nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒11‒22
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Innovation and imitation incentives in dynamic duopoly By Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
  2. A Theory of Price Adjustment under Loss Aversion By Steffen Ahrens; Inske Pirschel; Dennis J. Snower;
  3. Incentive for adoption of new technology in duopoly under absolute and relative profit maximization By Hattori, Masahiko; Tanaka, Yasuhito
  4. Multiproduct trading with a common agent under complete information: Existence and characterization of Nash equilibrium By Iván Arribas; Amparo Urbano Salvador
  5. Dynamic Selection and Distributional Bounds on Search Costs in Dynamic Unit-Demand Models By Jason R. Blevins; Garrett T. Senney
  6. The Magnitude of Menu Costs: A Structural Estimation By Andrea Stella
  7. Strategic outsourcing with technology transfer under price competition By Kabiraj, Tarun; Sinha, Uday Bhanu
  8. Post-shakeout Performance, Survivor Bias and the Meaning of Success By Ralitza Nikolaeva
  9. Strategic Subsidy Policies with Endogenous Choice of Competition Mode By Lim, Seonyoung; Choi, Kangsik
  10. Antitrust, Legal Standards and Investment By Giovanni Immordino; Michele Polo
  11. What Do We Know about the Effectiveness of Leniency Policies? A Survey of the Empirical and Experimental Evidence By Marvao, Catarina; Spagnolo, Giancarlo
  12. Merger control on two-sided markets: is there need for an efficiency defense? By Edmond Baranes; Thomas Cortade; Andreea Cosnita-Langlais
  13. Inovações Não Drásticas: Patentes, Difusão Tecnológica e Antitruste. By Esteves, Luiz A.
  14. Price Competition on Graphs By Pim Heijnen; Adriaan Soetevent
  15. Productivity and welfare: an application to the Spanish banking industry By Alfredo Martín Oliver; Sonia Ruano Pardo; Vicente Salas Fumás
  16. Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in US Large Air Markets By Hideki Murakami
  17. Third-degree Price Discrimination in the Presence of Congestion Externality By Achim I. Czerny; Anming Zhang
  18. Detailed Data and Changes in Market Structure: The Move to Unmanned Gasoline Service Stations By Tadas Bruzikas; Adriaan R. Soetevent
  19. Multiple Contracting in Insurance Markets: Cross-Subsidies and Quantity Discounts By Attar, Andrea; Mariotti, Thomas; Salanié, François
  20. Supply-side barriers to cross-border e-commerce in the EU Digital Single Market By Melisande Cardona; Bertin Martens
  21. New Business Formation and the Productivity of Manufacturing Incumbents: Effects and Mechanisms By Michael Fritsch; Javier Changoluisa

  1. By: Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
    Abstract: We study entry in a growing market by ex-ante symmetric duopolists when sunk costs differ for the innovating and imitating firm. Strategic competition takes the form either of a preemption race or of a war of attrition, the latter being likelier when demand uncertainty is high. Industry value is maximized when firms seek neither to race nor to delay investment. Free imitation is socially costly, and if the consumer surplus resulting from imitation is not too large the socially optimal imitation cost, as may be induced by patent protection, involves preemption. Finally, we discuss endogenous entry barriers and contractual alternatives that increase the likelihood of preemption regimes, with differing implications for imitator entry. When the cost of imitation is low for instance, innovators are shown to rely more heavily on trade secrecy and patents. Welfare-enhancing takeovers and licensing are also shown to occur.
    Keywords: Dynamic oligopoly; Knowledge spillover; Real options
    JEL: G31 L13 O33
    Date: 2014
  2. By: Steffen Ahrens; Inske Pirschel; Dennis J. Snower;
    Abstract: We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers’ perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers’ rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers’ reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that - in line with the empirical evidence - prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks.
    Keywords: price sluggishness, loss aversion, state-dependent pricing
    JEL: D03 D21 E31 E50
    Date: 2014–11
  3. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: We present an analysis about adoption of new technology by firms in a duopoly with differentiated goods under absolute and relative profit maximization. Technology itself is free, but each firm must expend a fixed set-up cost, for example, for education of its staff. Under absolute profit maximization there are three types of sub-game perfect equilibria depending on the value of set-up cost. Both firms, or one firm, or no firm adopt new technology. On the other hand, under relative profit maximization there are two sub-game perfect equilibria. Both firms, or no firm adopt new technology. And we show that if demand is sufficiently high, it is more probable that both firms adopt new technology under relative profit maximization than that both firms, or one firm adopt new technology under absolute profit maximization.
