nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒02‒11
24 papers chosen by
Russell Pittman
United States Department of Justice

  1. Incomplete contracts and the internal organisation of firms By Philippe Aghion; John Van Reenen; Nicholas Bloom
  2. Organizing to adapt and compete By Ricardo Alonso; Wouter Dessein; Niko Matouschek
  3. A trapped-factors model of innovation By Nicholas Bloom; Paul M. Romer; Stephen J. Terry; John Van Reenen
  4. Nonlinear Pricing with Finite Information By Dirk Bergemann; Ji Shen; Yun Xu; Edmund M. Yeh
  5. Pricing a Package of Services By Ketelaar, Felix; Szalay, Dezso
  6. Product Line Design By Anderson, Simon P; Celik, Levent
  7. Costly Search with Adverse Selection: Solicitation Curse vs. Accelerating Blessing By Marilyn Pease; Kyungmin Kim
  8. Peer effects in endogenous networks By Timo Hiller
  9. De-industrialisation and entrepreneurship under monopolistic competition By Schweinberger, Albert G.; Suedekum, Jens
  10. The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio By Lydia Cheung
  11. Identifying technology spillovers and product market rivalry By Nick Bloom; Mark Schankerman; John Van Reenen
  12. Innovation and SMEs Patent Propensity in Korea By Han, Junghee; Heshmati, Almas
  13. Synthesizing Econometric Evidence: The Case of Demand Elasticity Estimates By Philip DeCicca; Donald S. Kenkel
  14. Do M&A Lawsuits Discipline Managers' Investment Behavior? By Bourveau , Thomas; Spira , Sven
  15. Strategic patenting and software innovation By Michael Noel; Mark Schankerman
  16. A primer on damages of cartel suppliers: Determinants, standing US vs. EU and econometric estimation By Bueren, Eckart; Smuda, Florian
  17. Market Structure in Transition: Entry and Competition in Slovakia By Martin Lábaj; Karol Morvay; Peter Silaniè; Christoph Weiss
  18. Agricultural marketing cooperatives with direct selling : A cooperative non cooperative game By Maxime Agbo; Damien Rousselière; Julien Salanié
  19. Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition By Francisco J. André; Luis M. de Castro
  20. Assessing bank competition for consumer loans By Wilko Bolt; David Humphrey
  21. Price Comparison Websites By Ronayne, David
  22. Rockets and Feathers Meet Joseph: Reinvestigating the Oil-gasoline Asymmetry on the International Markets By Ladislav Kristoufek; Petra Lunackova
  23. Money and privacy: Android market evidence By Kummer, Michael; Schulte, Patrick
  24. Price dispersion and station heterogeneity on German retail gasoline markets By Haucap, Justus; Heimeshoff, Ulrich; Siekmann, Manuel

  1. By: Philippe Aghion; John Van Reenen; Nicholas Bloom
    Abstract: We survey the theoretical and empirical literature on decentralization within firms. We first discuss how the concept of incomplete contracts shapes our views about the organization of decision-making within firms. We then overview the empirical evidence on the determinants of decentralization and on the effects of decentralization on firm performance. A number of factors highlighted in the theory are shown to be important in accounting for delegation, such as heterogeneity and congruence of preferences as proxied by trust. Empirically, competition, human capital and IT also appear to foster decentralization. There are substantial gaps between theoretical and empirical work and we suggest avenues for future research in bridging this gap.
    Keywords: uncertainty
    JEL: J1
    Date: 2013–03
  2. By: Ricardo Alonso; Wouter Dessein; Niko Matouschek
    Abstract: We examine the relationship between the organization of a multi-divisional firm and its ability to adapt production decisions to changes in the environment. We show that even if lower-level managers have superior information about local conditions, and incentive conflicts are negligible, a centralized organization can be better at adapting to local information than a decentralized one. As a result, and in contrast to what is commonly argued, an increase in product market competition that makes adaptation more important can favor centralization rather than decentralization.
    Keywords: adaptation; information; organization
    JEL: D23 D83 L23
    Date: 2014
  3. By: Nicholas Bloom; Paul M. Romer; Stephen J. Terry; John Van Reenen
    Abstract: We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.
