nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒06‒27
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Strategic Incentives When Supplying to Rivals By Serge Moresi; Marius Schwartz
  2. On the efficiency of Bertrand and Cournot equilibrium in the presence of asymmetric network compatibility effects By Tsuyoshi Toshimitsu
  3. Price and quantity competition in a differentiated duopoly with network compatibility effects By Tsuyoshi Toshimitsu
  4. Quick or Persistent? Strategic Investment Demanding Versatility By Jan-Henrik Steg; Jacco Thijssen
  5. Empirical analysis of consumer behavior By Huang, Yufeng
  6. Cartel enforcement in the EU: Leniency programmes and the appeals process By Hüschelrath, Kai
  7. Antitrust, Regulation and the Neutrality Trap By Renda, Andrea
  8. The development of competition law in Kosovo By Nezaj, Novitet Xh.
  9. Licensing Innovations: The Case of the Inside Patent Holder By Fan, Cuihong; Jun, Byoung Heon; Wolfstetter, Elmar G.
  10. Appropriability Mechanisms, Innovation and Productivity:Evidence from the UK By Hall, Bronwyn H.; Sena, Vania
  11. Micro-Evidence on Product and Labor Market Regime Differences between Chile and France By Dobbelaere, Sabien; Lauterbach, Rodolfo; Mairesse, Jacques
  12. Strategic Design under Uncertain Evaluations: Structural Analysis of Design-Build Auctions By Takahashi, Hidenori
  13. Income effects and the welfare consequences of tax in differentiated product oligopoly By Griffith, Rachel; Nesheim, Lars; O'Connell, Martin
  14. Does competition affect truth-telling? An experiment with rating agencies By Jean Paul Rabanal; Olga A. Rabanal
  15. A dynamic conduct parameter model of electricity marketer pricing behavior in the California power exchange By Carol A. Dahl; Tyler Hodge
  16. Changes in the size and structure of the European Union banking sector – the role of competition between banks By Małgorzata Pawłowska
  17. The Welfare Effects of Supply-Side Regulations in Medicare Part D By Francesco Decarolis; Maria Polyakova; Stephen P. Ryan
  18. The role of network effects and consumer heterogeneity in adoption of mobile phones: evidence from South Africa By Lukasz Grzybowski
  19. Cournot Competition and “Green” Innovation: An Inverted-U Relationship By Luca Lambertini; Joanna Poyago-Theotoky; Alessandro Tampieri

  1. By: Serge Moresi (Charles River Associates, Inc., Washington DC); Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: We consider an unregulated, vertically integrated input monopolist that supplies to a differentiated downstream rival. With linear input pricing, the integrated firm unambiguously wants to induce expansion by the rivalÑthe opposite incentive from that in standard oligopoly settings with no supply relationship, even though the downstream competition effect is still present here. This result holds whether downstream competition involves prices or quantities and strategic substitutes or complements. If the firm charges a two-part tariff for the input, the result continues to hold under Bertrand competition in the ÒnormalÓ case of prices as strategic complements, but is reversed for Cournot and strategic substitutes. We analyze one mechanism for influencing the independent downstream firm, vertical delegation, whereby the integrated firm charges its downstream unit an observable input price, and the downstream unit does not treat that price as a pure internal transfer. Vertical delegation is shown to dominate centralized behavior by the integrated firm, and we characterize how the input price should be set in order to alter the independent firmÕs choice depending on the specifics of downstream competition.
    Keywords: Strategic Competition Against Customers, Vertical Delegation
    JEL: L13 D43 L14 L22
  2. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Based on a differentiated duopoly model, we consider the efficiency of Bertrand and Cournot equilibrium in the presence of network effects and product compatibility. In particular, we demonstrate that if an asymmetric product compatibility with a strong network effect between the firms arises, give certain conditions, Cournot equilibrium is more efficient than Bertrand equilibrium in terms of greater consumer, producer, and social surplus.
