and lower prices.
    Keywords: advertising, media, newspapers, matching, multi-homing, singlehoming, tracking, two-sided markets, platforms
    JEL: L11 L82
    Date: 2014–10–28
  13. By: Huric Larsen, Jesper Fredborg
    Abstract: The effect of consumer protection on firms’ strategy choices in a market with perfect competition is examined in a simple model. It is found that consumer protection may lead to reduced product quality and adverse effects on firm survival.
    Keywords: Strategy, consumer protection, firm incentives
    JEL: B21 L6 L8
    Date: 2014–02
  14. By: Jan De Loecker (Princeton University, NBER and CEPR); Catherine Fuss (National Bank of Belgium and Université Libre de Bruxelles); Johannes Van Biesebroeck (University of Leuven and CEPR)
    Abstract: We evaluate the impact of international competition on firm-level perfor- mance in Belgium. In the manufacturing sector we consider both the impact of global competition through measures of import penetration and the impact of within-EU competitiveness using measures of relative labor cost. In selected manufacturing sectors we identify the strength of international competition through a firm's proximity to the border. In both instances, we consider the impact on a variety of performance dimensions to learn about the mechanisms and about firms' adjustment to these competitive pressures
    Keywords: Efficiency; Markup; Competition, Import penetration
    Date: 2014–10
  15. By: Di Giannatale, Paolo; Passarelli, Francesco
    Abstract: Firms sign an integration contract with the purpose of increasing their expected profits from trade and competition with third parties. Gains depend on how the contract improves the partners' production function (e.g. better synergies, organization, etc.), and how it increases their power in the marketplace. We investigate three bilateral integration contracts under different ownership allocations over resources: M&A, Minority Stake purchase and Joint Venture. We study them theoretically with a cooperative game approach. We derive some profitability conditions that we test empirically on a sample of about 9000 US firms. In order to estimate the link between ownership, asset complementarity and profits over time, we propose a novel multiproduct and time-varying complementarity index. Empirical results fully support our theoretical predictions.
    Keywords: Cooperative Games; Merger; Acquisition; Joint venture; Complementarity
    JEL: C22 C71 G34
    Date: 2014–07–22
  16. By: Varelas, Erotokritos
    Abstract: Based on a traditional approach to the behavior of a bank which lends both private and public sector, and utilizing a typical expression for public debt accumulation, this paper concludes that the optimality of the number and size of banks depends heavily on the course of the public debt, ceteris paribus. If the intergenerational dimension of the public debt is assumed away, fiscal consolidation presupposes a limited number of banks under normal only profit, a sort of quasi-competitive banking. In the presence of intergenerational considerations, fiscal consideration requires a few efficient banks experiencing perhaps positive profit, which is consistent with the notion of workable competition. Consequently, the pre-consolidation size distribution of banks is immaterial policy-wise.
    Keywords: Optimum number of banks, Public debt accumulation, Perfect vs. workable competition, Commercial bank seigniorage
    JEL: E50 G20 L10
    Date: 2014
  17. By: Fabio Pinna; Stephan Seiler
    Abstract: We estimate the effect of consumer search on the price of the purchased product in a physical store environment. We implement the analysis using a unique data set obtained from radio frequency identification tags, which are attached to supermarket shopping carts. This technology allows us to record consumers' purchases as well as the time they spent in front of the shelf when contemplating which product to buy, giving us a direct measure of search effort. Controlling for a host of confounding factors, we estimate that an additional minute spent searching lowers price paid by $2.10 which represents 8 percent of average trip-level expenditure.
    Keywords: Consumer search, in-store marketing, path data
    JEL: D12 D83 L11 L15
    Date: 2014–09
  18. By: Christos Genakos; Pantelis Koutroumpis; Mario Pagliero
    Abstract: We study the repeal of a regulation that imposed maximum wholesale and retail markups for all but five fresh fruits and vegetables. We compare the prices of products affected by regulation before and after the policy change and use the unregulated products as a control group. We find that abolishing regulation led to a significant decrease in both retail and wholesale prices. However, markup regulation affected wholesalers directly and retailers only indirectly. The results are consistent with markup ceilings providing a focal point for collusion among wholesalers.
