nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒08‒13
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. On merger profitability and the intensity of rivalry By Escrihuela-Villar, Marc
  2. Demonstrations and Price Competition in New Product Release By Raphael Boleslavsky; Christopher Cotton; Haresh Gurnani
  3. "The value of personal information in markets with endogenous privacy" By Montes, Rodrigo; Sand-Zantman, Wilfried; Valletti, Tommaso
  4. Prices, Product Differentiation, and Heterogeneous Search Costs By Jose L. Moraga-Gonzalez
  5. Symmetry restoration by pricing in a duopoly of perishable goods By Su Do Yi; Seung Ki Baek; Guillaume Chevereau; Eric Bertin
  6. Cross-Licensing and Competition By Jeon, Doh-Shin; Lefouili, Yassine
  7. Price, target rate of profit and entry preventing By Jael, Paul
  8. Contracts as a barrier to entry when buyers are non-pivotal By Özlem Bedre-Defolie; Gary Biglaiser
  9. Strategic export policy, monopoly carrier, and product differentiation By Takauchi, Kazuhiro
  10. Income effects and the welfare consequences of tax in differentiated product oligopoly By Rachel Griffith; Lars Nesheim; Martin O'Connell
  11. Economic distributions and primitive distributions in monopolistic competition By Anderson, Simon P; de Palma, André
  12. Identification and estimation in first-price auctions with risk-averse bidders and selective entry By Matthew Gentry; Tong Li; Jingfeng Lu
  13. Unilateral Effects Screens for Partial Horizontal Acquisitions: The Generalized HHI and GUPPI By Duarte Brito; António Osório; Ricardo Ribeiro; Hélder Vasconcelos
  14. Antitrust, regulatory capture and economic integration By Mario Mariniello; Damien Neven; Jorge Padilla
  15. The optimal scope of trade secrets law By L. A. Franzoni; A. Kumar Kaushik
  16. Production Networks, Geography and Firm Performance By Yukiko Saito; Andreas Moxnes; Andrew Bernard
  17. Competition in the sharing economy By Demary, Vera
  18. Differentiated pricing of delivery services in the e-commerce sector By Borsenberger, Claire; Cremer, Helmuth; De Donder, Philippe; Joram, Denis
  19. Facility- and service-based competition and investment in fixed broadband networks: Lessons from a decade of access regulations in the European Union member states By Briglauer, Wolfgang; Gugler, Klaus; Haxhimusa, Adhurim
  20. Precios y desempeño regulatorio en el pool eléctrico español By John J. García Rendón; Jhonny Moncada Mesa
  21. Impacto de la regulación en la eficiencia asignativa del mercado spot eléctrico colombiano By John J. García; Santiago Arango Tamayo; Andrés F. Ortiz Rico
  22. On Abatement Services: Market Power and Efficient Environmental Regulation By Damien Sans; Sonia Schwartz; Hubert Stahn
  23. Strategic Promotion and Release Decisions for Cultural Goods By P. Belleflamme; D. Paolini

  1. By: Escrihuela-Villar, Marc
    Abstract: This paper considers a general symmetric quantity-setting oligopoly where the "coefficient of cooperation" defined by Cyert and DeGroot (An Analysis of Cooperation and Learning in a Duopoly Context, 1973) is interpreted as the parameter indicating severity of competition. It is obtained that horizontal mergers are more likely to be profitable in a more competitive market structure. Consequently, the results by Salant, Switzer and Reynolds (The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium, 1983) about merger profitability are sensitive to the assumption of pre-merger Cournot competition.
    Keywords: oligopoly,competitive intensity,horizontal mergers
    JEL: L13 L40 L41
    Date: 2015
  2. By: Raphael Boleslavsky (University of Miami); Christopher Cotton (Queen's University); Haresh Gurnani (Wake Forest University)
    Abstract: We incorporate product demonstrations into a game theoretic model of firm price competition. Demonstrations may include product samples, trials, return policies, reviews, or any other means by which a firm allows consumers to learn about their value for a new product. In our model, demonstrations help individual consumers learn whether they prefer an innovation over an established product. The innovative firm controls demonstration informativeness. When prices can respond to demonstration policies, the firm prefers to provide maximumly informative demonstrations, which optimally segment the market, dampen subsequent price competition, and maximize profits. In contrast, when prices are less flexible, the firm prefers only partially informative demonstrations, designed to maximize its market share at prevailing prices. Such a strategy can generate the monopoly profit for the innovative firm. We contrast the strategic role of demonstrations in our framework with the strategic role of capacity limits in models of judo economics (e.g. Gelman and Salop 1983), which also allow firms to divide a market and reduce competition.
