nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒03‒22
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. Quality Improvement and Process Innovation in Monopoly: A Dynamic Analysis By Luca Lambertini; Raimondello Orsini
  2. Behaviour Based Price Discrimination with Cross-Group Externalities By Elias Carroni
  3. Local advertising externalities and cooperation in one manufacturer-two retailers channel with exogenous marginal profits By Dridi, Dhouha; Ben Youssef, Slim
  4. A Simple Model of Price Dispersion and Price Rigidity By Randall Wright; Guido Menzio; Kenneth Burdett
  5. Asymmetric price adjustments: A supply side approach By Antoniou, Fabio; Fiocco, Raffaele; Guo, Dongyu
  6. Long-term Relationships: Static Gains and Dynamic Inefficiencies By Hemous, David; Olsen, Morten
  7. Multi-Firm Mergers with Leaders and Followers By Gamal Atallah
  8. On the economics of the "meeting competition defense" under the Robinson-Patman Act By Aguirre Pérez, Iñaki
  9. Tacit Collusion – The Neglected Experimental Evidence By Christoph Engel
  10. Online Shopping and Platform Design with Ex Ante Registration Requirements By Florian Morath; Johannes Münster
  11. Information and Online Reviews By O. Loginova; A. Mantovani
  12. Search Duplication in Research and Design Spaces - Exploring the Role of Local Competition By Kai A. Konrad
  13. Patent Purchase as a Policy for Pharmaceuticals By Ben van Hout; Jolian McHardy; Aki Tsuchiya
  14. The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program By Kate Ho; Joseph Hogan; Fiona Scott Morton
  15. Comparing the Costs of Vertical Separation, Integration, and Intermediate Organisational Structures in European and East Asian Railways By Fumitoshi Mizutani; Andrew Smith; Chris Nash; Shuji Uranishi
  16. Price Movements of the Competing Airlines in the Indian Market: An Empirical Study (A) By Dutta, Goutam; Santra, Sumitro
  17. Is zero the best price? Optimal pricing of mobile applications By Buck, Christoph; Graf, Julia
  18. Can a Platform Make Profit with Consumers' Mobility? A Two-Sided Monopoly Model with Random Endogenous Side-Switching By Pierre ANDREOLETTI; Pierre GAZE; Maxime MENUET
  19. Competition, Selectivity and Innovation in the Higher Educational Market By Lynne Pepall; Dan Richards
  20. Hotelling competition and teaching efficiency of Italian university faculties. A semi-parametric analysis By Angela Stefania Bergantino; Claudia Capozza; Francesco Porcelli
  21. Consumer Search and Prices in the Automobile Market By Moraga-González, José-Luis; Sándor, Zsolt; Wildenbeest, Matthijs
  22. ’Make or Buy’ as Competitive Strategy: Evidence from the Spanish Local TV Industry By Christian Ruzzier; Ricard Gil
  23. Does Competition Spur Innovation in Developing Countries? By Roberto Alvarez; Rolando Campusano

  1. By: Luca Lambertini (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy); Raimondello Orsini (Department of Economics, University of Bologna, Italy)
    Abstract: We investigate the R&D portfolio of a monopolist investing in cost-reducing and quality enhancing R&D. Incentives along the two directions are inversely related to the size of market demand, and independent of each other. The stability analysis shows the existence of a unique stable steady state equilibrium, which is a saddle point. Finally, we show that the monopolist undersupplies product quality as compared to the social optimum, while its investment in the abatement of marginal cost is socially efficient.
    Date: 2015–03
  2. By: Elias Carroni (CERPE, University of Namur)
    Abstract: This article studies the effects of Behaviour-Based Price Discrimination (BBPD) in a horizontally and vertically differentiated duopoly. In a two-period model, firms are allowed to condition their pricing policies on the past purchase behaviour of consumers. The paper shows two different types of equilibria depending on the strength of vertical differentiation. If the difference in quality is small enough, both firms steal each other’s con- sumers and suffer a situation in which prices and profits are lower and the consumer surplus increases. When quality differentials are instead substantial, asymmetric behaviours arise: the high-quality firm sells its product to few consumers at a high price in the first period and then becomes aggressive in the second one. As a consequence, customers only move from the low-quality to the high-quality firm. If consumers are myopic, the ODS scenario is detrimental for them and beneficial for firms in relation to uniform pricing. If instead consumers are forward-looking, they and the low-quality firm are better off and the high-quality firm is worse off when BBPD is viable.
