nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒09‒26
25 papers chosen by
Russell Pittman
United States Department of Justice

  1. Vertical bargaining and retail competition: What drives countervailing power? By Gaudin, Germain
  2. Competition, product safety, and product liability By Chen, Yongmin; Hua, Xinyu
  3. On pure-strategy Nash equilibria in price-quantity games By Bos A.M.; Vermeulen A.J.
  4. Is price dispersion always an indication of price discrimination? By Alberro, José Luis; Higgins, Richard
  5. On the emergence of scale-free production networks By Stanislao Gualdi; Antoine Mandel
  6. Dynamic Model of the Price Dispersion of Homogeneous Goods By Joachim Kaldasch
  7. The role of captive consumers in retailers' location choices By Anett Erdmann
  8. Too Much Attention on Low Prices? Loss Leading in a Model of Sales with Salient Thinkers By Inderst, Roman; Obradovits, Martin
  9. A theory on merger timing and announcement returns By Paulo J. Pereira; Artur Rodrigues
  10. Synergy effect of M&A Heterogeneity and Alliance Homogeneity on stock market By Jaisang Kim
  11. Information and Market Power By Dirk Bergemann; Tibor Heumann; Stephen Morris
  12. Offshoring under Oligopoly By Mitsuru Igami
  13. Does Foreign Entry Spur Innovation? By Yuriy Gorodnichenko; Jan Svejnar; Katherine Terrell
  14. Endogenous firms' organization, internal audit and leniency programs By Emilie Dargaud; Armel Jacques
  15. Contract Size and Small Firm Competition in Public Procurement By Strömbäck, Elon
  16. Peer-to-Peer Markets By Liran Einav; Chiara Farronato; Jonathan Levin
  17. Balancing competition and cooperation: Evidence from transatlantic airline markets By Bilotkach, Volodymyr; Hüschelrath, Kai
  18. Airport Congestion and Ineficiency in Slot Allocation By Pierre M. Picard; Alessandro Tampieri; Xi Wan
  19. Pharmaceutical patents and generic entry competition: the role of marketing exclusivity By MIYAGIWA, Kaz; WAN, Yunyun
  20. Competition and Consume Choice in Option Demand Markets By Gilad Sorek
  21. Vertical integration and exclusivities in maritime freight transport By ALVAREZ-SANJAIME, Oscar; CANTOS-SANCHEZ, Pedro; MONER-COLONQUES, Rafael; SEMPERE-MONERRIS, José J.
  22. Preference Externalities in Media Markets By Anderson, Simon P; Waldfogel, Joel
  23. The Irish Electricity Market: New Regulation to Preserve Competition By Lynch, Muireann Á.; Di Cosmo, Valeria
  24. 4G/LTE Mobile Broadband Competition and the Critical Role of Law and Regulation – A Taiwan Case Study By Yu-Wen Huang
  25. Network Externalities in Telecommunication Industry: An Analysis of Serbian Market By Dejan Trifunovic; Djordje Mitrovic; Bojan Ristic

  1. By: Gaudin, Germain
    Abstract: This paper investigates the effects of mergers, entry, and exit in retail markets when input prices are negotiated. Results are derived from a model of bilateral Nash-bargaining between manufacturers and retailers which allows for general forms of demand and retail competition. Whether countervailing buyer power arises, in the form of lower negotiated prices following greater retail concentration, depends on the pass-through rate of input to retail prices. Countervailing buyer power arises in equilibrium for a broad class of demand forms, and its magnitude depends on the degree of product differentiation. However, it generally does not translate into lower retail prices because of heightened market power at the retail level. Finally, the linear demand systems commonly used in the literature impose strong restrictions on the results.
