nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒02‒17
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Entry and Shakeout in Dynamic Oligopoly By Schmidt-Dengler, Philipp; Hünermund, Paul; Takahashi, Yuya
  2. Minimum Quality Standards and Non-Compliance By Voßwinkel, Jan; Birg, Laura
  3. Search, Differentiated Products, and Obfuscation By Gamp, Tobias
  4. Beat the gun - protection against zero-profit imitation By Schubert, Stefanie; Jost, Peter-J.
  5. Cross-Border M&As and Innovative Activity of Acquiring and Target Firms By Stiebale, Joel
  6. Entry Regulations, Welfare and Determinants of Market Structure By Maican, Florin; Orth, Matilda
  7. Collusive effects of a monopolist's use of an intermediary to deliver to retailers By Teichmann, Isabel; von Schlippenbach, Vanessa
  8. Advance-Purchase Financing of Projects with Few Buyers By Sahm, Marco
  9. Endogenous competition exposure: China's rise, intra-industry and intra-firm reallocations By Gampfer, Benjamin; Geishecker, Ingo
  10. A Principal-Agent Model of Competition Law Compliance By Herold, Daniel
  11. Number of firms, rationing, matching, and knowledge: A comprehensive study of variations in experimental Kreps-Scheinkman markets By Jacobs, Martin
  12. Bertrand-Edgeworth markets with increasing marginal costs and voluntary trading: Experimental evidence By Jacobs, Martin; Requate, Till
  13. Demand rationing in Bertrand-Edgeworth markets with fixed capacities: An experiment By Jacobs, Martin; Requate, Till
  14. Communication in Vertically Related Markets: Experimental Evidence By Normann, Hans-Theo; Möllers, Claudia; Snyder, Christopher M.
  15. Shrouding add-on information: an experimental study By Wenzel, Tobias; Normann, Hans-Theo
  16. Quality provision and reporting when health care services are multi-dimensional and quality signals imperfect By Huesmann, Katharina; Mimra, Wanda
  17. Fuel Prices and Station Heterogeneity on Retail Gasoline Markets By Siekmann, Manuel; Haucap, Justus; Heimeshoff, Ulrich
  18. Electricity Markets: Designing Auctions Where Suppliers Have Uncertain Costs By Holmberg, Pär; Wolak, Frank A.
  19. The Market for Nursing Homes in Germany: a spatial competition approach By Hange, Ulrich

  1. By: Schmidt-Dengler, Philipp; Hünermund, Paul; Takahashi, Yuya
    Abstract: In many industries, the number of firms evolves non-monotonically over time. A phase of rapid entry is followed by an industry shakeout: a large number of firms exit within a short period. We present a simple timing game of entry and exit with an exogenous technological process governing firm effi- ciency. We calibrate our model to data from the post World War II penicillin industry. The equilibrium dynamics of the calibrated model closely match the patterns observed in many industries. In particular, our model gener- ates richer and more realistic dynamics than competitive models previously analyzed. The entry phase is characterized by preemption motives while the shakeout phase mimics a war of attrition. We show that dynamic strategic incentives accelerate early entry and trigger the shakeout by comparing a Markov Perfect Equilibrium to an Open-loop Equilibrium.
    JEL: L11 O10 L13
    Date: 2015
  2. By: Voßwinkel, Jan; Birg, Laura
    Abstract: This paper studies the effect of non-compliance with a minimum quality standard on prices, quality, and welfare in a vertical differentiation model. Non-compliance with a minimum quality standard by a low-quality firm reduces quality levels of both firms, increases the price for the high-quality product, decreases the price for the low-quality product, and shifts demand from the low-quality to the high-quality firm. Under non-compliance, an increase in the standard increases the quality difference, increases the price difference, and shifts demand from the high-quality to the low-quality firm. Stricter government enforcement decreases the quality level of the low-quality firm, increases the price of the high-quality product and shifts demand from the low-quality firm to the high-quality firm. Non-compliance of the low quality firm increases profits for both firms, reduces consumer surplus and increases or decreases welfare depending on the market size, the effect of quality levels of the externality, the detection probability, and the minimum quality level.
    JEL: K42 L13 L50
    Date: 2015
  3. By: Gamp, Tobias
    Abstract: Consumers buy products even if they find it too time-consuming to evaluate products carefully. I present a simple market model with sequential consumer search and differentiated products in which consumers may purchase products without evaluation. In a market with evaluation cost heterogeneity and endogenous consumer participation, market prices and profits may fall with increasing product diversity. Resulting concerns that the market may fail to provide the welfare optimal variety of products are gratuitous if product diversity is endogenized. Firms find it nonetheless individually rational to offer niche products. I endogenize evaluation costs and interpret this as the firms opportunity to aggravate the acquisition of information by obfuscation. A firm s equilibrium strategy whether to obfuscate product information is monotonic in product diversity: while obfuscation is individually rational for high product diversity, firms simplify information acquisition if product diversity is low.
