nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒01‒03
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. Spatial Competition in Quality By Auer, Raphael; Sauré, Philip
  2. Dynamic Spatial Competition Between Multi-Store Firms By Aguirregabiria, Victor; Vicentini, Gustavo
  3. Spatial Competition and Flexible Manufacturing with Spatially Discriminatory Pricing By Wen-Jung Liang; Kuang-Cheng Wang; Hong-Ren Din
  4. Voting on Infrastructure Investment: The Role of Product Market Competition By Arghya Ghosh; Kieron Meagher
  5. On the economics of labels: how their introduction affects the functioning of markets and the welfare of all participants By Olivier Bonroy; Christos Constantatos
  6. Toward a theory of monopolistic competition By Philip Ushchev; Mathieu Parenti; Jacques-Francois Thisse
  8. Exclusive Dealing and Vertical Integration in Interlocking Relationships By Nocke, Volker; Rey, Patrick
  9. Quality Pricing-to-Market By Auer, Raphael; Chaney, Thomas; Sauré, Philip
  10. Downstream Market Power and the Lerner Index By Ioannis Pinopoulos
  11. Price Dynamics with Customer Markets By Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
  12. Product and Marketing Actions in a Competitive Scenario By Marco Giarratana; Alessandra Perri
  13. Auction Mechanisms and Bidder Collusion: Bribes, Signals and Selection By Aniol Llorente-Saguer; Ro’i Zultan
  14. Market Size, Competition, and the Product Mix of Exporters By Thierry Mayer; Marc J. Melitz; Gianmarco Ottaviano
  15. The levelling effect of product market competition on gender wage discrimination By Boris Hirsch; Michael Oberfichtner; Claus Schnabel
  16. Network Effects of Air Travel Demand, Second Version By Yanhao Wei
  17. The effect of code-share agreements on the temporal profile of airline fares By Marco Alderighi; Alberto A. Gaggero; Claudio A. Piga
  18. Restructuring the Electricity Industry: Vertical Structure and the Risk of Rent Extraction By Boom, Anette; Buehler, Stefan
  19. A Look Upstream: Electricity Market Restructuring, Risk, Procurement Contracts and Efficiency By Corrado Di Maria; Ian Lange; Emiliya Lazarova
  20. “Cooperation in R&D, firm size and type of partnership: Evidence for the Spanish automotive industry” By Erika Raquel Badillo; Francisco Llorente; Rosina Moreno
  21. The effects of disclosure policy on risk management incentives and market entry By Hoang, Daniel; Ruckes, Martin
  22. Garage and Curbside Parking Competition with Search Congestion By Eren Inci; Robin Lindsey
  23. Quality Competition among Platforms: a Media Market Case By Serena Marianna Drufuca; Maria Rosa Battaggion

  1. By: Auer, Raphael; Sauré, Philip
    Abstract: We develop a model of vertical innovation in which firms incur a market entry cost and position themselves in the quality space. Once established, firms compete monopolistically, selling to consumers with heterogeneous tastes for quality. We establish existence and uniqueness of the pricing game in such vertically differentiated markets with a potentially large number of active firms. Turning to firms' entry decisions, exogenously growing productivities induce firms to enter the market sequentially at the top end of the quality spectrum. We spell out the conditions under which the entry problem is replicated over time so that each new entrant improves incumbent qualities in fixed proportions. Sequential market entry overcomes the asymmetry of the location problem, which unavoidably arises in the quality spectrum because of its top and bottom ends. Our main technical contribution lies in handling this asymmetry, a feature absent in Salop (1979) and other circular representations of Hotelling (1929) and Lancaster (1966).
    Keywords: 15/6
    JEL: D4 L11 L13
    Date: 2014–06
  2. By: Aguirregabiria, Victor; Vicentini, Gustavo
    Abstract: We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store retailers. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We develop an algorithm to approximate a Markov Perfect Equilibrium in our model, and propose a procedure for the estimation of the parameters of the model using panel data on number of stores, prices, and quantities at multiple geographic locations within a city. We also present numerical examples to illustrate the model and algorithm.
