nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒01‒19
25 papers chosen by
Russell Pittman
United States Department of Justice

  1. Non-Reservation Price Equilibria And Search Without Priors By Alexei N. Parakhonyak; Anton Sobolev
  2. Limit pricing and secret barriers to entry By Luigi Brighi; Marcello D'Amato
  3. A dynamic model of price signaling, consumer learning, and price adjustment By Osborne, Matthew; Shapiro, Adam Hale
  4. Posted prices and bargaining: the case of Monopoly By Stephen P. King; Demitra Patras
  5. On the number of licenses under symmetric versus asymmetric information with signaling By Antelo, Manel; Sampayo, Antonio
  6. Sequential Markets, Market Power and Arbitrage By Koichiro Ito; Mar Reguant
  7. Credit Constrained R&D Spending and Technological Change By Pascal Aßmuth
  8. Harmonization versus Mutual Recognition: Some pitfalls for the coordination of product standards under imperfect competition By Jørgensen, Jan Guldager; Schröder, Philipp J.H.
  9. Intellectual Property Rights and Access to Innovation: Evidence from TRIPS By Margaret Kyle; Yi Qian
  10. On the Sustainability of Product Market Collusion under Credit Market Imperfection By Marjit, Sugata; Mukherjee, Arijit; Yang, Lei
  11. A Model Of Tacit Collusion: Nash-2 Equilibrium Concept By Marina S. Sandomirskaia
  12. Comparative Analusis Of Antitrust Policy Against Collusion In Some Transition Economies: Challenges For Effectiveness By Andrey V. Makarov
  13. Welfare Improving Cartel Formation in a Union-Oligopoly Static Framework By Minas Vlassis; Maria Varvataki
  14. Union-Oligopoly Bargaining and Vertical Differentiation: Do Unions Affect Quality? By Minas Vlassis; Maria Varvataki
  15. Incentives for product and process innovations: a case for the drug industry By Bhan, Aditya; Kabiraj, Tarun
  16. Can Health Insurance Competition Work? Evidence from Medicare Advantage By Vilsa Curto; Liran Einav; Jonathan Levin; Jay Bhattacharya
  17. Competition and Bank Opacity By Liangliang Jiang; Ross Levine; Chen Lin
  18. Avaliação do Processo de Concentração-Competição no Setor Bancário Brasileiro By Marcos Soares da Silva
  19. Retail market structure and consumer prices in the euro area By Ciapanna, Emanuela; Rondinelli, Concetta
  20. Price Setting in Online Markets: Does IT Click? By Yuriy Gorodnichenko; Viacheslav Sheremirov; Oleksandr Talavera
  21. Asymmetric Neutrality Regulation and Innovation at the Edges: Fixed vs. Mobile Networks By Choi, Jay; Jeon, Doh-Shin; Kim, Byung-Cheol
  22. Single Till or Dual Till at Airports: a Two-Sided Market By Estelle Malavolti
  23. Assessment of EU Postal Sector Policy during the Second Barroso Administration (2010-2014) By Christian Jaag; Urs Trinkner; Jeffrey Yusof
  24. Rail Transport: A Balance Sheet By Juan J. Montero
  25. Support Schemes for Renewable Electricity in the European Union: Producer Strategies and Competition By Luisa Dressler

  1. By: Alexei N. Parakhonyak (National Research University Higher School of Economics); Anton Sobolev (Vienna Graduate School of Economics)
    Abstract: In this paper we analyse a model of oligopolistic competition in which consumers search without priors. Consumers do not have prior beliefs about the distribution of prices charged by rms and thus try to use a robust search procedure: they minimise the loss relative to the searcher, who knows the price distribution, in the worst case scenario. We derive the optimal stopping rule and show that it does not possess the reservation price property. This means that for a range of prices for which consumers stop searching with a probability strictly between zero and one. We show that for any distribution of search costs there is a unique market equilibrium characterised by price dispersion. Therefore search without priors helps resolve the famous Diamond (1971) paradox. We show that although listed prices approach the monopoly price as the number of rms increases, the eective price paid by consumers does not depend on the number of rms. We show that prices in our model are lower than those in a model where consumers know the distribution of prices. The reason is that consumers actively search in equilibrium, and this pushes prices down. This eect is so strong that the price decrease more than compensates consumers for their extra search costs.
