nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒03‒05
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Asymmetric Price Effects of Competition By Lach, Saul; Moraga-González, José-Luis
  2. Personalized Pricing and Advertising: An Asymmetric Equilibrium Analysis By Anderson, Simon P; Baik, Alicia; Larson, Nathan
  3. Endogenous Horizontal Product Differentiation under Bertrand and Cournot Competition: Revisiting the Bertrand Paradox By James A. Brander; Barbara J. Spencer
  4. Bertrand versus Cournot with Convex Variable Costs By F. Delbono; L. Lambertini
  5. Endogenous unrestricted locations in markets with network effects By Ribeiro, Vitor
  6. Should Capital-Intensive Firms Share Demand Information with Their Competitors? By Gardete, Pedro M.
  7. Venture Capital and Knowledge Transfer By Dessi, Roberta; Yin, Nina
  8. Private Label Brands: Benefits and Challenges Pingo Doce Case Study By José Cevada; Joana César Machado
  9. Consumer Search: Evidence from Path-Tracking Data By Pinna, Fabio; Seiler, Stephan
  10. Competitors In Merger Control: Shall They Be Merely Heard Or Also Listened To? By Thomas Giebe; Miyu Lee; ;
  11. The Cost of Antitrust Law to Malaysia’s Financial Services Sector By Michael, Bryane; Williams, Mark; Munisamy, Susila
  12. Superbowl Ads By Hartmann, Wesley R.; Klapper, Daniel
  13. The Long Run Effects of U.S. Airline Mergers By Benkard, Lanier; Bodoh-Creed, Aaron; Lazarev, John
  14. Power to Choose? An Analysis of Consumer Inertia in the Residential Electricity Market By Ali Hortaçsu; Seyed Ali Madanizadeh; Steven L. Puller
  15. Estimación del precio marginal del sistema eléctrico colombiano: una mirada desde la organización industrial By Ona Duarte Venslauskas; John J. García
  16. The implications of liberalising the postal sector on welfare and pricing By Cremer, Helmuth; De Donder, Philippe; Rodriguez, Frank
  17. Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices By Matthew Grennan; Robert Town
  18. An Empirical Analysis of Primary and Secondary Pharmaceutical Patents in Chile By María José Abud Sittler; Bronwyn Hall; Christian Helmers
  19. Analisis de la concentracion y competencia en el sector bancario By Jaime Zurita
  20. Consumers' Activism: the Facebook boycott of Cottage Cheese By Hendel, Igal E; Lach, Saul; Spiegel, Yossi

  1. By: Lach, Saul; Moraga-González, José-Luis
    Abstract: In markets where price dispersion is prevalent the relevant question is not what happens to the price when the number of firms changes but, instead, what happens to the whole distribution of equilibrium prices. Using data from the gasoline market in the Netherlands, we find, first, that markets with a given number of competitors have price distributions that first-order stochastically dominate the corresponding price distributions in markets with one more firm. Second, the competitive response varies along the price distribution and is stronger at prices in the medium to upper part of the distribution. Finally, consumer gains from competition depend on how well informed they are and turn out to be larger for relatively attentive consumers. To account for these empirical results, we propose a generalisation of Varian's (1980) well-known model of sales that allows for richer heterogeneity in consumer price information.
    Keywords: distribution of price information; number of competitors; price dispersion
    JEL: D43 D83 L13
    Date: 2015–03
  2. By: Anderson, Simon P; Baik, Alicia; Larson, Nathan
    Abstract: We study personalized price competition with costly advertising among n quality-cost differentiated firms. Strategies involve mixing over both prices and whether to advertise. In equilibrium, only the top two firms advertise, earning “Bertrand-like" profits. Welfare losses initially rise then fall with the ad cost, with losses due to excessive advertising and sales by the “wrong " firm. When firms are symmetric, the symmetric equilibrium yields perverse comparative statics and is unstable. Our key results apply when demand is elastic, when ad costs are heterogeneous, and with noise in consumer tastes.