    JEL: D21 F14 L21 O31
    Date: 2013–05
  4. By: Dirk Bergemann (Cowles Foundation, Yale University); Ji Shen (Dept. of Finance, London School of Economics); Yun Xu (Dept. of Electrical Engineering, Yale University); Edmund M. Yeh (Dept. of Computer Science and Electrical Engineering, Northeastern University)
    Abstract: We analyze nonlinear pricing with finite information. A seller offers a menu to a continuum of buyers with a continuum of possible valuations. The menu is limited to offering a finite number of choices representing a finite communication capacity between buyer and seller. We identify necessary conditions that the optimal finite menu must satisfy, either for the socially efficient or for the revenue-maximizing mechanism. These conditions require that information be bundled, or "quantized" optimally. We show that the loss resulting from using the n-item menu converges to zero at a rate proportional to 1 = n^2. We extend our model to a multi-product environment where each buyer has preferences over a d dimensional variety of goods. The seller is limited to offering a finite number n of d-dimensional choices. By using repeated scalar quantization, we show that the losses resulting from using the d-dimensional n-class menu converge to zero at a rate proportional to d = n^{2/d}. We introduce vector quantization and establish that the losses due to finite menus are significantly reduced by offering optimally chosen bundles.
    Keywords: Mechanism design, Nonlinear pricing, Multi-Dimension, Multi-product, Private information, Limited information, Quantization, Information theory
    JEL: C72 C73 D43 D83
    Date: 2015–01
  5. By: Ketelaar, Felix; Szalay, Dezso
    Abstract: We study a tractable two-dimensional model of price discrimination. Consumers combine a rigid with a more flexible choice, such as choosing the location of a house and its quality or size. We show that the optimal pricing scheme involves no bundling if consumer types are affiliated. Conversely, if consumer types are negatively affiliated over some portion of types then some bundling occurs.
    Keywords: Bundling; Monopoly; Multidimensional screening; Price discrimination
    JEL: D42 D82 D86
    Date: 2014–12
  6. By: Anderson, Simon P; Celik, Levent
    Abstract: We characterize the product line choice and pricing of a monopolist as the upper envelope of net marginal revenue curves to the individual product demand functions. The equilibrium product varieties to include in a product line are those yielding the highest upper envelope. In a central case (corresponding to a generalized vertical differentiation framework), the equilibrium range of varieties is exactly the same as the first-best socially optimal range. These upper envelope and first-best optimal range findings extend to a symmetric Cournot oligopoly as well.
    Keywords: Cournot multi-product competition; product differentiation; product line design; product line pricing; second-degree price discrimination
    JEL: L12 L13 L15
    Date: 2014–12
  7. By: Marilyn Pease (University of Iowa); Kyungmin Kim (University of Iowa)
    Abstract: We study the effects of endogenizing search intensity in sequential search models of trading under adverse selection. Ceteris paribus, the low-type seller obtains more surplus from search and, therefore, searches more intensively than the high-type seller. This has two ramifications for trade. On the one hand, a seller who successfully finds a buyer is more likely to be the low type (solicitation curse). On the other hand, since the low-type seller leaves the market even faster than the high-type seller, a seller who is available is more likely to be the high type (accelerating blessing). We explore the interaction of these two effects in both stationary and non-stationary sequential search environments. In the stationary case, the two effects are balanced, while in the non-stationary case, the relative strengths of the two effects vary over time. We show that reducing search costs can be detrimental to the seller.
    Date: 2014
  8. By: Timo Hiller
    Abstract: This paper presents a simple model of strategic network formation with local complementarities in effort levels and positive local externalities for a general class of payoff functions. Results are obtained for one-sided and two-sided link creation. In both cases (pairwise) Nash equilibrium networks are nested split graphs, which are a strict subset of core-periphery networks. The relevance of the convexity of the value function (gross payoffs as a function of neighbours' effort levels when best responding) in obtaining nested split graphs is highlighted. Under additional assumptions on payoffs, we show that the only efficient networks are the complete and the empty network. Furthermore, there exists a range of linking cost such that any (pairwise) Nash equilibrium is inefficient and for a strict subset of this range any (pairwise) Nash equilibrium network structure is different from the efficient network. These findings are relevant for a wide range of social and economic phenomena, such as educational attainment, criminal activity, labor market participation, and R&D expenditures of firms.
    Keywords: strategic network formation; peer effects; strategic complements; positive externalities
    JEL: J1
    Date: 2013–09
  9. By: Schweinberger, Albert G.; Suedekum, Jens
    Abstract: This paper offers a new mechanism to explain de-industrialisation in response to a price increase of the manufactured good. In our trade model, one sector (agriculture) is perfectly competitive while the other (manufacturing) is monopolistically competitive. Both industries use skilled and unskilled labour as inputs. Entry into manufacturing requires a fixed cost in terms of skilled labour only. A rise in the market price for the differentiated goods raises both marginal revenue and the price of skilled labour, which affects the marginal cost of production and the entry cost. When short-run profits increase so that new manufacturing firms enter, fewer skilled workers are available for production purposes. This, in turn, may then lead to a decline in total manufacturing output. Our theoretical mechanism is jointly consistent with recent empirical observations on pre-mature deindustrialization characterizing several Latin American and Asian countries, and productive diversification as observed in various developing economies.