    Keywords: consumer search, search without priors, robust search, Diamond paradox, non-reservation price equilibrium.
    JEL: D83 D43 L11
    Date: 2014
  2. By: Luigi Brighi; Marcello D'Amato
    Abstract: We study a two periods entry game where the incumbent .rm, who has private information about his own production costs, makes a non observable long run investment choice, along with a pricing decision observed by the entrant. The investment choice affects both post-entry competition and first period cost of production, so that the cost of signaling becomes endogenous. The game is solved following Bayes-Nash requirements, the intuitive criterion is used to constrain off-equilibrium beliefs. When investment is publicly observable, it is shown that the unique intuitive equilibrium is the separating equilibrium with limit pricing and no entry deterrence. When investment is not observable, quite remarkably, there exists a unique intuitive pooling equilibrium which is Pareto superior, from the incumbent's point of view, to the unique intuitive separating equilibrium. In the pooling equilibrium no entry takes place and the price is below the low cost monopoly price. Thus, when investment is secret, a limit pricing policy supports entry deterrence. Our model provides an example of secret barriers to entry and their relationship with limit pricing. We also contribute to the analysis of a relatively under-researched class of games where the cost of signaling unobservable characteristics is endogenously determined by unobserved actions.
    Keywords: Entry deterrence, limit pricing, signaling, pooling equilibrium
    JEL: D58 L51
    Date: 2014–12
  3. By: Osborne, Matthew (University of Toronto, Rotman School ofManagement.); Shapiro, Adam Hale (Federal Reserve Bank of San Francisco)
    Abstract: We examine a model of consumer learning and price signaling where price and quality are optimally chosen by a monopolist. We find that price signaling causes the firm to raise prices, lower quality, and dampen the degree to which it passes on cost shocks to price. We identify two mechanisms through which signaling affects pass-through and find that signaling can lead to asymmetric pass-through.
    Date: 2014–11
  4. By: Stephen P. King; Demitra Patras
    Abstract: If buyers can choose to initiate bargaining with a seller, how does this alter the price that the seller `posts' in the market? And does the option of bargaining raise or lower expected welfare? This paper develops a simple model to answer these questions. With a single seller, the potential for bargaining raises the profit maximising posted price. In part, as has been noted in related literature, this reflects the role of the posted price as a fall-back option if bargaining fails. However, our model highlights a separate effect. When the choice to bargain is endogenous, a seller will raise the posted price to encourage buyers to bargain. The posted price not only exceeds the monopoly price, it can be higher than the price a seller would set if he knew in advance that all buyers would bargain. Further, the posted price can change discontinuously in exogenous parameters such as the buyers' distribution of bargaining costs. While we assume efficient bargaining, the welfare consequences are ambiguous.
    Date: 2014–09
  5. By: Antelo, Manel; Sampayo, Antonio
    Abstract: We analyze a two-period licensing game in which a non-producer upstream patent holder licenses an innovation to either one or two downstream licensees for a payment based on the licensee’s expected per-period profit. Licensees have private information about the innovation’s value, and their period-1 output may signal that value. We find that two licensees are more likely to be preferred under asymmetric information with signalling than under symmetric information.
    Keywords: Licensing, symmetric and asymmetric information, profit-based payments, monopoly, duopoly
    JEL: D45
    Date: 2014
  6. By: Koichiro Ito; Mar Reguant
    Abstract: We develop a theoretical framework to characterize strategic behavior in sequential markets under imperfect competition and limited arbitrage. Our theory predicts that these two elements can generate a systematic price premium. We test the model predictions using micro-data from the Iberian electricity market. We show that the observed price differences and firm behavior are consistent with the model. Finally, we quantify the welfare effects of arbitrage using a structural model. In our setting, we show that full arbitrage is not necessarily welfare-enhancing in the presence of market power, reducing consumer costs but decreasing productive efficiency.
