nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒11‒15
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Asymmetric and Endogenous Within-Group Communication in Competitive Coordination Games By Cason, Timothy; Sheremeta, Roman; Zhang, Jingjing
  2. Nash’s interpretations of equilibrium: Solving the objections to Cournot By Jorge M. Streb
  3. Selling Information to Competitive Firmstion By Jakub Kastl; Marco Pagnozzi; Salvatore Piccolo
  4. Nash equilibrium uniqueness in nice games with isotone best replies By Ceparano, Maria Carmela; Quartieri, Federico
  5. Quality and Competition between Public and Private Firms By Liisa Laine; Ching-To Albert Ma
  6. European Commission merger control: combining competition and the creation of larger European firms By Mark Thatcher
  7. Enforcement of Merger Control : Theoretical insights for its Procedural Design By Andreea Cosnita-Langlais
  8. Discriminatory Application of Competition Law and International Investment Agreements By TAMADA Dai
  9. Auctions vs negotiations in public procurement: which Works better? By Rafael Lalive; Armin Schmutzler; Christine Zulehner
  10. Mobile Access Charges and Collusion under Asymmetry By Edmond Baranes; Stefan Behringer; Jean-Christophe Poudou
  11. Network-Motivated Lending Decisions By Ogura, Yoshiaki; Okui, Ryo; Saito, Yukiko Umeno
  12. Foreign Competition and Banking Industry Dynamics By Dean Corbae; Pablo D'Erasmo
  13. State-Aid, Stability and Competition in European Banking By Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
  14. Does Reference Pricing Drive Out Generic Competition in Pharmaceutical Markets? Evidence from a Policy Reform By Kurt R. Brekke; Chiara Canta; Odd Rune StraumeAuthor-Email: o.r.straume@eeg.uminho.p
  15. Competition and the Cost of Medicare’s Prescription Drug Program By Congressional Budget Office
  16. Healthcare: how competition can improve management quality and save lives By Nicholas Bloom; John Van Reenen
  17. Product Quality Effects of International Airline Alliances, Antitrust Immunity, and Domestic Mergers By Gayle, Philip; Thomas, Tyson
  18. Retail competition with switching consumers in electricity markets By Carlos Ruiz Mora; Francisco J. Nogales Martín; Francisco Javier Prieto Fernández
  19. Modeling Software Piracy Protection: Monopoly versus Duopoly By Kresimir Zigic; Jiri Strelicky; Michael Kunin

  1. By: Cason, Timothy; Sheremeta, Roman; Zhang, Jingjing
    Abstract: Within-group communication in competitive coordination games has been shown to increase competition between groups and lower efficiency. This study further explores potentially harmful effects of communication, by addressing the questions of (i) asymmetric communication and (ii) the endogenous emergence of communication. Our theoretical analysis provides testable hypotheses regarding the effect of communication on competitive behavior and efficiency. We test these predictions using a laboratory experiment. The experiment shows that although asymmetric communication is not as harmful as symmetric communication, it leads to more aggressive competition and lower efficiency relative to the case when neither group can communicate. Moreover, groups vote to endogenously open communication channels even though this leads to lower payoffs and efficiency.
    Keywords: between-group competition, within-group competition, communication, coordination, contests, experiments
    JEL: C70 D72 H41
    Date: 2015–11–05
  2. By: Jorge M. Streb
    Abstract: A Nash equilibrium can also be seen as a Cournot-Nash equilibrium, though this is debated because Cournot provided a specific application, not a general formulation. In my view, another of Nash’s fundamental contributions stands out when contrasting him to Cournot. Cournot treated economic decisions as optimization problems, but his stability analysis of duopoly led to endless discussions because players did not use the available information. Nash solves this with his rational interpretation: when players know the structure of the game, they can use the solution to predict the equilibrium. He thus introduces rational expectations. Nash additionally offers an adaptive interpretation: when players do not know the structure of the game, they can adjust their strategies to maximize payoffs. These adaptive expectations were anticipated by Cournot in his analysis of monopoly. In brief, Nash was not only extraordinary as a mathematician; his deep insights allow solving decades-long debates in economics.
    Keywords: equilibrium, rational players, consistent beliefs, adaptive expectations, rational expectations
    JEL: B1 B2 B3 C7
    Date: 2015–11
  3. By: Jakub Kastl (Princeton University); Marco Pagnozzi (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università Cattolica del Sacro Cuore di Milano and CSEF)
    Abstract: A monopolistic information provider sells an informative experiment to a large number of perfectly competitive firms. Within each firm, a principal contracts with an exclusive agent who is privately informed about his production cost. Principals decide whether to acquire the experiment, that is informative about the agent’s production cost. While more accurate information reduces agency costs and allows firms to increase production, it also results in a lower market price, which reduces principals’ willingness to pay for information. We show that, even if information is costless for the provider, the optimal experiment is not fully informative when demand is price-inelastic and agents are likely to be inefficient. This result hinges on the assumption that firms are competitive and exacerbates when principals can coordinate vis-à-vis the information provider. In an imperfectly competitive information market, providers may restrict information by not selling the experiment to some of the principals.
