nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒12‒13
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Supplier fixed costs and retail market monopolization By Caprice, Stéphane; von Schlippenbach, Vanessa; Wey, Christian
  2. Hotelling Games on Networks: Efficiency of Equilibria By Gaëtan Fournier; Marco Scarsini
  3. Incentives in supply function equilibrium By Vetter, Henrik
  4. Preemption Games under Levy Uncertainty By Svetlana Boyarchenko; Sergei Levendorskii
  5. Learning from Inferred Foregone Payoffs By Ralph-C Bayer
  6. Logit price dynamics By Costain, James; Nakov, Anton
  7. Forward trading and collusion of firms in volatile markets By Aichele, Markus F.
  8. On the antitrust economics of the electronic books industry By Gaudin, Germain; White, Alexander
  9. A price concentration study on European mobile telecom markets: Limitations and insights By Pauline Affeldt; Rainer Nitsche
  10. Policy on the media platform industry: The analysis of pricing policies of internet media with two-sided market theory By Kim, Sung-min
  11. Defining a cluster market: The case of the Korean internet portal service market By Kwon, Youngsun
  12. The Value of “Made in USA”: Impact of Chinese acquisition of a US Company on Consumer Willingness to Pay By JIN, SHAOSHENG; ZHANG, YU
  13. Does Privatized Health Insurance Benefit Patients or Producers? Evidence from Medicare Advantage By Marika Cabral; Michael Geruso; Neale Mahoney
  14. Price Versus Non-price Incentives for Participation in Quality Labeling: The Case of the German Fruit Juice Industry By Herrmann, Roland; Bleich, Simon
  15. The Dynamics of Brand Value in the Carbonated Soft Drinks Industry By Huang, Lu; Liu, Yizao
  16. Average-cost pricing and dynamic selection incentives in the hospital sector By Kifmann, Mathias; Siciliani, Luigi
  17. Deregulation, Competition, and Market Integration in China's Electricity Sector By Yanrui WU
  18. Risk Corridors and Reinsurance in Health Insurance Marketplaces: Insurance for Insurers By Timothy J. Layton; Thomas G. McGuire; Anna D. Sinaiko

  1. By: Caprice, Stéphane; von Schlippenbach, Vanessa; Wey, Christian
    Abstract: Considering a vertical structure with perfectly competitive upstream firms that deliver a homogenous good to a differentiated retail duopoly, we show that upstream fixed costs may help to monopolize the downstream market. We find that downstream prices increase in upstream firms' fixed costs when both intra- and interbrand competition exist. Our findings contradict the common wisdom that fixed costs do not affect market outcomes.
    Keywords: Fixed Costs,Vertical Contracting,Monopolization
    JEL: L13 L14 L42
    Date: 2014
  2. By: Gaëtan Fournier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Marco Scarsini (Engineering and System Design Pillar - Singapore University of Technology and Design)
    Abstract: We consider a Hotelling game where a finite number of retailers choose a location, given that their potential customers are distributed on a network. Retailers do not compete on price but only on location, therefore each consumer shops at the closest store. We show that when the number of retailers is large enough, the game admits a pure Nash equilibrium and we construct it. We then compare the equilibrium cost bore by the consumers with the cost that could be achieved if the retailers followed the dictate of a benevolent planner. We perform this comparison in term of the induced price of anarchy, i.e., the ratio of the worst equilibrium cost and the optimal cost, and the induced price of stability, i.e., the ratio of the best equilibrium cost and the optimal cost. We show that, asymptotically in the number of retailers, these ratios are two and one, respectively.
    Keywords: Induced price of anarchy; induced price of stability; location games on networks; pure equilibria; large games
    Date: 2014–04
  3. By: Vetter, Henrik
    Abstract: The author analyses delegation in homogenous duopoly under the assumption that the firm-managers compete in supply functions. In supply function equilibrium, managers' decisions are strategic complements. This reverses earlier findings in that the author finds that owners give managers incentives to act in an accommodating way. As a result, optimal delegation reduces per-firm output and increases profits to above-Cournot profits. Moreover, in supply function equilibrium the mode of competition is endogenous. This means that the author avoids results that are sensitive with respect to assuming either Cournot or Bertrand competition.