    JEL: D43 L13 L94 Q40
    Date: 2014–12
  7. By: Pascal Aßmuth (Center for Mathematical Economics, Bielefeld University)
    Abstract: Firms often rely on external financing in order to conduct R&D. The question is to what extend discriminatory behaviour of the funds provider affects the industry evolution. The model is based on an evolutionary framework by Nelson and Winter. A firm chooses its R&D spending in an adaptive fashion where technological improvement is essential for survival in the competitive market. Firms can finance their activities by using retained profits or applying for credit. However, they have a clear hierarchy in choosing the source of funds and saved profits are always used up first. There is endogenous discriminatory lending as the banking sector provides credit according the firms' individual features. It compares profitability and market share across firms when assessing creditworthiness. The model is able to capture features of innovation and diffusion of technology. Results show that the availability of credit is crucial for technological change in a non-linear fashion and that the industry evolves faster if the bank values market share more in assessing creditworthiness.
    Keywords: Heterogeneous Agents Models, Innovation, Financial Constraints
    JEL: D92 G32
    Date: 2014–12
  8. By: Jørgensen, Jan Guldager (Department of Business and Economics); Schröder, Philipp J.H. (Aarhus University)
    Abstract: The present paper examines trade liberalization driven by the coordination of product standards. For oligopolistic firms situated in separate markets that are initially sheltered by national standards, mutual recognition of standards implies entry and reduced profits at home paired with the opportunity to start export sales. In contrast, harmonization, in particular the prospect that one's own national (but not the foreign) standard becomes the only globally accepted standard, opens the foreign market without balancing entry at home. We study these scenarios in a reduced form lobby game with two countries and three firms, where firms first lobby for the policy coordination regime (harmonization versus mutual recognition), and subsequently, in case of harmonization, the global standard is auctioned among the firms. We discuss welfare effects and conclude with policy implications. In particular, harmonized standards may fail to harvest the full pro-competitive effects from trade liberalization compared to mutual recognition; moreover, the issue is most pronounced in markets featuring price competition.
    Keywords: Standard regimes; harmonization; technical trade barriers; NTBs; Cournot competition; Bertrand competition
    JEL: F12 F13 F15
    Date: 2014–12–21
  9. By: Margaret Kyle; Yi Qian
    Abstract: We examine the effect of pharmaceutical patent protection on the speed of drug launch, price, and quantity in 60 countries from 2000-2013. The World Trade Organization required its member countries to implement a minimum level of patent protection within a specified time period as part of the TRIPS Agreement. However, members retained the right to impose price controls and to issue compulsory licenses under certain conditions. These countervailing policies were intended to reduce the potential static losses that result from reduced competition during the patent term. We take advantage of the fact that at the product level, selection into TRIPS "treatment" is exogenously determined by compliance deadlines that vary across countries. We find that patents have important consequences for access to new drugs: in the absence of a patent, launch is unlikely. That is, even when no patent barrier exists, generic entry may not occur. Conditional on launch, patented drugs have higher prices but higher sales as well. The price premium associated with patents is smaller in poorer countries. Price discrimination across countries has increased for drugs patented post-TRIPS and prices are negatively related to the burden of disease, suggesting that countervailing policies to offset expected price increases may have had the intended effects.
    JEL: I10 O34
    Date: 2014–12
  10. By: Marjit, Sugata; Mukherjee, Arijit; Yang, Lei
    Abstract: We study the implication of credit constraints for the sustainability of product market collusion in a bank financed Cournot duopoly when firms face an imperfect credit market. We consider two situations without or with credit rationing. When there is no credit rationing moderately higher cost of external finance may affect the degree of collusion, but a substantial increase keeps it unaffected. Permanent adverse demand shock in this set up does not affect the possibility of collusion, but may aggravate the finance constraint and eventually lead to collusion. We also discuss the case with credit rationing.
