nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒01‒14
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. Best Prices: Price Discrimination and Consumer Substitution By Judith A. Chevalier; Anil K Kashyap
  2. Entry and shakeout in dynamic oligopoly By Hünermund, Paul; Schmidt-Dengler, Philipp; Takahashi, Yuya
  3. Dynamic Voluntary Advertising under Partial Market Coverage By Yohei Tenryu; Keita Kamei
  4. On The Social Efficiency In Monopolistic Competitioin Models By Igor G. Pospelov; Stanislav A. Radionov
  5. Modelling Firm and Market Dynamics - A Flexible Model Reproducing Existing Stylized Facts By Thomas Brenner; Matthias Duschl
  6. Union-Oligopoly Bargaining and Vertical Differentiation: Do Unions Affect Quality? Dynamic Analysis By Minas Vlassis; Maria Varvataki
  7. Optimal Strategies in Unionized Oligopoly and Inward FDI By Minas Vlassis; Stefanos Mamakis
  8. Mergers in declining industries: puzzles from competition and industrial policies By Angelo Castaldo; Laura Ferrari-Bravo
  9. Search Deterrence By Armstrong, Mark; Zhou, Jidong
  10. Priority Service System Optimization under Service Level Constraints By Jayaswal, Sachin
  11. An Empirical Model of the Medical Match By Nikhil Agarwal
  12. Measuring Consumer Valuation of Limited Provider Networks By Keith Marzilli Ericson; Amanda Starc
  13. Patient choice and the effects of hospital market structure on mortality for AMI, hip fracture and stroke patients By Hugh Gravelle; Giuseppe Moscelli; Rita Santos; Luigi Siciliani
  14. Patient Mobility, Health Care Quality, Welfare And Regulation By Alexander Karpov
  15. Mergers and Acquisitions in the German Hospital Market – Who are the Targets? By Adam Pilny
  16. Is the German Retail Gas Market Competitive? A Spatial-temporal Analysis Using Quantile Regression By Alexander Kihm; Nolan Ritter; Colin Vance
  17. AirTicket Sales as Bids from Airline Alliances By Ivaldi, Marc; Petrova, Milena; Urdanoz, Miguel
  18. College Admissions as Non-Price Competition: The Case of South Korea By Christopher Avery; Soohyung Lee; Alvin E. Roth
  19. Financial performance of banks in Pakistan after Merger and Acquisition By Abbas, Qamar; Hunjra, Ahmed Imran; Azam, Rauf I; Ijaz, Muhammad Shahzad; Zahid, Maliha
  20. Competition in the Portuguese economy: estimated price-cost margins under imperfect labour markets By Amador, João; Soares, Ana Cristina
  21. EU Accession, Domestic Market Competition and Total Factor Productivity. Firm Level Evidence By Klaus S. Friesenbichler
  22. Does Accession to the European Union Foster Competition Policy? Country-level Evidence By Michael Böheim; Klaus S. Friesenbichler
  23. Competition and the Decline of the Rust Belt By Ohanian, Lee E.

  1. By: Judith A. Chevalier; Anil K Kashyap
    Abstract: We propose a method for constructing price indices when retailers use periodic sales to price-discriminate amongst heterogeneous customers. To do so, we introduce a model in which Loyal customers buy one brand and do not strategically time purchases, while Bargain Hunters always pay the lowest price available, the "best price". We derive the ideal price index and demonstrate empirically that accounting for our best price construct substantially improves the match between conventional price indices and actual prices paid by consumers. We demonstrate that our methodology improves inflation measurement without imposing an unrealistically large burden on the data-collection agency.
    JEL: C43 D11 D12 D4 L81
    Date: 2014–12
  2. By: Hünermund, Paul; Schmidt-Dengler, Philipp; Takahashi, Yuya
    Abstract: In many industries, the number of firms evolves non-monotonically over time. A phase of rapid entry is followed by an industry shakeout: a large number of firms exit within a short period. We present a simple timing game of entry and exit with an exogenous technological process governing firm efficiency. We calibrate our model to data from the post World War II penicillin industry. The equilibrium dynamics of the calibrated model closely match the patterns observed in many industries. In particular, our model generates richer and more realistic dynamics than competitive models previously analyzed. The entry phase is characterized by preemption motives while the shakeout phase mimics a war of attrition. We show that dynamic strategic incentives accelerate early entry and trigger the shakeout by comparing a Markov Perfect Equilibrium to an Open-loop Equilibrium.
