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on Industrial Competition |
| By: | F. Delbono; L. Lambertini |
| Abstract: | We show that the standard argument according to which supply function equilibria rank intermediate between Bertrand and Cournot equilibria may be reversed. We prove this result within a static oligopolistic game in which both supply function competition and Cournot competition yield a unique Nash equilibrium, whereas price setting yields a continuum of Nash equilibria. There are parameter regions in which Bertrand profits are higher than Cournot ones, with the latter being higher than in the supply function equilibrium. Such reversal of the typical ranking occurs when price-setting mimics collusion. We then show that the reversal in profits is responsible for a reversal in the welfare performance of the industry. |
| JEL: | D43 L13 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp1000&r=com |
| By: | Mikael C. Bergbrant (St. John’s University); Delroy M. Hunter (University of South Florida); Patrick J. Kelly (New Economic School) |
| Abstract: | We examine the impact of product market competition on quantity-of-capital constraints in 58 countries. Prior work shows that competition increases the costs of debt and equity, which reduce the economic profit from investment. Capital constraints, however, may prevent firms from exploiting all positive NPV projects. Using econometric techniques and unique survey data, we avoid potential endogeneity problems common to the study of both capital constraints and product market competition. We show that product market competition increases capital constraints. Auxiliary analyses suggest that asymmetric information is one mechanism driving this linkage. We also show that quantity-of-capital constraints negatively impact firm growth. |
| Keywords: | capital constraints; financial constraints; credit constraints; access to finance; product market competition; bank competition; credit rationing |
| JEL: | G15 G21 G30 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0215&r=com |
| By: | Juan Carlos Carbajal (University of New South Wales); Jeffrey C. Ely (Northwestern University) |
| Abstract: | We study optimal price discrimination when a monopolist faces a continuum of consumers with reference-dependent preferences. A consumer's valuation for product quality consists of an intrinsic valuation affected by a private state signal (type), and a gain-loss valuation that depends on deviations of purchased quality from a reference point. Following Kőszegi and Rabin (2006), we consider loss-averse buyers who evaluate gains and losses in terms of changes in the consumption valuation, but in our model each buyer evaluates consumption outcomes relative to his own state-contingent reference quality level. We capture the process by which reference qualities are formed via a reference consumption plan, and use a generalization of the Mirrlees representation of the indirect utility to fully characterize optimal contracts for loss-averse consumers. We find that, depending on the reference plan, optimal price discrimination may exhibit (i) downward distortions beyond the standard downward distortions due to screening; (ii) efficiency gains relative to second best contracts without loss aversion; (iii) upward distortions above first best quality levels without loss aversion. We consider ex-ante and ex-post consistent contracts in which quality offers by the firm coincide, in expectations or at every state realization, respectively, with the reference quality levels. We find the firm's unique preferred ex-ante and ex-post consistent contract menu and specify conditions under which, for the second case, it also constitutes the consumers' preferred menu. |
| Keywords: | Price discrimination, optimal contract menus, loss aversion, reference-dependent preferences, reference consumption plan, consistent reference plans |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2015-036&r=com |
| By: | Rácz, Zoltán; Tasnádi, Attila |
| Abstract: | We determine conditions under which a pure-strategy equilibrium of a mixed Bertrand-Edgeworth oligopoly exists. In addition, we determine its pure-strategy equilibrium whenever it exists and compare the equilibrium outcome with that of the standard Bertrand-Edgeworth oligopoly with only private firms. |
| Keywords: | Bertrand-Edgeworth, mixed oligopoly |
| JEL: | D43 L13 |
| Date: | 2015–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:cvh:coecwp:2015/08&r=com |
| By: | Corrado Benassi; Marcella Scrimitore |
| Abstract: | We enquiry about the effects of first and second order stochastic dominance shifts of the distribution of the consumers’ willingness to pay, within the standard model of a market with network externalities and hump-shaped demand curve. This issue is analyzed in the polar cases of perfect competition and monopoly. We find that, while under perfect competition both types of distributional changes result in higher output, provided marginal costs are low enough, in the monopoly case the final outcome depends on the way income distribution and the network externality interact in determining market demand elasticity. |
| Keywords: | Network externalities, income distribution, stochastic dominance. |
| JEL: | D31 D40 L1 |