    Keywords: duopoly, relative profit maximization, adoption of new technology
    JEL: D43 L13
    Date: 2014–09–04
  4. By: Iván Arribas (ERI-CES, University of Valencia, Ivie); Amparo Urbano Salvador (ERI-CES, University of Valencia)
    Abstract: This paper focuses on oligopolistic markets in which indivisible goods are sold by multiproduct firms to a continuum of homogeneous buyers, with measure normalized to one, who have preferences over bundles of products. Our analysis contributes to the literature on private, delegated agency games with complete information, extending the insights by Chiesa and Denicolò (2009) to multiproduct markets with indivisibilities and where the agent's preferences need not be monotone. By analyzing a kind of extended contract schedules -mixed bundling prices- that discriminate on exclusivity, the paper shows that efficient equilibria always exist in such settings. There may also exist inefficient equilibria in which the agent chooses a suboptimal bundle and no principal has a profitable deviation inducing the agent to buy the surplus-maximizing bundle because of a coordination problem among the principals. Inefficient equilibria can be ruled out by either assuming that all firms are pricing unsold bundles at the same profit margin as the bundle sold at equilibrium, or imposing the solution concept of subgame perfect strong equilibrium, which requires the absence of profitable deviations by any subset of principals and the agent. We also provide a characterization of the equilibrium strategies. More specific results about the structure of equilibrium prices and payoffs for common agency outcomes are ofered when the social surplus function is monotone and either submodular or supermodular.
    Keywords: Multiproduct Price Competition, Delegated Agency Games, Mixed Bundling Prices, Subgame Perfect Nash Equilibrium, Strong Equilibrium
    JEL: C72 D21 D41 D43 L13
    Date: 2014–09
  5. By: Jason R. Blevins (Department of Economics, Ohio State University); Garrett T. Senney (Department of Economics, Ohio State University)
    Abstract: This paper develops a dynamic model of consumer search that, despite placing very little structure on the dynamic problem faced by consumers, allows us to exploit intertemporal variation in within-period price and search cost distributions to estimate the population distribution from which consumers' search costs are initially drawn. We show that static approaches to estimating this distribution generally suffer from a dynamic sample selection bias because forward-looking consumers with unit demand for a good may delay their purchase in a way that depends on their individual search cost. We analyze identification of the population search cost distribution using only price data and develop estimable nonparametric upper and lower bounds on the distribution function and a nonlinear least squares estimator for parametric models. We also consider the additional identifying power of weak assumptions such as monotonicity of purchase probabilities in search costs. We apply our estimators to analyze the online market for two widely used econometrics textbooks. Our results suggest that static estimates of the search cost distribution are biased upwards, in a distributional sense, relative to the true population distribution. In a small-scale simulation study, we show that this is typical in a dynamic setting where consumers with high search costs are more likely to delay purchase than those with lower search costs.
    Keywords: nonsequential search, consumer search, dynamic selection, nonparametric bounds
    JEL: C14 D83 D43
    Date: 2014–10
  6. By: Andrea Stella (Federal Reserve Board)
    Abstract: The leading theories on monetary policy non-neutrality require some degree of price rigidity, which is often introduced by assuming fixed costs of price adjustment, also known as menu costs. Empirical evidence on the existence of such menu costs is scarce. Using weekly data on prices, costs and units sold by a supermarket chain, I estimate a discrete-choice dynamic model of a multi-product firm facing menu costs with a moment inequalities approach. This empirical methodology allows me to estimate two types of fixed costs of price adjustment: costs that are independent of the number of items that change prices and costs that are incurred at each item’s price change. I find that both types of menu costs exist and are substantial. The total cost from changing prices is estimated to be bounded between 0.22% and 0.59% of revenues and between 11.05% and 29.32% of net margins, depending on the specification. The first type of fixed cost accounts for up to 85% of this expense, pointing to substantial economies of scope in price setting.
