nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒04‒11
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Toward a theory of monopolistic competition By PARENTI, Mathieu; USHCHEV, Philip; THISSE, Jacques-François
  2. Oligopolistic vs. monopolistic competition: do intersectoral effects matter? By d’ASPREMONT, Claude; DOS SANTOS FERRERIA, Rodolphe
  3. Horizontal and Vertical Firm Networks, Corporate Performance and Product Market Competition By Bischoff, Oliver; Buchwald, Achim
  4. Empire-building and Price Competition By Pietri, Antoine; Tazdaït, Tarik; Vahabi, Mehrdad
  5. Revealing incentives for Compatibility Provision in Vertically differentiated Network Industries By Filomena Garcia; Cecilia Vergari
  6. Loss Aversion and the Uniform Pricing Puzzle for Vertically Differentiated Products By Courty, Pascal; Nasiry, Javad
  7. On Vertical Relations and Technology Adoption Timing By Maria Alipranti; Chrysovalantou Miliou; Emmanuel Petrakis
  8. A Quantal Response Model of Firm Competition By Ellis Scharfenaker
  9. Offshoring under Oligopoly By Mitsuru Igami
  10. Denying Leniency to Cartel Instigators: Costs and Benefits By Zhiqi Chen; Subhadip Ghosh; Thomas W. Ross
  11. Optimal enforcement of competition policy : the commitments procedure under uncertainty By GAUTIER, Axel; PETIT, Nicolas
  12. Discovering the Miracle of Large Numbers of Antitrust Investigations in Russia: The Role of Competition Authority Incentives By Svetlana Avdasheva; Dina Tsytsulina; Svetlana Golovanova; Yelena Sidorova
  13. Dynastic Entrepreneurship, Entry, and Non-Compete Enforcement By James Rauch
  14. Bundled procurement By Chen, Yongmin; Li, Jianpei
  15. Sequential English Auctions: A Theory of Opening-bid …Fishing By Joseph Uri Podwol
  16. Role of reinvestment in a competitive market By Jose S. Cánovas; Anastasiia Panchuk; Tonu Puu
  17. R&D Spillovers Effects on strategic behaviour of Large International Firms By Aldieri, Luigi; Aprile, Maria Carmela; Vinci, Concetto Paolo
  18. Competing one-way essential complements: the forgotten side of net neutrality By Broos, Sébastien; Gautier, Axel
  19. A Game Theoretic Framework for Competing/Cooperating Retailers under price and advertising dependent demand By Dridi, Dhouha; Ben Youssef, Slim
  20. Health Insurance and Competition in Health Care Markets By Gilad Sorek
  21. Retail Agglomeration and Competition Externalities: Evidence from Openings and Closings of Multiline Department Stores in the US By John M. Clapp; Stephen L. Ross; Tingyu Zhou

  1. By: PARENTI, Mathieu (Université catholique de Louvain, CORE, Belgium; NRU-Higher School of Economics, Russia); USHCHEV, Philip (NRU-Higher School of Economics, Russia); THISSE, Jacques-François (Université catholique de Louvain, CORE, Belgium; NRU-Higher School of Economics, Russia; CEPR)
    Abstract: We propose a general model of monopolistic competition, which encompasses existing models while being flexible enough to take into account new demand and competition features. The basic tool we use to study the market outcome is the elasticity of substitution at a symmetric consumption pattern, which depends on both the per capita consumption and the total mass of varieties. We impose intuitive conditions on this function to guarantee the existence and uniqueness of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shock are characterized through necessary and sufficient conditions. Finally, we show how our approach can be generalized to the case of a multisector economy and extended to cope with heterogeneous firms and consumers.