    Keywords: Delegation,incentives,supply function equilibrium
    JEL: D22 D43 L22
    Date: 2014
  4. By: Svetlana Boyarchenko (Department of Economics, University of Texas at Austin); Sergei Levendorskii (Department of Mathematics, University of Leicester)
    Abstract: We study a stochastic version of Fudenberg--Tirole's preemption game. Two firms contemplate entering a new market with stochastic demand. Firms differ in sunk costs of entry. If the demand process has no upward jumps, the low cost firm enters first, and the high cost firm follows. If leader's optimization problem has an interior solution, the leader enters at the optimal threshold of a monopolist; otherwise, the leader enters earlier than the monopolist. If the demand admits positive jumps, then the optimal entry threshold of the leader can be lower than the monopolist's threshold even if the solution is interior; simultaneous entry can happen either as an equilibrium or a coordination failure; the high cost firm can become the leader. We characterize subgame perfect equilibrium strategies in terms of stopping times and value functions. Analytical expressions for the value functions and thresholds that define stopping times are derived.
    Keywords: stopping time games, preemption, Levy uncertainty
    JEL: C73 C61 D81
    Date: 2011–05
  5. By: Ralph-C Bayer (School of Economics, University of Adelaide)
    Abstract: A player's knowledge of her own actions and the corresponding own payoffs may enable her to infer or form belief about what the payoffs would have been if she had played differently. In studies of low-information game settings, however, players' ex-post inferences and beliefs have been largely ignored by quantitative learning models. For games with large strategy spaces, the omission may seriously weaken the predictive power of a learning model. We propose an extended payoff assessment learning model which explicitly incorporates players' ex-post inferences and beliefs about the foregone payoffs for unplayed strategies. We use the model to explain the pricing and learning behavior observed in a Bertrand market experiment. Maximum likelihood estimation shows that the extended model organizes the data remarkably well at both aggregate level and individual level.
    Keywords: Learning, Ex-Post Inference, Partial Information, Bertrand Duopoly
    JEL: C73 D43 D83 L13
    Date: 2013–11
  6. By: Costain, James; Nakov, Anton
    Abstract: We model retail price stickiness as the result of errors due to costly decision-making. Under our assumed cost function for the precision of choice, the timing of price adjustments and the prices firms set are both logit random variables. Errors in the prices firms set help explain micro “puzzles” relating to the sizes of price changes, the behavior of adjustment hazards, and the variability of prices and costs. Errors in adjustment timing increase the real effects of monetary shocks, by reducing the “selection effect”. Allowing for both types of errors also helps explain how trend inflation affects price adjustment. JEL Classification: E31, D81, C73
    Keywords: information-constrained pricing, logit equilibrium, near rationality, nominal rigidity, state-dependent pricing
    Date: 2014–07
  7. By: Aichele, Markus F.
    Abstract: Commodity markets are characterized by large volumes of forward contracts as well as high volatility. They are often accused of weak competitive pressure. This article extends the existing literature by analyzing tacit collusion of firms, forward trading and volatility simultaneously. The expected collusive pro t may depart from the monopoly outcome in a volatile market (Rotemberg and Saloner, 1986). Introducing forward trading enables firms to gain the expected monopoly pro t for a broader range of parameters. In contrast to a deterministic market (Liski and Montero, 2006), trading forward in a volatile market may lead to an expected collusive pro t below the monopoly one.
    Keywords: Industrial organization,Forward trading,Collusion,Energy Markets
    JEL: L13
    Date: 2014
  8. By: Gaudin, Germain; White, Alexander
    Abstract: When Apple entered the ebook market, prices rose. A recent court decision found Apple guilty of colluding with publishers, blaming the price hike, in part, on agency agreements and prohibiting their use. Building a model to compare these with traditional wholesale agreements, we identify a single, pivotal condition that leads prices under agency to be higher than under wholesale with two-part tariffs but lower with linear pricing. Our model shows that the increase in ebook prices can be explained, instead, by heightened competition for reading devices, and it guides our understanding of when restricting agency agreements is advisable.
