nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒04‒25
forty papers chosen by
Russell Pittman
United States Department of Justice

  1. Capacity Choice under Uncertainty with Product Differentiation By Christiaan Behrens; Mark Lijesen
  2. 1On endogenous Stackelberg leadership: The case of horizontally differentiated duopoly and asymmetric net work compatibility effects By Tsuyoshi Toshimitsu
  3. Costly Location in Hotelling Duopoly By Jeroen Hinloopen; Stephen Martin
  4. Price Competition on Graphs By Pim Heijnen; Adriaan Soetevent
  5. Market Structure and the Pricing of New Products: A Nested Logit Approach with Asymmetric Firms By Sylvia Bleker; Christiaan Behrens; Paul Koster; Erik T. Verhoef
  6. Prices, Product Differentiation, and Heterogeneous Search Costs By José L. Moraga-González; Zsolt Sándor; Matthijs R. Wildenbeest
  7. Consumer Search and Double Marginalization By Maarten Janssen; Sandro Shelegia
  8. The influence of product liability on vertical product differentiation By Baumann, Florian; Friehe, Tim; Rasch, Alexander
  9. The Effects of Leniency on Cartel Pricing By Harold Houba; Evgenia Motchenkova; Quan Wen
  10. Legal Principles in Antitrust Enforcement By Harold Houba; Evgenia Motchenkova; Quan Wen
  11. Competition in the Presence of Individual Demand Uncertainty By Marc Möller; Makoto Watanabe
  12. In Defense of Trusts: R&D Cooperation in Global Perspective By Jeroen Hinloopen; Grega Smrkolj; Florian Wagener
  13. Output Commitment through Product Bundling: Experimental Evidence By Jeroen Hinloopen; Wieland Mueller; Hans-Theo Normann
  14. Price-Quantity Competition of Farsighted Firms: Toughness vs. Collusion By Marina S. Sandomirskaia
  15. Consumer Search and Prices in the Automobile Market By José Luis Moraga-González; Zsolt Sándor; Matthijs R. Wildenbeest
  16. Industry structure and collusion with uniform yardstick competition By Dijkstra, Peter; Haan, Marco A.; Mulder, Machiel
  17. On the use of price-cost tests in loyalty discounts: Which implications from economic theory? By Fumagalli, Chiara; Motta, Massimo
  18. Research among Copycats: R&D, Spillovers, and Feedback Strategies By Grega Smrkolj; Florian Wagener
  19. Incentives for Process Innovations Under Discrete Structural Alternatives of Competition Policy By Andrey E Shastitko; Alexander Kurdin
  20. Tender Auctions with Existing Operators Bidding By Vincent A.C. van den Berg
  21. Penalizing Cartels: The Case for Basing Penalties on Price Overcharge By Yannis Katsoulacos; Evgenia Motchenkova; David Ulph
  22. Maximum Likelihood Estimation of Search Costs By Jose Luis Moraga-Gonzalez; Matthijs R. Wildenbeest
  23. Airline Route Structure Competition and Network Policy By Hugo Emilo Silva; Erik T. Verhoef; Vincent van den Berg
  24. Miles, Speed and Technology: Traffic Safety under Oligopolistic Insurance By Maria Dementyeva; Erik T. Verhoef
  25. Price Differentiation and Discrimination in Transport Networks By Adriaan Hendrik van der Weijde
  26. Does Competition make Banks more Risk-seeking? By Stefan Arping
  27. Detailed Data and Changes in Market Structure: The Move to Unmanned Gasoline Service Stations By Tadas Bruzikas; Adriaan R. Soetevent
  28. Can market power be controlled by regulation of core prices alone?: An empirical analysis of airport demand and car rental price By Achim I. Czerny; Zijun Shi; Anming Zhang
  29. Third-degree Price Discrimination in the Presence of Congestion Externality By Achim I. Czerny; Anming Zhang
  30. Asymmetric Price Adjustment - Evidence For India By Sartaj Rasool Rather; S. Raja Sethu Durai; M. Ramachandran
  31. Creating a National Champion: International Competition and Unbundling in Rail Transportation By Juranek, Steffen
  32. Strategic investment in merchant transmission: the impact of capacity utilization rules By Federico Boffa; Viswanath Pingali; Francesca Sala
  33. Innovation and Legal Enforcement for Competition Policy: Theory and international evidence from overseas subsidiaries of the Japanese auto-parts suppliers By TAKEDA Yosuke; UCHIDA Ichihiro
  34. Firm Formation and Agglomeration under Monopolistic Competition By Stephan Brunow; Peter Nijkamp
  35. Airlines' Strategic Interactions and Airport Pricing in a Dynamic Bottleneck Model of Congestion By Hugo E. Silva; Erik T. Verhoef; Vincent A.C. van den Berg
  36. Loyalty Programs and Consumer Behaviour: The Impact of FFPs on Consumer Surplus By Christiaan Behrens; Nathalie McCaughey
  37. Dynamic Equilibrium at a Congestible Facility under Market Power By Erik T. Verhoef; Hugo E. Silva
  38. Shapley-Based Stackelberg Leadership Formation in Networks By Belik, Ivan; Jörnsten, Kurt
  39. Single-Till versus Dual-Till Regulation of Airports By Achim I. Czerny; Anmin Zhang
  40. The Industrial Organisation of the Dance Industry in the Netherlands: a Transaction Cost Perspective on Hybrid Forms of Organisation By Frank A.G. den Butter; Jelle Joustra

  1. By: Christiaan Behrens (VU University Amsterdam); Mark Lijesen (VU University Amsterdam)
    Abstract: We explore the characteristics of a capacity-then-price game for a duopoly market with product differentiation and stochastic demand. The analysis shows that a minimum threshold value for the level of vertical product differentiation exists, relative to horizontal product differentiation, for which existence of a Nash equilibrium in pure strategies is guaranteed. We find that when the quality and cost differences between the firms exactly offset each other, demand uncertainty causes equilibrium outcomes in capacities to become asymmetric. Without demand uncertainty, only a symmetric equilibrium can be established. This difference between stochastic and deterministic demand is the main driver behind our finding that if the regulator ignores the stochastic nature of demand, regulation lowers welfare for a large range of parameters, that is for approximately 10 per cent of the plausible parameter space.