    Keywords: entrepreneurship,monopolistic competition,de-industrialisation
    JEL: F12 D43
    Date: 2015
  10. By: Lydia Cheung (Department of Economics, Faculty of Business and Law, Auckland University of Technology)
    Abstract: The diversion ratio is a key ingredient to the calculation of the Upward Pricing Pressure (UPP) test, which is a new shortcut for screening mergers. It measures the degree of substitutability between the merging goods, which affects the potential for price increase post-merger. There is currently little existing research on how the diversion ratio is to be estimated (unlike its cousin, the cross-price elasticity). This paper explores one of the methods to estimate diversion ratios, which is through the estimation of a demand system. Specifically, this paper shows that the estimated value of the diversion ratio is, in fact, little affected by one of the most contentious decisions in merger analysis: the definition of the market boundary.
    Keywords: Upward pricing pressure, mergers
    Date: 2014–11
  11. By: Nick Bloom; Mark Schankerman; John Van Reenen
    Abstract: The impact of R&D on growth through spillovers has been a major topic of economic research over the last thirty years. A central problem in the literature is that firm performance is affected by two countervailing "spillovers" : a positive effect from technology (knowledge) spillovers and a negative business stealing effects from product market rivals. We develop a general framework incorporating these two types of spillovers and implement this model using measures of a firm's position in technology space and productmarket space. Using panel data on U.S. firms, we show that technology spillovers quantitatively dominate, so that the gross social returns to R&D are at least twice as high as the private returns. We identify the causal effect of R&D spillovers by using changes in federal and state tax incentives for R&D. We also find that smaller firms generate lower social returns to R&D because they operate more in technological niches. Finally, we detail the desirable properties of an ideal spillover measure and how existing approaches, including our new Mahalanobis measure, compare to these criteria.
    Keywords: market value; patents; productivity; R&D; spillovers
    JEL: O31 O33 O32 L1 F23
    Date: 2013–07–17
  12. By: Han, Junghee (Chonnam National University); Heshmati, Almas (Centre of Excellence for Science and Innovation Studies (CESIS), Jönköping International Business School, & 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: 2015–01–27
  13. By: Philip DeCicca; Donald S. Kenkel
    Abstract: Econometric estimates of the responsiveness of health-related consumer demand to higher prices are often key ingredients for policy analysis. Drawing on several examples, especially that of cigarette demand, we review the potential advantages and challenges of synthesizing econometric evidence on the price-responsiveness of consumer demand. We argue that the overarching goal of research synthesis in this context is to provide policy-relevant evidence for broad brush conclusions and propose three main criteria to select among research synthesis methods. We also contribute a new empirical exercise that puts the results of previous research synthesis to the test. In particular, we ask whether the “best” consensus estimates of the price-elasticity of smoking help predict trends in smoking from 1995 to 2010. The demographics of the smoking population in our baseline year predict a downward trend in smoking even if cigarette prices remained constant. Average cigarette prices, however, more than doubled in real terms by 2010. We find that the observed declines in smoking over this period are considerably smaller than smoking demographics combined with prior consensus elasticity estimates would predict. Our results suggest that these consensus estimates may have systematically overestimated the price responsiveness of cigarette demand.
    JEL: H0 H2 I1 I18
    Date: 2015–01
  14. By: Bourveau , Thomas; Spira , Sven
    Abstract: Using securities lawsuits related to M&A as an industry shock, the authors examine whether litigation risk acts as an external governance mechanism by disciplining managers' investment decisions. In the two years following an M&A lawsuit (a lawsuit where plaintiffs allege that the firm hid poor performance related to a prior acquisition), they find that industry peers experience higher bidder announcement returns, choose more adequate methods of payment, and engage in fewer diversifying and smaller takeovers. Collectively, this evidence is consistent with post lawsuit deals being of higher quality. Furthermore, the authors find that peer firms respond to the increased litigation risk by reducing abnormally high investment expenditures. Finally, the reactions are stronger among firms with fewer anti-takeover provisions. Overall, their results show that M&A lawsuits can have an industry-wide deterrence effect on firms' suboptimal investment behavior.
