nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒03‒06
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Collusion et possibilité d’entrée en aval dans une industrie verticalement intégrée By Avenel, Eric; Caprice, Stéphane
  2. Consumer Search and Retail Market Structure By Rhodes, Andrew; Zhou, Jidong
  3. Contract Competition between Hierarchies, Managerial Compensation and Imperfectly Correlated Shocks By Michela, Cella; Federico, Etro
  5. Can collusion promote sustainable consumption and production? By Schinkel, Maarten Pieter; Spiegel, Yossi
  6. Leniency and Damages By Marvao, Catarina; Spagnolo, Giancarlo; Buccirossi, Paolo
  7. Margin squeeze: An above-cost predatory pricing approach By Gaudin, Germain; Mantzari, Despoina
  8. The Competition Effect in a Public Procurement Model: An error-in-variables approach By Sundström, David
  9. Endogenous firm competition and the cyclicality of markups By Afrouzi, Hassan
  10. Tariff-mediated network effects with incompletely informed consumers By Muck, Johannes
  11. The role of networks in firms’ multi-characteristics competition and market-share inequality By Lapatinas, Athanasios; Garas, Antonios
  12. Upstream Competition and Open Access Regimes: Experimental Evidence By Horstmann, Niklas; Krämer, Jan; Schnurr, Daniel
  13. Recent Development of Net Neutrality Conditions in Japan: Impact of Fiber Wholesale and Long-term Evolution (LTE) By Jitsuzumi, Toshiya
  14. Evaluation of the impact of net neutrality on the profitability of telecom operators: A game-theoretic approach By Van der Wee, Marlies; Vandevelde, Niels; Verbrugge, Sofie; Pickavet, Mario
  15. Strategic capacity withholding through failures in the German-Austrian electricity market By Bergler, Julian; Heim, Sven; Hüschelrath, Kai
  16. Have Customers Benefited from Electricity Retail Competition? By Su, Xuejuan
  17. Airline Price Discrimination By Stacey, Brian
  18. Measuring Competition Intensity; An Application to Air/HSR Transport Markets By Christiaan Behrens; Mark Leijsen
  19. The effect of international competition on firm productivity and market power By De Loecker, Jan; Van Biesebroeck, Johannes

  1. By: Avenel, Eric; Caprice, Stéphane
    Abstract: We analyze the impact of an entry threat at the downstream level on the ability of a pair of vertically integrated incumbents to collude. Entrants depend on the vertically integrated firms on the intermediate market for the purchasing of good. While the entry threat leaves collusion profits unchanged, we show that deviation profits are also unchanged and that profits are lower in the punishment periods. Consequently, an entry threat facilitates collusion, thus benefiting to incumbents.
    JEL: D43 L13 L23 L40
    Date: 2015–11
  2. By: Rhodes, Andrew; Zhou, Jidong
    Abstract: This paper proposes a framework for studying how consumer search frictions affect retail market structure. In our model single-product firms which supply different products can merge to form a multiproduct firm. Consumers wish to buy multiple products and value the one-stop shopping convenience associated with a multiproduct firm. We find that when the search friction is relatively large all firms are multiproduct in equilibrium. However when the search friction is smaller the equilibrium market structure is asymmetric, with single-product and multiproduct firms coexisting. This asymmetric market structure often leads to the weakest price competition, and is the worst for consumers among all possible market structures. Due to the endogeneity of market structure, a reduction in the search friction can increase market prices and decrease consumer welfare.
    Keywords: consumer search; conglomerate merger; multiproduct pricing; one-stop shopping; retail market structure
    JEL: D11 D43 D83 L13
    Date: 2016–02
  3. By: Michela, Cella; Federico, Etro
    Abstract: We analyze competition through incentive contracts for managers in duopoly. Privately informed managers exert surplus enhancing e¤ort that generates an externality on the rival. Asymmetric information on imperfectly correlated shocks creates a two-way distortion of efforts under strategic substitutability in effort and a double downward distortion under strategic complementarity in effort. In the first case, as with contracts for R&D activity or small contractual spillovers for quantity and price competition, increasing the correlation of types reduces the polarization of contracts and the di¤erentials in managerial compensations between efficient and inefficient managers. In the second case, as with large contractual spillovers, the opposite occurs.
    Keywords: oligopoly, screening, two way distortion, incentives, investments
    JEL: D21 D82 D86 L13 L22
    Date: 2016–02–07
  4. By: Uday Bhanu Sinha (Departments of Economics, Delhi School of Economics, University of Delhi, India)
    Abstract: We consider a mechanism for optimizing the value of a patent owned by an independent patent holder who is not a producer in the market. We consider two kinds of cost reducing innovations: “common innovation” and “new technology innovation” in a homogeneous good Cournot market with ex-ante asymmetric costs of production. We show that the value of the patent is maximized when the patent holder sells the patent to the efficient firm at a fixed payment who would further license the innovation to its rival. This patent sale dominates all other licensing mechanisms for both kinds of innovations.