    Keywords: Competitive BBPD, Vertical Differentiation, Switching
    JEL: L1 D4
    Date: 2015–01
  3. By: Dridi, Dhouha; Ben Youssef, Slim
    Abstract: Game theory is a relevant and powerful tool for analyzing strategic interactions in a supply chain in which the decision of each player affect the payoff of other players. In order to relax the classical two supply chain members’ situation to a three supply chain members’ situation and to integrate the problem of competition at retail level, we consider a supply chain consisting of a monopolistic manufacturer and two duopolistic retailers. The latter two are geographically related. Our paper examines the optimal decisions on advertising (local, national and cooperative advertising) in a centralized and a decentralized supply chain using Stackelberg – Cournot game, Stackelberg - Collusion game and Cooperative games, and we investigate the impact of the existing of competition at retail level, the retailer coalition and the cooperation between all supply chain members’ on the channel members’ optimal decisions, on the sales volume and on the profits. Applying the equilibrium analysis and using numerical example, comparing results indicates that all advertising, the sales volume of each member and the total profit in the centralized decision-making are larger than those in the decentralized decision-making. Retailer coalition harms themselves (in terms of profit) despite the increasing of sales, but is beneficial to the manufacturer. We identify also the feasible solutions of the best cooperative advertising scheme that members are interesting in cooperation.
    Keywords: Game theory; Cooperative advertising; Supply chain coordination; Retail competition, retail coalition
    JEL: C7 M3
    Date: 2015–03–08
  4. By: Randall Wright (U Wisconsin); Guido Menzio (University of Pennsylvania); Kenneth Burdett (UPenn)
    Abstract: There are two facts about the world that we take as given: First the "law of one price" is false – one can find many different prices for what appears to be, beyond reasonable doubt, the same good. Second, prices are set in nominal terms and appear, beyond reasonable doubt, to be sticky – some sellers keep their prices rigid when the aggregate price level increases. We shown these phenomena emerge naturally together in a search model. In contrast to theories that assume nominal price rigidities, when they are endogenous, they cannot be exploited by monetary policy, even though money is not neutral. The object of this study is to explain the above in a tractable model of money and search.
    Date: 2014
  5. By: Antoniou, Fabio; Fiocco, Raffaele; Guo, Dongyu
    Abstract: Using a model of dynamic price competition, this paper provides an explanation from the supply side for the well-established observation that retail prices adjust faster when input costs rise than when they fall. The opportunity of profitable storing for the next period induces competitive firms to immediately increase their prices in anticipation of higher future input costs. This relaxes competition and firms earn positive profits. Conversely, when input costs are expected to decline, firms adjust their prices only after a cost reduction materializes, and the firms' incentives for price undercutting lead to the standard Bertrand outcome.
    Keywords: Asymmetric price adjustments; Bertrand-Edgeworth competition; Storage; Gasoline
    JEL: D4 L1
    Date: 2015–03
  6. By: Hemous, David; Olsen, Morten
    Abstract: Do contractual frictions matter when firms are engaged in repeated interactions? This paper argues that long-term relationships, which allow firms to (partly) overcome the static costs associated with low contractibility, will under certain circumstances create dynamic inefficiencies. We consider the repeated interaction between final good producers and intermediate input suppliers, where the provision of the intermediate input is noncontractible. A producer/supplier pair can be a good match or a bad match, with bad matches featuring lower productivity. This allows us to build a cooperative equilibrium where producers can switch suppliers and start cooperation immediately with new suppliers. Every period, one supplier has the opportunity to innovate, and in the baseline model, innovations are imitated after one period. We show that (i) innovations need to be larger to break up existing relationships in the cooperative equilibrium than in either a set-up where the input is contractible or when we preclude cooperation in long-term relationships, (ii) the rate of innovation in the cooperative equilibrium is lower than in the contractible case, and may even be lower than in the non-cooperative equilibrium and (iii) cooperation may reduce welfare. Next, we assume that the frontier technology diffuses slowly to suppliers (instead of after one period). In that case, for sufficiently slow diffusion, the innovation rate in the cooperative equilibrium may be higher than even in the contractible case. Finally, we show that cooperation may also increase relationship specific innovations.