    Keywords: Life Cycle,Dynamic Oligopoly,Preemption,War of Attrition,Penicillin
    JEL: L11
    Date: 2014
  3. By: Yohei Tenryu (Graduate School of Economics, Osaka University); Keita Kamei (Graduate School of Economics, Kyoto University)
    Abstract: We consider a dynamic voluntary advertising model with a duopoly. Firms can use advertising and price as competitive tools where product quality is a given and the market is not fully covered by consumers. Advertising also plays a role as a public good. In this situation, we investigate how advertising, profits, and welfare respond to changes in consumer preference and product quality. We mainly find that a higher maximum preference value leads to increases in advertising, profits, and consumer surplus but a decrease in incumbent consumers’ utility. We further find that a technology improvement by a low-quality firm increase its profit and consumer surplus if the technology gap is relatively large but if this is not the case, then the innovation could have different effects on firms’ profits and consumer surplus.
    Keywords: Advertising, product quality, differential games, duopoly
    JEL: C72 C73 L13 M37
    Date: 2014–12
  4. By: Igor G. Pospelov (National Research University Higher School of Economics); Stanislav A. Radionov (National Research University Higher School of Economics)
    Abstract: We consider standard monopolistic competition models with aggregate consumer's preferences dened by two well-known classes of utility functions | the Kimball utility function and the variable elasticity of substitution utility function. It is known that market equilibruim is ecient only for the special case when utility function has a constant elasticity of substitution, but we nd that in both cases a special tax on rms' output may be introduced such that market equilibrium becomes ecient
    Keywords: monopolistic competition, eciency.
    JEL: D43 D61
    Date: 2014
  5. By: Thomas Brenner (Economic Geography and Location Research, Philipps-University, Marburg); Matthias Duschl (Economic Geography and Location Research, Philipps-University, Marburg)
    Abstract: This paper presents a firm and market model that is able to reproduce the empirically observed patterns on firm growth and its statistical characteristics. It goes beyond the existing firm models by reproducing all stylized facts established in the literature. Furthermore, the model is flexible so that it can be adapted to certain industries and life-cycle stages. We analyse and discuss the options that are provided by the various parameters in this sense.
    Keywords: Firm model, firm growth, market model, industry dynamics
    JEL: L11 L13 L22 L25 O12 C15
    Date: 2014–11–25
  6. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Maria Varvataki (University of Crete)
    Abstract: This paper studies oligopolistic markets with differentiated products, with endogenous union structures and quality improvement-R&D investments. In the context of a dynamic game-theoretic analysis we investigate the conditions under which firm-level unions may strategically collude, or not, and the impact of their decisions upon the firms� incentives to individually spend on R&D investments. We show that, under sufficiently high (low) discount rate and substitutability among the firms' products, an industry-wide union emerges (separate firm-level unions sustain) in the equilibrium, where product quality along with the level of R&D investments are relatively low (high). Moreover, we consider the instance where a benevolent policy maker undertakes the costs of firm-specific R&D investments and finances these costs by indirect taxation. We conclude that in such cases, higher surpluses emerge for the market participants in the equilibrium.
    Keywords: Oligopoly, Unions, Collusion, R&D Investments, Repeated Games
    JEL: D43 J51 L13 O31 C73
    Date: 2014–12–15
  7. By: Minas Vlassis (University of Crete); Stefanos Mamakis (Department of Economics, University of Crete, Greece)
    Abstract: In a union-oligopoly context, we interpret the optimal equilibria may arise from the implementation of any possible policies of a benevolent social planner in the labour market. The applied policies may contradict or correspond with unions' and firms' objectives, while in other cases institutional arrangements of labour market appear to be inefficient to induce or deter FDI and thus social planner must search for alternative strategic devices. Given the complexity of the model, which must be solved computationally to obtain results, there are several outcomes depending on the values of the parameters.
    Keywords: Oligopoly, Cournot Duopoly, Labour Unions, Unionisation, Foreign Direct Investment, Endogenous Objectives
    JEL: J50 J51 L13 F21
    Date: 2014–12–03
  8. By: Angelo Castaldo (Sapienza Università di Roma); Laura Ferrari-Bravo (Sapienza Università di Roma)
    Abstract: Exit strategies referred to specific industry characteristics have been widely studied in the economic literature (Harrigan, 1980; Ghemawat et al., 1985, 1990; Lieberman, 1990; Reynolds, 1988; Fundenberg et al., 1989; Baptista et al., 2006). These studies show that exit dynamics – by setting new boundaries and changing the dynamic of sectorial competition – may reallocate activities towards more efficient outcomes. In declining industries particularly exit strategies play a crucial role in granting efficiency. When demand declines, efficiency rules call out for a shrink in production capacity. We focus on M&A as a strategy of orderly exiting from a declining industry. We argue that merger strategies in such a context could represent an efficient solution to the attrition game. However, mergers often give rise to competitive concerns. This raises the question of how to reconcile the enforcement of competition rules with the need of mergers as efficient devices for orderly exiting from declining industries. We suggest a two-step approach to merger scrutiny that, beginning from market definition from both a competition law and industrial policy perspective, attempts to solve the trade-off between fostering competition and recovering from decline, thereby reducing the possibility of committing Type I and II errors in assessing the competitive impact of mergers.
