nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒04‒04
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Vertical Differentiation and Collusion: Cannibalization or Proliferation? By Jean J. Gabszewicz; Marco A. Marini; Ornella Tarola
  2. The Optimal Trading Partner for an Upstream Monopolist By Yamada, Mai
  3. Ownership Concentration and Strategic Supply Reduction By Doraszelski, Ulrich; Seim, Katja; Sinkinson, Michael; Wang, Peichun
  4. Competitive Search with Ex-post Opportunism By Pere Gomis-Porqueras; Benoit Julien; Liang Wang
  5. Profit-maximizing Wages under Duopoly By Hattori, Keisuke
  6. On Competing Mechanisms under Exclusive Competition By Andrea Attar; Eloisa Campioni; Gwenaël Piaser
  7. Strategy Revision Opportunities and Collusion By Matthew Embrey; Friederike Mengel; Ronald Peeters
  8. Cooperation in Indefinitely Repeated Games of Strategic Complements and Substitutes By Ayse Gül Mermer; Wieland Müller; Sigrid Suetens
  9. A Patent Race of Heterogeneous Firms and Its Application By Tetsugen Haruyama
  10. How can imitation counterbalance innovation? An ABM Bass model for competing products By Philippe Collard; Wilfried Segretier
  11. The Localization of Interfirm Transaction Relationships and Industry Agglomeration By Nakajima, Kentaro; Saito, Yukiko Umeno; Uesugi, Iichiro
  12. Monopoly VS Competition: Market Structure’s Impact on Product Innovation-with Endogenous Quality of New Product By Yang, Jinrui
  13. Descending Price Coordinates Approximately Efficient Search By Robert Kleinberg; Bo Waggoner; E. Glen Weyl
  14. Time-period and industry heterogeneity of innovation activity in Japan By Yagi, Michiyuki; Managi, Shunsuke
  15. Patent Settlements in the Pharmaceutical Industry: What Can We Learn From Economic Analysis? By Severin Frank; Wolfgang Kerber
  16. Competitive Price Targeting with Smartphone Coupons By Jean-Pierre H. Dubé; Zheng Fang; Nathan Fong; Xueming Luo
  17. The Price Effects of Cross-Market Hospital Mergers By Leemore Dafny; Kate Ho; Robin S. Lee
  18. Assessing Competition in the Bulgarian Insurance Industry: A Panzar-Rosse Approach By Aleksandar B. Todorov
  19. Stock exchange integration and price jump risks - The case of the OMX Nordic exchange mergers By Liu, Yuna
  20. Attention and Saliency on the Internet: Evidence from an Online Recommendation System By Christian Helmers; Pramila Krishnan; Manasa Patnam;

  1. By: Jean J. Gabszewicz (CORE, Université Catholique de Louvain); Marco A. Marini (Università La Sapienza, Roma); Ornella Tarola (Università La Sapienza, Roma)
    Abstract: In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multiproduct firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market. The same findings do not hold when firms are horizontally differentiated along a circle.
    Keywords: Vertically Differentiated Markets, Cannibalization, Market Pruning, Price Collusion
    JEL: D42 D43 L1 L12 L13 L41
    Date: 2016–03
  2. By: Yamada, Mai
    Abstract: We examine an optimal trading partner for an upstream monopolist, an input supplier, in a situation in which the intensity of market competition depends on trading partner choice. The upstream monopolist supplies the input to either the incumbent or the entrant. We assume only incumbent has the outside option which it can make the input by itself and then produces the final product. On the other hand, the entrant does not have the outside option. If the upstream firm chooses the incumbent as its trading partner, it can have a bilateral monopoly relationship with the incumbent. If the upstream firm chooses the entrant as its trading partner, it faces downstream competition. We show trading with the entrant can yield greater profits for the upstream monopolist than trading with the incumbent. Thus, the upstream monopolist has incentives to encourage downstream competition through its trading partner choice. Our paper suggests that the existence of the incumbent's outside option encourages new entry into the downstream market.