    Keywords: Electronic Books,Antitrust in High-Tech Industries,Vertical Contracting,Wholesale vs. Agency Agreements,Media Economics
    JEL: D21 D40 L23 L4 L42 L51 L82 L86
    Date: 2014
  9. By: Pauline Affeldt (E.CA Economics, ESMT European School of Management and Technology); Rainer Nitsche (E.CA Economics)
    Abstract: Price concentration studies investigate the relationship between market concentration and price levels. They are increasingly used in the mobile telecom industry. This paper provides a detailed account of the limitations of such studies. In addition, it proposes a specific approach in order to account for quality differences across countries, which are likely important when explaining price differences. When applying our approach to European mobile telecom markets from 2003 to 2012, we find that there is no positive relationship between concentration and prices and some indications that the relationship may be negative.
    Keywords: Price concentration study, mobile, wireless, merger control, efficiencies
    Date: 2014–11–18
  10. By: Kim, Sung-min
    Date: 2014
  11. By: Kwon, Youngsun
    Abstract: In a cluster market, many related and unrelated products or services are sold. Examples of cluster markets are Tesco, Sears, Carrefour, Walmart, JCPenny, and Meijer. Because of certain unique characteristics of cluster markets, studies of cluster market definition have been very scant. This paper reviews the market definition issues of cluster markets, proposes a statistical market definition method for cluster markets, and applies the method to the Korean Internet portal service market. The results of analyses show that there is one market for the Korean Internet portals and confirm the concern that the a priori definition of the Internet portal service market using a representative group of services like 1S4C, which was used by the Korea Fair Trade Commission in 2008, did not reflect the actual structure of competition in the Korean Internet portal service market. According to the analyses, the third ranked player in the Korean Internet portal service market, Nate, is more akin to a specialty service provider, not a player competing in the cluster market with Naver and Daum.
    Keywords: Cluster Market,Market Definition,Internet Portal,Click Data,Cluster Analysis,Republic of Korea
    Date: 2014
    Abstract: In this study, we explore how the acquisition of Smithfield, the world’s larger pork producer, by a Chinese firm Shuanghui, on Chinese consumers’ WTP to meat product using experimental auctions. We conducted two sets of experiments, one when the acquisition was still pending approval and the other after its approval. Our results indicate that the acquisition benefits Shuanghui in particular and other Chinese firms in general in terms of consumer’s willingness to pay. On the other firms, the general impacts on US firms might be negative, probably due to expected lower price or reduced perceived difference between domestic and imported meat products.
    Keywords: Cross-border Merger and Acquisition, Consumer Willingness to Pay, Auctions, Meat Product, Agribusiness, Agricultural and Food Policy, Consumer/Household Economics, Food Consumption/Nutrition/Food Safety, Industrial Organization, Institutional and Behavioral Economics, Marketing, D03, D8, F2,
    Date: 2014
  13. By: Marika Cabral; Michael Geruso; Neale Mahoney
    Abstract: The debate over privatizing Medicare stems from a fundamental disagreement about whether privatization would primarily generate consumer surplus for individuals or producer surplus for insurance companies and health care providers. This paper investigates this question by studying an existing form of privatized Medicare called Medicare Advantage (MA). Using difference-in-differences variation brought about by payment floors established by the 2000 Benefits Improvement and Protection Act, we find that for each dollar in increased capitation payments, MA insurers reduced premiums to individuals by 45 cents and increased the actuarial value of benefits by 8 cents. Using administrative data on the near-universe of Medicare beneficiaries, we show that advantageous selection into MA cannot explain this incomplete pass-through. Instead, our evidence suggests that insurer market power is an important determinant of the division of surplus, with premium pass-through rates of 13% in the least competitive markets and 74% in the markets with the most competition.
