nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒11‒07
thirteen papers chosen by
Russell Pittman
United States Department of Justice

  1. When Ricardo Meets Chamberlin: A Simple Dynamic Model Of Monopolistic Competition By Vera Ivanova; Philip Ushchev
  2. Demand-Driven Integration and Divorcement Policy By Legros, Patrick; Newman, Andrew
  3. Market structure, the functional form of demand and the sensitivity of the vertical reaction function By Agustin Redonda
  4. Pricing with Limited Knowledge of Demand By Maxime C. Cohen; Georgia Perakis; Robert S. Pindyck
  5. The Impact of Innovative New Economy Products on Market Competition: Competition Might Decrease By Arzdar Kiracı
  6. Asymmetric cartel formation under trade liberalization: Heterogeneous firms with capacity constraints By Aya Ahmed
  7. Merger Policy in a Quantitative Model of International Trade By Holger Breinlich; Volker Nocke; Nicolas Schutz
  8. Patent Assertions: Are We Any Closer to Aligning Reward to Contribution? By Fiona Scott Morton; Carl Shapiro
  9. Optimal Product Variety in Radio Markets By Steven Berry; Alon Eizenberg; Joel Waldfogel
  10. Effects of Payment Reform in More versus Less Competitive Markets By Neeraj Sood; Abby Alpert; Kayleigh Barnes; Peter Huckfeldt; Jose Escarce
  11. The e¤ects of global bank competition and presence on local business cycles: The Goldilocks principle does not apply to global banking By Uluc Aysun
  12. Incentive Fees and Competition in Pension Funds: Evidence from a Regulatory Experiment in Israel By Hamdani, Assaf; Kandel, Eugene; Mugerman, Yevgeny; Yafeh, Yishay
  13. Does Competition Matter? The Efficiency of Regional Higher Education Systems and Competition: The Case of Russia By Oleg V. Leshukov; Daria P. Platonova; Dmitry S. Semyonov

  1. By: Vera Ivanova (National Research University Higher School of Economics); Philip Ushchev (National Research University Higher School of Economics)
    Abstract: We develop a dynamic model of monopolistic competition which sheds light on how the interplay between the degree of product dierentiation and intertemporal elasticity of substitution aects the steady-state equilibrium. Consumers love variety and split their labor endowment between wage labor, which brings immediate income, and producing capital, which yields a rent in the future. The impact of the elasticity of substitution across varieties on the market outcome depends crucially on whether consumption today and consumption tomorrow are gross substitutes or gross complements. The case of Cobb-Douglas intertemporal utility is a borderline situation, when the market outcome is invariant to the degree of product dierentiation. We also fully characterize the unique steady-state equilibrium path and show that the key dynamic properties of the model, such as local stability and determinacy of equilibrium, also hinge mainly on the interplay between the intra- and intertemporal elasticities of substitution.
    Keywords: intertemporal choice, intertemporal elasticity of substitution, love for variety, product dierentiation, toughness of competition, overlapping generations, capital, structural instability.
    JEL: D43 D90 D91 L13
    Date: 2015
  2. By: Legros, Patrick; Newman, Andrew
    Abstract: Industrial organization's concern with vertical integration has traditionally been limited to considering the effects on market outcomes, in particular product prices: they increase because integration enhances market power, or they decrease because it yields efficiency gains. This note offers a theoretical argument for reverse causality, from prices -- more generally, demand -- to integration. If, as many organizational theories in suggest, integration has positive effects on production efficiency and has any costs that are largely independent of output, then bearing those costs is more attractive when prices are higher, as when there is high demand. Therefore high prices lead to more integration. We discuss evidence for this reverse causality and its implications for regulation.
    Keywords: OIO; reverse causality; theory of the firm; vertical integration
    JEL: D23 D43
    Date: 2015–11
  3. By: Agustin Redonda (Council on Economic Policies (CEP))
    Abstract: Tax incidence and tax competition have largely been studied separately. Models assessing the incidence of excise taxes do not consider strategic interaction and exclusively assess the pass-through of taxes to prices. These settings focus on imperfectly competitive markets where prices can react more (less) than proportionally to a variation in tax rates. On the other hand, tax competition models focus on the strategic interactions arising because of a shared tax base but assume producer prices to be constant. Hence, the pass-through of taxes is restricted to be fully on consumers. This paper extends Keen (1997) by relaxing this assumption and, thus, by allowing local governments to internalize the possibility that taxes are over-shifted (undershifted). Interestingly, market structure (that was absent in previous settings), turns out to be one of the determinants of the vertical reaction function in this model; particularly determining the sensitivity of local tax setters to a variation of higher-tier taxes.