    Keywords: cannibalization; industry dynamics; spatial competition; spatial preemption; store location; sunk costs
    JEL: C73 L13 L81 R10 R30
    Date: 2014–11
  3. By: Wen-Jung Liang; Kuang-Cheng Wang; Hong-Ren Din
    Abstract: Spatial Competition and Flexible Manufacturing with Spatially Discriminatory Pricing Abstract This paper develops a two-dimensional spatial framework to explore the firms¡¦ optimal locations and optimal attributes of basic products under linear transportation costs, in which firms have the technique of flexible manufacturing and engage in spatially discriminatory pricing. We can observe in the real world that the technique of flexible manufacturing has been widely adopted by most major manufacturing industries. As indicated by Eaton and Schmitt (1994), the key feature of flexible manufacturing is economies of scope, which can be represented by the production of an array of differentiated products extended by a basic product using the same manufacturing process. The production of the basic product incurs a sunk cost of product development, whose feature can be described by a point on Hotelling¡¦s attribute line. This basic product can be modified to produce extended variant products by incurring additional costs. The additional cost of producing an extended variant product is denoted by a per-unit modification cost that is proportional to the distance of the attribute line between the attribute addresses of the basic product and the extended variant product. The game in question is a three-stage game. Firms simultaneously select their equilibrium locations in the first stage. Then, they simultaneously choose the optimal attributes of the basic products in the second stage. Finally, firms engage in spatially discriminatory pricing in the third stage. The main findings of the paper are as follows. First of all, we show that the two firms will agglomerate at the center of the location line and the optimal attributes of the two basic products will be located at the first and third quartiles of the attribute line, respectively, when the ratio of the marginal modification rate to the transport rate is high. Secondly, the two firms will locate separately on the location line and the optimal attributes of the two basic products will remain at the first and third quartiles when this ratio is moderate. Moreover, the two firms will locate at the first and third quartiles of the location line, respectively, and the optimal attributes of the basic products will agglomerate at the center of the attribute line when this ratio is low. JEL Classification: R32, L22 Keywords: Spatial Agglomeration; Flexible Manufacturing; Spatially Discriminatory Pricing
    Keywords: Spatial Agglomeration; Flexible Manufacturing; Spatially Discriminatory Pricing;
    JEL: R32 L22
    Date: 2014–11
  4. By: Arghya Ghosh; Kieron Meagher
    Abstract: In spatial competition, public infrastructure plays a crucial role in determining product market outcomes. In our model, consideration of infrastructure’s impact on the product market drives the voting behavior of consumers in their dual role as voter/taxpayers. The spatial heterogeneity of consumers produces conflicting political interests and in many cases inefficient outcomes. However across both exogenous and endogenous market environments product market competition consistently leads to higher levels of publicly funded infrastructure than monopoly/collusion. Furthermore, competition’s boost to the popular support for infrastructure investment is often excessive while monopoly leads to underinvestment.
    JEL: D43 L13 H40 H54
    Date: 2014–08
  5. By: Olivier Bonroy (Economie Appliquée de Grenoble, INRA); Christos Constantatos (Department of Economics, University of Macedonia)
    Abstract: Are labels good or bad for consumers and firms? The answer may seem straightforward since labels improve information, yet economic theory reveals situations where their introduction reduces the welfare of at least some market participants. This essay reviews the theoretical literature on labels in order to identify and explain the main reasons that may cause labeling to produce undesirable side-effects. In contrast to earlier reviews that either concentrate on narrow topics or treat the subject in a more or less informal way, we bring together the main results from all the relevant topics by presenting and discussing the assumptions and model-building techniques that underpin them. The advantage of this approach is that it identifies the origin of the differences between results, thus allowing the synthesis of results that sometimes appear even to be contradictory. We focus on “quality labels†and examine the impact of labeling on market structure, the side-effects of costly certification, issues related to the label's trustworthiness, the rationale for mandatory vs. voluntary labeling, the level at which the label's standard is set according to the agency that selects it, the political economy of labels, that is, pro- or anti-label lobbying, lobbying to affect the label's standard, and lobbying in favor or against the label's mandatory imposition. These topics cover a wide range of applications, including Genetically Modified Organism (GMOs), organic produce, geographic indicators, controlled origin, eco-labels, etc. We conclude by identifying topics that require further research.