    Keywords: Countervailing buyer power,Bilateral negotiations,Vertical relations,Nash-bargaining,Pass-through rate,Market concentration,Retail mergers,Entry,Exit
    JEL: C78 D43 L13 L14 L81
    Date: 2015
  2. By: Chen, Yongmin; Hua, Xinyu
    Abstract: A firm's incentive to invest in product safety is affected by both the market environment and the liability when its product causes consumer harm. A long-standing question in law and economics is whether competition can (partially) substitute for product liability in motivating firms to improve product safety. We investigate this issue in a spatial model of oligopoly with product differentiation, where reputation provides a market incentive for product safety and higher product liability may distort consumers' incentive for proper product care. We find that partial liability, together with reputation concerns, can motivate firms to make socially desirable safety investment. Increased competition due to less product differentiation lowers equilibrium market price, which diminishes a firm's gain from maintaining reputation and raises the socially desirable product liability. On the other hand, an increase in the number of competitors reduces both the benefit from maintaining reputation and the potential cost savings from cutting back safety investment; consequently, the optimal liability may vary non-monotonically with the number of competitors in the market. In general, therefore, the relationship between competition and product liability is subtle, depending on how competition is measured.
    Keywords: product safety, product liabilty, competition
    JEL: K13 L13 L15
    Date: 2015–09–04
  3. By: Bos A.M.; Vermeulen A.J. (GSBE)
    Abstract: This paper examines the existence and characteristics of pure-strategy Nash equilibria in oligopoly models in which firms set both prices and quantities. Existence is proved for a broad and natural class of price-quantity games. With differentiated products, the equilibrium outcome is similar to that of a price-only model. With undifferentiated products and limited spillover demand, there are rationing equilibria in which combined production falls short of market demand. Moreover, there might again be an equilibrium reflecting the outcome of a price game. Competition in price and quantity may thus yield Bertrand outcomes under a variety of market conditions.
    Keywords: Microeconomic Policy: Formulation; Implementation; Evaluation; Market Structure, Firm Strategy, and Market Performance: General;
    JEL: D04 L10
    Date: 2015
  4. By: Alberro, José Luis; Higgins, Richard
    Abstract: It has been established for a long time that there is significant dispersion in prices charged for seemingly homogeneous goods. This may happen in competitive markets because the world is not frictionless, and certainly in other markets where price discrimination is carried out by firms with oligopolistic power. This paper is the first survey of the economic literature on price dispersion that addresses the following three key issues: i) its characteristics as a result of optimizing search behavior; ii) its relevance as a reflection of price discrimination and its consequences for social welfare and policy intervention; and iii) the empirical evidence of price dispersion. By contributing to a better understanding of price dispersion, this survey may help in the design and implementation of competition and anti-trust policies
    Date: 2015–01
  5. By: Stanislao Gualdi; Antoine Mandel
    Abstract: Building upon the standard model of monopolistic competition on the market for intermediary goods, we propose a simple dynamical model of the formation of production networks. The model subsumes the standard general equilibrium approach and robustly reproduces key stylized facts of firms' demographics. Firms' growth rates are negatively correlated with size and follow a core double-exponential distribution followed by fat tails. Firms' size and production network are power-law distributed. These properties emerge because continuous inflow of new firms shifts away the model from a steady state to a disequilibrium regime in which firms get scaled according to their resistance to competitive forces.
    Date: 2015–09
  6. By: Joachim Kaldasch
    Abstract: Presented is an analytic microeconomic model of the temporal price dispersion of homogeneous goods in polypoly markets. This new approach is based on the idea that the price dispersion has its origin in the dynamics of the purchase process. The price dispersion is determined by the chance that demanded and supplied product units meet in a given price interval. It can be characterized by a fat-tailed Laplace distribution for short and by a lognormal distribution for long time horizons. Taking random temporal variations of demanded and supplied units into account both the mean price and also the standard deviation of the price dispersion are governed by a lognormal distribution. A comparison with empirical investigations confirms the model statements.
