nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒12‒08
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Rationalizability and Efficiency in an Asymmetric Cournot Oligopoly By Gabriel Desgranges; Stéphane Gauthier
  2. Reverse First-mover and Second-mover Advantage in a Vertical Structure By Lee, DongJoon; Choi, Kangsik; Hwang, Kyu-Chan
  3. Permission to Exist By Martin C. Byford; Joshua S. Gans
  4. "Bayesian Estimation of Entry Games with Multiple Players and Multiple Equilibria" By Yuko Onishi; Yasuhiro Omori
  5. Bargaining in Bilateral Oligopoly: An Alternating Offers Representation of the "Nash-in-Nash" Solution By Allan Collard-Wexler; Gautam Gowrisankaran; Robin S. Lee
  6. Successive Market Power and Contracts of Finished Products By Xia, Tian; Li, Xianghong
  7. Detecting Collusion in Spatially Differentiated Markets By Agnes Kügler; Matthias Firgo
  8. The appeals process: An empirical assessment By Hüschelrath, Kai; Smuda, Florian
  9. The Bidder Exclusion Effect By Dominic Coey; Bradley Larsen; Kane Sweeney
  10. Consumer Price Search and Platform Design in Internet Commerce By Michael Dinerstein; Liran Einav; Jonathan Levin; Neel Sundaresan
  11. Homogeneous platform competition with endogenous homing By Jeitschko, Thomas D.; Tremblay, Mark J.
  12. Exclusion and sources of technological competition in mobile networks By Stylianou, Konstantinos
  13. The impact of local loop unbundling revisited By Klein, Gordon; Wendel, Julia
  14. Asymmetric Adjustments in Vertical Price Transmission in the US Beef Sector: Testing for Differences among Product Cuts and Quality Grade By Surathkal, Prasanna; Chung, Chanjin; Han, Sungill
  15. Imperfect Competition in the Italian Dairy Chain: Consequences for the Price Transmission and Welfare Distribution By Rosa, Franco; Vasciaveo, Michaela
  17. Mobile payments: Main trends in the retail industry By Apanasevic, Tatjana
  18. Fixed Costs and the Product Market Treatment of Preference Minorities By Steven Berry; Alon Eizenberg; Joel Waldfogel
  19. Starving (or Fattening) the Golden Goose?: Generic Entry and the Incentives for Early-Stage Pharmaceutical Innovation By Lee Branstetter; Chirantan Chatterjee; Matthew J. Higgins
  20. Alternative operators investing in NGNs: A causal analysis of the case in Spain By Herrera-González, Fernando; García-Arribas, Gonzalo

  1. By: Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We study rationalizable solutions in a linear asymmetric Cournot oligopoly. We show that symmetry across firms favors multiplicity of rationalizable solutions: A merger (implying a greater asymmetry across firms) makes out-of-equilibrium behavior less likely and should dampen &lquo;coordination&rquo; volatility. The market structure maximizing consumers' surplus at a rationalizable solution is not always the competitive one: This may be a symmetric oligopoly with few firms. An empirical illustration to the airlines industry shows that a reallocation of 1% of market share from a small carrier to a larger one yields a 1.3% decrease in volatility, measured by the within carrier standard error of the number of passengers.
    Keywords: Competition policy; Cournot oligopoly; dominance solvability; efficiency; rationalizability; stability; airline industry
    Date: 2014–03
  2. By: Lee, DongJoon; Choi, Kangsik; Hwang, Kyu-Chan
    Abstract: This paper examines the issue of the first-mover and second-mover advantage in a vertical structure in which each manufacturer trades with a separated retailer via two-part tariffs. Compared to the canonical result in one-tier market, we find that the manufacturers' preference orderings over sequential versus simultaneous play are reversed in a vertical structure. We show that the Stackelberg leader (Stackelberg follower) had the first (second)-mover advantage in the downstream Cournot (Bertrand) competition. The first (second)-mover advantage compels its manufacturer to set the wholesale price higher than that of rival. Finally, we show that the manufacturer in which its retailer moves second (first) in a downstream Stackelberg Cournot (Bertrand) competition earns higher profits than the other in which its retailer moves first (second) in a downstream Stackelberg Cournot (Bertrand) competition.