    Keywords: judo economics, demonstrations, product trials, product samples, return policies, money back guarantees, marketing strategy, product differentiation
    JEL: L13 L15 D83
    Date: 2015–07
  3. 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
  4. By: Jose L. Moraga-Gonzalez (VU University Amsterdam)
    Abstract: We study price formation in the standard model of consumer search for differentiated products (Wolinsky, 1986) but allow for search cost heterogeneity. In doing so, we dispense with the usual assumption that all consumers search at least once in equilibrium. This allows us to analyze the manner in which prices affect the decision to search rather than to not search at all, which is an important but often neglected aspect of the price mechanism. Recognizing the role the equilibrium price plays in consumers' participation decisions turns out to be critical for understanding how search costs affect market power. This is because the two margins that determine prices---the intensive search margin, or search intensity, and the extensive search margin, or search participation---may be affected in opposing directions by a change in search costs. When search costs go up, fewer consumers decide to search, which modifies the search composition of demand such that demand can become more elastic. At the same time, the consumers who choose to search reduce their search intensity, which makes demand less elastic. Whether the effect on the extensive or the intensive search margin dominates depends on the range and shape of the search cost density. We identify conditions for higher search costs to result in higher, constant, or lower prices. Similar results are obtained when the marginal gains from search vary across consumers.
    Date: 2015
  5. By: Su Do Yi; Seung Ki Baek; Guillaume Chevereau; Eric Bertin
    Abstract: Competition is a main tenet of economics, and the reason is that a perfectly competitive equilibrium is Pareto-efficient in the absence of externalities and public goods. Whether a product is selected in a market crucially relates to its competitiveness, but the selection in turn affects the landscape of competition. Such a feedback mechanism has been illustrated in a duopoly model by Lambert et al., in which a buyer's satisfaction is updated depending on the {\em freshness} of a purchased product. The probability for buyer $n$ to select seller $i$ is assumed to be $p_{n,i} \propto e^{ S_{n,i}/T}$, where $S_{n,i}$ is the buyer's satisfaction and $T$ is an effective temperature to introduce stochasticity. If $T$ decreases below a critical point $T_c$, the system undergoes a transition from a symmetric phase to an asymmetric one, in which only one of the two sellers is selected. In this work, we extend the model by incorporating a simple price system. By considering a greed factor $g$ to control how the satisfaction depends on the price, we argue the existence of an oscillatory phase in addition to the symmetric and asymmetric ones in the $(T,g)$ plane, and estimate the phase boundaries through mean-field approximations. The analytic results show that the market preserves the inherent symmetry between the sellers for lower $T$ in the presence of the price system, which is confirmed by our numerical simulations.
    Date: 2015–08
  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: Jael, Paul
    Abstract: Since the marginalist controversy held from 1939 to the mid-fifties, the full cost principle presents itself as an alternative to the marginalist theory of the producer’s equilibrium, without being able to shake its dominance. Yet, through decades, empirical investigations are rather favourable to it. Its rationality has not been sufficiently emphasized; so, orthodoxy was able to belittle it as an empirical practice compatible with its own precepts. The present article shows that three principles stated by the full costers and their successors would allow to build a sound theory of full cost pricing. These are: - preventing entry of new competitors; - target rate of profit; - competitive price leadership The article proves that full cost pricing is more conducive to profit maximization than marginalist rule, especially in the case of a competitive market with few suppliers, a market structure usually neglected by microeconomics. Opponents to full cost pricing often consider changes in demand as its Achilles heel. The present article analyses this problem in depth
    Keywords: pricing, competition, market structure, full cost
    JEL: D21 D40
    Date: 2015–08
  8. By: Özlem Bedre-Defolie (ESMT European School of Management and Technology); Gary Biglaiser (University of North Carolina)
    Abstract: We analyze whether the use of breakup fees by an incumbent might induce an inefficient allocation of consumers and possibly foreclose efficient entry where buyers are non-pivotal (infinitesimal) and have to pay switching costs if they switch from the incumbent to an entrant. When the entrants are competitive, in the unique equilibrium the incumbent induces the efficient outcome, so there is no inefficient foreclosure. When there is a single entrant, the incumbent cannot deter the entry if it is not allowed to use a breakup fee. In the equilibrium of this case there might be too much or too little entry depending on the entrant's cost advantage versus the highest level of switching costs. When the incumbent can use a breakup fee in its long-term contract, in the unique equilibrium the incumbent forecloses the entrant by a sufficiently high breakup fee. This result does not depend on the level of switching costs or the entrant's efficiency advantage. We extend the result to a situation where consumers do not face switching costs, but they get a lower match value from the entrant's product than the incumbent's. In this case the results differ only when there is a single entrant. There are no inter temporal effects without breakup fees and if the incumbent is allowed to use breakup fees, it forecloses the entrant if and only if the entrant's cost advantage is sufficiently low compared to the highest switching cost. All results are robust to allowing the incumbent to offer a spot price.