    JEL: D43 D83 L13
    Date: 2015
  4. By: Schubert, Stefanie; Jost, Peter-J.
    Abstract: The recent development of 3D printing raises the issue of how to protect manufacturing firms from product piracy. In this paper, we are interested in potential regulatory requirements to protect firms from falling victim of product piracy and associated quality choices. We employ a game-theoretic model of duopoly competition. One firm offers a high-quality product facing quality-related costs. An imitator views the product and produces an imitation using a low-cost production method as 3D printing. Our results indicate that copy protection by the high-quality firm yields a higher quality than under patent protection. However, the chosen quality level of the high-quality firm is highest in duopoly without protection. Optimal patent protection crucially depends on the underlying objective function. It is only socially optimal if the regulatory authority maximises GDP.
    JEL: L13 L51 O31
    Date: 2015
  5. By: Stiebale, Joel
    Abstract: This paper analyzes the effects of cross-border mergers and acquisitions (M&As) on the innovation of European firms. The results indicate a considerable increase in post-acquisition innovation in the merged entity. This is mainly driven by inventors based in the acquirer's country, while innovation in the target's country tends to decline. The asymmetry of effects between acquiring and target firms increases with pre-acquisition differences in knowledge stocks, indicating a relocation of innovative activities towards more efficient usage within multinational firms. Instrumental variable techniques as well as a propensity-score matching approach indicate that the effect of cross-border M&As on innovation is causal.
    JEL: F23 D22 G34
    Date: 2015
  6. By: Maican, Florin (University of Gothenburg); Orth, Matilda (Research Institute of Industrial Economics (IFN))
    Abstract: We use a dynamic oligopoly model of entry and exit with store-type differentiation to evaluate how entry regulations affect profitability, market structure and welfare. Based on unique data for all retail food stores in Sweden, we estimate demand, recover variable profits, and estimate entry costs and fixed costs by store type. Counterfactual policy experiments show that welfare increases when competition is enhanced by lower entry costs. Protecting small stores by imposing licensing fees on large stores is not welfare enhancing. This study sheds light on the long-run implications of entry regulations for the welfare of differentiated product industries with endogenous entry and exit.
    Keywords: Imperfect competition; product differentiation; retail markets; entry; exit; sunk costs; welfare
    JEL: L11 L13 L81
    Date: 2015–12–28
  7. By: Teichmann, Isabel; von Schlippenbach, Vanessa
    Abstract: A manufacturer contracting secretly with several downstream competitors faces an opportunism problem, preventing it from exerting its market power. In an infinitely repeated game, the opportunism problem can be relaxed. We show that the upstream firm's market power can be restored even further if the upstream firm chooses a mixed distribution system in which it makes use of an intermediary to distribute the good to a subset of the retailers and delivers directly only to the remaining downstream firms.
    JEL: L12 L14 L42
    Date: 2015
  8. By: Sahm, Marco
    Abstract: I investigate a simple model of advance-purchase contracts as a mode of financing costly projects. The analysis can easily be reinterpreted as a model of monopolistic provision of excludable public goods under private information. An entrepreneur has to meet some capital requirement in order to start production and sell the related good to a limited number of potential buyers who are privately informed about their willingness to pay. I find that advance-purchase arrangements allow to finance more costly projects than traditional funding sources. The entrepreneur is able to use advance-purchase surcharges as a price discrimination device. However, the discriminatory power is limited by the problem of free-riding which aggravates for an increasing number of potential buyers. I apply the model to research and development activities in the health industry discussing the availability of new drugs and vaccines in poor countries.
    JEL: D42 H41 L12
    Date: 2015
  9. By: Gampfer, Benjamin; Geishecker, Ingo
    Abstract: In this paper we analyse the manufacturing sector's capacity to mitigate increasing import competition from China. In our view, competition exposure is endogenous, i.e. influenced by firms' decisions which products are sold and what markets are served. We construct a counterfactual competition measure to assess the importance of different types of adaptation to increased competition: inter- and intra-industry reallocations, firm entry and exit, and product- and destination switching, among others. Combining Danish firm register data with transactional level trade statistics we are able to track product-level competition changes on the domestic as well as on each export market. Between 1997 and 2008 aggregated manufacturing level exposure to Chinese imports increased by 177 per cent but counterfactually would have increased by remarkable 283 per cent had the manufacturing sector not successfully adapted. The mitigation of sector level competition exposure works through all adaptation channels, notably firm entry and exit, and inter-industry reallocations. However, for surviving firms, product and destination switching are very relevant mechanisms to mitigate increased competitive pressure from China.