    Keywords: asymmetric information, certification, credence good, labeling, market power, political economy, regulation, vertical product differentiation, welfare, label, réglementation, économie politique, analyse des marchésétiquetagelabel de qualitédifférenciation verticalethéorie économique
    JEL: L1 L5 Q1
    Date: 2014
  6. By: Philip Ushchev; Mathieu Parenti; Jacques-Francois Thisse
    Abstract: We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. Using the concept of Frechet differentiability, we determine a general demand system. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Our model is able to mimic oligopolistic behavior and to replicate partial equilibrium results within a general equilibrium framework. For example, an increase in per capita income or in population size shifts prices (outputs) downwards (upwards). When firms face the same productivity shock, they adopt an incomplete pass-through policy, except when preferences are homothetic. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous firms and consumers.
    Keywords: monopolistic competition; general equilibrium; additive preferences; homothetic preferences
    JEL: D43 L11 L13
    Date: 2014–11
  7. By: Jovica Marković, Jovana Mutibarić, Marko Carić (University Business Academy in Novi Sad, Faculty of Economics and Engineering Management, Novi Sad)
    Abstract: Until the early 1920s, the classical theory of price included two main models, perfect competition and monopoly. However, E. Chamberlin and J. Robinson introduced a new theory of monopolistic competition in 1933. At the time of global economic crisis, when only the most powerful companies survive, the model of monopolistic competition is hardly sustainable. In fact, the most widespread market model in highly developed world economies has been replaced by monopoly. Supply reduction due to the bankruptcy of many companies, combined with demand decline as a result of the austerity measures, and on the other hand growing need for higher budget inflows, lead to the price hikes in all industries. All mentioned result lead to an extreme market model – the monopoly; even in countries that were known as market economies and by its monopolistic competition. Furthermore, it is well known that employment level is lower in economies that are not competitive. That fact additionally contributes to conclusion that the sustainability of the monopolistic competition is almost impossible during the crisis, considering that we have witnessed high unemployment rates in some EU countries (e.g. Spain, Greece, Italy, Portugal and Ireland). The subject of this paper is to explore sustainability of the market model of monopolistic competition in conditions of the global economic crisis, transitional economies and the reform, under which is a public sector of the Republic of Serbia. The aim of the paper is to determine are there any opportunities for the survival of the mentioned market model in terms of re-industrialization, which is inevitable companion of globalization.
    Keywords: Monopolistic competition, global economic crisis
    JEL: D4 D43 D43
    Date: 2014–04
  8. By: Nocke, Volker; Rey, Patrick
    Abstract: We develop a model of interlocking bilateral relationships between upstream firms (manufacturers) that produce differentiated goods and downstream firms (retailers) that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, to the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically.
    Keywords: bilateral contracting; exclusive dealing; foreclosure; vertical merger; vertical relations
    JEL: D43 L13 L42
    Date: 2014–09
  9. By: Auer, Raphael; Chaney, Thomas; Sauré, Philip
    Abstract: We examine firm's pricing-to-market decisions in vertically differentiated industries featuring a large number of firms that compete monopolistically in the quality space. Firms sell goods of heterogeneous quality to consumers with non-homothetic preferences that differ in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the pricing game under costly international trade, thus establishing existence and uniqueness. We then examine how the interaction of good quality and market demand for quality affects firms' pricing-to-market decisions. The relative price of high quality goods compared to that of low quality goods is an increasing function of the income in the destination market. When relative costs change, the rate of exchange rate pass-through is decreasing in quality in high income countries, yet increasing in quality in low-income countries. We then document that these predictions receive empirical support in a dataset of prices and quality in the European car industry.
