nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒10‒04
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Nonlinear Pricing By Mark Armstrong
  2. Price and non-price competition in oligopoly: An analysis of relative payoff maximizers By Moghadam, Hamed M.
  3. Information and Market Power By Dirk Bergemann; Tibor Heumann; Stephen Morris
  4. The nonparametric approach to evolutionary oligopoly By Moghadam, Hamed M.
  5. Identification in Differentiated Products Markets By Steven T. Berry; Philip A. Haile
  6. Hedonic Quality and Social Norms: a hybrid model of product differentiation By A. Mantovani; O. Tarola; C. Vergari
  7. Inter-Industrial Factor Allocation in the Short and Long Runs in Chamberlinian Monopolistic Competition By Hiroshi Goto
  8. Robust Selling Mechanisms By Vinicius Carrasco; Vitor Farinha Luz; Paulo Monteiro; Humberto Moreira
  9. Does a Platform Monopolist Want Competition? By Niedermayer, Andreas
  10. Network Centrality and Market Prices: An Empirical Note By Matthias Firgo; Dieter Pennerstorfer; Christoph R. Weiss
  11. Networks, Frictions, and Price Dispersion By Donna, Javier; Schenone, Pablo; Veramendi, Gregory
  12. Measuring Market Power and the Efficiency of Alberta’s Restructured Electricity Market: An Energy-Only Market Design By Brown, David P.; Olmstead, Derek
  13. Competition with Multinational Firms: Theory and Evidence By Balázs Murakozy; Katheryn Niles Russ
  14. Merger Policy in a Quantitative Model of International Trade By Breinlich, Holger; Nocke, Volker; Schulz, Nicolas
  15. On Competitive Nonlinear Pricing By Attar, Andrea; Mariotti, Thomas; Salanié, François

  1. By: Mark Armstrong
    Abstract: I survey the use of nonlinear pricing as a method of price discrimination, both with monopoly and oligopoly supply. Topics covered include an analysis of when it is profitable to offer quantity discounts and bundle discounts, connections between second- and third-degree price discrimination, the use of market demand functions to calculate nonlinear tariffs, the impact of consumers with bounded rationality, bundling arrangements between separate sellers, and the choice of prices for upgrades and add-on products.
    Keywords: Price discrimination, nonlinear pricing, bundling, product-line pricing, screening, discrete choice.
    JEL: D11 D21 D42 D86 L13 M31
    Date: 2015–09–10
  2. By: Moghadam, Hamed M.
    Abstract: Do firms under relative payoffs maximizing (RPM) behavior always choose a strategy profile that results in tougher competition compared to firms under absolute payoffs maximizing (APM) behavior? In this paper we will address this issue through a simple model of symmetric oligopoly where firms select a two dimensional strategy set of price and a non-price variable known as quality simultaneously. In conclusion, our results show that equilibrium solutions of RPM and APM are distinct. We further characterize the comparison between these two equilibrium concepts. In particular, RPM does not always lead to stricter competition compared to the Nash equilbrium (APM). In fact, the comparison between two equilibrium concepts is influenced by the parameters of demand curve and cost function. The conditions, derived in this paper, determine under which circumstances RPM induces more competition or less competition w.r.t the price or non-price dimension.
    Abstract: Wählen Firmen, die ihre relativen Profite maximieren (RPM), immer ein Strategieprofil, das zu härterem Wettbewerb führt, im Vergleich zu Firmen, die ihre absoluten Profite maximieren (APM)? In diesem Aufsatz werden wir diese Frage durch ein einfaches, symmetrisches Oligopol-Modell beleuchten, wo Firmen gleichzeitig eine zwei-dimensionale Strategie wählen, bestehend aus einer Preis- und einer nicht-Preis-Variable, die wir als Qualität bezeichnen. Unsere Ergebnisse zeigen, dass die Gleichgewichtslösungen für RPM und APM unterschiedlich sind. Desweiteren charakterisieren wir den Unterschied zwischen diesen beiden Gleichgewichten. Insbesondere führt RPM nicht immer zu härterem Wettbewerb im Vergleich zum Nash-Gleichgewicht (APM). In der Tat wird der Unterschied zwischen den beiden Gleichgewichtskonzepten durch die Parameter der Nachfragekurve und der Kostenfunktion beeinflusst. Die in diesem Aufsatz abgeleiteten Voraussetzungen legen fest, unter welchen Umständen RPM mehr oder weniger Wettbewerb in Bezug auf die Preis- oder nicht-Preis-Dimension induziert.