    Keywords: Upstream monopolist; Trading partner choice; Bargaining game; Profits; Outside Option
    JEL: C78 L13
    Date: 2016–03–01
  3. By: Doraszelski, Ulrich; Seim, Katja; Sinkinson, Michael; Wang, Peichun
    Abstract: We explore ownership concentration as a means to seek rents in the context of the U.S. government's planned acquisition of broadcast TV licenses in the upcoming incentive auction. We document the significant purchases of licenses by private equity firms in the run-up to this auction and perform a prospective analysis of the effect of firms controlling multiple licenses on the outcome of the auction. Our results show that multi-license holders are able to earn large rents from a supply reduction strategy where they strategically withhold some of their licenses from the auction to drive up the closing price for the remaining licenses they own. Relative to the case where each license is bid into the auction independently, spectrum acquisition costs increase by one third to one half. Strategic behavior by multi-license holders reduces economic efficiency as the set of licenses surrendered into the auction is not the socially optimal set. A case study illustrates the mechanism in a specific local media market. We propose a partial remedy that mitigates the effect of ownership concentration and reduces the distortion in payouts to broadcast TV license holders by one to two thirds.
    Date: 2016–03
  4. By: Pere Gomis-Porqueras (Deakin University); Benoit Julien (University of New South Wales); Liang Wang (University of Hawaii Manoa)
    Abstract: We consider a frictional market where buyers are uncoordinated and sellers can not commit to a per-unit price and quantity of a divisible good ex-ante. By doing so sellers can exploit their local monopoly power by adjusting prices or quantities depending on the case once the local demand is realized. We find that when sellers can adjust quantities ex-post, then there exists a unique symmetric equilibrium where the increase in the buyer-seller ratio leads to higher quantities and prices in equilibrium. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium does not exist.
    Keywords: Competitive Search; Price Posting; Quantity Posting
    JEL: D40 L10
    Date: 2016–03
  5. By: Hattori, Keisuke
    Abstract: Using a simple duopoly model with endogenous order of moves, this study provides a potential explanation for why firms might pay their employees a higher wage than rival firms or the market-clearing rate: Setting a higher wage can serve as a commitment to obtain the preferred order of moves in subsequent price competition. This holds even if the wage increase does not enhance worker productivity or efficiency. Simultaneous wage setting admits no pure strategy Nash equilibrium, as their best responses form a cycle wherein firms repeatedly overbid in wages to preempt the preferred position in price competition. Sequential wage setting leads to wage dispersion even among homogeneous workers and firms: the wage-setting leader offers a high wage such that the rival firm would not want to overbid in equilibrium. In contrast, in quantity competition, duopolists have no such incentives because, ceteris paribus, a firm that pays a wage higher than the competitor will be unsuccessful in obtaining first-mover advantages in subsequent quantity competition.
    Keywords: Endogenous timing; Price leadership; Wage setting; Heterogeneous duopoly; Wage commitment.
    JEL: C72 D43 J31 L13
    Date: 2016–03–25
  6. By: Andrea Attar; Eloisa Campioni; Gwenaël Piaser
    Abstract: We study games in which several principals design incentive schemes in the presence of privately informed agents. Competition is exclusive: each agent can participate with at most one principal, and principal-agents corporations are isolated. We analyze the role of standard incentive compatible mechanisms in these contexts. First, we provide a clarifying example showing how incentive compatible mechanisms fail to completely characterize equilibrium outcomes even if we restrict to pure strategy equilibria. Second, we show that truth-telling equilibria are robust against unilateral deviations toward arbitrary mechanisms. We then consider the single agent case and exhibit sufficient conditions for the validity of the revelation principle.
    Keywords: Competing Mechanisms, Exclusive Competition, Incomplete Information.
    JEL: D82
    Date: 2016–03–17
  7. By: Matthew Embrey (University of Sussex); Friederike Mengel (University of Essex and Maastricht University); Ronald Peeters (Maastricht University)
    Abstract: This paper studies whether and how strategy revision opportunities affect levels of collusion in indefinitely repeated two-player games. Consistent with standard theory, we find that such opportunities do not affect strategy choices, or collusion levels, if the game is of strategic substitutes. In contrast, there is a strong and positive effect for games of strategic complements. Revision opportunities lead to more collusion. The latter cannot be explained by renegotiation or standard risk-dominance considerations, but is consistent with a notion of fear of miscoordination based on minmax regret.
