nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒05‒02
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Cournot Retrouvé under Price or Supply Function Competition By F. Delbono; L. Lambertini
  2. Alliance Formation in a Vertically Differentiated Market By Jean J. Gabszewicz; Marco A. Marini; Ornella Tarola
  3. Socially optimal Nash equilibrium locations and privatization in a model of spatial duopoly with price discrimination By Eleftheriou, Konstantinos; Michelacakis, Nickolas
  4. Strategic Dual Sourcing as a Driver for Free Revealing ofInnovation By Noriaki Matsushima; Laixun Zhao
  5. Age and productivity as determinants of firm survival over the product life cycle By Silviano Esteve Pérez; Fabio Pieri; Diego Rodriguez
  7. Price caps, oligopoly, and entry By Stanley Reynolds; David Rietzke
  8. Price Leadership and Unequal Market Sharing: Collusion in Experimental Markets By Dijkstra, Peter T.
  9. The U.S. Electricity Industry After 20 Years of Restructuring By Severin Borenstein; James Bushnell
  10. Accumulation with Malnutrition - The Role of Status Seeking Behavior By Sugata Marjit; Lei Yang
  11. Why do Cross-border Merger/Acquisition Deals become Delayed, or Unsuccessful? – A Cross-Case Analysis in the Dynamic Industries By Reddy, Kotapati Srinivasa
  12. Financial Intermediation and Deposit Contracts: A Strategic View By Vittorio Larocca
  13. How Does Foreign Bank Entry Affect Financial Inclusion in Emerging and Developing Economies? By Sasidaran Gopalan; Ramikishen S. Rajan
  14. Pricing in Social Networks under Limited Information By Elias Carroni; Simone Righi
  15. Automobile Demand and Supply in Brazil: Effects of Tax Rebates and Trade Liberalization on Price-marginal Cost Markups in the 1990s By Eduardo P. S. Fiuza
  16. Market Distortions and Political Rent: The Case of Fertilizer Price Divergence in Africa By Shimeles, Abebe; Gurara, Daniel Zerfu; Birhanu Tessema, Dawit

  1. By: F. Delbono; L. Lambertini
    Abstract: This paper aims at participating in the long-lasting debate about the analytical foundations of the Cournot equilibrium. In a homogeneous oligopoly, under standard regularity conditions, we prove that Cournot-Nash emerges both under (i) price competition and Cournot conjectures; and (ii) supply function competition with ex post market clearing. We demonstrate both results within a model of exogenous product differentiation.
    JEL: D43 L13
    Date: 2015–04
  2. By: Jean J. Gabszewicz (CORE UniversitŽ Catholique de Louvain); Marco A. Marini (Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza"); Ornella Tarola (Dipartimento di Scienze sociali ed economiche, Universita' degli Studi di Roma "La Sapienza")
    Abstract: This paper studies how the possibility for firms to sign collusive agreements (as for instance being part of alliances, cartels and mergers) may affect their quality and price choice in a market with vertically differentiated goods. For this purpose we model the firm decisions as a three-stage game in which, at the first stage, firms can form an alliance via a sequential game of coalition formation and, at the second and third stage, they decide simultaneously their product qualities and prices, respectively. In such a setting we study whether there exist circumstances under which either full or partial collusion can be sustained as a subgame perfect Nash equilibrium of the coalition formation game. Also, we analyse the effects of different coalition structures on equilibrium qualities, prices and profits accruing to firms. It is shown that only intermediate coalition structures arise at the equilibrium, with the bottom quality firm always included. Moreover, all equilibrium price and quality configurations always coincide with that observed in the duopoly case, with only two quality variants on sale.
    Keywords: Vertically differentiated market ; endogenous alliance formation ; coalition structures ; price collusion ; grand coalition ; coalition stability ; sequential games of coalition formation
    Date: 2015
  3. By: Eleftheriou, Konstantinos; Michelacakis, Nickolas
    Abstract: We generalize Beladi et al. (2014) for any non-negative, increasing, continuous function of distance as transportation costs function. By doing so, we show that in a duopoly, partial privatization does not change the socially optimal character of the Nash equilibrium location. Our results call for further research on testing their robustness under the existence of more than two competing firms.
    Keywords: Privatization; Spatial competition; Transportation costs
    JEL: L13 L32 R32
    Date: 2015–04–12
  4. By: Noriaki Matsushima (Institute of Social and Economic Research, Osaka University); Laixun Zhao (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper examines the role of dual sourcing (e.g., outside options) in vertical and horizontal relations. In a bilateral monopoly market, if either the upstream or downstream firm has outside options, the other firm could lose from seemingly positive shocks, e.g., market expansion or technology improvements. We extend this setting to a bilateral duopoly market in which each downstream firm has outside options and upstream firms can engage in cost reducing investments and generate technological spillovers. We find that each upstream firm has an incentive to voluntarily generate technological spillovers to its upstream rival if the downstream firms have better outside options.