    Keywords: Price competition, Capacity choice, Demand uncertainty, Product differentiation, Price dispersion
    JEL: D43 L11 L13
    Date: 2012–10–26
  2. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Introducing product compatibility associated with network externalities (hereafter, network compatibility effects) into a horizontally differentiated duopoly model, we consider how network compatibility effects and the level of product substitutability affect endogenous timing decisions in the cases of quantity- and price-setting competition. In particular, we demonstrate the following. First, given asymmetric network compatibility effects between the products of the firms, there is Stackelberg equilibrium where the firm providing a product with a larger network compatibility effect than some certain level of product substitutability emerges as a leader (follower), whereas the firm providing a product with a smaller network compatibility effect than some certain level of product substitutability emerges as a follower (leader) in the case of quantity (price)-setting competition. Second, the Stackelberg equilibrium is Pareto-superior for both firms compared with other equilibria. However, with alternative formulation determining network size, with respect to the endogenous Stackelberg leader−follower relationship, the revers holds.
    Keywords: Stackelberg equilibrium; Nash equilibrium; leader-follower; product compatibility; network externality; product substitutability; fulfilled expectations; horizontally differentiated products
    JEL: D21 D43 D62 L15
    Date: 2015–04
  3. By: Jeroen Hinloopen (University of Amsterdam); Stephen Martin (Krannert School of Management, Purdue University, West Lafayette, Indiana, United States of America)
    Abstract: We introduce a cost of location into Hotelling’s (1929) spatial duopoly. We derive the general conditions on the cost-of-location function under which a pure strategy price-location Nash equilibrium exists. With linear transportation cost and a suitably specified cost of location that rises toward the center of the Hotelling line, symmetric equilibrium locations are in the outer quartiles of the line, ensuring the existence of pure strategy equilibrium prices. With quadratic transportation cost and a suitably specified cost of location that falls toward the center of the line, symmetric equilibrium locations range from the center to the end of the line.
    Keywords: Horizontal product differentiation, spatial competition, cost of location
    JEL: D21 D43 L13
    Date: 2013–07–30
  4. By: Pim Heijnen (University of Groningen); Adriaan Soetevent (University of Groningen)
    Abstract: This paper extends Hotelling's model of price competition with quadratic transportation costs from a line to graphs. We derive an algorithm to calculate firm-level demand for any given graph, conditional on prices and firm locations. These graph models of price competition may lead to spatial discontinuities in firm-level demand. We show that the existence result of D'Aspremont et al. (1979) does not extend to simple star graphs and conjecture that this non-existence result holds more generally for all graph models with two or more firms that cannot be reduced to a line or circle.
    Keywords: spatial competition, Hotelling, graphs
    JEL: D43 L10 R12
    Date: 2014–10–02
  5. By: Sylvia Bleker (VU University Amsterdam, the Netherlands); Christiaan Behrens (VU University Amsterdam, the Netherlands); Paul Koster (VU University Amsterdam, the Netherlands); Erik T. Verhoef (VU University Amsterdam, the Netherlands)
    Abstract: This article investigates competition in a market with an emerging technology using a discrete choice model to analyze demand and welfare. We focus on industry structure and investigate the impact of different market structures on demand for the new technology and on welfare. The car market serves as a prime example of such a market, where electric vehicles (EV’s) represent the new technology competing with standard cars with internal combustion engines (ICV’s). To analyze such a market, we use a nested logit model. In contrast to earlier literature, we allow firms to be asymmetric and active in multiple nests, with different numbers of variants in each nest, which can add up to any market share. Additionally, we add to existing literature by considering the case where substitutability between firms is stronger than between technologies, by nesting products by technology instead of by firm. We find implicit analytical solutions for the equilibrium mark-ups which can be used when there are two nests in the market; within that restriction firms can be asymmetric. Numerically, we find that EV sales are higher if offered by a new entrant only selling EV’s as opposed to when it is supplied by a firm selling variants of both types. We present an index based on mark-up differences between variants in the market, which can be used to a priori determine whether a change in market structure would increase or decrease welfare. These results are general to the nested logit model, and the index can thus be used in any market, as long as the market is sufficiently accurately described by the nested logit model.