    Date: 2015–05
  7. By: Anett Erdmann
    Abstract: This paper investigates empirically the effect of anticipated price competition and distribution costs in firms' location choices within an oligopolistic market. I set up a static location-price game of incomplete information in which retailers choose their locations based on (firm-)location-specific characteristics, the expected market power and the expected degree of price competition. In particular, I tie the firms' strategic location incentives to the population distribution using the concept of captive consumers. This approach is in line with theoretical spatial price competition models and does not require price or quantity data. I address the computational difficulties of the estimation using mathematical programming with equilibrium constraints. Applied to the supermarket industry, the model confirms the existence of benefits of spatial differentiation for firms' profits and provides evidence that firms anticipate price competition and distribution costs in their site selections.
    Keywords: spatial competition , location choice , price competition , retail competition , discrete games , constrained optimization
    JEL: L13 L20 D43 R12
    Date: 2015–05
  8. By: Inderst, Roman; Obradovits, Martin
    Abstract: Loss leading is analyzed in a model of promotions (as in Varian 1980) with limited consumer attention: (i) Consumers only compare prices of a selected number of products and (ii) they may pay more attention either to price or quality, depending on the salience of the respective attributes. When consumers have standard preferences, which is our benchmark case, manufacturers benefit when one-stop shopping induces retailers to discount their products, as this expands demand. Results are strikingly different when consumers are salient thinkers. When one-stop shopping or retail competition increases the scope for loss leading, manufacturers' profits decline and there may be an inefficient substitution to lower-quality products. In particular, shoppers who compare products may end up with a choice that is strictly inferior to that of non-shoppers who are locked in to a (local) retailer. Our analysis has implications both for competition policy, as we analyze the implications of a ban on loss leading, and for marketing, as we also analyze how salience affects retailers' product and promotion strategies.
    Keywords: limited attention; loss leading; manufacturer profits; product choice; promotions; quality choice; retailing; sales; salience
    JEL: D21 D43 D83 L11 L13 L15
    Date: 2015–09
  9. By: Paulo J. Pereira (CEF.UP and Faculdade de Economia, Universidade do Porto.); Artur Rodrigues (School of Economics and Management and NIPE, University of Minho.)
    Abstract: This paper develops a dynamic model for the timing and terms of mergers and acquisitions. In contrast to other models, we show that firms agree about the timing independently from how the merger surplus is shared. Firms agree on the timing and discuss the sharing rule of the merger surplus according to their bargaining power or some other exogenous factor. We also show that, under asymmetric information, the combination of surprises regarding merger timing and merger terms, can produce either negative or positive abnormal returns for the merging firms.
    Keywords: Mergers, Merger terms, Timing, Uncertainty, Real Options, Event studies.
    JEL: G34 D81
    Date: 2015
  10. By: Jaisang Kim (Sungkyunkwan University)
    Abstract: Since Merger and Acquisition (M&A) and Strategic Alliance have been regarded as essential parts of successful strategies for profitable growth till date, none of previous researches investigated stock market’s response toward the synergy effect of M&A strategy and Strategic Alliance from the perspective of behavioral economics—more precisely—prospect theory. Therefore, by examining the synergy effect of M&A and Strategic Alliance and applying ‘prospect theory’ to stock price response, the goal of our research is to empirically test unconventional responses of stock market and ‘synergetic relation’ between M&A and Strategic Alliance. By doing so, this research will prove that two strategies can work together for better performance in the stock market.
    Keywords: Synergy effect ,Merger and Acquisition (M&A), Strategic Alliance, portfolio theory, prospect theory, loss aversion.
    JEL: M10
  11. By: Dirk Bergemann; Tibor Heumann; Stephen Morris
    Date: 2015–09–21
  12. By: Mitsuru Igami (Yale University)
    Abstract: This paper uncovers a novel pattern of offshoring and market structure in a high-tech industry, and proposes a simple oligopoly model to explain it. Specifically, the hard disk drive industry (1976-98) witnessed massive waves of entry, exit, and the relocation of manufacturing plants to low-cost countries, in which shakeouts occurred predominantly among home firms and almost all survivors were offshore firms. I build and estimate a dynamic offshoring game with entry/exit to explain these facts, and then investigate the relationship between offshoring and market structure as well as the impacts of hypothetical government interventions.