    JEL: F14 L60
    Date: 2015
  10. By: Herold, Daniel
    Abstract: This paper analyzes firm owners' incentives to implement Competition Law Compliance Programs as imperfect monitoring devices in a principal-agent setup and the interaction effects with bonus contracts. The manager chooses working effort and has the option to cartelize. The model reveals a non-monotonic relationship between profit targets and incentives to collude. Contrary to intuition, it might be the case that low instead of high profit targets facilitate collusion. This result is driven by the threat of detection and punishment. A Compliance Program deters the agent from misbehavior and enhances effort as long as the agent did not engage in collusive activity. Additionally, the owner can use the Program as an insurance against fines.
    JEL: D21 D82 D02
    Date: 2015
  11. By: Jacobs, Martin
    Abstract: This study provides a comprehensive picture of experimental Kreps-Scheinkman markets with capacity choice in the first stage and subsequent price competition at the second. We conduct seven different treatments of such markets, varying the number of firms, the demand rationing scheme, the subject matching, and subjects' knowledge about the market mechanism. We find that only the number of firms entails a persistent effect on capacity choices. Price choices are affected by both the number of firms and the rationing scheme. Subjects in the high-knowledge condition behave in the same manner from the first periods as subjects with low knowledge do in later periods after having gained experience. In all treatments conduct is generally more competitive than the Cournot outcome, irrespective of whether the Cournot outcome is the Nash equilibrium or not. Nevertheless, the Cournot model entails some predictive power. Exact Cournot choices are more likely to occur for both capacities and prices under efficient demand rationing, where the Cournot outcome is the equilibrium, than under proportional rationing.
    Keywords: Kreps-Scheinkman,Cournot,price competition,capacity choice,demand rationing,oligopoly,laboratory experiment
    JEL: C90 D43 L11 L13
    Date: 2016
  12. By: Jacobs, Martin; Requate, Till
    Abstract: Price competition with increasing marginal costs, though relevant for many markets, appears as an under-researched field in the experimental oligopoly literature. We provide results from an experiment that varies the number of firms as well as the demand rationing and matching schemes in Bertrand-Edgeworth markets with increasing marginal costs and voluntary trading. We find that prices and profits are substantially higher in duopoly than in triopoly and with proportional compared to efficient demand rationing. The matching rule has little effect on prices and profits. Nash equilibrium predictions do not capture observed behavior. Neither the mixed-strategy Nash equilibria of the underlying one-shot game nor, for the fixed matching condition, the symmetric stationary outcome pure-strategy Nash equilibria of the infinitely repeated game are supported by the data. In contrast to results from related experiments, behavior is largely more competitive than predicted by Nash equilibrium theory. Individual pricing decisions can predominantly be explained by either myopic best responses (Edgeworth cycles) or simple imitative behavior, where the complexity of the decision situation plays a crucial role in which behavioral pattern applies.
    Keywords: Bertrand-Edgeworth,demand rationing,increasing marginal costs,Edgeworth cycles,oligopoly,laboratory experiment
    JEL: C72 C90 D43 L13
    Date: 2016
  13. By: Jacobs, Martin; Requate, Till
    Abstract: This study is the first to investigate the effect of demand rationing in experimental Bertrand-Edgeworth markets with fixed exogenous capacities. It is found that prices and profits are significantly higher under proportional than under efficient demand rationing. Moreover, the amount of capacity available to each firm is varied. In accordance with earlier studies, prices and profits are significantly higher when capacities are lower. Those effects accord qualitatively with the Nash equilibrium predictions of the corresponding stage games. However, the Nash equilibrium concept does poorly at quantitative predictions. Prices are significantly higher than the Nash prediction in all treatments, irrespective of whether the Nash equilibrium is in mixed or in pure strategies. Profits are higher than the Nash prediction with high capacities, but may converge to the equilibrium prediction in the long run with low capacities. The data of individual price choices feature dynamic patterns that can potentially be explained by both Edgeworth price cycles and imitation of the price set by the competitor.