    Keywords: Vertical tax competition, pass-through, market structure, excise taxes, tax incidence
    JEL: H22 H70 D43 L13
    Date: 2015
  4. By: Maxime C. Cohen; Georgia Perakis; Robert S. Pindyck
    Abstract: How should a firm price a new product for which little is known about demand? We propose a simple pricing rule: the firm only estimates the maximum price it can charge and still expect to sell at least some units, and then sets price as though the actual demand curve were linear. We show that if the true demand curve is one of many commonly used demand functions, or even if it is a more complex function, and if marginal cost is known and constant, the firm can expect its profit to be close to what it would earn if it knew the true demand curve. We derive analytical performance bounds for a variety of demand functions, and calculate expected profit performance for randomly generated demand curves.
    JEL: D40 D80 D81
    Date: 2015–10
  5. By: Arzdar Kiracı (Siirt University, Department of Economics)
    Abstract: This paper presents a parametric Cournot type of game theoretic model that uses Rogers’ Diffusion of Innovations Theory to construct a model that simulates the strategic interaction between firms. The constructed model simulates the strategic interaction of old economy firms that compete with the adoption of an innovative information and communication technologies based product, which is produced by a monopolistic New Economy firm. The model incorporates the accelerated product innovation process, globalization and interaction of firms in competitive environment. This paper confirms the expected result that innovator firms gain by adopting profitable New Economy products; however, surprisingly, under some circumstances market competition might decrease even when there is globalization. It is proven that this result is valid for markets with large (customer) demands when firms of the New Economy that produce innovative products charge high prices for their products. Firms of the New Economy that produce innovative products are given the privilege to be monopolists for the duration of their patent, but according to the findings of this paper they need to be regulated by competition authorities.
    Keywords: Game Theory, Cost structure, New Economy, Globalization, Competition, Innovative Product
    JEL: C72 O14 O33 D42 L11
    Date: 2015
  6. By: Aya Ahmed (Paris School of Economics)
    Abstract: In a context of trade liberalization , this paper is interested in studying the impact of a decline in trade costs on cartel formation between foreign and domestic firms. In a model that endogenizes the cartel formation be- tween heterogeneous firms in their capacities and their marginal costs, the paper investigates how the decrease in trade tariffs affects the formation of such a cartel. Contrary to previous works in this area, the paper does not study how trade liberalization affects cartel stability, however it is in- terested in testing whether the cartel becomes more or less inclusive after this openness. The model predicts that the price prevailing on the mar- ket following trade liberalization depends on capacity distribution of the foreign firms. If they are large enough, price may increase after openness.
    JEL: L13 L22 L40 F12 D41
    Date: 2015
  7. By: Holger Breinlich; Volker Nocke; Nicolas Schutz
    Abstract: In a two-country international trade model with oligopolistic competition, we study the 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: 2015–10
  8. By: Fiona Scott Morton; Carl Shapiro
    Abstract: The 2011 America Invents Act was the most significant reform to the United States patent system in over fifty years. However, the AIA did not address a number of major problems associated with patent litigation in the United States. In this paper, we provide an economic analysis of post-AIA developments relating to Patent Assertion Entities (PAEs) and Standard-Essential Patents (SEPs). For PAEs and SEPs, we examine the alignment, or lack of alignment, between the rewards provided to patent holders and their social contributions. Our report is mixed. Regarding PAEs, we see significantly improved alignment between rewards and contributions, largely due to a series of rulings by the Supreme Court. Legislation currently under consideration in Congress would further limit certain litigation tactics used by PAEs that generate rewards unrelated to contribution. We also see some notable developments relating to SEPs, especially with the recent reform to the patent policies of the IEEE, a leading Standard-Setting Organization (SSO) and with several recent court decisions clarifying what constitutes a Fair, Reasonable and Non-Discriminatory (FRAND) royalty rate. However, other steps that could better align rewards with contributions on the SEP front have largely stalled out, particularly because other major SSOs do not seem poised to follow the lead of the IEEE. Antitrust enforcement in this area could further improve the alignment of rewards and contributions.