    Keywords: Bertrand equilibrium; consumer targeting; mixed strategy equilibrium; price advertising; price dispersion
    JEL: D43 L13
    Date: 2015–03
  3. By: James A. Brander; Barbara J. Spencer
    Abstract: This paper provides a new and simple model of endogenous horizontal product differentiation based on a standard demand structure derived from quadratic utility. One objective of the paper is to explain the “empirical Bertrand paradox” – the failure to observe homogeneous product Bertrand oligopoly, while homogeneous product Cournot oligopoly has significant empirical relevance. In our model firms invest in product differentiation if differentiation investments are sufficiently effective (i.e. if differentiation is not too costly). The threshold level of differentiation effectiveness needed to induce such investments is an order of magnitude less for Bertrand firms than for Cournot firms. Thus there is a wide range over which Bertrand firms differentiate their products but Cournot firms do not. If Cournot firms do choose to differentiate their products, corresponding Bertrand firms always differentiate more. We also establish the important insight that if product differentiation is endogenous Bertrand firms may charge higher prices and earn higher profits than corresponding Cournot firms, in contrast to the general presumption that Bertrand behavior is more competitive than Cournot behavior. Interestingly, consumer surplus increases with differentiation in the Cournot model but, due to sharply increasing prices, decreases with differentiation in the Bertrand model.
    JEL: D4 L1 L13
    Date: 2015–02
  4. By: F. Delbono; L. Lambertini
    Abstract: Within a simple model of homogeneous oligopoly, we show that the traditional ranking between Bertrand and Cournot equilibria may be reversed. For price setting entails a continuum of price equilibria under convex variable costs, departure from marginal cost pricing may be observed. As a consequence, Bertrand-Nash equilibrium profi…ts (welfare) may be higher (lower) than Cournot-Nash ones. The reversal of the standard rankings occurs when pricing strategies mimic collusive behaviour.
    JEL: D43 L13
    Date: 2015–02
  5. By: Ribeiro, Vitor
    Abstract: The paper studies indirect network effects in a market composed by two incompatible intermediaries that choose price (short-term issue) in addition to location (long-term issue). The paper first shows that (i) when the network externality is sufficiently weak, only maximum differentiation prevails, (ii) the location equilibrium can be asymmetric for an intermediate level of the network externality, given that the first entrant locates at the city centre while the follower chooses an extreme (niche) positional location and (iii) tipping occurs favouring the leader in the location choice when the intensity of the network externality is sufficiently strong. Moreover, the paper concludes that the likelihood of an asymmetric location equilibrium is higher when there is no mismatch between the product space occupied by consumers and intermediaries. Finally, the author concludes that a penetration pricing strategy conducted by a third intermediary is more successful when the pre-entry condition is not the tipping equilibrium location.
    Keywords: simple network effect,unconstrained spatial competition,location leadership
    JEL: D43 L13 R12
    Date: 2015
  6. By: Gardete, Pedro M. (Stanford University)
    Abstract: This paper proposes a model of competition under asymmetric information to investigate whether firms have an incentive to share demand information with their competitors. The question naturally arises because the result that better information benefits a single-agent does not generalize to multi-agent settings. The paper also proposes parametric identification and estimation methods for a broad class of games of asymmetric information. Data from the Dynamic Random-Access Memory (DRAM) industry is used to determine the parameter region of study. I find that firms may indeed benefit from sharing demand information with their competitors, in contrast with the results established by the standard linear-normal models. Moreover, capacity constraints may induce asymmetric effects of information on different competitors. Finally, downstream firms and consumers also benefit from information sharing due to higher coordination between the market needs and the industry output.
    Date: 2014–07
  7. By: Dessi, Roberta; Yin, Nina
    Abstract: This paper explores a new role for venture capitalists, as knowledge intermediaries. A venture capital investor can communicate valuable knowledge to an entrepreneur, facilitating innovation. The venture capitalist can also communicate the entrepreneur's innovative knowledge to other portfolio companies. We study the costs and benefits of these two forms of knowledge transfer, and their implications for investment, innovation, and product market competition. The model also sheds light on the choice between venture capital and other forms of finance, and the determinants of the decision to seek patent protection for innovations. Our analysis provides a rationale for the use of contingencies (specifically, patent approval) in VC contracts documented by Kaplan and Stromberg (2003), and for recent evidence on patterns of syndication among venture capitalists.
    Keywords: venture capital, knowledge intermediaries, contracts, innovation, competition, patents.
