nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒03‒17
twelve papers chosen by
Russell Pittman
United States Department of Justice

  1. Toward a theory of monopolistic competition By Parenti, M.; Ushchev, P.; Thisse, J.-F.
  2. Evolutionary Competition between Adjustment Processes in Cournot Oligopoly: Instability and Complex Dynamics By Cars H. Hommes; Marius I. Ochea; Jan Tuinstra
  3. Switching Costs in Two-sided Markets By LAM, W.
  4. Not So Demanding: Demand Structure and Firm Behavior By Mrazova, Monika; Neary, J Peter
  5. Core Existence in Vertically Differentiated Markets By Jean J. Gabszewicz; Marco A. Marini; Ornella Tarola
  6. Competition and corporate control in partial ownership acquisitions By Stühmeier, Torben
  7. Pricing when customers have limited attention By Tamer Boyaci; Yalçin Akçay
  8. Monopoly price discrimination and privacy: the hidden cost of hiding By BELLEFLAMME, P.
  9. False Advertising By Rhodes, Andrew; Wilson, Chris
  10. Identifying Collusion in English Auctions By Kaplan, Uma; Marmer, Vadim; Shneyerov, Artyom
  11. Problemy dzielenia się wiedzą w poziomej współpracy badawczo-rozwojowej By Karbowski, Adam
  12. "Free Entry and Social Inefficiency in Vertical Relationships: The Case of the MRI Market" By Ken Onishi; Naoki Wakamori; Chiyo Hashimoto; Shun-ichiro Bessho