    Keywords: Bertrand equilibrium; Cournot equilibrium; product compatibility; network effect; fulfilled expectation; horizontally differentiated duopoly
    JEL: L13 L32 L33
    Date: 2015–06
  3. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: We consider endogenous choice of the strategic variables, price and quantity, in a horizontally differentiated duopoly market, assuming network effects and product compatibility (hereafter, network compatibility effects). We demonstrate the following. If the degree of network compatibility effects of the other rival firm is smaller (larger) than the degree of product substitutability, then choosing quantity (price) is a dominant strategy for the firm. In this case, the Cournot (Bertrand) equilibrium arises. If there are asymmetric network compatibility effects between the firms, the firm with larger (smaller) network compatibility effects than the degree of product substitutability chooses quantity (price). In this case, the Cournot−Bertrand equilibrium arises.
    Keywords: Bertrand equilibrium; Cournot equilibrium; Cournot−Bertrand equilibrium; product compatibility; network effect; fulfilled expectation; horizontally differentiated duopoly
    JEL: C72 D01 D43 L13
    Date: 2015–06
  4. By: Jan-Henrik Steg (Center for Mathematical Economics, Bielefeld University); Jacco Thijssen (Department of Mathematics, University of York)
    Abstract: In this paper we analyse a dynamic model of investment under uncertainty in a duopoly, in which each firm has an option to switch from the present market to a new market. We construct a subgame perfect equilibrium in mixed strategies and show that both preemption and attrition can occur along typical equilibrium paths. In order to determine the attrition region a two-dimensional constrained optimal stopping problem needs to be solved, for which we characterize the non-trivial stopping boundary in the state space. We explicitly determine Markovian equilibrium stopping rates in the attrition region and show that there is always a positive probability of eventual preemption, contrasting the deterministic version of the model. A simulation-based numerical example illustrates the model and shows the relative likelihoods of investment taking place in attrition and preemption regions.
    Keywords: stochastic timing games, preemption, war of attrition, real options, Markov perfect equilibrium, two-dimensional optimal stopping
    JEL: C61 C73 D21 D43 L13
    Date: 2015–06
  5. By: Huang, Yufeng (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of three essays in quantitative marketing, focusing on structural empirical analysis of consumer behavior. In the first essay, he investigates the role of a consumer's skill of product usage, and its imperfect transferability across brands, in her product choice. It shows that experienced consumers have higher but more specialized demand towards high-end products. The second essay investigates a consumer’s choice of considering a product before purchase. Because consideration is costly in effort, the consumer will purchase fewer products than she likes, and firms have to compete on price to prevent being excluded from consumer consideration. In the third and final essay, Yufeng investigates why the choice to shop online is increasingly sensitive to changes in shopping distance. He finds that the major driving force of this is the reduction in perceived risk to online shopping, when a consumer gains experience in doing so.
    Date: 2015
  6. By: Hüschelrath, Kai
    Abstract: Fighting cartels is a major priority of EU competition policy. Acting in concert with national competition authorities in the EU, the European Commission (EC) has made considerable efforts to promote competitiveness by detecting and punishing cartels. These efforts are visible not only in the increasing number of cartel cases, but also in the substantial rise in the average fines imposed per cartel member. While the successes of past years in fighting cartels clearly hinge to some extent on various policy reforms, many commentators argue that the introduction of the EC leniency programme (LP) in 1996 is likely a key enabler. Generally, LPs offer violators a fine reduction or even full amnesty from fines if they disclose an infringement to the responsible authority and cooperate during the subsequent investigation. Below, the key results of an empirical ZEW study on the determinants of self-reporting under the European LP are presented. Given the substantial increase in both the number of detected cartels and the average fine per cartel member, it comes as no surprise that an increasing number of convicted firms have considered filing an appeal against EC decisions. Below, the characteristics of firms filing an appeal and the factors that determine their success in terms of fine reduction are discussed.
