nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒08‒30
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Multiproduct Monopoly Made Simple By Mark Armstrong; John Vickers
  2. A Search Theory of Retail Market Structure By Jidong Zhou; Andrew Rhodes
  3. Strategic Formation of Customer Relationship Networks By Sonja Brangewitz; Claus-Jochen Haake; Philipp Moehlmeier
  4. Competition for Attention By Pedro Bordalo; Andrei Shleifer
  5. Information and Price Dispersion: Theory and Evidence By Pennerstorfer, Dieter; Schmidt-Dengler, Philipp; Schutz, Nicolas; Weiss, Christoph; Yontcheva, Biliana
  6. Equilibrium Price Dispersion Across and Within Stores By Guido Menzio; Nicholas Trachter
  7. Relative Price Dispersion By Nicholas Trachter; Leena Rudanko; Guido Menzio; Greg Kaplan
  8. Cost Reduction can Decrease Prot and Welfare in a Monopoly By Ryoma Kitamura
  9. Structural Analysis of Nonlinear Pricing By Luo, Yao; Perrigne, Isabelle; Vuong, Quang
  10. Upward Pricing Pressure Formulations with Logit Demand and Endogenous Partial Acquisitions By Fotis, Panagiotis; Polemis, Michael; Eleftheriou, Konstantinos
  11. Panel Data Hedonics: Rosen's First Stage and Difference-in-Differences as "Sufficient Statistics" By H. Spencer Banzhaf
  12. Behavioural economics: the implications for competition policy By Annemieke Tuinstra-Karel
  13. How Much Do Cartel Overcharge? (The "Working Paper" Version) By Marcel Boyer; Rachidi Kotchoni
  14. Is Collusion-Proof Procurement Expensive? By Gaurab Aryal; Maria F. Gabrielli
  15. ANTITRUST VERSUS INDUSTRIAL POLICIES, ENTRY AND WELFARE By Guy Meunier; Jean-Pierre Ponssard; Francisco Ruiz-Alizeda
  16. Peer-to-Peer Markets By Liran Einav; Chiara Farronato; Jonathan Levin
  17. Bundle of Joy? By Konrad Hurren
  18. Innovation, Emissions Policy, and Competitive Advantage in the Diffusion of European Diesel Automobiles By Miravete, Eugenio J; Moral Rincón, Maria J; Thurk, Jeff
  19. Competition and financial constraints: a two-sided story By Michele Bernini; Alberto Montagnoli
  20. 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
  21. Die wettbewerbsrechtliche Zulässigkeit von Meistbegünstigungsklauseln auf Buchungsplattformen am Beispiel von HRS By Hamelmann, Lisa; Haucap, Justus; Wey, Christian

  1. By: Mark Armstrong; John Vickers
    Abstract: We present a tractable class of multiproduct monopoly models that involve a generalized form of homothetic preferences. This class includes CES, linear and logit demand. Within the class, profit-maximizing quantities are proportional to efficient quantities. We discuss cost-passthrough, including cases where optimal prices do not depend on other products’costs. We show how the analysis can be extended to Cournot oligopoly. Finally, we discuss optimal monopoly regulation when the firm has private information about its vector of marginal costs, and show that if the probability distribution over costs satisfies an independence property, then optimal regulation leaves relative price decisions to the firm.
    Keywords: Multiproduct pricing, homothetic preferences, cost passthrough, monopoly regulation, multidimensional screening.
    JEL: D42 D82 L12 L51
    Date: 2015–08–20
  2. By: Jidong Zhou (NYU Stern School of Business); Andrew Rhodes (Toulouse School of Economics)
    Abstract: This paper studies how consumer multiproduct shopping and search frictions jointly affect retail market structure. Single-product shops with different products can merge to form a multiproduct retailer. By doing this, they provide one-stop shopping convenience and thus attract more consumers. However, the conglomerate merger also changes the market structure and affects price competition. We fiÂÂ…nd that an asymmetric market structure with one multiproduct retailer and smaller single-product competitors often leads to the weakest price competition. We solve for the equilibrium market structure, and show that it is asymmetric whenever the search friction is not too high. Conglomerate merger which leads to such an asymmetric market structure often raises market prices and harms consumers. Due to the endogeneity of the market structure, reducing the search friction does not necessarily induce lower market prices and higher consumer welfare.
