nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒05‒09
25 papers chosen by
Russell Pittman
United States Department of Justice

  1. Free entry oligopoly, Cournot, Bertrand and relative profit maximization By Satoh, Atsuhiro; Tanaka, Yasuhito
  2. Relative profit maximization in duopoly: difference or ratio By Satoh, Atsuhiro; Tanaka, Yasuhito
  3. Mergers and the Dynamics of Innovation By Xavier Boutin
  4. The Double Diamond Paradox By Daniel Garcia; Jun Honda; Maarten Janssen
  5. Multi-product Offshoring By Eckel, Carsten; Irlacher, Michael
  6. Are R&D investments by incumbents decreasing in the availability of complementary assets for start-ups? By Luca Stanca; Herbert Dawid; Mariacristina Piva; Marco Vivarelli
  7. Asymmetric information and imperfect competition in lending markets By Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
  8. Competition and Bank Risk Taking in a Differntiated Oligopoly By Kaniska Dam; Martín Basurto
  9. Microcredit and Price Competition: standardize to differentiate By Paolo Casini
  10. Incentives and Competition in Microfinance By Kaniska Dam; Prabal Roy Chowdhuri
  11. Pharmaceutical regulation, mandatory substitution, and generic competition By Birg, Laura
  12. An equilibrium model estimated on pharmaceutical data By Dalen, Dag Morten; Locatelli, Marilena; Strom, Steinar
  13. Intellectual Property Protection And Drug Plan Coverage: Evidence From Ontario By Paul Grootendorst; Minsup Shim; Adam Falconi; Tyler Robinson; Ethar Ismail; Joel Lexchin
  14. Patent Monopolies and the Costs of Mismarketing Drugs By Ravi Katari, Dean Baker
  15. Price Transmission and Market Power in Modern Agricultural Value Chains By Johan Swinnen; Anneleen Vandeplas
  16. Biofuels and Vertical Price Transmission: The Case of the U.S. Corn, Ethanol, and Food Markets By Dusan Drabik; Pavel Ciaian; Jan Pokrivcak
  17. Does Market Size Matter Also for Charities? By Scharf, Kimberley; Tukiainen, Janne
  18. Modelling "race to the bottom" effect on the self-regulated markets By Kolesnik, Georgiy
  19. Price setting in online markets: does IT click? By Gorodnichenko, Yuriy; Sheremirov, Viacheslav; Talavera, Oleksandr
  20. Energy Efficiency Policy with Price-quality Discrimination By Marie-Laure Nauleau; Louis-Gaëtan Giraudet; Philippe Quirion
  21. An Exact Solution Method for Binary Equilibrium Problems with Compensation and the Power Market Uplift Problem By Daniel Huppmann; Sauleh Siddiqui
  22. The Microeconomics of Television Markets By Hurren, Konrad
  23. Bargaining agenda in a unionised monopoly with network effects By Fanti, Luciano; Buccella, Domenico
  24. Manager-union bargaining agenda under monopoly and with network effects By Fanti, Luciano; Buccella, Domenico
  25. Bargaining agenda, timing, and entry By Fanti, Luciano; Buccella, Domenico

  1. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: We study a symmetric free entry oligopoly in which firms produce differentiated goods so as to maximize their relative profits. The relative profit of each firm is the difference between its profit and the average of the profits of other firms. We show that whether firms determine their outputs or prices, the equilibrium price when firms maximize their relative profits is lower than the equilibrium price when firms maximize their absolute profits, but the equilibrium number of firms under relative profit maximization is smaller than the equilibrium number of firms under absolute profit maximization. This is because each firm is more aggressive and produces larger output under relative profit maximization than under absolute profit maximization.