    Keywords: contractibility; innovation; relational contract; repeated game
    JEL: C73 K12 L14 O31 O43
    Date: 2015–03
  7. By: Gamal Atallah (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper analyzes mergers involving several leaders and followers in Stackelberg models, with the merged entity acting as a leader. Adding a follower to a merger increases its profitability or reduces its losses. A merger between one leader and any number of followers is always profitable. When a merger involves two leaders, it requires a sufficiently large proportion of followers to participate in it to be profitable. A merger is less likely to be profitable when the number of participating leaders is intermediate and the number of participating followers is small. All mergers involving leaders and followers are welfare reducing. Overall, Stackelberg leadership partially alleviates the merger paradox.
    Keywords: Fusions, Profitabilité des fusions, Paradoxe des fusions, Stackelberg, Meneurs, Suiveurs
    JEL: D43 L13
    Date: 2015
  8. By: Aguirre Pérez, Iñaki
    Keywords: meeting competition defense, robinson-patman act, social welfare, price discrimination
    JEL: D42 L12 L13
    Date: 2015–02
  9. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Both in the US and in Europe, antitrust authorities prohibit merger not only if the merged entity, in and of itself, is no longer sufficiently controlled by competition. The authorities also intervene if, post merger, the market structure has changed such that "tacit collusion" or "coordinated effects" become disturbingly more likely. It seems that antitrust neglects the fact that, for more than 50 years, economists have been doing experiments on this very question. Almost any conceivable determinant of higher or lower collusion has been tested. This paper standardises the evidence by way of a meta-study, and relates experimental findings as closely as possible to antitrust doctrine.
    JEL: D43 K21 L13 L41 C91 D22
    Date: 2015–01
  10. By: Florian Morath; Johannes Münster
    Abstract: We study platform design in online markets in which buying involves a (non-monetary) cost for consumers caused by privacy and security concerns. Firms decide whether to require registration at their website before consumers learn the price and all relevant product information. We show that a monopoly seller requires ex ante registration in equilibrium if and only if the consumersÂ’registration cost is sufficiently low. This result extends to the case of price competition. We also show that discounts (store credit) can increase the share of consumers who register and hence a firm's profit even though discounts affect the equilibrium price.
    Keywords: E-commerce, Privacy concerns, Security concerns, Registration cost, Platform design, Price competition, Information
    JEL: D42 D43 D82 D83 L81
    Date: 2014–12
  11. By: O. Loginova; A. Mantovani
    Abstract: Online review aggregators, such as TripAdvisor, HotelClub and OpenTable help consumers identify the products and services that best match their preferences. The goal of this study is to understand the impact of online review aggregators on firms and consumers. We adopt Salop’s circular city model in which consumers initially do not know the locations of the firms in the product space. The firms decide whether or not to be listed on an online review aggregator’s website and choose their prices. When a firm resorts to the aggregator, its location and price become observable to the consumers who visit the website. We consider two different scenarios, depending on the possibility for online firms to offer discounts to the consumers who book online. We show that in equilibrium not all firms will go online – some will remain offline. Online firms attract more customers than their offline counterparts due to reduced mismatch costs, but face a tougher price competition. Comparing the equilibrium prices, profits and the number of firms that go online across the scenarios, we derive interesting conclusions from the private and the social standpoints.
    JEL: C72 D43 D61 L11 L13 M31
    Date: 2015–03
  12. By: Kai A. Konrad
    Abstract: Clustering and lack of sufficient diversification in research strategies has been identified as an important problem for delegated research as it takes place in design contests by Erat and Krishnan (2012). We show that this problem can be solved by local competition (such as bribery, lobbying or rent seeking) among players who apply the same search strategies or develop the same design. Such competition can restore full efficiency in the non-cooperative equilibrium. Local competition interacts with the choice of whether to cluster or to diversify, and rather than adding a further inefficiency to the existing ones, it eliminates inefficiency. The results are robust and hold under simultaneous search strategy choices as well as for sequential choices.