    JEL: D82 D86 G24 L22
    Date: 2015–02
  8. By: José Cevada (Faculdade de Economia e Gestão, Universidade Católica Portuguesa - Porto); Joana César Machado (Faculdade de Economia e Gestão and CEGE, Universidade Católica Portuguesa - Porto)
    Abstract: This working paper analyzes the growing importance of private labels in today’s modern distribution, and the main opportunities and threats they raise for retailers and national brands. Our main purpose was to: (1) analyze consumer´s perceptions of private label brands, (2) identify their critical relevance for retailers; (3) understand how national brands can benefit from private labels’ sustainable growth and (4) identify the major challenges they bring for different types of national brands (namely, A Brands and B Brands). We used a case study approach and analyzed the strategy of Pingo Doce brand, a private label that belongs to Jerónimo Martins group. Among other relevant findings, we found evidence that the drop in Pingo Doce’s market share, in 2013, was the result of a strategic move to significantly improve consumers’ quality perceptions, and, simultaneously, keep a profitable balance between the private label and national brands.
    Keywords: Corporate brand; private label brands; retailers; national brands; benefits of private label brands
    Date: 2015–01
  9. By: Pinna, Fabio (London School of Economics and Political Science); Seiler, Stephan (Centre for Economic Performance, Stanford University)
    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.
    Date: 2014–08
  10. By: Thomas Giebe; Miyu Lee; ;
    Abstract: There are legal grounds to hear competitors in merger control proceedings, and competitor involvement has gained significance. To what extent this is economically sensible is our question. The competition authority applies some welfare standard while the competitor cares about its own profit. In general, but not always, this implies a conflict of interest. We formally model this setting with cheap talk signaling games, where hearing the competitor might convey valuable information to the authority, but also serve the competitor’s own interests. We find that the authority will mostly have to ignore the competitor but, depending on the authority’s own prior information, strictly following the competitor’s selfish recommendation will improve the authority’s decision. Complementary to our analysis, we provide empirical data of competitor involvement in EU merger cases and give an overview of the legal discussion in the EU and US.
    Keywords: merger control, antitrust, European Commission, signaling, efficiency, competitors, rivals
    JEL: G34 K21 L4 C73 L2
    Date: 2015–02
  11. By: Michael, Bryane; Williams, Mark; Munisamy, Susila
    Abstract: Judging by only economic incentives, Malaysian financial institutions (particularly banks) should completely ignore the Competition Act. The data show that Malaysian banks probably benefit from anticompetitive behaviour. Political and family connections likely facilitate such behaviour. Given that the Malaysian Competition Commission will likely lack the resources to investigate and sanction anti-competitive behaviour in Malaysia’s banking industry – the banks’ best response to the Act probably consists of ignoring it. Maximum fines of 10 million ringgit and revenue-tied penalties of only 10% of worldwide revenue mean that banks still have strong incentives to engage in anticompetitive behaviour and to pay any low fine that might be levied. The best compliance programme for banks in Malaysia likely consists of actions that avoid detection rather than detecting and preventing anticompetitive behaviour. Private rights of action are unlikely to provide any stronger economic incentives for Malaysian banks to adopt strong antitrust compliance programmes and internal audit programmes. By staying the course, Malaysian banks can continue to earn about 15 billion ringgits (approximately US$4.6 billion in anticompetitive rents).
    Keywords: antitrust,Malaysia,internal audit,compliance
    JEL: D41 L44
    Date: 2015
  12. By: Hartmann, Wesley R. (Stanford University); Klapper, Daniel (Humboldt University Berlin)
    Abstract: We explore the effects of television advertising in the setting of the NFL's Super Bowl telecast. The Super Bowl is the largest advertising event of the year and is well suited for measurement. The event has the potential to create significant increases in "brand capital" because ratings average over 40 percent of households and ads are a focal point of the broadcast. Furthermore, variation in exposures is exogenous because a brand cannot choose how many impressions it receives in each market. Viewership is determined based on local preferences for watching the two competing teams. With this significant and exogenous variation in Super Bowl advertising exposures we test whether advertisers' sales are affected accordingly. We run our analysis using Nielsen ratings and store level sales data in the beer and soda categories. We find that Super Bowl ads generate significant increases in revenue and volume per household. However, when two major brands both advertise, they erode most of the gain. The largest effects occur during weeks with spikes in other sports events suggesting that placing an advertisement in the most watched sporting event of the year generates associations with sports more broadly. We test this using local viewership data of NCAA basketball in the second month after the Super Bowl and find strong evidence that advertising can generate or augment complementarities between a brand and the ways potential consumers spend their time.
