nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒04‒16
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Strategic Choice of Network Externality By Yuanzhu Lu; Sougata Poddar
  2. Empirical Evidence on Conditional Pricing Practices By Bogdan Genchev; Julie Holland Mortimer
  3. A Market Based Solution for Fire Sales and Other Pecuniary Externalities By Weerachart T. Kilenthong; Robert M. Townsend
  4. Are Online and Offine Prices Similar? Evidence from Large Multi-Channel Retailers By Alberto F. Cavallo
  5. The "Veblen" Effect, Targeted Advertising and Consumer Welfare By Lynne Pepall; Joseph Reiff
  6. Does the Nature of Piracy and Competition Matter? By Yuanzhu Lu; Sougata Poddar
  7. Trading in Networks: Theory and Experiments By Syngjoo Choi; Andrea Galeotti; Sanjeev Goyal;
  8. Strategic Gains from Labor Market Discrimination By Johan N. M. Lagerlöf
  9. Substitution between Online and Offline Advertising: Evidence from the Carbonated Soft Drink Industry By He, Xi; Lopez, Rigoberto A.; Liu, Yizao
  10. How mergers affect innovation: Theory and evidence from the pharmaceutical industry By Haucap, Justus; Stiebale, Joel
  11. Non-sequential search, competition and price dispersion in retail electricity By Gugler, Klaus; Heim, Sven; Liebensteiner, Mario
  12. Stock exchange mergers and weak-form information efficiency: Evidence from the OMX Nordic and Baltic consolidation By Hellström, Jörgen; Liu, Yuna; Sjögren, Tomas
  13. A risk governance approach to managing antitrust risks in the banking industry By Denise Scheld; Johannes Paha; Nicolas Fandrey
  14. Screening for bid-rigging - does it work? By Imhof, David; Karagök, Yavuz; Rutz, Samuel

  1. By: Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics, Beijing, China); Sougata Poddar (Department of Economics, Faculty of Business and Law, Auckland University of Technology)
    Abstract: In many product markets, impact of network externality plays an important role to affect the overall quality of a product. However, the degree or the strength of network externality is assumed as a parameter in most of the literature. We propose a model of vertical product differentiation with two competing firms where the strength of network externality is endogenized as a strategic choice of the high quality firm. We show how the equilibrium market structure and market coverage depend on the cost of choosing the network strength and on the relative quality difference of the competing products. We also show that the relationship between the optimal level of network externalities and the relative quality differences of the products can be monotonic or non-monotonic.
    Keywords: Vertical product differentiation, Network externality, Market structure, Market coverage, Investment cost
    Date: 2015–03
  2. By: Bogdan Genchev (Boston College); Julie Holland Mortimer (Boston College)
    Abstract: Conditional pricing practices allow the terms of sale between a producer and a downstream distributor to vary with the ability of the downstream firm to meet a set of conditions put forward by the producer. The conditions may require a downstream firm to accept minimum quantities or multiple products, to adhere to minimum market-share requirements, or even to deal exclusively with one producer. The form of payment from the producer to the downstream firm may take the form of a rebate, marketing support, or simply the willingness to supply inventory. The use of conditional pricing practices is widespread throughout many industries, and the variety of contractual forms used in these arrangements is nearly as extensive as the number of contracts.
    Keywords: conditional pricing, terms of sale, downstream firm
    JEL: K11 K21 L4 L42
    Date: 2016–02–15
  3. By: Weerachart T. Kilenthong; Robert M. Townsend
    Abstract: We show how bundling, exclusivity and additional markets internalize fire sale and other pecuniary externalities. Ex ante competition can achieve a constrained efficient allocation. The solution can be put rather simply: create segregated market exchanges which specify prices in advance and price the right to trade in these markets so that participant types pay, or are compensated, consistent with the market exchange they choose and that type's excess demand contribution to the price in that exchange. We do not need to identify and quantify some policy intervention. With the appropriate ex ante design we can let markets solve the problem.
    JEL: D52 D53 D61 D62
    Date: 2016–03
  4. By: Alberto F. Cavallo
    Abstract: Online prices are increasingly being used for a variety of inflation measurement and research applications, yet little is know about their relation to prices collected offline, where most retail transactions take place. This paper presents the results of the first large-scale comparison of online and offline prices simultaneously collected from the websites and physical stores of 56 large multi-channel retailers in 10 countries. I find that price levels are identical about 72% of the time for the products sold in both locations, with significant heterogeneity across countries, sectors, and retailers. The similarity is highest in electronics and clothing and lowest for drugstores and office-supply retailers. There is no evidence of prices varying with the location of the ip address or persistent browsing habits. Price changes are un-synchronized but have similar frequencies and average sizes. These results have implications for National Statistical Offices and researchers using online data, as well as those interested in the effect of the internet on retail prices in different countries and sectors.