| Date: | 2015–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:eei:rpaper:eeri_rp_2015_05&r=com |
| By: | Aleksenko, Natalia; Kornyushin, Stanislav; Shchukin, Vladimir |
| Abstract: | In real life, we often encounter markets monopolistic competition. The main characteristic of the market of monopolistic competition is product differentiation. In this paper, we propose to consider Hotelling's "linear city model" |
| Keywords: | монополистическая конкуренция, модель Хотеллинга |
| JEL: | A12 C02 |
| Date: | 2014–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63607&r=com |
| By: | Benjamin Eden (Vanderbilt University) |
| Abstract: | I use the Prescott (1975) hotels model to explain variations in price dispersion across goods sold by supermarkets in Chicago. I extend the theory to accounts for the monopoly power of chains and for non-shoppers. The main empirical finding is that the effect of demand uncertainty on price dispersion is highly significant and quantitatively important: More than 50% of the cross sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good. |
| Keywords: | Price Dispersion, Demand Uncertainty, Sequential Trade |
| JEL: | D5 L0 |
| Date: | 2014–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-14-00011&r=com |
| By: | Andrew B. Bernard; Andreas Moxnes; Yukiko U. Saito |
| Abstract: | This paper examines the importance of buyer-supplier relationships, geography and the structure of the production network in firm performance. We develop a simple model where firms can outsource tasks and search for suppliers in different locations. Low search and outsourcing costs lead firms to search more and find better suppliers. This in turn drives down the firm's marginal production costs. We test the theory by exploiting the opening of a high-speed (Shinkansen) train line in Japan which lowered the cost of passenger travel but left shipping costs unchanged. Using an exhaustive dataset on firms' buyer-seller linkages, we find significant improvements in firm performance as well as creation of new buyer-seller links, consistent with the model. |
| JEL: | D22 D85 F14 L10 L14 R12 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21082&r=com |
| By: | Eduardo P. S. Fiuza |
| Abstract: | While often times the Hypothetical Monopolist Test (HMT) utilized in relevant market delineation is implemented with uniform price increases throughout all the goods in the candidate relevant market, since 1984 the versions of the U.S. Merger Guidelines have emphasized that these small but significant and non-transitory increase in prices (SSNIP) should be profit-maximizing, what would result in uniform increases only under very particular conditions. Such increases could then be analyzed–sufficient data existing for such–in the same manner as the simulations of unilateral effects of mergers, introduced in the 1980s and further developed in the 1990s. Thus, in this article, building on structural models of demand and supply and on recent contributions to the literature, we propose a unified framework for merger simulations and for the so-called HMT in its diversity of versions implemented in various countries along the years, and we better detail their differences. To illustrate those differences, we report the results of a Monte Carlo experiment using three demand specifications: isoelastic, linear and linearized Almost Ideal Demand System (AIDS), all of them in a two-stage budget setting. We conclude that the choice of the test version and of the demand specification may affect significantly the size of the relevant market found, depending on the distribution and magnitude of cross and own price elasticities in the potential market. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:0185&r=com |
| By: | Shcherbakov, Oleksandr; Wakamori, Naoki |
| Abstract: | Proportional reduction is a common cartel practice, in which cartel members reduce their output by the same percentage. We develop a simple method to quantify this reduction relative to a benchmark market equilibrium scenario. Our measure is continuous, has a simple interpretation as the “degree of collusion" and nests the earlier models in the existing literature. More importantly, by exploiting firms ex post heterogeneity and optimality conditions, Corts (1999) critique can be addressed by estimating time-varying degree of industry monopolization from a short panel of firm-level observations. We illustrate the method in Monte-Carlo simulations and in application to the data from the Joint Executive Committee railroad cartel. |
| Keywords: | Cartel; Proportional Reduction; Degree of collusion |
| JEL: | D22 L41 C36 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:497&r=com |
| By: | Oechssler, Jörg; Roomets, Alex; Roth, Stefan |
| Abstract: | In oligopoly, imitating the most successful competitor yields very competitive outcomes. This theoretical prediction has been confirmed experimentally by a number of studies. A recent paper by Friedman et al. (2015) qualifies those results in an interesting way: while they replicate the very competitive results for the first 25 to 50 periods, they show that when using a much longer time horizon of 1200 periods, results slowly turn to more and more collusive outcomes. We replicate their result for duopolies. However, with 4 firms none of our oligopolies becomes permanently collusive. Instead, the average quantity always stays above the Cournot-Nash equilibrium quantity. Thus, it seems that “four remain many” even with 1200 periods. |