    Keywords: Declining Industries, Mergers
    JEL: G34 K21 L41 L52
    Date: 2014–12
  9. By: Armstrong, Mark; Zhou, Jidong
    Abstract: This paper studies sales techniques which discourage consumer search by making it harder or more expensive to return to buy after a search for alternatives. It is unilaterally profitable for a seller to deter search under mild conditions, but sellers can suffer when all do so. When a seller cannot commit to its policy, it exploits the inference that those consumers who try to buy later have no good alternative, and in many cases the outcome is as if the seller could only make an exploding offer. Search deterrence results in sub-optimal matching of products to consumers and often raises the price consumers pay.
    Keywords: Consumer search, price discrimination, sequential screening, exploding offers, sales techniques
    JEL: D18 D43 D82 D83 D86 L13
    Date: 2014–12
  10. By: Jayaswal, Sachin
    Abstract: We consider a service system that serves one class of customers, which is willing to pay a premium for a faster delivery, with priority over the other class, which is more price sensitive but is willing to wait longer. The demand from one class depends not only on the price and delivery time quoted to it, but also on that offered to the other class. The service provider needs to select the price and delivery time quoted to the two classes, and the required service capacity to meet the quoted delivery times with a certain degree of reliability, so as to maximize its rate (per unit time) of earning profit. This results in a non-linear priority queue optimization model, for which the analytical expression for service level constraint for the low priority customers is unknown. We provide a cutting plane method to solve the problem, where constraints to be satisfied are identified iteratively from results of matrix geometric evaluation of the proposed system alternative, which are then added to the mathematical model for re-optimization.
  11. By: Nikhil Agarwal
    Abstract: This paper develops a framework for estimating preferences in two-sided matching markets with non-transferable utility using only data on observed matches. Unlike single-agent choices, matches depend on the preferences of other agents in the market. I use pairwise stability together with a vertical preference restriction on one side of the market to identify preference parameters for both sides of the market. Recovering the distribution of preferences is only possible in an environment with many-to-one matching. These methods allow me to investigate two issues concerning the centralized market for medical residents. First, I examine the antitrust allegation that the clearinghouse restrains competition, resulting in salaries below the marginal product of labor. Counterfactual simulations of a competitive wage equilibrium show that residents’ willingness to pay for desirable programs results in estimated salary markdowns ranging from $23,000 to $43,000 below the marginal product of labor, with larger markdowns at more desirable programs. Therefore, a limited number of positions at high quality programs, not the design of the match, is the likely cause of low salaries. Second, I analyze wage and supply policies aimed at increasing the number of residents training in rural areas while accounting for general equilibrium effects from the matching market. I find that financial incentives increase the quality, but not the number of rural residents. Quantity regulations increase the number of rural trainees, but the impact on resident quality depends on the design of the intervention.
    JEL: C51 C78 J41 J44 L44
    Date: 2014–12
  12. By: Keith Marzilli Ericson; Amanda Starc
    Abstract: We measure provider coverage networks for plans on the Massachusetts health insurance exchange using a two measures: consumer surplus from a hospital demand system and the fraction of population hospital admissions that would be covered by the network. The two measures are highly correlated, and show a wide range of networks available to consumers. We then estimate consumer willingness-to-pay for network breadth, which varies by age. 60-year-olds value the broadest network approximately $1200-1400/year more than the narrowest network, while 30-year-olds value it about half as much. Consumers place additional value on star hospitals, and there is significant geographic heterogeneity in the value of network breadth.