    Keywords: strategy revision opportunities, cooperation, repeated games, complements vs. substitutes, fear of miscoordination
    JEL: C73 C92 D43
    Date: 2016–02
  8. By: Ayse Gül Mermer; Wieland Müller; Sigrid Suetens
    Abstract: This paper studies the effects of transparency on information transmission and decision-making theoretically and experimentally. We develop a model in which a de- cision maker seeks the advice of a better-informed adviser. Before giving advice, the adviser may choose to accept a side payment from a third party, where accepting this payment binds the advisor to give a particular recommendation, which may or may not be dishonest. Without transparency, the decision maker learns only the recom- mendation of the adviser. With transparency, the decision maker learns in addition the decision of the adviser with respect to the side payment. Prior research has shown that transparency is either ine¤ective or harmful to decisionmakers? because con?icted advisers become more dishonest in their advice. The novelty of our model is that the conflict of interest is endogeneous as the adviser can choose to decline the third-party payment. Our theoretical results predict that transparency is never harmful and may help decision makers. Our experimental results show that transparency improves the accuracy of decision making. However, we also observe that (i) while transparency clearly improves decision making when it is mandatory, the evidence in favor of a voluntary form of transparency is much weaker, and that (ii) the positive e¤ects of transparency decline over time.
    JEL: L13 C72 C92
    Date: 2016–03
  9. By: Tetsugen Haruyama (Graduate School of Economics, Kobe University)
    Date: 2016–03
  10. By: Philippe Collard (I3S - Laboratoire d'Informatique, Signaux, et Systèmes de Sophia Antipolis - UNS - Université Nice Sophia Antipolis - CNRS - Centre National de la Recherche Scientifique); Wilfried Segretier (IDC - LAMIA - Laboratoire de Mathématiques Informatique et Applications - UAG - Université des Antilles et de la Guyane)
    Abstract: The general context of this paper is the Bass model which presented a theory of the adoption of new products. We propose an agent based modelling to allow to model the respective grow of competing products. We assume that there is competition for the same market among two trademarks: each one has its own rate of spontaneous innovation and its own rate of imitation. This paper deals with the relative weight of these competing behaviors on the global dynamics; in particular, we ask the question of the equivalence between mass media influence and word-of-mouth effect.
    Keywords: Agent based modelling, Bass model, Marketing, Competing products
    Date: 2014–05–28
  11. By: Nakajima, Kentaro; Saito, Yukiko Umeno; Uesugi, Iichiro
    Abstract: Using a unique and massive dataset on firms' suppliers and customers, we examine the localization of transaction relationships to find the following. First, based on a counterfactual that controls for the location of firms and their potential partners, transaction relationships in about 90 to 95% of the three-digit manufacturing industries are localized within 40km. Second, based on a counterfactual that controls for the average distance of transaction relationships in the entire manufacturing sector, in about 40% of industries transaction relationships are localized. Third, the extent of industry agglomeration and the extent of the localization of transaction relationships are positively correlated.
    Keywords: Interfirm transactions, agglomeration, transaction distance
    JEL: R11
    Date: 2016–03
  12. By: Yang, Jinrui
    Abstract: This paper focuses on innovation for new product with exogenously determined horizontal difference from initial product which is provided either by a monopolist or by competitive firms. The innovator, no matter initially under monopoly or competition, will be unique producer of new product and need decide quality of new product which is correlated with investment for innovation. The paper through a model shows that for horizontally similar new product, competition is superior to monopoly to innovate. However, for typical horizontally differentiated product, a monopolist would choose higher quality and invest more than a competitive innovator does if innovation is complex, but brings about lower endogenous quality than the innovator initially under competition does if innovation is easy. Monopoly can support sales of new product with higher price of initial product, but also hamper product innovation to avoid erosion of initial profit. If it is presumed that complexity of innovation is always huge at the beginning, monopoly is more likely to generate innovation for horizontally different product while competition for similar product, respectively compared to each other.