    Keywords: monopolistic competition, general equilibrium, additive preferences, homothetic preferences
    JEL: D43 L11 L11 L13
    Date: 2014–11–18
  2. By: d’ASPREMONT, Claude (CORE, UniversitéCatholique de Louvain, Voie du Roman Pays 34, B-1348 Louvain-la-Neuve, Belgium); DOS SANTOS FERRERIA, Rodolphe (BETA, Université de Strasbourg, France, and FCEE, Universidade Cataolica Portuguesa, Lisbon, Portugal)
    Abstract: Recent extensions of the standard Dixit-Stiglitz (1977) model, that go beyond the CES sub-utility assumption, while maintaining monopolistic competition, have mainly emphasized the role of iintrasectoral substitutability. We argue that introducing oligopolistic competition can be an alternative extension, still tractable, allowing to restore the role of intersectoral substitutability and reinforcing the general equilibrium dimension of the model. For this purpose, we use the concept of oligopolistic equilibrium and derive a comprehensive formula to characterize the set of potential equilibria with varying competitive toughness. For two particular competitive regimes, price competition and quantity competition, we show how, with strategic interactions, procompetitive or anti-competitive effects now depend on the elasticity of intersectoral substitution as compared to the elasticity of intrasectoral substitution.
    Keywords: monopolistic competition, oligopolistic competition, general equilibrium, intersectoral substitution
    JEL: D43 D51 L13
    Date: 2015–02–02
  3. By: Bischoff, Oliver; Buchwald, Achim
    Abstract: This paper sheds new light on the assessment of firm networks via multiple directorships in terms of corporate firm performance. Using a large sample of European listed firms in the period from 2003 to 2011 and system GMM we find a significant compensation effect on corporate firm performance for the initial negative effect of horizontal multiple directorships by product market competition. In markets with effective competition, horizontal multiple directorships turn out to be an efficient mechanism to increase firm performance and thus assure competitive advantages. By contrast, linkages between up- and downstream firms have no significant influence on financial performance, irrespective of the level of competition intensity.
    Keywords: Horizontal and Vertical Firm Networks, Multiple Directorships, Corporate Governance, Product Market Competition, Dynamic Panel
    JEL: C23 G32 G34 L14 L25 L40
    Date: 2015–04–01
  4. By: Pietri, Antoine; Tazdaït, Tarik; Vahabi, Mehrdad
    Abstract: This paper examines the relevance of price competition in the protection market in order to explain the different modes of empire-building. Our approach unravels the economic rationale of merchant empires which is not explicable with existing theoretical frameworks systematically eluding price competition. Our main contribution is to introduce a distinction between two different types of rent, namely an ‘absolute’ and a ‘differential’ one. Absolute protection rent (AR) corresponds to rents extracted by sellers of protection (empires) using threats and coercion. In contrast, differential protection rent (DR) stands for economic advantages conferred on subjects of an empire. The choice of the territorial expansion rule (AR-maximizing or DR-maximizing) depends on the nature of the protection market which is influenced by the assets structure detaining by the buyers of protection. In this paper, we build a general framework consistent with historical evidence in which coercive rivalry appears to be one case of empire-building among others (including price competition).
    Keywords: absolute and differential protection rents; sellers’ and buyers’ protection market; contest success function; coercive rivalry and price competition; merchant empire JEL classification: D74, H11, H56, P16
    JEL: D74 H11 H56 P16
    Date: 2013–09
  5. By: Filomena Garcia (Indiana University and ISEG/UECE); Cecilia Vergari (University of Bologna)
    Abstract: Abstract: We determine the incentives for compatibility provision of firms that produce network goods with different intrinsic qualities. We consider the case in which both firms have the power to veto compatibility and the case in which none has this power. We obtain that if consumers have a strong preference for the network, there are multiple equilibria in pricing and consumer decisions. We show that in some equilibria, it is the high quality firm that invests in compatibility, whereas in others, the low quality fi rm triggers compatibility. The socially optimal compatibility level is zero, except under strong network effects, where one of the equilibria has all consumers buying the low quality good. In this case, a partial level of compatibility is optimal. Comparison between the privately and the socially optimal levels of compatibility depends on whether or not rms have veto power over compatibility.