    Keywords: First- and Second-mover Advantage, Two-part Tariffs, Vertical Structure.
    JEL: D43 L13 L14
    Date: 2014–09–25
  3. By: Martin C. Byford; Joshua S. Gans
    Abstract: We provide a new model that generates persistent performance differences amongst seemingly similar enterprises. Our model provides a mechanism whereby efficient incumbent rivals can give permission for an inefficient firm to exist in the presence of efficient entrants. We demonstrate that, in a repeated game, an efficient incumbent has a unilateral incentive to establish a relational contract that softens price competition to either strengthen the inefficient firm in a war of attrition that emerges post-entry or reduce the value to the inefficient firm of selling its position to entrants. The paper provides conditions under which that equilibrium exists and derives a number of empirical predictions as implications of the model. It is demonstrated that performance differences are likely to be associated with stability in the identity of firms in the market.
    JEL: L11 L22
    Date: 2014–09
  4. By: Yuko Onishi (Graduate School of Economics, The University of Tokyo); Yasuhiro Omori (Faculty of Economics, The University of Tokyo)
    Abstract: Entry game models are often used to study the nature of firms’ profit and the nature of competition among firms in empirical studies. However, when there are multiple players in an oligopoly market, resulting multiple equilibria have made it difficult in previous studies to estimate the payo↵ functions of players in complete information, static and discrete games without using unreasonable assumptions. To overcome this difficulty, this paper proposes a practical estimation method for an entry game with three players using a Bayesian approach. Some mild assumptions are imposed on the payoff function, and the average competitive effect is used to capture the entry effect of the number of firms. Our proposed methodology is applied to Japanese airline data in 2000, when there are three major airline companies, ANA, JAL and JAS. The model comparison is conducted to investigate the nature of strategic interaction among these Japanese airline companies.
    Date: 2014–10
  5. By: Allan Collard-Wexler; Gautam Gowrisankaran; Robin S. Lee
    Abstract: The concept of a Nash equilibrium in Nash bargains, proposed in Horn and Wolinsky (1988), has become the workhorse bargaining model for predicting and estimating the division of surplus in applied analysis of bilateral oligopoly. This paper proposes a non-cooperative foundation for this concept—in which agreements between each pair of firms maximizes their bilateral Nash product conditional on all other negotiated agreements—by extending the Rubinstein (1982) alternating offers model to a setting with multiple upstream and downstream firms. In our model, downstream firms make simultaneous offers to upstream firms in odd periods, and upstream firms make simultaneous offers to downstream firms in even periods. Given restrictions on underlying payoffs, we prove that there exists a perfect Bayesian equilibrium with passive beliefs that generates the "Nash-in-Nash" solution, and that this equilibrium outcome is unique.
    JEL: C78 D43 L13
    Date: 2014–10
  6. By: Xia, Tian; Li, Xianghong
    Keywords: contracts, successive market power, Industrial Organization,
  7. By: Agnes Kügler (Department of Economics, Vienna University of Economics and Business); Matthias Firgo (WIFO - Austrian Institute of Economic Research)
    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 behavior 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.
    Keywords: tacit collusion, strategic alliances, spatial differentiation, ski lift ticket prices
    JEL: C21 D43 L11 L41 L83 R32
    Date: 2014–10
  8. By: Hüschelrath, Kai; Smuda, Florian
    Abstract: The appeals process - whereby the losing party of an administrative or judicial decision can seek reconsideration of their arguments before a higher institution - is an important mechanism to correct legal errors and to improve existing laws and regulations. We use data of 467 firm groups that participated in 88 cartels convicted by the European Commission between 2000 and 2012 to study both the characteristics of firm groups filing an appeal and the factors that determine their successfulness in terms of fine reduction. Applying discrete choice models and a two-stage hurdle model, we find that while some characteristics - such as the size and financial condition of the firm group or the clarity of fine guidelines - only affect the probability to file an appeal, other factors such as the size of the fine imposed in connection to characteristics as ringleader, repeat offender or leniency applicant influence both the probability and the success of an appeal. We take our empirical results to derive conclusions for both firms and public policy makers.
