nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒01‒26
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Buyer Power and Functional Competition for Innovation By Inderst, Roman; Jakubovic, Zlata; Jovanovic, Dragan
  2. Exclusive Contracts with Complementary Inputs By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  3. To know or not to know: Endogenous market structure when information can be strategically neglected By R. Cellini; L. Lambertini; G. I. P. Ottaviano
  4. Managerial delegation in a dynamic renewable resource oligopoly By L. Lambertini
  5. Optimal production channel for private labels: Too much or too little innovation? By Claire Chambolle; Clémence Christin; Guy Meunier
  6. Resale in Second-Price Auctions with Costly Participation By Gorkem Celik; Okan Yilankaya
  7. Minimum quality standards and non-compliance By Birg, Laura; Voßwinkel, Jan S.
  8. Minimum quality standards and compulsory labeling: More than the sum of its parts By Birg, Laura; Voßwinkel, Jan S.
  10. Are Patent Fees Effective at Weeding Out Low-Quality Patents? By Gaétan de Rassenfosse; Adam B. Jaffe
  11. Instrument-free Identification and Estimation of Differentiated Products Models By David Byrne; Susumu Imai; Vasilis Sarafidis; Masayuki Hirukawa
  12. Implications of hitting the jackpot competition for the health agenda By Revoredo-Giha, Cesar
  13. Farmgate versus retail prices and supermarkets’ pricing decisions: an integrated approach By Russo, Carlo; Goodhue, Rachael
  14. Transmission of beef and veal prices in different marketing channels By El Benni, Nadja; Finger, Robert; Hediger, Werner
  15. Competition Reform in the Philippine Rice Sector By Briones, Roehlano M.; Dela Pena, Beulah
  16. How can the differences in German raw milk prices be explained? An empirical investigation of market power asymmetries and other price determinants By Zavelberg, Yvonne; Wieck, Christine; Heckelei, Thomas
  17. Have Indonesian rubber processors formed a cartel? Analysis of intertemporal marketing margin manipulation By Kopp, Thomas; Alamsyah, Zulkifli; Fatricia, Raja Sharah; Brümmer, Bernhard
  18. Agency costs of vertical integration: the case of wine business in France By Cadot, Julien
  19. Horizontal subcontracting and intermittent power generation By BOUCKAERT, Jan; VAN MOER, Geert
  20. Incentives For Repeated Contracts In Public Sector: Empirical Study Of Gasoline Procurement In Russia By Andrei Yakovlev; Oleg Vyglovsky; Olga Demidova; Alexander Bashlyk

  1. By: Inderst, Roman; Jakubovic, Zlata; Jovanovic, Dragan
    Abstract: Our analysis starts from the observation that with progressive consolidation in retailing and the spread of private labels, retailers increasingly take over functions in the vertical chain. Focusing on innovation, we isolate various reasons for why when a large retailer grows in size, this can lead to an inefficient shift of innovation activity away from manufacturers and to the large retailer. One rationale for this is the retailer's control of access to consumers, which gives rise to a rent-appropriation motive for innovation, next to a hold-up problem. With retail competition, through crowding out the manufacturer's innovative activity, a large retailer obtains a competitive advantage vis-à-vis smaller retailers. We further analyze when inefficiencies are aggravated in case a large retailer's presence threatens the manufacturer with imitation of his innovations.
    Keywords: Buyer Power, Innovation, Functional Competition, Imitation
    JEL: D43 L11 L13 L42
    Date: 2015–01
  2. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: This study constructs a model of anticompetitive exclusive contracts in the presence of complementary inputs. A downstream firm transforms multiple complementary inputs into final products. When complementary input suppliers have market power, upstream competition within a given input market benefits not only the downstream firm (by lowering the input price) but also complementary input suppliers (by raising complementary input prices). The downstream firm is thus unable to earn higher profits even when socially efficient entry is allowed. Hence, the inefficient incumbent supplier can deter socially efficient entry by using exclusive contracts even in the absence of economies of scale and downstream competition. These results have important implications for antitrust agencies, showing the importance of considering the existence of complementary inputs when examining cases of potential anticompetitive exclusive dealing.
    Date: 2015–01
  3. By: R. Cellini; L. Lambertini; G. I. P. Ottaviano
    Abstract: We study the firms’ choice of whether or not to consider pieces of information concerning their interdependence. In particular, any firm can strategically choose to consider or not the fact that industry output is affected by its own production choice. If this piece of information is considered, the firm behaves as an aligopolist; if not, firm behaves in a monopolistically competitive way. Thus, the market regime is endogenously determined. We show that different outcomes can emerge, depending on the number of firms, the degree of product substitutability and the cost structure.