    Keywords: Compatibility, vertical
    Date: 2015–05
  6. By: Courty, Pascal; Nasiry, Javad
    Abstract: The uniform pricing puzzle for vertically differentiated products states that a monopolist sells high and low quality products at the same price despite the fact that quality is perfectly observable and that there are no significant costs of adjusting prices. The puzzle is relevant for movies, books, music, and mobile apps, among others. We show that the puzzle can be resolved by accounting for consumer loss aversion in monetary and consumption utilities and by assuming that consumers face a random utility shock. The novelty of our approach is that the reference transaction is endogenously set as part of a `personal equilibrium' and includes only past purchases of products of the same quality.
    Keywords: expectations-based loss aversion; personal equilibrium; uniform pricing puzzle; vertically differentiated products
    JEL: D03 D21 L1 L2
    Date: 2015–04
  7. By: Maria Alipranti (University of Crete); Chrysovalantou Miliou (Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126, Getafe (Madrid)); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: This paper explores how vertical relations influence the timing of new technology adoption. It shows that both the bargaining power distribution among the vertically related firms and the contract type through which vertical trading is conducted affect crucially the speed of adoption: the downstream firms can adopt later a new technology when the upstream bargaining power increases as well as when wholesale price contracts, instead of two-part tariffs, are employed. Importantly, it shows that technology adoption can take place earlier when firms obtain their inputs from external suppliers than when they produce them in-house; hence, the presence of vertical relations can accelerate the adoption of a new technology.
    Keywords: Technology adoption; vertical relations; two-part tariffs; wholesale price contracts; bargaining
    JEL: L13 O31 L22 L41
    Date: 2014–11–30
  8. By: Ellis Scharfenaker (Department of Economics, New School for Social Research)
    Abstract: The distribution of prot rates in the U.S. economy for 21,714 rms from 1962 - 2012 appears to be highly organized in a Laplace-like distribution. Pos- itive prot rate deviations from the mode appear to be remarkably stationary over time displaying little parametric changes while negative prot rate devi- ations introduce an asymmetry into the distribution that appears to uctuate over time. In this paper I propose a model of \classically" competitive rms facing informational entropy constraints in their decisions to potentially enter or exit markets based on prot rate dierentials. The result is a three parameter logit quantal response distribution for rm entry and exit decisions. Bayesian methods are used for inference into the the distribution of entry and exit deci- sions conditional on prot rate deviations and rm level data from Compustat is used to test these predictions. The model parameters show a uctuating asymmetry in rm exit decisions, an increase in dispersion of negative prot rate dierentials, and a falling general rate of prot.
    Keywords: Firm competition, Laplace distribution, Gibbs sampler, prot rate, statistical equilibrium, rational inattention, information theory, quantal response
    JEL: C10 C15 D20 D22 E10 L11
    Date: 2015–03
  9. By: Mitsuru Igami (Yale University)
    Abstract: This paper empirically investigates high-tech firms’ decisions to relocate manufacturing plants to low-cost countries. Computers and electronics have undergone sector-wide offshoring and typically feature an oligopolistic market structure, in which firms’ profits depend on their own and rivals’ costs. To incorporate the endogenous evolution of offshoring incentives and market structure, I model and estimate a dynamic offshoring game with entry/exit, using unique data on hard disk drive (HDD) manufacturers. The results suggest that due to competitive pressure, the incentives to offshore increase as more rivals offshore. I then assess the welfare impacts of government interventions and find that (1) offshoring is pro-competitive, (2) discouraging offshoring would risk the survival of domestic firms, and (3) governments in Nash equilibrium would engage in either a subsidy race to drive out foreign firms, or free-riding on foreign firms’ offshoring efforts, depending on policy objectives.   Also available via SSRN. 