    Date: 2015
  3. By: Sonja Brangewitz (University of Paderborn); Claus-Jochen Haake (University of Paderborn); Philipp Moehlmeier (Bielefeld University)
    Abstract: We analyze the stability of networks when two intermediaries strategically form costly links to customers. We interpret these links as customer relationships that enable trade to sell a product. Equilibrium prices and equilibrium quantities on the output as well as on the input market are determined endogenously for a given network of customer relationships. We investigate in how far the substitutability of the intermediaries' products and the costs of link formation influence the intermediaries' equilibrium profits and thus have an impact on the incentives to strategically form relationships to customers. For networks with three customers we characterize locally stable networks, in particular existence is guaranteed for any degree of substitutability. Moreover for the special cases of perfect complements, independent products and perfect substitutes, local stability coincides with the stronger concept of Nash stability. Additionally, for networks with n customers we analyze stability regions for selected networks and determine their limits when n goes to infinity. It turns out that the shape of the stability regions for those networks does not significantly change compared to a setting with a small number of customers.
    Keywords: Network Formation, Product Differentiation, Oligopoly, Quantity Competition
    JEL: C70 D43 D85 L13
    Date: 2015–05
  4. By: Pedro Bordalo; Andrei Shleifer
    Abstract: We present a model of market competition in which consumers? attention is drawn to the products? most salient attributes. Firms compete for consumer attention via their choices of quality and price. Strategic positioning of a product affects how all other products are perceived. With this attention externality, depending on the cost of producing quality some markets exhibit ?commoditized? price salient equilibria, while others exhibit ?de-commoditized? quality salient equilibria. When the costs of quality change, innovation can lead to radical shifts in markets, as in the case of decommoditization of the coffee market by Starbucks. In the context of financial innovation, the model generates the phenomenon of ?reaching for yield?.
  5. By: Pennerstorfer, Dieter; Schmidt-Dengler, Philipp; Schutz, Nicolas; Weiss, Christoph; Yontcheva, Biliana
    Abstract: We examine the relationship between information and price dispersion in the retail gasoline market. We first show that the clearinghouse models in the spirit of Stahl (1989) generate an inverted-U relationship between information and price dispersion. We construct a new measure of information based on precise commuter data from Austria. Regular commuters can freely sample gasoline prices on their commuting route, providing us with spatial variation in the share of informed consumers. We use detailed information on gas station level prices to construct price dispersion measures. Our empirical estimates of the relationship are in line with the theoretical predictions.
    Keywords: commuter data; price dispersion; retail gasoline; search
    JEL: D43 D83 L13
    Date: 2015–08
  6. By: Guido Menzio; Nicholas Trachter
    Abstract: We develop a search-theoretic model of the product market that generates price dispersion across and within stores. Buyers differ with respect to their ability to shop around, both at different stores and at different times. The fact that some buyers can shop from only one seller while others can shop from multiple sellers causes price dispersion across stores. The fact that the buyers who can shop from multiple sellers are more likely to be able to shop at inconvenient times (e.g., on Monday morning) causes price dispersion within stores. Specifically, it causes sellers to post different prices for the same good at different times in order to discriminate between different types of buyers.
    JEL: D43
    Date: 2015–08
  7. By: Nicholas Trachter (Federal Reserve Bank of Richmond); Leena Rudanko (Federal Reserve Bank of Philadelphia); Guido Menzio (University of Pennsylvania); Greg Kaplan (Princeton University)
    Abstract: Using scanner data we document some interesting patterns of pricing. We document significant differences in (1) overall price levels across stores, and (2) deviations of individual prices from the store average price. We build a model of spatial price discrimination to explore these phenomena.
    Date: 2015
  8. By: Ryoma Kitamura (Graduate School of Economics, Kwansei Gakuin University)
    Abstract: This paper develops a monopoly model in which two vertically differentiated goods are supplied and involve a within-product network externality. Within this model, I examine how the cost of the high-quality good affects the firm’s profit and welfare, demonstrating a surprising result that both the profit and welfare are U-shaped in the cost and thus, in particular, a decrease in the marginal cost can reduce the monopoly profit. I show that the assumptions of the fulfilled expectations equilibrium and multi-product monopoly lead to this counter intuitive possibility. Furthermore, changes in production costs and in quality yield cannibalization such that the consumption of one good increases while that of the other decreases.