    Keywords: Dual sourcing, Outside option, Spillover, Vertical relations
    JEL: L13 O32 M11 C72
    Date: 2015–04
  5. By: Silviano Esteve Pérez (Department of Applied Economics II, Universitat de València); Fabio Pieri (Department of Applied Economics, Universitat de València); Diego Rodriguez (Department of Applied Economics II, Universidad Complutense de Madrid)
    Abstract: This paper contributes to fill the gap between the literature on the determinants of firm survival and the theoretical and empirical works on the product life cycle (PLC). Using a representative sample of Spanish manufacturing firms with ten or more employees over the period 1991-2010, we empirically analyze the role played by firm age and productivity on firm survival across three different phases of the PLC to which firms are allocated according to firm- and product-level haracteristics. Firm age results to be negatively and significantly correlated with hazard rates mostly in the ‘young’ phase of the PLC, pointing out the role of ‘learning processes’ in this phase, while firm productivity is associated with lower hazard rates only in the ‘old’ phase of the PLC when market competition is primarily efficiency-driven. Our results qualify the roles of age and productivity as determinants of firm survival.
    Keywords: Product life cycle; firm survival; Spanish manufacturing firms; discrete time survival methods
    JEL: C41 L10 L60
    Date: 2015–04
  6. By: Lilia Cavallari (University of Roma Tre)
    Abstract: This paper studies the implications of entry costs for business formation in a dynamic stochastic general equilibrium model with endogenous entry and exit. The paper first documents some facts about business formation in the US. Exit is more volatile than entry, both are more volatile than output and co-move over the cycle. Firms are less volatile than output and procyclical. Then, it shows that a model with entry and exit can replicate these facts fairly well. In addition it captures important features of the US business cycle, outperforming models with a fixed exit rate and a fixed number of firms. The performance of the model is sensitive to changes in the composition of entry costs.
    Keywords: entry costs, firm entry, firm exit, business cycle, business creation, business destruction
    JEL: E31 E32 E52
    Date: 2014
  7. By: Stanley Reynolds; David Rietzke
    Abstract: We extend the analysis of price caps in oligopoly markets to allow for sunk entry costs and endogenous entry. In the case of deterministic demand and constant marginal cost, reducing a price cap yields increased total output, consumer welfare, and total welfare; results consistent with those for oligopoly markets with a fixed number of firms. With deterministic demand and increasing marginal cost these comparative static results may be fully reversed, and a welfare-improving cap may not exist. Recent results in the literature show that for a fixed number of firms, if demand is stochastic and marginal cost is constant then lowering a price cap may either increase or decrease output and welfare (locally); however, a welfare improving price cap does exist. In contrast to these recent results, we show that a welfare-improving cap may not exist if entry is endogenous. However, within this stochastic demand environment we show that certain restrictions on the curvature of demand are sufficient to ensure the existence of a welfare-improving cap when entry is endogenous.
    Keywords: Price caps, oligopoly, entry, stochastic demand
    JEL: D21 L13 L51
    Date: 2015
  8. By: Dijkstra, Peter T. (Groningen University)
    Abstract: We consider experimental markets of repeated homogeneous price-setting duopolies. We investigate the effect on collusion of sequential versus simultaneous price setting. We also examine the effect on collusion of changes in the size of each subject's market share in case both subjects set the same price.<br/>Our results show that sequential price setting compared with simultaneous price setting facilitates collusion, if subjects have equal market shares or if the follower has the larger market share.<br/>With sequential price setting, we find more collusion if subjects have equal market shares rather than unequal market shares. We observe more collusion if the follower has the larger market share than if the follower has the smaller market share.
    Date: 2014
  9. By: Severin Borenstein; James Bushnell
    Abstract: Prior to the 1990s, most electricity customers in the U.S. were served by regulated, vertically-integrated, monopoly utilities that handled electricity generation, transmission, local distribution and billing/collections. Regulators set retail electricity prices to allow the utility to recover its prudently incurred costs, a process known as cost-of-service regulation. During the 1990s, this model was disrupted in many states by "electricity restructuring," a term used to describe legal changes that allowed both non-utility generators to sell electricity to utilities — displacing the utility generation function — and/or "retail service providers" to buy electricity from generators and sell to end-use customers — displacing the utility procurement and billing functions. We review the original economic arguments for electricity restructuring, the potential winners and losers from these changes, and what has actually happened in the subsequent years. We argue that the greatest political motivation for restructuring was rent shifting, not efficiency improvements, and that this explanation is supported by observed waxing and waning of political enthusiasm for electricity reform. While electricity restructuring has brought significant efficiency improvements in generation, it has generally been viewed as a disappointment because the price-reduction promises made by some advocates were based on politically-unsustainable rent transfers. In reality, the electricity rate changes since restructuring have been driven more by exogenous factors — such as generation technology advances and natural gas price fluctuations — than by the effects of restructuring. We argue that a similar dynamic underpins the current political momentum behind distributed generation (primarily rooftop solar PV) which remains costly from a societal viewpoint, but privately economic due to the rent transfers it enables.