    Date: 2015–07–20
  9. By: Takauchi, Kazuhiro
    Abstract: This paper examines strategic subsidy/tax policy in a third-country market model with a monopoly carrier. To transport its product to the third market, each exporting firm must use the carrier. We show that under Cournot duopoly, the optimal policy is an export tax if the degree of product differentiation is large enough. In a Bertrand duopoly, the optimal policy is always the export tax. We also show that the subsidized firm's exports in the Cournot duopoly are larger than those in the Bertrand duopoly if the degree of product differentiation is small enough.
    Keywords: Export subsidy/tax; Monopoly carrier; Product differentiation
    JEL: F12 F13
    Date: 2015–08–07
  10. By: Rachel Griffith (Institute for Fiscal Studies and IFS and Manchester); Lars Nesheim (Institute for Fiscal Studies and cemmap and UCL); Martin O'Connell (Institute for Fiscal Studies)
    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. Supplementary material for this paper is available here.
    Keywords: Income effects; compensating variation; demand estimation; oligopoly; pass-through
    JEL: L13 H20
    Date: 2015–06
  11. By: Anderson, Simon P; de Palma, André
    Abstract: We link fundamental technological and taste distributions to endogenous economic distributions of firm size (output, profit) and prices in extensions of canonical IO and Trade models. We develop a continuous logit model of monopolistic competition to show that exponential or normal distributions respectively generate Pareto or log-normal economic size distributions. Two groups of distributions (output, profit, and quality-cost; and price and cost) are linked through the technological relation between cost and quality-cost. We formulate a general monopolistic competition model and recover the demand structure, mark-ups, and the quality-cost distribution from the output and profit distributions. Adding the price distribution recovers the cost distribution and the relation between quality-cost and cost. We also find long-run equilibrium distributions as a function of the primitives. On the Trade side, we provide a parallel analysis for the CES and break the Pareto circle by introducing quality.
    Keywords: ces; general monopolistic competition model; logit; pareto and log-normal distribution; price and profit dispersion; primitive and economic distributions
    JEL: L13
    Date: 2015–07
  12. By: Matthew Gentry (Institute for Fiscal Studies and London School of Economics); Tong Li (Institute for Fiscal Studies and Vanderbilt University); Jingfeng Lu (Institute for Fiscal Studies)
    Abstract: We study identification and estimation in first-price auctions with risk-averse bidders and selective entry, building on a flexible entry and bidding framework we call the Affiliated Signal with Risk Aversion (AS- RA) model. This framework extends the AS model of Gentry and Li (2014) to accommodate arbitrary bidder risk aversion, thereby nesting a variety of standard models as special cases. It poses, however, a unique methodological challenge - existing results on identification with risk aversion fail in the presence of selection, while the selection-robust bounds of Gentry and Li (2014) fail in the presence of risk aversion. Motivated by this problem, we translate excludable variation in potential competition into identified sets for AS-RA primitives under various classes of restrictions on the model. We show that a single parametric restriction - on the copula governing selection into entry - is typically sufficient to restore point identification of all primitives. In contrast, a parametric form for utility yields point identification of the utility function but only partial identification of remaining primitives. Finally, we outline a simple semiparametric estimator combining Constant Relative Risk Aversion utility with a parametric signal-value copula. Simulation evidence suggests that this estimator performs very well even in small samples, underscoring the practical value of our identification results.