    Date: 2014
  7. By: Kabiraj, Tarun; Sinha, Uday Bhanu
    Abstract: We construct a model to show that outsourcing of a crucial input can occur even though it can be produced in-house at a lower cost. There are two firms producing differentiated goods and competing in prices, and only one of them possesses input production technology which is superior to that of an independent input supplier. We show that if the degree of product differentiation is small or the technological gap between two input producing firms is small, strategic outsourcing will occur. Technology transfer in the form of patent sale will act as a commitment that the firm will outsource. While the outsourcing firm gains, consumers’ welfare as well as social welfare goes down. Interestingly, sometimes rival firm’s profit might increase. The paper brings into focus some competition policy concerns.
    Keywords: Outsourcing; patent transfer; price competition; welfare; competition policy.
    JEL: D43 L22 L23 L24
    Date: 2014–04–15
  8. By: Ralitza Nikolaeva
    Abstract: A new market poses many questions for potential entrants. Among the most pertinent ones are which factors contribute to firm’s survival. But whether the same factor is equally beneficial at the time of entry and at a later stage has been rarely addressed. Consequently, we explore the dynamism of firm-controlled survival determinants and their correspondence to sales drivers. Our contributions are twofold – exploring the time-varying effect of survival determinants and comparing them to sales determinants after a shakeout in the market. We demonstrate the dangers of generalizing about success factors without considering their dynamic nature or the firm’s strategic objectives.
    Keywords: dynamic effects, e-retailing, survivor bias
    JEL: M13
    Date: 2014–10–30
  9. By: Lim, Seonyoung; Choi, Kangsik
    Abstract: We investigate government subsidy policies in which a home firm and a foreign firm choose to strategically set prices or quantities in a third market. We show that even though each firm can earn higher profits under Cournot competition than under Bertrand competition regardless of the nature of goods, choosing Bertrand competition is the dominant strategy for both firms. This leads each firm to face a prisoners' dilemma in equilibrium. We also show that from the aspects of governments under subsidy regime, Cournot competition is more efficient than Bertrand competition when the goods are substitutes, and vice versa when the goods are complements. For this, from the aspects of firms, the Cournot equilibrium could be Pareto superior (inferior) with government's intervention of subsidy policy when the goods are substitutes (complements). Thus, the conflict of interests between governments and firms occur when goods are complements. Hence, our result may justify that when the goods are substitutes, a general principle is that the incentive to intervene in the international trade is greater under Cournot competition than under Bertrand competition.
    Keywords: Subsidy, Cournot, Bertrand, Social Welfare, Prisoners' Dilemma.
    JEL: F12 F13 L13
    Date: 2014–10–24
  10. By: Giovanni Immordino; Michele Polo
    Abstract: We study the interaction of a firm that invests in research and, if successful, undertakes a practice to exploit the innovation, and an enforcer that sets legal standards, fines and accuracy. In this setting deterrence on actions interacts with deterrence on research. When the practice increases expected welfare the enforcer commits not to intervene by choosing a more rigid per-se legality rule to boost investment, moving to a more flexible discriminating rule combined with type-I accuracy for higher probabilities of social harm. Patent and antitrust policies act as substitutes in our setting; additional room for per-se (illegality) rules emerges when fines are bounded. Our results on optimal legal standards extend from the case of (uncertain) investment in research to the case of (deterministic) investment in physical assets.
    Keywords: legal standards, accuracy, antitrust, innovative activity, enforcement.
    JEL: D73 K21 K42 L51
    Date: 2013
  11. By: Marvao, Catarina (Stockholm Institute of Transition Economics); Spagnolo, Giancarlo (Stockholm Institute of Transition Economics)
    Abstract: Over the last decade a large body of economic research has emerged that has sought to empirically test the effectiveness of leniency policies as tools to enhance the detection, prosecution and deterrence of cartel conduct. This research has considerable potential value in assisting competition authorities design optimal policies by having a better understanding of the impact that such policies, their specific features and manner of administration, have on the behaviour of cartel participants. Some researchers have taken the approach of testing empirically the effects of actual policies – predominantly those administered by the United States Department of Justice (USDOJ) and the European Commission (EC) – while others have tested different hypothetical policies in the lab. This section reviews the key studies which have been undertaken to date, it highlights the main findings and compares their results. After appreciating the main contributions and limitations of these studies, it concludes with a general assessment and an agenda for future research.