    Keywords: Adverse Selection, Information Acquisition, Experiments, Competitive Markets
    JEL: D40 D82 D83 L11
    Date: 2015–11–04
  4. By: Ceparano, Maria Carmela; Quartieri, Federico
    Abstract: We prove the existence of a unique pure-strategy Nash equilibrium in nice games with isotone chain-concave best replies and compact strategy sets. We establish a preliminary fixpoint uniqueness argument showing sufficient assumptions on the best replies of a nice game that guarantee the existence of exactly one Nash equilibrium. Then, by means of a comparative statics analysis, we examine the necessity and sufficiency of the conditions on (marginal) utility functions for such assumptions to be satisfied; in particular, we find necessary and sufficient conditions for the isotonicity and chain-concavity of best replies. We extend the results on Nash equilibrium uniqueness to nice games with upper unbounded strategy sets and we present "dual" results for games with isotone chain-convex best replies. A final application to Bayesian games is exhibited.
    Keywords: Nash equilibrium uniqueness; Chain-concave best replies; Nice games; Comparative statics; Strategic complementarity.
    JEL: C61 C72
    Date: 2015–10–05
  5. By: Liisa Laine (Boston University and Dand School of Business and Economics, University of Jyvaskyla); Ching-To Albert Ma (Boston University)
    Abstract: We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have different quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame perfect equilibria for general consumer valuation distributions and quality cost functions, and provide conditions for first-best equilibrium qualities. Various policy implications are drawn.
    Keywords: price-quality competition, quality, public firm, private firm
    JEL: D4 L1 L2 L3
    Date: 2015–06
  6. By: Mark Thatcher
    Abstract: The article examines the European Commission's use of its legal powers over mergers. It discusses and tests two views. One is that the 'neoliberal' Commission has ended previous industrial policies of aiding 'national champion' firms to grow through mergers and instead pursues a 'merger-constraining' policy of vigorously using its legal powers to block mergers. The other is that the Commission follows an 'integrationist policy' of seeking the development of larger European firms to deepen economic integration. It examines Commission decisions under the 1989 EC Merger Regulation between 1990 and 2009. It selects three major sectors that are 'likely' for the 'merger-constraining' view - banking, energy and telecommunications - and analyses a dataset of almost 600 Commission decisions and then individual merger cases. It finds that the Commission has approved almost all mergers, including by former 'national champion' firms. There have been only two prohibitions over 20 years in the three sectors and the outcome has been the creation of larger European firms through mergers. It explains how the Commission can pursue an integrationist policy through the application of competition processes and criteria. The wider implication is that the Commission can combine competition policy with achieving the 'industrial policy' aim of aiding the development of larger European firms.
    Keywords: European Commission; mergers; national champions; neoliberalism
    JEL: F00
    Date: 2014–11–10
  7. By: Andreea Cosnita-Langlais
    Abstract: This paper reviews the theoretical underpinnings of the main procedural choices for merger control enforcement. At each relevant stage we highlight the economic trade-offs behind the corresponding procedural choices: mandatory vs voluntary pre-merger notification, ex ante vs ex post merger review, and the type of decision eventually made, binary or not. The paper also identifies the missing debates that still need formal treatment. Our study provides insight for the optimal procedural design of merger control, and as such may be useful to understand the different choices made by the various jurisdictions for merger policy enforcement.
    Keywords: merger control, enforcement, procedural design.
    JEL: K21 L41 D82
    Date: 2015
  8. By: TAMADA Dai
    Abstract: The relationship between competition law and investment law has been a topic of recent discussion. The former aims to establish fair competition conditions in the markets. The latter seeks to protect foreign investments in the State. The broader the regulation of international investment agreements (IIAs), the more visible is the tension between the two laws. For example, the monopoly of a sector by the host State's domestic companies can be regarded as a barrier for foreign investors' entry into the market. If a host State interprets and applies its domestic laws in favor of its domestic companies, then consequently, to the foreign investors' disadvantage, there is discrimination based on nationality. This should be regarded as a breach of national treatment as stipulated in the IIAs. The relationship between the two laws should be analyzed and discussed in greater detail in the future.