    Keywords: free entry, oligopoly, relative profit maximization
    JEL: D43 L13
    Date: 2015–05–03
  2. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: We compare formulations of relative profit maximization in duopoly with differentiated goods, 1) (Difference case) maximization of the difference between the profit of one firm and that of the other firm, 2) (Ratio case) maximization of the ratio of the profit of one firm to the total profit. We show that in asymmetric duopoly the equilibrium output of the more efficient (lower cost) firm in the ratio case is larger than that in the difference case and the price of the good of the more efficient firm in the ratio case is lower than that in the difference case. For the less efficient firm (higher cost firm) we obtain the converse results.
    Keywords: duopoly, relative profit maximization, difference, ratio
    JEL: D43 L13
    Date: 2015–05–03
  3. By: Xavier Boutin
    Keywords: mergers; innovation; dynamics models; consumer welfare
    JEL: C61 G34 O31
    Date: 2015–05
  4. By: Daniel Garcia; Jun Honda; Maarten Janssen
    Abstract: We study vertical relations in markets with consumer and retailer search. Retailers search to learn manufacturers' prices. We obtain three important new results. First, we explain why empirical distributions of retail prices are bi- modal, with a regular price and a sales price. Second, under competitive condi- tions (many retailers or small consumer search cost) social welfare is signicantly smaller than in the double marginalization outcome. Manufacturers' regular price is significantly above the monopoly price squeezing retailers' markups and pro- viding an alternative explanation for incomplete cost pass-through. Finally, by randomizing to induce active consumer search, manufacturers can increase their profits.
    JEL: D40 D83 L13
    Date: 2015–04
  5. By: Eckel, Carsten; Irlacher, Michael
    Abstract: We show that the labor market effects of product line relocations within multi-product firms differ significantly from the relocation of production tasks within single-product firms. By incorporating offshoring of labor-intensive goods in a model with multi-product firms, and exploring its implications in partial and general equilibrium, we identify the cannibalization effect of offshoring as an important transmission mechanism within multi-product firms and show that this effect hits domestic labor demand in addition to the well-known relocation effect. Furthermore, we contribute to the growing literature on multi-product firms and trade by showing that lower offshoring costs tend to increase the range of products produced.
    Keywords: cannibalization effect; efficiency-seeking offshoring; general oligopolistic equilibrium; product range
    JEL: F12 F23 L23
    Date: 2015–05
  6. By: Luca Stanca; Herbert Dawid; Mariacristina Piva; Marco Vivarelli
    Abstract: This paper investigates, both theoretically and empirically, the implications that complementary assets needed for the formation of start-ups -proxied by the ease of access to financial resources- have on the innovative efforts of incumbent firms. In particular, we develop a theoretical model, highlighting a strategic incentive effect by which the innovative efforts of incumbent firms are decreasing in the availability of the complementary assets needed for the creation of a startup. The empirical relevance of this effect is investigated by using firm level data drawn from the third Italian Community Innovation Survey covering the period 1998-2000. The results of our empirical analysis support our theory-based insights.
    Keywords: R&D, Innovation, Start-up, Complementary Assets
    Date: 2015–04–28
  7. By: Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
    Abstract: We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition.
    Keywords: Asymmetric information, imperfect competition, lending markets, Italian banking, adverse selection
    JEL: D82 G21 L13
    Date: 2015–04
  8. By: Kaniska Dam; Martín Basurto (Division of Economics, CIDE)
    Abstract: We re-examine the relationship between the degree of deposit market competition and bank risk taking in a model where banks compete in differentiated deposit services. When banks invest their deposits directly, as has already been established in the extant literature, an increased degree of competition, measured either by greater degree of substitutability or by greater number of banks, induces the banks to take more risk in equilibrium. When banks invest their deposits in loans, and their borrowers choose the level of risk, the risk of bank failure is independent of the degree of competition in the deposit market.
    Keywords: Bank competition; risk taking; loan contracts.
