nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒02‒05
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Consumer Search with Observational Learning By Sandro Shelegia; Daniel Garcia
  2. Consumer search: evidence from path-tracking data By Fabio Pinna; Stephan Seiler
  3. Sequential Auctions with Capacity Constraints: an Experimental Investigation By Brocas, Isabelle; Carrillo, Juan D; Otamendi, F. Javier
  4. Equilibrium bids in sponsored search auctions: theory and evidence By Tilman Borgers; Ingemar Cox; Martin Pesendorfer; Vaclav Petricek
  5. On the Use of Price-cost Tests in Loyalty Discounts: Which Implications from Economic Theory? By Chiara Fumagalli; Massimo Motta
  6. Bidding Rings: A Bargaining Approach By Chatterjee, Kalyan; Mitra, Manipushpak; Mukherjee, Conan
  7. Business Associations, Lobbying, and Endogenous Institutions By Larrain Aylwin, M.J.; Prüfer, J.O.
  8. Innovation and SMEs Patent Propensity in Korea By Han, Junghee; Heshmati, Almas
  9. Innovation, Governance and Competition By Roychoudhury, Saurav; Bhowmik, Anuj; Chattopadhyay, Srobonti
  10. Health provider networks, quality and costs By Jan Boone; Christoph Schottmüller
  11. Patents and the global diffusion of new drugs By Iain Cockburn; Jean O. Lanjouw; Mark Schankerman
  12. A Quantitative Analysis of the Retail Market for Illicit Drugs By Galenianos, Manolis; Gavazza, Alessandro
  13. Evaluating a decade of mobile termination rate regulation By Christos Genakos; Tommaso Valletti
  14. Regulatory Objectives and the Intensity of Unbundling in Electricity Markets By Lindemann, Henrik
  15. Actual and Potential Competition in International Telecommunications By Jason Pearcy; Scott J. Savage
  16. Modelling media ownership limits: the impact of current policy proposals on the UK media market By Justin Schlosberg
  17. A quantitative analysis of the used-car market By Alessandro Gavazza; Alessandro Lizzeri; Nikita Roketskiy
  18. The Welfare Gain from a New Good: An Introduction By Creedy, John
  19. The impact of maximum markup regulation on prices By Christos Genakos; Pantelis Koutroumpis; Mario Pagliero

  1. By: Sandro Shelegia; Daniel Garcia
    Abstract: This paper studies observational learning in a consumer search environment. In our model, consumers observe the purchasing decision of a predecessor before deciding which rm to visit. We show that if consumers emulate their predecessor and initiate their search at the rm she purchased from, a social multiplier of demand induces a lower equilibrium price. Further, as the search cost increases, rms compete ercely to attract consumers and prices converge to the marginal cost. We show that the result can be extended to any number of rms, and the eect of emulation on prices is stronger as the number of rms increases. We also show that, as consumers observe more previous purchasing decisions, the downward pressure on prices grows to the degree that the pure strategy equilibrium may cease to exist. We then provide a rationale for emulation by introducing positive correlation in preferences across consumers. This correlation gives rise to free-riding which deters search, and as a result puts further downward pressure on prices for high search cost.
    JEL: D11 D83 L13
    Date: 2015–01
  2. By: Fabio Pinna; Stephan Seiler
    Abstract: We estimate the effect of consumer search on the price of the purchased product in a physical store environment. We implement the analysis using a unique data set obtained from radio frequency identification tags, which are attached to supermarket shopping carts. This technology allows us to record consumers' purchases as well as the time they spent in front of the shelf when contemplating which product to buy, giving us a direct measure of search effort. Controlling for a host of confounding factors, we estimate that an additional minute spent searching lowers price paid by $2.10 which represents 8 percent of average trip-level expenditure.
    Keywords: Consumer search; in-store marketing; path data
    JEL: D12 D83 L11 L15
    Date: 2014–09
  3. By: Brocas, Isabelle; Carrillo, Juan D; Otamendi, F. Javier
    Abstract: We conduct a laboratory experiment where groups of 4 subjects constrained to obtain at most one good each, sequentially bid for 3 goods in first and second price auctions. Subjects learn at the beginning of each auction their valuation for the good and exit the auction once they have obtained one good. We show that, contrary to equilibrium predictions, subjects’ bidding behavior is excessively similar across units and across mechanisms at the aggregate level. We provide two (complementary) explanations for these departures. One is bounded rationality. Subjects do not fully comprehend subtle differences between mechanisms. The other is self-selection. Subjects are very heterogeneous and some of them deviate more from equilibrium than others. Since deviations take mostly the form of overbidding, these subjects win the first or second good and exit the auction, leaving those who play closer to theoretical predictions to bid for the third good. Support for this hypothesis comes from the documented higher bidding, lower efficiency and lower profits associated with the first and second unit compared to the third one.