    JEL: L51 L94 L97
    Date: 2015–04
  10. By: Sugata Marjit (CTRPFP, Centre for Studies in Social Sciences, Calcutta, India); Lei Yang (Hong Kong Polytechnic University, Hong Kong)
    Abstract: This paper investigates the optimal environmental policy (the mix of emissions tax and R&D subsidy) when two firms, producing differentiated products, compete in the output market over time. Firms compete over supply schedules, which encompasses a continuum of market structures from Bertrand to Cournot. While production generates environmentally damaging emissions, firms can undertake R&D, which has the sole purpose of reducing emissions. In addition to characterising the optimal policy, we examine how the optimal tax and subsidy and the optimal level of abatement change as competition intensifies, as the dynamic parameters change and as the investment in abatement technology changes. In this setting, increased competition no longer necessarily leads to an increase in welfare. Instead, there are two forces. Competition increases welfare through its impact on the final goods price. However, lower prices result in larger quantities and more pollution. Our contribution is to show that the impact depends on the extent of the market, and the nature of preferences and technology.
    Keywords: Status,Consumption pattern,Inequality,Growth
    JEL: C13 C14 C51 D01 D12 O40
    Date: 2015–04–24
  11. By: Reddy, Kotapati Srinivasa
    Abstract: The purpose of this paper is to analyze three litigated cross-border inbound acquisitions that associated with Asian emerging market-India, namely Vodafone-Hutchison and Bharti Airtel-MTN deals in the telecommunications industry, and Vedanta-Cairn India deal with oil and gas exploration industry. To do so, we adopt a legitimate method in qualitative research, that is, case study method and thereby perform a unit of analysis and cross-case analysis. We suggest that government officials’ erratic nature and ruling political party influence were more in foreign inward deals that characterize higher bid value, listed target company, cash payment, and stronger government control in the industry. Importantly, the liability of foreignness and liability of localness was found to be severe in Indian-hosted deals that describe higher valuation, cash payment and dynamic industry. We eventually propose implications of mergers and acquisitions for extractive industries thus to enhance productivity and improve welfare measures during post-integration phase.
    Keywords: Cross-border mergers and acquisitions; Foreign direct investment; Oil and gas exploration industry; Telecommunications industry; Institutional theory; legal and regulatory framework; Internationalization
    JEL: F2 F23 F4 G3 G34 L2 M1 M16
    Date: 2015
  12. By: Vittorio Larocca (ETH Zurich, Switzerland)
    Abstract: This paper investigates competition among financial intermediaries in a finite-trader version of the Diamond and Dybvig (1983) economy under no aggregate uncertainty. The economy is populated by self-interested financial intermediaries that compete strategically over deposit contracts offered to consumers. Both exclusive and nonexclusive competition perspective are considered, in both cases multiple equilibria arise if banks do not have an initial endowment. When financial intermediaries have a sufficient level of endowment, regardless the competition perspective adopted, the first best allocation is the unique equilibrium allocation.
    Keywords: financial intermediation; deposit contracts.
    JEL: D82 G21
    Date: 2015–04
  13. By: Sasidaran Gopalan (Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Ramikishen S. Rajan (School of Policy, Government and International Affairs (SPGIA), George Mason University)
    Abstract: An important dimension of the effects of foreign bank entry on financial sector development relates to that of financial inclusion. Despite its policy significance, the empirical literature offers little evidence on the impact of bank competition generally or foreign bank entry specifically on financial inclusion. This paper examines the relationship between foreign bank entry and financial inclusion for a panel of 57 emerging and developing economies over the period 2004-2009. The empirical findings suggest that foreign banks have a positive impact in furthering financial inclusion, though the relationship turns negative when foreign bank entry is followed by greater banking concentration.