    Date: 2015–03
  9. By: Paolo Casini
    Abstract: Microfinance institutions, despite the presence of competition and informational asymmetries, typically offer a limited variety of contracts. Assuming price competition, we propose a simple theoretical explanation for this behavior and study its consequences in terms of strategic interaction and borrower welfare. We model an oligopolistic market in which Microfinance Institutions design their contracts and choose how many of them to offer. We find that when offering a menu is costly, MFIs always offer a single contract. Despite that, there exist equilibria in which MFIs coordinate and offer screening contracts, allowing them to extract a large fraction of the borrower welfare. We discuss the policy implications of our model in terms of price caps, market entry and outreach measurement.
    Keywords: Micronance, Competition, Altruism, Contract Menus, Credit Rationing
    JEL: G21 L13 L31 O16
    Date: 2014
  10. By: Kaniska Dam; Prabal Roy Chowdhuri (Division of Economics, CIDE)
    Abstract: We develop a model of competition among socially motivated microfinance institutions (MFIs), where the MFIs offer repayment-based incentive contracts to credit agents. The agents gather information regarding a borrower, and may, or may not collude with the borrower, taking bribes in return for not acting upon their information in case of collusion. We show that competition may either increase, or decrease incentives, with incentives becoming less high powered if the MFIs are not too motivated. Further, whenever either the moral hazard problem is relatively severe and/or the MFIs are not too motivated, competition increases default, thus providing a possible explanation for the recent episodes of crisis in the MFI sector. Interestingly, the effects of competition are linked to mission drift, i.e., whether the MFIs in the concerned countries are more, or less motivated. Further, default problems may worsen in case competition is accompanied by greater access to donor funds.
    Keywords: Microfinance; competition; collusion; staff incentive schemes; monitoring.
    Date: 2015–03
  11. By: Birg, Laura
    Abstract: This paper studies the effect of two regulatory instruments - a price cap and a reference price system - a mandatory substitution rule, and the combination of both on generic competition in a Salop-type model with an off-patent brand-name drug and n differentiated generic versions. The price cap reduces only the brand-name price, the reference price system reduces the brand-name price and generic prices. Both regulatory instruments reduce the generic market share and the number of generic competitors. The mandatory substitution rule decreases the brand-name price, but increases generic prices. It increases the generic market share and the number of generic competitors. Under mandatory substitution, price decreases under both regulatory instruments are lower. Mandatory substitution weakens the negative effect of the price cap on the generic market share and the number of generic competitors, but it amplifies the negative effect of the reference price system on the generic market share and the number of generic competitors.
    Keywords: pharmaceutical regulation,generic competition,mandatory substitution,reference price,price cap
    JEL: I18 I11 L50
    Date: 2015
  12. By: Dalen, Dag Morten; Locatelli, Marilena; Strom, Steinar (University of Turin)
    Abstract: The purpose of this paper is to estimate to what extent patients/doctors respond to prices when making a choice between a brand name product and its generics, and also how pharmacies respond to government regulation and to prices set by brand name producers. Data is unique in the sense that we observe prices set by pharmacies as well as by producers. We have estimated the demand side, but also jointly the demand side and the price setting by retailers/wholesalers and producers. Results confirm that estimating only the demand side yields biased estimates. Taking the whole data generating process into account we find much stronger price responses.
    Date: 2015–04
  13. By: Paul Grootendorst; Minsup Shim; Adam Falconi; Tyler Robinson; Ethar Ismail; Joel Lexchin
    Abstract: Canada has strengthened intellectual property (IP) protections for pharmaceutical drugs several times over the last three decades. These changes were intended to lengthen the period of market exclusivity for new brand drugs and thereby allow them to earn additional sales revenues that could be used to recoup R&D investments. Whether these policies achieved their objective of increasing sales revenues is unclear, however. Whether they did depends on the coverage decisions of the major drug plans. Longer periods of market exclusivity amount to a price increase for brand drugs. In response to higher prices, drug plans could have become more selective in the drugs they cover, and they could have waited longer to list these drugs on their formularies, reducing formulary exclusivity periods. To investigate, we assembled data on the coverage of brand drugs approved for use in Canada over the last 35 years by the Ontario Drug Benefit (ODB) program, the largest and most influential drug plan in Canada. We find that, except for a brief period of time, the marked strengthening of Canadian pharmaceutical IP laws over the last 25 years have not lead to an increase in the exclusivity period that brand-name drugs enjoy on the ODB formulary. In fact, exclusivity periods have been dropping more or less consistently since the mid 1970s. The causes of these changes remain to be explored.