    Date: 2015
  13. By: Yuriy Gorodnichenko; Jan Svejnar; Katherine Terrell
    Abstract: Our estimates, based on large firm-level and industry-level data sets from eighteen countries, suggest that FDI and trade have strong positive spillover effects on product and technology innovation by domestic firms in emerging markets. The FDI effect is more pronounced for firms from advanced economies. Moreover, our results indicate that the spillover effects can be detected with micro data at the firm-level, but that using linkage variables computed from input-output tables at the industry level yields much weaker, and usually insignificant, estimated effects. These patterns are consistent with spillover effects being rather proximate and localized.
    JEL: F2 M16 O16 P23
    Date: 2015–09
  14. By: Emilie Dargaud (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS); Armel Jacques (CEMOI - Centre d'Économie et de Management de l'Océan Indien - IAE - Institut d'Administration des Entreprises - Université de la Réunion - Université de la Réunion)
    Abstract: When multi-product firms make simultaneous price-fixing agreements on different markets, they may wish to compartmentalize their agreements managing them with different individuals in order to avoid the contagion of antitrust authority investigations. Sometimes the leniency programs are effcient to defeat this strategy and to induce CEO to launch internal investigations and report the obtained hard evidence to the antitrust authority. However these programs may have pro-collusive effects for centralized firms.
    Keywords: Collusion, antitrust policy, leniency programs, multimarket contact, organizational form
    Date: 2015–09–15
  15. By: Strömbäck, Elon (Department of Economics, Umeå School of Business and Economics)
    Abstract: The European Commission encourages public authorities to split procurement contracts into multiple contracts in order to increase the competiveness of small and medium sized enterprises (SMEs). In this paper, I use data from Swedish public procurement auctions for internal regular cleaning service contracts to study the effect of contract size and number of contracts on SME participation and the probability of submitting the winning bid. I found that SME participation is negatively related to both contract size and the number of contracts in the procurement. A possible interpretation is that reduced contract size in order to stimulate SME participation is counteracted by reduced incentives for them to enter into procurements with multiple contracts. Medium-sized firms are also more successful when bidding for smaller contracts relative to large firms. Nevertheless, the results indicate that the SMEs’ award rate is positively correlated with the number of contracts in the procurement.
    Keywords: Procurement design; Split-award; Endogenous entry; Small and medium sized enterprises
    JEL: D44 H11 H57 L23
    Date: 2015–09–15
  16. By: Liran Einav (Stanford University and NBER); Chiara Farronato (Harvard Business School); Jonathan Levin (Stanford University and NBER)
    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.
  17. By: Bilotkach, Volodymyr; Hüschelrath, Kai
    Abstract: In the last two decades, airline alliances were not only successful in extending the size of their networks, but also received approvals by public authorities to intensify their cooperation through to merger-like revenue-sharing joint ventures (JVs). We empirically investigate the impact of the implementation of such joint ventures on both the respective airlines' competitive strategies as well as productive efficiency. Using U.S. DOT T100 International Segment data and applying airline-market fixed effects models, we find that joint ventures - compared to services with a lower degree of cooperation - lead to a 3-5 percent increase in capacity between the respective partner airlines' hub airports; however, this is done at the expense of services elsewhere in the network. Productive efficiency, as measured by load factors, is found to be 0.5-5 percent lower for joint venture routes compared to routes operated under antitrust immunity only. We use our empirical results to discuss implications for the balancing of competition and cooperation in transatlantic airline markets.
