nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒09‒11
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Downstream Competition and the Effects of Buyer Power By Zhiqi Chen; Hong Ding; Zhiyang Liu
  2. Product Line Strategy in a Vertically Di¤erentiated Duopoly By Ryoma Kitamura; Tetsuya Shinkai
  3. Search and Bargaining in the Product Market and Price Rigidities By Mirko Abbritti; Tommaso Trani
  4. Entry Regulation in a Linear Market with Elastic Demand By Javier Elizalde; Markus Kinateder; Ignacio Rodríguez-Carreño
  5. Open Innovation in a Model à la Hotelling By Bottai, Carlo
  6. Information exchange through non-binding advance price announcements: An antitrust analysis By Boshoff, Willem; Frübing, Stefan; Hüschelrath, Kai
  7. The settlement procedure in EC cartel cases: An empirical assesment By Hüschelrath, Kai; Laitenberger, Ulrich
  8. The duration of the EC merger control process: Determinants and the impact of the 2004 merger regulation reform By Heim, Sven; Hüschelrath, Kai; Laitenberger, Ulrich
  9. Add-on pricing: theory and evidence from the cruise industry By M. Savioli; L. Zirulia
  10. Insurer Competition in Health Care Markets By Ho, Katherine; Lee, Robin S.
  11. Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D. By Maria Polyakova
  12. Quality provision and reporting when health care services are multi-dimensional and quality signals imperfect By Katharina Huesmann; Wanda Mimra
  13. Restructuring European Electricity Markets ? A Panel Data Analysis By Hyland, Marie
  14. Innovation, Deregulation, and the Life Cycle of a Financial Service Industry By Fumiko Hayashi; Grace Bin Li; Zhu Wang
  15. Deregulation, competition, and consolidation: The case of the German interurban bus industry By Dürr, Niklas S.; Heim, Sven; Hüschelrath, Kai
  16. Competition in the German interurban bus industry: A snapshot two years after liberalization By Dürr, Niklas S.; Hüschelrath, Kai

  1. By: Zhiqi Chen (Department of Economics, Carleton University); Hong Ding (Deloitte Enterprise Consulting); Zhiyang Liu (Shanghai University of Finance and Economics)
    Abstract: To examine the interaction between buyer power and competition intensity in a downstream market, we consider four variations of a model in which oligopolistic retailers compete in the downstream market and one of them is a large retailer that has its own exclusive supplier. We demonstrate that an increase in the buyer power of the large retailer against its supplier leads to a fall in retail price and an improvement in consumer welfare, and this is true even in the extreme case where the large retailer is a monopoly in the downstream market. More interestingly, we find that the beneficial effects of an increase in buyer power are large when the intensity of downstream competition is low, with the effects being the largest in the case of downstream monopoly.
    Keywords: buyer power; retail competition; antitrust policy
    JEL: L1 L4
    Date: 2015–07–06
  2. By: Ryoma Kitamura (Graduate School of Economics, Kwansei Gakuin University); Tetsuya Shinkai (School of Economics, Kwansei Gakuin University)
    Abstract: We consider a duopoly model in which …rms with di¤erent costs supply two vertically di¤erentiated products in the same market. We show that the e¢ cient …rm produces more of the high-quality good and the ine¢ cient one produces more of the low-quality good in equilibrium. We also …nd that a change in the quality superiority of goods and relative cost e¢ ciency ratios leads to cannibalization from one good to the other and characterize graphically the product line strategies of …rms through the two ratios.
    Keywords: Multi-product …rm; Duopoly; Cannibalization; Vertical product di¤erentiation
    JEL: D21 D43 L13 L15
    Date: 2015–08
  3. By: Mirko Abbritti (University of Navarra); Tommaso Trani (University of Navarra)
    Abstract: This paper develops a model of pricing dynamics in business to business relationships. The formation of business relationships is a process of search and matching between retailers and wholesalers in the product market. The size of each transaction and the related price are set through bilateral bargaining. There are three key factors that influence the reaction of prices and quantities to cost shocks: the persistence of the shocks, the adjustment of final goods production and the search externalities. These factors determine how firms adjust, whether through the intensive margin, through the extensive margin or through both. Based on this, we assess to what extent wholesale prices affect the allocation of consumption in closed economy and deliver expenditure switching in open economy.