    Keywords: intellectual property, pharmaceuticals, public drug coverage, ontario
    JEL: I18 I13 O34
    Date: 2015–05
  14. By: Ravi Katari, Dean Baker
    Abstract: Patent monopolies have long been used as a mechanism for financing innovation and research. The logic is that the government awards a monopoly on a product or process for a limited period of time in order to reward innovation. However, in addition to providing incentives for innovation and research, patent monopolies also provide incentives for a wide-range of rent-seeking behaviors, many of which can have major social costs. This paper attempts to calculate one category of these costs for prescription drugs. It produces estimates of the costs associated with mismarketing drugs. The estimates are based on assessments of the costs in the form of increased morbidity and mortality associated with five prominent cases of mismarketing over the last two decades.
    Keywords: trade deficit, pharmaceuticals, off-label, rent-seeking, mismarketing, Vioxx, Avandia, Bextra, OxyContin, Zyprexa, Pfizer, Merck, GlaxoSmithKline, Eli Lilly, Purdue
    JEL: I I1
    Date: 2015–04
  15. By: Johan Swinnen; Anneleen Vandeplas
    Abstract: “Modern” agricultural markets are characterized by, among other things, quality requirements and vertical coordination. The nature of the industrial organization of the value chain depends on a variety of factors, such as local institutions, economic growth, demand, institutional infrastructure etc. In this paper we present a conceptual framework to explicitly integrate key characteristics of these “modern” agricultural markets and derive implications for price transmission and market power in these markets and value chains.
    Date: 2014
  16. By: Dusan Drabik; Pavel Ciaian; Jan Pokrivcak
    Abstract: This is the first paper to analyze the impact of biofuels on the price transmission along the food chain. We analyze the U.S. corn sector and its vertical links with food and ethanol (energy) markets. We find that biofuels affect the price transmission elasticity in the food chain compared to a no biofuel production situation but the effect depends on the source of the market shock and the policy regime: the price transmission elasticity declines under a binding blender’s tax credit and a food market shock. Our results also indicate that the response of corn and food prices to shocks in the corn and/or food markets is lower in the presence of biofuels. Finally, the sensitivity analyses indicate that our results are robust to different assumptions about the model parameters.
    Keywords: price transmission, food chain, biofuels, prices
    JEL: Q11 Q21
    Date: 2014
  17. By: Scharf, Kimberley (Department of Economics and CAGE, University of Warwick, Coventry, UK and CEPR); Tukiainen, Janne (VATT Institute for Economic Research, Finland, and HECER, Finland;)
    Abstract: We analyze implications of market size on market structure in the not-forprofit sector. We show that, while a standard model of oligopolistic competition between for-profits predicts a positive relationship between market size and firm size, an analogous model of not-for-profit competition predicts no such correlation. We then interrogate these predictions empirically by focusing on five charitable markets for local public goods. These findings both reject the applicability of the classic theories of oligopolistic competition between for-profit firms to the not-for-profit case and fail to reject the simple model proposed here.
    Keywords: Competition in the Non-profit Sector; Market Structure
    Date: 2015
  18. By: Kolesnik, Georgiy
    Abstract: The effect of the competition among self-regulatory organizations (SROs) on the efficiency of the corresponding goods and services markets is studied. It is shown that under certain conditions the competition among SROs worsens the quality of the goods and services and leads to decreasing consumers’ welfare. Moreover, the distinctive feature of the competition among SROs in comparison with other types of regulatory competition is that even introduction of the alternative state control does not improve the situation. The proposals are formulated for self-regulatory markets’ structure and conditions change in order to reduce the negative effects of the SROs’ competition.
