nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒12‒20
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Competitive Bundling By Zhou, Jidong
  2. Endogenous Mergers in Vertically Differentiated Markets By Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
  3. Endogenous firm entry in an estimated model of the US business cycle. Updated version By Offick, Sven; Winkler, Roland C.
  4. Promoting Competition by Coordinating Prices: When Rivals Share Intellectual Property By Gallini, Nancy
  5. R&D partnerships and innovation performance: Can there be too much of a good thing? By Hottenrott, Hanna; Lopes-Bento, Cindy
  6. Mixed Oligopoly and Privatization in General Equilibrium By Kenji Fujiwara
  7. Registered cartels in Austria: An overview By Fink, Nikolaus; Schmidt-Dengler, Philipp; Stahl, Konrad; Zulehner, Christine
  8. The Price Ain't Right? Hospital Prices and Health Spending on the Privately Insured By Zack Cooper; Stuart Craig; Martin Gaynor; John Van Reenen
  9. The Impact of Consumer Inattention on Insurer Pricing in the Medicare Part D Program By Ho, Katherine; Hogan, Joseph; Scott Morton, Fiona
  10. Competitive Equilibrium in the Italian Wholesale Electricity Market By Simona BIGERNA; Carlo Andrea BOLLINO; Maria Chiara D'ERRICO; Paolo POLINORI
  11. Innovation and competition in Internet and mobile banking: an industrial organization perspective By Mariotto, Carlotta; Verdier, Marianne
  12. Monoposony Exploitation in Professional Sport: Evidence from Major League Baseball Position Players, 2000-2011 By Brad R. Humphreys; Hyunwoong Pyun
  13. Competition in Treasury Auctions By Elsinger, Helmut; Schmidt-Dengler, Philipp; Zulehner, Christine
  14. Prices vs. quantities in presence of a second, unpriced, externality By Guy Meunier

  1. By: Zhou, Jidong
    Abstract: This paper proposes a model of competitive bundling with an arbitrary number of firms. In the regime of pure bundling, we find that relative to separate sales pure bundling tends to raise market prices, benefit firms, and harm consumers when the number of firms is above a threshold. This is in contrast to the findings in the duopoly case on which the existing literature often focuses. Our analysis also sheds new light on how consumer valuation dispersion affects price competition more generally. In the regime of mixed bundling, having more than two firms raises new challenges in solving the model. We derive the equilibrium pricing conditions and show that when the number of firms is large, the equilibrium prices have simple approximations and mixed bundling is generally pro-competitive relative to separate sales. Firms' incentives to bundle are also investigated.
    Keywords: bundling, multiproduct pricing, product compatibility, oligopoly
    JEL: D43 L13 L15
    Date: 2015–12–12
  2. By: Gabszewicz, Jean J.; Marini, Marco A.; Tarola, Ornella
    Abstract: This paper studies the incentives for firms competing in vertically differentiated markets to sign binding collusive agreements, as in the case of mergers and alliances. Empirical investigations show that firms involved in mergers and acquisitions revise prices and qualities as to maximize their joint profits. In a few cases merging firms are also observed shutting down some lines of activities (so called market pruning). In this paper we attempt to test these predictions by modelling a three-stage game in which, at the first stage, three firms selling goods independently in a vertically differentiated market can commit to sign either a full or a partial voluntary agreement (with a subset of firms) via a sequential game of coalition formation while, at the second and third stage they can optimally revise their qualities and prices, respectively. In such a setting we study whether some binding agreements (as full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game. Moreover, we analyse the final effects of different coalition structures on equilibrium qualities, prices and profits accruing to firms. We obtain the following results: (i) initial firms' heterogeneity appears a crucial factor for mergers to arise; (ii) although profitable, the grand coalition of firms (i.e. the whole market merger) is not the outcome of the finite-horizon negotiation, where only partial mergers arise; (iii) all stable mergers comprehends the firm producing the bottom quality good; (iv) all stable mergers reduce the number of variants on sale (market pruning); (v) stable mergers always increase the quality gap among variants. All model findings seem compatible with the existing empirical observations.
    Keywords: Vertically Differentiated Markets, Mergers, Merger Policies, Cannibalization, Market Pruning, Endogenous Coalition Formation, Price Collusion, Grand Coalition, Coalition Stability, Core, Sequential Game of Coalition Formation.
    JEL: D2 D4 D42 D43 L1
    Date: 2015–12–10
  3. By: Offick, Sven; Winkler, Roland C.
    Abstract: A recent theoretical literature highlights the role of endogenous firm entry as an internal amplification mechanism of business cycle fluctuations. The amplification mechanism works through the competition and the variety effect. This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the competition and the variety effect. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The competition and the variety effect are estimated to be statistically significant. Together, they amplify the volatility of output by 8.5 percent relative to a model in which both effects are switched off. The competition effect accounts for most amplification, whereas the variety effect only plays a minor role.