    Keywords: auctions; laboratory experiment
    JEL: C92 D44 D82
    Date: 2015–01
  4. By: Tilman Borgers; Ingemar Cox; Martin Pesendorfer; Vaclav Petricek
    Abstract: This paper presents a game theoretic analysis of the generalized second-price auction that the company Overture operated in 2004 to sell sponsored search listings on search engines. We construct a model that embodies few prior assumptions about parameters, and we present results that indicate that this model has under quite general assumptions a multiplicity of Nash equilibria. We then analyze bid data assuming that advertisers choose Nash equilibrium bids. We offer preliminary conclusions about advertisers' true willingness to bid for sponsored search listings. We find that advertisers' true willingness to bid is multi-dimensional and decreasing in listing position
    JEL: D44 L86 M31 M37
    Date: 2013–11
  5. By: Chiara Fumagalli (Università Bocconi, CSEF and CEPR); Massimo Motta (ICREA-Universitat Pompeu Fabra and Barcelona Graduate School of Economics)
    Abstract: Recent cases in the US (Meritor, Eisai) and in the EU (Intel ) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts.
    Keywords: Market-share discounts, Inefficient foreclosure, Exclusive dealing
    JEL: K21 L41
    Date: 2015–01–22
  6. By: Chatterjee, Kalyan (Department of Economics, Pennsylvania State University); Mitra, Manipushpak (Economic Research Unit, Indian Statistical Institute, Kolkata, India); Mukherjee, Conan (Department of Economics, Lund University)
    Abstract: We address the issue of bidder ring formation in single and multi-unit Vickrey auctions. We address this issue in a bargaining game set up under the assumption that valuation of bidders is commonly known only amongst themselves. In the single unit case, we show that the equilibrium coalition structure can only be an order preserving r-ring, that includes the winner and the top (r-1) losers. In the multiple units case, we specify sufficient conditions for formation of an interesting class of equilibrium coalition structures, which we call single winner ring with free riding, where exactly one winner colludes with all the losers and generates maximum possible bidders' surplus, and, depending on the protocol, the remaining winners free ride either by staying alone or by colluding in pairs.
    Keywords: Bidding rings; Bargaining games; Coalition formation; Auctions
    JEL: C71 C72 C78 D44 L41
    Date: 2015–01–16
  7. By: Larrain Aylwin, M.J. (Tilburg University, TILEC); Prüfer, J.O. (Tilburg University, TILEC)
    Abstract: Are business associations - private, formal, nonprofit organizations designed to promote the common interests of their members - positive or negative for the economy and overall welfare? Scholars from institutional and organizational economics, on the one side, and from industrial organization, law & economics, and public choice, on the other side, have given different answers to this question, which is instrumental for policy making. We construct a model that endogenizes association membership of firms and the main functions of associations, which can have positive or negative spillovers on the economy. We derive predictions regarding associations’ functions and their net welfare effects, depending on the level of property rights securitization, which are in line with empirical observations.
    Keywords: Business Associations; Trade Associations; Professional organizations; guilds; Lobbying; Private Ordering; Endogenous Institutions; Quality of Legal Institutions
    JEL: D02 D62 D71 D72 L44
    Date: 2014
  8. By: Han, Junghee (Chonnam National University); Heshmati, Almas (Jönköping University, Sogang University)
    Abstract: This paper analyzes the patent propensity as an outcome of innovative activities of regional SMEs. To achieve the aims, we apply robust regression analysis to estimate the models to test 5 research hypotheses using 263 firm level data located at Gwangju region in Korea. Our empirical results show that a firm's industry characteristics, such as machinery and automotive parts industry, is negatively related with propensity to patent innovation. Also, unlike expectations, the InnoBiz firms designated as innovative SMEs by the government are not performing differently than general firms. Only the CEO's academic credentials are positively related with propensity to patent. From the findings, we can conclude that patenting propensity is not directly related with a firm's characteristics but mainly to CEO's managerial strategy. Also, we cannot find evidence for policy effectiveness from public support given to InnoBiz firms as part of the state policy to nurture photonic industry to boost regional economic development. Given the lack of strong policy effects, a new industry policy should be considered to actively promote SMEs innovativeness.