    Keywords: product innovation; horizontal difference; monopoly; competition; complexity of innovation
    JEL: D8 L1 O3 O31
    Date: 2016–03–17
  13. By: Robert Kleinberg; Bo Waggoner; E. Glen Weyl
    Abstract: When exploring acquisition targets, firms typically begin with the possibilities offering greatest option value and work their way down, as prescribed by optimal search theory. Yet the market designs economists have often prescribed, involving simultaneous or ascending prices, stymie this process. As a result they may be arbitrarily inefficient when one accounts for the costs bidders must invest to learn their value for acquiring different items. We present a model that incorporates such costs, and a simple descending price procedure that we prove robustly approximates the fully optimal sequential search process quite generally. Our results exploit a novel characterization of Weitzman's "Pandora's Box" problem in terms of option pricing theory that connects seamlessly with recent techniques from algorithmic mechanism design.
    Date: 2016–03
  14. By: Yagi, Michiyuki; Managi, Shunsuke
    Abstract: This study examines time-period and industry heterogeneity of innovation activity in Japan from 1964 to 2006 using patent data and non-consolidated firm data. This study focuses on the following three periods, based on changes of the Japanese patent system, in and non-manufacturing industries: I) before 1976; II) 1976–1987; and III) after 1988. Specifically, for each degree of patent protection in each industry, this study examines how innovation activities are affected by the following determinants found in the innovation literature: size, market competition, and search variety (depth and scope). Empirical results show that when using the entire sample from 1964 to 2006, the size effect on innovation is significantly positive. In addition, the effects of market competition and search variety on innovation are inverse-U. When considering time-period heterogeneity, the effects of size and search variety are similar to the entire period; however, the inverse-U effect of market competition is broken after 1988. On the other hand, when considering industry heterogeneity, the effects of size and search variety are similar to the entire sample, but differ between manufacturing and non-manufacturing industries. In addition, the effect of market competition is not statistically significant in either industry.
    Keywords: Patent; Inverse-U relationship; Competition; Search for variety
    JEL: L10 L40 O31
    Date: 2016
  15. By: Severin Frank (University of Marburg); Wolfgang Kerber (University of Marburg)
    Abstract: Patent settlements between originator and generic firms in the pharmaceutical industry have been challenged by antitrust and competition authorities in the U.S. and the EU. Particularly settlements with large "reverse payments" to generic firms raise the concern of collusive behaviour for protecting weak patents and delaying price competition through generic entry and therefore harming consumers. However, it is still heavily disputed under what conditions such patent settlements are anticompetitive and violate antitrust rules. This article scrutinizes critically what economic analysis has so far contributed to our knowledge about the effects of these patent settlements and the possible rules for their antitrust treatment. An important claim of this paper is that the problem of patent settlements can only be understood, if we analyze it not only from a narrow antitrust perspective but also take into account its deep interrelationship with the problems (and the economics) of the patent system. Therefore we identify three different channels of effects, how patent settlements can influence consumer welfare: (1) price effects, (2) innovation incentive effects, and (3) effects via the incentives to challenge weak patents. The paper critically analyzes the existing economic studies and identifies a number of research gaps, especially also in regard to trade offs between different effects. It also suggests that policy solutions for these patent settlements should also be sought in combination with patent law solutions.
    Keywords: Patent settlements, probabilistic patents, weak patents, pharmaceutical industry, generic competition
    JEL: K40 L40 O34
    Date: 2016
  16. By: Jean-Pierre H. Dubé; Zheng Fang; Nathan Fong; Xueming Luo
    Abstract: We conduct a large-scale field experiment to study competitive price discrimination in a duopoly market with two rival movie theaters. The firms use mobile targeting to offer different prices based on location and past consumer activity. A novel feature of our experiment is that we test a range of relative ticket prices from both firms to trace out their respective best-response functions and to assess equilibrium outcomes. We use our experimentally-generated data to estimate a demand model that can be used to predict the consumer choices and corresponding firm best-responses at price levels not included in the test. We find an empirically large return on investment when a single firm unilaterally targets its prices based on the geographic location or historical visit behavior of a mobile customer. However, these returns can be mitigated by competitive interactions whereby both firms simultaneously engage in targeting. In practice, firms typically test only their own prices and do not consider the competitive response of a rival. In our study of movie theaters, competition enhances the returns to behavioral targeting but reduces the returns to geo-targeting. Under geographic targeting, each theater offers a discount in the other rival's local market, toughening price competition. In contrast, under behavioral targeting, the strategic complementarity of prices coupled with the symmetric incentives of the two theaters to raise prices charged to high-recency customers softens price competition. Thus, managers need to consider how competition moderates the profitability of price targeting. Moreover, field experiments that hold the competitor's actions fixed may generate misleading conclusions if the permanent implementation of a tested action would likely elicit a competitive response.