    Keywords: dynamic oligopoly, Industry Life Cycle, Offshoring, Strategic Trade Policy
    JEL: F12 F14 L13
    Date: 2015
  10. By: Zhiqi Chen (Department of Economics, Carleton University); Subhadip Ghosh (Grant MacEwan University); Thomas W. Ross (Sauder School of Business, University of British Columbia)
    Abstract: A large number of countries have introduced successful leniency programs into their competition law enforcement to encourage colluding firms to come forward with evidence that will help detect cartels and punish price-fixers. This paper studies a feature of some of these programs that has received relatively little attention in the literature: the inclusion of “No Immunity for Instigators Clauses” (NIICs). These provisions deny leniency benefits to parties that instigate cartel behavior or function as cartel ringleaders. Our results show that NIICs can lead to increased or decreased levels of cartel conduct. By removing the instigator’s benefit from cooperating with the authorities, a NIIC undoes some of the destabilizing benefit the leniency program was intended to generate and thereby furthers cartel stability. On the other hand, the instigator faces an asymmetrically severe punishment under a NIIC and this can reduce the incentive to instigate in the first place.
    Keywords: antitrust, collusion, leniency programs, instigators
    JEL: L41 L12 K21
  11. By: GAUTIER, Axel (Université catholique de Louvain, CORE, Belgium); PETIT, Nicolas (University of Liege)
    Abstract: Since the introduction of a formal commitments procedure in EU an- titrust policy (Article 9 of Council Regulation 1/2003), the European Commission has extensively settled cases of alleged anticompetitive practices. In this paper, we use a formal model of law enforcement (Be- bchuk, 1984; Shavell, 1988) to identify the optimal procedure to resolve cases in a context of uncertainty related to the law (L-uncertainty) and to the facts (F-uncertainty). We show that commitments are subop- timal when L-uncertainty is important. Furthermore, the generalized use of commitments creates an additional risk of under-enforcement when F-uncertainty is significant.
    Keywords: Competition Policy, European Commission, Settlements, Commitments, Law Enforcement
    JEL: K21 K41 L40
    Date: 2014–12–01
  12. By: Svetlana Avdasheva (National Research University Higher School of Economics); Dina Tsytsulina (National Research University Higher School of Economics); Svetlana Golovanova (National Research University Higher School of Economics); Yelena Sidorova (National Research University Higher School of Economics)
    Abstract: Many antitrust investigations in Russia continue to present a challenge for the assessment of competition policy and international enforcement ratings. On the one hand, many infringement decisions may be interpreted as an indicator of high enforcement efforts in the context of rigid competition restrictions and the significant related harm to social welfare. On the other hand, many investigations proceed under poor legal and economic standards; therefore, the impact of decisions and remedies on competition is questionable. In fact, large number of investigations may indicate the ineffectiveness of antitrust enforcement. The article explains the possible effects of antitrust enforcement in Russia. Using a unique dataset of the appeals of infringement decisions from 2008-2012, we classify the investigated cases according to their potential impact on competition. A case-level analysis reveals that the majority of cases would never be investigated under an appropriate understanding of the goals of antitrust enforcement, restrictions on competition and basic cost-benefit assessments of agency activity. There are diverse explanations for the distorted structure of enforcement, including the incompleteness and imperfection of sector-specific regulations, rules concerning citizen complaints against the executive authorities and the incentives of competition authorities. Our analysis shows that competition agencies tend to pay more attention to the investigation of cases, which requires less input and, at the same time, results in infringement decisions with a lower probability of being annulled
    Keywords: antitrust enforcement, authorities’ incentives, harm, Russia
    JEL: K21 K42
    Date: 2015
  13. By: James Rauch
    Abstract: We investigate entry in a dynastic entrepreneurship (overlapping generations) environment created by employee spinoffs. Without finance constraints, enforcement of non-compete agreements unambiguously improves social welfare outcomes, and even increases the rate of spinoffs from original firms. Indeed, if employers have all the bargaining power vis-à-vis their employees, optimal entry of original firms and all subsequent employee spinoffs is achieved, despite the fact that the original firm can only negotiate with the first spinoff. However, if employees are unable to buy out their non-compete contracts, enforcement of these agreements shuts down socially profitable spinoff firms. Non-enforcement sacrifices entry of original firms that would be marginally profitable in the absence of employee spinoffs, but otherwise clearly improves social welfare outcomes over enforcement in the presence of finance constraints.