    Keywords: Law and Economics,appeals,antitrust policy,cartels,European Union
    JEL: K21 K41 K42 L41
    Date: 2014
  9. By: Dominic Coey; Bradley Larsen; Kane Sweeney
    Abstract: We introduce a simple and robust approach to answering two key questions in empirical auction analysis: discriminating between models of entry and quantifying the revenue gains from improving auction design. The approach builds on Bulow and Klemperer (1996), connecting their theoretical results to empirical work. It applies in a broad range of information settings and auction formats without requiring instruments or estimation of a complex structural model. We demonstrate the approach using US timber and used-car auction data.
    JEL: C10 D44 L10 L13 L40
    Date: 2014–09
  10. By: Michael Dinerstein; Liran Einav; Jonathan Levin; Neel Sundaresan
    Abstract: Search frictions can explain why the "law of one price" fails in retail markets and why even firms selling commodity products have pricing power. In online commerce, physical search costs are low, yet price dispersion is common. We use browsing data from eBay to estimate a model of consumer search and price competition when retailers offer homogeneous goods. We find that retail margins are on the order of 10%, and use the model to analyze the design of search rankings. Our model explains most of the effects of a major re-design of eBay's product search, and allows us to identify conditions where narrowing consumer choice sets can be pro-competitive. Finally, we examine a subsequent A/B experiment run by eBay that illustrates the greater difficulties in designing search algorithms for differentiated products, where price is only one of the relevant product attributes.
    JEL: D12 D22 D83 L13 L86
    Date: 2014–08
  11. By: Jeitschko, Thomas D.; Tremblay, Mark J.
    Abstract: We develop a model for two-sided markets with consumers and producers, who interact through a platform. Typical settings for the model are the market for smartphones with phone users, app producers, and smartphone operating systems; or the video game market with game players, video game producers, and video game consoles. Only consumers who purchase the platform can access content from the producers. Consumers are heterogeneous in their gains from the producer side; and producers are heterogeneous in their costs of bringing apps to the platform. We consider competition between two homogeneous platforms that allows consumers and firms to optimize with respect to how they home, i.e. we allow both individual consumers and individual producers to multi-home or single-home depending on whether it is optimal based on their type. This leads to multiple equilibrium allocations of consumers and firms - all of which are seen in existing markets. We then find conditions under which a monopoly platform generates higher surplus than two competing homogeneous platforms.
    Keywords: two-sided markets,platforms,platform competition,multi-homing,single-homing,endogenous homing decisions,network effects
    JEL: L14 L22 D40 L13
    Date: 2014
  12. By: Stylianou, Konstantinos
    Abstract: The degree of competition in a market is one of the key determinants of its health and the related need for regulatory remedies. Modern industrial economics and their legal counterpart, antitrust law, have distilled a set of factors to consider when assessing the competitive pressures firms face in the market. However, the economic aspects of competition are not enough to give the full picture of the sources of competitive pressures in technology-intensive industries such as mobile telecommunications. We present here an account of how the technological nature of mobile telecommunications alters our perception of the true competitive conditions actors face in the mobile telecommunications industry. This technological side of competition has remained so far either marginal or presented in an unsystematic way. It is only by considering all aspects of competition-economic and technological-that one can assess the need for regulatory intervention to make up for any perceived lack of competition.