    Keywords: Delegated research, clustering, product design, design contest, search strategy, rent-seeking
    JEL: O32 O33 D72 D74
    Date: 2014–10
  13. By: Ben van Hout (Health Economics and Decision Science, School of Health and Related Research, University of Sheffield); Jolian McHardy (Department of Economics, University of Sheffield); Aki Tsuchiya (Health Economics and Decision Science, School of Health and Related Research, University of Sheffield)
    Abstract: We consider a proposal for pharmaceutical patenting policy: namely, for society to grant and purchase the patent of the first of a new class of drug, instead of purchasing the drug, and award no further patents to runner-up drugs, producing or licensing production with price set to maximise welfare subject to cover costs. It is often observed that when the first of a new class of drugs is patented, it does not necessarily halt the development of a second and a third drug of the same class. The result may be a number of rugs with similar efficacy at similar prices well above the production costs. Where this happens, society could substantially reduce the cost of duplicated R&D and the price of the drug by buying the first patent. This would benefit more patients and produce larger health gains. Under this policy social welfare is increased, the winner is fully compensated, while the runner-up firm incurs possible losses - but there are viable conditions under which firms would not lose on average. We take a drug life-cycle approach to the welfare gains of a patent purchase policy. The results are generated based upon a number of stylised facts regarding R&D in the pharmaceutical industry.
    Keywords: Patent Purchase; Pharmaceuticals; Life-Cycle; Welfare
    JEL: D4 L5 O3
    Date: 2015–03
  14. By: Kate Ho; Joseph Hogan; Fiona Scott Morton
    Abstract: Medicare Part D presents a novel privatized structure for a government pharmaceutical benefit. Incentives for firms to provide low prices and high quality are generated by consumers who choose among multiple insurance plans in each market. To date the literature has primarily focused on consumers, and has calculated how much could be saved if they chose better plans. In this paper we take the next analytical step and consider how plans will adjust prices as consumer search behavior improves. We use detailed data on enrollees in New Jersey to demonstrate that consumers switch plans infrequently and imperfectly. We estimate a model of consumer plan choice with inattentive consumers. We then turn to the supply side and examine insurer responses to this behavior. We show that high premiums are consistent with insurers profiting from consumer inertia. We use the demand model and a model of firm pricing to calculate how much lower Part D program costs would be if consumer inattention were removed and plans re-priced in response. Our estimates indicate that consumers would save $536 each, and the government would save $550 million total over three years, when firms' choice of markup is taken into account. Cost growth would also fall: by the last year of our sample government savings would amount to 8.2% of the cost of subsidizing the relevant enrollees.
    JEL: I11 L10 L11
    Date: 2015–03
  15. By: Fumitoshi Mizutani (Graduate School of Business Administration, Kobe University); Andrew Smith (Institute for Transport Studies, University of Leeds); Chris Nash (Institute for Transport Studies, University of Leeds); Shuji Uranishi (Graduate School of Economics, Osaka City University)
    Abstract: There is a major policy debate within Europe and more widely on how to structure railway systems to enhance competition, whilst minimising costs. This is the first study in the academic literature to examine, using econometric methods, the cost impacts of three different approaches to structuring railway systems: vertical separation, vertical integration and the intermediate holding company model. Our analysis is based on a panel of European and East Asian railways (1994-2010). We find that the optimal railway structure depends on the intensity and type of traffic running on the network. Our research suggests that, at least on cost grounds, countries should be free to choose between vertical integration, the holding company model or vertical separation.
    Keywords: Vertical Separation, Holding Company, Horizontal Separation, Competition, Railway, Cost
    Date: 2014–11
  16. By: Dutta, Goutam; Santra, Sumitro
    Abstract: In this paper, we analyze the price movements of the Indian domestic airline industry. In the first part, we conduct a detailed econometric analysis of five selected domestic routes. In the second part, we study the weekend effect on the average airfare. Our research suggests that competition steps up airfares as the departure date comes closer and weekend airfares are higher than weekday airfares. The application of Revenue Management and Dynamic Pricing is the common practice in the Indian domestic airlines industry.