    Abstract: Die Bekämpfung von Kartellen hat einen außerordentlich hohen Stellenwert im Rahmen der EU-Wettbewerbspolitik. In Zusammenarbeit mit den nationalen Wettbewerbsbehörden der EU-Mitgliedstaaten hat die Europäische Kommission (EC) durch die Aufdeckung und Verfolgung von Kartellen erhebliche Anstrengungen zur Stärkung der Wettbewerbsfähigkeit unternommen. Zahlreiche Beobachter argumentieren, dass die von der Kommission 1996 eingeführte Kronzeugenregelung ("Leniency Programme", LP) in diesem Zusammenhang ein Schlüsselelement darstelle. Angesichts der steigenden Anzahl aufgedeckter Kartelle und der erhöhten durchschnittlichen Bußgeldstrafen pro Kartellmitglied ist es nicht überraschend, dass verurteilte Unternehmen immer häufiger erwägen, gegen die Entscheidungen der Kommission in Berufung zu gehen. Das vorliegende Paper präsentiert die zentralen Ergebnisse einer empirischen ZEW-Studie zu den Voraussetzungen einer Selbstanzeige im Rahmen des europäischen LP. Es diskutiert zudem die Merkmale der Unternehmen, die Berufung einlegen, sowie die Erfolgsfaktoren, die zu einer Bußgeldverminderung führen.
    Date: 2015
  7. By: Renda, Andrea
    Abstract: EU Internet policy seems bewitched by the term ‘neutrality’, applied to networks and now search engines and other online platforms. Andrea Renda questions in this latest Special Report whether this is this a good way to protect end users. Originally confined to the infrastructure layer, today the neutrality rhetoric is being expanded to multi-sided platforms such as search engines and more generally online intermediaries. Policies for search neutrality and platform neutrality are invoked to pursue a variety of policy objectives, encompassing competition, consumer protection, privacy and media pluralism. This paper analyses this emerging debate and comes to a number of conclusions. First, mandating net neutrality at the infrastructure layer might have some merit, but it certainly would not make the Internet neutral. Second, since most of the objectives initially associated with network neutrality cannot be realistically achieved by such a rule, the case for network neutrality legislation would have to stand on different grounds. Third, the fact that the Internet is not neutral is mostly a good thing for end users, who benefit from intermediaries that provide them with a selection of the over-abundant information available on the Web. Fourth, search neutrality and platform neutrality are fundamentally flawed principles that contradict the economics of the Internet. Fifth, neutrality is a very poor and ineffective recipe for media pluralism, and as such should not be invoked as the basis of future media policy. All these conclusions have important consequences for the debate on the future EU policy for the Digital Single Market.
    Date: 2015–04
  8. By: Nezaj, Novitet Xh.
    Abstract: Competition law is a pillar of a market economy and determines the quality of economic life. This paper explores the origin and development of competition law in Kosovo. It deals with constitutional developments. It attempts to explore how Kosovo's Constitution expresses crucial provisions regarding competition law. Additionally, it takes a broad approach to the relevance of EU competition law for Kosovo. It discusses specific aspects of EU competition law, and the implications of the changes required by the Stabilization and Association Agreement (SAA). This paper seeks to address these aspects by developing theoretical approaches and conceptual tools that can enable the implementation of the SAA's provisions.
    Keywords: competition,SAA,approximation,enforcement,competition authority
    Date: 2015
  9. By: Fan, Cuihong; Jun, Byoung Heon; Wolfstetter, Elmar G.
    Abstract: The present paper reconsiders the inside innovators’ licensing problem under incomplete information. Employing an optimal mechanism design approach, we show that, contrary to what is claimed in the literature, the optimal mechanism may prescribe fixed fees, royalty rates lower than the cost reduction, and even negative royalty rates.
    Keywords: Innovation; licensing; industrial organization.
