nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒10‒25
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Dynamics of Compatibility under Switching Costs By Doh-Shin Jeon; Domenico Menicucci; Nikrooz Nasr
  2. Oligopolistic Equilibrium and Financial Constraints By Beviá, Carmen; Corchón, Luis C.; Yasuda, Yosuke
  3. Advertised Prices in Decentralized Markets By Derek Stacey
  4. The Merger Paradox and R&D By MIYAGIWA, Kaz; WAN, Yunyun
  5. Price Discrimination by a Two-sided Platform: with Applications to Advertising and Privacy Design By Doh-Shin Jeon; Byung-Cheol Kim; Domenico Menicucci
  6. A Model of Non-Stationary Dynamic Price Competition with an Application to Platform Design By Andrew Sweeting
  7. Patents as Quality Signals? The Implications for Financing Constraints on R&D By Bronwyn Hall
  8. Equity Prices and Cartel Activity By Dan Richards; Heng Yuan; Marcelo Bianconi
  10. Pharmaceutical Patents and Generic Entry Competition: A New View on the Hatch-Waxman Act By WAN, Yunyun; MIYAGIWA, Kaz
  11. A Snapshot of the Current State of Residential Broadband Networks By Jacob Malone; Aviv Nevo; Jonathan Williams
  12. Testing for Endogenous Sunk Costs in the Retail Industry By Roman, Hernan
  13. Can islands profit from economies of density? An application to the retail sector By L. Cocco; M. Deidda; M. Marchesi; F. Pigliaru
  14. State-Owned Banks: Acquirers in M&A deals By Emanuele BACCHIOCCHI; Matteo FERRARI; Massimo FLORIO; Daniela VANDONE
  15. Challenging Competition at Public Procurement Markets: Are SMEs Too Big to Fail? The Case of BiH and Croatia By Suncana Slijepcevic; Jelena Budak; Edo Rajh
  16. Trends in Firm Entry and New Entrepreneurship in Canada By Shutao Cao; Mohanad Salameh; Mai Seki; Pierre St-Amant
  17. How Limiting Deceptive Practices Harms Consumers By Salvatore Piccolo; Piero Tedeschi; Giovanni Ursino

  1. By: Doh-Shin Jeon (Toulouse School of Economics and CEPR, 21 allees de Brienne, 31000 Toulouse, France); Domenico Menicucci (Dipartimento di Scienze per l'Economia e l'impresa, Università degli Studi di Firenze, Via delle Pandette 9, I-50127 Firenze (FI), Italy); Nikrooz Nasr (Toulouse School of Economics, 21 allees de Brienne, 31000 Toulouse, France)
    Abstract: We study firms’ choices of compatibility in a dynamic setting. Current compatibility choice shapes the distribution of consumers’ switching costs and thereby affects competition and compatibility choice in the future. Given today’s market shares, the dynamics of compatibility is asymmetric in that firms are more likely to embrace compatibility tomorrow if products are compatible today but no such inertia exists for incompatibility. However, this asymmetry disappears when the market shares are endogenous. Contrary to what happens in a static setting, when consumer lock-in arises due to a significant switching cost, firms make their systems incompatible in order to soften future competition, which hurts consumers and tends to reduce welfare.
    Keywords: (In)Compatibility, Dynamics, Lock-in, Switching Cost
    JEL: D43 L13 L41
    Date: 2015–04
  2. By: Beviá, Carmen (Universidad de Alicante, Universitat Autònoma de Barcelona and Barcelona GSE); Corchón, Luis C. (Universidad Carlos III de Madrid); Yasuda, Yosuke (Osaka University)
    Abstract: We provide a model of dynamic duopoly in which firms face financial constraints and disappear when they are unable to fulfill them. We show that, in some cases, Cournot outputs are no longer supported in equilibrium, because if these outputs were set, a firm may have incentives to ruin the other. In these cases, standard grim-trigger strategies in which collusion is sustained by infinite reversion to Cournot outputs cannot be used. We show that there is a stationary Markov equilibrium in mixed strategies where predation occurs with a positive probability. We also obtain a modified "folk theorem". We show that any bankruptcy-free outputs (outputs in which no firm can drive another firm to bankruptcy without becoming bankrupt itself) that attain individually rational profits (reflecting bankruptcy consideration) can be supported by a subgame perfect Nash equilibrium when firms are sufficiently long-sighted.
