nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒03‒13
thirteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Intra-Industry Trade with Bertrand and Cournot Oligopoly: The Role of Endogenous Horizontal Product Differentiation By James A. Brander; Barbara J. Spencer
  2. Cournot Games with Uncertainty: Coalitions, Competition, and Efficiency By Baosen Zhang; Ramesh Johari; Ram Rajagopal
  3. Can Mechanism Designers Exploit Buyers' Market Information By Peters, Michael
  4. Firms entry, oligopolistic competition and labor market dynamics By Andrea Colciago; Lorenza Rossi
  5. Antitrust versus industrial policies, entry and welfare By Guy Meunier; Jean-Pierre Ponssard; Francisco Ruiz-Aliseda
  6. Innovation, R&D spillovers, and the variety and concentration of the local production structure By Leppälä, Samuli
  7. Firm Heterogeneity and Location Choice of European Multinationals By Marti, Josep; Alguacil, Maite; Orts, Vicente
  8. Power Market Design beyond 2020: Time to Revisit Key Elements? By Karsten Neuhoff; Sophia Ruester; Sebastian Schwenen
  9. Can Health Insurance Competition Work? Evidence from Medicare Advantage By Jay Bhattacharya; Vilsa Curto; Liran Einav; Jonathan Levin
  10. Guru Dreams and Competition: An Anatomy of the Economics of Blogs By Dong, Yi; Massa, Massimo; Zhang, Hong
  11. Identification and Estimation of Auctions with Incomplete Contracts: A Structural Analysis of California Highway Construction Projects By An, Yonghong; Tang, Xun
  12. Asymmetric Information and Imperfect Competition in Lending Markets By Crawford, Gregory S; Pavanini, Nicola; Schivardi, Fabiano
  13. How does firms' perceived competition affect technological innovation in Luxembourg? By Raymond W.; Plotnikova T.

  1. By: James A. Brander; Barbara J. Spencer
    Abstract: This paper investigates the effect of endogenous horizontal product differentiation on trade patterns and the gains from trade under Bertrand and Cournot oligopoly. Firms differentiate their products to mitigate competition, but only if the investment required is not too high. Investment in product differentiation takes place in a much wider range of cases and results in a greater difference between products under Bertrand than Cournot competition. In our model, trade in homogeneous products never takes place under Bertrand competition: Bertrand firms export only if they differentiate their products. Cournot firms may trade in either homogeneous or differentiated products. If there is trade, consumers tend to be better off with Bertrand than Cournot competition due to greater product differentiation and more aggressive pricing, but higher levels of investment can raise Bertrand profit above Cournot profit and also above the monopoly profit at autarky when investment costs are sufficiently low.
    JEL: F12 L1 L13
    Date: 2015–03
  2. By: Baosen Zhang; Ramesh Johari; Ram Rajagopal
    Abstract: We investigate the impact of group formations on the efficiency of Cournot games where producers face uncertainties. In particular, we study a market model where producers must determine their output before an uncertainty production capacity is realized. In contrast to standard Cournot models, we show that the game is not efficient when there are many small producers. Instead, producers tend to act conservatively to hedge against their risks. We show that in the presence of uncertainty, the game becomes efficient when producers are allowed to take advantage of diversity to form groups of certain sizes. We characterize the trade-off between market power and uncertainty reduction as a function of group size. Namely, we show that when there are N producers present, competition between groups of size square root of N results in equilibria that are socially optimal.
    Date: 2015–03
  3. By: Peters, Michael
    Abstract: It is known that mechanism designers can extract agents' information about competitors' mechanisms in a competing mechanism game. This makes it possible for sellers to punish each other for deviations even when they do not directly observe other sellers' mechanisms. This allows for very collusive equilibria. This paper is concerned with whether these collusive equilibria can be sustained in large markets when buyers either don't understand sellers mechanisms, or find it costly to convey their market information. We provide conditions under which collusive equilibria will persist in large markets and conditions under which all equilibria of the competing mechanism game will become competitive.
    Keywords: competing mechanisms
    Date: 2015–02–24
  4. By: Andrea Colciago; Lorenza Rossi
    Abstract: Using U.S. quarterly data we provide VAR evidence showing that a positive productivity shock leads to a persistent decrease in the unemployment rate and in the price markup, together with an increase in aggregate profits. In response to the shock the labor share of income decreases on impact and overshoots its long run trend before reverting to equilibrium. To address these facts, we propose a model where Cournot competition and firms' entry in the goods market interact with search and matching frictions in the labor market. The price markup countercyclicality delivered by our model is a key factor to jointly account for the empirical facts we documented.