    JEL: I10 I11 I13 L14
    Date: 2014–12
  13. By: Hugh Gravelle (Economics of Social and Health Care Research Unit, Centre for Health Economics, University of York, UK); Giuseppe Moscelli (Economics of Social and Health Care Research Unit, Centre for Health Economics, University of York, UK. PhD Student, University of Tor Vegata.); Rita Santos (Economics of Social and Health Care Research Unit, Centre for Health Economics, University of York, UK); Luigi Siciliani (Economics of Social and Health Care Research Unit, Centre for Health Economics, University of York, UK. Department of Economics and Related Studies, University of York, UK)
    Abstract: We examine (a) the effect of market structure on the level of mortality for AMI, hip fracture, and stroke between 2002/3 and 2010/11 and (b) whether this effect changed after the introduction of Choice policy in 2006 which gave patients the right to a wider choice of hospital. For AMI and hip fracture, hospitals with more rivals had higher mortality at the beginning of the period but this effect became smaller over the period. We find that the decline in the detrimental effect of market structure predated the introduction of Choice. Market structure had no effect on stroke mortality.
    Keywords: competition, quality, hospital, choice
    JEL: H51 I11 I18 L32 L33
    Date: 2014–12
  14. By: Alexander Karpov (National Research University Higher School of Economics)
    Abstract: This paper justifies unequal health care quality in a model with two regions and patients differentiated by location and quality perception. Efficient distribution with unequal healthcare quality arises when there are low travel and/or quality provision costs. If costs are sufficiently low, then both regions win from inequality. Lump-sum transfers and price regulatory policies restore an efficient solution.
    Keywords: horizontal and vertical differentiation, health care quality, health care inequality
    JEL: L1 I1
    Date: 2014
  15. By: Adam Pilny
    Abstract: Since the introduction of the DRG system in 2004, the German hospital market experienced a stream of consolidations in terms of mergers and acquisitions, resulting in a decreasing number of hospital owners. In this study, I examine the ex-ante characteristics of hospitals prior to a merger or an acquisition occurring between 2005 and 2010 in Germany, predominantly focusing on the financial conditions of hospitals. The results reveal that hospitals with a higher probability of default and less liquid resources are more often the targets of acquisitions. On the other hand, hospitals with a lower equity-to-assets ratio exhibit a higher probability of merger. This pattern can be explained by different motives and rationales of hospital chains and potential investors.
    Keywords: Hospital market; mergers; acquisitions; consolidation
    JEL: I11 L33
    Date: 2014–11
  16. By: Alexander Kihm; Nolan Ritter; Colin Vance
    Abstract: We explore whether non-competitive pricing prevails in Germany’s retail gasoline market by examining the influence of the crude oil price on the retail gasoline price, focusing specifically on how this influence varies according to the brand and to the degree of competition in the vicinity of the station. Our analysis identifies several factors other than cost – including the absence of nearby competitors and regional market concentration – that play a significant role in mediating the influence of the oil price on the retail gas price, suggesting price setting power among stations.
    Keywords: Panel data; quantile regression; spatial competition; gasoline market
    JEL: C33 Q41 R41
    Date: 2014–12
  17. By: Ivaldi, Marc; Petrova, Milena; Urdanoz, Miguel
    Abstract: Motivated by the higher price sensitivity and service homogenisation in the airline industry in recent years, we propose a new methodology to deal with transaction prices and to estimate the effect of alliances in the US domestic market. The assumption that airlines compete on price allows us to take advantage of the observational equivalence between Bertrand competition and the reverse English auction. We then apply an MLE method, developed by Paarsch (1997) for esti- mating auctions, to recover the distributional characteristics of air fares using a sample of airline tickets from the US domestic market. This procedure allows us to benefit from the heterogeneity of individual prices while most studies have used average prices, which would have involved a loss of information and a potential bias. We find that an alliance operating in a market is associated with prices on average 18.9 percent higher. Additionally, we find the standard deviation of ticket prices to be 4.3 percent higher, which is likely related to more efficient revenue management practice by alliance partners operating together in the same market.
    Keywords: airlines, alliances, airfares.
    JEL: L40 L93 R48
    Date: 2014–12–08
  18. By: Christopher Avery; Soohyung Lee; Alvin E. Roth
    Abstract: This paper examines non-price competition among colleges to attract highly qualified students, exploiting the South Korean setting where the national government sets rules governing applications. We identify some basic facts about the behavior of colleges before and after a 1994 policy change that changed the timing of the national college entrance exam and introduced early admissions, and propose a game-theoretic model that matches those facts. When applications reveal information about students that is of common interest to all colleges, lower-ranked colleges can gain in competition with higher-ranked colleges by limiting the number of possible applications.