    JEL: K12 L26
    Date: 2015–04
  14. By: Chen, Yongmin; Li, Jianpei
    Abstract: When procuring multiple products from competing firms, a buyer may choose separate purchase, pure bundling, or mixed bundling. We show that pure bundling will generate higher buyer surplus than both separate purchase and mixed bundling, provided that trade for each good is likely to be efficient. Pure bundling is superior because it intensifies the competition between firms by reducing their cost asymmetry. Mixed bundling is inferior because it allows firms to coordinate to the high prices associated with separate purchase. (Pure) bundling is more likely to be selected as a procurement strategy when: (i) the products' values are higher relative to their possible costs, (ii) costs for different goods are more negatively or less positively dependent, or (iii) the cost distribution of each product is more dispersed.
    Keywords: procurement, bundled procurement, separate purchase, bundling, mixed bundling
    JEL: D21 D44 L24
    Date: 2015–04–02
  15. By: Joseph Uri Podwol (Economic Analysis Group, U.S. Department of Justice)
    Abstract: Cassady (1967) describes an auction in which the auctioneer “fishes” for an opening bid, calling out lower and lower amounts until an opening bid is eventually placed. Once a bid is placed, it is not uncommon for the bidding to escalate above the initial starting price. The current study explains this puzzle in a model in which an auctioneer sells an indivisible good via English ascending-price auction and cannot commit to keeping the item off the market should the initial starting price fail to elicit any bids. A key insight of the paper is that the well-known strategy equivalence between the English auction and the second-price auction fails to extend to the sequential setting. This difference has important implications for the equilibrium starting-price path, giving rise to a Coase conjecture in the English auction but not in the second-price auction.
    Date: 2015–03
  16. By: Jose S. Cánovas (Universidad Polit Ìecnica de Cartagena, Departamento de Matematica Aplicada y Estad Ìıstica); Anastasiia Panchuk (nstitute of Mathematics, National Academy of Sciences of Ukraine); Tonu Puu (CERUM, Umea University, SE-90187 Umea, Sweden)
    Abstract: In the present work we study asymptotic dynamics of a multi-dimensional piecewise smooth map which models an oligopoly market where competitors use adaptive scheme for reaction choice. Each competitor also defines the moment for renewing the capital equipment depending on how intensively the latter is used. Namely, the larger output is produced, the quicker the capital exhausts. It is shown then that the asymptotic dynamics of the map is rather sensitive to initial conditions, which leads to coexistence of different metric attractors. We also investigate stability of trajectories representing Cournot equilibria, which in this case are not fixed but periodic points. In particular, it is shown that several such Cournot equilibria, belonging to different invariant manifolds, may coexist some of them being locally asymptotically stable and some being unstable.