    Keywords: relative payoff s maximizing (RPM),quality,price,oligopoly
    JEL: C73 D21 D43 L13 L15
    Date: 2015
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Dept. of Economics, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: We analyze demand function competition with a finite number of agents and private information. We show that the nature of the private information determines the market power of the agents and thus price and volume of equilibrium trade. We establish our results by providing a characterization of the set of all joint distributions over demands and payoff states that can arise in equilibrium under any information structure. In demand function competition, the agents condition their demand on the endogenous information contained in the price. We compare the set of feasible outcomes under demand function to the feasible outcomes under Cournot competition. We find that the first and second moments of the equilibrium distribution respond very differently to the private information of the agents under these two market structures. The first moment of the equilibrium demand, the average demand, is more sensitive to the nature of the private information in demand function competition, reflecting the strategic impact of private information. By contrast, the second moments are less sensitive to the private information, reflecting the common conditioning on the price among the agents.
    Keywords: Demand function competition, Supply function competition, Price impact, Market power, Incomplete information, Bayes correlated equilibrium, Volatility, Moments restrictions, Linear best responses, Quadratic payoffs
    JEL: C72 C73 D43 D83 G12
    Date: 2015–08
  4. By: Moghadam, Hamed M.
    Abstract: A recent paper of Carvajal, Deb, Fenske, and Quah (Econometrica 2013) applies the revealed preference approach in the context of a quantity competition oligopoly game. This paper aims to present a different solution concept for an evolutionary model in the asymmetric oligopoly setup where firms have different cost functions to produce a homogenous good. Then, using the approach introduced by Carvajal et al. (2013), we derive the testable conditions of the evolutionary oligopoly model. Therefore, contrary to the typical empirical literature in IO, without making any parametric assumption regarding to the demand curve and the cost function, this nonparametric approach characterizes a set of conditions (restrictions) on observational dataset to be consistent with evolutionary oligopoly model. An empirical application to the oil market with OPEC producers and Non-OPEC producers is presented and we compare the rejection rates of both Cournot and evolutionary hypotheses.
    Abstract: In einem jüngst veröffentlichten Artikel wenden Carvajal, Deb, Fenske und Quah (Econometrica 2013) den Ansatz der offenbarten Präferenzen im Rahmen eines Cournot-Oligopols an. Dieser Aufsatz soll ein anderes Lösungskonzept für ein evolutionäres Modell eines asymmetrischen Oligopols präsentieren, wo Unternehmen über verschiedene Kostenfunktionen verfügen, um ein homogenes Gut zu produzieren. Mithilfe des Ansatzes von Carvajal et al. (2013) leiten wir anschließend die testbaren Bedingungen des evolutionären Oligopol-Modells ab. Entgegen der typischen empirischen Literatur in IO, das heißt ohne eine parametrische Annahme bezüglich der Nachfragekurve und der Kostenfunktion, charakterisiert dieser nichtparametrische Ansatz daher eine Reihe von Bedingungen (Einschränkungen) für beobachtete Datensätze, um sie mit einem evolutionären, oligopolistischen Modell in Einklang zu bringen. Eine empirische Anwendung auf den Ölmarkt mit OPEC-Produzenten und nicht-OPEC-Produzenten wird präsentiert und wir vergleichen die Hypothesen des Cournot-Modells und des evolutionären Modells hinsichtlich ihrer Ablehnungsraten.
    Keywords: evolutionary oligopoly,observable restrictions,non-parametric test,oil market
    JEL: C73 D22 D43
    Date: 2015
  5. By: Steven T. Berry (Cowles Foundation, Yale University); Philip A. Haile (Cowles Foundation, Yale University)
    Abstract: Empirical models of demand for -- and, often, supply of -- differentiated products are widely used in practice, typically employing parametric functional forms and distributions of consumer heterogeneity. We review some recent work studying identification in a broad class of such models. This work shows that parametric functional forms and distributional assumptions are not essential for identification. Rather, identification relies primarily on the standard requirement that instruments be available for the endogenous variables -- here, typically, prices and quantities. We discuss the kinds of instruments needed for identification and how the reliance on instruments can be reduced by nonparametric functional form restrictions or better data. We also discuss results on discrimination between alternative models of oligopoly competition.