    Keywords: Nested logit model, asymmetry, market structure, welfare indices, emerging technology
    JEL: D43 D60 L11 L91
    Date: 2014–10–28
  6. By: José L. Moraga-González (VU University Amsterdam, the Netherlands); Zsolt Sándor (Sapientia University, Rumania); Matthijs R. Wildenbeest (Indiana University, United States)
    Abstract: We study price formation in the standard model of consumer search for differentiated products but allow for search cost heterogeneity. In doing so, we dispense with the usual assumption that all consumers search at least once in equilibrium. This allows us to analyze the manner in which prices affect the decision to search rather than to not search at all, which is an important but often neglected aspect of the price mechanism. Recognizing the role the equilibrium price plays in consumers' participation decisions turns out to be critical for understanding how search costs affect market power. This is because the two margins that determine prices|the intensive search margin, or search intensity, and the extensive search margin, or search participation|may be affected in opposing directions by a change in search costs. When search costs go up, fewer consumers decide to search, which modifies the search composition of demand such that demand can become more elastic. At the same time, the consumers who choose to search reduce their search intensity, which makes demand less elastic. Whether the effect on the extensive or the intensive search margin dominates depends on the range and shape of the search cost density. We identify conditions for higher search costs to result in higher, constant, or lower prices. Similar results are obtained when the marginal gains from search vary across consumers.
    Keywords: sequential search, search cost heterogeneity, differentiated products, existence and uniqueness of equilibrium
    JEL: D43 D83 L13
    Date: 2014–07–03
  7. By: Maarten Janssen; Sandro Shelegia
    Abstract: The well-known double marginalization problem understates the inefficiencies arising from vertical relations in consumer search markets where consumers are uninformed about the wholesale prices charged by manufacturers to retailers. Con- sumer search provides a monopoly manufacturer with an additional incentive to increase its price, worsening the double marginalization problem and lowering the manufacturer's prots. Nevertheless, manufacturers in more competitive wholesale markets may not have an incentive to reveal their prices to consumers. We show that retail prices decrease in search cost, and so both industry prots and consumer surplus increase in search cost.
    JEL: D40 D83 L13
    Date: 2014–12
  8. By: Baumann, Florian; Friehe, Tim; Rasch, Alexander
    Abstract: This paper explores the impact of product liability on vertical product differentiation when product safety is perfectly observable. In a two-stage competition, duopolistic firms are subject to strict liability and segment the market such that a low-safety product is marketed at a low price to consumers with relatively small harm levels whereas the safer product is sold at a high price to consumers with high levels of harm. Firms' expected liability payments are critically influenced by how the market is segmented, creating a complex relationship between product liability and product differentiation. We vary the liability system's allocation of losses between firms and consumers. Shifting more losses to firms increases the safety levels of both products, but decreases the degree of product differentiation. Some shifting of losses is always socially beneficial, but the optimum may require that some compensable losses stay with the consumers.
    Keywords: product liability,accident,harm,imperfect competition,product safety,vertical product differentiation
    JEL: D43 K13 L13
    Date: 2015
  9. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (University of Chicago, United States)
    Abstract: We analyze how leniency affects cartel pricing in an infinitely-repeated oligopoly model where the fine rates are linked to illegal gains and detection probabilities depend on the degree of collusion. A novel aspect of this study is that we focus on the worst possible outcome. We investigate the maximal cartel price, the largest price for which the conditions for sustainability hold. We analyze how the maximal cartel price supported by different cartel strategies adjusts in response to the introduction of (ex-ante and ex-post) leniency programs. We disentangle the effects of traditional antitrust enforcement, leniency, and cartel strategies on the maximal cartel price. Ex-ante leniency cannot reduce the maximal cartel price below the price under antitrust without leniency. On the other hand, for ex-post leniency, improvement is possible and granting full immunity to single-reporting firms achieves the largest reduction in the maximal cartel price. To reduce adverse effects under both leniency programs, fine reductions to multiple-reporting firms should be moderate or absent. Finally, ex-post leniency should provide less generous fine reductions to multiple-reporting firms, which is supported by the current practice in the US and the EU.
    Keywords: Cartel, Antitrust, Competition Policy, Leniency Program, Self-reporting, Repeated Game
    JEL: L41 K21 C72
    Date: 2014–11–10
  10. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (University of Washington, United States)
    Abstract: We study antitrust enforcement that channels price-fixing incentives through setting fines and allocating resources to detection activities. Antitrust fines obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. Bankruptcy considerations limit maximum fines, ensure abnormal cartel profits and impose a challenge for optimal antitrust enforcement. We integrate the mentioned legal principles into an infinitely-repeated oligopoly model. We derive the optimal level of detection activities and the optimal fine schedule that achieves maximal social welfare under these legal principles. The optimal fine schedule remains below the maximum fine and induces collusion on a lower price by making it more attractive than collusion on higher prices. For a range of low cartel prices, the fine is set to the legal minimum. Raising minimum fines will enable the cartel to raise its price and is better avoided. Our analysis and results relate to the marginal deterrence literature.