| Keywords: | imitation; experiment. |
| Date: | 2015–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0588&r=com |
| By: | Eduardo P. S. Fiuza; Fabiana F. M. Tito |
| Abstract: | In Brazil, mergers and acquisitions are usually analyzed by the Antitrust Authorities ex post, following a SCP framework close to the Merger Guidelines applied in the USA. However, this framework was unable to address a set of acquisitions of four mining companies by the newly privatized national champion CVRD. The present article reports an econometric exercise undertaken by the Brazilian Ministry of Justice, which came to reinforce the definition of the relevant geographic market and to test for structural breaks in the price series. Though international prices Grangercaused domestic prices in Brazil, they explain less than a third of the variance. A price surge on the acquired miners’ series was observed above the export price increase not long after the acquisitions, such that a structural break could not be rejected. No Brasil, fusões e aquisições normalmente são analisadas ex-post pelo Sistema Brasileiro de Defesa da Concorrência, seguindo um arcabouço de Estrutura-Conduta-Desempenho próximo ao aplicado nos Estados Unidos. Entretanto, esse arcabouço não era suficiente para tratar da série de quatro aquisições de mineradoras pela recémprivatizada Companhia Vale do Rio Doce (CVRD), considerada uma “campeã nacional”. Este artigo relata um exercício econométrico desenvolvido na Secretaria de Direito Econômico (SDE) do Ministério da Justiça que veio reforçar a definição de mercado relevante geográfico e testar quebras estruturais nas séries de preços. Apesar de que os preços internacionais causaram (no sentido de Granger) preços domésticos no Brasil, eles explicam menos de 1/3 da variância. Foi observado um repique nas séries de preços das mineradoras adquiridas acima da variação do preço de exportação, pouco depois das aquisições, quando então não foi rejeitada uma quebra estrutural. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:0182&r=com |
| By: | Svensson, Roger (Research Institute of Industrial Economics (IFN)) |
| Abstract: | Firms and governments spend billions of dollars on R&D every year. To increase social welfare, the results of R&D must be commercialized so that consumers can benefit from improved products and lower prices. One measure of R&D output is patents; however, most patent databases contain no information on whether patents have been commercialized, i.e., whether innovations have been introduced in the market. This paper applies a new method to identify innovations in patent databases by relating traditional patent quality indicators (patent renewal, patent equivalents and forward citations) to patent commercialization variables. For this purpose, I use a unique database on Swedish patents that includes information on whether patents are commercialized and whether the commercialization is profitable. The estimations show that commercialization is strongly positively correlated with both patent renewal and patent equivalents but only moderately positively correlated with forward citations. Further, successful innovations are most positively related to patent renewal. Based on the traditional patent quality indicators and estimated parameters in the model, probabilities of commercialization and successful innovations can be predicted. The developed parameters may be used to identify innovations across sectors and regions in other patent databases. |
| Keywords: | Patents; Commercialization; Innovations; Profitability; Patent renewal; Patent equivalents; Forward citations; Predicted probabilities |
| JEL: | O31 O34 |
| Date: | 2015–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1067&r=com |
| By: | Justyna Kufel (Institute of Agricultural and Food Economics – National Research Institute) |
| Abstract: | Agri-food sectors are commonly considered as highly regulated, traditional and of strategic importance, mainly due to the food security issues. Changes in the related market structures are subject of constant interest because of their importance for competition and economic welfare of food producers and consumers. In Poland, a rising concentration among various branches of the food industry can be observed. The main objective of the article was to depict the changes of the market power execution in the Polish food sector and its branches in the period 2002-2013. As a measure of this phenomenon the markups of price above the marginal cost were applied and for their estimation two methods were used, namely the Roeger method involving primal and dual Solow residuals and the method based on the marginal cost of labor. Yearly data for 32 food sector branches and various accounting categories were used in the calculations. It was found that in the analyzed period the markup over marginal cost on average amounted to 10.4% and it was increasing over time. The labor input category seemed to be not sufficient for the markup calculation. The evolution of the monopolistic power in the Polish food sector appears to be associated not only with the business cycle, but also with the sector developments accelerated by the accession to the EU. Moreover, the differences in results for the branches indicate a considerable heterogeneity in the Polish food industry companies pricing practices. |