    Keywords: Patent sale; licensing; asymmetric firms; cost reducing innovation; auction; fixed fee; royalty, two part tariff
    JEL: D43 D44 D45 L13 O32 O33
    Date: 2015–08
  5. By: Schinkel, Maarten Pieter; Spiegel, Yossi
    Abstract: Several competition authorities consider the exemption of horizontal agreements among firms from antitrust liability if the agreements sufficiently promote public interest objectives such as sustainable consumption and production. We show that when consumers value sustainable products and firms choose investments in sustainability before choosing output or prices, coordination of output choices or prices boosts investments in sustainability and may even enhance consumer surplus when products are sufficiently close substitutes and the marginal cost of investment in sustainability is relatively low. By contrast, coordination of investments in sustainability leads to lower investments and harms consumers.
    Keywords: antitrust; collusion; consumer surplus; public interest; Sustainability
    JEL: K21 L13 L40 Q01
    Date: 2016–02
  6. By: Marvao, Catarina (Stockholm Institute of Transition Economics); Spagnolo, Giancarlo (Stockholm Institute of Transition Economics); Buccirossi, Paolo (LEAR)
    Abstract: Modern antitrust engenders a possible conflict between public and private enforcement due to the central role of Leniency Programs. Damage actions may reduce the attractiveness of Leniency Programs for cartel participants if their cooperation with the competition authority increases the chance that the cartel’s victims will bring a successful suit. A long legal debate culminated in a EU directive, adopted in November 2014, which seeks a balance between public and private enforcement. It protects the effectiveness of a Leniency Program by preventing the use of leniency statements in subsequent actions for damages and by limiting the liability of the immunity recipient to its direct and indirect purchasers. Our analysis shows such compromise is not required: limiting the cartel victims’ ability to recover their loss is not necessary to preserve the effectiveness of a Leniency Program and may be counterproductive. We show that damage actions will actually improve its effectiveness, through a legal regime in which the civil liability of the immunity recipient is minimized (as in Hungary) and full access to all evidence collected by the competition authority, including leniency statements, is granted to claimants (as in the US).
    Keywords: Private and public enforcement; cartels; competition policy; Leniency Program
    JEL: C72 C73 D43 D81 H11 K21 K42 L13 L44 L51
    Date: 2015–02–13
  7. By: Gaudin, Germain; Mantzari, Despoina
    Abstract: We provide a new legal perspective for the antitrust analysis of margin squeeze conducts. Building on recent economic analysis, we explain why margin squeeze conducts should solely be evaluated under adjusted predatory pricing standards. The adjustment corresponds to an increase in the cost benchmark used in the predatory pricing test by including opportunity costs due to missed upstream sales. This can reduce both the risks of false-positives and false-negatives in margin squeeze cases. We justify this approach by explaining why classic arguments against above-cost predatory pricing typically do not hold in vertical structures where margin squeezes take place and by presenting case law evidence supporting this adjustment. Our approach can help to reconcile the divergent US and EU antitrust stances on margin squeeze.
    Keywords: Margin squeeze,Predatory pricing,Price-cost test,Abuse of dominance
    JEL: K21 L12 L43
    Date: 2016
  8. By: Sundström, David (Department of Economics, Umeå University)
    Abstract: Auction theory suggests that as the number of bidders (competition) increases, the sizes of the participants’ bids decrease. An issue in the empirical literature on auctions is which measurement(s) of competition to use. Utilizing a dataset on public procurements containing measurements on both the actual and potential number of bidders I find that a workhorse model of public procurements is best fitted to data using only actual bidders as measurement for competition. Acknowledging that all measurements of competition may be erroneous, I propose an instrumental variable estimator that (given my data) brings about a competition effect bounded by those generated from models using the actual and potential number of bidders, respectively. Also, some asymptotic results are provided for non-linear least squares estimators obtained from a dependent variable transformation model.
    Keywords: dependent variable transformation model; instrumental variable; measurement error; non-linear least squares
    JEL: C26 C51 D22 D44
    Date: 2016–01–11
  9. By: Afrouzi, Hassan (The University of Texas at Austin)
    Abstract: The cyclicality of markups is crucial to understanding the propagation of shocks and the size of multipliers. I show that the degree of inertia in the response of output to shocks can reverse the cyclicality of markups within implicit collusion and customer-base models. In both classes of models, markups follow a forward looking law of motion in which they depend on firms' conditional expectations over stochastic discount rates and changes in output, implying that auxiliary assumptions that affect the inertia of output can potentially reverse cyclicality of markups in each of these models. I test this common law of motion with data for firms' expectations from New Zealand and find that firms' markup setting behavior is more consistent with implicit collusion models than customer base models. Calibrating an implicit collusion model to the U.S. data, I find that markups are procyclical if there is inertia in the response of output to shocks, as commonly found in the data.