    Keywords: Antitrust enforcement, Antitrust Law, Cartel, Oligopoly, Repeated game
    JEL: L4 K21 D43 C73
    Date: 2013–10–25
  11. By: Marc Möller (University of Bern, Switzerland); Makoto Watanabe (VU University Amsterdam)
    Abstract: This paper sheds light on a recent empirical controversy about the effect of competition on price discrimination in airline markets (Borenstein and Rose (1994), Gerardi and Shapiro, (2009)). We introduce individual demand uncertainty into Hotelling’s model of horizontal product differentiation and show that in equilibrium, firms offer advance purchase discounts. Consumers trade–off an early (uninformed) purchase at a low price against a late (informed) purchase at a high price. Relative to a (multi-product) monopolist, competing firms offer larger discounts, leading to an intertemporal distribution of sales that is more skewed towards low prices. We show that whether competition has a positive or a negative effect on the Gini coefficient of price dispersion depends on the degree of product differentiation and the level of demand uncertainty.
    Keywords: Competition, Price Dispersion, Individual Demand Uncertainty, Advance Purchase Discounts
    JEL: D43 D80 L13
    Date: 2013–11–15
  12. By: Jeroen Hinloopen (University of Amsterdam); Grega Smrkolj (University of Amsterdam); Florian Wagener (University of Amsterdam)
    Abstract: We present a continuous-time generalization of the seminal R&D model of d’Aspremont and Jacquemin (American Economic Review, Vol. 78, No. 5) to examine the trade-off between the benefits of allowing firms to cooperate in R&D and the corresponding increased potential for product market collusion. We consider all trajectories that are candidates for an optimal solution as well as initial marginal cost levels that exceed the choke price. Firms that collude develop further a wider range of initial technologies, pursue innovations more quickly, and are less likely to abandon a technology. Product market collusion could thus yield higher total surplus.
    Keywords: Antitrust policy, Bifurcations, Collusion, R&D cooperatives, Spillovers
    JEL: D43 D92 L13 L41 O31 O38
    Date: 2013–03–15
  13. By: Jeroen Hinloopen (University of Amsterdam); Wieland Mueller (Vienna University); Hans-Theo Normann (Heinrich-Heine University)
    Abstract: This discussion paper resulted in a publication in <I>European Economic Review</I> (2014), 164-180.<P> We analyze the impact of product bundling in experimental markets. One firm has monopoly power in a first market but competes with another firm in a second market. We compare treatments where the multiproduct firm (i) always bundles, (ii) never bundles, and (iii) chooses whether or not to bundle. We also contrast the simultaneous and the sequential order of moves in the duopoly market. Our data indicate support for the theory of product bundling: with bundling and simultaneous moves, the multiproduct firm offers the predicted number of units. When the multiproduct firm is the Stackelberg leader, the predicted equilibrium is better attained with bundling, especially when it chooses to bundle, even though in theory bundling should not make a difference here. In sum, bundling works as a commitment device that enables the transfer of market power from one market to another.
    Keywords: Cournot; commitment; experiments; product bundling; Stackelberg
    JEL: C92 D43 L11 L12 L41
    Date: 2011–11–28
  14. By: Marina S. Sandomirskaia (National Research University Higher School of Economics)
    Abstract: The paper examines an interaction of boundedly rational firms that are able to calculate their gains after reaction of an opponent to their own deviations from the current strategy. We consider an equilibrium concept that we call a Nash-2 equilibrium. We discuss the problem of existence and possible multiplicity of such equilibria, relation to infinite rationality approach of folk theorem and security considerations of equilibrium in secure strategies. For a number of models (Bertrand with homogeneous and heterogeneous product, Cournot, Tullock competition) the Nash-2 equilibrium sets are obtained and considered as tacit collusion or strong competition in dependence of additional security considerations
    Keywords: Nash-2 equilibrium, secure deviation, secure profile, Bertrand model, Cournot duopoly, differentiated product, Tullock contest, tacit collusion, tough competition.
    JEL: C72 D03 D43 D70 L13
    Date: 2015
  15. By: José Luis Moraga-González (VU University Amsterdam); Zsolt Sándor (Sapientia Hungarian University of Transylvania, Romania); Matthijs R. Wildenbeest (Indiana University, United States)
    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: consumer search, differentiated products, demand and supply, automobiles
    JEL: C14 D83 L13
    Date: 2015–03–06
  16. By: Dijkstra, Peter; Haan, Marco A.; Mulder, Machiel (Groningen University)
    Abstract: We study cartel stability in an industry that is subject to uniform yardstick regulation. In a theoretical model, we show that the number of symmetric firms does not affect collusion. In a laboratory experiment, however, we do find an effect. If anything, increasing the number of firms facilitates collusion. Our theory suggests that an increase in heterogeneity increases the regulated price if firms do not collude, but also makes collusion harder, rendering the net effect ambiguous. Our experiment suggests that the effect of collusion is stronger.
    Date: 2014
  17. By: Fumagalli, Chiara; Motta, Massimo
    Abstract: Recent cases in the US (Meritor, Eisai) and in the EU (Intel) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts.
    Keywords: exclusive dealing; inefficient foreclosure; market-share discounts
    JEL: K21 L41
    Date: 2015–04
  18. By: Grega Smrkolj (Newcastle University, United Kingdom); Florian Wagener (University of Amsterdam, the Netherlands)
    Abstract: We study a stochastic dynamic game of process innovation in which firms can initiate and terminate R&D efforts and production at different times. We discern the impact of knowledge spillovers on the investments in existing markets, as well as on the likely structure of newly forming markets, for all possible asymmetries between firms. We show that the relation between spillovers, R&D efforts, and surpluses is non-monotonic and dependent on both the relative and absolute efficiency of firms. Larger spillovers increase the likelihood that a new technology is brought to production, but they do not necessarily make the industry more competitive.