    Date: 2015–11
  9. By: Rafael Lalive; Armin Schmutzler; Christine Zulehner
    Abstract: Public agencies mainly rely on two modes to procure goods and services: auctions and direct negotiations. We study a 1994 policy change in Germany that introduced the possibility to procure rail services in auctions as well as in direct negotiations with the incumbent. We analyze the effect of the procurement mode on service frequency and procurement price. Our analysis relies on self-collected data on the frequency of rail service on about 500 rail lines. We first develop a theoretical framework to study an agency’s decision on the procurement mode. We then use this framework to guide our empirical analysis on rail service, procurement price, and choice of procurement mode. Results indicate that, compared with negotiations, auctions improve service levels and reduce prices. As a result, surplus on auctioned lines increased by about 30%. Interestingly, surplus would also have increased by 16% on negotiated lines had auctions been used. We argue that the predominance of non-competitive modes reflects (actual or perceived) administrative costs of carrying out auctions.
    Keywords: Auctions, negotiations, liberalization, passenger railways, public procurement
    JEL: D43 D44 R48
    Date: 2015–11
  10. By: Edmond Baranes; Stefan Behringer; Jean-Christophe Poudou
    Abstract: This paper considers collusion between asymmetric networks in the telecommunications industry. Its primary purpose is to fill the gap between the literature on collusion between asymmetric firms and the literature on collusion in the telecommunications industry. Employing the standard Hotelling framework of horizontal product differentiation with non-linear tariffs and network based price discrimination we allow for differentiation in a second dimension. Modulo locations, the subscribers to each network operator face an asymmetry parameter that directly impacts their demands and can capture asymmetries in demand elasticities, in demand size, or even both. The implications of these asymmetries for the possibility of sustaining collusion are investigated under alternative access pricing regimes.
    Date: 2015–10
  11. By: Ogura, Yoshiaki; Okui, Ryo; Saito, Yukiko Umeno
    Abstract: We theoretically and empirically demonstrate that monopolistic or collusive banks will keep lending to a loss-making firm at an interest rate lower than the prime rate if the firm is located in an influential position in an inter-firm supply network. An influential firm generates a positive externality, and its exit damages the sales in the supply network. To internalize this externality, the banks may forbear on debt collection and/or bail out such influential firms when the cost to support the loss-making influential company can be recouped by imposing high interest on less influential companies. The analytical model shows that such forbearance can improve welfare. Our empirical study, performed using a unique dataset containing information about inter-firm transactions, provides evidence for such network-motivated lending decisions. In particular, this effect is more clearly observed at less credit-worthy firms whose main bank is a regional bank. Notably, we observe that such banks are often dominant lenders in the local loan market, and most of their clientele do not have direct access to the stock and bond market.
    Keywords: supply network, influence coefficient, centrality, forbearance, bailout
    JEL: D57 G21 G32 L13 L14
    Date: 2015–10
  12. By: Dean Corbae (University of Wisconsin); Pablo D'Erasmo (FRB Philadelphia)
    Abstract: We develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. We apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given high concentration in the Mexican banking industry, domestic and foreign banks act strategically in our framework. After calibrating the model to Mexican data, we examine the welfare consequences of government policies which promote global competition. We find modest welfare gains for households and substantial gains for business.
    Date: 2015
  13. By: Fiordelisi, Franco; Mare, Davide Salvatore; Molyneux, Philip
    Abstract: What is the relationship between bank fragility and competition during a period of market turmoil? Does market power in European banking involve extra-gains after discounting for the cost of government intervention? We answer these questions in the context of Eurozone banking over 2005-2012 and show that greater market power increases bank stability implying aggregate extra-gains of 57% of EU12 gross domestic product for the banking sector after discounting for the costs associated with government intervention. The negative influence of competition on bank stability is non-monotonic and reverses for lower degrees of competition. Capital injections, guarantees and asset relief measures elicit greater bank soundness.
    Keywords: Bank Stability, Prudential Regulation, Competition, Global Financial Crisis, European Banking Union, Government Bailouts
    JEL: C23 G21 G28
    Date: 2015–09
  14. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics); Chiara Canta (Department of Economics, Norwegian School of Economics); Odd Rune StraumeAuthor-Email: o.r.straume@eeg.uminho.p (Universidade do Minho - NIPE)
    Abstract: In this paper we study the impact of reference pricing (RP) on entry of generic firms in the pharmaceutical market. For given prices, RP increases generic firms' expected profit, but since RP also stimulates price competition, the impact on generic entry is theoretically ambiguous. In order to empirically test the effects of RP, we exploit a policy reform in Norway in 2005 that exposed a subset of drugs to RP. Having detailed product-level data for a wide set of substances from 2003 to 2013, we find that RP increased the number of generic drugs. We also find that RP increased market shares of generic drugs, reduced the prices of both branded and generic drugs, and led to a (weakly significant) decrease in total drug expenditures. The reduction in total expenditures was relatively smaller than the reduction in average prices, reflecting the fact that lower prices stimulated total demand.