    Date: 2014–11–01
  4. By: Javier Elizalde (University of Navarra); Markus Kinateder (University of Navarra); Ignacio Rodríguez-Carreño (University of Navarra)
    Abstract: This work performs a comparative welfare analysis of two types of entry regulation in a duopolistic retail market: number of licenses and minimum distance between stores. In a linear (Hotelling) market we show that a minimum distance rule is beneficial for the consumers and disadvantageous for the firms when demand is sufficiently inelastic. The distance rule that maximises social welfare is one quarter of the market under which firms will be located at the quartiles. Those locations are also optimal under regulated prices. This analysis, which is not yet considered in the literature, is motivated by a change of entry regulation in the drugstore market in the Spanish region of Navarre
    Date: 2014–02–01
  5. By: Bottai, Carlo (University of Turin)
    Abstract: This paper shows a model à la Hotelling in which profit-maximizing firms use either an open or a closed strategy to develop their software products. Only in the first case they can freely interchange information about their R&D, and the spillovers are higher the closer they are. What comes out is a clustering force that drives open firms to stay closer one another in the product characteristic space and which lead to believe that a sense of community is essential to work for an organizational model that is decentralized, modular and that cannot be planned in advance, like the Bazaar development model, used by open firms, is.
    Date: 2015–06
  6. By: Boshoff, Willem; Frübing, Stefan; Hüschelrath, Kai
    Abstract: We study the welfare effects of non-binding advance price announcements. Applying a differentiated Bertrand model with horizontal products and asymmetric information, we find that such announcements can help firms to gain information on each other thereby allowing them to achieve higher profits. However, our results also show that the overall welfare effects of such announcements in a context of heterogeneous products are not as clear-cut as previous research in a homogeneous products framework has suggested. We conclude that - although non-binding advance price announcements may raise competition concerns - in many settings, their positive effects are likely to outweigh the potential detrimental effects on welfare.
    Keywords: antitrust policy,collusion,information exchange,price announcements
    JEL: L41 K21
    Date: 2015
  7. By: Hüschelrath, Kai; Laitenberger, Ulrich
    Abstract: In June 2008, the European Commission (EC) was enabled to introduce a settlement procedure that aims at promoting the procedural efficiency of cartel enforcement in the European Union (EU). We use a data set consisting of 84 cartels decided by the EC from 2000 to 2014 to empirically investigate the impact of the EU settlement procedure on the duration of cartel investigations. Separating the enforcement process into two consecutive stages, we find that the introduction of the settlement procedure is followed by a substantial shortening of the second stage - reaching from the statement of objections (SO) to the decision - while it leaves the duration of the first stage from the beginning of the case to the SO unaffected. Subsequent to a discussion of further evaluation approaches we conclude that the EU Settlement Procedure has increased procedural efficiency of cartel enforcement in the European Union substantially.
    Keywords: competition policy,cartels,settlements,ex-post evaluation,European Union
    JEL: K21 L41
    Date: 2015
  8. By: Heim, Sven; Hüschelrath, Kai; Laitenberger, Ulrich
    Abstract: The duration of merger proceedings held by competition authorities is an important determinant of the efficiency of the entire merger control process. We use a dataset of 2953 Phase I and 92 Phase II investigations completed by the European Commission (EC) between 1999 and 2008 to examine the key determinants of their duration. Differentiating between authority- and caserelated drivers, we find that while the duration of Phase I investigations largely depends on the type of decision and use of simplified procedure, the duration of Phase II investigations is driven by factors such as industry knowledge, the duration of the preceding Phase I investigation, the origin of the notifying firm or the number of identified relevant markets. We also provide evidence that the significant increase in average duration identified after the 2004 merger regulation reform does not imply a decrease in administrative efficiency, as the probability of indepth investigations was correspondingly reduced.
    Keywords: competition policy,ex-post evaluation,merger control,European Union
    JEL: K21 L41
    Date: 2015
  9. By: M. Savioli; L. Zirulia
    Abstract: In many industries, firms give consumers the opportunity to add (at a price) optional goods and services to a baseline product. The aim of our paper is to provide a theoretical model of add-on pricing in competitive environments with two new distinctive features. First, we discuss the choice of offering the add-on, assuming that this entails a fixed cost. Second, we allow firms to have a varying degree of market power over the add-on, associated with the ability to capture the value that consumers obtain from such an additional good/service. Our model shows that the conventional wisdom, according to which offering the add-on should unambiguously lower the price of the baseline product, is not always supported. In asymmetric equilibria, in which only one firm offers the add-on, baseline prices are higher if the firm’s market power over the add-on is limited. The predictions of the model are confirmed by a hedonic price model on a dataset of cruises offered worldwide.
    JEL: D43 L83
    Date: 2015–09
  10. By: Ho, Katherine; Lee, Robin S.
    Abstract: We analyze the impact of insurer competition on health care markets using a model of premium setting, hospital-insurer bargaining, household demand for insurance, and individual demand for hospitals. Increased insurer competition may lead to lower premiums; it may also increase health providers' leverage to negotiate higher prices, thereby mitigating premium reductions. We use detailed California admissions, claims, and enrollment data from a large benefits manager. We estimate our model and simulate the removal of an insurer from consumers' choice sets. Although premiums rise and annual consumer surplus falls by $50-120 per capita, hospital prices and spending fall in certain markets as remaining insurers negotiate lower rates. Overall, the impact on negotiated prices is heterogeneous, with increases or decreases of up to 15% across markets. We conclude that insurer competition can increase consumer surplus but also generate a redistribution of rents across hospitals and greater medical spending in certain markets.