    Keywords: self-regulation; race to the bottom; regulatory competition; state control; hierarchical system; non-cooperative game
    JEL: C72 L22 L51
    Date: 2015–05–03
  19. By: Gorodnichenko, Yuriy (University of California, Berkeley); Sheremirov, Viacheslav (Federal Reserve Bank of Boston); Talavera, Oleksandr (University of Sheffield)
    Abstract: Using a unique dataset of daily U.S. and U.K. price listings and the associated number of clicks for precisely defined goods from a major shopping platform, this paper explores how prices are set in online markets, which have a number of special properties such as low search costs, low costs of monitoring competitors' prices, and low costs of nominal price adjustment. High-quality data are not only useful to estimate price rigidity and other properties of price adjustment in online commerce but also allow comparing the behavior of those properties with estimates available from brick-and-mortar stores.
    Keywords: online markets; prices; price dispersion
    JEL: E3
    Date: 2015–01–01
  20. By: Marie-Laure Nauleau (CIRED); Louis-Gaëtan Giraudet (CIRED, Ecole des Ponts ParisTech); Philippe Quirion (CIRED, CNRS)
    Abstract: We compare a range of energy efficiency policies in a durable good market subject to both energy-use externalities and price-quality discrimination by a monopolist. We find that the social optimum can be achieved with differentiated subsidies. With ad valorem subsidies, the subsidization of the high-end good leads the monopolist to cut the quality of the low-end good. The rates should always be decreasing in energy efficiency. With per-quality subsidies, there is no such interference and the rates can be increasing if the externality is large enough relative to the market share of low-type consumers. Stand-alone instruments only achieve second-best outcomes. A minimum quality standard may be set at the high-end of the product line if consumers are not too dissimilar, otherwise it should only target the low-end good. An energy tax should be set above the marginal external cost. Likewise, a uniform ad valorem subsidy should be set above the subsidy that would be needed to specifically internalize energy-use externalities. Lastly, if, as is often observed in practice, only the high-end good is to be incentivized, a per-quality schedule should be preferred over an ad valorem one. An ad valorem tax on the high-end good may even be preferred over an ad valorem subsidy if the externality is small enough and low-end consumers dominate the market.
    Keywords: Energy Efficiency, Price-Quality Discrimination
    JEL: Q4 Q41 Q48
    Date: 2015–04
  21. By: Daniel Huppmann; Sauleh Siddiqui
    Abstract: We propose a novel method to find Nash equilibria in games with binary decision variables by including compensation payments and incentive-compatibility constraints from non-cooperative game theory directly into an optimization framework in lieu of using first order conditions of a linearization, or relaxation of integrality conditions. The reformulation offers a new approach to obtain and interpret dual variables to binary constraints using the benefit or loss from deviation rather than marginal relaxations. The method endogenizes the trade-off between overall (societal) efficiency and compensation payments necessary to align incentives of individual players. We provide existence results and conditions under which this problem can be solved as a mixed-binary linear program. We apply the solution approach to a stylized nodal power-market equilibrium problem with binary on-off decisions. This illustrative example shows that our approach yields an exact solution to the binary Nash game with compensation. We compare different implementations of actual market rules within our model, in particular constraints ensuring non-negative profits (no-loss rule) and restrictions on the compensation payments to non-dispatched generators. We discuss the resulting equilibria in terms of overall welfare, efficiency, and allocational equity.