    JEL: D43 L13
    Date: 2015–01
  4. By: L. Lambertini
    Abstract: I propose a differential oligopoly game of resource extraction under (quasi-static) open-loop and nonlinear feedback strategies, where firms are managerial and two alternative types of delegation contract are considered. Under open-loop information, delegation expands the residual steady state resource stock. Conversely, under nonlinear feedback information the outcome depends on the structure of managerial incentives. If sales are used, once again delegation favours resource preservation. On the contrary, if market shares are included in the delegation contract, this combines with an underlying voracity effect in shrinking the steady state volume of the resource.
    JEL: C73 L13 Q2
    Date: 2015–01
  5. By: Claire Chambolle (INRA-UR1303 ALISS); Clémence Christin (Normandie Université, UCBN, CREM-UMR CNRS 6211); Guy Meunier (INRA-UR1303 ALISS)
    Abstract: We analyze the impact of the private label production channel on innovation. A retailer may either choose to integrate backward with a small firm (insourcing) or rely on a national brand manufacturer (outsourcing) to produce its private label. The trade-off between insourcing and outsourcing strategies is a choice between too much or too little innovation (i.e. quality investment) on the private label. When insourcing, an outside-option effect leads the retailer to over-invest to increase its buyer power. When outsourcing, a hold-up effect leads to under-investment. In addition, selecting the national brand manufacturer may create economies of scale that spur innovation.
    Keywords: Private label, vertical relations, buyer power, innovation
    JEL: L14 L15 L42
    Date: 2014–07
  6. By: Gorkem Celik (Department of Economics, ESSEC Business School and THEMA Research Center, Cergy-Pontoise, France); Okan Yilankaya (Department of Economics, Koc University)
    Abstract: We investigate efficiency properties of sealed-bid second-price auctions with costly participation and resale. Each bidder chooses to participate in the auction if her valuation is higher than her optimally chosen participation cutoff. If resale is not allowed and the bidder valuations are drawn from a strictly convex distribution function, the symmetric equilibrium (where all bidders use the same cutoff) is less efficient than a class of two-cutoff asymmetric equilibria. Existence of these equilibria without resale is sufficient for existence of similarly constructed two-cutoff equilibria with resale. Moreover, these equilibria with resale are more asymmetric and (under a sufficient condition) more efficient than the corresponding equilibria without resale.
    Keywords: Second-price auctions; resale; participation cost; endogenous entry; endogenous valuations
    JEL: C72 D44 D82
    Date: 2015–01
  7. By: Birg, Laura; Voßwinkel, Jan S.
    Abstract: This paper studies the effect of non-compliance with a minimum quality standard on prices, quality, and welfare in a vertical differentiation model. Non-compliance with a minimum quality standard by a low-quality firm reduces quality levels of both firms, increases the price for the high-quality product, decreases the price for the low-quality product, and shifts demand from the low-quality to the high-quality firm. Under non-compliance, an increase in the standard increases the quality difference, increases the price difference, and shifts demand from the high-quality to the low-quality firm. Stricter government enforcement decreases the quality level of the low-quality firm, increases the price of the high-quality product and shifts demand from the low-quality firm to the high-quality firm. Non-compliance of the low quality firm increases profits for both firms, reduces consumer surplus and increases or decreases welfare depending on the market size, the effect of quality levels of the externality, the detection probability, and the minimum quality level.
    Keywords: minimum quality standard,non-compliance,enforcement
    JEL: K42 L13 L50
    Date: 2015
  8. By: Birg, Laura; Voßwinkel, Jan S.
    Abstract: This paper studies the effect of a minimum quality standard, a compulsory labeling scheme, and the combination of both instruments in a vertical differentiation model when not all quality dimensions of products can be observed byconsumers. Both a minimum quality standard on the non-observable quality dimension and a labeling scheme that informs consumers about the non-observable quality dimension have no impact on the observable quality dimension, increase prices, and have no impact on demand. The combination of a minimum standard and a labeling scheme increases prices, reduces or enhances investment in the observable quality dimension, and alters market shares depending on the minimum quality level. Compared to the case of no regulation, social welfare may decrease or increase under the minimum quality standard, the compulsory labeling scheme or the combined scheme, depending on the level of the minimum quality standard and the market size.
    Keywords: minimum quality standards,labeling,vertical differentiation
    JEL: L13 L15 L51
    Date: 2014
  9. By: Tadashi Sekiguchi
    Abstract: The present paper studies repeated oligopoly where the firms compete with price in multiple markets. The markets are subject to independent, stochastic fluctuations in demands. The literature points out that while the demand fluctuations generally hinder collusion, the multimarket contact sometimes facilitates it. We show that on an intermediate range of discount factors where only partial collusion is possible under a single market, the difference between the profit under full collusion and the maximum equilibrium profit converges to zero, if the number of markets goes to infinity. Thus the collusion-deterrence effects of fluctuated demands completely vanish in the limit.
