nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒07‒25
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Multi-Product Duopoly With Cross-Product Cost Interdependencies By Gary Biglaiser; Andrei Hagiu
  2. Competing with Asking Prices By Benjamin Lester; Ludo Visschers; Ronald Wolthoff
  3. Tacit Collusion in Repeated Contests with Noise By Boudreau, James W.; Shunda, Nicholas
  4. Full versus partial collusion among brands and private label producers By Hasnas, Irina; Wey, Christian
  5. Intra-sector and inter-sector competition in a model of growth By Di Cintio, Marco; Grassi, Emanuele
  6. Insider's Dilemma: a General Solution in a Repeated Game By Berardino Cesi; Walter Ferrarese
  7. Three Models of Noncooperative Oligopoly in Markets with a Continuum of Traders By Francesca BUSETTO; Giulio CODOGNATO; Sayantan GHOSSAL
  8. Hamiltonian Potential Functions for Differential Games By Davide Dragone; Luca Lambertini; George Leitmann; Arsen Palestini
  9. Innovation, Reallocation and Growth By William Kerr; Ufuk Akcigit; Nicholas Bloom; Daron Acemoglu
  10. Enforcement Trend in the Chinese Antimonopoly Law: Selectively targeting foreign companies and being used as a tool of industrial policies? (Japanese) By KAWASHIMA Fujio
  11. Microeconomic Theory of Regulation: Applied Aspects By Radchenko, Tatiana; Shastitko, Andrei
  12. Assessment of Indicators of Price Discrimination on Oligopolistic Markets of Commodities of the Russian Federation By Agapova, E.; Smirnova, Olga; Elagina, A.
  13. Antimonopoly regulation method based on perfect price discrimination By Vadim Borokhov
  14. Network Effects and Switching Costs in the US Wireless Industry By Weiergräber, Stefan
  15. A single espresso, please! Rationalizing espresso price dispersion across Italian cities By F. Delbono; G. Dipoppa; L. Lambertini; C. Reggiani
  16. Assessing the competitiveness of the supply side response to China’s iron ore demand shock By Luke Hurst
  17. The Break of Brand Exclusivity in Brazilian Credit Card Acquiring: effects and markup-cost decomposition in a price dispersion setting By Gabriel Garber; Márcio Issao Nakane
  18. Innovation, Deregulation, and the Life Cycle of a Financial Service Industry By Hayashi, Fumiko; Li, Grace; Wang, Zhu
  19. Newton´s Laws of Motion and Price Theory By Tomáš R. Zeithamer

  1. By: Gary Biglaiser (University of North Carolina); Andrei Hagiu (Harvard Business School, Strategy Unit)
    Abstract: Many multi-product firms incur a complexity fixed cost when offering different product lines in different quality tiers relative to the case when offering all products lines in the same quality tier (high or low). Such fixed costs create an interdependency between firms' choices of quality tiers across different product lines, even when demands are independent. We investigate the effects of this interdependency on equilibrium profits in a Stackelberg duopoly game. Both firms' profits are (weakly) higher when the complexity cost is infinite than when it is 0. The Stackelberg leader's profits are always (weakly) higher with a positive complexity fixed cost, but its profits can be non-monotonic in the magnitude of this cost. The Stackelberg follower's profits can be lower when the complexity fixed cost is positive than when it is equal to 0.
    Keywords: multi-product duopoly, vertical differentiation, fixed costs.
    JEL: L1 L2 L8
    Date: 2015–07
  2. By: Benjamin Lester; Ludo Visschers; Ronald Wolthoff
    Abstract: In many markets, sellers advertise their good with an asking price. This is a price at which the seller will take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalence in a variety of real world markets, asking prices have received little attention in the academic literature. We construct an environment with a few simple, realistic ingredients and demonstrate that using an asking price is optimal: it is the pricing mechanism that maximizes sellers' revenues and it implements the efficient outcome in equilibrium. We provide a complete characterization of this equilibrium and use it to explore the implications of this pricing mechanism for transaction prices and allocations.
    Keywords: asking prices, directed search, inspection costs, efficiency
    JEL: C78 D44 D82 D83 L11 R31 R32
    Date: 2015–05–26
  3. By: Boudreau, James W.; Shunda, Nicholas
    Abstract: We analyze the determinants of tacit collusion in an infinitely repeated contest with noise in the contest success function. Sustaining collusion via Nash reversion strategies is easier the more noise there is, and is more difficult the larger is the contest's prize value. An increase in the contest's number of players can make sustaining collusion either more or less difficult.