    Keywords: Differential game, Feedback Nash equilibrium, Numerical partial differential equations, R&D, Spillovers
    JEL: C61 C63 C73 D43 D92 L13 O31
    Date: 2014–08–22
  19. By: Andrey E Shastitko; Alexander Kurdin (National Research University Higher School of Economics)
    Abstract: This study analyses the incentives for process innovations under different conditions determined by the competition policy for intellectual property rights (IPR) and particular features of markets and technologies. Competition policy is defined by the presence or absence of compulsory licensing, markets are characterized by technological leadership or technological competition. The results of modelling show that the uncertainty engendered by technological competition may lower the intensity of innovative activities, if there are no mechanisms of coordination between participants. Voluntary licensing generally improves social welfare but does not guarantee an increase in innovative efforts. Compulsory licensing can impede innovations due to the opportunistic behaviour of market participants but certain measures of state policy can prevent this negative effect
    Keywords: competition policy, compulsory licensing, process innovations
    JEL: L24 O31 K21
    Date: 2015
  20. By: Vincent A.C. van den Berg (VU University Amsterdam)
    Abstract: Consider a government tendering a facility, such as an airport or utility, where one bidder owns a competing facility. With a "standard auction", this "existing operator" bids above the auctioned facility's expected profit, as winning means being a monopolist instead of a duopolist. This auction leads to an unregulated outcome which hurts welfare. A consumer-price auction can alleviate this problem. With complementing facilities, the existing operator offers a price below marginal cost and is more likely to win than other bidders; with substitutes, it is less likely to win. Often, the advantaged bidder always wins, eliminating competition for the field.
    Keywords: Tender auction, existing operators, Advantaged bidder, Price auction
    JEL: D43 D44 L13 L51
    Date: 2013–08–15
  21. By: Yannis Katsoulacos (Athens University of Economics and Business, Greece); Evgenia Motchenkova (VU University Amsterdam); David Ulph (University of St Andrews, United Kingdom)
    Abstract: In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than tho se based on profit)while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.
    Keywords: Antitrust Enforcement, Antitrust Law, Cartel, Oligopoly, Repeated Games
    JEL: D43 C73
    Date: 2014–09–26
  22. By: Jose Luis Moraga-Gonzalez (University of Groningen); Matthijs R. Wildenbeest (Erasmus University Rotterdam)
    Abstract: In a recent paper Hong and Shum [2006. Using price distributions to estimate search costs. Rand Journal of Economics 37, 257–275] present a structural method to estimate search cost distributions. We extend their approach to the case of oligopoly and present a new maximum likelihood method to estimate search costs. We apply our method to a data set of online prices for different computer memory chips. The estimates suggest that the consumer population can be roughly split into two groups which either have quite high or quite low search costs. Search frictions confer a significant amount of market power to the firms: Despite more than 20 firms operating in each of the markets, we estimate price-cost margins to be around 25%. The paper also illustrates how the structural method can be employed to simulate the effects of the introduction of a sales tax.<P>This discussion paper has resulted in a publication in the <A HREF=""><I>European Economic Review</I></A>, 2008, 52(5), 820-48.
    Keywords: consumer search; oligopoly; price dispersion; structural estimation; maximum likelihood
    JEL: C14 D43 D83 L13
  23. By: Hugo Emilo Silva (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam); Vincent van den Berg (VU University Amsterdam)
    Abstract: This paper resulted in a publication in <A HREF=""><I>Transportation Research Part B: Methodological</I></A>, 2014, 67, 320-343.<P> This paper studies whether a regulator needs to correct the route structure choice by carriers with market power in the presence of congestion externalities, in addition to correct their pricing. We account for passenger benefits from increased frequency, passenger connecting costs, airline endogenous hub location and route structure strategic competition. We find that, for some parameters, an instrument directly aimed at regulating route structure choice may be needed to maximize welfare, in addition to per-passenger and per-flight tolls designed to correct output inefficiencies. This holds true when the regulator is constrained to set non-negative tolls, but also for the case of unconstrained tolling.
    Keywords: Route structure competition, Aviation policy, Hub-and-spoke networks, Fully-connected networks
    JEL: H2 L13 L93 R4
    Date: 2013–11–26
  24. By: Maria Dementyeva; Erik T. Verhoef
    Abstract: This paper studies road safety and accident externalities when insurance companies have market power, and can influence road users' driving behaviour via insurance premiums. We obtain both welfare and profit maximizing marginal conditions for first- and second-best insurance premiums for monopoly and oligopoly market structures in insurance. The insurance program consists of an insurance premium, and marginal dependencies ("slopes") of that premium on speed and on the own safety technology choice. While a private monopolist internalizes accident externalities up to the point where compensations to users' benefit matches the full (immaterial) costs, in oligopolistic markets insurance firms do not fully internalize accident externalities that their customers impose upon one another. Therefore, non-optimal premiums as well as speed and technology control apply. Analytical results demonstrate how insurance firms' incentives to influence traffic safety deviate from socially optimal incentives.