    Keywords: Bayesian estimation,Business Cycles,Competition Effect,Entry,Mark-ups,Variety Effect
    JEL: E20 E32
    Date: 2015
  4. By: Gallini, Nancy
    Abstract: The paper examines technology agreements and the standards process from which they emerge when members supply inputs to the alliance while simultaneously competing with it. Under this overlapping ownership structure, pool members are horizontally related. I show that strategic complementarity between the downstream products owned by a member and those arising from the collaboration is sufficient for a pool to be pro-competitive. Although patent pools are more efficient than uncoordinated pricing, consumers are better off if an outside firm rather than a pool member owns the non-pool competing product. Antitrust rules facilitating efficient IP agreements under overlapping ownership and their implications for the direction of technological change are derived.
    Keywords: Industrial Organization, Patent Pools, Intellectual Property, Antitrust Policy
    Date: 2015–12–07
  5. By: Hottenrott, Hanna; Lopes-Bento, Cindy
    Abstract: R&D collaboration facilitates pooling of complementary skills, learning from the partner as well as sharing risks and costs. Research therefore repeatedly stressed the positive relationship between collaborative R&D and innovation performance. Fewer studies addressed potential drawbacks of collaborative R&D. Collaborative R&D comes at the costs of coordination and monitoring, requires knowledge disclosure and involves the risk of opportunistic behaviour by the partners. Thus, while the net gains from collaboration can be high initially, cost may start to outweigh those benefits if firms engage in multiple collaborative projects simultaneously. This study explicitly considers a firm's collaboration intensity, that is, the share of collaborative R&D projects in the firms' total R&D project portfolio. For a sample of 2,891 firms located in Germany, active in abroad range of manufacturing and service sectors and of which 86% are SMEs, we indeed find that increasing the share of collaborative R&D projects in total R&D projects is associated with a higher probability of product innovation and with a higher market success of new products. While we can confirm previous findings in terms of gains for innovation performance, we also find that collaboration has decreasing and even negative returns on product innovation if its intensity increases above a certain threshold. Consequently, the relationship between collaboration intensity and innovation has an inverted-U shape. In particular, costs start outweighing benefits if a firm pursues more than about two thirds of its R&D projects in collaboration. This result is robust to conditioning market success to the introduction of new products and to accounting for the selection into collaborating.
    Keywords: innovation performance,product innovation,R&D partnerships,collaboration intensity,financing constraints,collaboration complexity,transaction costs,selection model,endogenous switching
    JEL: O31 O32 O33 O34
    Date: 2015
  6. By: Kenji Fujiwara (School of Economics, Kwansei Gakuin University)
    Abstract: Making use of a general oligopolistic equilibrium model with private and public firms, this paper examines the welfare effects of privatization. We show that in an exogenous market structure privatizing the public firm necessarily reduces welfare, which contrasts with the existing result that some degree of privatization is optimal. In contrast, we find that privatization has no effect on welfare in an endogenous market structure with free entry of private firms.
    Keywords: Partial privatization, General oligopolistic equilibrium, Exogenous market structure, Endogenous market structure
    JEL: L13 L32 L33
    Date: 2015–12
  7. By: Fink, Nikolaus; Schmidt-Dengler, Philipp; Stahl, Konrad; Zulehner, Christine
    Abstract: Cartels were legal to a large extent in Austria until the country's EU Accession in 1995. We examine archival material on registered horizontal cartels to learn about their inner working. Applying content analysis to legally binding cartel contracts, we comprehensively document different collusion methods along the lines described by Stigler (1964). Quota cartels employ regular reporting schemes and use compensation mechanisms for departures from set quotas. Specialization cartels divide markets, and rely the least on information exchange and punishment. Price and payment condition cartels primarily aim to prevent secret price cuts, requiring information provision upon request, allow for discretionary decision-taking and (sometimes immediate) punishment. These stylized facts on the contractual arrangements suggest that the possibility to write legally binding agreements was employed to address the usual obstacles to sustaining collusion.
    Keywords: Collusion,Cartels,Legal Cartels,Contracts
    JEL: L41 L43
    Date: 2015
  8. By: Zack Cooper; Stuart Craig; Martin Gaynor; John Van Reenen
    Abstract: We use insurance claims data for 27.6 percent of individuals with private employer-sponsored insurance in the US between 2007 and 2011 to examine the variation in health spending and in hospitals' transaction prices. We document the variation in hospital prices within and across geographic areas, examine how hospital prices influence the variation in health spending on the privately insured, and analyze the factors associated with hospital price variation. Four key findings emerge. First, health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the US. Moreover, the correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14. Second, variation in providers' transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution. Third, we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of twelve across the nation and, on average, two-fold within HRRs. Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.3 percent higher than those in markets with four or more hospitals.
    Keywords: healthcare, health spending, hospitals, prices, price dispersion, competition, market structure
    JEL: L10 L11
    Date: 2015–12
  9. By: Ho, Katherine; Hogan, Joseph; Scott Morton, Fiona
    Abstract: Medicare Part D presents a novel privatized structure for a government pharmaceutical benefit. Incentives for firms to provide low prices and high quality are generated by consumers who choose among multiple insurance plans in each market. To date the literature has primarily focused on consumers, and has calculated how much could be saved if they chose better plans. In this paper we take the next analytical step and consider how plans will adjust prices as consumer search behavior improves. We use detailed data on enrollees in New Jersey to demonstrate that consumers switch plans infrequently and imperfectly. We estimate a model of consumer plan choice with inattentive consumers. We then turn to the supply side and examine insurer responses to this behavior. We show that high premiums are consistent with insurers profiting from consumer inertia. We use the demand model and a model of firm pricing to calculate how much lower Part D program costs would be if consumer inattention were removed and plans re-priced in response. Our estimates indicate that consumers would save $601 each over three years when firms’ choice of markup is taken into account. Cost growth would also fall: by the last year of our sample government savings would amount to $224 million per year or 4.1% of the cost of subsidizing the relevant enrollees.