    Keywords: Contest, Conflict, Collusion, Noise
    JEL: C72 C73 D72 D74
    Date: 2015–07–17
  4. By: Hasnas, Irina; Wey, Christian
    Abstract: We analyze the incentives to collude when brand manufacturers compete with a private label producer of inferior quality. Full collusion is easier to sustain than partial collusion from the brands.perspective when horizontal differentiation is large and vertical differentiation is small. The private label firm is better off under full collusion than under partial collusion if goods are sufficiently homogenous (horizontal and/or vertical). Partial collusion could be preferred by the private label exactly when full collusion is easier to sustain. Improving the private label's quality makes full collusion more likely, either because it relaxes the brand producers' incentive constraint or because it shifts the preference of the private label firm from partial collusion to full collusion. Fully collusive behavior reveals itself through a nonnegative price effect on the brands' side caused by a quality increase of the private label good.
    Keywords: Oligopoly,Product Differentiation,Private Label,Collusion
    JEL: L11 L13
    Date: 2015
  5. By: Di Cintio, Marco; Grassi, Emanuele
    Abstract: The role of patents is threefold: first, they are important to state the property rights of an invention; second, they are necessary to secure financing for starting a new venture; third, they are fundamental to recoup R&D investments. The main difficulty in preventing unauthorized use of an innovation is in the establishment of ranges and contexts of patents applicability. Noting the imperfections of the patent legal system, the authors are in a position to consider an economy with two levels of competition under different market structures: the inter-sector monopolistic competition and the intra-sector Cournot oligopoly. The explicit consideration of strategic interactions in a model of endogenous growth produces interesting results. Considering the sectorial market share as the indicator of patent system enforcement, the authors find that growth takes place, if and only if, there are some property rights of private knowledge produced by R&D activities. In turn, the patent system translates into a low degree of competition among firms. Its influence on the growth rate goes in a single unambiguous direction. As competition rises, few resources are available for R&D, so the growth rate goes down.
    Keywords: product differentiation,endogenous growth,market structure,R&D
    JEL: E10 L13 L16 O31 O40
    Date: 2015
  6. By: Berardino Cesi (DEF, University of Rome "Tor Vergata"); Walter Ferrarese (DEDI, University of Rome "Tor Vergata")
    Abstract: We show that in an infinitely repeated Cournot game when firms adopt stick and carrot strategies exogenous horizontal mergers are profitable regardless the size of the merged entity. We characterize an equilibrium in which the new entity maximizes its discounted intertemporal profit under the constraint that each outsider produces just enough to be better off after the merger. Once the merger has occurred each insider gains more than each outsider, therefore the insider's dilemma is completely solved.
    Keywords: Insider's dilemma, horizontal mergers, repeated games, stick and carrot strategy
    JEL: L11 L12
    Date: 2015–07–14
  7. By: Francesca BUSETTO (Università degli Studi di Udine, Dipartimento di Scienze Economiche e Statistiche); Giulio CODOGNATO (Università degli Studi di Udine, Dipartimento di Scienze Economiche e Statistiche); Sayantan GHOSSAL (University of Warwick, Department of Economics)
    Abstract: In this paper, we reconstruct the main developments of the theory of noncooperative oligopoly in general equilibrium by focusing on the analysis of three prototypical models for pure exchange economies: the Cournot-Walras equilibrium model of Codognato and Gabszewicz (1991), the Cournot-Nash equilibrium model originally proposed by Lloyd S. Shapley and known as the “window†model, and the Cournot-Walras equilibrium model of Busetto et al. (2008). We establish in a systematic manner the relationship between the three notions of equilibrium proposed in these models and the notion of Walras equilibrium. We then investigate the relationships linking these three notions of equilibrium.
    Keywords: Noncooperative oligopoly, Cournot-Walras equilibria, Cournot-Nash equilibria
    JEL: C72 D51
    Date: 2013–12–01
  8. By: Davide Dragone (Department of Economics, University of Bologna, Italy); Luca Lambertini (Department of Economics, University of Bologna, Italy; ENCORE, University of Amsterdam, The Netherlands; The Rimini Centre for Economic Analysis, Italy); George Leitmann (College of Engineering, University of California at Berkeley, United States of America); Arsen Palestini (MEMOTEF, Sapienza University of Rome, Italy)
    Abstract: We introduce the concept of Hamiltonian potential functions for non-cooperative open-loop differential games and we characterize sufficient conditions for their existence. We also identify a class of games admitting a Hamiltonian potential and illustrate the related properties of their dynamic structure. Possible similarities with the theory of quasi-aggregative games are discussed. As an illustration, we consider an asymmetric oligopoly game with process innovation.