    Keywords: Multi-product firm, Monopoly, Cannibalization, Network externality
    JEL: D21 D42 L12 L15
    Date: 2015–07
  9. By: Luo, Yao (University of Toronto); Perrigne, Isabelle (Rice University); Vuong, Quang (NYU)
    Abstract: This paper proposes a methodology for analyzing nonlinear pricing data with an illustration on cellular phone. The model incorporates consumers exclusion. Assuming a known traffic, we establish identification of the model primitives using the first-order conditions of both the firm and the consumer up to a cost parameterization. Next, we propose a new one-step quantile-based non-parametric method to estimate the consumers inverse demand and their type distribution. We show that our nonparametric estimator is the square root of N-consistent. We then introduce unobserved product heterogeneity with an unknown tariff. We show how our identification and estimation results extend. Our analysis of cellular phone consumption data assesses the performance of alternative pricing strategies relative to nonlinear pricing.
    Date: 2014–07
  10. By: Fotis, Panagiotis; Polemis, Michael; Eleftheriou, Konstantinos
    Abstract: The aim of this paper is to derive the formula of Gross Upward Pricing Pressure Index (GUPPI), used on duopoly markets with differentiated products, when we allow for unilateral equity stakes (expressed as a function of victim's market share) to be endogenously determined. The results show that the unilateral effects of partial acquisitions, as they are measured by GUPPI when the percentage of equity stakes of the acquirer in the target firm is considered endogenous, may be higher than in the case where the said percentage is exogenously determined.
    Keywords: Differentiated Product Markets; GUPPI; Logit Demand; Endogenous Partial Acquisitions
    JEL: G3 L13 L16
    Date: 2015–03–26
  11. By: H. Spencer Banzhaf
    Abstract: For decades, economists have used the hedonic model to estimate demands for the implicit characteristics of differentiated commodities. The traditional cross-sectional approach can recover marginal willingness to pay for characteristics, but has faltered over a difficult endogeneity problem for non-marginal welfare measures. I show that when marginal prices can be reliably estimated, and when panel data on household demands is available, one can construct a second-order approximation to non-marginal welfare measures using only the first-stage marginal prices. Under a single-crossing restriction, the approach remains valid for repeated cross sections of product prices. More recently, economists have questioned the assumptions under which one can identify these cross-sectional hedonic price functions, raising the possibility of unobservables that are correlated with the characteristic of interest. To overcome this problem, they have introduced difference-in-differences econometric models to identify capitalization effects. Unfortunately, the interpretation of these effects has not been clearly perceived in the literature. I additionally show these capitalization effects are the "average direct unmediated effect" on prices of a change in characteristics, which can be interpreted as a movement along the ex post hedonic price func-tion. This effect is a lower bound on Hicksian equivalent surplus.
    JEL: D46 D61 H4 Q51 R3
    Date: 2015–08
  12. By: Annemieke Tuinstra-Karel
    Abstract: Behavioural economics, the interdisciplinary field of research that studies the impact of psychological factors on economic decision making, is a trending topic in policy circles. Annemieke Tuinstra-Karel discusses the implications for competition policy, based on a recent investigation by the Netherlands Authority for Consumers and Markets.