    JEL: L1 L11 L13 M31
    Date: 2016–03
  17. By: Leemore Dafny; Kate Ho; Robin S. Lee
    Abstract: So-called "horizontal mergers" of hospitals in the same geographic market have garnered significant attention from researchers and regulators alike. However, much of the recent hospital industry consolidation spans multiple markets serving distinct patient populations. We show that such combinations can reduce competition among the merging providers for inclusion in insurers' networks of providers, leading to higher prices. The result derives from the presence of "common customers” (i.e. purchasers of insurance plans) who value both providers, as well as (one or more) "common insurers" with which price and network status is negotiated. We test our theoretical predictions using two samples of cross-market hospital mergers, focusing exclusively on hospitals that are bystanders rather than the likely drivers of the transactions in order to address concerns about the endogeneity of merger activity. We find that hospitals gaining system members in-state (but not in the same geographic market) experience price increases of 6-10 percent relative to control hospitals, while hospitals gaining system members out-of-state exhibit no statistically significant changes in price. The former group are likelier to share common customers and insurers. This effect remains sizeable even when the merging parties are located further than 90 minutes apart. The results suggest that cross-market, within-state hospital mergers appear to increase hospital systems' leverage when bargaining with insurers.
    JEL: I11 L10
    Date: 2016–03
  18. By: Aleksandar B. Todorov (Department of Economics, University of Economics - Varna)
    Abstract: The study assesses the competitive behavior in the Bulgarian general insurance industry by applying an empirical methodology developed by Panzar & Rosse (1987). Based on company data from insurers' balance sheets and profit and loss accounts for the period between 2005 and 2014 a reduced-form revenue equation is estimated. The information about the insurers' competitive behavior is provided by the sum of the estimated factor price elasticities, which constitute the so called H-statistic. The fixed effects panel estimation suggests that the hypotheses of monopoly or collusive behavior cannot be rejected. These findings suggest that the Bulgarian insurance market is far from being perfectly competitive and may require further actions to promote its competitive development.
    Keywords: Market Structure, General Insurance, Panzar-Rosse Model
    JEL: G22 L13 L41
    Date: 2016–03
  19. By: Liu, Yuna (Department of Economics, Umeå University)
    Abstract: The impact of the stock market mergers that took place in the Nordic countries during 2000 – 2007 on the probabilities for stock price jumps, i.e. for relatively extreme price movements, are studied. The main finding is that stock market mergers, on average, reduce the likelihood of observing stock price jumps. The effects are asymmetric in the sense that the probability of sudden price jumps is reduced for large and medium size firms whereas the effect is ambiguous for small size firms. The results also indicate that the market risk has been reduced after the stock market consolidations took place.
    Keywords: Tests for jumps; International financial markets; Market structure; Integration; Common trading platform; Mergers; Acquisitions
    JEL: C22 C51 C58 G15 G34 L10
    Date: 2016–03–16
  20. By: Christian Helmers; Pramila Krishnan; Manasa Patnam;
    Abstract: Using high-frequency transaction-level data from an online retail store, we examine whether consumer choices on the internet are consistent with models of limited attention. We test whether consumers are more likely to buy products that receive a saliency shock when they are recommended by new products. To identify the saliency effect, we rely on i) the timing of new product arrivals, ii) the fact that new products are per se highly salient upon arrival, drawing more attention and iii) regional variation in the composition of recommendation sets. We find a sharp and robust 6% increase in theaggregate sales of existing products after they are recommended by a new product. To structurally disentangle the effect of saliency on a consumer’s consideration and choice decision, we use data on individual transactions to estimate a probabilistic choice set model. We find that the saliency effectis driven largely by an expansion of consumers’ consideration sets.
    Keywords: Limited attention, advertising, online markets.
    JEL: D22 M30 K11 O34
    Date: 2015–11–10

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