    Date: 2015–02
  9. By: William Kerr (Harvard University); Ufuk Akcigit (University of Pennsylvania); Nicholas Bloom (Stanford); Daron Acemoglu (Massachusetts Institute of Technology)
    Abstract: We build a model of firm-level innovation, productivity growth and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. We estimate the parameters of the model using detailed US Census micro data on firm-level output, R&D and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. We find industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. On the contrary, substantial improvements (of the order of 5% improvement in welfare) are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants. We show that optimal policy encourages the exit of low-type firms and supports R&D by high-type incumbents and entry.
    Date: 2015
  10. By: KAWASHIMA Fujio
    Abstract: In August 2014, just after celebrating the sixth anniversary of the entry into force of the Chinese Antimonopoly Law (hereinafter, Chinese AML), the National Development and Reform Commission of China, which is one of the enforcing agencies of the law, announced its decisions on the two price-fixing cases in which eight Japanese automobile parts manufacturers and four Japanese bearing manufacturers are involved. Since the time around this announcement, many media reports, Japanese and overseas, have casted doubt as to whether Chinese AML has been used as a tool to "bash foreign capitals" or selectively enforced toward foreign capitals. At the same time in September 2014, the U.S. Chamber of Commerce issued a paper on Chinese AML, which severely criticized it as having been "used as a tool of industrial policies."Against this backdrop, this paper, by introducing the statistics of formal decisions based on Chinese AML and analyzing their concrete content in details, tries to grasp the trend of its enforcement and examine whether such criticism claiming "bashing foreign capitals" and "a tool of industrial policies" can be sustained. According to the statistics, it is not so easy to conclude that Chinese AML has been selectively enforced towards foreign capitals, but if we examine the concrete content of the decisions in details, there are some decisions where policies other than competition policy, such as industrial policies or resource or food security policy, are reflected in their reasoning for the interference. As the enforcement of the AML by China, which is expanding its presence not only as "the world's factory" but also as "the world's market," has the potential to influence competition in the world market as a whole significantly, it is necessary to continue to monitor the trend of its enforcement carefully and also try to develop disciplines of international economic law which can address the abuse of antimonopoly laws.
    Date: 2015–07
  11. By: Radchenko, Tatiana (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Shastitko, Andrei (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The paper reviewed the main provisions of FAS Russia approved the principle of economic analysis of pricing practices for compliance with the federal law "On Protection of Competition"; formulate proposals for their adjustment in terms of reducing the potential regulatory risks for businesses, and for dominant companies in particular; calculated the potential impact of different methods of pricing in the export markets in terms of changes in market turnover and changes in consumer surplus. The results of the study can be used in the work of the Federal Antimonopoly Service of Russia in order to improve the economic analysis of pricing practices for compliance with competition law and the prevention of the breach, in particular Article 10 of the Federal Law "On Protection of Competition".
    Keywords: competition, economic regulation, discrimination, economic concentration transaction, monopolistically high price regulations
    Date: 2015–07
  12. By: Agapova, E. (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Smirnova, Olga (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Elagina, A. (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: Analysis of the regulatory practice of price discrimination shows that in most cases the decision of antitrust authorities challenged in court and in more than 50% of cases are canceled. In addition, from 2009 to 2013 in the arbitration courts of various levels was considered 227 cases of violation of the antimonopoly legislation on sub 6 paragraph 1 of Article 10 of the Law on Protection of Competition number 135, indicating a high load on the judicial system and anti-monopoly authorities in the regulation of price discrimination . As a result of the proposed methods for the assessment of indicators proposed form of price discrimination practices of formation of commodity prices under oligopoly to form the upper limit of the price, which will reduce the price differentiation between buyers and not the associated costs for the implementation of sales. Also, to reduce the capacity to implement price discrimination suggests approaches to improve the practices of the exchange trading in commodity markets.
    Keywords: price discrimination, oligopolic markets, commodity markets
    Date: 2015–06
  13. By: Vadim Borokhov
    Abstract: We propose a method of antimonopoly regulation in a day-ahead power market with locational marginal pricing which forms economic incentives for a producer, operating a portfolio of generating units, to submit an offer indicating its true cost and faithful values of technical parameters, entering generating units constraints. The uncertainty faced by regulator when applying the method affects neither nodal output/consumption volumes nor locational marginal prices but manifests itself in overall uplift or downlift for the market, which may be allocated among the other market players in a way preserving the price signals produced by the market.