    Keywords: Collusion, Credit Market
    JEL: D21 D43 G21
    Date: 2014
  11. By: Marina S. Sandomirskaia (National Research University Higher School of Economics)
    Abstract: We examine the novel concept for repeated noncooperative games with bounded rationality: \Nash-2" equilibrium, called also \threatening-proof prole" in [16, Iskakov M., Iskakov A., 2012b]. It is weaker than Nash equilibrium and equilibrium in secure strategies: a player takes into account not only current strategies but also the next-stage responses of the partners to her deviation from the current situation that reduces her relevant choice set. We provide a condition for Nash-2 existence, criteria for a strategy prole to be the Nash-2 equilibrium in strictly competitive games, apply this concept to Bertrand and Hotelling game and interpret the results as tacit collusion
    Keywords: Nash-2 equilibrium, secure deviation, Bertrand paradox, Hotelling model, tacit collusion.
    JEL: C72 D03 D43 D70 L13
    Date: 2014
  12. By: Andrey V. Makarov (National Research University Higher School of Economics)
    Abstract: This article focuses on the development of antitrust policy in transition economies in the context of preventing explicit and tacit collusion. Experience of BRICS, Kazakhstan, Ukraine and CEE countries (Bulgaria, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Czech Republic, Estonia) in the creation of antitrust institutions was analyzed, including both legislation and enforcement practice. This article analyzes such enforcement problems as: classification problems (tacit vs explicit collusion, vertical vs horizontal agreements), flexibility of prohibitions (“per se” vs “rule of reason”), design of sanctions, private enforcement challenge, leniency program mechanisms, the role of antitrust authorities etc. Main challenges for policy effectiveness in this field were shown
    Keywords: collusion, antitrust policy, leniency program, transition economies, CEE, BRICS
    JEL: K21 L41 L42
    Date: 2014
  13. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Maria Varvataki (University of Crete)
    Abstract: In a union-oligopoly static framework we study the role of unions regarding the possibility and the effects of endogenous cartel formation. Given that firms independently adjust their own quantities, we show that, if union members are not sufficiently risk-averse and firms� products are sufficiently close substitutes, then collusion among firms may emerge in equilibrium, and that � in contrast to conventional wisdom � cartel formation proves to be a welfare improving market arrangement. Quite remarkably, the latter gain in social welfare materializes at the cost of union rents despite it is the union�s presence which effectively sustains collusion.
    Keywords: Oligopoly, Unions, Collusion
    JEL: D43 J51 L13
    Date: 2014–12–15
  14. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Maria Varvataki (University of Crete)
    Abstract: This paper investigates unionized oligopolistic markets with differentiated products and quality improvement-R&D investments. In endogenous union structures, 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, separate firm-level unions are sustained in the equilibrium, where product quality and the level of R&D investments are relatively high. Moreover, we consider two instances of policy maker�s intervention. In the first case, we assume that a benevolent policy maker proceeds to quality improvement-R&D, as a common public good, by undertaking the costs of those investments and providing for free the know-how to the industry. In the second case he finances a percentage of the cost of firm-specific R&D investments. In both cases he finances those costs by indirect taxation on market products. We conclude that all market participant surpluses are higher (and consequently so is Social Welfare), when the R&D - quality improvement is a public good, even if this leads to indirect taxation on market products.
    Keywords: Oligopoly, Unions, Collusion, R&D Investments
    JEL: D43 J51 L13 O31
    Date: 2014–12–15
  15. By: Bhan, Aditya; Kabiraj, Tarun
    Abstract: We consider an interaction of competing firms in an integrated world market and study their R&D incentives under each of product patent and process patent regimes. We follow a framework generally observed in the drug industry. We show that product patent regime leads to a larger R&D investment. Consumers may also benefit from product patenting. However, if the number of goods is large enough, the choice of patent regime loses significance with respect to R&D incentives.