    Keywords: exchange rate pass-through; intra-industry trade; monopolistic competition; pricing-to-market; vertical differentiation
    JEL: E3 E41 F12 F4 L13
    Date: 2014–07
  10. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia, Greece)
    Abstract: A well-known result in oligopoly theory regarding one-tier industries is that the equilibrium mark-up and the Lerner index decreases with the number of firms. In other words, market power is diminished when more firms are present in the market. In the present paper, we consider a two-tier industry and focus on the behaviour of the equilibrium mark-up and Lerner index in the downstream market with respect to a change in the number of downstream ?rms. In a very general setting, without specific demand functions for final goods and vertical relations between upstream and downstream firms, we derive conditions under which the equilibrium downstream mark-up and Lerner index may increase with the number of downstream firms. Moreover, we show that, in contrast to the case of one-tier industries, the equilibrium mark-up and Lerner index in the downstream market can move to opposite directions as a result of an increase in the number of downstream firms. We also provide a specific example by considering a successive Cournot oligopoly model where firms freely enter into the upstream market.
    Keywords: Vertically related markets, Market power, Lerner index.
    JEL: L4 L22
    Date: 2014–11
  11. By: Paciello, Luigi (Einaudi Institute for Economics and Finance); Pozzi, Andrea (Einaudi Institute for Economics and Finance); Trachter, Nicholas (Federal Reserve Bank of Richmond)
    Abstract: We study a tractable model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price, describes the behavior of optimal prices in the presence of customer acquisition and retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit novel micro data on purchases from a panel of households from a large U.S. retailer to quantify the model and compare it to the counterfactual benchmark of the standard monopolistic competition setting. We show that a model with customer markets has markedly different implications in terms of the equilibrium price distribution, which better fit the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to shocks that affects price dispersion is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of demand to these shocks.
    JEL: E12 E30 L16
    Date: 2014–12–04
  12. By: Marco Giarratana (Dept. of Management and Technology, Bocconi University); Alessandra Perri (Dept. of Management, Università Ca' Foscari Venice)
    Abstract: We analyze product and marketing actions and their consequences on firm competitive outcomes. These actions are investigates in relative terms compared to a firmÕs direct competitors. Our results shed new light on how a firmÕs choices regarding product portfolio and marketing postures affect its performance, while accounting for competitive conditions in the external environment. The theory is tested using data from the US apparel industry.
    Keywords: Product and Marketing Strategic actions, Competitive Interaction, Performance.
    JEL: M10 M31
    Date: 2014–12
  13. By: Aniol Llorente-Saguer (Queen Mary University of London); Ro’i Zultan (Ben-Gurion University)
    Abstract: The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. In equilibrium, collusive negotiations are either successful or are avoided altogether, hence such analysis neglects the effects of failed collusion attempts. In such contingencies, information revealed in the negotiation process is likely to affect the bidding behavior in first-price (but not second-price) auctions. We test experimentally a setup in which collusion is possible, but negotiations often break down and information is revealed in an asymmetric way. The existing theoretical analysis of our setup predicts that the first-price mechanism deters collusion. In contrast, we find the same level of collusion in first-price and second-price auctions. Furthermore, failed collusion attempts distort the bidding behavior in the ensuing auction, leading to loss of efficiency and eliminating the revenue dominance typically observed in firstprice auctions.
    Keywords: Auctions, Collusion, Bribes, Experiment
    JEL: C72 C91 D44
    Date: 2014–12
  14. By: Thierry Mayer (Département d'économie); Marc J. Melitz (Department of Economics); Gianmarco Ottaviano (Università di Bologna)
    Abstract: We build a theoretical model of multi-product firms that highlights how competition across market destinations affects both a firm's exported product range and product mix. We show how tougher competition in an export market induces a firm to skew its export sales toward its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Theoretically, this within-firm change in product mix driven by the trading environment has important repercussions on firm productivity. A calibrated fit to our theoretical model reveals that these productivity effects are potentially quite large.