    JEL: D21 D92 E3
    Date: 2016–02–01
  10. By: Muck, Johannes
    Abstract: I explore the competitive effects of on-net/off-net differentiation in a market with two asymmetric networks by combining the literature on on-net/off-net differentiation with research on costly consumer search in an agent-based simulation model. All consumers in the market are subscribed to one of two networks, whereby, initially, clusters of subscribers to network B exist. A priori, consumers lack information on the market shares of both network and, hence, have to engage in costly fixed-sample search. With respect to the extent of search costs, I distinguish between three types of consumers: (1) fully informed consumers (FICs) have non-positive search costs and, accordingly, are always perfectly informed about networks' market shares; (2) partly informed consumers (PICs) have moderate search costs, which allow them to observe market shares within a circular sensing field; and (3) locally informed consumers (LICs) have high search costs and, hence, only observe market shares among their immediate eight neighbours. Irrespective of their type, consumers maximize their expected utility by subscribing to the network offering the lowest expected cost for a call to a random consumer. The results of a systematic variation of the key parameters of the model show that the larger network's probability to increase its market share or to corner the market is negatively affected by the fraction of PICs and LICs, whereas it is positively affected by PICs's sensing radius, the larger network's initial market share, and the number of clusters. The introduction of calling clubs reveals that the probability of calling a friend inflicts a negative effect while the size of the calling clubs has a positive effect. These findings highlight the pivotal role of the amount of information available to consumers for the distribution of market shares.
    Keywords: on-net/off-net differentiation,tariff-mediated network effects,agent-based computational economics,search costs
    JEL: C63 D83 K23 L14 L96
    Date: 2016
  11. By: Lapatinas, Athanasios; Garas, Antonios
    Abstract: We develop a location analysis spatial model of firms’ competition in multi-characteristics space, where consumers’ opinions about the firms’ products are distributed on multilayered networks. Firms do not compete on price but only on location upon the products’ multi-characteristics space, and they aim to attract the maximum number of consumers. Boundedly rational consumers have distinct ideal points/tastes over the possible available firm locations but, crucially, they are affected by the opinions of their neighbors. Our central argument is that the consolidation of a dense underlying consumers’ opinion network is the key for the firm to enlarge its market-share. Proposing a dynamic agent-based analysis on firms’ location choice we characterize multi-dimensional product differentiation competition as adaptive learning by firms’ managers and we argue that such a complex systems approach advances the analysis in alternative ways, beyond game-theoretic calculations.
    Keywords: location choice, networks, multi-characteristics space, networks; consumer behavior; decision heuristics; agent-based model;
    JEL: C63 C65 D72 L14 R39
    Date: 2016
  12. By: Horstmann, Niklas; Krämer, Jan; Schnurr, Daniel
    Abstract: We investigate the effects of alternative open access regimes on market performance. In particular, by means of an economic laboratory experiment we compare the market outcomes under unregulated wholesale competition, under a price-fixing rule (where firms must maintain their wholesale price for a fixed period of time), and under a margin squeeze rule (where the retail price of integrated firms must exceed their wholesale price). Our analysis suggests that wholesale and retail prices are substantially reduced by the introduction of a price-fixing rule at the upstream level compared to the unregulated scenario. In contrast, we do not find evidence that a margin squeeze regulation reduces retail market prices. In fact, while such a rule benefits the reselling firm by allowing for a viable profit margin, prices for consumers tend to be even higher than in the unregulated case.
    Keywords: Next Generation Access Networks,Access Regulation,Open Access,Upstream Competition,Experimental Economics,Margin Squeeze
    JEL: C92 L51 L90
    Date: 2015
  13. By: Jitsuzumi, Toshiya
    Abstract: The Japanese broadband market was very competitive until recently owing to the interconnection rules and the significant market power (SMP) regulations on the incumbent fixed telecom giant, NTT East/West. Japan’s regulator, the Ministry of Internal Affairs and Communications (MIC), could let the market dynamism deal with the net neutrality issue without introducing any “special” rules. However, technological developments in mobile broadband have turned mobile operators into leading players in the broadband ecosystem, which is making the broadband access market increasingly oligopolistic. The fiber wholesale recently introduced by NTT East/West may accelerate this trend by realizing the virtual integration of NTT Docomo and NTT East/West. Since mobile network operators are less disciplined in Japan’s telecom framework than fixed ones are, the MIC cannot sit back and do nothing. This paper compares two of the tools the MIC may use—increasing competitive pressure in the market and controlling the behavior of dominant mobile operators—and concludes that the latter is more promising. The author recommends that the MIC begin examining the re-regulation of mobile operators and the introduction of new rules for net neutrality.
