nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒06‒20
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Prices and Heterogeneous Search Costs By Moraga-González, José-Luis; Sándor, Zsolt; Wildenbeest, Matthijs
  2. The Simple Economics of Asymmetric Cost Pass-Through By Robert A. Ritz
  3. Price equilibrium and willingness to pay in a vertically differentiated mixed duopoly By C. Benassi; M. Castellani; M. Mussoni
  4. Investigating the Strategic Nature of Supply Functions in Oligopoly By F. Delbono; L. Lambertini
  5. Trading in Fragmented Markets By Markus Baldauf; Joshua Mollner
  6. Cross-Licensing and Competition By Jeon, Doh-Shin; Lefouili, Yassine
  7. Speculative Constraints on Oligopoly By Sebastien Mitraille; Henry Thille
  8. Merger remedies in oligopoly under a consumer welfare standard By Dertwinkel-Kalt, Markus; Wey, Christian
  9. Endogenous information disclosure in experimental oligopolies By David Kopanyi; Anita Kopanyi-Peuker
  10. "The value of personal information in markets with endogenous privacy" By Montes, Rodrigo; Sand-Zantman, Wilfried; Valletti, Tommaso
  11. Firms Endogenous Entry and Monopolistic Banking in a DSGE model By Carla La Croce; Lorenza Rossi
  12. Inverted-U relationship between innovation and survival: Evidence from firm-level UK data By Guidi, Francesco; Solomon, Edna; Trushin, Eshref; Ugur, Mehmet
  13. Determinantes de la innovación en la industria uruguaya 1998-2009. By Carlos Bianchi; Guillermo Lezama; Adriana Peluffo
  14. Airport Prices in a Two-Sided Market Setting: Major US Airports By Ivaldi, Marc; Sokullu, Senay; Toru, Tuba
  15. Stadiums and Scheduling: Measuring Deadweight Losses in Professional Sports Leagues, 1920-1970 By Lional Frost; Luc Borrowman; Abdel K. Halabi
  16. Estimating Equilibrium in Health Insurance Exchanges: Analysis of the Californian Market under the ACA By Pietro Tebaldi
  17. Cournot Competition and "Green" Innovation: An Inverted-U Relationship By L. Lambertini; J. Poyago-Theotoky; A. Tampieri
  18. Energy efficiency subsidies with price-quality discrimination By Marie-Laure Nauleau; Louis-Gaëtan Giraudet; Philippe Quirion
  19. Do your Rivals Enhance your Access to Credit? Theory and Evidence By Vittoria Cerasi; Alessandro Fedele; Raffaele Miniaci
  20. Triple and Quadruple Play Bundles of Communication Services By OECD
  21. Law enforcement and drug trafficking networks: a simple model By Raffo López Leonardo

  1. By: Moraga-González, José-Luis; Sándor, Zsolt; Wildenbeest, Matthijs
    Abstract: We study price formation in a model of consumer search for differentiated products when consumers have heterogeneous marginal search costs. We provide conditions under which a symmetric Nash equilibrium exists and is unique. Search costs affect two margins—the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density. When the search cost density has the increasing likelihood ratio property (ILRP), the effect of lowering search costs on the intensive search margin has a dominating influence and prices decrease. By contrast, when the search cost density has the decreasing likelihood ratio property (DLRP), the effect on the extensive search margin is dominant and lower search costs result in higher prices. We compare these results with those obtained when consumers have heterogeneous fixed search costs.
    Keywords: differentiated products; monotone likelihood ratio; search cost heterogeneity; sequential search
    JEL: D43 D83 L13
    Date: 2015–06
  2. By: Robert A. Ritz
    Abstract: In response to cost changes, prices often rise more strongly or quickly than they fall. This phenomenon has attracted attention from economists, policymakers, and the general public for decades. Many assert that it cannot be explained by standard economic theory, and is evidence for “anti-competitive” behaviour by firms. This paper argues against this conventional wisdom; it shows that simple price theory can, in principle, account for such asymmetric pass-through - even with perfect competition. From a policy perspective, knowledge of cost pass-through patterns in a market does not allow for strong inferences on the intensity of competition.