    Keywords: Innovation; process patenting; product patenting; drug industry
    JEL: F23 L13 O34
    Date: 2014–12–15
  16. By: Vilsa Curto; Liran Einav; Jonathan Levin; Jay Bhattacharya
    Abstract: We estimate the economic surplus created by Medicare Advantage under its reformed competitive bidding rules. We use data on the universe of Medicare beneficiaries, and develop a model of plan bidding that accounts for both market power and risk selection. We find that private plans have costs around 12% below fee-for-service costs, and generate around $50 dollars in surplus on average per enrollee-month, after accounting for the disutility due to enrollees having more limited choice of providers. Taxpayers provide a large additional subsidy, and insurers capture most of the private gains. We use the model to evaluate possible program changes.
    JEL: D43 I11 I13 L13 L33 L51
    Date: 2014–12
  17. By: Liangliang Jiang; Ross Levine; Chen Lin
    Abstract: Did regulatory reforms that lowered barriers to competition among U.S. banks increase or decrease the quality of information that banks disclose to the public and regulators? We find that an intensification of competition reduced abnormal accruals of loan loss provisions and the frequency with which banks restate financial statements. The results indicate that competition reduces bank opacity, enhancing the ability of markets and regulators to monitor banks.
    JEL: D22 D4 G21 G28 G38
    Date: 2014–12
  18. By: Marcos Soares da Silva
    Abstract: This paper assesses the evolution of the bank credit market concentration process in Brazil. We use an unbalanced panel data that covers the period from 2000 to 2013, with data from the banking segment’s active conglomerates and isolated financial institutions. This study empirically investigates how concentration is affected by competition in four major types of credit, by estimating the Panzar-Rosse model’s H-statistic and the Boone model’s Indicator. The results support the thesis that the process of concentration occurred recently in the country is mostly explained by an increased competition among large banks. Our results also suggest that the Brazilian banking industry operates in monopolistic competition and that, even in highly concentrated market segments, there is a significant evidence of competition
    Date: 2014–12
  19. By: Ciapanna, Emanuela; Rondinelli, Concetta
    Abstract: We investigate the empirical relationship between product market competition and prices in the retail grocery sector in the euro area. The study uses micro-data from ACNielsen on chain stores' census characteristics and price levels for a broad variety of products. We construct Herfindahl-Hirschman indices of concentration at different levels of market aggregation (buying group and parent company) to investigate their effects on prices. The analysis confirms the inverse relation between downstream market competition among retailers and price levels for most of the reference products. Though less conclusive in terms of statistical significance, the proposed estimates also point to a welfare enhancing role of buying groups. Our results indicate that buying groups provide a balancing mechanism between retailers' and producers' bargaining power, in support of the countervailing power hypothesis. JEL Classification: L1, L4, L8, E31
    Keywords: buying group, market concentration, parent company, price levels, regional Herfindahl-Hirschman indices
    Date: 2014–12
  20. By: Yuriy Gorodnichenko; Viacheslav Sheremirov; Oleksandr Talavera
    Abstract: Using a unique dataset of daily U.S. and U.K. price listings and the associated number of clicks for precisely defined goods from a major shopping platform, we shed new light on how prices are set in online markets, which have a number of special properties such as low search costs, low costs of monitoring competitors' prices, and low costs of nominal price adjustment. We document that although online prices are more flexible than offline prices, they continue to exhibit relatively long spells of fixed prices, large size and low synchronization of price changes, considerable cross-sectional dispersion, and low sensitivity to predictable or unanticipated changes in demand conditions. Qualitatively these patterns are similar to those observed for offline prices, which calls for more research on the sources of price rigidities and dispersion.
