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on Industrial Competition |
| By: | Lester, Benjamin (Federal Reserve Bank of Philadelphia); Shourideh, Ali (The Wharton School of the University of Pennsylvania); Venkateswaran, Venky (NYU–Stern School of Business); Zetlin-Jones, Ariel (Carnegi Mellon University) |
| Abstract: | We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. On the positive side, we show how the structure of equilibrium contracts—and, hence, the relationship between an agent’s type, the quantity he trades, and the corresponding price—is jointly determined by the severity of adverse selection and the concentration of market power. This suggests that quantifying the effects of adverse selection requires controlling for the market structure. On the normative side, we show that increasing competition and reducing informational asymmetries can be detrimental to welfare. This suggests that recent attempts to increase competition and reduce opacity in markets that suffer from adverse selection could potentially have negative, unforeseen consequences |
| Keywords: | Adverse selection; Imperfect competition; Screening; Transparency; Search theory |
| JEL: | D41 D42 D43 D82 D83 D86 L13 |
| Date: | 2016–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-10&r=com |
| By: | Marc Möller (University of Bern, Switzerland); Makoto Watanabe (Faculty of Economics and Business Administration, VU University Amsterdam, the Netherlands) |
| Abstract: | When products are sold in advance, i.e. prior to consumption, consumers trade off an early, uninformed purchase at a low price against a late, informed purchase at a high price. This paper considers the effect of market structure on the prevalence of advance selling. We show that in an oligopolistic market with multi-product firms, advance selling (with its associated allocative inefficiency) is decreasing in market concentration when the consumers’ preference uncertainty is high but can be increasing when uncertainty is low. |
| Keywords: | Competition; Price Discrimination; Individual Demand Uncertainty; Advance Purchase Discounts |
| JEL: | D43 D80 L13 |
| Date: | 2016–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160020&r=com |
| By: | Johan N. M. Lagerlöf (Department of Economics, University of Copenhagen) |
| Abstract: | This paper proposes an n-firm homogeneous-good Bertrand model with private information about costs. The model allows for any non-negative correlation between the cost draws and for any demand elasticity but still yields a closed-form solution. The solution is simple, in pure strategies, and involves price dispersion. For some parameter values, a weak version of the winner’s curse arises. This framework is used to study the question whether cost uncertainty softens competition. Earlier literature has shown that the answer (perhaps counter-intuitively) is “no,” while assuming (i) independent cost draws and (ii) no drastic innovations. The analysis here shows that relaxing (ii) but not (i) does not alter that result. However, when the cost draws are sufficiently highly correlated and the price elasticity of demand is sufficiently low, cost uncertainty indeed softens competition. |
| Keywords: | Bertrand competition, Hansen-Spulber model, private information, information sharing, common values, private values, winner’s curse |
| JEL: | D43 D44 L13 |
| Date: | 2016–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1602&r=com |
| By: | Syngjoo Choi; Andrea Galeotti; Sanjeev Goyal; |
| Abstract: | We propose a model of posted prices in networks. The model maps traditional concepts of market power, competition and double marginalization into networks, allowing for the study of pricing in complex structures of intermediation such as supply chains, transportation and communication networks and financial brokerage. We provide a complete characterization of equilibrium prices. Our experiments complement our theoretical work and point to node criticality as an organizing principle for understanding pricing, efficiency and the division of surplus in networked markets. |
| Keywords: | Intermediation, competition, market power, double marginalization. |
| JEL: | C70 C71 C91 C92 D40 |
| Date: | 2014–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1457&r=com |
| By: | Ariel Pakes |
| Abstract: | I review a subset of the empirical tools available for competition analysis. The tools discussed are those needed for the empirical analysis of; demand, production efficiency, product repositioning, and the evolution of market structure. Where relevant I start with a brief review of tools developed in the 1990’s that have recently been incorporated into the analysis of actual policy. The focus is on providing an overview of new developments; both those that are easy to implement, and those that are not quite at that stage yet show promise. |
| JEL: | L1 L4 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22086&r=com |
| By: | Bronwyn H. Hall (Institute for Fiscal Studies); Christian Helmers (Institute for Fiscal Studies and Santa Clara University); Georg von Graevenitz (Institute for Fiscal Studies and Queen Mary University of London) |
| Abstract: | We analyze the effect of patent thickets on entry into technology areas by firms in the UK. We present a model that describes incentives to enter technology areas characterized by varying technological opportunity, complexity of technology, and the potential for hold-up in patent thickets. We show empirically that our measure of patent thickets is associated with a reduction of first time patenting in a given technology area controlling for the level of technological complexity and opportunity. Technological areas characterized by more technological complexity and opportunity, in contrast, see more entry. Our evidence indicates that patent thickets raise entry costs, which leads to less entry into technologies regardless of a firm’s size. |