    Keywords: consumer inattention; firm pricing; health insurance
    JEL: I11 L1
    Date: 2015–12
  10. By: Simona BIGERNA; Carlo Andrea BOLLINO; Maria Chiara D'ERRICO; Paolo POLINORI
    Abstract: The market power analysis in electricity market is relevant for understanding the competitive development of the industry’s restructuring and the liberalization process. The paper analyzes the market power exercised by power generators in the Italian wholesale electricity market. Following the approach of Wolak (2003, 2009), the extent of market power is measured using the Lerner index computed as the inverse of arc elasticity of the residual demand faced by each Cournot competitors. Then, the market supply curves have been adjusted to entail market power effects and the new market resolutions were derived. The new equilibrium prices are the competitive ones and represent the market clearing price that would have been if the electricity market was competitive and the effects of unilateral market power were removed.
    Keywords: Market Power, Residual demand, Lerner Index, Transmission Congestion
    JEL: D43
    Date: 2015–12–01
  11. By: Mariotto, Carlotta (MINES ParisTech, PSL - Research University); Verdier, Marianne (Université Paris 2 Panthéon Assas, CRED (TEPP) and MINES ParisTech, PSL - Research University)
    Abstract: Over the recent years, the development of Internet banking and mobile banking has had a considerable impact on competition in the retail banking industry. In some countries, the regulatory framework has been adapted to allow non-banks to operate in retail payments and compete with banks for deposits. Several platforms or large retailers have started to offer innovative financial products to their customers. In this paper, we survey the issues related to innovation and competition in Internet banking and mobile banking and discuss some perspectives for future research.
    Keywords: bank competition; bank regulation; non-banks; payment systems; Internet banking; mobile banking; platform markets
    JEL: E42 G21 L96
    Date: 2015–11–25
  12. By: Brad R. Humphreys (West Virginia University, Department of Economics); Hyunwoong Pyun (West Virginia University, Department of Economics)
    Abstract: Some professional athletes still face monoposony power in labor markets, underscoring the importance of estimating players' marginal revenue product (MRP) to assess its effects. We introduce two new empirical approaches, spline revenue functions and fixed-effects stochastic production functions, into the standard Scully (1974) approach to MRP estimation, and calculate Monoposony Exploitation Ratios (MERs) for position players in Major League Baseball over the 2001-2011 seasons. Estimates indicate that MERs are about 0.89 for rookie players, 0.75 for arbitration eligible players, and 0.21 for free agents. Recent collective bargaining agreements have reduced MERs for free agents, but had no effect on MERs for other players.
    Keywords: monoposony salary exploitation, Major League Baseball, marginal revenue product
    JEL: J24 J42 J52 L13 L40
    Date: 2015–10
  13. By: Elsinger, Helmut; Schmidt-Dengler, Philipp; Zulehner, Christine
    Abstract: We investigate the role of competition on the outcome of Austrian Treasury auctions. Austria’s EU accession led to an increase in the number of banks participating in treasury auctions. We use structural estimates of bidders’ private values to examine the effect of increased competition on auction performance: We find that increased competition reduced bidder surplus substantially, but less than reduced form estimates would suggest. A significant component of the surplus reduction is due to more aggressive bidding. Counterfactuals establish that as competition increases, concerns regarding auction format play a smaller role.
    Keywords: competition; multiunit auctions; structural estimation; treasury auctions
    JEL: D43 D44
    Date: 2015–12
  14. By: Guy Meunier (Ecole Polytechnique [Palaiseau] - Ecole Polytechnique, INRA- UR1303 ALISS)
    Abstract: We study a situation in which two goods jointly generate an externality but only one of them is regulated. Unilateral regulation of greenhouse gas emissions and related carbon leakage is a well known example. We compare tax and quantity instruments under uncertainty à la Weitzman (1974). Because of the uncertainty surrounding the unregulated good, the external cost is stochastic with both instruments. Whether the unregulated good quantity is more or less variable under a tax or under a quota depends on the degree of substitutability and the correlation between uncertainties on private valuations. In case of a positive correlation and imperfect substitution, a tax better stabilize the unregulated good quantity and can therefore dominate a quota when the slope of the external cost associated to the unregulated good is large. In a specification, relevant for leakage, it is shown that if uncertainty about the unregulated good (imports) is large, a tax might be preferable to a quota, regardless of the convexity of the external cost.
    Keywords: Environmental regulation, Tax , Quotas, Multi-pollutant, Carbon leakage
    Date: 2015–12–11

This nep-com issue is ©2015 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.