    Keywords: Asymmetric price transmission, cost pass-through, electricity markets, price theory, rockets and feathers
    JEL: D40 L11 L94
    Date: 2015–06–11
  3. By: C. Benassi; M. Castellani; M. Mussoni
    Abstract: In the framework of a vertically differentiated mixed duopoly, with uncovered market and costless quality choice, we study the existence of a price equilibrium when a welfare-maximizing public firm producing low quality goods competes against a profit-maximizing private firm producing high quality goods. We show that a price equilibrium exists if the quality spectrum is wide enough vis à vis a measure of the convexity of the distribution of the consumers' willingness to pay, and that such equilibrium is unique if this sufficient condition is tightened. Log-concavity of the income distribution is inconsistent with the existence of equilibrium.
    JEL: D43 L13 L51
    Date: 2015–06
  4. By: F. Delbono; L. Lambertini
    Abstract: We show that supply functions cannot be classified as either strategic complements or substitutes according to the twofold criterion advanced by Bulow et al. (1985). This is because while the slope of the best reply is univocally positive, this is not the case with the sign of the cross derivative of marginal profit. We first show this discrepancy in the original Klemperer and Meyer (1989) setting, and then in a linear-quadratic model of differentiated duopoly. We further confirm and strengthen our result by proving that the game in supply functions is neither supermodular nor submodular.
    JEL: D43 L13
    Date: 2015–06
  5. By: Markus Baldauf (Stanford University); Joshua Mollner (Stanford University)
    Abstract: This paper applies an econometric model of imperfect competition to equity trading with competing exchanges. Stock of the same company is traded on multiple venues today. This development was driven by regulations, aimed at benefiting investors by fostering competition among exchanges. However, the welfare consequences of increased exchange competition are theoretically ambiguous. While competition does place down- ward pressure on the bid-ask spread, this force may be outweighed by increased adverse selection that stems from additional arbitrage opportunities. We investigate this ambi- guity empirically by estimating key parameters of the model using detailed trading data from Australia. The benefits of increased competition are outweighed by the costs of multi-venue arbitrage. Compared to the prevailing duopoly, we predict that the coun- terfactual spread under a monopoly would be 23 percent lower. Further, market design variations on the continuous limit order book would eliminate profits from cross-venue ar- bitrage strategies and reduce the spread by 51 percent. Finally, eliminating off-exchange trades, so-called dark trading, would reduce the spread by 11 percent.
    Date: 2015–06
  6. By: Jeon, Doh-Shin; Lefouili, Yassine
    Abstract: We study bilateral cross-licensing agreements among N (> 2) competing firms. We find that the fully cooperative royalty, i.e., the one that allows them to achieve the monopoly profit, can be sustained as the outcome of bilaterally efficient agreements, regardless of whether the agreements are public or private and whether firms compete in quantities or prices. We extend this monopolization result to a general class of two-stage games in which firms bilaterally agree in the first stage to make each other payments that depend on their second-stage non-cooperative actions. Policy implications regarding the antitrust treatment of cross-licensing agreements are derived.
    Keywords: Cross-Licensing, Royalties, Collusion, Antitrust and Intellectual Property.
    JEL: D43 L13 L24 L41 O34
    Date: 2015–05–19
  7. By: Sebastien Mitraille (Toulouse Business School, University of Toulouse); Henry Thille (Department of Economics and Finance, University of Guelph)
    Abstract: We examine an infinite horizon game in which producers’ output can be purchased by speculators for resale in a future period. The existence of speculators serves to constrain the feasible set of prices that can result from producers’ output game in each period. Absent speculation, producers play a repeated Cournot game with random demand. With speculative inventories possible, the game becomes a dynamic one in which speculative stocks are a state variable which firms can control via their influence on price. We employ collocation methods to find the unknown expected price and value functions required for computation of equilibrium quantities. We demonstrate that strategic considerations result in an incentive to sell to speculators that is nonmonotonic in the number of producers: speculation has the largest effect on equilibrium prices and welfare for market structures intermediate between monopoly and perfect competition. Using a computed example, we demonstrate that the effect of speculative storage on the average price level can be substantial, even though the effects on social welfare can be ambiguous.