    Keywords: markups, markup regulation, policy evaluation
    JEL: L0 L1 L4 L5
    Date: 2014
  19. By: Carl Benedikt Frey (James Martin Fellow, Oxford Martin Programme on the Impacts of Future Technology, United Kingdom (UK).); Atif Ansar (Lecturer at the Blavatnik School of Government, University of Oxford and an Associate Fellow of the Saïd Business School, UK.); Sacha Wunsch-Vincent (Economics and Statistics Division, WIPO)
    Abstract: Brands are ever more visible and central to the functioning of modern economies. Firms, institutions, government and non-governmental actors as part of civil society spend an everincreasing amount on the right branding of their organization, and/or their products. The demand for trademarks has thus grown substantially. Mirroring this trend, “Markets for brands” - as defined in this paper - play an important but underappreciated economic role in today’s global economy. Trademarks and brands are increasingly the object of commercial transactions; they can be purchased, franchised or licensed. The ability to use Market for Brands allows companies to diversify their business, to access competences, and to generate new revenues without substantial investments. In recent years, firms in emerging economies have been more active users of these markets by licensing or acquiring established global brands. Yet, despite their apparent importance, little is known about the size of these markets, and how relevant these are for firms in countries with different stages of development. This paper first defines and provides a taxonomy for different brand markets. Second, it analyzes the economic rationale of such markets. Finally, it provides evidence on their magnitude, also assessing their relative importance of the different brand-related transaction types in developed and emerging economies alike.
    Keywords: Brands, branding, trademarks, licensing, franchising, mergers and acquisitions, emerging economies, intellectual property
    JEL: F23 M3 O3 O34
    Date: 2014–09
  20. By: Iain Cockburn; Jean O. Lanjouw; Mark Schankerman
    Abstract: This paper studies how patent rights and price regulation affect how fast new drugs are launched in different countries, using newly constructed data on launches of 642 new drugs in 76 countries for the period 1983-2002, and information on the duration and content of patent and price control regimes. Price regulation strongly delays launch, while longer and more extensive patent protection accelerates it. Health policy institutions, and economic and demographic factors that make markets more profitable, also speed up diffusion. The effects are robust to using instruments to control for endogeneity of policy regimes. The results point to an important role for patents and other policy choices in driving the diffusion of new innovations. This project was initiated by Jean (Jenny) Lanjouw. Tragically, Jenny died in late 2005, but had asked us to complete the project. This took much longer than expected because it involved complete reconstruction of the data set and empirical work. It is essentially a new paper in its current form, but it remains an important part of Jenny's legacy and a topic to which she devoted much of her intellectual and policy efforts. We hope she would be satisfied with our work which, for us, was a labor of love.
    Keywords: Patents, pharmaceuticals, diffusion, drug launches, price regulation
    JEL: O31 O33 O34 O38 I15 I18 K19 L65
    Date: 2014–09
  21. By: Andersson, Martin (CIRCLE, Lund University and Department of Industrial Economics, Blekinge Institute of Technology); Xiao, Jing (CIRCLE and Department of Economic History, Lund University)
    Abstract: We analyze the frequency and nature by which new firms are acquired by established businesses. Acquisitions are often considered to reflect a technology transfer process and to also constitute one way in which a “symbiosis” between new technology-based firms (NTBFs) and established businesses is realized. Using a micro-level dataset for Sweden in which we follow new entrants up to 18 years after entry, we show that acquisitions of recent start-ups are rare and restricted to a small group of entrants with defining characteristics. Estimates from competing risks models show that acquired start-ups, in particular by multinational enterprises (MNEs), stand out from entrants that either remain independent or exit by being much more likely to be spin-offs operating in high-tech sectors, having strong technological competence, and having weak internal financial resources. Our overall findings support the argument that acquisitions primarily concern NTBFs in market contexts where entry costs are large, access to finance is important and incumbents have high market power.
    Keywords: acquisitions; post-entry performance; market selection; start-ups; new technology-based firms (NTBFs); innovation; competing-risk model; Sweden
    JEL: G34 L22 L26 O32 O33
    Date: 2014–10–03
  22. By: Martínez-Sánchez, Francisco
    Abstract: In order to analyze the privatization policies undertaken by the national and regional governments, we consider a horizontal differentiation model with price competition in which a country consists of two regions of different sizes. We show that public-sector intervention by either the national or regional government is essential for achieving the social optimum, because a private duopoly does not achieve the social optimum. However, not all public interventions in firms are better than the private duopoly. On the other hand, the preferences of consumers and firms about privatization policy are completely opposite. Finally, the privatization policies of regional governments are completely opposite from one region to the other, and do not coincide with that of the national government. Overall, this paper shows that the relative size of regions is an important feature in the design of the privatization policies implemented by national and regional governments.
    Keywords: Horizontal Differentiation, National and Regional Governments, Mixed Duopoly, Region Size, Partial Privatization
    JEL: H42 L13 L32 L33 R59
    Date: 2014–09–23

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