| Keywords: | markups fluctuations; Polish food sector; market power |
| JEL: | L11 L66 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pes:wpaper:2015:no69&r=com |
| By: | Tomasz Kijek (University of Life Sciences in Lublin) |
| Abstract: | This paper tries to find how firms use IPRs in the form of patents to protect innovation capital and find determinants of their effectiveness. The research is based on a large sample of 2960 Polish manufacturing firms that were engaged in developing and/or implementing a product or process innovation in the years 2010-2012. Besides descriptive statistics which show firms’ attitudes toward the effectiveness of patents and their determinants, I apply the knowledge production functionto find a link between patent propensity, R&D and innovation performance. Descriptive analyses show that Polish manufacturing firms rarely use patents as the appropriability mechanism which results in the low level of their perceived effectiveness. It also turns out that the perceived effectiveness of a patent depends on a firm’s size, theinnovation type and technological opportunities. In turn, the results of the knowledge production function estimationallow me to conclude that an increase in patent propensity affects the firm’s innovation performancepositively. |
| Keywords: | innovation capital;appropriability mechanism; intellectual property rights;patent;knowledge production function |
| JEL: | O31 O34 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pes:wpaper:2015:no60&r=com |
| By: | Tim Burnett |
| Abstract: | This paper empirically analyses the impact of the bundling of four common home communication services with a single supplier on the probability that an individual changes supplier using a survey-elicited dataset of 2,871 individuals. Implementing a random effects probit approach to control for individual heterogeneity, the results strongly show that when individuals bundle their service then they are significantly less likely to change supplier. A second result indicates that service- and supplier- related variables are better predictors of an individual's likelihood of switching than are the characteristics of the individual, suggesting that future research in this area should prioritise their inclusion. |
| Keywords: | Bundling, Consumers, Panel-data, Regulation, Switching, telecommunications |
| JEL: | C3 C5 D1 L5 L8 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:14/321&r=com |
| By: | Tomasz Galewski (Wroclaw University of Economics) |
| Abstract: | Until recently, Internet was considered as technology that will make the trade in goods frictionless. Online retailers’ margins were to fall to zero and prices - according to theory of economics - were to equalize as a result of buyers comparing prices more easily (e.g. using shop bots). Empirical research performed so far has not proven these expectations right. Studies in many countries show that online prices vary significantly (sometimes price dispersion in the Internet is higher than that in traditional trade). The purpose of this article is to present a critical view on the methods of measuring price dispersion in e-commerce. Researchers of this area use different measures of price differentials, include shipping costs or not, use the proposed price or try to determine transaction prices, reject part of the data considered as outliers that may indicate a hidden heterogeneity of a product. Some scientists also try to justify price dispersion with the reputation of a vendor, and also additional features of the sellers such as the amount of information presented in the offer, convenience of shopping, user-friendly interface, etc. All these factors are problematic for the research due to lack of a clear (and proper) way of measuring the mentioned attributes. Most of the previous studies also ignored the pricing strategy of vendors, which is a very important factor for price dispersion – it may involve reduction in prices of several products in order to attract customers to the store to buy other products with a much higher margin. |
| Keywords: | price dispersion, e-commerce, shopbots |
| JEL: | D40 D82 D83 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pes:wpaper:2015:no50&r=com |
| By: | Alexander Galetovic; Stephen Haber; Ross Levine |
| Abstract: | A large literature asserts that standard essential patents (SEPs) allow their owners to “hold up” innovation by charging fees that exceed their incremental contribution to a final product. We evaluate two central, interrelated predictions of this SEP hold-up hypothesis: (1) SEP-reliant industries should experience more stagnant quality-adjusted prices than similar non-SEP-reliant industries; and (2) court decisions that reduce the excessive power of SEP holders should accelerate innovation in SEP-reliant industries. We find no empirical support for either prediction. Indeed, SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy. |