    Keywords: patent propensity, photonic industry, SMEs growth, R&D, innovation, InnoBiz, Korea
    JEL: C51 D22 O31 O32
    Date: 2015–01
  9. By: Roychoudhury, Saurav; Bhowmik, Anuj; Chattopadhyay, Srobonti
    Abstract: We consider a two period career concern model where corporate governance is a decisive factor for innovation efforts by a manager. In the beginning of the frst period, a manager decides whether to innovate. Prior to the innovation decision, the ability of the manager is unknown to the firm but known to the manager and an expected wage is paid based on a probability distribution of managerial abilities. The success of the innovation is both a function of the managerial ability and the product market competition and the beliefs about the managerial ability is updated if the manager innovates and the wage is set for the second period accordingly. Our model predicts that the rate of innovation would be higher under a more democratic governance structure and relatively low product market competition. Using a panel dataset from 1990s, compiled from Aghion et al.(2013b) and Gompers, Ishii,and Metrick (2003), containing time-varying information of patent citations, R&D, product market competition, and Governance index, we show that there is a robust association between innovation and the quality of governance and this relationship is strongest in industries with relatively low competition.
    Keywords: Governance, Compeition
    JEL: G3
    Date: 2015–01–15
  10. By: Jan Boone (Department of Economics, University of Tilburg); Christoph Schottmüller (Department of Economics, University of Copenhagen)
    Abstract: We provide a modeling framework to think about selective contracting in the health care sector. Two health care providers differ in quality and costs. When buying health insurance, consumers observe neither provider quality nor costs. We derive an equilibrium where health insurers signal provider quality through their choice of provider network. Selective contracting focuses on low cost providers. Contracting both providers signals high quality. Market power tends to lower quality and lead to inefficiency. In a dynamic extension of the model, providers under-invest in quality while there can be both over and under-investment in cost reductions if there is a monopoly insurer while an efficient investment equilibrium exists with insurer competition.
    Keywords: selective contracting, exclusive contracts, common contracts, managed care, health care quality, signaling
    JEL: I11 L13
    Date: 2015–01–31
  11. By: Iain Cockburn; Jean O. Lanjouw; Mark Schankerman
    Abstract: This paper studies how patent rights and price regulation affect how fast new drugs are launched in different countries, using newly constructed data on launches of 642 new drugs in 76 countries for the period 1983-2002, and information on the duration and content of patent and price control regimes. Price regulation strongly delays launch, while longer and more extensive patent protection accelerates it. Health policy institutions, and economic and demographic factors that make markets more profitable, also speed up diffusion. The effects are robust to using instruments to control for endogeneity of policy regimes. The results point to an important role for patents and other policy choices in driving the diffusion of new innovations. This project was initiated by Jean (Jenny) Lanjouw. Tragically, Jenny died in late 2005, but had asked us to complete the project. This took much longer than expected because it involved complete reconstruction of the data set and empirical work. It is essentially a new paper in its current form, but it remains an important part of Jenny’s legacy and a topic to which she devoted much of her intellectual and policy efforts. We hope she would be satisfied with our work which, for us, was a labor of love.
    Keywords: Patents; pharmaceuticals; diffusion; drug launches; price regulation
    JEL: I18 K19 L65 O31 O33 O34 O38
    Date: 2014–09
  12. By: Galenianos, Manolis; Gavazza, Alessandro
    Abstract: We develop a theoretical framework to study illicit drugs markets and we estimate it using data on purchases of crack cocaine. Buyers are searching for high-quality drugs, but they determine drugs' quality (i.e., their purity) only after consuming them. Hence, sellers can rip off first-time buyers or can offer higher-quality drugs to induce buyers to purchase from them again. In equilibrium, a distribution of qualities persists. The estimated model implies that sellers' moral hazard reduces the average and increases the dispersion of drug purity. Moreover, increasing penalties may increase the purity and affordability of the drugs traded because doing so increases sellers' relative profitability of targeting loyal buyers versus first-time buyers.
    Keywords: drugs; moral hazard; product quality; search
    JEL: D82 D83 L15 L65
    Date: 2015–01
  13. By: Christos Genakos; Tommaso Valletti
    Abstract: We re-consider the impact that regulation of call termination on mobile phones has had on mobile customers’ bills. Using a large panel covering 27 countries, we find that the “waterbed” phenomenon, initially observed until early 2006, becomes insignificant on average over the 10-year period, 2002-2011. We argue that this is related to the changing nature of the industry, whereby mobile-to-mobile traffic now plays a much bigger role compared to fixed-to-mobile calls in earlier periods. Over the same decade, we find no evidence that regulation caused a reduction in mobile operators’ profits and investments.