    JEL: D21 D43 D44 D45
    Date: 2015–05–21
  10. By: Hall, Bronwyn H. (University of California at Berkeley and University of Maastricht; NBER, IFS London, and NIESR); Sena, Vania (Essex Business School, University of Essex)
    Abstract: We use an extended version of the wellestablished Crepon, Duguet and Mairesse model (1998) to model the relationship between appropriability mechanisms, innovation and firmlevel productivity. We enrich this model in several ways. First, we consider different types of innovation spending and study the differences in estimates when innovation spending (rather than R&D spending) is used to predict innovation in the CDM model. Second, we assume that a firm simultaneously innovates and chooses among different appropriability methods (formal or informal) to protect the innovation. Finally, in the third stage, we estimate the impact of the innovation output conditional on the choice of appropriability mechanisms on firms’ productivity. We find that firms that innovate and rate formal methods for the protection of Intellectual Property (IP) highly are more productive than other firms, but that the same does not hold in the case of informal methods for the protection of a firm’s IP, except possibly for large firms as supposed to SMEs. We also find that this result is strongest for firms in the services, trade, and utility sectors, and negative in the manufacturing sector.
    Keywords: productivity; innovation; intellectual property; appropriability; patents; CDM
    JEL: L25 O30 O34
    Date: 2015–06–18
  11. By: Dobbelaere, Sabien (VU University Amsterdam); Lauterbach, Rodolfo (Maastricht University); Mairesse, Jacques (CREST-INSEE)
    Abstract: Institutions, social norms and the nature of industrial relations vary greatly between Latin American and Western European countries. Such institutional and organizational differences might shape firms' operational environment in general and the type of competition in product and labor markets in particular. Contributing to the literature on estimating simultaneously product and labor market imperfections, this paper quantifies industry differences in both types of imperfections using firm-level data in Chile –a non-OECD member under the considered time period– and France. We rely on two extensions of Hall's econometric framework for estimating price-cost margins by nesting three labor market settings (perfect competition or right-to-manage bargaining, efficient bargaining and monopsony). Using an unbalanced panel of 1,737 firms over the period 1996-2003 in Chile containing unique data on firm-level output price indices and 14,270 firms over the period 1994-2001 in France, we first classify 20 comparable manufacturing industries in 6 distinct regimes that differ in the type of competition prevailing in product and labor markets. We then investigate industry differences in the estimated product and labor market imperfections. Consistent with differences in institutions and in the industrial relations system in the two countries, we find important regime differences across the two countries. In addition, we observe cross-country differences in the levels of product and labor market imperfections within regimes.
    Keywords: rent sharing, monopsony, price-cost mark-ups, production function, panel data
    JEL: C23 D21 J51 L13
    Date: 2015–06
  12. By: Takahashi, Hidenori
    Abstract: I investigate firms' competition over price and product design under uncertain design evaluations in the context of Design-Build (DB) auctions. Reviewers' design evaluations contain uncertainty from a bidder's perspective, leading luck to curtail differences in firms' chances of winning. I model bidders' behavior and derive semiparametric identification of the model primitives. Uncertain evaluations worsen the expected price of design quality, and exacerbate an auctioneer's uncertainty in auction outcomes. A simple adjustment in the auction mechanism may completely shut down the impact of uncertain evaluations on bidding incentives, restoring efficient allocations of projects.
    Date: 2015
  13. By: Griffith, Rachel; Nesheim, Lars; O'Connell, Martin
    Abstract: Random utility models are widely used to study consumer choice. The vast majority of applications make strong assumptions about the marginal utility of income, which restricts income effects, demand curvature and pass-through. We show that flexibly modeling income effects can be important, particularly if one is interested in the distributional effects of a policy change, even in a market in which, a priori, the expectation is that income effects will play a limited role. We allow for much more flexible forms of income effects than is common and we illustrate the implications by simulating the introduction of an excise tax.
    Keywords: compensation variation; demand estimation; income effects; oligopoly; pass-through
    JEL: H20 L13
    Date: 2015–06
  14. By: Jean Paul Rabanal (Ball State University); Olga A. Rabanal (Ball State University)
    Abstract: We study the effect of competition on the conflicts of interest in an issuer-pay model. Our analysis complements the theoretical work of Bolton, Freixas and Shapiro (2012) by introducing an experimental approach that examines the effect of market structure –monopoly and competition– on the incidence of misreporting by rating agencies. In our game, agencies receive a signal regarding the type of asset that the seller holds. The seller does not know the asset type and therefore, asks the rating agency for a report which is either blue (good) or red (bad). The asset, along with the report (if any), is then presented to the buyer for purchase. We find that in the monopoly environment the likelihood of misreporting is almost three times as high as in the more competitive market.