| JEL: | K11 O31 O34 O38 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21090&r=com |
| By: | Stephen Littlechild |
| Abstract: | Since 2008 UK energy regulator Ofgem has imposed increasingly severe restrictions on suppliers to the domestic (residential) retail market. Initially, non-discrimination conditions aimed to “remove unfair price differentials”, particularly between suppliers’ prices between regions, totalling £0.5 bn. This actually envisaged increasing prices to other customers by £0.5 billion, to maintain revenue neutrality. In the event, competition reduced, customer switching fell by half, and profits of major suppliers increased by nearly £1 billion, at the expense of customers. Later, restrictions on the number and types of tariffs aimed to encourage customers to engage in the market. However, there is no empirical evidence to justify this, and the policy prohibits many discounts and tariff types that customers value, especially vulnerable customers. Perhaps Ofgem felt pressed to Do Something in the face of an unprecedented increase in energy prices. Successive Governments have supported its interventions, but cannot be blamed for designing them. The decline of economists in senior positions at Ofgem removed an important ‘sanity check’. But Ofgem itself bears responsibility for its change in policy since 2008. It may have been well-meaning, attempting to protect the interests of vulnerable customers, but inappropriate restrictions have made customers worse off. Should other regulators follow suit? No. Hopefully the CMA market investigation will reveal this and bring to an end one of the most misguided episodes in the modern history of UK regulation. |
| Keywords: | retail competition, energy regulation, non-discrimination |
| JEL: | L51 L97 L94 |
| Date: | 2014–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1441&r=com |
| By: | Tomáš Havránek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Czech National Bank); Diana Zigraiova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | The theoretical literature gives conflicting predictions on how bank competition should affect financial stability, and dozens of researchers have attempted to evaluate the relationship empirically. We collect 598 estimates of the competition-stability nexus reported in 31 studies and analyze the literature using meta-analysis methods. We control for 35 aspects of study design and employ Bayesian model averaging to tackle the resulting model uncertainty. Our findings suggest that the definition of financial stability and bank competition used by researchers influences their results in a systematic way. The choice of data, estimation methodology, and control variables also affects the reported coefficient. We find evidence for moderate publication bias. Taken together, the estimates reported in the literature suggest little interplay between competition and stability, even when corrected for publication bias and potential misspecifications. |
| Keywords: | Bayesian model averaging, bank competition, financial stability, publication selection bias, meta-analysis |
| JEL: | C83 C11 G21 L16 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2015_07&r=com |
| By: | Amedeo Piolatto (Universitat de Barcelona & IEB) |
| Abstract: | Online review aggregators (e.g., booking.com or ClubKviar) provide detailed information about experience goods, such as restaurants and hotels. This study fosters the understanding of how such aggregators modify competition, profits and welfare. Using a spokes model of horizontal competition, I show that review aggregators enhance total welfare mainly by making valuable information available to consumers. The effect on welfare goes through different channels: 1) realised transactions are more valuable for the match between producers and consumers is more accurate; 2) the costumer base enlarges, for more agents find a suitable product; 3) the equilibrium price weakly decreases for competition amongst firms is more intense. However, firms face a prisoner dilemma: firms best response to the status quo is to appear on the aggregator's web so as to enlarge their market share, however, this leads to lower profits than if they all agreed not to use the aggregator. |
| Keywords: | Horizontal competition, spokes model, welfare, review aggregators, online booking, ClubKviar, experience goods, mismatch costs |
| JEL: | D43 D61 D83 L11 L13 L15 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ieb:wpaper:doc2015-11&r=com |
| By: | Laurent Bouton; Georg Kirchsteiger |
| Abstract: | Rankings have become increasingly popular on various markets, e.g. the market for study programs. We analyze their welfare implications. Consumers have to choose between two goods of unknown quality with exogenous presence or absence of an unbiased informative ranking. The existence of the ranking might affect the welfare of all consumers negatively. With rigid prices, the ranking induced change in demand can be detrimental to all consumers in markets featuring rationing or consumption externalities. With perfectly flexible prices, the ranking might increase firms' market power, and hence lead to losses for all consumers even in the absence of rationing and consumption externalities. |
| JEL: | D8 L15 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21083&r=com |