    JEL: D4 H22 I11 I13 L1
    Date: 2014–09
  14. By: Herrmann, Roland; Bleich, Simon
    Abstract: Quality assurance and labeling play an important and increasing role in firms’ marketing strategies. In almost all cases, a price incentive has been stressed as the major incentive for firms to participate in such schemes. We argue here that important non-price incentives for participation in quality labeling may exist, too. In German retailing, it can be observed that discount retailers are listing more and more foods with quality labels. Processors may then participate in voluntary quality labeling in order to enter the large and growing market of discount retailers. The price-premium versus the market-entry hypothesis are analyzed theo-retically. We investigate then in an empirical hedonic pricing model for the German fruit juice market and for participation in the quality label of the Deutsche Landwirtschafts-Gesellschaft (DLG) which of the two hypotheses is consistent with the data. There is strong support for the market-entry hypothesis.
    Keywords: Labeling, price premium, market entry, fruit juice market, DLG award, Agribusiness, Food Consumption/Nutrition/Food Safety, Food Security and Poverty, Industrial Organization, Research Methods/ Statistical Methods, L660, M380, Q130,
    Date: 2013–09
  15. By: Huang, Lu; Liu, Yizao
    Abstract: This study examines how brand values of different carbonated soft drink (CSD) products change over time and how advertising and social media exposure contribute to brand building. The model consists of two stages. In the first stage, we adopt a structural approach to estimate the brand equities of 12 CSD products and measure the brand values in a Bertrand-Nash equilibrium. In the second stage, we study the impacts of marketing-mix variables on brand values. The empirical results show that both advertising expenditure and the quality of social media activity are important to brand value while the increase in the total social media activity has little effect.
    Keywords: Carbonated soft drinks, Social media, Advertising, Demand and Price Analysis, Industrial Organization, Marketing, D12, L66, M37,
    Date: 2014
  16. By: Kifmann, Mathias; Siciliani, Luigi
    Abstract: This study investigates hospitals' dynamic incentives to select patients when hospitals are remunerated according to a prospective payment system of the DRG type. Given that prices typically reflect past average costs, we use a discrete-time dynamic framework. Patients differ in severity within a DRG. Providers are to some extent altruistic. For low altruism, a downward spiral of prices is possible which induces hospitals to focus on low-severity cases. For high altruism, dynamic price adjustment depends on relation between patients' severity and benefit. In a steady state, DRG prices are unlikely to give optimal incentives to treat patients.
    Keywords: hospitals,DRGs,selection,severity
    JEL: I11 I18 L13 L44
    Date: 2014
  17. By: Yanrui WU (University of Western Australia)
    Abstract: This report presents an updated and expanded review of reforms in China’s electricity sector. It aims to examine the impact of reforms on competition, deregulation, and electricity market integration in China. The findings are used to draw policy implications for electricity market development, particularly the promotion of energy market integration (EMI).
    Keywords: electricity sector, reforms, unbundling, energy market integration and China
    Date: 2014
  18. By: Timothy J. Layton; Thomas G. McGuire; Anna D. Sinaiko
    Abstract: In order to encourage entry and lower prices, most regulated markets for health insurance include policies that seek to reduce the uncertainty faced by insurers. In addition to risk adjustment of premiums paid to plans, the Health Insurance Marketplaces established by the Affordable Care Act implement reinsurance and risk corridors. Reinsurance limits insurer costs associated with specific individuals, while risk corridors protect against aggregate losses. Both tighten the insurer's distribution of expected costs. This paper considers the economic costs and consequences of reinsurance and risk corridors. Drawing a parallel to individual insurance principles first described by Arrow (1963) and Zeckhauser (1970), we first discuss the optimal insurance policy for insurers. Then, we simulate the insurer's cost distribution under reinsurance and risk corridors using health care utilization data for a group of individuals likely to enroll in Marketplace plans from the Medical Expenditure Panel Survey. We compare reinsurance and risk corridors in terms of insurer risk reduction and incentives for cost containment, finding that one-sided risk corridors achieve more risk reduction for a given level of cost containment incentives than both reinsurance and two-sided risk corridors. We also find that the ACA policies being implemented in the Marketplaces (a mix of reinsurance and two-sided risk corridor policies) substantially limit insurer risk but that they are outperformed by a simpler one-sided risk corridor policy according to our measures of insurer risk and incentives.
    JEL: I11 I13
    Date: 2014–09

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