  10. By: Gaétan de Rassenfosse (École polytechnique fédérale de Lausanne); Adam B. Jaffe (Motu Economic and Public Policy Research)
    Abstract: The paper investigates whether patent fees are an effective mechanism to deter the filing of low-quality patent applications. The study analyses the effect of the Patent Law Amendment Act of 1982, which resulted in a substantial increase in patenting fees at the U.S. Patent and Trademark Office, on patent quality. Results from a series of difference-in-differences regressions suggest that the increase in fees led to a weeding out of low-quality patents. About 16–17 per cent of patents in the lowest quality decile were filtered out. The figure reaches 24–30 per cent for patents in the lowest quality quintile. However, the fee elasticity of quality decreased with the size of the patent portfolio held by applicants. The study has strong policy implications in the current context of concerns about declines in patent quality and the financial vulnerability of patent offices.
    Keywords: Patents; Patent fees; Patent quality; Innovation; Invention
    JEL: K2 O31 O34 O38
    Date: 2015–01
  11. By: David Byrne (University of Melbourne); Susumu Imai (UTS and Queen's University); Vasilis Sarafidis (Monash University); Masayuki Hirukawa (Setsunan University)
    Abstract: We propose a new methodology for estimating the demand and cost functions of differentiated products models when demand and cost data are available. The method deals with the endogeneity of prices to demand shocks and the endogeneity of outputs to cost shocks, but does not require instruments for identification. We establish non-parametric identification, consistency and asymptotic normality of our estimator. Using Monte-Carlo experiments, we show our method works well in contexts where instruments are correlated with demand and cost shocks, and where commonly-used instrumental variables estimators are biased and numerically unstable.
    Keywords: Instrument-free, Differentiated goods oligopoly, BLP, parametric identification, nonparametric identification, sieve
    JEL: C13 C14 L13 L41
    Date: 2015–01
  12. By: Revoredo-Giha, Cesar
    Abstract: One of the models in the industrial organisation literature considers that firms aim to “hit the jackpot”, i.e., to introduce new products that are successfully uptaken by consumers, and therefore, remain on retailers’ shelves for a long time. This paper studies the implications of such a type of competition for the health agenda aiming at improving the nutritional quality of the available food products focusing on the processed potato products category. The analysis indicates that one should not expect the assortment of products to change and the most effective public policy would be the enforcement of product reformulation.
    Keywords: Manufacturing firms, health agenda, industrial organisation, Health Economics and Policy,
    Date: 2014–08
  13. By: Russo, Carlo; Goodhue, Rachael
    Abstract: Food and agricultural commodity prices exhibit several empirical regularities, including asymmetric price transmission, higher farmgate price volatility, and relatively low correlation between farmgate and retail prices. Supermarket pricing behaviors include promotions, loss-leaders, and unadvertised sales. Existing explanations tend to focus on either the behavior of farmgate and retail prices or on supermarkets’ pricing decisions. We develop a model that integrates them. It has three core assumptions: consumers are basket shoppers, each consumer has a preferred store, and consumers cannot observe the full set of prices freely before entering the store. The phenomena listed above are all outcomes of the model.
    Keywords: Price distribution, price transmission, supermarket pricing, basket shoppers, Consumer/Household Economics,
    Date: 2014–08
  14. By: El Benni, Nadja; Finger, Robert; Hediger, Werner
    Abstract: This paper investigates price transmission in beef and veal markets in Switzerland. We extend earlier research by analyzing both prices in one system and considering two different marketing channels for meat. VAR and VEC models are estimated using monthly up- and downstream prices collected at the processors’ level for 2004-2013. Tests on Granger causality for these markets suggest that a) multiple product investigation should be preferred over beef (or veal) only analysis and b) the results for the same product can differ across marketing channels. In both channels, veal (and not beef) prices adjust significantly if deviations from the long-run price equilibrium occur. Nonetheless, no empirical evidence can be found that downstream industries exercise market power over producers. In all marketing channels, no significant asymmetry in price transmission is found.
    Keywords: asymmetric price transmission, Granger causality, beef and veal, retail and restaurant channel, Switzerland, Demand and Price Analysis,
    Date: 2014–08
  15. By: Briones, Roehlano M.; Dela Pena, Beulah
    Abstract: The rice sector is regulated by the National Food Authority, with imports under a statutory monopoly. Consistent with previous studies done on the rice supply chain, a rapid appraisal finds that the domestic paddy and rice supply chain is highly competitive. Entry into import business is however severely curtailed. Welfare analysis indicates that in 2013, if quantitative restrictions were eliminated and rice imports were allowed to freely enter the country, rice imports would have increased tenfold, bringing down the retail price of rice to PHP 19.80/kg from PHP 33.08/kg. Consumer surplus would have increased by PHP 178 billion, compared to a PHP 34 billion reduction in producer surplus, for a net social benefit of PHP 138 billion. This paper recommends tariffication, i.e., liberalized importation policy with moderate tariffs.