    Keywords: foreign bank entry, financial liberalization, financial inclusion, financial development, banking concentration
    JEL: F21 G00 G21 O16
    Date: 2015–02
  14. By: Elias Carroni (CERPE, University of Namur); Simone Righi (University of Modena and Reggio Emilia)
    Abstract: We model the choices of a monopolist who faces a partially uninformed population of consumers. She aims at expanding demand by exploiting his (limited) knowledge about consumers’ social network. She offers rewards to current clients in order to induce them to activate their social network and to convince peers to buy the product sold by the company. The program is profitable provided that the monopolist faces a serious enough informational problem and that the cost of investment in the social network is not prohibitively high. Price for informed consumers is lowered by the introduction of the reward compared to the benchmark where no program is run. There are no effects on the price charged to uninformed consumers. The offer of bonuses affects individual incentives of informed people to share information, determining a minimal degree condition for the costly investment in the social network. The level of such threshold strongly depends on the distribution of connections in the social network. In random networks, roughly the most popular half of informed consumers invests, regardless of network density. On the contrary, in scale-free networks the monopolist faces a clear-cut decision between maximising margins (running a small referral program) and maximising demand (motivating many informed agents to communicate). The optimal choice depends on the probability of observing highly-connected individuals. In empirically observed scale-free networks, the first alternative would be preferred, in line with real-world markets.
    Keywords: social networks, monopoly pricing, network-based pricing
    Date: 2015–04
  15. By: Eduardo P. S. Fiuza
    Abstract: This work is a pioneer effort to estimate supply and demand of automobiles in Brazil with a Discrete Choice model in a differentiated product oligopolistic market. We apply a Nested Logit model to the demand side and assume differentiated product price-setting firms on the supply side to evaluate the severe transformations undergone by the Brazilian automobile industry in the 1990s, especially policy events such as the tax rebates created for the so-called popular models (introduced in 1993) and the trade liberalization (initiated in 1991 and partially reversed in 1995 under the so-called Automotive Regime). We find that, although domestic cars still enjoyed considerably higher price-marginal cost markup rates than their imported counterparts (net of VATs and duties) in all market segments at the end of our sample (1997), these rates had dropped drastically and permanently during the 1995 import boom, not only because of import, but also from fiercer domestic competition. A perhaps striking finding is that, as opposed to what was verified in studies for other countries, popular and compacts enjoy the highest price-marginal cost markup rates, as they are significantly less threatened by imported competitors than the larger and luxurious models. These rates do not translate into higher pricecost margins in money units, but due to their high sales volumes these models account for great shares of the firms’ profits. Este trabalho é um esforço pioneiro para a estimação da oferta e da demanda de automóveis no Brasil com um modelo de Escolha Discreta em um mercado oligopolístico com produtos diferenciados. Nós aplicamos uma modelagem econométrica de logit hierárquico (Nested Logit) para o lado da demanda, e adotamos a hipótese de firmas fixadoras de preços com múltiplos produtos diferenciados no lado da oferta, para avaliar as profundas transformações ocorridas na indústria automotiva brasileira nos anos 1990, especialmente a adoção de políticas como os incentivos fiscais para os chamados carros populares (introduzidos em 1993) e a liberalização comercial (iniciada em 1991 e revertida parcialmente sob o chamado regime automotivo). Nós constatamos que, embora os carros nacionais ainda auferissem taxas consideravelmente altas de markup em relação aos seus similares importados (líquidas de impostos sobre valor agregado e tarifas) em todos os segmentos de mercado no final da nossa amostra (1997), essas taxas tiveram uma queda drástica e permanente durante o boom de importações de 1995, não apenas por causa dessas importações, mas também em virtude da competição doméstica mais acirrada. Uma constatação, talvez surpreendente, é que, ao contrário do verificado em estudos em outros países, os carros populares e compactos têm as maiores taxas de markup, na medida em que são muito menos ameaçados pela competição estrangeira do que os carros grandes e de luxo. Essas taxas não se traduzem em margens preçocusto mais altas também em unidades monetárias, mas, devido ao grande volume de vendas, esses modelos correspondem a grandes percentagens dos lucros das firmas.
    Date: 2015–01
  16. By: Shimeles, Abebe (African Development Bank); Gurara, Daniel Zerfu (African Development Bank); Birhanu Tessema, Dawit (African Development Bank)
    Abstract: We examine the fertilizer retail-import price gap in 14 African countries between 2002 and 2013. This price differential is large and remains persistent even after accounting for changes in the cost of domestic transportation. We hypothesize that these persistent deviations may be indicative of market power by importers/suppliers granted to them by governments that are prepared to bar competition in exchange for political rent. Our results show that the retail-import price differential is negatively correlated with government effectiveness. Quality of institutions both in terms of executing public policy and delivering services is, on average, likely to affect retail-import price gaps. Overall, our understanding of market imperfections is enhanced by a closer examination of the role of governance and regulation. The study illustrates this by establishing a link between retail-import price differentials and market efficiency and the quality of regulatory environment in Africa.
    Keywords: market distortions, political rent
    JEL: D43 O12
    Date: 2015–04

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