    JEL: K21 L0
    Date: 2015–10
  9. By: Steven Berry; Alon Eizenberg; Joel Waldfogel
    Abstract: A vast theoretical literature shows that inefficient market structures may arise in free entry equilibria. The inefficiency may manifest itself in the number, variety, or quality of products. Previous empirical work demonstrated that excessive entry may obtain in local radio markets. Our paper extends that literature by relaxing the assumption that stations are symmetric, allowing instead for endogenous station differentiation along both horizontal and vertical dimensions. Importantly, we allow station quality to be an unobserved station characteristic. We compute the optimal market structures in local radio markets and find that, in most broadcasting formats, a social planner who takes into account the welfare of market participants (stations and advertisers) would eliminate 50%-60% of the stations observed in equilibrium. In 80%-95% of markets that have high quality stations in the observed equilibrium, welfare could be unambiguously improved by converting one such station into low quality broadcasting. In contrast, it is never unambiguously welfare-enhancing to convert an observed low quality station into a high quality one. This suggests local over-provision of quality in the observed equilibrium, in addition to the finding of excessive entry.
    JEL: L1 L11 L13 L82
    Date: 2015–10
  10. By: Neeraj Sood; Abby Alpert; Kayleigh Barnes; Peter Huckfeldt; Jose Escarce
    Abstract: Policymakers are increasingly interested in reducing healthcare costs and inefficiencies through innovative payment strategies. These strategies may have heterogeneous impacts across geographic areas, potentially reducing or exacerbating geographic variation in healthcare spending. In this paper, we exploit a major payment reform for home health care to examine whether reductions in reimbursement lead to differential changes in treatment intensity and provider costs depending on the level of competition in a market. Using Medicare claims, we find that while providers in more competitive markets had higher average costs in the pre-reform period, these markets experienced larger proportional reductions in treatment intensity and costs after the reform relative to less competitive markets. This led to a convergence in spending across geographic areas. We find that much of the reduction in provider costs is driven by greater exit of “high-cost” providers in more competitive markets.
    JEL: D21 D22 D4 D78 I11 I13 L2
    Date: 2015–10
  11. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: I solve a two-country real business cycle model that includes Cournot competitive global and local banks to investigate the impact of banking competition and global bank presence on local business cycles. Simulations reveal an inverted U-shaped relationship between the two factors and the volatility of output when global banks face portfolio adjustment costs. This relationship is determined by the asymmetric degree of diminishing returns to lending that global banks face in each economy. SpeciÂ…cally, when global banks have a larger presence or are less competitive in one of the economies than the other, the cross-country mobility of loanable funds and the local responses to domestic shocks are smaller compared those obtained when the two economies are more symmetric.
    Keywords: Global banks, Cournot competition, real business cycles, bank size
    JEL: E32 E44 F33 F44
    Date: 2015–10
  12. By: Hamdani, Assaf; Kandel, Eugene; Mugerman, Yevgeny; Yafeh, Yishay
    Abstract: Regulators worldwide take the view that competition—and not performance-based fees—should play a dominant role in aligning the interests of retirement savings fund managers with those of their clients. We use a regulatory experiment from Israel to examine the effects of incentive fees and competition on performance. Taking advantage of a unique institutional setup, we compare three exogenously-given types of retirement savings funds operated by the same management companies: (i) funds where fees are performance-based; (ii) funds where fees are based on assets under management (AUM) operating in an environment with very weak competitive pressures; and (iii) funds where fees are AUM-based and the environment is highly competitive. We find that funds with performance-based fees exhibit high returns, high risk and high α. By contrast, when comparing the average performance of funds with AUM-based fees in competitive and less competitive environments, we find no significant differences (except that funds in a competitive environment charge lower fees). We conclude that incentives and competition are not perfect substitutes in the retirement savings industry. We also conjecture that the ubiquitous regulatory restrictions on the use of incentives in fund management may be inefficient, and should perhaps be reconsidered.
    Keywords: Competition; Incentives; Pension Funds; Retirement Savings
    JEL: G23 G28 G38
    Date: 2015–11
  13. By: Oleg V. Leshukov (National Research University Higher School of Economics.); Daria P. Platonova (National Research University Higher School of Economics.); Dmitry S. Semyonov (National Research University Higher School of Economics.)
    Abstract: This paper explores the relationship between the degree of competition between higher education institutions (HEIs) and the efficiency of regional higher education systems using evidence from the Russian Federation. The choice of the regional system of higher education as a unit of analysis is explained by features of the Russian system of higher education, especially by “closeness” in the borders of regions. Using data envelopment analysis (DEA) we investigate the efficiency of higher education systems in the regions and compare the results with the extent of higher education competition within them. The analysis finds that within the overall sample the correlation is positive, but not striking. However the extent of competition correlates with the efficiency of regional sets of HEIs more in less socio-economically developed regions.
    Keywords: higher education, efficiency, competition, regions, Russia
    JEL: I23 I28
    Date: 2015

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