    Date: 2014–06
  13. By: Benkard, Lanier (Stanford University); Bodoh-Creed, Aaron (?); Lazarev, John (?)
    Date: 2014–04
  14. By: Ali Hortaçsu; Seyed Ali Madanizadeh; Steven L. Puller
    Abstract: Many jurisdictions around the world have deregulated utilities and opened retail markets to competition. However, inertial decisionmaking can diminish consumer benefits of retail competition. Using household-level data from the Texas residential electricity market, we document evidence of consumer inertia. We estimate an econometric model of retail choice to measure two sources of inertia: (1) search frictions/inattention, and (2) a brand advantage that consumers afford the incumbent. We find that households rarely search for alternative retailers, and when they do search, households attach a brand advantage to the incumbent. Counterfactual experiments show that low-cost information interventions can notably increase consumer surplus.
    JEL: D8 L0 L5
    Date: 2015–02
  15. By: Ona Duarte Venslauskas; John J. García
    Abstract: This paper has two important goals. The first one is to build a Cournot model that illustrate the strategic behavior of the leader energy generators of the Colombian energy market, using the spot price as a strategic variable to estimate the optimal quantities of the short term energy market. The second goal is to use the quantities estimated to build industrial organizational variables, and with them estimate the spot price using VAR models, that allow an impulse response analysis. A daily series is used for the estimation, which it goes from June of 2010 until November of the same year. The results showed that the storage capacity of the hydraulic companies give them a higher strategic behavior that thermal companies when the demand level is low, but the opposite happens when the demand level is high. It was found that a random shock over the residual demand of the oligopoly and the concentration ratio of the market structure, are reflected in a fluctuated behavior of the spot energy price, this effect can be read as a reaction of the companies to the new circumstances of the market condition. ****** El artículo tiene dos principales objetivos. El primero es construir un modelo de Cournot que simule el comportamiento estratégico de las empresas generadoras líderes del mercado eléctrico colombiano, usando el Precio Marginal del Sistema (PMS) como variable estratégica para determinar las cantidades optimas a ofertar en el mercado spot. El segundo es usar las cantidades estimadas con el modelo de Cournot para construir variables de organización industrial (Índice de Demanda Residual y el Índice de Herfindahl e Hirschman) y con ellas estimar modelos vectoriales autorregresivos (VAR) que permitan estimar el PMS y hacer análisis de impulso respuesta. Los modelos se estiman para la serie diaria desde junio del 2010 hasta noviembre del mismo año. Los resultados muestran que la capacidad de almacenamiento de las empresas hidráulicas permite un mayor comportamiento estratégico que el de una empresa térmica cuando la demanda es baja, mientras que las térmicas son más estratégicas cuando la demanda es alta dado que los recursos de generación hidráulica se ven reducidos. Además se encuentra que los choques sobre los cambios en la capacidad de maniobra del oligopolio y en la concentración del mercado, se reflejan en un comportamiento fluctuante sobre el crecimiento del PMS, lo que se puede interpretar como una reacción de la estrategia de las empresas ante un cambio en las circunstancias de organización del mercado.
    Keywords: Modelo de Cournot; Precio Marginal del Sistema; mercado eléctrico; Índice dedemanda residual; Índice de Herfindahl - Hirschman; modelo de vectores autorregrasivos - VAR
    JEL: D43 L11 L13
    Date: 2014–03–01
  16. By: Cremer, Helmuth; De Donder, Philippe; Rodriguez, Frank
    Abstract: This note synthesises several research papers that IDEI has produced together with Royal Mail economists and others since 2000 and summarises their findings on the welfare and pricing implications of opening the postal market to competition, when the national postal operator operates under different regulatory requirements (e.g. price constraints or universal service obligations) and according to the competition regime (such as access only, bypass only, access and bypass) which emerges in the market following its liberalisation.4 The understanding of the postal sector and of likely effects of different types of regulation requires taking appropriate account of the specific nature of this industry. We then start this note (section 2) by mentioning the most important characteristics of the sector, which renders it different from other network industries such as telecoms or energy. We then summarise in section 3 the research papers. All papers share the same form: they start with a specific research question, build a formal model incorporating the relevant characteristics of the postal sector given this research question, and then provide numerical results based on a calibration of this model to a generic European postal market. The calibration assumptions are not from a particular postal operator, but are reflective, in our view, of the general nature of postal markets and cost structures found in published empirical studies. The same calibration assumptions are used in all papers, except when assumptions are updated to reflect the results of newly available empirical studies. In most of the papers we have checked the robustness of our results through sensitivity testing of key calibration values. However, we should stress that these results are indicative and in any particular country, for example the UK, a more detailed empirical exercise would be necessary to model prospective effects directly. Section 4 concludes with a brief summary of the main results surveyed here.