    Keywords: Litigation Risk; Mergers; Investment Decisions; Corporate Governance
    Date: 2014–06–04
  15. By: Michael Noel; Mark Schankerman
    Abstract: Strategic patenting is widely believed to raise the costs of innovating, especially in industries characterised by cumulative innovation. This paper studies the effects of strategic patenting on R&D, patenting and market value in the computer software industry. We focus on two key aspects: patent portfolio size, which affects bargaining power in patent disputes, and the fragmentation of patent rights (‘patent thickets’) which increases the transaction costs of enforcement. We develop a model that incorporates both effects, as well as knowledge spill overs. Using panel data for 121 firms covering the period 1980–99, we show that strategic patenting and spill overs affect innovation and market value of software firms, that there is a patent premium accounting for 20 per cent of the returns to R&D, and that software firms do not appear to be trapped in a prisoners' dilemma of ‘excessive patenting.
    JEL: N0
    Date: 2013–09
  16. By: Bueren, Eckart; Smuda, Florian
    Abstract: While private actions for damages against price-cartels by direct and indirect customers receive much attention, it is largely unresolved to what extent other groups that are negatively affected may claim compensation. This paper focuses on probably the most important one: suppliers to a downstream sellers' cartel. The paper shows graphically and analytically that cartel suppliers are negatively affected by the conspiracy depending on three effects: a direct quantity, a price and a cost effect. The article then examines whether suppliers are entitled to claim ensuing losses as damages in the US and the EU, with exemplary looks at England and Germany, thereby delineating the boundaries of the right to damages in different legal systems. We find that, while the majority view in the US denies standing, the emerging position in the EU, considering also recent case law and the forthcoming Damages Directive, allows for approving cartel supplier damage claims. We argue that this can indeed be justified in view of the different institutional context and the goals assigned to the right to damages in the EU. The Annex complements our result that supplier damage claims are practically viable by showing how supplier damages can be estimated econometrically with an adjusted residual demand model.
    Keywords: competition policy,comparative law,private enforcement,cartels,suppliers,quantification of damages,standing
    JEL: L41 K21
    Date: 2014
  17. By: Martin Lábaj (University of Economics in Bratislava, Faculty of National Economy, Department of Economic Policy); Karol Morvay; Peter Silaniè; Christoph Weiss
    Abstract: The present paper provides first empirical evidence on the relationship between market size and the number of firms for a transition economy. We estimate size thresholds required to support different numbers of firms for seven retail and professional service industries in a large number of distinct geographic markets in Slovakia. The empirical analysis is carried out for three time periods (1995, 2001 and 2010) characterizing different stages of the transition process. Our results suggest that the relationship between market size and the number of firm has changed substantially over time. While entry threshold ratios tend to be larger than one and decline with the number of firms in most professions in 1995, the estimation results obtained for 2010 suggest entry threshold ratios much closer to one. This finding is consistent with observations suggesting a significant decline in entry barriers as well as an intensification of competition over time.
    Keywords: entry thresholds, competition, Slovakia, transition, geographic markets
    JEL: L22 D22 M13 R11
    Date: 2014–01–15
  18. By: Maxime Agbo (African School of Economics, Abomey-Calavi, Benin); Damien Rousselière (AGROCAMPUS OUEST, Departement of Economics, Management and Society, Angers, France, UMR GRANEM, Angers, France); Julien Salanié (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France, Université Jean Monnet, Saint-Etienne, F-42000, France)
    Abstract: We build a theoretical model to study a market structure of a marketing cooperative with direct selling, in which many farmers are members of an agricultural marketing cooperative. They can sell their production either to the cooperative or on an oligopolistic local market. We show that the decision to sell to the cooperative induces an anti-competitive effect on the direct selling market. The cooperative facilitates collusion on the local market by making farmers softer competitors on that market. Conversely, direct selling may create a "healthy emulation" among farmers, leading to more production benefiting the cooperative.
    Keywords: marketing cooperative, direct selling, local market, competition
    JEL: D43 L11 Q13
    Date: 2014
  19. By: Francisco J. André (Universidad Complutense de Madrid, Spain); Luis M. de Castro (Universidad Complutense de Madrid, Spain)
    Abstract: It has been shown in prior research that cost effectiveness in the competitive emissions permit market could be affected by tacit collusion or price manipulation when the corresponding polluting product market is oligopolistic. We analyze these cross market links using a Stackelberg model to show that under reasonable assumptions, there are no incentives to collude for lobbying prices up. However, incentives for manipulating the price of permits up appear if there is an initial free allocation of permits, which is a policy argument against grandfathering and in favor of auctioning. This effect is increasing with the amount of permits allocated to the leader. Moreover, the changes for price manipulation increase with those changes that tend to undermine the leader's advantage in output production or to reduce the leader’s abatement cost.