    JEL: E3
    Date: 2014–12
  21. By: Choi, Jay; Jeon, Doh-Shin; Kim, Byung-Cheol
    Abstract: We study how net neutrality regulations affect a high-bandwidth content provider's (CP) investment incentives in quality of services (QoS). We find that the effects crucially depend on network capacity levels. With limited capacity, as in mobile networks, prioritized delivery services are complementary to the CP's investments and can facilitate entry of congestion-sensitive content; however, this creates more congestion for other existing content. By contrast, if capacity is relatively large, as in fixed-line networks, prioritized services reduce QoS investment as they become substitutes, but improves traffic management. These results are qualitatively robust to the extension of the ISP's endogenous choice of network capacity.
    Keywords: Net neutrality, asymmetric regulation, quality of service, investment incentives, queuing, congestion, mobile/fixed networks
    JEL: D4 K2 L1 L5 O3
    Date: 2014–08–31
  22. By: Estelle Malavolti (Ecole Nationale de l'Aviation Civile (ENAC))
    Abstract: Big airports profits are more and more often coming from commercial activities such as retailing. However, commercial services are relatively far from the original mission of the airport: providing airlines with aviation services such as ground handling, terminal management or airside operations, and being regulated for that because of an obvious dominant position with respect to airlines. For this reason, one can advocate for the separation of the two activities, i.e. for a dual till approach, in which only the aeronautical activity is regulated. We, instead, suggest that a single till regulation, in which the total profit of the airport is examined, is relevant because it allows to take into account the externalities existing between retailing and aeronautical services. Using a two-sided market approach (Armstrong 2006, Rochet-Tirole 2003, 2006), we show that the airport is a platform which makes the shops and the passengers meet. The retailing activity depends on how many passengers are circulating and connecting at the airport, as well as the time they spent in the airport, while passengers value the least connecting time as possible. We show that the aeronautical tax can be either higher or lower under single till depending on whether the impact of the passengers demand or of the waiting time is the more important for the shops.
    Keywords: two-sided market, network externalities, air transport economics
    JEL: L11 L12 L89
    Date: 2014–12
  23. By: Christian Jaag; Urs Trinkner; Jeffrey Yusof
    Abstract: This paper assesses the EU postal sector policy of the second Barroso Commission from 2010 to 2014. The main goal of the Commission is to achieve a single European market for postal services. The paper distinguishes between the following three objectives, whose implementation should lead to the achievement of an internal postal market: implementation of the Third Postal Directive; fostering e-commerce and parcel delivery; and enforce its State aid framework in the postal sector. The analysis shows that almost all Member States have transposed the Directive into national law and fully liberalized their markets, but nevertheless competition in all Member States has only developed to a limited extent. While there is strong growth of the e-commerce sector, a consistent alignment of State Aid policy with USO and full market opening is still under development.The current design of the USO and its financing may not be appropriate in times of fast changing technology and consumer needs. Therefore, the paper presents new approaches, suggesting to include new technologies or even proposing to establish an intermodal USO for postal and telecommunication services.
    Keywords: Third Postal Directive, single market, e-commerce, state aid, universal service obligations
    Date: 2014–12
  24. By: Juan J. Montero
    Abstract: The creation of a single European railway area is the overall policy objective of the European Union for the railway industry. Rail infrastructure management is seen as a natural monopoly to be operated at a national scale. Competition is possible downstream in the provision of rail transport services. A European-wide market of rail transport services would benefit from larger economies of scale, and competition would ensure such efficiencies are passed down to European citizens and businesses. However, the reform process has been set back by Member States that disagree with the full vertical separation of infrastructure management and transport service provision, as well as by Member States that want to delay the full liberalization of the industry. As a consequence, inconsistent national models are emerging and non-sustainable asymmetries between Member States are creating tensions. The Fourth Railway Package is the opportunity to conclude the European railway reform process, both for commercial services and for public contract services. Imaginative solutions are necessary to reach a workable consensus.
    Keywords: liberalization
    Date: 2014–12–02
  25. By: Luisa Dressler
    Keywords: oligopoly; forward market; renewable electricity; feed-in tariff; premium
    JEL: G13 L13 L98 Q42 Q48
    Date: 2014–12

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