    Keywords: Accident externalities, congestion externalities, traffic regulations, road safety,second-best, market power
    JEL: D43 D62 R41 R42 R48
    Date: 2015–02–16
  25. By: Adriaan Hendrik van der Weijde (VU University Amsterdam)
    Abstract: This paper analyzes the effects of price differentiation and discrimination by a monopolistic transport operator, which sets fares in a congestible network. Using three models, with different spatial structures, we describe the operator’s optimal strategies in an unregulated market, a market where price differentiation is not allowed (i.e., ticket prices must be the same for all users), and a market where price discrimination is illegal (i.e., ticket prices must only differ with the marginal external costs of users), and analyze the welfare effects of uniform and non-discriminatory pricing policies. The three models allow us to consider three different forms of price differentiation and discrimination in networks: by user class, by origin-destination pair, and by route. We generalize the existing literature, in which groups usually only differ in their value of time, and hence, there is no distinction between differentiation and discrimination. In our models, users may also have different marginal external costs; we show how these two differences interact. We also show how non-differentiated and non-discriminatory policies may increase or decrease welfare, and that non-discrimination can be worse than non-differentiation. The network models show that results obtained for a single-link network can be generalized to a situation where operators price-discriminate or differentiate based on users’ origins and destinations, but not directly to a situation in which differentiation is based on route choices.
    Keywords: price differentiation, price discrimination, transport, networks, congestion
    JEL: L11 L51 L91
    Date: 2014–08–01
  26. By: Stefan Arping (University of Amsterdam)
    Abstract: This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banks’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.
    Keywords: Charter Value Hypothesis, Bank Franchise Value, Bank Competition, Financial Stability, Capital Requirements
    JEL: G2 G3
    Date: 2014–05–12
  27. By: Tadas Bruzikas (University of Groningen); Adriaan R. Soetevent (University of Groningen, the Netherlands)
    Abstract: We illustrate the impact of detailed data in empirical economic research by considering how the increased data availability has changed the scope and focus of studies on retail gasoline pricing. We show how high-volume, high-frequency price data help to identify and explain long-term trends using original data for the Dutch retail gasoline market. We find that 22% of the observed increase in the highway/off-highway price gap can be explained by the trend towards more unmanned stations; another 13% can be explained by major-to-non-major re-brandings. In one of the first applications of event study analysis to non-financial price data, we show that the adjustment to the new, lower price level is almost immediate in case of manned-to-unmanned conversions but takes one to two months in case of major-to-non-major re-brandings. The impact of both events is asymmetric with no measurable price impact of changes in the opposite direction.
    Keywords: retail gasoline pricing, big data, competitive spillovers, event study analysis
    JEL: L13 L81
    Date: 2014–09–16
  28. By: Achim I. Czerny (VU University Amsterdam, the Netherlands); Zijun Shi (Carnagie Mellon University, United States); Anming Zhang (University of British Columbia, Canada)
    Abstract: Many firms offer “core” and “side” goods in the sense that side-good consumption is conditional on core-good consumption. Airports are a common example where the supply of runway and terminal capacity is the core good and the supply of various concession services (for example, car rental services) is the side good. While side-good supply can be responsible for a major share in total revenue, monopoly regulation typically concentrates on the control of core-good prices (“core prices” in short). Whether market power can indeed be effectively controlled by the regulation of core prices alone then depends on whether core-good consumption is a function of the price for side goods. This study empirically shows that a one-dollar increase in the daily car rental price reduces passenger demand at 199 US airports by more than 0.36 percent. A major implication of our findings is that for the case of airports, the effective control of market power may require regulation of both prices for core and side goods.
    Keywords: Core goods; side goods; airport; monopoly; car rentals
    JEL: L12 L43 L93
    Date: 2015–03–30
  29. By: Achim I. Czerny (VU University Amsterdam, the Netherlands); Anming Zhang (The University of British Columbia, Canada)
    Abstract: This paper analyzes third-degree price discrimination of a monopoly airline in the presence of congestion externality when all markets are served. The model features the business-passenger and leisure-passenger markets where business passengers exhibit a higher time valuation, and a less price-elastic demand, than leisure passengers. Our main result is the identification of the time-valuation effect of price discrimination, which can work in the opposite direction as the well-known output effect on welfare. This time-valuation effect clearly explains why discriminating prices can improve welfare even when this is associated with a reduction in aggregate output.
    Keywords: Price discrimination, congestion, time valuation, monopoly, airline
    JEL: D42 L93
    Date: 2014–10–23
  30. By: Sartaj Rasool Rather (Madras School of Economics); S. Raja Sethu Durai (Department of Economics, Pondicherry University, Puducherry); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: We construct an error correction mechanism to examine whether firms’ price adjustment is asymmetric as anticipated by Ball and Mankiw (1994). We have used monthly time series data on prices of 418 commodities, which constitute 97 percent of commodity price basket used in the construction of wholesale price index in India. The empirical evidence indicates that the price adjustment of most of the firms exhibits strong asymmetry; shocks that increases firms’ desired prices causes quicker and larger rise in prices whereas shocks that lower desired prices causes smaller or no fall in prices. Also, we identify a threshold value for each firm below which it does not allow its relative price to fall. These evidences imply that larger relative price variability can trigger inflation even in the absence of demand shocks. Moreover, the distribution of output is likely to be negatively skewed even if the demand shocks are symmetric.