    Date: 2014
  13. By: Klein, Gordon; Wendel, Julia
    Abstract: For more than 15 years, Local Loop Unbundling (LLU) has been introduced as a regulatory mean to overcome the bottleneck control over the last mile of copper cable owned by incumbent operators. However, despite its assumed positive effects on market entry and competition intensity, negative effects on network investment incentives and long run overall broadband penetration are expected. In our paper we concentrate on the potential effects of LLU on investment and penetration rates. In contrast to earlier studies, we not only consider the implementation of unbundling, but also include the tariffs of unbundling. Using a large panel, we find that unbundling itself does have a general positive effect on broadband penetration. However, if an interaction between the particular unbundling tariffs is introduced, the per se effect is even increased. Therefore, the overall effect depends strongly on the size of the tariff.
    Date: 2014
  14. By: Surathkal, Prasanna; Chung, Chanjin; Han, Sungill
    Abstract: This study examines the dynamic relationship between wholesale and retail prices of beef products, accounting for product differentiation in cuts and quality grades. We test for long-run association in price transmission relationship in presence of asymmetry caused by threshold-type adjustments. The results indicate that there are significant asymmetric effects such that decrease or increase in wholesale beef prices tend to have different effects on the retail beef prices, and this effect varies across quality grades. Superior quality beef tend to show longer persistence to increase in prices and are adjusted at a slower rate than relatively inferior quality beef. This shows that adjustment of beef prices at retail market is influenced by the level of quality, thus supporting our original hypothesis.
    Keywords: Asymmetric price transmission, Threshold Cointegration, Error correction model, Market linkages, Beef, the United States, Agribusiness, Demand and Price Analysis, Industrial Organization, Livestock Production/Industries,
    Date: 2014
  15. By: Rosa, Franco; Vasciaveo, Michaela
    Abstract: The milk quotas were introduced in Italy in 1984; from that time onward, the dairy chain has progressed in technology and organization with consequences for the market competition. The Aglink-Cosimo simulations suggest milk production will return to an increasing path, driven by a fairly optimistic demand outlook for the improved macroeconomic 2020 future prospects in the EU-27 economies and milk production will exceed the present level by about 3%. Milk deliveries would be expected to increase in Italy by a slightly higher rate, according with the consumption trend of dairy products. Purpose of this paper is to analyze the consequences of structural adjustments of the dairy chain for the competitive price setting assuming the retailers and processors having the control on the market prices, causing changes on the welfare distribution. The analysis is based on derived demand and price-transmission equations, using a successive oligopoly model. The conjectural hypothesis about the players provides the framework for estimating the degrees of price transmission in a dynamic setting with agents at the industry and retail levels (rather than firm) are acting as two oligopoly players. The conjectures about the oligopoly depending on the structure (number of competitors, size and degree of collusion), across the vertical stages of the dairy chain allow to simulate different degrees of market imperfection reflected on the price transmission and welfare distribution. (Dhar and Cotterill, 2000; McCorriston and Scheldon, 96; Morgan and Rayner, 1988). Six simulations for price transmission and ten simulations for welfare distribution are performed assuming different collusive patterns and results are used to check for the market efficiency hypothesis.
    Keywords: dairy chain, imperfect competition, successive oligopoly, price transmission, welfare, Agribusiness, Farm Management, Research Methods/ Statistical Methods, JEL L13,
    Date: 2013–09
  16. By: Li, Xi-Le; Saghaian, Sayed
    Keywords: Market power, price adjustment, Colombian Milds, Agribusiness, Demand and Price Analysis, C32, Q13, Q02,
    Date: 2014
  17. By: Apanasevic, Tatjana
    Abstract: The main objective of the ongoing study is to investigate obstacles and driving forces affecting organization adoption of innovation. In order to that an example of the mobile payments applied in the Swedish retail industry has been used. The main analyzed factors are: adopter characteristics, supplier marketing activity, perceived innovation characteristics, social network, and environmental influences. The analysis of case study findings helped to estimate some common trends in the adoption of mobile payment services by retailers. As a result, the analyzed factors were categorized as obstacles or driving forces to adoption of the mobile payments.