    Keywords: Pharmaceuticals; Reference pricing; Generic entry
    JEL: I11 I18 L13 L65
    Date: 2015
  15. By: Congressional Budget Office
    Abstract: Spending for Medicare's prescription drug program (Part D) was $50 billion in 2013—about 50 percent less than CBO projected when the program was created. Lower growth rates in national drug spending and lower-than-expected enrollment primarily account for the difference. The competitive design of Part D has also constrained spending. CBO found that spending was lower in years when, and in areas of the country where, more plan sponsors competed for beneficiaries.
    JEL: I10 I11 I13 I18 I38
    Date: 2014–07–30
  16. By: Nicholas Bloom; John Van Reenen
    Abstract: NHS hospitals in England are rarely closed in constituencies where the governing party has a slender majority. This means that for near random reasons, those parts of the country have more competition in healthcare - which has allowed Nicholas Bloom and John Van Reenen to assess its impact on management quality and clinical performance.
    Keywords: management, hospitals, competition, productivity
    Date: 2015–11
  17. By: Gayle, Philip; Thomas, Tyson
    Abstract: Much of the literature on airline cooperation focuses on the price effects of cooperation. A key contribution of our paper is to empirically examine the product quality effects of airline cooperation. Two common types of cooperation among airlines involve international alliances and antitrust immunity (ATI), where ATI allows for more extensive cooperation. Additionally, this paper examines the extent to which domestic mergers affect the quality of international air travel products. The results suggest that increases in the membership of a carrier’s alliance or ATI partners and domestic mergers are associated with the carrier’s own products having more travel-convenient routing quality. Therefore, a complete welfare evaluation of airline cooperation and mergers should not ignore product quality effects.
    Keywords: Product quality; Airline competition; International alliance; Antitrust immunity; Mergers
    JEL: L13 L40 L93
    Date: 2015–09
  18. By: Carlos Ruiz Mora; Francisco J. Nogales Martín; Francisco Javier Prieto Fernández
    Abstract: The ongoing transformations of power systems worldwide pose important challenges,both economic and technical, for their appropriate planning and operation. A key approach to improve the efficiency of these systems is through demand-side management, i.e., to promote the active involvement of consumers in the system. In particular, the current trend it to conceive systems where electricity consumers can vary their load according to real-time price incentives, offered by retailing companies.Under this setting, retail competition plays an important role as inadequate prices orservices may entail consumers switching to a rival retailer. In this work we consider a game theoretical model where asymmetric retailers compete in prices to increase their profits by accounting for the utility function of consumers. Consumer preferences for retailers are uncertain and distributed within a Hotelling line. We analytically characterize the equilibrium of a retailer duopoly, establishing its existence and uniqueness conditions. Furthermore, sensitivities of the equilibrium prices with respect to relevant model parameters are also provided. The duopoly model is extended to a multiple retailer case for which we perform an empirical analysis via numerical simulations. Results indicate that, depending on the retailer costs, loyalty rewards and initial market shares, the resulting equilibrium can range from complete competition to one in which a retailer have a leading or even a dominant position in the market, decreasing the consumers' utility significantly. Moreover, the retailer network configuration also plays an important role in the competitiveness of the system.
    Keywords: Elastic consumers , Electricity market , Hotelling line , Market equilibrium , Retail competition , Switching consumers
    Date: 2015–11
  19. By: Kresimir Zigic; Jiri Strelicky; Michael Kunin
    Abstract: The economic analyses of software piracy typically rely on the simplifying assumption that the product is o¤ered by a single producer. We argue that a realistic description of the software market and associated economic aspects of software piracy might be also captured by studying competition between software developers. Using an illegal version of software violates intellectual property rights (IPR) and, due to public protection (such as copyrights), is punishable when discovered. If a developer nonetheless considers the level of piracy to be high, he may introduce his own private protection. The focus of our analysis is on the interaction between public and private IPR protection in the two market structures under considerations. We show that, unlike in cases of monopolies, there is no conflict of interest between the regulator and producers in duopoly setup. Moreover, unlike in a monopoly, the optimal public IPR protection in duopoly does not affect the developers' choice of software quality.
    Keywords: software piracy; private and public IPR protection; quality and competition effects; vertically differentiated duopoly;
    JEL: D43 L11 L21 O25 O34
    Date: 2015–10

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