    Date: 2014–09–01
  13. By: Marcel Boyer; Rachidi Kotchoni
    Abstract: The estimation of cartel overcharges lies at the heart of antitrust policy on cartel prosecution as it constitutes a key element in the determination of fines. Connor and Lande (2008) conducted a survey of cartels and found a mean overcharge estimate in the range of 31% to 49%. By examining more sources, Connor (2010) finds a mean of 50.4% for successful cartels. However, the data used in those studies are estimates obtained from different methodologies, sources and contexts rather than from direct observations. Therefore, these data are subject to model error, estimation error, endogeneity bias, and publication bias. An examination of the Connor database reveals that the universe of overcharge estimate is asymmetric, heterogenous and contains a number of influential observations. Beside the fact that overcharge estimates are potentially biased, fitting a linear regression model to the data without providing a carefull treatment of the problems raised above may produce distorted results. We conduct a meta-analysis of cartel overcharge estimates in the spirit of Connor and Bolotova (2006) while providing a sound treatment of these matters. We find bias-corrected mean and median overcharge estimates of 15.47% and 16.01%. Clearly, our results have significant antitrust policy implications. L’estimation des surprix des cartels est au coeur de la politique de lutte aux cartels car elle est un élément clé de la détermination des pénalités. Connor et Lande (2008) survolent la litérature sur les majorations de prix des cartels et concluent à une augmentation moyenne variant entre 31% et 49%. Considérant un échantillon plus grand, Connor (2010) trouve une moyenne de 50,4% pour les cartels réussis. Cependant, les données utilisées dans ces études sont des estimations obtenues à partir de méthodologies, sources, et contextes différents plutôt que d’observations directes. De ce fait, ces données héritent potentiellement d’erreurs de modélisation et d’estimation, ainsi que de biais d'endogenéité et de publication. L’analyse directe des surprix dans l’échantillon de Connor révèle une distribution asymétrique, une importante hétérogénéité et la présence d’observations aberrantes. Au-delà du fait que les estimations des surprix sont potentiellement biaisées, l’estimation d’un modèle de régression linéaire avec de telles données sans un traitement adéquat des problèmes identifiés ci-dessus pourait produire des résultats fallacieux. Nous présentons une méta-analyse dans l’esprit de Connor and Bolotova (2006), mais qui tient compte adéquatement des problèmes mentionnés ci-dessus. Après correction des biais, nous obtenons une moyenne et une médiane de majorations de prix de l’ordre de 15,47% et 16,01%. Nos résultats débouchent sur des enjeux importants en matière de politique de la concurrence.
    Keywords: Antitrust, Cartel overcharges, Heckman, Heckit, Kullback-Leibler divergence, Meta-analysis, Antitrust, Surprix de cartel, Heckman, Heckit, Divergence de Kullback-Leibler, Meta-analyse
    Date: 2015–07–31
  14. By: Gaurab Aryal; Maria F. Gabrielli
    Abstract: Collusion adversely affects procurement cost and efficiency. It is hard to quantify just how prevalent collusion is, but it's safe to assume that there's a lot of collusion going on. Detecting collusion from (just) bid data is hard so the extent of the damages can never be known. A natural response would have been to use collusion-proof procurement, yet, such auctions are hardly used. Why? Using California highway procurements data, we estimate the extra cost of implementing a collusion-proof auction to be anywhere between 1.6% to 5%. Even after we factor in the marginal excess burden of taxes needed to finance the expenses, the cost ranges between 2.08% and 6.5%, which is too small to be the answer. Since other than cost there is no obvious answer, this shows that there is a lacuna in the empirical auction literature.
    Date: 2015–05
  15. By: Guy Meunier (INRA - Institut national de la recherche agronomique (INRA), Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X); Jean-Pierre Ponssard (CNRS, Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X); Francisco Ruiz-Alizeda (Department of Economics, Ecole Polytechnique - CNRS - Polytechnique - X)
    Abstract: In industries with large sunk costs, the investment strategy of competing firms depends on the regulatory context. We consider ex-ante industrial policies in which the sunk cost may be either taxed or subsidized, and antitrust policies which could be either pro-competitive (leading to divestiture in case of high ex-post protability) or lenient (allowing mergers in case of low ex-post protability). Through a simple entry game we completely characterize the impact of these policies and examine their associated dynamic trade-offs between the timing of the investment, the ex-post benefits for the consumers, and the possible duplication of fixed costs. We find that merger policies are dominated by ex-ante industrial policies, whereas the latter are dominated by divestiture policies only under very special circumstances.
    Date: 2015–02–16
  16. By: Liran Einav; Chiara Farronato; Jonathan Levin
    Abstract: Peer-to-peer markets such as eBay, Uber, and Airbnb allow small suppliers to compete with traditional providers of goods or services. We view the primary function of these markets as making it easy for buyers to find sellers and engage in convenient, trustworthy transactions. We discuss elements of market design that make this possible, including search and matching algorithms, pricing, and reputation systems. We then develop a simple model of how these markets enable entry by small or flexible suppliers, and the resulting impact on existing firms. Finally, we consider the regulation of peer-to-peer markets, and the economic arguments for different approaches to licensing and certification, data, and employment regulation.