    JEL: C78 I23
    Date: 2014–12
  19. By: Abbas, Qamar; Hunjra, Ahmed Imran; Azam, Rauf I; Ijaz, Muhammad Shahzad; Zahid, Maliha
    Abstract: Business transactions are going to be fast day by day because of dynamic changes in the global environment. Merger and Acquisition is a strategy adopted by the organizations globally to meet the needs of recent dynamic business environment. It has achieved much attention and importance in corporate world. In Pakistan, this strategy has been used widely in banking sector. Therefore, the objective of the study is to evaluate the financial performance of banks in Pakistan after M&A. The financial and accounting data for 10 banks was taken from the Financial Statement Analysis by State Bank of Pakistan. Profitability & Efficiency, Leverage, and Liquidity ratios were used to measure the financial performance, where pre and post ratio analysis was done. Results of the study show that there is no positive improvement in the financial performance of the banks in Pakistan after Merger and Acquisition.
    Keywords: Merger and Acquisition; Financial Performance; Profitability; Liquidity; Leverage; Pre & Post Analysis
    JEL: G3 G34
    Date: 2014–11–15
  20. By: Amador, João; Soares, Ana Cristina
    Abstract: This article estimates price-cost margins for the Portuguese markets in a context of imperfect competition in the labour market. The database used includes virtually the universe of Portuguese firms for the period 2005-2009. The results strongly reject the hypothesis of perfect competition in both labour and product markets. Estimated price-cost margins are very heterogeneous across markets and the average for the overall economy ranges between 25 and 28 per cent, depending on the variables used to weight each market. In addition, the tradable sector presents a lower price-cost margin than the non-tradable sector. According to the methodology used, workers’ bargaining power in the Portuguese economy is approximately 13 per cent, without a clear distinction between tradable and non-tradable sectors. Finally, workers’ bargaining power is highly and positively correlated with price-cost margins across markets. JEL Classification: L10, L60, O50
    Keywords: market competition, Portuguese economy, production function
    Date: 2014–12
  21. By: Klaus S. Friesenbichler (WIFO)
    Abstract: In this paper we argue that changes in the EU membership status of the countries in Central and Eastern Europe led to less concentrated markets. This is due to the implementation of competition policy and other pro-competitive policies embedded in the Community Acquis, the body of European Union law. A regression analysis using data on 39,646 firms from six survey waves between 2002 and 2013 found EU membership to significantly increase the degree of domestic competition. While the effect of competition policy itself on market structures was statistically insignificant, the interaction between EU membership status and competition policy showed a strong and statistically significant competition enhancing effect. These findings were linked to a firm-level TFP analysis. Less concentrated markets were associated with higher productivity levels. This finding is robust after controlling for endogeneity issues. EU membership was only weakly associated with changes in TFP levels, but led to a decrease in the variance of the productivity measure across firms.
    Keywords: competition policy, productivity, Community Acquis, EU, Enterprise Surveys, ECA, CEE
    Date: 2014–12–18
  22. By: Michael Böheim (WIFO); Klaus S. Friesenbichler (WIFO)
    Abstract: This paper argues that the accession to the European Union improves the quality of competition policy via the implementation of pro-competitive policies, especially antitrust and competition policies, embedded in the Community Acquis. We assess this conjecture empirically for the (former) transition economies of Central and Eastern Europe, using member countries as well as developing and developed countries in Europe and Central Asia as a control group. The data used is a macro-economic panel of 48 countries covering six 3-year periods between 1995 and 2012. We find that EU accession positively affected the quality of competition policies over and above an overall trend towards more market oriented policies. The improvement in competition policy was not reversed in a single country of the sample. The findings are robust when controlling for endogeneity issues. We also document a slow-down in policy reform efforts in the aftermath of the crisis, challenging previous literature which expects a reform enhancing effect of crisis.
    Keywords: competition policy, regulation, economic transition, Community Acquis, EU accession
    Date: 2014–12–18
  23. By: Ohanian, Lee E. (Federal Reserve Bank of Minneapolis)
    Abstract: The decline of the heavy manufacturing industry in the American “Rust Belt” is often thought to have begun in the late 1970s, when the United States suffered a significant recession. But theory suggests, and data support, that the Rust Belt’s decline started in the 1950s when the region’s dominant industries faced virtually no product or labor competition and therefore had little incentive to innovate or become more productive. As foreign imports increased and manufacturing shifted to the American South, the Rust Belt’s share of manufacturing jobs and total jobs declined dramatically. Eventually the region’s manufacturers began to innovate, resulting in a stabilization of employment share at a significantly lower level. Our model suggests that this factor—lack of competitive pressure—accounts for about two-thirds of the Rust Belt’s decline in employment share. These results imply that vigorous competitive pressure in both product and labor markets is important for creating the incentives for firms to continuously innovate, create and grow, and that government policy should encourage such competition.
    JEL: L20 N62
    Date: 2014–12–20

This nep-com issue is ©2015 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.