  1. By: Parenti, M. (Université catholique de Louvain, CORE, Belgium); Ushchev, P. (NRU-Higher School of Economics); Thisse, J.-F. (Université catholique de Louvain, CORE, Belgium)
    Abstract: We propose a general model of monopolistic competition with unspecified preferences. Our analysis applies to the case of symmetric/asymmetric preferences and costs. Our basic tool is the elasticity of substitution function, which is shown to depend on the actions taken by firms. We impose intuitive conditions on this function to guarantee the existence of a free-entry equilibrium. Comparative statics with respect to population size, GDP per capita and productivity shocks (the pass-through rate) is conducted by means of necessary and sufficient conditions in the case of symmetric firms.
    Keywords: monopolistic competition, general equilibrium, additive preferences, homothetic preferences
    JEL: D43 L11 L13
    Date: 2015–02–20
  2. By: Cars H. Hommes; Marius I. Ochea; Jan Tuinstra (Université de Cergy-Pontoise, THEMA)
    Abstract: We introduce evolutionary competition between adjustment processes in the Cournot oligopoly model. Our main focus is on rational play versus a general short-memory adaptive adjustment process. We nd that, although rational play has a stabilizing inuence, a su¢ cient increase in the number of rms in the market tends to make the Cournot-Nash equilibrium unstable. Moreover, the interaction between adjustment processes naturally leads to the emergence of complicated endogenous uctuations as the number of rms increases, even when demand and costs are linear.
    Keywords: Stability of Cournot-Nash equilibrium, n-player Cournot games, Evolutionary competition, Endogenous uctuations
    JEL: C72 C73 D43
    Date: 2016
  3. By: LAM, W. (University of Liege)
    Abstract: In many markets, there are switching costs and network effects. Yet the literature gen- erally deals with these two concepts separately. This paper bridges the gap by analyzing their interaction effects (or “indirect bargain”) in a dynamic two-sided market. I show that in a symmetric equilibrium, the classic result that the first-period price is U-shape in switching costs does not emerge, but instead switching costs always intensify first-period price competition. Moreover, an increase in switching costs on one side decreases the first- period price on the other side. Thus policies that ignore these effects may underestimate the welfare-enhancing effects of switching costs.
    Keywords: switching costs, two-sided markets, network externality, myopia, loyalty
    JEL: D43 L13 L96
    Date: 2015–03–01
  4. By: Mrazova, Monika; Neary, J Peter
    Abstract: We show that any well-behaved demand function can be represented by its demand manifold, a smooth curve which relates the elasticity and convexity of demand. This manifold is a sufficient statistic for many comparative statics questions; leads naturally to characterizations of new families of demand functions which nest most of those used in applied economics; and connects assumptions about demand structure with firm behavior and economic performance. In particular, we show that the demand manifold leads to new insights about industry adjustment with heterogeneous firms, and provides a quantitative framework for measuring the effects of globalization.
    Keywords: Heterogeneous Firms; Pass-Through; Quantifying Responses to Trade Liberalization; Super- and Sub-Convexity; Supermodularity
    JEL: F12 F15 F23
    Date: 2016–02
  5. By: Jean J. Gabszewicz (CORE, Universite' Catholique de Louvain, Belgium); Marco A. Marini (Department of Computer, Control and Management Engineering Antonio Ruberti (DIAG), University of Rome La Sapienza, Rome, Italy); Ornella Tarola (University of Rome La Sapienza, Rome, Italy)
    Abstract: We prove that a sufficient condition for the core existence in a n-firm vertically differentiated market is that the qualities of Â…firmsÂ’ products are equally-spaced along the quality spectrum. This result contributes to see that a fully collusive agreement among firms in such markets is more easily reachable when product qualities are not distributed too asymmetrically along the quality ladder.
    Keywords: Vertically Differentiated Markets ; Price Collusion ; Grand Coalition ; Coalition Stability ; Core
    Date: 2016
  6. By: Stühmeier, Torben
    Abstract: Competition authorities have a growing interest in assessing the effects of partial ownership arrangements. We show that the effects of such agreements on competition and welfare depend on the intensity of competition in the market and on the firms' governance structure. When assessing the effects of partial ownership, competition policy has to consider both the financial interest and level of control of the acquiring firm in the target firm.
    Keywords: corporate control,merger,partial acquisition
    JEL: L11 L13 L41
    Date: 2016
  7. By: Tamer Boyaci (ESMT European School of Management and Technology); Yalçin Akçay (College of Administrative Sciences and Economics, Koç University)
    Abstract: We study the optimal pricing problem of a firm facing customers with limited attention and capability to process information about the value (quality) of the offered products. We model customer choice based on the theory of rational inattention in the economics literature, which enables us to capture not only the impact of true qualities and prices, but also the intricate effects of customer’s prior beliefs and cost of information acquisition and processing. We formulate the firm’s price optimization problem and characterize the pricing and revenue implications of customer’s limited attention. We test the robustness of our results under various modelling generalizations such as prices signaling quality and customer heterogeneity, and study extensions such as multiple products, competition, and joint inventory and pricing decisions. We also show that using alternative pricing policies that ignore the limited attention of customers or their ability to allocate this attention judiciously can potentially lead to significant profit losses for the firm. We discuss the managerial implications of our key findings and prescribe insights regarding information provision and product positioning.
    Keywords: Pricing, choice behavior, rational inattention, information acquisition, signaling game
    Date: 2016–03–02
  8. By: BELLEFLAMME, P. (Université catholique de Louvain, CORE, Belgium)
    Abstract: A monopolist can use a ‘tracking’ technology that allows it to identify a consumer's willingness to pay with some probability. Consumers can counteract tracking by acquiring a ‘hiding’ technology. We show in this note that consumers are collectively better off when this hiding technology is not available, even when consumers can acquire it free of charge.
    Keywords: price discrimination, privacy, monopoly
    JEL: D11 D18 L12 L86
    Date: 2015–10–15
  9. By: Rhodes, Andrew; Wilson, Chris
    Abstract: There is widespread evidence that some firms use false advertising to overstate the value of their products. Using a model in which a policymaker is able to punish such false claims, we characterize a natural equilibrium in which false advertising actively influences rational buyers. We analyze the effects of policy under different welfare objectives and establish a set of demand and parameter conditions where policy optimally permits a positive level of false advertising. Further analysis considers some wider issues including the implications for product investment and industry self-regulation.
    Keywords: Misleading Advertising,Pass-through,Product Quality
    JEL: M37 L15 D83
    Date: 2016–02–22
  10. By: Kaplan, Uma; Marmer, Vadim; Shneyerov, Artyom
    Abstract: We develop a fully nonparametric identification framework and a test of collusion in ascending bid auctions. Assuming efficient collusion, we show that the underlying distributions of values can be identified despite collusive behaviour when there is at least one bidder outside the cartel. We propose a nonparametric estimation procedure for the distributions of values and a bootstrap test of the null hypothesis of competitive behaviour against the alternative of collusion. Our framework allows for asymmetric bidders, and the test can be performed on individual bidders. The test is applied to the Guaranteed Investment Certificate auctions conducted by US municipalities over the Internet. Despite the fact that there have been allegations of collusion in this market, our test does not detect deviations from competition. A plausible explanation of this finding is that the Internet auction design involves very limited information disclosure.
    Keywords: English auctions, identification, collusion, nonparametric estimation
    JEL: C14
    Date: 2016–02–26
  11. By: Karbowski, Adam
    Abstract: Intensive development of inter-firm R&D cooperation since the mid 1980s led to the crystallization of various forms of inter-firm R&D cooperation. Particularly important from the market structure perspective and the pace of innovation introduction to the marketplace is horizontal R&D cooperation, i.e. the R&D cooperation of competitors. Horizontal R&D cooperation is however hampered by the existence of the conflict of incentives to share technical knowledge with market rivals. In the literature one may find formal and legally-based solutions to the problem of incentives, i.e. know-how contracting, know-how licensing and debt financing of R&D projects. In the following paper the new solution to the sketched out problem of incentives is suggested. The cooperating firms can alleviate the problem through the choice of fixed cost of setting up the collaboration. The fixed cost constitutes the important strategic measure that can be used by managers to stabilize the horizontal R&D cooperation.
    Keywords: inter-firm cooperation, research and development, knowledge sharing
    JEL: O32
    Date: 2015
  12. By: Ken Onishi (School of Economics, Singapore Management University); Naoki Wakamori (Faculty of Economics, The University of Tokyo); Chiyo Hashimoto (Japan Medical Association); Shun-ichiro Bessho (Faculty of Economics, Keio University)
    Abstract: This paper quantifies the social inefficiency that arises from the medical arms race in the context of MRI adoption. We construct a novel dataset that contains a complete list of medical institutions and includes their characteristics, MRI ownership and utilization information, and data on patient co-payments and medical institution reimbursements. Using the data, the paper builds and estimates a vertical industry model where MRI manufacturers sell MRIs and hospitals purchase MRIs ("free entry") in the upstream market, and hospitals provide medical services to patients in the downstream market. The estimated model allows us to evaluate potential policy interventions. Simulation results suggest that the current "laissez-faire" policy in Japan leads to excess MRI adoption, resulting in lower social welfare compared the regulation style used in France. Furthermore, softening competition in the upstream market via collusive agreement or mergers among upstream firms would increase social welfare substantially by reducing excess MRI adoption and mitigating the business-stealing effect in the downstream market. These findings shed light on the mechanism behind the social inefficiency of medical arms races and offer new insight into antitrust policies in industries with vertical structure.

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