| Keywords: | IPR, patents, entry, technological opportunity, technological complexity, hold-up |
| JEL: | O34 O31 L20 K11 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:16/02&r=com |
| By: | Davide Luzzini (Audencia Recherche - Audencia); Markus Amann (Bundeswehr University Munich); Federico Caniato (Politecnico di Milano [Milan]); Michael Essig (Bundeswehr University Munich); Stefano Ronchi (Politecnico di Milano [Milan]) |
| Abstract: | This paper aims to investigate the effects of supplier collaboration on the firm innovation performance as well as the enabling characteristics of the purchasing function. This is an original contribution as few papers empirically test the effect of supplier collaboration (meant as supplier involvement, development, and integration) on innovation performance and –simultaneously – the contribution of strategic sourcing activities and purchasing knowledge. Also, we explore the technological uncertainty of the purchase as an important contingent factor that might influence the firm’s innovation strategy and the emphasis on supplier collaboration or strategic sourcing. Towards this end, we develop a theoretical framework and test it through a survey conducted on a sample of 498 companies worldwide. Results show that innovation, as a category priority, does lead to emphasize supplier collaboration and strategic sourcing which, in turn, ensure better innovation performance. Empirical evidence also shows that, on the one hand, adequate purchasing (managers) knowledge enables greater supplier collaboration and strategic sourcing; on the other hand, technological uncertainty put greater emphasis on innovation strategy as well as on strategic sourcing. |
| Keywords: | Innovation, Supplier collaboration, Strategic sourcing, Purchasing knowledge, Technological uncertainty |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01289738&r=com |
| By: | Anne Marie Knott; Carl Vieregger |
| Abstract: | Since Schumpeter, there has been a long-standing debate regarding the optimal firm size for innovation. Empirical results have settled into a puzzle: R&D spending increasing with scale while R&D productivity decreases with scale. Thus large firms appear irrational. We propose the puzzle stems from the fact that product and patent counts undercount large firm innovation. To test that proposition we use recently available NSF BRDIS survey data of firms R&D practices as well as a broader measure of R&D productivity. Using the broader measure, we find that both R&D spending and R&D productivity increase with scale—thus resolving the puzzle. We further find that while large firms and small firms differ in the types of R&D they conduct, there is no type whose returns decrease in scale—there are merely types for which the small firm penalty is less severe. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:16-20&r=com |
| By: | Pedro Bento (Texas A&M University, Department of Economics) |
| Abstract: | I look at manufacturing firms across countries and over time, and find that barriers to competition actually increase the number of firms. This finding contradicts a central feature of all current models of endogenous markups and free entry, that higher barriers should reduce competition and firm entry, thereby increasing markups. To rationalize this finding, I extend a standard model in two ways. First, I allow for multi-product firms. Second, I model barriers as increasing the cost of entering a product market, rather than the cost of forming a firm. Higher barriers to competition reduce the number of products per firm and per market, but increase markups and the total number of firms. Calibrating the model to U.S. data, I estimate cross-country differences in consumption as large as 65 percent from observed differences in barriers to competition. In addition, increasing barriers generates either a negative or inverted-U relationship between firm-level innovation and markups. While higher markups encourage product-level innovation through the usual Schumpeterian mechanism, firm-level innovation (at least eventually) drops as firms reduce their number of products. I provide new evidence supporting these two novel implications of the model - that product-level innovation increases with barriers to competition, while the number of products per firm decreases. |
| Keywords: | product market regulation, entry costs, firm size, productivity, innovation, markups, competition, multi-product firms, innovation, inverted-U |
| JEL: | L1 L5 O1 O3 O4 |
| Date: | 2016–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:txm:wpaper:20160323-001&r=com |
| By: | Amiti, Mary; Itskhoki, Oleg; Konings, Jozef |
| Abstract: | How strong are strategic complementarities in price setting across firms? In this paper, we provide a direct empirical estimate of firm price responses to changes in prices of their competitors. We develop a general framework and an empirical identification strategy to estimate the elasticities of a firm’s price response to both its own cost shocks and to the price changes of its competitors. Our approach takes advantage of a new micro-level dataset for the Belgian manufacturing sector, which contains detailed information on firm domestic prices, marginal costs, and competitor prices. The rare features of these data enable us to construct instrumental variables to address the simultaneity of price setting by competing firms. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 35% in response to the price changes of its competitors and with an elasticity of 65% in response to its own cost shocks. Furthermore, we find substantial heterogeneity in these elasticities across firms, with small firms showing no strategic complementarities and a complete cost pass-through, while large firms responding to their cost shocks and competitor price changes with roughly equal elasticities of around 50%. We show, using a tightly calibrated quantitative model, that these findings have important implications for shaping the response of domestic prices to international shocks. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11182&r=com |