    Keywords: Financial Constraints, Bankruptcy, Firm Behavior, Dynamic Games
    JEL: D2 D4 L1 L2
    Date: 2015–10
  3. By: Derek Stacey (Ryerson University)
    Abstract: A model of a decentralized market is developed that features search frictions, advertised prices and bargaining. Sellers can post ask prices to attract buyers through a process of directed search, but ex post there is the possibility of renegotiation. Similarly, buyers can advertise negotiable bid prices to attract sellers. Even though transaction prices often differ from quoted prices, advertised bid and ask prices play a crucial role in directing search and reducing trading frictions. The features and predictions of the model align well with aspects of the secondary market for transferable taxicab license plates in Toronto. This provides a useful and unique context for studying the relationships between advertised and actual prices in a decentralized market.
    Date: 2015
  4. By: MIYAGIWA, Kaz; WAN, Yunyun
    Abstract: The merger paradox is revisited in the presence of cost-reducing R&D in Cournot oligopoly. Two cases are found, in which merger is profitable without satisfying the 80-percent threshold requirement of Salant et al (1983).
    Keywords: merger paradox, R&D, Cournot oligopoly
    Date: 2015–09–28
  5. By: Doh-Shin Jeon (Toulouse School of Economics and CEPR. Manufacture de Tabacs, 21 allees de Brienne - 31000 Toulouse, France.); Byung-Cheol Kim (School of Economics, Georgia Institute of Technology. 221 Bobby Dodd Way, Atlanta, GA 30332, USA.); Domenico Menicucci (Dipartimento di Scienze per l’Economia e l’impresa, Universit`a degli Studi di Firenze. Via delle Pandette 9, I-50127 Firenze (FI), Italy)
    Abstract: We study price discrimination by a monopoly two-sided platform who mediates interactions between two different groups of agents. We adapt a canonical model of second-degree price discrimination `a la Mussa and Rosen (1978) to a two-sided platform by focusing on non-responsiveness, a clash between the allocation the platform wants to achieve and the incentive compatible allocations. In this framework we address the key question of when a price discrimination on one side complements or substitutes a price discrimination on the other side. We offer two applications on advertising platforms and also highlight the role of commitment in eliciting personal information for targeted advertising.
    Keywords: price discrimination, two-sided markets, non-responsiveness, privacy, advertising, positive/negative sorting
    JEL: D4 D62 D82 M3
    Date: 2015–10
  6. By: Andrew Sweeting (Department of Economics, University of Maryland, College Park, MD 20742, USA)
    Abstract: I develop a tractable framework for conducting platform design counterfactuals in settings where many sellers compete and set prices dynamically, using approaches developed in the recent literature on Oblivious Equilibria. As an initial application, I use the model to study a simple platform design counterfactual using data from the secondary event ticket market on where the perishability of the product being sold results in sellers facing a dynamic and non-stationary pricing problem. Currently, most transactions happen at low prices close to the event. Motivated by some simple theoretical examples, I investigate how the dynamics of prices, the timing of transactions, platform revenues and participant surplus would be a affected if a commission structure that encouraged earlier transactions was introduced.
    Keywords: dynamic pricing, platform, non-stationary equilibrium, perishable goods
    JEL: C7 C63 L13 L11
    Date: 2015–09
  7. By: Bronwyn Hall
    Abstract: Information about the success of a new technology is usually held asymmetrically between the research and development (R&D)-performing firm and potential lenders and investors. This raises the cost of capital for financing R&D externally, resulting in financing constraints on R&D especially for firms with limited internal resources. Previous literature provided evidence for start-up firms on the role of patents as signals to investors, in particular to Venture Capitalists. This study adds to previous insights by studying the effects of firms’ patenting activity on the degree of financing constraints on R&D for a panel of established firms. The results show that patents do indeed attenuate financing constraints for small firms where information asymmetries may be particularly high and collateral value is low. Larger firms are not only less subject to financing constraints, but also do not seem to benefit from a patent quality signal.
    Date: 2014–07
  8. By: Dan Richards; Heng Yuan; Marcelo Bianconi
    Abstract: We use an event study method to determine the impact of announced cartel activity on equity prices. Unlike prior research, we employ the Fama-French (1993) three-factor model to estimate normal event-window returns. The announcement that a firm is under investigation for price-fixing has a long-lasting negative impact on stock prices of nearly two percent in magnitude. This effect however seems to vanish for those firms receiving leniency for early confession. We further find that the extra profit lost from ending the cartel may plausibly explain the equity fall.