    Keywords: postal; regulation; welfare; pricing
    Date: 2015–02
  17. By: Matthew Grennan; Robert Town
    Abstract: This paper examines optimal regulatory testing requirements when new product quality is uncertain but market participants may learn over time. We develop a model capturing the regulator's tradeoff between consumer risk exposure and access to innovation. Using new data and exogenous variation between EU and US medical device regulatory rules, we document patterns consistent with our model and estimate its parameters. We find: without information from regulatory testing, risk shuts down the market; US policy is close to the one that maximizes a measure of welfare derived from our theoretical model and our empirical estimates; EU surplus could increase 20 percent with more pre-market testing; and “post-market surveillance” could increase surplus 24 percent.
    JEL: I11 L11 L51
    Date: 2015–02
  18. By: María José Abud Sittler; Bronwyn Hall; Christian Helmers
    Abstract: We analyze the patent filing strategies of foreign pharmaceutical companies in Chile distinguishing between “primary” (active ingredient) and “secondary” patents (patents on modified compounds, formulations, dosages, particular medical uses etc.). There is prior evidence that secondary patents are used by pharmaceutical originator companies in the U.S. and Europe to extend patent protection on drugs in length and breadth. Using a novel dataset that comprises all drugs registered in Chile between 1991 and 2010 as well as the corresponding patents and trademarks, we find evidence that foreign originator companies pursue similar strategies in Chile. We find a primary to secondary patents ratio of 1:4 at the drug-level which is comparable to the available evidence for Europe; most secondary patents are filed over several years following the original primary patent and after the protected active ingredient has obtained market approval in Chile. This points toward effective patent term extensions through secondary patents. Secondary patents dominate “older” therapeutic classes like anti-ulcer and anti-depressants. In contrast, newer areas like anti-virals and anti-neoplastics (anti-cancer) have a much larger share of primary patents.
    JEL: K12 L5 L65 O34
    Date: 2015–02
  19. By: Jaime Zurita
    Abstract: La crisis ha fomentado la consolidacion y concentracion de muchos sectores bancarios, alimentando el debate sobre los efectos de una mayor concentracion sobre el nivel de competencia y la estabilidad del sistema. No obstante, las conclusiones de la literatura sobre este tema no soportan que exista una relacion directa entre concentracion y poder de mercado en los sistemas bancarios. Multiples estudios tratan de contrastar la existencia de esta relacion en sistemas bancarios completos, o realizando una simple segmentacion entre bancos grandes y pequenos. Estos estudios no encuentran una relacion directa entre concentracion y poder de mercado, excepto en el caso de paises desarrollados y bancos muy grandes. La conclusion principal es que la mayor o menor concentracion de un mercado es una variable a tener en cuenta a la hora de estudiar la competencia de un sistema financiero, pero hay otras variables que influyen tambien en la actividad de las entidades y el nivel de competencia de los sistemas, entre las que hay que mencionar la herencia historica politica de cada pais, la contestabilidad del mercado, el entorno institucional y regulatorio y el ciclo economico, entre otras.
    Keywords: Concentracion, Competencia, Consolidacion, Panzar-Rosse
    JEL: G21 L11 L13 L21
    Date: 2014–09
  20. By: Hendel, Igal E; Lach, Saul; Spiegel, Yossi
    Abstract: We study a consumer boycott on cottage cheese that was organized in Israel on Facebook in the summer of 2011 following a steep increase in prices after price controls were lifted in 2006. The boycott led to an immediate decline in prices which stayed low more than three years after the boycott. We find that (i) demand at the start of the boycott, at the new low prices, would have been 30% higher but for the boycott, (ii) own price elasticities and especially cross price elasticities increased substantially after the boycott, and (iii) post-boycott prices are substantially below the levels implied by the post-boycott elasticities of demand, suggesting that firms lowered prices due to fears of the boycott spreading to other products, of new price controls, and of possibly class action law suits.
    Keywords: consumer boycott; price elasticities; social media
    JEL: D12 L1
    Date: 2015–03

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