| By: | Arnildo da Silva Correa; Myrian Beatriz S. Petrassi; Rafael Santos |
| Abstract: | Price surveys became popular after the seminal work of Blinder (1991) exploring the price-setting practices of the US firms, which filled some blanks left by the simple observation of prices charged by firms. The present paper reports the findings of a survey conducted by the Central Bank of Brazil with local firms. The sample covered 7,002 firms, the entire country and 3 economic sectors: manufacturing, services and commerce. The collected answers suggest important features about price-setting behavior in Brazil, such as: (i) the cost of reviewing price are low, but there is important nominal rigidity – firms report that change prices 3.6 times per year –, (ii) state-dependent rules seem to be more frequent than time-dependent behavior, (iii) markup pricing appears to be the dominant strategy, and (iv) the two most important factors driving price changes are the cost of intermediate goods and the inflation rate. A complete description of the results is found throughout the paper and summarized in the final section. The paper also discusses some policy implications from the results |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:422&r=com |
| By: | Harrington, Joseph E.; Hüschelrath, Kai; Laitenberger, Ulrich |
| Abstract: | A challenge for many cartels is avoiding a destabilizing increase in non-cartel supply in response to having raised price. In the case of the German cement cartel that operated over 1991-2002, the primary source of non-cartel supply was imports from Eastern European cement manufacturers. Industry sources have claimed that the cartel sought to control imports by sharing rents with intermediaries in order to discourage them from sourcing foreign supply. Specifically, cartel members would allow an intermediary to issue the invoice for a transaction and charge a fee even though the output went directly from the cartel member's plant to the customer. We investigate this claim by first developing a theory of collusive pricing that takes account of the option of bribing intermediaries. The theory predicts that the cement cartel members are more likely to share rents with an intermediary when the nearest Eastern European plant is closer and there is more Eastern European capacity outside of the control of the cartel. Estimating a logit model that predicts when a cartel member sells through an intermediary, the empirical analysis supports both predictions. |
| Keywords: | collusion,cartel,non-cartel supply,cement,distribution channels,intermediary |
| JEL: | L41 K21 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:16025&r=com |
| By: | Adjemian, Michael; Brorsen, B. Wade; Hahn, William; Saitone, Tina L.; Sexton, Richard J. |
| Abstract: | Concentration levels in U.S. agriculture are high and rising. As downstream competition declines, marketing opportunities for producers are constrained to—in some cases—a single buyer. Processors in thin markets (those with few purchasers, low trading volume, and low liquidity) could use informational advantages to depress farm-level prices for commodities (compared to a competitive market). Moreover, the low volume of trading in thin markets makes it difficult for participants and observers to gather market information and assess market performance. At the same time, many markets are moving away from traditional cash markets to bilateral contracts and vertical integration, which offer more opportunities for coordination and may foster efficiency gains that ultimately benefit producers. Both methods resolve information problems not addressed by the cash market, and forward-looking processors in many thin markets pay producers high enough prices to ensure a stable input supply. Thin market producers who can successfully enter and maintain contracts with these processors can achieve returns that meet or exceed their longrun costs. Attempting to impose greater competition on naturally thin markets can have adverse consequences for producers, processors, and consumers. However, small producers face new challenges in a thin market environment. |
| Keywords: | Thin markets, farm prices, competition, coordination, market power, contracts, Agribusiness, Crop Production/Industries, Industrial Organization, Livestock Production/Industries, Marketing, |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uersib:232928&r=com |
| By: | Gianpaolo Parise |
| Abstract: | I explore the effect of the threat posed by low-cost competitors on debt structure in the airline industry. I use the route network expansion of low-cost airlines to identify routes where the probability of future entry increases dramatically. I find that when strategic routes are threatened, incumbents significantly increase debt maturity before entry occurs. Overall, the main findings suggest that airlines respond to entry threats trading off financial flexibility for lower rollover risk. The results are consistent with models in which firms set their optimal debt structure in the presence of costly rollover failure. |
| Keywords: | Liquidity risk, competition, debt maturity, rollover risk, threat of entry |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:556&r=com |
| By: | Eleftheriou, Konstantinos; Polemis, Michael |