    Keywords: Mobile telephony; termination rates; waterbed effect
    JEL: D12 D43 L5 L96 L98
    Date: 2014–07
  14. By: Lindemann, Henrik
    Abstract: Despite the positive effect electricity grids separated from generation and supply by ownership are expected to have on the level of competition in the non-network activities, several EU member states still adhere to a solely legally unbundled transmission grid. This choice might be induced by regulators focusing on objectives other than the promotion of consumer interests: theoretically analyzing the decisions an authority takes on both the unbundling regime and the grid charge when it supervises a network monopolist providing a downstream Cournot duopoly with capacity, we find an agency pursuing consumer-oriented goals to always implement Ownership Unbundling. For a regulator acting in the interests of the industry or the government, though, results suggest the authority to be indifferent between Legal and Ownership Unbundling; minor potential drawbacks of a network separated by ownership for the agency or the companies might then tip the scales and cause the regulator to adhere to Legal Unbundling.
    Keywords: Legal Unbundling,Ownership Unbundling,Regulatory Authorities,Regulatory Objectives
    JEL: D73 L12 L13 L42 L50 L51 L94
    Date: 2015–01
  15. By: Jason Pearcy (Montana State University); Scott J. Savage (University of Colorado at Boulder)
    Abstract: By allowing carriers to route telephone calls over low-cost private lines, international simple resale (ISR) makes it possible for carriers to provide international telephone service without owning an international circuit. When approved, ISR reduces entry barriers and can increase competition. Using data from US markets from 1995 to 2004, we estimate the effects of ISR on entry and retail prices. Results show that ISR has no effect on entry and actual competition. However, controlling for actual competition, ISR authorization causes an average reduction in prices of 32.7 percent. Markets with relatively high carrier surplus experience an additional reduction in the price by 0.4 percent, and prices are 3.4 percent lower in markets with relatively high private line capacity. Our findings suggest that ISR promotes potential competition and lower prices in markets where the threat of hit-and-run entry is more credible.
    Keywords: Crop Insurance, Contestable Markets, Barriers to Entry, Competition, Policy Evaluation, Treatment Effects
    JEL: C21 D04 L1 L13 L96
    Date: 2014–02–24
  16. By: Justin Schlosberg
    Abstract: Since the Leveson Inquiry, academic and civil society experts have proposed a range of new limits on media ownership, both ceiling limits and threshold triggers of targeted behavioural intervention. The impact of these limits in the current situation would be relatively minor, even if the ceiling limits were set at the lower bounds of 15% or 20%, and need not necessarily result in enforced divestment or equate to a cap on growth. The BBC should be included in the measurement and monitoring of media plurality, but not in prescribed remedies. Plurality policy should address both individual markets for news and information (newspapers, radio, television and internet) as well as the total media market that extends beyond news providers.
    JEL: R14 J01 L91 L96
    Date: 2013–12
  17. By: Alessandro Gavazza; Alessandro Lizzeri; Nikita Roketskiy
    Abstract: We quantitatively investigate the allocative and welfare effects of secondary markets for cars. An important source of gains from trade in these markets is the heterogeneity in the willingness to pay for higher-quality (newer) goods, but transaction costs are an impediment to instantaneous trade. Calibration of the model successfully matches several aggregate features of the U.S. and French used-car markets. Counterfactual analyses show that transaction costs have a large effect on volume of trade, allocations, and the primary market. Aggregate effects on consumer surplus and welfare are relatively small, but the effect on lower-valuation households can be large.
    JEL: N0 L91 L96 L81
    Date: 2014–11
  18. By: Creedy, John
    Abstract: This note provides an elementary introduction to the measurement of welfare gains from the introduction of a new good, based on the concept of the ‘virtual price’ and standard expressions for welfare changes arising from price changes.
    Keywords: Welfare changes, Virtual price, New good,
    Date: 2015
  19. By: Christos Genakos; Pantelis Koutroumpis; Mario Pagliero
    Abstract: We study the repeal of a regulation that imposed maximum wholesale and retail markups for all but five fresh fruits and vegetables. We compare the prices of products affected by regulation before and after the policy change and use the unregulated products as a control group. We find that abolishing regulation led to a significant decrease in both retail and wholesale prices. However, markup regulation affected wholesalers directly and retailers only indirectly. The results are consistent with markup ceilings providing a focal point for collusion among wholesalers.
    Keywords: Markups; markup regulation; policy evaluation
    JEL: L0 L1 L4 L5
    Date: 2014–10

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