    Keywords: Event Study, Equity Prices, Cartels
    JEL: G14 L4
  9. By: Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros); Jorge Padilla (Compass Lexecon)
    Abstract: There is considerable controversy about the relative merits of the apportionment rule (which results in per-unit royalties) and the entire market value rule (which results in ad-valorem royalties) as ways to determine the scope of the royalty base in licensing negotiations and disputes. This paper analyzes the welfare implication of the two rules abstracting from implementation and practicability considerations. We show that ad-valorem royalties tend to lead to lower prices, particularly in the context of successive monopolies. They benefit upstream producers but not necessarily hurt downstream producers. When we endogenize the investment decisions, we show that a sufficient condition for ad-valorem royalties to improve social welfare is that enticing more upstream investment is optimal or when multiple innovators contribute complementary technologies. Our findings contribute to explain why most licensing contracts include royalties based on the value of sales.
    Keywords: Intellectual property, standard setting organizations, patent licensing, R&D investment.
    JEL: L15 L24 O31 O34
    Date: 2014–12
  10. By: WAN, Yunyun; MIYAGIWA, Kaz
    Abstract: We present a formal analysis that sheds new light on the Hatch-Waxman Act. Hatch-Waxman restores incentives to develop new drugs by extending the patent life for them, but also promotes generic entry by reducing entry costs and by providing 180-day marketing exclusivity to a first challenger to the patent. Although these two objectives appear incompatible, our model shows that marketing exclusivity, with a significant entry cost reduction, contributes to incentive restoration. It finds however that social welfare is lower with marketing exclusivity. Finally, our analysis suggests that marketing exclusivity not be granted in the case of drugs for rare diseases.
    Keywords: innovation, generic entry competition, patent, pharmaceuticals, Hatch-Waxman
    JEL: I18 K23 L13
    Date: 2015–08–30
  11. By: Jacob Malone (University of Georgia, Department of Economics, 310 Herty Drive, 535 Brooks Hall, Athens GA 30602); Aviv Nevo (Northwestern University, Department of Economics, 2001 Sheridan Road, Evanston, IL 60208); Jonathan Williams (University of North Carolina - Chapel Hill, Department of Economics, 141 South Road, Gardner Hall 107, CB# 3305, Chapel Hill, NC 27599)
    Abstract: The way in which consumers use the Internet is changing rapidly, and over-the-top video services (OTTV) are a major contributor to this trend. The dramatic rise of OTTV services has led to major changes in the telecommunications sector and greater attention to several important and ongoing public policy debates. We provide an essential component to inform these policy debates: an in-depth descriptive analysis of the rapidly changing way in which consumers use the Internet from a representative sample of consumers. At the core of our contribution are unique data from the spring and summer of 2015 that we acquired from a North American ISP that provides detailed disaggregated high-frequency information on individuals’ Internet usage. We provide insight into temporal patterns in usage within the day, measure persistence in the level and composition of usage across days, and contrast usage patterns for consumers that subscribe to traditional pay TV services (i.e., purchase a bundle of services from the operator) to those that do not. We also present results on how the level and composition of usage for a consumer changes immediately after “cutting the cord” and dropping traditional linear TV service.
    Keywords: Residential Broadband, Demand, Net Neutrality, Usage-based Pricing, Municipal Broadband, Cord Cutting
    JEL: L11 L13 L96
    Date: 2015–09
  12. By: Roman, Hernan
    Abstract: This paper uses data from retail industries in Chile to test Shaked and Sutton's (1987) hypothesis of endogenous sunk costs. I find that industries which are less likely to have endogenous sunk costs display a signicant negative relationship between market size and concentration. In contrast, in the supermarket industry, where investment in advertising is presumed to be more intense, the tests show that concentration does not vary with market size and is bounded away from zero.
    Keywords: Endogenous Sunk costs, concentration
    JEL: L11 L81
    Date: 2010
  13. By: L. Cocco; M. Deidda; M. Marchesi; F. Pigliaru
    Abstract: This paper examines the additional costs borne by retailers whose strategy relies upon the exploitation of density economies when they decide to expand their network in an island. Insularity implies indeed being a non-connected node in the network, thus preventing economies of density to be entirely exploited. On this regard, such a discontinuity would entail lower profits due to a reduced efficiency in the distribution network. Starting from real data regarding an Italian large retailer, we evaluate the extent to which insularity represents a threat for the exploitation of economies of density by the retail industry. In this respect, the Italian peculiar geographical configuration makes it an interesting case study. The main finding is that while stores located in the mainland are interested by a progressive reduction of transport costs, Sardinia, which is a remote island, is not interested by such a pattern. Indeed, a contiguous distribution network helps lowering distances covered to make deliveries, thus reducing the burden represented by distribution costs. On this regard, geographical permanent features connected to insularity- such as low accessibility and small size prevent retailers to expand their network in an island, thus lowering competition and affecting consumers welfare.