    Keywords: Cartels; competition policy; Leniency Programme
    JEL: D43 K21 K42 L13 L40 L51
    Date: 2014–10–01
  12. By: Edmond Baranes; Thomas Cortade; Andreea Cosnita-Langlais
    Abstract: We study horizontal mergers on two-sided markets between horizontally differentiated platforms. We provide a theoretical analysis of the merger's price effect based on the amount of cost savings it generates, the behavior of outsider platforms, and the size of cross-group network effects. We point out differences as compared with the standard, one-sided merger analysis, and also discuss the merger control policy implications.
    Date: 2014–11
  13. By: Esteves, Luiz A.
    Abstract: Economic literature describes drastic and non-drastic innovations as sources of marginal cost reduction. The difference is that non-drastic innovations are unable to reduce the new marginal cost in order to ensure that the innovator is able to set monopoly price lower than the previous marginal cost. So while protected by a patent, the innovator monopolist will not have incentives to reduce its price. At the end of the patent protection period, it is possible a market movement in direction of lower prices and higher quantities. However, this welfare gain is achieved only with the entry of a large number of competitors, which in turn depends on the efficiency of the diffusion of new technology. Failures of technological diffusion can stimulate anticompetitive behaviour, eliminating the gains to society. The antitrust policy can mitigate these risks and strengthen the role of technological diffusion of the patents.
    Keywords: Innovations; Patents; Technological Diffusion; Antitrust
    JEL: L4 O30 O31 O33
    Date: 2014–08–01
  14. By: Pim Heijnen (University of Groningen); Adriaan Soetevent (University of Groningen)
    Abstract: This paper extends Hotelling's model of price competition with quadratic transportation costs from a line to graphs. We derive an algorithm to calculate firm-level demand for any given graph, conditional on prices and firm locations. These graph models of price competition may lead to spatial discontinuities in firm-level demand. We show that the existence result of D'Aspremont et al. (1979) does not extend to simple star graphs and conjecture that this non-existence result holds more generally for all graph models with two or more firms that cannot be reduced to a line or circle.
    Keywords: spatial competition, Hotelling, graphs
    JEL: D43 L10 R12
    Date: 2014–10–02
  15. By: Alfredo Martín Oliver (Universitat de les Illes Balears); Sonia Ruano Pardo (Banco de España); Vicente Salas Fumás (Universidad de Zaragoza)
    Abstract: This paper examines the links between productivity and social welfare, with an application to the banking industry. It models spatial price competition between bank branches jointly with banks’ decisions on the opening or closing of branches based on profit expectations. The model predicts that more productive banks set lower (higher) interest rates on loans (deposits) and increase their market share through both higher demand per branch and a larger network of branches. Specifically, the paper i) uses a new measure of bank productivity; ii) provides a productivity differences-based explanation of the distance between bank branches and bank customers; and iii) shows how the intensity of market competition may be unaffected when the number of banks decreases, provided that banks continue expanding their branch network. The empirical implementation of the model uses Spanish banks over the period 1993-2007 and it confirms the theoretical predictions of the paper
    Keywords: banking spatial competition, bank branch productivity, interest rates, branch dynamics, bank economic profits.
    JEL: E43 G21 L11 O30 R32
    Date: 2014–10
  16. By: Hideki Murakami (Graduate School of Business Administration, Kobe University)
    Abstract: This paper empirically analyses the patterns of inter-firm rivalry between low-cost and full service carriers by carrier and airport bases, and demonstrate welfare implication of LCC, using 1163 US cross-sectional data of 1998 when LCCs were purely no-frilled carriers. Our main findings are: (1) that both LCC and full service carriers keep higher price-cost margins when LCCs enter in the secondary airport, while especially full service carriers suffer from low price-cost margin when LCCs enter the same markets, (2) that total gains of welfare are 25.5 million USD for our dataset, and 90% of welfare gains come from the gain in consumer' s surplus. LCCs' cumulative profit is 4.45 million USD, but full service carriers lost 1.92 million USD in total due to the competition by LCCs, (3) that LCCs sometimes provide unreasonably small (i.e, less-than-monopoly) capacities instead of profit-maximizing ones when they have no information about own demand curves.