    Keywords: Auctions; endogenous participation; risk aversion; identification
    Date: 2015–04
  13. By: Duarte Brito (Universidade Nova de Lisboa); António Osório (Universitat Rovira i Virgili); Ricardo Ribeiro (Faculdade de Economia e Gestão - Universidade Católica Portuguesa, Porto); Hélder Vasconcelos (Universidade do Porto)
    Abstract: Recent years have witnessed an increased interest, by competition agencies, in assessing the competitive effects of partial acquisitions. We propose a generalization to a partial horizontal acquisition setting of the two most traditional indicators used to screen unilateral anti-competitive effects: the Herfindahl-Hirschman Index and the Gross Upward Price Pressure Index. The proposed generalized indicators can deal with all types of acquisitions that may lessen competition in the industry: acquisitions by owners that are internal to the industry (rival firms) and engage in cross-ownership, as well as acquisitions by owners that are external to the industry and engage in common-ownership. Furthermore, these indicators can deal with direct and indirect acquisitions, which may or may not correspond to control, and nest full mergers as a special case. We provide an empirical application to several acquisitions in the wet shaving industry. The results seem to suggest that (i) a full merger induces higher unilateral anti-competitive effects than a partial controlling acquisition involving the same firms, (ii) a partial controlling acquisition induces higher unilateral anti-competitive effects than a partial non-controlling acquisition involving the same firms and the same financial stakes, and (iii) an acquisition by owners that are internal to the industry induces higher unilateral anti-competitive effects than an acquisition (involving the same firms and the same stakes) by external owners that participate in more than one competitor firm.
    Keywords: Antitrust, Partial Horizontal Acquisitions, Oligopoly, Screening Indicators, HHI, GUPPI
    JEL: L13 L41 L66
    Date: 2015–07
  14. By: Mario Mariniello; Damien Neven; Jorge Padilla
    Abstract: Highlights - There is growing worldwide concern about bias in the enforcement of competition law in favour of domestic firms. Even seemingly neutral antitrust laws can lead discrimination if they are enforced selectively. - Authors investigate the distortions that national competition authorities generate when they pursue non-competition goals in favour of domestic firms, and discuss ways to address this negative policy development in a globalised world. - The distortions identified in the paper would dissipate if governments agreed that the sole objective of competition law ought to be the protection of consumer welfare that competition-law institutions ought to be protected against capture. - A realistic and effective way to prompt international convergence towards independent enforcement of competition laws is through the inclusion of competition clauses in bilateral trade agreements and the development of dispute-resolution mechanisms.
    Date: 2015–07
  15. By: L. A. Franzoni; A. Kumar Kaushik
    Abstract: The paper investigates the optimal scope of trade secrets law. In the model, one innovative firm invests resources first to produce knowledge, and then to protect it from unwanted disclosure. A rival firm invests to ferret out this knowledge. Trade secrets law affects this "secrecy contest" by reducing the probability of unwanted disclosure given the efforts of the parties. We show how optimal trade secrets policy depends on structural market features and cost parameters. In the final section, we consider the limit case in which the innovation lies on the face of the product, and derive the optimal scope of legal provisions preventing copycat imitation of products (unfair competition, passing off).
    JEL: K1 L1
    Date: 2015–07
  16. By: Yukiko Saito (RIEITI); Andreas Moxnes (Dartmouth College); Andrew Bernard (Dartmouth College)
    Abstract: This paper examines the importance of buyer-supplier relationships, geography and the structure of the production network in firm performance. We develop a simple model where firms can outsource tasks and search for suppliers in different locations. Firms located in close proximity to other markets, and firms that face low search costs, will search more and find better suppliers. This in turn drives down the firm's marginal production costs. We test the theory by exploiting the opening of a high-speed (Shinkansen) train line in Japan which lowered the cost of passenger travel but left shipping costs unchanged. Using an exhaustive dataset on firms' buyer-seller linkages, we find significant improvements in firm performance as well as creation of new buyer-seller links, consistent with the model.
    Date: 2015
  17. By: Demary, Vera
    Abstract: Sharing goods, services or knowledge is at the center of the so-called Sharing Economy. Businesses are usually based on online platforms that match demand and supply which is in many cases, but not always provided by individuals. Sharing Economy companies typically compete with traditional companies in many different markets. The main challenge of this type of competition currently is the application of the existing regulation. While incumbent firms adhere to this, Sharing Economy companies often feel it does not apply to their business model. This paper examines the organization of the Sharing Economy and the functioning of markets and competition in it. Europe is lagging behind the United States with respect to the diffusion of Sharing Economy businesses and the number of successful companies. Therefore this paper also offers policy advice from a European perspective to level the playing field between traditional and Sharing Economy companies and to promote the formation of the latter in Europe.