    Keywords: retail sector, economies of density, Insularity
    JEL: R12 L81 L10
    Date: 2015
  14. By: Emanuele BACCHIOCCHI (Department of Economics, Management and Quantitative methods,University of Milan, Italy); Matteo FERRARI (Department of Economics, Management and Quantitative methods,University of Milan, Italy); Massimo FLORIO (Department of Economics, Management and Quantitative methods,University of Milan, Italy); Daniela VANDONE (Department of Economics, Management and Quantitative methods,University of Milan, Italy)
    Abstract: Between 2003 and 2013, according to Zephyr (BvD) data, 22% of M&A deals between banks have involved state-owned banks, either as targets (12%) or as acquirers (10%). The behavior of state-owned banks in the market control is, however, underresearched.The standard Inefficient Management Hypothesis suggests that more efficient managerial teams target less performing firms. The IMH, however, has never been tested for deals involving state-owned banks, nor the pre-deal operating characteristics of state-owned banks involved as acquirers in M&A deals. We build up a unique dataset of 3,682 deals between banks that allows us to classify M&As into four categories, depending on the ownership of the acquirer and the target: 1) public re-organization (deals between two state-owned banks), 2) publicization (a stateowned bank acquiring a private bank), 3) privatization and 4) private re-organization (deals between two private banks). Our findings confirms for the first time the IMH also for state-owned banks. We also find that state-owned banks active as acquirers in the market for corporate control have a better pre-deal performance compared to the private benchmark; this evidence is stronger for development banks.
    Keywords: Inefficient Management Hypothesis, Mergers & Acquisitions,State-owned banks, Ownership
    JEL: G32 G34 L32
    Date: 2015–08
  15. By: Suncana Slijepcevic (The Institute of Economics, Zagreb); Jelena Budak (The Institute of Economics, Zagreb); Edo Rajh (The Institute of Economics, Zagreb)
    Abstract: This study empirically evaluates the role and perspectives for SMEs to successfully compete at public procurement markets. The government procurement markets in post-transition countries make a significant share of national economy and seemingly their importance rises in the times of economic crisis. The literature on public procurement and involvement of SMEs noted severe obstacles for companies to access public procurement markets, and the set of policies were established in the EU to promote SMEs’ involvement in public procurement. This case study encompasses business sector in two post-transition countries, Croatia and Bosnia and Herzegovina (BiH) in order to explore competitiveness and entry barriers specifically for SMEs to participate at the public procurement market. We compare the views of managers and business people representing companies of the small and medium size on the level of competition and on the range and intensity of obstacles to participate at public procurement tenders, in terms of availability of resources, corruption risks, transparency and fairness of procedure, clarity of documentation, principles and standards achieved, price, deadlines and other dimensions of public procurement. If there are differences between the two countries, do they stem from the different EU membership status? Are there differences between subgroups of micro, small, and medium companies? In order to provide plausible answers to these questions, we use the empirical evidence collected through the survey of companies in BiH in 2014, and comparable data on Croatian companies surveyed in 2013. The findings are put in the context of public procurement as an opportunity to enhance growth and economic development in post-transition era.
    Keywords: public procurement, small and medium enterprises, post-transition countries, competition
    JEL: D73 H57 L25
    Date: 2015–10
  16. By: Shutao Cao; Mohanad Salameh; Mai Seki; Pierre St-Amant
    Abstract: Recently released data show downward trends for both the firm entry rate and the rate of new entrepreneurship since the early 1980s in Canada. This paper documents these trends and discusses potential explanations. A shift-share analysis suggests that changes to Canada’s industrial and demographic structures cannot explain the long-term downward trends, although population aging accounts for part of the decline in new entrepreneurship since around 2000. The paper also discusses other factors potentially contributing to the downward trends: increased industrial concentration, changing labour market conditions, an increased college wage premium and higher student debt. In-depth analysis of these factors is left for future research.
    Keywords: Firm dynamics; Market structure and pricing; Productivity
    JEL: L11 M13
    Date: 2015
  17. By: Salvatore Piccolo (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Piero Tedeschi (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Giovanni Ursino (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: There are two competing sellers of an experience good, one offers high quality, one low. The low-quality seller can engage in deceptive advertising, potentially fooling a buyer into thinking the product is better than it is. Although deceptive advertising might seem to harm the buyer, we show that he could be better off when the low-quality seller can engage in deceptive advertising than not. We characterize the optimal deterrence rule that a regulatory agency seeking to punish deceptive practices should adopt. We show that greater protection against deceptive practices does not necessarily improve the buyer-welfare.
    Keywords: Misleading Advertising, Deception, Bayesian Consumers, Asymmetric Information
    JEL: L13 L15 L4
    Date: 2015–05

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