    Date: 2015
  14. By: Van der Wee, Marlies; Vandevelde, Niels; Verbrugge, Sofie; Pickavet, Mario
    Abstract: Net neutrality is defined as the concept in which Internet service providers are obliged to treat all data streams equally, independent of which application, service, device, sender or receiver is involved. They are as such forbidden to block, throttle or alter data traffic over their networks. The current debate about net neutrality raises important questions about if and how it should be implemented by law. This research summarizes the current regulations regarding net neutrality in the EU and US and finds significant differences, as well as specific cases where operators breached (or tried to breach) the concept of net neutrality. A case study about video on demand is used to analyze both these violations and certain approaches under net neutrality in order to see which scenario offers the greatest benefits, both from an operator’s, as well as from a regulator’s perspective. The results are computed using a game theoretic approach and from these results recommendations are subtracted that can be presented to regulators. The study finds that net neutrality can be enforced by law to prevent the decline of competition and innovation on the market.
    Keywords: net neutrality,game theory,telecommunications,congestion,video on demand,techno-economic analysis
    Date: 2015
  15. By: Bergler, Julian; Heim, Sven; Hüschelrath, Kai
    Abstract: In electricity day-ahead markets organized as uniform price auction, a small reduction in supply in times of high demand can cause substantial increases in price. We use a unique data set of failures of generation capacity in the German-Austrian electricity market to investigate the relationship between electricity spot prices and generation failures. Differentiating between strategic and non-strategic failures, we find a positive impact of prices on non-usable marginal generation capacity for strategic failures only. Our empirical analysis therefore provides evidence for the existence of strategic capacity withholding through failures suggesting further monitoring efforts by public authorities to effectively reduce the likelihood of such abuses of a dominant position.
    Keywords: Antitrust Policy,Market Power,Auctions,Electricity,Withholding
    JEL: L94 L12 L41 K21
    Date: 2016
  16. By: Su, Xuejuan (University of Alberta, Department of Economics)
    Abstract: Compared to traditional cost-of-service (COS) regulation, electricity retail competition may lead to lower costs but higher markups. Thus, the net effect on electricity retail prices is ambiguous. This paper uses a difference-in-difference approach to estimate the impact. The results suggest that in restructured states, only residental customers have benefited from significantly lower prices but not commercial or industrial customers. Furthermore, this benefit is transitory and disappears in the long run. Overall, retail compettion does not seem to deliver lower electricity prices to retail customers across the board or over time.
    Keywords: electricity; restructuring; retail competition; difference-in-difference
    JEL: D42 D43 K23 L52 Q48
    Date: 2012–10–01
  17. By: Stacey, Brian
    Abstract: Price discrimination enjoys a long history in the airline industry. Borenstein (1989) discusses price discrimination through frequent flyer programs from 1985 as related to the Piedmont-US Air merger, price discrimination strategies have grown in size and scope since then. From Saturday stay over requirements to varying costs based on time of purchase, the airline industry is uniquely situated to enjoy the fruits of price discrimination.
    Keywords: Price Discrimination, Oligopoly
    JEL: L13
    Date: 2015–05–06
  18. By: Christiaan Behrens (VU University Amsterdam); Mark Leijsen (VU University Amsterdam)
    Abstract: We develop a method to measure the intensity of competition between firms. Our method, which we call the Best Response Measure (BRM), is related to the conduct parameter method, but avoids the main problems associated with that method. The BRM relies on a very general framework and limited data requirements. Moreover, we show that it provides valuable information in determining the relevant market. We illustrate how the BRM can be used in markets with imperfect substitutes and apply the method to aviation markets in the North Sea area. This also enables us to establish to what extent the high speed rail link between London and the European mainland affects the supply by air carriers.
    Keywords: inter- and intramodal competition, aviation, spatial networks, high-speed rail
    JEL: D22 D43 L10 L93 R41
    Date: 2015–06–24
  19. By: De Loecker, Jan; Van Biesebroeck, Johannes
    Abstract: We propose a framework to evaluate the potential impact of international competition on firm performance and highlight two points. First, it is important to consider effects on productive efficiency and market power in an integrated framework. The popular concept of (revenue) TFP combines both effects which can lead to problems of estimation and interpretation. Second, greater international competition enlarges the relevant market and can affect both the number and the type of competitors a firm faces, as well as the nature of competition. While it is possible that firms respond by adjusting their production operations, pricing adjustments are all but guaranteed. We contrast three estimation approaches that start, respectively, from the demand side, the product extensive margin, and the production side. We conclude with a few avenues for future research.
    Keywords: competition; firm performance; trade liberalization
    JEL: F10 L1 O30
    Date: 2016–02

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