    Keywords: Inventory, speculation, oligopoly, commodity markets
    JEL: L13 D43
    Date: 2015
  8. By: Dertwinkel-Kalt, Markus; Wey, Christian
    Abstract: We analyze the welfare effects of structural remedies on merger activity in a Cournot oligopoly if the antitrust agency applies a consumer surplus standard. We derive conditions such that otherwise price-increasing mergers become externality-free by the use of remedial divestitures. In this case, the consumer surplus standard ensures that mergers are only implemented if they increase social welfare. If the merging parties can extract the entire surplus from the asset sale, then the socially optimal buyer will be selected under a consumer standard.
    Keywords: Remedies,Merger control,Consumer standard,Synergies
    JEL: L13 L41 K21
    Date: 2015
  9. By: David Kopanyi (Department of Economics, University of Nottingham); Anita Kopanyi-Peuker (University of Amsterdam)
    Abstract: With this research we examine whether observing firm-specific production levels leads to a less competitive market outcome. We consider an endogenous information setting where firms can freely decide whether they want to share information about their past production levels. By voluntarily sharing information, firms can show their willingness to cooperate.We conduct a laboratory experiment where firms decide only about their production levels first, and the information they receive is exogenous (either no information, or aggregate / disaggregated information about others' production, in varying order). Later, firms can also decide whether to share their past production levels with others. We vary the kind of information firms receive: they receive the shared information either in aggregate or in disaggregated form. Our results show no difference in average total outputs across data aggregation and information settings. However, we observe more collusion when individual information was shared voluntarily. Our results show that subjects use voluntary sharing to show their intentions to cooperate. If they share information, they produce significantly less than if they do not share information.
    Keywords: Cournot competition, information, collusion, experiment
    Date: 2015–11
  10. By: Montes, Rodrigo; Sand-Zantman, Wilfried; Valletti, Tommaso
    Abstract: This paper investigates the effects of price discrimination on prices, profits and consumer surplus, when one or more competing firms can use consumers' private information to price discriminate and consumers can pay a privacy cost to avoid it. While a monopolist always benefits from higher privacy costs, this is not true in the competing duopoly case. In this last case, firms' individual profits are decreasing while consumer surplus is increasing in the privacy cost. Finally, under competition, we show that the optimal selling strategy for the owner of consumer data consists in dealing exclusively with one firm in order to create maximal competition between the winner and the loser of data. This brings ineficiencies, and we show that policy makers should concentrate their attention on exclusivity deals rather than making it easier for consumers to protect their privacy.
    Keywords: Privacy, Information, Price Discrimination
    Date: 2015–05
  11. By: Carla La Croce (Department of Economics and Management, University of Pavia); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: We consider a DSGE model with monopolistic competitive banks together with endogenous ?firms entry. We ?find that our model implies higher volatilities of both real and fi?nancial variables than those implied by a DSGE model with monopolistic banking sector and a ?fixed number of ?firms. The response of the economic activity is also more persistent in response to all shocks. Furthermore, we show that inefficient banks enhance the endogenous propagation of the shocks in respect to a model where banks compete under perfect competition and can fully ensure against the risk of ?firms default.
    Date: 2015–06
  12. By: Guidi, Francesco; Solomon, Edna; Trushin, Eshref; Ugur, Mehmet
    Abstract: Theoretical and empirical work on innovation and firm survival has produced varied and often conflicting findings. In this paper, we draw on Schumpeterian models of competition and innovation and stochastic models of firm dynamics to demonstrate that the conflicting findings may be due to linear specifications of the innovation-survival relationship. We demonstrate that a quadratic specification is appropriate theoretically and fits the data well. Our findings from an unbalanced panel of 39,705 UK firms from 1997-2012 indicate that an inverted-U relationship holds for different types of R&D expenditures and sources of funding. We also report that R&D intensity is more likely to increase survival when firms are in more concentrated industries and in Pavitt technology classes consisting of specialized suppliers of technology and scale-intensive industries. Finally, we report that the effects of firm and industry characteristics as well as macroeconomic environment indicators are all consistent with prior findings. The results are robust to step-wise modeling, controlling for left truncation and use of lagged values to address potential simultaneity bias.