    Keywords: air transportation,alliances,antitrust immunity,efficiencies,GMM estimator
    JEL: L41 L93 K21
    Date: 2015
  18. By: Pierre M. Picard (CREA, Université de Luxembourg); Alessandro Tampieri (CREA, Université de Luxembourg); Xi Wan (CREA, Université de Luxembourg)
    Abstract: This paper analyzes optimal slot allocation in the presence of airport congestion. We model peak and offpeak slots as vertically differentiated products, and congestion limits the number of peak slots that the airport can allocate. Inefficiency emerges when the airport does not exploit all its slots. We show that for a private airport, inefficiency may arise if the airport is not too congested and the per-passenger fee is small enough, while with a public airport it does not emerge. Furthermore the airport, irrespective of its ownership, tends to give different slots to flights with same destination if the underlying market is a duopoly, and a single slot if the underlying market is served by a monopoly.
    Keywords: Slot allocation, Airport congestion, Vertical differentiation
    JEL: R41 H23 H21
    Date: 2015
  19. By: MIYAGIWA, Kaz; WAN, Yunyun
    Abstract: Extensive tests required by FDA severely curtail effective patent length for innovation drugs, raising concern that incentives to develop new drugs are insufficient in the U.S. The Hatch-Waxman Act addresses this issue with a five-year patent extension. At the same time, Hatch-Waxman promotes generic entry by reducing the entry cost for generics and by granting 180-day marketing exclusivity to a first challenger of the patent. While these two objectives seem at odds with other, we show that if the entry cost reduction is substantial, granting the marketing exclusivity also contributes to restoration of incentives to innovate. However, market exclusivity most likely decreases social welfare.
    Keywords: innovation, generic entry competition, patent, pharmaceuticals
    JEL: I18 K23 L13
    Date: 2015–08–21
  20. By: Gilad Sorek
    Abstract: Two medical providers choose their geographic location and medical-care specialization, and then compete in prices through health insurance sales. When buying insurance consumers know their geographic address, but they do not know their preferred medical treatment before getting sick. This uncertainty generates option demand for multiple providers: consumers may desire access for both providers although eventually attending only one. I characterize equilibrium with both providers located at the city center and at the quartiles of the products line. Under these locations and products choices all consumers buy insurance with access to both providers. This market outcome is efficient only if consumers care about minimizing mismatches between medical needs and medical products more than they care about minimizing commuting distance. Otherwise the market provides excessive product differentiation and insufficient geographic dispersion between medical providers. In this case the first best market outcome can be achieved by regulating (zoning) providers' geographic locations in a way that eliminates option demand for multiple providers: each consumer wishes access only to the geographically-closest provider.
    Keywords: Location, Product Differentiation, Option Demand
    JEL: I11 I13 L1
    Date: 2015–09
  22. By: Anderson, Simon P; Waldfogel, Joel
    Abstract: Media industries typically exhibit two fundamental features, high fixed costs and heterogeneity of consumer preferences. Daily newspaper markets, for example, tend to support a single product. In other examples, such as radio broadcasting, markets often support multiple differentiated offerings. Both contexts can deliver preference externalities, when the options and well-being for consumers depend on the number and mix of consumers according to their content preferences. This chapter presents evidence on these fundamental features of media markets. We then incorporate these features into a suite of theoretical models to obtain both a description of media markets as well as predictions for how they would be expected to function. In a third section we turn to “results,” i.e. empirical evidence on the questions illuminated by the theoretical models. We then explore the effects of technological change, and we suggest directions for future work.