  17. By: Buck, Christoph; Graf, Julia
    Abstract: [Introduction ...] This leads us to our major research question: How to optimally set prices of mobile applications depending on their utility-classification? Each of the following chapters sequentially contributes to the answer of this question. Chapter 2 focuses on the managerial relevance of pricing and the specific characteristics of mobile applications. In chapter 3, we develop a model for mobile application pricing and derive advises for profit-maximizing mobile application pricing. The article closes with a discussion and conclusion in chapter 4.
    Keywords: Optimal Pricing,Mobile Applications,Apps,Price
    Date: 2015
  18. By: Pierre ANDREOLETTI; Pierre GAZE; Maxime MENUET
    Date: 2015
  19. By: Lynne Pepall; Dan Richards
    Abstract: Recent innovations in digital learning and web-based technologies have enabled scalability in educational services that has previously not been feasible presenting a potential disruption in traditional higher education markets. This paper explores the impact of these innovations in a vertically differentiated higher educational market with both selective and nonselective institutions. Selective institutions are characterized by peer effects and a revenue model that assures quality. Nonselective institutions have open admissions and are tuition driven. Students differ in their ability to benefit from educational services. We describe how selective and non-selective institutions compete for students through tuition and admission criteria and how free non-credentialed educational services such as MOOCs affect the market equilibrium. Our model also helps explain why selective institutions are the main proprietors of MOOCs.
    Keywords: Higher Education, Vertical Differentiation, Network Effects
    JEL: D43 I23
  20. By: Angela Stefania Bergantino (Università degli Studi di Bari Aldo Moro); Claudia Capozza (Università degli Studi di Bari Aldo Moro); Francesco Porcelli (SOSE – Soluzioni per il Sistema Economico S.p.A.)
    Abstract: In this paper we explore the effect of competition (à la Hotelling) on teaching efficiency of the Italian university system at faculty-level, over the period 2004 to 2008. The analysis is performed in two stages. First, we use Data Envelopment Analysis (DEA) to calculate an index of teaching efficiency. Second, a parametric approach is used to evaluate the determinants of teaching efficiency, focusing on the impact of competition. Our results are in favour of competition: when faculties operate in a more competitive environment, they are induced to carry out teaching activity in a more efficient way.
    Keywords: teaching efficiency, competition, two step DEA analysis
    JEL: A2 L13
  21. By: Moraga-González, José-Luis; Sándor, Zsolt; Wildenbeest, Matthijs
    Abstract: In many markets consumers have imperfect information about the utility they derive from the products that are on offer and need to visit stores to find the product that is the most preferred. This paper develops a discrete-choice model of demand with optimal consumer search. Consumers first choose which products to search; then, once they learn the utility they get from the searched products, they choose which product to buy, if any. The set of products searched is endogenous and consumer specific. Therefore imperfect substitutability across products does not only arise from variation in their characteristics but also from variation in the costs of searching them. We apply the model to the automobile industry. Our search cost estimate is highly significant and indicates that consumers conduct a limited amount of search. Estimates of own- and cross-price elasticities are lower and markups are higher than if we assume consumers have full information.
    Keywords: automobiles; consumer search; demand and supply; differentiated products
    JEL: C14 D83 L13
    Date: 2015–03
  22. By: Christian Ruzzier (Department of Economics, Universidad de San Andres); Ricard Gil (Johns Hopkins Carey Business School)
    Abstract: This paper empirically investigates whether changes in product market competition affect firm boundaries. Exploiting regulation-induced shocks to entry barriers and differences in regulation enforcement across cities to obtain exogenous variation in competition, we establish a negative causal effect of competition (through reduced entry barriers and a larger number of rival firms) on vertical integration in the setting of the Spanish local television industry between 1995 and 2002.
    Keywords: competition, vertical integration, Spanish television
    JEL: D22 L22 L24 L82
    Date: 2015–02
  23. By: Roberto Alvarez; Rolando Campusano
    Abstract: Using the Climate Investment Survey from the World Bank, we analyze the effect of competition on technological innovation in developing countries. We deal with endogeneity of competition by using the interaction between industry turnover and entry regulation as an instrument. The basic idea for this instrument is that entry regulations have a negative and more pronounced effect on competition in those industries with more natural turnover. Our results indicate a negative impact of competition on several measures of innovation outputs and inputs, which are robust across industries and using alternative measures of competition.
    Date: 2014–06

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