    Keywords: Firms' Entry; Oligopolistic competition
    JEL: L11 E32
    Date: 2015–03
  5. By: Guy Meunier (INRA-UR1303 ALISS); Jean-Pierre Ponssard (CNRS); Francisco Ruiz-Aliseda (Ecole Polytechnique)
    Abstract: In industries with large sunk costs, the investment strategy of firms depends on the regulatory context. We consider ex-ante industrial policies in which the sunk cost may be either taxed or subsidized, and antitrust policies which could either be pro-competitive (leading to divestiture in case of high ex-post profitability) or lenient (allowing mergers in case of low ex-post profitability). Through a simple entry game we completely characterize the impact of these policies and examine their associated dynamic trade-offs between the timing of the investment, the ex-post benefits for the consumers, and the possible duplication of fixed costs. We find that merger policies are dominated by ex-ante industrial policies, whereas the latter are dominated by divestiture policies only under very special circumstances.
    Keywords: entry, industry dynamic, antitrust policy, divestiture
    JEL: L1 L4 L5
    Date: 2015–03
  6. By: Leppälä, Samuli (Cardiff Business School)
    Abstract: This paper presents a Cournot oligopoly model with R&D spillovers both within and across industries. The aim is to provide an appropriate theoretical foundation for three different hypotheses regarding the impact of the local production structure on innovation and output, as well as addressing mixed empirical results in this area. Both the effective R&D and total industry output are shown to increase with the variety of industries, which is aligned with Jacobs externalities. With respect to the concentration, the outcome is more ambiguous, where it depends on the variety, both spillover rates, and the R&D efficiency. If the variety is limited, then partial support is given to both Marshall-Arrow-Romer externalities in the case of effective R&D, and to Porter externalities in the case of the total industry output. The use of a relative rather than an absolute measure of variety is also shown to be important.
    Keywords: concentration; innovation; knowledge spillover; regional economy; variety
    JEL: O33 R11 L13
    Date: 2015–02
  7. By: Marti, Josep; Alguacil, Maite; Orts, Vicente
    Abstract: In this paper we investigate how the different characteristics of European multinational firms affect their decision tolocate in different foreign markets. Considering the existence of n geographically separated markets with different attributes, in terms of entry or fixed costs, variable production costs and the market potential, our theoretical model shows that both firm and country characteristics determine the location of multinational firms. The model reveals that given the characteristics of the countries, the decision to enter a specific country in order to serve all markets globally will depend on all the sources of a firm’s heterogeneity. In the empirical analysis, we drawn on a dataset comprised of harmonized and detailed firm-level data across European countries for 2008 (EFIGE dataset). The results obtained confirm that firms’ international location decision reflects the underlying dissimilarities of European multinational firms, including the specific industry in which they operate. More specifically, our estimations show that only the most productive European firms invest in Latin America and those that decide to enter North America are more productive than firms that locate in China and India. However, we find that this ranking may vary across industries, depending not only on TFP, but also on the years of establishment and the firms’ human and R&D intensity.
    Keywords: multinational firms, firm heterogeneity, location choices, European FDI
    JEL: D24 F14 F21 F23
    Date: 2015–03–05
  8. By: Karsten Neuhoff; Sophia Ruester; Sebastian Schwenen
    Abstract: We revisit key elements of European power market design with respect to both short term operation and longer-term investment and re-investment choices. For short term markets, the European policy debate focuses on the definition of common interfaces, like for example gate closure time. We argue that that this is insufficient if the market design is to accommodate for the different needs of renewable and conventional generation assets and different flexibility options. The market design needs to ensure resources are pooled over larger geographic areas, the full flexibility of different assets can be realized with complex bids and scarce network resources are efficiently used. For investment and re-investment choices we argue that different technology groups like wind and solar versus fossil fuel based generation may warrant different treatment – reflecting different level of publicly accessible information, requirements for grid infrastructure, types of strategic choices relevant for the sector and share of capital cost in overall generation costs. We discuss opportunities for such a differentiated treatment and implications for electricity consumers.