    Keywords: Mobile Payment Services,Organizational Acceptance of Technology,Service Adoption,Mobile payments,Mobile payment services,Retail, Merchants
    Date: 2014
  18. By: Steven Berry; Alon Eizenberg; Joel Waldfogel
    Abstract: It is well documented that, in the presence of substantial fixed costs, markets offer preference majorities more variety than preference minorities. This fact alone, however, does not demonstrate the market outcome is in any way biased against preference minorities. In this paper, we clarify the sense in which the market outcome may in fact be biased against preference minorities, and we provide some conditions for such bias to occur. We then estimate the degree of bias in a particular industry using an empirical model of entry into radio broadcasting with two types of listeners, a preference majority and a minority, and the two types of stations targeting those respective listeners. Listening model estimates are used to infer fixed costs, which can then be used to find optimal station configurations as well as the welfare weights on different groups that rationalize the current configuration. The ensuing estimates reveal welfare weights that are 2-3 times higher for whites than blacks, and 1.5-2 times higher for non-Hispanic than Hispanic, listeners. The difference between the black and Hispanic results arises from the different patterns of importing and exporting: Hispanics listen to non-Hispanic-targeted stations more than blacks listen to white-targeted stations; and whites listen to black-targeted stations more than non-Hispanics listen to Spanish-language stations. Researchers and policy makers might add product markets to labor markets and other contexts that warrant attention for disparate treatment of minorities.
    JEL: L13 L82
    Date: 2014–09
  19. By: Lee Branstetter; Chirantan Chatterjee; Matthew J. Higgins
    Abstract: Over the last decade, generic penetration in the U.S. pharmaceutical market has increased substantially, providing significant gains in consumer surplus. What impact has this rise in generic penetration had on the rate and direction of early stage pharmaceutical innovation? We explore this question using novel data sources and an empirical framework that models the flow of early-stage pharmaceutical innovations as a function of generic penetration, scientific opportunity, firm innovative capability, and additional controls. While the aggregate level of early-stage drug development activity has increased, our estimates suggest a sizable, robust, negative relationship between generic penetration and early-stage pharmaceutical research activity within therapeutic markets. A 10% increase in generic penetration is associated with a 7.9% decline in all early-stage innovations in the same therapeutic market. When we restrict our sample to first-in-class pharmaceutical innovations, we find that a 10% increase in generic penetration is associated with a 4.6% decline in early-stage innovations in the same market. Our estimated effects appear to vary across therapeutic classes in sensible ways, reflecting the differing degrees of substitution between generics and branded drugs in treating different diseases. Finally, we are able to document that with increasing generic penetration, firms in our sample are shifting their R&D activity to more biologic-based (large-molecule) products rather than chemical-based (small-molecule) products. We conclude by discussing the potential implications of our results for long-run welfare, policy, and innovation.
    JEL: D2 L5 L51 L65 M2
    Date: 2014–09
  20. By: Herrera-González, Fernando; García-Arribas, Gonzalo
    Abstract: The telecommunications market was completely open to competition in 1998 in Spain, as in most EU countries. The model for the liberalization of the market was based on the regulated use of the incumbent operators' network, so that new entrants could initially use these resources to allow for a soft entry in the market, by climbing a 'ladder of investment'. However, as late as 2011, no entrant operator had gone beyond the Unbundled Local Loop deploying its own access network. This changed in Spain in 2012, when Jazztel decided it would invest in deploying Fibre-to-the-Home. Later, Orange and Vodafone announced that they have reached an agreement to share the deployment of fibre to 6 Millions of households. This phenomenon has coincided in time with the lack of regulated wholesale access on Telefónica FTTH network for speeds above 30 Mbps. In this paper, we show the causality between both events (lack of actual regulated wholesale access to the fibre, deployment by alternative operators), by understanding competition as a process, in the Hayekian and Schumpeterian tradition.
    Date: 2014

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