    Keywords: Internet,Konsum,Wettbewerb
    Date: 2015
  18. By: Borsenberger, Claire; Cremer, Helmuth; De Donder, Philippe; Joram, Denis
    Date: 2015–07–30
  19. By: Briglauer, Wolfgang; Gugler, Klaus; Haxhimusa, Adhurim
    Abstract: This paper employs firm-level panel data of 57 incumbent and entrant firms for 23 European countries in the decade from 2003 to 2012. We examine the impact of service- and facility-based competition on firm-level investment as well as the strategic effects underlying infrastructure investment decisions. At the same time we explicitly model the structural dynamics of broadband investment by means of a flexible accelerator model. The empirical specification employs dynamic panel estimation techniques which allows us to account for various sources of endogeneity. We find that facility-based competition exerts a positive and significant impact on both incumbents and entrants implying that incumbents' and entrants' investment decisions are strategic complements. Moreover, we find that intermodal competition in terms of fixed-mobile substitution exerts different effects at the firm level. Finally, we show that service-based competition appears to have no significant impact on the investment decision of incumbents and entrants. However, with respect to the later phase of market liberalization, service-based competition exerts a negative impact on entrants' investment. Our results thus also provide relevant policy guidance on the role of service-based competition in regulating emerging high-speed broadband infrastructure.
    Keywords: investment dynamics,regulation,service-based competition,facility-based competition,strategic effects
    JEL: L43 L52 L96
    Date: 2015
  20. By: John J. García Rendón; Jhonny Moncada Mesa
    Abstract: This study examines the relation between the gap of the system marginal price and other common variables in the market such as industrial organization and regulatory changes in the Spanish electricity pool. We estimate a long panel model where the time is larger than the number of firms. Our findings show that high market concentration and the possibility of being a pivot agent generate adverse effects on price determination. In addition, regulatory changes did not generate the expected effects, creating distortion and incorrect incentives in the market.
    Keywords: Regulación; precios; cointegración en panel; pool eléctrico español
    JEL: L51 L13 C23
    Date: 2015–07–15
  21. By: John J. García; Santiago Arango Tamayo; Andrés F. Ortiz Rico
    Abstract: This paper uses an ARCH regression model to analyze the effect of several regulatory measures and fundamental factors (the relationship between commercial demand and real availability, El Niño, and water supplies) on the spot price in the Colombian wholesale power market. The results indicate that the regulations established by the Electricity and Gas Regulatory Commission have had a substantial and statistically-significant effect on spot prices. In addition, El Niño and hydro supplies have a positive and negative respectively effect on the spot price, due to the large share of hydropower in this market.
    Keywords: Regulación; Mercado de Energía Mayorista, precio spot; ARCH; Colombia.
    JEL: D43 L13 L51
    Date: 2015–07–15
  22. By: Damien Sans (Aix-Marseille University (Aix-Marseille School of Economics), CNRS, & EHESS); Sonia Schwartz (CERDI, Université d’Auvergne); Hubert Stahn (Aix-Marseille University (Aix-Marseille School of Economics), CNRS, & EHESS)
    Abstract: In this paper, we study an eco-industry providing an environmental service to a competitive polluting sector. We show that even if this eco-industry is highly concentrated, a standard environmental policy based on a Pigouvian tax or a pollution permit market reaches the first-best outcome, challenging the Tinbergen rule. To illustrate this point, we first consider an upstream monopoly selling eco-services to a representative polluting firm. We progressively extend our result to heterogeneous downstream polluters and heterogeneous upstream Cournot competitors. Finally, we underline some limits of this result. It does not hold under the assumption of abatement goods or downstream market power. In this last case, we obtain Barnett's result.
    Keywords: environmental regulation, eco-industry, Imperfect Competition, abatement services
  23. By: P. Belleflamme; D. Paolini
    Abstract: We study how producers of cultural goods can strategically increase their promotion budgets to secure the most profitable release dates for their goods. In a game-theoretic setting, where two producers choose their budget before simultaneously setting the release date of their good, we prove that two equilibria are possible - releases are either simultaneous (at the demand peak) or staggered (one producer delays). In the latter equilibrium, the first-mover secures its position by investing more in promotion. We test this prediction on a dataset of more than 1500 American movies released in ten countries over 13 years. Our empirical analysis confirms that higher budgets allow movie studios to move release dates closer to demand peaks.
    Keywords: Non-price competition, Strategic promotion, Strategic timing, Motion pictures
    JEL: L13 L82
    Date: 2015

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