    JEL: D21 D24 F13 F14 F41 L11
    Date: 2014–02
  15. By: Boris Hirsch (University of Erlangen–Nuremberg); Michael Oberfichtner (University of Erlangen–Nuremberg); Claus Schnabel (University of Erlangen–Nuremberg)
    Abstract: Using linked employer–employee panel data for West Germany that include direct information on the competition faced by plants, we investigate the effect of product market competition on the gender pay gap. Controlling for match fixed effects we find that intensified competition significantly lowers the unexplained gap in plants with neither collective agreements nor a works council. Conversely, there is no effect in plants with these types of worker codetermination, which are unlikely to have enough discretion to adjust wages in the short run. We also document a larger competition effect in plants with few females in their workforces. Our findings are in line with Beckerian taste-based employer wage discrimination that is limited by competitive forces.
    Keywords: gender pay gap, discrimination, product market competition
    JEL: J16 J31 J71
    Date: 2014–09
  16. By: Yanhao Wei (Department of Economics, University of Pennsylvania)
    Abstract: As demand increases, airline carriers often increase flight frequencies to meet the larger flow of passengers in their networks, which reduces passengers' schedule delays and attracts more demand. Focusing on the “network effects", this paper develops and estimates a structural model of the U.S. airline industry. Compared with previous studies, the model implies higher cost estimates, which seem more consistent with the unprofitability of the industry; below-marginal-cost pricing becomes possible and appears on many routes. I also study airline mergers and find that the network effects can be the main factor underlying their profitability.
    Keywords: Network effects, airline networks, differentiated product markets, airlines, merger
    JEL: L13 L93 D62 C31
    Date: 2014–09–25
  17. By: Marco Alderighi (Università della Valle d’Aosta, The Rimini Centre for Economic Analysis, Italy); Alberto A. Gaggero (Department of Economics and Management, University of Pavia, Italy); Claudio A. Piga (Keele Management School, United Kingdom, The Rimini Centre for Economic Analysis, Italy)
    Abstract: This paper aims at investigating how the pricing strategy of European airline carriers is affected by code-share agreements on international routes. Our data cover several routes linking the main UK airports to largest European destinations and includes posted fares collected at different days before departure. By analyzing the temporal profile of airline fares, we identify three main results. First, code-share increases fares especially for early bookers. Second, the higher prices in code-shared flights are offered by marketing carriers. Finally, when flights are in unilateral code-share, the pricing profile is flatter than under parallel code-share.
    Date: 2014–11
  18. By: Boom, Anette (Department of Economics, Copenhagen Business School); Buehler, Stefan (University of St. Gallen)
    Abstract: We study the role of vertical structure in determining generating capacities and retail prices in the electricity industry. Allowing for uncertain demand, we compare three market configurations: (i) integrated monopoly, (ii) integrated duopoly with wholesale trade, and (iii) separated duopoly with wholesale trade. We find that equilibrium capacities and retail prices are such that welfare is highest (lowest) under separated (integrated) duopoly. The driving force behind this result is the risk of rent extraction faced by competing integrated generators on the wholesale market. Our analysis suggests that vertical structure plays an important role in determining generating capacities and retail prices.
    Keywords: Electricity; Investments; Generating Capacities; Vertical Integration; Monopoly and Competition
    JEL: D42 D43 D44 L11 L12 L13
    Date: 2014–03–14
  19. By: Corrado Di Maria (School of Economics, University of East Anglia); Ian Lange (Division of Economics and Business, Colorado School of Mines); Emiliya Lazarova (School of Economics, University of East Anglia)
    Abstract: This paper analyzes theoretically and empirically how upstream markets are affected by deregulation downstream. Deregulation tends to increase the level of uncertainty in the upstream market. Our theoretical analysis predicts that deregulated firms respond to this increase in uncertainty by writing more rigid contracts with their suppliers. Using the restructuring of the electricity market in the U.S. as our case study, we find support for our theoretical predictions. Furthermore, we investigate the impact this change in procurement contracts has on efficiency. Focusing on coal mines, we find that those selling coal to plants in restructured markets are significantly more productive than their counterparts working with regulated plants. On the other hand, we also find that transaction costs may have increased as a consequence of deregulation.