    Keywords: multidimensional piecewise smooth map; coexisting metric attractors; oligopoly market model; Cournot equilibrium stability
    JEL: D41 D43 C61 C62
    Date: 2015–04
  17. By: Aldieri, Luigi; Aprile, Maria Carmela; Vinci, Concetto Paolo
    Abstract: This study contributes to existing literature on firms’ innovative activity examining the relationship between the R&D rivalry and spillovers at the firm level. In particular, we present an empirical analysis in United States, Japan and Europe based upon a new dataset composed of 879 worldwide R&D-intensive firms. In order to identify the technological proximity, we use the Jaffe industry weight matrix, based on the construction of technological vectors for each firm, where its patents are distributed across technology classes, in such a way that we compute knowledge spillovers. Opportune econometric techniques, which deal with both firm’s unobserved heterogeneity and weak exogeneity of the explanatory variables, are implemented. In order to test the robustness of our results, we introduce also the combined spatial-autoregressive model with autoregressive disturbances and additional endogenous variables. The empirical results are differentiated across countries, and suggest that the spatial effects are statistically significant
    Keywords: Spatial models; Innovation; R&D spillovers
    JEL: C31 C33 O31 R15
    Date: 2015–04
  18. By: Broos, Sébastien (Université de Liège, HEC Management School, Belgium); Gautier, Axel (Université catholique de Louvain, CORE, Belgium)
    Abstract: We analyze the incentives of internet service providers (ISPs) to break net neutrality by excluding internet applications competing with their own products, a typical example being the exclusion of VoIP applications by telecom companies offering internet and voice services. Exclusion is not a concern when the ISP is a monopoly because it can extract the additional surplus created by the application through price rebalancing. When ISPs compete, it could lead to a fragmented internet where only one firm offers the application. We show that, both in monopoly and duopoly, prohibiting the exclusion of the app and surcharges for its use –a strong form of net neutrality– is not welfare improving.
    Keywords: net neutrality, foreclosure, one-way essential complements
    JEL: L12 L13 L51 L96
    Date: 2014–12–15
  19. By: Dridi, Dhouha; Ben Youssef, Slim
    Abstract: In this paper, we develop a game theoretic model for cooperative advertising in a supply chain consisting of a monopolistic manufacturer selling its product to the consumer only through competing duopolistic retailers. We consider a new form of the demand function which is an additive form. The demand is influenced by both retail price and advertising expenditures. To identify optimal advertising and pricing decisions, we discuss three possible games (two non cooperative games including Stackelberg-Cournot and Stackelberg-Collusion, and one cooperative game) and then we compare the various decision variables and the profits for all cases and also with similar results of the existing literature to develop some important insights.
    Keywords: game theory, supply chain, pricing, advertising, cooperative advertising, retail competition, retail cooperation, cooperation.
    JEL: C7 M3
    Date: 2015–03–29
  20. By: Gilad Sorek
    Abstract: I study duopolistic market for differentiated medical products. Medical providers decide whether to sell on the spot market to sick consumers or to sell through competitive insurance market to healthy consumers. While shopping for insurance consumers know only the distribution of possible medical needs they may have if they get sick. Only when getting sick their actual medical need reveals and diagnosed. Hence consumers on the insurance market have lower taste differentiation than the sick consumers who are shopping on the spot market. I find that in equilibrium providers sell only on the insurance market, even though this intensifies competition because of lower taste differentiation. Competition between providers under insurance sales brings premiums low enough to motivate consumers buying insurance for both products. Insurance sales generate efficient horizontal product differentiation, lower prices, and efficiently higher quality.
    Keywords: Insurance; Non-linear Pricing; Option Demand; Differentiation
    JEL: I11 I13 L1
    Date: 2015–04
  21. By: John M. Clapp (University of Connecticut); Stephen L. Ross (University of Connecticut); Tingyu Zhou (Concordia University)
    Abstract: From the perspective of an existing retailer, the optimal size of a cluster of retail activity represents a trade-off between the marginal increases in consumer attraction from another store against the depletion of the customer base caused by an additional competitor. We estimate opening and closing probabilities of multi-line department stores (“anchors”) as a function of pre-existing anchors by type of anchor store (low-priced, mid-priced or high-priced) using a bias corrected probit model with county and year fixed effects. We find strong negative competitive effects of an additional same type but no effect on openings of anchors of another type.
    Keywords: Multi-line Department Stores, Shopping Centers, Openings, Closings, Bias-Corrected Probit
    JEL: D43 L1 L21 L81 R1 R3 R12 R33
    Date: 2015–04

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