    Keywords: binary Nash game, non-cooperative equilibrium, compensation, incentive compatibility, electricity market, power market, uplift payments
    JEL: C72 C61 L13 L94
    Date: 2015
  22. By: Hurren, Konrad
    Abstract: I consider the literature surrounding the television market. Two important issues in the literature are: the market's two-sided nature, and bundling of channels. I discuss how an asymmetric pricing structure arises in television markets. The literature on bundling in the television market is reviewed, with some authors finding that bundling is a first best solution. Other authors show that a la carte pricing is socially optimal. Interestingly, there is consensus that mixed bundling is unambiguously worse than pure bundling and a la carte. Public service broadcasting is described in four English speaking countries to provide context. Failures in the television market are identified and some policy responses are discussed. I include literature analysing a price cap on basic cable packages and a domestic content requirement.
    Keywords: Bundling, Television, Two-Sided Markets,
    Date: 2014
  23. By: Fanti, Luciano; Buccella, Domenico
    Abstract: This paper investigates the bargaining agenda selection in a unionised monopoly with network effects. In contrast with the established result that monopolist always prefers Right-To-Manage (RTM), it is shown that monopolist prefers Sequential Efficient Bargaining (SEB), provided that the network effect is sufficiently intense and union’s power not too high. Since the union always prefers SEB, the presence of network effects may solve the traditional conflict of interests between parties and allow the achievement of the highest social welfare. Moreover, if the monopolist can choose the agenda, it may strategically commit either to RTM or SEB or EB to deter market entry, depending on the network intensity and thus all agendas are an effective device as a barrier to entry. Furthermore, with endogenous agenda’s selection, the parties may agree on SEB, provided that the network effects are intense and the union’s power not excessively low. The social welfare under duopoly with SEB is the Pareto-superior outcome. However, the SEB institution may deter entry in specific cases. Thus, the SEB institution itself may prevent the most desirable welfare outcome but in any case it remains socially preferred to RTM and EB.
    Keywords: Efficient bargaining; Right-to-manage; Firm-union bargaining agenda; Network effects
    JEL: J51 L13 L21
    Date: 2015
  24. By: Fanti, Luciano; Buccella, Domenico
    Abstract: The present paper investigates the determination of the bargaining agenda in a unionised monopoly with managerial delegation, without and with network effects in consumption. First, we show that, in contrast with the received literature, monopolist hires a manager even in the absence of risk-sharing and asymmetric information considerations. Without network effects, in contrast to standard oligopoly results, managerial delegation benefits the monopolist, while harms consumers, workers and society. Moreover, in contrast to the conventional wisdom, monopoly profits with managerial delegation are higher with sequential Efficient Bargaining (EB) than Right-to-Manage (RTM), while union’s welfare can be higher with RTM than EB: then a conflict of interests between the parties may exist but, paradoxically, for reverted choices of the bargaining agenda. Consumption externalities change the picture: managerial delegation benefits consumers, workers and society, provided that the network effect is sufficiently strong and union’s power relatively low. The monopolist still prefers sequential EB; however, the union’s welfare becomes larger under EB even for relatively low value of their power, provided that the network effect is sufficiently strong. Thus, the monopolist and the union endogenously choose the EB agenda which is also Pareto-superior.
    Keywords: Efficient Bargaining; Right-to-manage; Firm-union bargaining agenda; Managerial Delegation; Network effects
    JEL: J51 L13 L21
    Date: 2015–05–04
  25. By: Fanti, Luciano; Buccella, Domenico
    Abstract: In a unionised Cournot duopoly, the present paper extensively re-examines the subject of the bargaining scope between firms and unions. It investigates the endogenous equilibrium agenda (Right-to-Manage vs Efficient Bargaining) that can arise under three timing specification of the bargaining game both for a given duopoly and monopoly with threat of entry. A novel result is that, in sequential negotiations, Efficient Bargaining emerges in equilibrium for a range of the unions’ power larger than in simultaneous negotiations. Moreover, given the potential market deterrence effect of the Efficient Bargaining, the conventional wisdom that this agenda is socially “efficient” can be reversed.
    Keywords: Efficient Bargaining; Right-to-manage; Cournot duopoly; Firm-union bargaining agenda
    JEL: J51 L13
    Date: 2015–01

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