    Keywords: low-cost carrier, inter-firm rivalry, social welfare
  17. By: Achim I. Czerny (VU University Amsterdam, the Netherlands); Anming Zhang (The University of British Columbia, Canada)
    Abstract: This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.
    Keywords: Price discrimination, congestion, time valuation, monopoly, airline
    JEL: D42 L93
    Date: 2014–10–23
  18. By: Tadas Bruzikas (University of Groningen); Adriaan R. Soetevent (University of Groningen, the Netherlands)
    Abstract: We illustrate the impact of detailed data in empirical economic research by considering how the increased data availability has changed the scope and focus of studies on retail gasoline pricing. We show how high-volume, high-frequency price data help to identify and explain long-term trends using original data for the Dutch retail gasoline market. We find that 22% of the observed increase in the highway/off-highway price gap can be explained by the trend towards more unmanned stations; another 13% can be explained by major-to-non-major re-brandings. In one of the first applications of event study analysis to non-financial price data, we show that the adjustment to the new, lower price level is almost immediate in case of manned-to-unmanned conversions but takes one to two months in case of major-to-non-major re-brandings. The impact of both events is asymmetric with no measurable price impact of changes in the opposite direction.
    Keywords: retail gasoline pricing, big data, competitive spillovers, event study analysis
    JEL: L13 L81
    Date: 2014–09–16
  19. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We study a nonexclusive insurance market with adverse selection in which insurers compete through simple contract offers. Multiple contracting endogenously emerges in equilibrium. Different layers of coverage are priced fairly according to the types of insurees who purchase them, giving rise to cross-subsidies between types. Riskier insurees demand greater total coverage at an increasing unit price, but the contracts offered by insurers feature quantity discounts in equilibrium. Our policy implications emphasize the need to regulate the supply side of nonexclusive insurance markets, leaving insurees free to choose their optimal level of coverage.
    Keywords: Insurance Markets, Multiple Contracting, Adverse Selection.
    JEL: D43 D82 D86
    Date: 2014–10–07
  20. By: Melisande Cardona (European Commission – JRC - IPTS); Bertin Martens (European Commission – JRC - IPTS)
    Abstract: Between 2009 and 2012 the percentage of online consumers in the EU who made online purchases in another EU Member State increased from 8 to 11 per cent, below the target of 20 per cent put forward in the EU Digital Agenda. Both, subjective perceptions on the consumer side or objective barriers on the supply side can play a role. This study uses a mystery shopping survey to measure the relative importance of supply side barriers. While 97 per cent of domestic orders lead to a successful shipment, we find that suppliers accepted to ship only 48 per cent of all cross-border online orders. This high failure rate may overstate the ordinary consumer experience because of the artificiality of the mystery shopping trade patterns. We therefore focus on the factors that drive success and failure. A shared language between buyer and supplier countries increased and size of the goods decreased the chances of success. Goods that are subject to geographical sales restrictions (vertical agreements) between producers, wholesalers and retailers are the least likely to be available for online cross-border orders. This may indicate that restrictions in competition in offline markets are spilling over to online markets and prevent the realization of some of the benefits of e-commerce. We conclude that regional integration in digital markets is constrained by the lack of integration in traditional bricks & mortar markets.
    Keywords: online trade, e-commerce, cross-border trade, barriers to trade, vertical constraints in online markets
    Date: 2014–10
  21. By: Michael Fritsch (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Javier Changoluisa (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: We analyze the effect of new business formation on the productivity of incumbent manufacturing establishments. We obtain robust empirical evidence of productivity improvements that are due to the emergence of new businesses in the same industry, that is, on the output market. This effect is spatially limited to the respective region. Regional competition from new businesses on the input market and cross-industry effects are not related to incumbents' productivity changes. The effect that new competition has on incumbents is moderated by an incumbent's distance from the technological frontier; incumbents close to the frontier exhibit a more pronounced positive reaction.
    Keywords: New business formation, productivity, incumbent firms
    JEL: L26 D20 O12
    Date: 2014–10–27

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