| Abstract: | We build an Asymmetric Spatial Error Correction Model (ASpECM) to investigate the role of spatial dependence at the retail gasoline price adjustment mechanism. We find evidence that the symmetric price pattern is fully reversed when we account for spatial spillover effects, indicating that retail prices adjust more rapidly in an upward than a downward direction. This finding raises the possibility that retailers are more likely to engage in anti-competitive practices which may be ignored when the regulators bypass the role of spatial dependence. |
| Keywords: | ASpECM; Spatial dependence; Asymmetric gasoline price adjustment |
| JEL: | C23 L13 |
| Date: | 2016–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70037&r=com |
| By: | Hyland, Marie |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:rb2016/1/2&r=com |
| By: | Gert Brunekreeft; Marius Buchmann; Toru Hattori; Roland Meyer |
| Abstract: | The German energy transition massively alters the market structure of electricity supply and forces incumbent electric utilities to rethink their business strategies. We analyze three main developments that undermine the former market dominance of the “Big 4” incumbents in Germany. First, nuclear phase-out reduces their market shares and creates financial risk of nuclear waste decommissioning. Second, the large-scale integration of renewables fosters market entry from third parties and intensifies competition. Third, a possible coal-phase out in combination may have positive effects on market revenues but tends to increase regulatory risk. In total, incumbents face “disruptive Challenges” and need to find new value-creating products and services beyond sole energy supply. Promising focus areas are renewable energies, the distribution business, and smart, customer-oriented solutions. |
| Keywords: | Electric Utilities, Market Structure, Firm Strategy |
| JEL: | L94 L11 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:bei:00bewp:0023&r=com |
| By: | Iwata, Hiroki |
| Abstract: | This study investigates the effect of an environmental regulation on the innovation choice of firms in an oligopoly. Most existing studies on environmental regulations and innovations examine the optimal behavior of firms when one innovation project is feasible. In our model, firms are allowed to choose from multiple types of innovation projects. Our main contributions are that we derive the conditions under which environmentally friendly and cost reducing innovations are selected in Bertrand competition and we show how environmental regulation affects innovation choice. |
| Keywords: | environmental regulation; innovation; the Porter hypothesis |
| JEL: | D21 Q55 Q58 |
| Date: | 2016–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:70280&r=com |
| By: | Susan J. Méndez (Melbourne Institute of Applied Economics and Social Research, The University of Melbourne) |
| Abstract: | The goal of this paper is to investigate and quantify the impact of parallel trade in markets for pharmaceuticals. The paper develops a structural model of demand and supply using data on prices, sales and characteristics of statins, medicines used in the treatment for high cholesterol, in Denmark. The model provides a framework to simulate outcomes under a complete ban of parallel imports, keeping other regulatory schemes unchanged. There are two sets of key results from prohibiting parallel imports. The first set focuses on price effects, which differ substantially along two dimensions: the patent protection status of the molecule and the type of the firm. On average, prices increase more in markets where the molecule has lost patent protection. On the other dimension, both generic firms and original producers increase their pharmacy purchase prices when competition from parallel importers is removed. Given the prevailing reimbursement rules, most changes in pharmacy purchase prices are absorbed by the government. The final price paid by consumers after reimbursement increases more for original firms than for generic producers. The second set of empirical results reports the effects on market participants. My model takes into consideration consumers’ preferences allowing them to substitute between products. Prohibiting parallel imports induces consumers to substitute towards original products for which they have stronger preferences. In sum, banning parallel imports leads to (i) an increase in variable profits for original producers and a decrease for generic firms, (ii) an increase in governmental health care expenditures, and (iii) a decrease in consumers’ welfare. Classification-I18, H51 |
| Keywords: | Pharmaceutical markets, parallel trade, regulation, welfare analysis |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2016n8&r=com |
| By: | Emmanuel LORENZON |
| Abstract: | In this paper we aim at studying the sensitivity of the Generalized Second-Price auction to bidder collusion when monetary transfers are allowed. We propose a model of position auction that incorporates third-parties as agents facilitating collusion in complete information. We show that the first-best collusive outcome can be achieved under any Nash condition. Under the locally envy-free criterion, we find that if the collusive gain is uniformly redistributed among members, the best that can be achieved is Vickrey-Clarkes-Groves outcome. Bidders do not have sufficient incentives to reduce even more their expressed demand. We then provide elements upon which an incentive compatible fee can be set by the center. We provide conditions under which bidders can enhance efficient collusion. Doing so we also contribute to the literature on collusion in multiple-objects simultaneous auctions. |
| Keywords: | Auctions, Online advertising, Position auctions; Bidding ring, Cartel |
| JEL: | D44 C72 M3 L41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2016-08&r=com |