    Keywords: bargaining; health care markets; vertical contracts
    JEL: I11 L10
    Date: 2015–09
  11. By: Maria Polyakova
    Abstract: I take advantage of regulatory and pricing dynamics in Medicare Part D to empirically explore interactions among adverse selection, switching costs, and regulation. I first document novel evidence of adverse selection and switching costs within Part D using detailed administrative data. I then estimate a contract choice and pricing model in order to quantify the importance of switching costs for risk-sorting, and for policies that may affect risk sorting. I first find that in Part D, switching costs help sustain an adversely-selected equilibrium and are likely to mute the ability of ACA policies to improve risk allocation across contracts, leading to higher premiums for some enrollees. I then estimate that, overall, decreasing the cost of active decision-making in the Part D environment could lead to a substantial gain in consumer surplus of on average $400-$600 per capita, which is around 20%-30% of average annual per capita drug spending.
    JEL: H0 H50 H51 I1 I13 L51 L78
    Date: 2015–09
  12. By: Katharina Huesmann (University of Cologne, Germany); Wanda Mimra (ETH Zurich, Switzerland)
    Abstract: We model competition for a multi-attribute health service where patients observe attribute quality imprecisely before deciding on a provider. High quality in one attribute, e.g. medical quality, is more important for ex post utility than high quality in the other attribute. Providers can shift resources to increase expected quality in some attribute. Patients rationally focus on attributes depending on signal precision and beliefs about the providers’ resource allocations. When signal precision is such that patients focus on the less important attribute, any Perfect Bayesian Nash Equilibrium is inefficient. Increasing signal precision can reduce welfare, as the positive effect of better provider selection is overcompensated by the negative effect that a shift in patient focusing has on provider quality choice. We discuss the providers’ strategic reporting incentives and reporting policies. Under optimal reporting, signals about the important attribute are always published. However, banning reporting on less important attributes might be necessary.
    Keywords: multi-attribute good, quality signals, focusing, reporting
    JEL: I11 D83 L10
    Date: 2015–09
  13. By: Hyland, Marie
    Abstract: This paper looks at the restructuring of European electricity markets that has been taking place since the 1990s. This liberalisation process, driven largely by EU legislation aiming to create a single market for electricity, has led to significant changes in how electricity markets in member states operate. In this paper I estimate the impact of the restructuring process on electricity prices for industrial consumers. Much of the literature to date estimating the impacts of electricity market restructuring fails to take into account the potential endogeneity of the reform process. By using dynamic panel-data techniques, I aim to overcome this shortcoming. I find that once the potential endogeneity of reforms is accounted for, restructuring has, as of yet, had no statistically significant impact on electricity prices. This research highlights the importance of accounting for dynamics and endogeneity before drawing inferences about the results of EU electricity-market reform.
    Date: 2015–06
  14. By: Fumiko Hayashi; Grace Bin Li; Zhu Wang
    Abstract: This paper examines innovation, deregulation, and firm 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 dataset 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.
    Keywords: Financial services industry;United States;Industrial structure;Technological innovation;Equilibrium. Econometric models;Innovation; Deregulation; Industry Dynamics; Shakeout
    Date: 2015–08–18
  15. By: Dürr, Niklas S.; Heim, Sven; Hüschelrath, Kai
    Abstract: We provide an empirical assessment of the German interurban bus industry two years after its deregulation in January 2013. In addition to a general description of key developments of the industry, we use a unique route-level price data set to study both competitive interaction in general and the potential price effects of a recently announced merger of the two largest players in the market in particular. We find that route-level average prices, inter alia, do not only depend on the number of competitors but especially on the composition of firms operating on a particular route. Although our empirical results suggest short-term price increases on certain route types post-merger, it remains an open question whether the merger should be classified as anticompetitive.
    Keywords: deregulation,competition,merger,interurban bus services,Germany
    JEL: L11 L41 L92 K21 K23
    Date: 2015
  16. By: Dürr, Niklas S.; Hüschelrath, Kai
    Abstract: We study competition in the German interurban bus industry two years after its liberalization in January 2013. In addition to a brief characterization of the liberalization process and several general market developments, we provide a detailed analysis of selected market characteristics such as concentration and competitive interaction, fares as well as service quality. We use the gained insights to discuss two recent policy issues - industry consolidation and possible abuses of market power by incumbents - and derive several recommendations to secure effective competition in the industry.
    Keywords: liberalization,interurban bus services,competition,merger,predation,Germany
    JEL: L11 L41 L43 L92 K21 K23
    Date: 2015

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.