    Keywords: Nonparametric identification, Instrumental variables, Discrete choice, Differentiated products oligopoly, Demand and supply, Firm conduct
    JEL: C3 D12 D22 D4 L1
    Date: 2015–08
  6. By: A. Mantovani; O. Tarola; C. Vergari
    Abstract: We analyse how strategic competition between a green firm and a brown competitor develops when their products are differentiated along two dimensions: hedonic quality and environmental quality. The former dimension refers to the pure (intrinsic) performance of the good, whereas the latter dimension has a positional content: buying green goods satisfies the consumers’ desire to be socially worthy citizens. Product variants thus comply at different levels with "green" social norms. Consumer preferences depend on a combination of hedonic quality and compliance with social norms. Assuming that the high hedonic quality variant complies less with these norms than the low hedonic quality variant, we characterize different equilibrium configurations which appear as a result of both the intensity of such norms and the willingness to pay for the hedonic quality. Afterwards, we discuss the policy implications of our analysis.
    JEL: D62 L13
    Date: 2015–09
  7. By: Hiroshi Goto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This study reviews the allocation of factors among industries distinguishing between the short run and long run in a monopolistically competitive world. Without any conditions on scale economy, non-homotheticity, and factor intensity, it is shown that the long-run equilibrium characterized by factor-price equalization between industries is always locally stable. In addition, the direction of non-homothetic bias does not have qualitative effects on the allocation of factors, while it works as key elements to determine the direction of the change in relative industry size. The direction of the change in factor allocation mainly depends on the gross substitutability of factors which is magnified by non-homotheticity and scale economies.
    Keywords: Non-homotheticity, Scale economy, Factor intensity, Elasticity of substitution
    JEL: F11 L13 L16
    Date: 2015
  8. By: Vinicius Carrasco (Department of Economics PUC-Rio); Vitor Farinha Luz (European University Institute and the Department of Economics, The University of British Columbia); Paulo Monteiro (FGV/EPGE); Humberto Moreira (FGV/EPGE)
    Abstract: We consider the problem of a seller who faces a privately informed buyer and only knows one moment of the distribution from which values are drawn. In face of this uncertainty, the seller maximizes his worst-case expected profits. We show that a robustness property of the optimal mechanism imposes restrictions on the seller’s ex-post profit function. These restrictions are used to derive the optimal mechanism. The optimal mechanism entails distortions at the intensive margin, e.g., except for the highest value buyer, sales will take place with probability strictly smaller than one. The seller can implement such allocation by committing to post prices drawn from a non-degenerate distribution, so that randomizing over prices is an optimal robust selling mechanism. We extend the model to deal with the case in which: (i) M goods are sold and the buyer’s private information is multidimensional and (ii) the seller and the buyer interact for several periods. In the case of multiple goods, there are several optimal mechanisms. With multiple goods full bundling is optimal, as well as selling the goods in a fully separable way. In the dynamic model, we show that repetition, period by period, of the static-optimal mechanism is optimal.
    Date: 2015–04
  9. By: Niedermayer, Andreas
    Abstract: We consider a software vendor first selling a monopoly platform and then an application running on this platform. He may face competition by an entrant in the applications market. The platform monopolist can benefit from competition for three reasons. First, his profits from the platform increase. Second, competition serves as a credible commitment to lower prices for applications. Third, higher expected product variety may lead to higher demand for his application. Results carry over to non-software platforms and, partially, to upstream and downstream firms. The model also explains why Microsoft Office is priced significantly higher than Microsoft’s operating system.
    Keywords: Platforms; Entry; Complementary Goods; Price Commitment; Product Variety; Microsoft; Vertical Integration; Two-Sided Markets
    JEL: D41 D43 L13 L86
    Date: 2015–09–22
  10. By: Matthias Firgo (Austrian Institute of Economic Research (WIFO)); Dieter Pennerstorfer (Department of Economics, Vienna University of Economics and Business; Austrian Institute of Economic Research (WIFO)); Christoph R. Weiss (Department of Economics, Vienna University of Economics and Business)
    Abstract: We empirically investigate the importance of centrality (holding a central position in a spatial network) for strategic interaction in pricing for the Austrian retail gasoline market. Results from spatial autoregressive models suggest that the gasoline station located most closely to the market center - defined as the 1-median location - exerts the strongest effect on pricing decisions of other stations. We conclude that centrality influences firms' pricing behavior and further find that the importance of centrality increases with market size.