    Keywords: Energy Policy, Electricity Market Restructuring, Deregulation, Procurement Contracts, Risk, Efficiency
    JEL: L14 L15 Q31 Q48
    Date: 2014–11
  20. By: Erika Raquel Badillo (Department of Econometrics. University of Barcelona); Francisco Llorente (Department of Econometrics. University of Barcelona); Rosina Moreno (Department of Econometrics. University of Barcelona)
    Abstract: This paper aims to analyse cooperation in R&D in the automobile industry in Spain. It first examines to what extent firms cooperate with external actors in the field of technological innovation, and if so, with what type of cooperation partner, paying special attention to the differentiation according to the size of the firms. Second, it aims to study how the firm’s size may affect not only the decision of cooperating but also with which type of partner, while controlling for other determinants that have been considered in the literature as main drivers of collaborative activities in R&D. We use data provided by the Technological Innovation Panel in the 2006-2008 period for firms in the automotive sector. We estimate a bivariate probit model that takes into account the two types of cooperation mostly present in the automotive industry, vertical and institutional, explicitly considering the interdependencies that may arise in the simultaneous choice of both.
    Keywords: Innovation, Cooperation in R&D, Partnership, Firm size, Automotive Industry JEL classification: D22, O32, L24, L62
    Date: 2014–10
  21. By: Hoang, Daniel; Ruckes, Martin
    Abstract: This paper studies the effects of hedge disclosure requirements on corporate risk management and product market competition. The analysis is based on a simple model of market entry and shows that incumbent firms engage in risk management when these activities remain unobserved by outsiders. The resulting equilibrium is desirable from a social standpoint. Financial markets are well informed and entry is efficient. However, potential attempts for more transparency by additional disclosure requirements introduce a commitment device that provides firms with incentives to distort risk management activities thereby influencing entrant beliefs. In equililibrium, firms engage in significant risk-taking. This behavior limits entry and adversely affects the nature of competition in industries. Our findings thus suggest that more disclosure on risk management may change risk management in socially undesirable ways.
    Keywords: Risk Management,Hedge Disclosures,Market Entry,Signal Jamming
    JEL: D82 G3 L1 M4
    Date: 2014
  22. By: Eren Inci; Robin Lindsey
    Abstract: In many downtown areas, privately operated parking garages compete with each other and with publicly operated curbside parking. Garages exercise market power by charging fees that vary with parking duration. Curbside space is scarce, and drivers have to search for it. This creates a congestion externality and enhances garages' market power. We show that with inelastic parking demand setting differentiated hourly curbside parking fees can support the social optimum without regulating garage fees. Second-best uniform curbside fees can also perform well. In general, first-best and second-best parking fees are sensitive to parking supply and demand conditions, and therefore should be tailored to local circumstances.
    Keywords: endogenous outside option; parking; price discrimination; search costs; spatial competition
    JEL: D62 L13 R41 R48
    Date: 2014–11
  23. By: Serena Marianna Drufuca; Maria Rosa Battaggion
    Abstract: We provide a two-sided model in a vertical di§erentiation context. We solve the model and we calculate the equilibrium in terms of advertising levels, subscription fees and qualities provision, both in duopoly - two platforms of different quality - and in monopoly case. We would like to investigate how competition among platforms and the entry deterrence behavior might a§ect the equilibrium, with particular focus on quality provision.
    Keywords: two-sided market, media; quality
    JEL: D42 D43 L15 L82
    Date: 2014

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