    Keywords: Emissions Permits, Collusion, Market Power, Duopoly, Stackelberg Model
    JEL: D43 L13 Q58
    Date: 2015–02
  20. By: Wilko Bolt; David Humphrey
    Abstract: We assess the competitiveness of the $400 billion dollar U.S. bank consumer loan market by comparing results from different competition measures-HHI, Lerner Index, H-Statistic along with three others, two of which are related to frontier analysis. These measures are typically weakly related to one another and only half of them identify banks with the highest loan price and spread as also being the least competitive. This is the opposite of what would be expected. The states where the most and least competitive banks are located are noted. The most populous states with the largest banks are underrepresented.
    Keywords: consumer loans; bank competition; frontier analysis
    JEL: G21 L80 L00
    Date: 2015–01
  21. By: Ronayne, David (Department of Economics, University of Warwick)
    Abstract: Price comparison websites are commonly thought to benefit consumers by increasing competitive pressure between firms, in turn lowering prices faced by consumers. This article investigates the impact of the introduction of a PCW or ‘web aggregator’ to the market for a homogeneous good. We find that the introduction of a PCW increases prices, harming consumers. Under competing aggregators, consumer welfare does not improve when consumers check only one, and is only guaranteed to improve when they check all of them. Furthermore, when consumers do not check all, increasing the number of aggregators can increase prices. All equilibria feature price dispersion. Key words: JEL classification:
    Date: 2015
  22. By: Ladislav Kristoufek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic); Petra Lunackova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: We reinvestigate the "rockets and feathers" effect between retail gasoline and crude oil prices in a new framework of fractional integration, long-term memory and borderline (non)stationarity. The most frequently used error-correction model is examined in detail and we find that the prices return to their equilibrium value much more slowly than would be typical for the error-correction model. Such dynamics is usually referred to as "the Joseph effect". The standard procedure is shown to be troublesome and we introduce two new tests to investigate possible asymmetry in the price adjustment to equilibrium under these complicated time series characteristics. On the dataset of seven national gasoline prices, we find no statistically significant asymmetry. The proposed methodology is not limited to the gasoline and crude oil case but it can be utilized for any asymmetric adjustment analysis.
    Keywords: rockets and feathers, asymmetry, gasoline, crude oil, cointegration
    JEL: Q40 Q43 Q48
    Date: 2015–02
  23. By: Kummer, Michael; Schulte, Patrick
    Abstract: We study the role of privacy in the market for mobile applications. For such programs used with smartphones and tablet PCs a very important market has emerged. Yet, neither the role of privacy on that market is well understood, nor do we have empirical evidence regarding its role therein. We exploit data on 300,000 mobile applications and almost 600 "applications-pairs" to analyze both sides of this market: First, we analyze the price that application suppliers charge for more privacy. Second, we study how users' installations are related to the "personal data greediness" of mobile applications. We provide the first empirical evidence on the main assumptions of recent early models on suppliers' and consumers' strategies in this market. Our results show that (1) consumers take it into account when applications request rights to collect private information and (2) suppliers ask for more rights if they offer an app for free than if they offer it for a fee.
    Keywords: Information Acquisition,Mobile Applications,Smartphones,Online Privacy,Permissions,Price,Privacy Regulation
    JEL: D4 D83 L15
    Date: 2014
  24. By: Haucap, Justus; Heimeshoff, Ulrich; Siekmann, Manuel
    Abstract: Price levels and movements on gasoline and diesel markets are heavily debated among consumers, policy-makers, and competition authorities alike. In this paper, we empirically investigate how and why price levels differ across gasoline stations in Germany, using eight months of data from a novel panel data set including price quotes from virtually all German stations. Our analysis specifically explores the role of station heterogeneity in explaining price differences across gasoline stations. Key determinants of price levels across fuel types are found to be ex-refinery prices as key input costs, a station's location on roads or highway service areas, and brand recognition. A lower number of station-specific services implies lower fuel price levels, so does a more heterogeneous local competitive environment.
    Keywords: Gasoline Pricing,Price Dispersion,Fuel Prices,Gasoline Stations
    JEL: L11 L71
    Date: 2015

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