    Keywords: Menu cost, asymmetric price adjustment, relative price, error correction
    JEL: C32 E31 E52
    Date: 2014–11
  31. By: Juranek, Steffen (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This article investigates the incentives to unbundle operations and infrastructure in the railway industry in a two-country model with international network effects from the viewpoint of national governments. The analysis shows that the decision to unbundle institutionally or organizationally with separated accounts depends crucially on the importance of cross-border transportation. For a sufficiently high importance of cross-border transportation, national governments choose accounting separation. However, national governments are stuck in a Prisoners' dilemma and would be better off coordinating on a separated industry structure. This result justifies major policy initiatives by the European Union but explains also actions of national governments in implementing these initiatives.
    Keywords: Bundling; vertical integration; international competition; railway; regulation; cross-border transport
    JEL: F53 L50 L92
    Date: 2015–04–10
  32. By: Federico Boffa (Free University of Bolzano & IEB); Viswanath Pingali (Indian Institute of Management Ahmedabad); Francesca Sala (Competition and Markets Authority)
    Abstract: In this paper we look at the relative merits of two capacity utilization regimes in the merchant electricity transmission network: Must offer (Mo) where the entire capacity installed is made available for transmission and Non Must Offer (NMo) where some capacity could be withheld. We look at two specific cases: (i) Demand for transmission varies across time, and (ii) Vertical integration is allowed between investors in transmission network and electricity generators. In the case of time-varying demand under Mo, we find that a monopolist may underinvest in transmission when compared to NMo, although NMo may lead to more capacity withholding. In the case of vertical integration, we find that when the market power is with the generators of the exporting node, without vertical integration no welfare-enhancing merchant investment would occur. Further, if the generators in the importing node have market power, which of the two regimes is welfare enhancing depends on the parameter values. In case vertical integration is better, then Mo is better than NMo. Finally, we also argue that the incentive to collude among various transmission network investors is mitigated with Mo in place.
    Keywords: Electricity transmission, merchant lines, capacity utilization, vertical integration, collusion
    JEL: L94 D24
    Date: 2015
  33. By: TAKEDA Yosuke; UCHIDA Ichihiro
    Abstract: Do legal enforcements for competition policy have differential effects on innovative research and development (R&D) activities? Taking into account both strategic R&D competition between incumbent and entrant, and government's optimal choice of legal schemes, we first present a game-theoretic model of innovation and legal enforcement (Glaeser and Shleifer, 2003; Schwartzstein and Shleifer, 2013; Segal and Whinston, 2007). The model suggests that there are in subgame-perfect equilibria some relations concerning average treatment effects of legal enforcement on entrant's R&D or incumbent's deterrence activities, conditional on law and order degree in host countries (World Bank Worldwide Governance Indicators). Second, focusing on overseas subsidiaries of the Japanese auto-parts suppliers that have international deployments with different legal origins in locations, we use a pooled data set of the Basic Survey of Overseas Business Activities and the Basic Survey of Japanese Business Structure and Activities. The average multi-valued treatment effect estimation shows positive results for the model. It suggests that under regulation as a legal enforcement scheme instead of strict liability or negligence, even in countries with low degree of law and order, R&D activities would be more enhanced and R&D-deterrent ones be further suppressed on average. Legal enforcement for competition policy does matter for innovation.
    Date: 2015–04
  34. By: Stephan Brunow (Institute for Employment Research (IAB) of the German Federal Employment Agency (BA), Nuremberg, Germany); Peter Nijkamp (VU University Amsterdam)
    Abstract: In the presence of agglomeration economies one might expect a relocation and concentration of industries. Then firm start-up activities may be assumed to reveal those effects. We introduce an empirical testable model inspired by the New Economic Geography and human capital externalities literature. The novelty of this paper is that it derives a measure of agglomeration economies founded on microeconomic analysis based on households' and firms' maximization behavior, namely the real market potential. Besides agglomeration forces, dispersion and human capital effects can be separated and explicitly controlled for. The paper sheds new light on the general mechanisms of intra-industrial agglomeration forces because it explicitly considers the regional distribution of economic activities. It offers clear evidence for the empirical relevance of the New Economic Geography.
    Keywords: New Economic Geography, Agglomeration, Externalities, Firm Formation
    JEL: L13 O41 R11 R3
    Date: 2013–09–06
  35. By: Hugo E. Silva (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam); Vincent A.C. van den Berg (VU University Amsterdam)
    Abstract: This discussion paper resulted in a publication in the <A href=""><I>Journal of Urban Economics</I></A>, 2014, 13-27.<P> This paper analyzes efficient pricing at a congested airport dominated by a single firm. Unlike much of the previous literature, we combine a dynamic (bottleneck) model of congestion and a vertical structure model that explicitly considers the role of airlines and passengers. We show that when a Stackelberg leader interacts with a competitive fringe, charging the congestion toll that is derived for fully atomistic carriers to both leader and fringe yields the first-best outcome. This holds regardless of the leader's internalization of congestion in the unregulated equilibrium, and regardless of the assumed demand substitution pattern between firms. This result implies that thefinancial deficit under optimal pricing may be less severe than what earlier studies suggest. Finally, we show that there are various alternative toll regimes that also induce the welfare maximizing outcome, and therefore widen the set of choices for regulators.