    Keywords: broadcasting; differentiation; entry; media markets; preference externalities
    Date: 2015–09
  23. By: Lynch, Muireann Á.; Di Cosmo, Valeria
    Date: 2015–03
  24. By: Yu-Wen Huang (Dept. of Transportation and Communcation Management Science, Institute of Telecom Management, National Cheng Kung University)
    Abstract: Mobile broadband services play a key role of our daily communication, operation and entertainment. More than 393 4G/LTE networks have been commercially launched in 138 countries by March 2015 (GSA 2015). According to Vanson Bourne’s survey of 2014, six in ten UK organisations hope to harness the potential of the 4G coverage, but only one in ten orgnisations have already started making changes in recognition of 4G coming into place. Taiwan joins the high speed mobile broadband club with its 4G/LTE commercially launch in May 2014. This paper examines the mobile broadband service market in Taiwan, illustrating the development of Taiwan’s broadband market and its connection with the progress of digital convergence. It aims to draw a general picture of existing broadband market and how potential competition can be developed in responding to both market and legal viewpoints. This paper is based on four parts. The first part provides a brief introduction of Taiwan’s broadband market. The second part analyses Taiwan’s mobile broadband environment and its competition aspects, which include the dramatic 4G license auction in 2013 and the reshuffle of Taiwan’s existing mobile broadband market. The third part provides an initial analysis on the business strategies and market deployment of existing 4G/LTE operators, demonstrating the 4G operator’s efforts towards competition in a digital convergence era. The final part of this paper discusses the legal environment and regulatory issues in Taiwan, which includes on-going regulatory reform and recent legislative evolvement. The controversial licensing policy for 4G/LTE broadband and the hardship case of Taiwan’s Wi-MAX operators are also discussed in this section. This paper concludes with views which reflect remaining concerns and deficits in law and regulation in creating a competitive broadband market environment. These, above all, include reassessing regulatory control and market definition in a digital convergence epoch; accelerating regulatory reform in order to promote cross-sectorial competition and innovative service deployment. Last but not least, we strongly suggest that predictable and sustainable spectrum policy, law and enforcement are the key towards a flourishing mobile broadband service market. In this, it is critical for the regulator to take innovative thinking and a brave leap to create a healthy and competitive legal environment, so that the existing and prospective market players, as well as the end users can all benefit from.
    Keywords: 4G/LTE, Mobile Broadband Service, Digital Convergence, Regulatory Reform, Telecom Law and Regulation, Wi-MAX.
  25. By: Dejan Trifunovic (University of Belgrade, Faculty of Economics); Djordje Mitrovic (University of Belgrade, Faculty of Economics); Bojan Ristic (University of Belgrade, Faculty of Economics)
    Abstract: Telecommunication industry has probably the highest level of direct network effects. Direct externalities are related to the number of consumers using the same service, and indirect externalities stem from the availability of supporting services. Apart from network externalities, in telecommunication call externalities also exist when user of one network benefits from receiving free calls from users of other networks. Serbian mobile phone telecommunication market was first a duopoly market with majority state- owned Telecom Serbia and privately owned Telenor. After that a third license was sold to VIP mobile. The two incumbents were well established in the market and have long time ago reached the critical mass of users. At the beginning, users of VIP mobile benefited mainly from call externalities and incumbents reacted by price discriminating between on-net and off-net calls aiming to deter entry of new rival in the market. The entrant succeeded in obtaining new users mainly by offering lower prices than incumbents. The subsequent decision of regulatory agency to permit changing operator without changing user’s number levelled the playing field, reduced user’s switching costs and the extent of user’s lock-in. The purpose of the paper is to analyse the current level of network and call externalities in Serbia using data from the Serbian mobile telephone market for the period 2003–2013 (number of subscribers, providers’ market shares and mobile call prices per minute). We show that the number of subscribers that changed their operator increased with the growing size of the new comer’s network installed base. Also, we have found that implicit price discrimination between on-net and off-net calls could be identified both in pre-paid and post-paid packages. In the former case, all operators offer cheap additional packages with large number of minutes for on-net calls. In the latter case, post-paid users can use additional large number of free minutes for on-net calls after they spent all the minutes available for calls to all networks from their existing subscription packages.
    Keywords: Network externalities, Call externalities, Price discrimination
    JEL: L14 L96

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