    Keywords: Credit rating agencies, Conflicts of interest, Market structure, Laboratory experiment
    JEL: C91 D43 D82 G24 L15
    Date: 2015–06
  15. By: Carol A. Dahl (Division of Economics and Business, Colorado School of Mines); Tyler Hodge (U.S. Energy Information Administration)
    Abstract: This paper contains a dynamic conduct parameter model to look at the pricing behavior of five power marketers in the California Power Exchange (CalPX) on daily data for 2000. Only our previous paper Hodge and Dahl (2012) specifically focused on just the electric power marketers. In this paper we compare a dynamic conduct parameter with that of our earlier static model to test whether the static estimates are biased downwards or towards not rejecting the null hypothesis of no market power. We estimate the model using generalized methods of moments on data for each marketer. We find more evidence of collusive behavior with the dynamic than the earlier static model estimates.
    Keywords: Electricity, Conduct Parameter, Dynamic, Marketer
    JEL: L10 L94 Q40 Q41
    Date: 2015–06
  16. By: Małgorzata Pawłowska
    Abstract: The aim of this paper is to present the changes in the banking sectors of European Union (EU) countries both before the last global financial crisis and during the crisis, with particular emphasis on the change in concentration and competition, in an attempt to determine the relationship between competition, concentration, and risk-taking by banks. This paper also addresses the current problems in the banking sector of the EU (i.e., banks are too-big-to-fail (TBTF)), and attempts to solving these problems within the framework of regulatory initiatives. The empirical results based on panel data analysis find that increasing the concentration and size of the banking sectors within EU-27 from the period 2006–2010 had a negative impact on financial stability. The results for competition are unambiguous, as competition had a positive impact on financial stability, mainly within the EU-12 banking sectors.
    Keywords: banking and finance, market structure, competition, European Union (EU), banking regulations, panel data analysis, financial stability.
    JEL: F36 G2 G21 G34 L1
    Date: 2015
  17. By: Francesco Decarolis; Maria Polyakova; Stephen P. Ryan
    Abstract: The efficiency of publicly-subsidized, privately-provisioned social insurance programs depends on the interaction between insurer behavior and public subsidies. We study this interaction within Medicare Part D Prescription Drug Plan (PDP) markets. Using a structural model of supply and demand, we find: consumers purchase too few and too socially-costly PDP plans; insurers price near marginal cost; the primary driver of welfare is the opportunity cost of government spending on other Medicare programs; and the current subsidization policy achieves a level of total welfare close to that obtained under an optimal in-kind subsidy, but is far from the social planner's first-best solution.
    JEL: H2 H4 I11 I18 L1 L2
    Date: 2015–06
  18. By: Lukasz Grzybowski
    Abstract: In this paper we analyze the role of network effects and consumer heterogeneity in the adoption of mobile phones. We estimate the decision to adopt a mobile phone using panel survey data of South African households between the years 2008 and 2012, which includes interviews with all adult household members. We construct variables which approximate network effects on the household level and find that the greater the number of mobile phones in the household, the greater the likelihood that the other household members will also adopt a mobile phone. Moreover, network effects depend on who in the household adopts a mobile phone. Without within-household network effects the penetration of mobile phones of 76.4% in 2012 would be lower by about 9.9 percentage points. The decision to adopt a mobile phone is also explained by observed and unobserved consumer heterogeneity.
    Keywords: Mobile phones, Network effects, Consumer heterogeneity
    JEL: L13 L96
    Date: 2015
  19. By: Luca Lambertini (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy); Joanna Poyago-Theotoky (School of Economics, La Trobe University, Australia; The Rimini Centre for Economic Analysis, Italy); Alessandro Tampieri (Faculty of Law, Economics and Finance, University of Luxembourg, Luxembourg)
    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 maximize 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.
    Date: 2015–06

This nep-com issue is ©2015 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.