    Keywords: Airport pricing, Congestion, Bottleneck model
    JEL: H23 L50 L93 R48
    Date: 2012–05–25
  36. By: Christiaan Behrens (VU University Amsterdam); Nathalie McCaughey (Monash University, United States)
    Abstract: Frequent Flier Programs (FFPs) are said to impact airline consumer behaviour such that revenue of sponsoring airlines increases. Prior research relies on aggregate industry data to study FFPs. We examine the impact of FFPs on individual consumer behaviour in a quasi-natural experimental set-up using a combined discrete choice and count data model. We exploit an unanticipated change in the FFP to avoid self-selection bias. We derive the causal effect of redesigning a frequency reward program into a customer tier program on average transaction size, purchase frequency, revenues of the sponsoring airline, and compensating variation. We find that, on average, revenues increased by 8$ per member over a 16 month period. The welfare impact is small but positive. We find that, on average, consumer surplus increased by 5$ per member over a 16 month period. The results vary su bstantially across individuals. In line with previous studies, our results suggest that moderate buyers increase their average transaction size and purchase frequency most due to the introduction of the customer tier program.
    Keywords: Loyalty programs; Frequent Flier Programs; Two-stage budgeting model; Longitudinal demand models; Airline pricing
    JEL: D12 L11 R41 L93
    Date: 2015–04–16
  37. By: Erik T. Verhoef (VU University Amsterdam, the Netherlands); Hugo E. Silva (VU University Amsterdam, the Netherlands)
    Abstract: Various contributions to the recent literature on congestion pricing have demonstrated that when services at a congestible facility are provided by operators with market power, the case in point often being a few airlines jointly using a congested airport, optimal congestion pricing rules deviate from the familiar Pigouvian rule that tolls be equal to the marginal external costs. The reason is that an operator with market power has an incentive to internalize the congestion effects that its customers and vehicles impose upon one-another, so that Pigouvian tolling would lead to overpricing of congestion. More recent contributions to this literature, however, have brought to the fore that when congestion at the facility takes on the form of dynamic bottleneck congestion à la Vickrey (1969), where trip scheduling is the key behavioural margin, there may exist no Nash e quilibrium in arrival schedules for oligopolistic operators also under rather plausible assumptions on parameters. This paper investigates whether in such cases, an equilibrium does exist for another congestion technology, namely the Henderson-Chu dynamic model of flow congestion. We find that a stable and unique equilibrium exists also in cases where it fails to exist under bottleneck congestion (notably when the value of schedule late exceeds the value of travel delays). Our results suggest that self-internalization with only two firms leads to a considerable efficiency gain compared to the atomistic equilibrium (83% or more of the gain from first-best pricing in our numerical exercises).
    Keywords: Congestion pricing, dynamic congestion, market power, internalization
    JEL: R41 R48 D62
    Date: 2015–03–31
  38. By: Belik, Ivan (Dept. of Business and Management Science, Norwegian School of Economics); Jörnsten, Kurt (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: In the given research we study a leadership formation of the most influential nodes in networks. Specifically, we analyze the competition between a leader and a follower based on the Stackelberg leadership model. Applying the concept of Shapley value to measure node’s importance, we represent the mechanism of Shapley-based Stackelberg leadership formation in networks. The approach is tested and represented in tabular and graphical formats.
    Keywords: Stackelberg competition; Shapley value; leadership; networks analysis
    JEL: C00 C60 C61 Z13
    Date: 2015–04–10
  39. By: Achim I. Czerny (VU University Amsterdam, the Netherlands); Anmin Zhang (University of British Columbia, Canada)
    Abstract: Most airports operate under public ownership, while some are privatized and economically regulated. Only a few airports are privately owned and experience little or no ex-ante regulation of airport charges. On the other hand, airports nowadays earn as much revenue from transport-related activities as from commercially-oriented business activities. Taken together, these two observations lead to a natural question: How to optimally integrate profits derived from commercial activities into the regulation of airport infrastructure charges? This question is addressed in this paper. We discuss basic issues that are relevant for the design of regulatory regimes for airports and how these issues can be tackled by using airport profits derived from commercial activities for infrastructure cost recovery. The main insights are summarized at the end of each section and then are further summarized in the conclusions section.
    Keywords: Airport; monopoly; regulation; single till; dual till
    JEL: L42 L51 L93
    Date: 2015–04–17
  40. By: Frank A.G. den Butter (VU University Amsterdam); Jelle Joustra (VU University Amsterdam, the Netherlands)
    Abstract: The organization of Electronic Dance Music (EDM) events has become a major export product in the Netherlands. In order to respond quickly to the new trends and needs, innovative forms of cooperation between producers are to be set up for the organization of exciting new events. A case study on how these EDM events are actually organised in the Netherlands shows that the best way to do it is through hybrid forms of organisation, which combine horizontal forms of organisation through the market and vertical forms through the hierarchy. As EDM events are characterised by much asset specificity, the perspective of transaction cost economics indicates why this industry relies on hybrid forms of organisation. Trust between the collaborating partners, intrinsic motivation to be professional in the design and creation of new, ground-breaking music sensations and an extensiv e use of social media play a key role in lowering the transaction costs in the dance industry.
    Keywords: Industrial organization, coordination costs, transaction cost economics, resource based view, cooperation in hybrid organizations, Electronic Dance Music (EDM) events, trust, use of social media
    JEL: D23 D85 E23 L23 L24 L82 O31 P13
    Date: 2014–07–24

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