    Date: 2015–07
  14. By: Weiergräber, Stefan
    Abstract: I develop an empirical framework to disentangle different sources of consumer inertia in the US wireless industry. The use of a detailed data set allows me to identify preference heterogeneity from consumer type-specific market shares and switching costs from churn rates. Identification of a localized network effect comes from comparing the dynamics of distinct local markets. The central condition for identification is that neither the characteristics defining consumer heterogeneity nor the characteristics defining reference groups are a (weak) subset of the other. Being able to separate switching costs and network effects is important as both can lead to inefficient consumer inertia, but depending on its sources policy implications may be very different. Estimates of switching costs range from US-$ 316 to US-$ 630. The willingness to pay for a 20%-point increase in an operator’s market share is on average US-$ 22 per month. My counterfactuals illustrate that both effects are important determinants of consumers’ price elasticities potentially translating into market power that helps large carriers in defending their dominant position.
    Date: 2014–11–17
  15. By: F. Delbono; G. Dipoppa; L. Lambertini; C. Reggiani
    Abstract: This paper aims at providing an explanation of the observed espresso price dispersion across major Italian cities. The empirical evidence suggests a positive relationships between the average espresso price in a city and the number of coffee shops (normalized for the adult population) operating in that city. This finding is shown to be robust after controlling for GDP per capita and consumers.price index. We provide an interpretation of the empirical findings relying on a model of price competition delivering a continuum of Nash equilibria, where firms adjust the mark-up to offset the negative effect of any increase in their number.
    JEL: L11 L13 L66
    Date: 2015–07
  16. By: Luke Hurst (EABER)
    Abstract: This article examines the scale of China’s demand shock and the supply-side reaction in established and fringe iron ore regions. It outlines the short-run constraints on supply expansion and explores the supply-side response to understand whether the long-run iron ore market adjustment has been competitive, or influenced by strategic supply and price interventions by incumbent producers.
    Keywords: iron ore; market adjustment; competition; oligopoly
    JEL: F13 L16 L11
    Date: 2015–05
  17. By: Gabriel Garber; Márcio Issao Nakane
    Abstract: Visanet monopolized Visa merchant acquiring activities in Brazil while Redecard did the same for MasterCard, until the industry was under authorities’ scrutiny and exclusivity was broken in mid-2010. In this paper, we perform two main tasks. First, we use the knowledge of part of the marginal cost specific to this industry (the interchange fee) to identify markup and marginal cost using individual merchant data. Then, we use this framework to evaluate the impact of the change of the environment on these price components. We find sizable reduction in markup as a result of increased competition
    Date: 2015–06
  18. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Li, Grace (International Monetary Fund); Wang, Zhu (Federal Reserve Bank of Richmond)
    Abstract: This paper examines innovation, deregulation, and fi rm dynamics over the life cycle of the U.S. ATM and debit card industry. In doing so, we construct a dynamic equilibrium model to study how a major product innovation (introducing the new debit card function) interacted with banking deregulation drove the industry shakeout. Calibrating the model to a novel data set on ATM network entry,exit, size, and product offerings shows that our theory fits the quantitative pattern of the industry well. The model also allows us to conduct counterfactual analyses to evaluate the respective roles that innovation and deregulation played in the industry evolution.
    JEL: G2 L10 O30
    Date: 2015–07–20
  19. By: Tomáš R. Zeithamer (University of Economics, Prague, Faculty of Informatics and Statistics, Department of Mathematics)
    Abstract: The paper focuses on factual research in bibliographic and biographical databases showing that representatives of the Czech School of Economics took a leading role in the methodological use of applied and theoretical physics in the basic economic research, especially in the second half of the twentieth century.The linear and non-linear analytical structures of theoretical physics are compared with the analytical structures of commodity price theory in a market with nearly perfect competition. Newton´s equations of motion for the non-relativistic speed of instantaneous relative depreciation and instantaneous relative commodity prices over time are analyzed. Assuming that the market value of a commodity is fully determined exclusively by the value of the instantaneous commodity price, the price jerk equation acquires a form corresponding to the non-relativistic equation for jerk in mechanics, following from Newton´s second law of motion. In this paper price jounce and price crackle are defined.
    Keywords: Instantaneous relative depreciation, Newton´s laws of motion, market value, nearly perfect competition, price jerk, price jounce, price crackle
    JEL: A12 C65

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