    Keywords: Bertrand-Edgeworth,demand rationing,Edgeworth cycles,oligopoly,laboratory experiment
    JEL: C72 C90 D43 L13
    Date: 2016
  14. By: Normann, Hans-Theo; Möllers, Claudia; Snyder, Christopher M.
    Abstract: When an upstream monopolist supplies several competing downstream firms, it may fail to monopolize the market because of opportunistic behavior towards the downstream firms. We analyze this well-known commitment problem in an experiment where we extend previous research by allowing for communication. In one treatment, the upstream firm can bilaterally talk to either of two downstream firms. In a second treatment, all three firms talk together. We find that the treatment with bilateral communication leads to fewer rejections of offers and higher joint profits than a baseline treatment without communication, but output is still above the monopoly benchmark. Only the treatment where all three firms can communicate leads to complete monopolization. Such communication effectively works as a vertical restraint and should be regarding as potentially anticompetitive.
    JEL: L12 L42 C90
    Date: 2015
  15. By: Wenzel, Tobias; Normann, Hans-Theo
    Abstract: We explore how competition affects firms obfuscation strategies in laboratory experiments. Firms sell a base good and an add-on product. The price of the add-on may be shrouded and, if so, myopic consumers pay too much. Shrouding is an equilibrium but an unshrouding equilibrium coexists. In our experiments, competition matters in that only duopolistic markets are frequently shrouded whereas fourfirm markets are not. With repeated interaction, shrouding rates do not increase. However, the opportunities to shroud facilitate tacit collusion on the base good price for the duopolies: the unshrouding equilibrium serves as a credible punishment if deviations occur.
    JEL: L40 L41 C90
    Date: 2015
  16. By: Huesmann, Katharina; Mimra, Wanda
    Abstract: We model competition for a multi-attribute service, like health care services, where consumers observe attribute quality imprecisely before deciding on a provider. High quality in one attribute is more important in terms of ex post utility. Attribute quality is stochastic, providers can shift resources in order to increase expected quality in some attributes. Consumers rationally focus on attributes depending on signal precision and beliefs about the providers' resource allocations. When signal precision is such that consumers focus weakly on the less important attribute, any Perfect Bayesian Nash Equilibrium is inefficient. Increasing signal precision can reduce welfare, as the positive effect of better provider selection is overcompensated by the negative effect that a shift in consumer focusing has on provider quality choice. We discuss the providers' incentives for information disclosure.
    JEL: L15 D83 I11
    Date: 2015
  17. By: Siekmann, Manuel; Haucap, Justus; Heimeshoff, Ulrich
    Abstract: Price levels and movements on gasoline and diesel markets are heavily debated among consumers, policy-makers, and competition authorities alike. In this paper, we empirically investigate how and why price levels differ across gasoline stations in Germany, using eight months of data from a novel panel data set including price quotes from virtually all German stations. Our analysis specifically explores the role of station heterogeneity in explaining price differences across gasoline stations. Key determinants of price levels across fuel types are found to be ex-refinery prices as key input costs, a station's location on roads or highway service areas, and brand recognition. A lower number of station-specific services implies lower fuel price levels, so does a more heterogeneous local competitive environment.
    JEL: L11 L71 L13
    Date: 2015
  18. By: Holmberg, Pär (Research Institute of Industrial Economics (IFN)); Wolak, Frank A. (Program on Energy and Sustainable Development (PESD) and Department of Economics, Stanford University)
    Abstract: We analyse how the market design influences the bidding behaviour in multi-unit auctions, such as wholesale electricity markets. It is shown that competition improves for increased market transparency and we identify circumstances where the auctioneer prefers uniform to discriminatory pricing. We note that political risks could significantly worsen competition in hydro-dominated markets. It would be beneficial for such markets to have clearly defined contingency plans for extreme market situations.
    Keywords: cost uncertainty; asymmetric information; uniform-price auction; discriminatory pricing; Bertrand game; market transparency; wholesale electricity market; treasury auction; Bayesian Nash equilibria
    JEL: C72 D43 D44 L13 L94
    Date: 2015–12–18
  19. By: Hange, Ulrich
    Abstract: The German nursing home industry rapidly grows due to the permanent increase of people in need of long-term care, in particular. At the same time a large share of residents in German nursing homes is in need of social assistance. In a simple spatial competition model we show that the presence of people in need of social assistance increases prices of nursing homes. Bargaining between nursing homes and long-term care insurance companies and social assistance administration can restrain this price-enhancing effect. In addition, price negotiation may help to reach a social optimal number of nursing homes. Thus, our analysis also presents a rationale in favor of negotiations in nursing home markets from a welfare point of view.
    JEL: H53 I11 I38
    Date: 2015

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