    Keywords: Network Centrality, Spatial Competition, Retail Markets, Gasoline Prices
    JEL: C21 D43 L11 L81 R12
    Date: 2015–09
  11. By: Donna, Javier; Schenone, Pablo; Veramendi, Gregory
    Abstract: This paper models frictions in buyer-seller markets using networks, where buyers are linked with a subset of sellers and sellers are linked with a subset of buyers. Sparser networks are associated with higher search frictions. We use the model to characterize pairwise stable allocations and their supporting prices. Our approach allows for network effects, where a buyer who is not linked to a seller affects the price obtained by that seller. Network effects generate the central finding of our paper: even relatively sparse networks lead to price distributions and allocations that are close to the perfectly competitive outcome where the law of one price holds. We then investigate the role of network effects in a dynamic setting by studying wages in the context of an on-the-job search model. We find two novel predictions relative to the search literature. Lowering frictions (so that workers receive job offers at a higher rate) leads to: (1) lower worker mobility and lower expected wage growth and (2) lower expected wages in markets with high unemployment. We argue that our framework is suited to the analysis of a wide range of real-world markets, such as the labor market and buyer-seller trading platforms like eBay or Amazon.
    Keywords: Networks; Matching; Auctions; Competition; Frictions; Price Dispersion
    JEL: C78 D44 J31 L00
    Date: 2015–07–17
  12. By: Brown, David P. (University of Alberta, Department of Economics); Olmstead, Derek (Alberta Market Surveillance Administrator)
    Abstract: We measure the degree of market power execution and inefficiencies in Alberta’s restructured electricity market. Using hourly wholesale market data from 2008 to 2014, we find that firms exercise substantial market power in the highest demand hours with limited excess production capacity. The degree of market power execution in all other hours is low. Market inefficiencies are larger in the high demand hours and elevate production costs by 14% - 19% above the competitive benchmark. This reflects 2.35% of the average market price across all hours. A recent regulatory policy clarifies that certain types of unilateral market power execution is permitted in Alberta. We find evidence that suggests that strategic behavior changed after this announcement. Market power execution increased. We illustrate that the observed earnings are often sufficient to promote investment in natural gas based technologies. However, the rents from market power execution can exceed the estimated capacity costs for certain generation technologies. We demonstrate that the energy market profits in the presence of no market power execution are generally insufficient to promote investment in new generation capacity. This stresses the importance of considering both short-run and long-run performance measures.
    Keywords: Electricity Markets; Market Power; Regulatory Policy
    JEL: D44 L13 L50 L94 Q40
    Date: 2015–09–23
  13. By: Balázs Murakozy (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences); Katheryn Niles Russ (University of California, Davis and NBER)
    Abstract: Do multinational firms wield more market power than their domestic counterparts? Using Hungarian firm-level data between 1993 and 2007, we find that markups are 19 percent higher for foreign-owned firms than for domestically owned firms. Moreover, markups for domestically owned firms are significantly lower in industries where multinationals have a greater technological edge, suggesting that Ricardian differences in technology and endogenous markups constitute important dimensions for models of foreign direct investment. We innovate within a canonical Ricardian model of endogenous markups and heterogeneous firms to provide analytical distributions of market shares and markups when goods are imperfect substitutes to provide structure for our empirical analysis. Our model explains about half of the multinational markup premium identified in the empirical analysis.
    Keywords: multinational firm; heterogeneous firms; Bertrand competition
    JEL: F12 F13 F15 F23
    Date: 2015–06
  14. By: Breinlich, Holger; Nocke, Volker; Schulz, Nicolas
    Abstract: In a two-country international trade model with oligopolistic competition, we studythe conditions on market structure and trade costs under which a merger policy designed to benefit domestic consumers is too tough or too lenient from the viewpoint of the foreign country. Calibrating the model to match industry-level data in the U.S. and Canada, we show that at present levels of trade costs merger policy is too tough in the vast majority of sectors. We also quantify the resulting externalities and study the impact of different regimes of coordinating merger policies at varying levels of trade costs.
    Keywords: Mergers and Acquisitions; Merger Policy; Trade Policy; Oligopoly; International Trade
    JEL: F12 F13 L13 L44
    Date: 2015–09–21
  15. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: Many financial markets rely on a discriminatory limit-order book to balance supply and demand. We study these markets in a static model in which uninformed market makers compete in nonlinear tariffs to trade with an informed insider, as in Glosten (1994), Biais, Martimort, and Rochet (2000), and Back and Baruch (2013). We analyze the case where tariffs are unconstrained and the case where tariffs are restricted to be convex. In both cases, we show that pure-strategy equilibrium tariffs must be linear and, moreover, that such equilibria only exist under exceptional circumstances. These results cast doubt on the stability of even well-organized financial markets.
    Keywords: adverse selection; competing mechanisms; limit-order book
    JEL: D43 D82 D86
    Date: 2015–09

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