    JEL: D02 L86
    Date: 2015–08
  17. By: Konrad Hurren
    Abstract: The pricing of television is taken as given in New Zealand. But internationally, regulators and competition authorities have begun to think about the effects that different pricing structures have on viewers and competition in television markets. Konrad Hurren outlines a pricing structure known as bundling, explains why firms use it, and ponders what it means for television viewers and content providers.
    Date: 2013–11–01
  18. By: Miravete, Eugenio J; Moral Rincón, Maria J; Thurk, Jeff
    Abstract: Spurred by Volkswagen's introduction of the TDI diesel engine in 1989, market penetration of diesel cars in Europe increased from 10% in 1990 to over 50% in 2000. Using Spanish automobile registration data, we estimate an equilibrium discrete choice, oligopoly model of horizontally differentiated products. We find that changing product characteristics and the increasing popularity of diesels leads to correlation between observed and unobserved (to the researcher) product characteristics, an aspect we allow for in the estimation. Despite widespread imitation by its rivals, Volkswagen was able to capture 32% of the potential innovation rents and diesels accounted for approximately 60% of the firm's profits. Moreover, diesels amounted to an important competitive advantage for European auto makers over foreign imports. We provide evidence that the greenhouse emissions policy enacted by European regulators, and not preferential fuel taxes, enabled the adoption of diesels. In so doing, this non-tariff policy was equivalent to a 20% import tariff; effectively cutting imports in half.
    Keywords: diesel cars; emission standards; import tariff equivalence; innovation rents
    JEL: F13 L62 O33
    Date: 2015–08
  19. By: Michele Bernini (National Institute of Economic and Social Research, London, UK); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Keywords: Financial constraints; Credit rationing; Competition; Transition
    JEL: D22 E22 G1 P20 A
    Date: 2015–08
  20. 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.
    Keywords: Credit cards; two-sided markets; price discrimination
    JEL: L41 L12 L13 D22
    Date: 2015–08–10
  21. By: Hamelmann, Lisa; Haucap, Justus; Wey, Christian
    Abstract: Auf Plattformmärkten werden vielfach Meistbegünstigungsklauseln eingesetzt, durch welche der Anbieter verpflichtet wird, seine Produkte auf der jeweiligen Plattform zu den günstigsten Konditionen zu offerieren. Kartellrechtlich sind diese Klauseln umstritten. Im Jahr 2013 hat das Bundeskartellamt (BKartA) in dem HRS-Beschluss, welcher jüngst durch das OLG Düsseldorf bestätigt wurde, eine solche Klausel als wettbewerbsbeschränkende Vertikalvereinbarung sowie als Missbrauch einer marktbeherrschenden Stellung eingestuft. Angelehnt an diesen Beschluss beleuchtet der folgende Beitrag die wettbewerbsökonomischen Auswirkungen sowie die wettbewerbsrechtliche Zulässigkeit dieser Klauseln. Dabei wird durch die Verknüpfung juristischer und ökonomischer Betrachtungen eine adäquate Marktabgrenzung in einem - potenziell - zweiseitigen Markt sowie eine deskriptive Wirkungsanalyse vorgenommen und resümiert.
    Abstract: Online platforms have increasingly implemented so-called 'Across-Platform Parity Agreements', restraining the seller to offer his goods to any other retailer / intermediary at more favorable terms and conditions. These clauses raise antitrust concerns; i. a., the German Federal Cartel Office (recently confirmed by the Düsseldorf Court of Appeal) declared the implementation by the online hotel-booking portal HRS as anticompetitive. The justification given was that it would constitute an effected restriction of competition as well as an abuse of a dominant position. While incorporating the (often neglected) economic theory into legal practice, this case study examines the admissibility under competition law and discusses the most controversial issues. In particular, the market definition of the - potentially - two-sided market based on the demand-side oriented market concept is scrutinized. In addition, a descriptive efficiency analysis is performed, considering possible alternatives to attain the positive effects. By applying the 'more-economic approach', both of these factors, which were also decisive for the injunctive relief, are differently assessed to the decision. Consequently, from a competition policy perspective, this law and economics analysis concludes that the prohibition of the implementation of APPA is not justified.
    Date: 2015

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