    Keywords: innovation,R&D,firm dynamics,survival anaysis
    JEL: C41 D21 D22 L1 O3
    Date: 2015–06–15
  13. By: Carlos Bianchi (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Guillermo Lezama (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Adriana Peluffo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: This paper presents a preliminary analysis of the determinants of firms' innovation in the Uruguayan manufacturing industry. It describes the Uruguayan innovation surveys, the national background and the recent use of innovation indicators. It is an empirical work which presents results from the first panel data built on all the micro data of the Uruguayan innovation survey between 1998-2009. The results confirm that the innovative propensity in the Uruguayan industry is determined by the firm's export behaviour and by the linkages with the NIS, but, mainly by the size of the firm.
    Keywords: innovation surveys, panel data, Uruguay
    JEL: L25 L60 O30
    Date: 2015–06
  14. By: Ivaldi, Marc; Sokullu, Senay; Toru, Tuba
    Abstract: This paper analyzes the rationale of airport business models. First, it provides evidence that the airports should be considered as two sided markets because of significant network externalities between the airlines and the passengers. This result invalidates the traditional approach where the airport-airline-passenger relationship is considered as vertically integrated, taking passengers as final consumers. Second, a testing procedure aimed at eliciting the real business model of airports demonstrates that the major U.S. airports do not internalize the externalities existing between airlines and passengers. We find that these airports set profit maximizing prices for the non-aeronautical services to passengers and Ramsey prices for the aeronautical services to airlines. Given these results, we conduct a welfare analysis by simulating the implementation of profit maximizing prices when an airport fully accounts for the two-sidedness of its activities. In particular, we show that the impact on social welfare is not independent on the specific features of each airport and that the privatization of airports cannot be considered as the only solution for airports.
    Keywords: airport industry; two-sided markets
    JEL: C32 L93
    Date: 2015–06
  15. By: Lional Frost; Luc Borrowman; Abdel K. Halabi
    Abstract: In studies of professional sports leagues it has not been possible to quantify losses of economic welfare (deadweight losses) because of the absence of a counterfactual. Before 1970, Australian Football’s major league, the Melbourne-based Victorian Football League (VFL) set standard admission prices for all games and scheduled matches to distribute revenue evenly between clubs. Almost all of the League’s teams were based in one city, with all but one playing home (or regular season) games at small stadiums with limited facilities, while the city’s largest and best equipped stadium lay vacant every second weekend. By estimating demand for matches between the five highest drawing clubs over a 50-year period, we specify the size of revenue losses that resulted from different schedules and venues. The results show significant losses in League revenue and attendances, but these were not sufficient to threaten the survival of a distance-protected cartel. Fixed pricing created welfare gains for supporters of the larger clubs and welfare losses for supporters of the smaller clubs, and was not conducive to an even competition.
    Keywords: Sports, football, cartels, stadiums, scheduling, pricing
    JEL: D42 L1 L83 N97
    Date: 2015–01
  16. By: Pietro Tebaldi (Stanford University)
    Abstract: This paper develops and estimates a model of a regulated health insurance exchange, in which insurers’ ability to adjust prices across buyers with different observed risk or preferences is restricted. I show conditions under which the joint distribution of risk and preferences is identified, even when the econometrician does not observe any information on individual risk. These primitives can then be used to simulate equilibrium under alternative regulations. I estimate the model with data from the first year of the Californian exchange under the Affordable Care Act, where age-rating restrictions and a subsidy program determine the way in which insurers’ decisions translate to expected profits. For this market, I investigate alternative designs of the subsidy program. Compared to the subsidy formula mandated by the healthcare reform, the adoption of a voucher program – providing buyers with a lump-sum equal to 70-80% of their expected expenditure – would transfer welfare away from insurers, favoring consumers and/or taxpayers. Simulations of equilibrium under this alternative policy result in total coverage between 100-115% of the levels achieved by the current regulations, while also reducing government expenditure, average premiums, and markups, by 0-20%, 12-15%, and 22-27%, respectively.