    Keywords: Power market design, regulation, investment framework
    JEL: L11 L94 G32
    Date: 2015
  9. By: Jay Bhattacharya (Stanford University); Vilsa Curto (Stanford University); Liran Einav (Stanford University); Jonathan Levin (Stanford University)
    Abstract: We estimate the economic surplus created by Medicare Advantage under its reformed competitive bidding rules. We use data on the universe of Medicare beneficiaries, and develop a model of plan bidding that accounts for both market power and risk selection. We find that private plans have costs around 12% below fee-for-service costs, and generate around $50 in surplus on average per enrollee-month, after accounting for the disutility due to enrollees having more limited choice of providers. Taxpayers provide a large additional subsidy, and insurers capture most of the private gains. We use the model to evaluate possible program changes.
    Date: 2014–12
  10. By: Dong, Yi; Massa, Massimo; Zhang, Hong
    Abstract: The rise of social media has encouraged guru dreams because of the low entry barrier and highly skewed distribution of public attention that characterize social media. The pursuit of guru status, however, may be achieved through information provision or cheap talk, and competition inherent to social media may incentivize participants to either process better information or express more extreme options. Using a unique dataset of blogs covering S&P 1500 stocks over the 2006-2011 period, we find evidence that social media can be informative about future stock returns but that competition distorts opinions rather than encouraging participants to process better information. In particular, competition induces exaggerated negative tones in blogs, which is unrelated to information. Our results suggest that social media may provide mixed incentives for its participants in terms of information efficiency.
    Keywords: Blogs; Competition; Information provision; Social media
    JEL: G30 M41
    Date: 2015–03
  11. By: An, Yonghong; Tang, Xun
    Abstract: We introduce a structural model of procurement auctions with incomplete contracts, where a procurer chooses an initial project specification endogenously. The contract between the procurer and the winner of the auction is incomplete in that the two parties may agree to adopt a new feasible specification later, and negotiate an additional transfer via Nash Bargaining where both parties’ disagreement values depend on the auction price. In a Perfect Bayesian Equilibrium, contractors competing in the auction take account of such incompleteness while quoting prices. We show that the model primitives are non-parametrically identified and propose a feasible estimation procedure. Using data from highway procurement auctions in California, we estimate the structural elements that determine the hold-up due to incompleteness, and infer how a contractor’s bargaining power and the mark-up in the price quoted vary with its characteristics and the features of the construction project. We also find that ignoring the existence of contract incompleteness in the structural analysis of the bidding data leads to substantial over-estimation of the mark-ups in the prices.
    Keywords: Identification, estimation, incomplete contracts, procurement auctions
    JEL: C14 D44
    Date: 2015–02
  12. By: Crawford, Gregory S; Pavanini, Nicola; Schivardi, Fabiano
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian market for small business lines of credit. We provide evidence that a bank’s optimal price response to an increase in adverse selection varies depending on the degree of competition in its local market. More adverse selection causes prices to increase in competitive markets, but can have the opposite effect in more concentrated ones, where banks trade off higher markups and the desire to attract safer borrowers. This implies both that imperfect competition can moderate the welfare losses from an increase in adverse selection, and that an increase in adverse selection can moderate the welfare losses from market power. Exploiting detailed data on a representative sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. We find evidence of adverse selection in the data, and increase it with a policy experiment to evaluate its importance. As predicted, in the counterfactual equilibrium prices rise in more competitive markets and decline in more concentrated ones, where we also observe an increase in access to credit and a reduction in default rates. Thus market power may serve as a shield against the negative effects of an increase in adverse selection.
    Keywords: assymetric information; credit markets; imperfect competition; lending markets
    JEL: G14 G21 L13
    Date: 2015–03
  13. By: Raymond W.; Plotnikova T. (UNU-MERIT)
    Abstract: This paper revisits the competition-innovation relationship using an unbalanced panel of enterprise data stemming from four waves of the Luxembourgish innovation survey for the period 2002-2010. We estimate by full-information maximum likelihood a nonlinear dynamic simultaneous-equations model with pseudo-fixed effects using four measures of perceived competition and three indicators of innovation and find that firms whose main market is characterised by rapid obsolescence of products are more likely to spend on innovation and to introduce product or process innovations. We also find that these firms also often consider their main market to be characterised by rapidly-changing technologies where higher competition also implies higher innovation.
    Keywords: Multiple or Simultaneous Equation Models: Models with Panel Data; Longitudinal Data; Spatial Time Series; Multiple or Simultaneous Equation Models: Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Innovation and Invention: Processes and Incentives; Management of Technological Innovation and R&D; Technological Change: Government Policy;
    JEL: O31 O32 O38 C33 C35
    Date: 2015

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