    Keywords: competition policy, Philippines, rice policy, agricultural marketing, welfare analysis
    Date: 2015
  16. By: Zavelberg, Yvonne; Wieck, Christine; Heckelei, Thomas
    Abstract: Addressing competition in Germany’s dairy sector, this paper investigates imperfect competition on the raw milk market. By using the conjectural variation approach to determine dairy processors market power towards raw milk producers, regions in Germany with a high degree of imperfect competition can be detected. Therefore a panel data set of dairy processor's price data and related federal state level farm structural and market information data is used which also allows to analyze other price determinants like structural change and spatial aspects on raw milk prices.
    Keywords: market power, conjectural variation, dairy, price determinants, Demand and Price Analysis, Marketing,
    Date: 2014–08
  17. By: Kopp, Thomas; Alamsyah, Zulkifli; Fatricia, Raja Sharah; Brümmer, Bernhard
    Abstract: A high level of market-power within the rubber processing industry limits the spread of the wealth generated with exports in Indonesia’s Jambi province. The market-power of the crumb rubber factories is based on a high level of concentration. With an Auto-Regressive Asymmetric Threshold Error Correction Model, we study the price transmission at these factories. The extent of the threshold effect is studied, as well as the rents that are redistributed from the farmers to the factories. This is the first paper to quantify the additional distributional consequences of intertemporal marketing margin manipulation based on cartelistic or oligopsonistic market power.
    Keywords: Intertemporal marketing margin manipulation, rubber cartel, asymmetric price transmission, threshold error correction, Indonesia, Marketing,
    Date: 2014
  18. By: Cadot, Julien
    Abstract: Vertical integration theory has long suggested internal costs related to changes in incentives due to vertical integration, which means that vertical integration may lead to agency costs. In this work, we specify the notion of agency costs of vertical integration and extend Ang, Cole and Lin (2000)’s measurement of agency costs to provide an empirical assessment of these costs in the French wine industry. Our econometric analysis finds that the agency costs of vertical integration may reach 2% to 3% of sales. It also displayed an unexpected result: vertical integration implies less costs for cooperatives than for other firms, but provides a lower performance. This result deserves further investigations.
    Keywords: agency costs, vertical integration, ownership structure, cooperatives, wine industry, Industrial Organization, Institutional and Behavioral Economics,
    Date: 2014–08
  19. By: BOUCKAERT, Jan; VAN MOER, Geert
    Abstract: Intermittent power sources enable firms to reduce costs by horizontally subcontracting generation. Dispatchable units serve as a strategic device, even when never used, since their availability credibly limits the price paid for subcontracting. Security of supply measures motivated by too low plant profitability therefore underestimate firms’ unilateral incentive to install dispatchable units.
    Keywords: Subcontracting, Intermittency, Security of supply, Dispatchable units
    JEL: D43 L13 L14
    Date: 2014–12
  20. By: Andrei Yakovlev (National Research University Higher School of Economics); Oleg Vyglovsky (National Research University Higher School of Economics); Olga Demidova (National Research University Higher School of Economics); Alexander Bashlyk (National Research University Higher School of Economics)
    Abstract: This paper analyzes the phenomenon of repeated procurements made by public sector customers from the same supplier. The previous surveys of “relational contracts” gave different explanations for the possible implications of such repeated procurements, but those surveys dealt mostly with goods and services, with quality difficult to verify at the point of delivery. This work studies the impact of repeated procurements on the price of a simple homogeneous product. We presume that the downward price shift of such a product during repeated procurements can be the consequence of transaction costs reduction in the framework of the bona fide behavior of a customer and supplier. An upward shift in the prices as compared to the market average can, on the contrary, be interpreted as an indirect indication of corrupt collusion between them. Using a huge dataset on procurements of AI-92 gasoline in Russia in 2011, we show that the price difference between repeated and one-time contracts can be explained by the type of procurement procedures providing different opportunities for corrupt behavior. Less transparent procedures (single-sourcing and requests for quotations) are more suitable for corrupt collusion. This might explain why the prices of repeat contracts in this case were higher. On the contrary, the prices of repeat contracts were lower compared to one-time procurement in the case of more transparent e-auctions.
    Keywords: public procurement, repeated contracts, relational contracting, corruption, e-auction
    JEL: H57 L14
    Date: 2014

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