    Keywords: Health insurance, health reform, ACA, health exchanges, subsidies, regulation.
    JEL: I11 I13 I18 L51 H51 L88
    Date: 2015–06
  17. By: L. Lambertini; J. Poyago-Theotoky; A. Tampieri
    Abstract: We examine the relationship between competition and innovation in an industry where production is polluting and R&D aims to reduce emissions (“green” innovation). We present an n-firm oligopoly where firms compete in quantities and decide their investment in “green” R&D. When environmental taxation is exogenous, aggregate R&D investment always increases with the number of firms in the industry. Next we analyse the case where the emission tax is set endogenously by a regulator (committed or time-consistent) with the aim to maximise social welfare. We show that an inverted-U relationship exists between aggregate R&D and industry size under reasonable conditions, and is driven by the presence of R&D spillovers.
    JEL: Q55 Q56 O30 L13
    Date: 2015–06
  18. By: Marie-Laure Nauleau (CIRED); Louis-Gaëtan Giraudet (CIRED, Ecole des PontsParisTech); 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 are 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 spec ifically 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, imperfect discrimination, vertical differentiation, subsidy
    JEL: H23 Q48 Q54
    Date: 2015–06
  19. By: Vittoria Cerasi (University of Milano-Bicocca, Department of Economics, Management and Statistics); Alessandro Fedele (Free University of Bolzano‐Bozen, Faculty of Economics and Management); Raffaele Miniaci (University of Brescia, Department of Economics and Management)
    Abstract: In this paper, we unveil a potential, yet disregarded, benefit of product market competition for small and medium enterprises (SMEs). In a model where firms are financed through collateralized bank loans and compete à la Cournot, we introduce a probability of bankruptcy. We discuss the conditions under which an increase in the number of rivals within the industry enhances the equilibrium amount of bank lending through the impact on the resale value of collateralized productive assets. This benefit vanishes if firms outside the industry are willing to acquire the productive assets of the distressed incumbents. These predictions are empirically tested on a sample of Italian SMEs for which we know the percentage of productive investment funded with bank lending in addition to other characteristics. In line with the theoretical predictions, we find evidence of a beneficial effect of product market competition on the amount of bank lending only when outsiders are absent.
    Keywords: collateralized bank loans, product market structure, productive assets resale value
    JEL: G33 G34 L13 D22
  20. By: OECD
    Abstract: This report examines the provision of multiple communication services over broadband access networks, a phenomenon known as “bundling”. It highlights that care should be taken to ensure that such offers do not unreasonably constrain competition or bind consumers to a single provider in a manner that decreases welfare. The provision of bundled communication services can increase competition if it brings more choices, higher quality, or lower prices to consumers from the facilities-based networks providing bundled offers. On the other hand, it may also lead to increased consolidation between fixed and mobile network providers and result in less competition in wholesale and retail markets.
    Date: 2015–06–18
  21. By: Raffo López Leonardo
    Abstract: This article presents a theoretical model to explain the performance of illicit drug markets. The analytical framework is based on the oligopoly model of Poret and Téjedo (2006), but the latter is extended in a crucial respect: the influence of drug trafficking networks in the illicit drug markets is considered. The proposed model indicates that Poret and Téjedo were correct: the aggregate quantity of drugs sold is negatively affected by the intensity of the law enforcement policies applied and positively affected by the number of traffickers in the market. We also determined that the individual and aggregate sales in the market are positively affected by the network’s average density. Our model is useful for explaining the failure of the war against drugs to halt the reproduction and expansion of illegal activities at a global level during the three past decades.
    Keywords: drug trafficking, illegal markets, law enforcement, social networks, gametheory, oligopoly
    JEL: K42 D43 L13 C72 D85
    Date: 2015–05–01

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