    JEL: E31 F4 L1
    Date: 2016–03
  5. By: Lynne Pepall; Joseph Reiff
    Abstract: The technology of advertising in the twenty-first century allows for better targeting of consumers and better identification of consumer subgroups in the population. This makes it easier for firms to create in their advertising a desire to belong to the group identified with a product. We explore this kind of advertising in a monopoly model. The firm has an incentive to target this kind of advertising to the most lucrative segment of a particular social grouping and while advertising does create value for the consumer, it leads to an outcome where less output is sold at a higher price in a narrower or more segmented market than in the standard monopoly model. As a result even though consumers value the identification effect they are worse off. This is because the firm uses advertising to exploit a form of price discrimination and appropriate more surplus.
    Keywords: Targeted Advertising, Peer Effects, Monopoly
    JEL: L12 M3
  6. By: Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics, Beijing, China); Sougata Poddar (Department of Economics, Faculty of Business and Law, Auckland University of Technology)
    Abstract: We explore whether the nature of piracy or the counterfeiting activity and the competition between the copyright holder and the pirate(s) matter in a given regime of Intellectual Property Right (IPR) protection. Generally, the nature of piracy can be of two types, commercial and end-user; and the nature of competition between copyright holder and if the pirate is commercial can be either in price or quantity depending on the pirated good. We find irrespective of the nature of piracy or competition, when the consumers’ tastes are sufficiently diverse and IPR protection is weak, it is profitable for the copyright holder to accommodate the pirate(s), while deter the pirate(s) in all other situations. The relationship between the quality of pirated good and piracy rate can be monotonic or non-monotonic. Piracy is more likely to survive under commercial piracy than under end-user piracy. The relationship between private and public anti-piracy measures is non-monotonic.
    Keywords: IPR protection, private copyright protection, piracy rate, product quality, commercial piracy, end-user piracy
    JEL: D23 D43 L13 L86 O3
    Date: 2015–04
  7. 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
  8. By: Johan N. M. Lagerlöf (Department of Economics, University of Copenhagen)
    Abstract: According to a classical argument, an employer handicaps herself if she bases hiring decisions on factors unrelated to productivity; therefore, discrimination is undermined by competition. The present paper, in contrast, argues that being discriminatory can be a commitment device that helps an employer and its rivals to partially segment the labor market, which leads to lower wages and higher profits. Discrimination can thus be an endogenous response to (changes in) competition. Indeed, the relationship between discrimination and competition can be non-monotone. Moreover, a ban on wage discrimination (which may be feasible, as such discrimination is easily detectable) may lead to discrimination in hiring (which cannot be banned because it is harder to observe).
    Keywords: discrimination, competition, strategic interaction, market segmentation
    JEL: J71 D43
    Date: 2016–02–12
  9. By: He, Xi (University of Connecticut); Lopez, Rigoberto A. (University of Connecticut); Liu, Yizao (University of Connecticut)
    Abstract: This paper uses data collected from hypothetical and non-hypothetical choice-based conjoint survey instruments to estimate willingness to pay for distance-based local food products. The survey was administered to three different groups of respondents: members of a consumer buying club with local and grass-fed market experience, a random sample of Maryland residents, and shoppers at a non-specialty suburban Maryland grocery store. We find that both the random sample of Maryland residents and the grocery store shoppers are willing to pay a premium for local products, but view local and grass-fed production as substitutes. Conversely, members of the consumer buying club are willing to pay significantly less for local than their counterparts, but do not conflate local with other premium attributes, such as grass-fed production.
    Keywords: Online advertising, media substitution, translog cost function, CSDs
    JEL: L13 M37 D12
    Date: 2015–07
  10. By: Haucap, Justus; Stiebale, Joel
    Abstract: This papers analyses how horizontal mergers affect innovation activities of the merged entity and its non-merging competitors. We develop an oligopoly model with heterogeneous firms to derive empirically testable implications. Our model predicts that a merger is more likely to be profitable in an innovation intensive industry. For a high degree of firm heterogeneity, a merger reduces innovation of both the merged entity and non-merging competitors in an industry with high R&D intensity. Using data on horizontal mergers among pharmaceutical firms in Europe, we find that our empirical results are consistent with many predictions of the theoretical model. Our main result is that after a merger, patenting and R&D of the merged entity and its non-merging rivals declines substantially. The effects are concentrated in markets with high innovation intensity and a high degree of firm heterogeneity. The results are robust towards alternative specifications, using an instrumental variable strategy, and applying a propensity score matching estimator.
    Keywords: mergers & acquisitions,innovation,R&D incentives,merger policy
    JEL: D22 L13 L4 G34 O31
    Date: 2016
  11. By: Gugler, Klaus; Heim, Sven; Liebensteiner, Mario
    Abstract: We investigate the impact of consumer search and competition on pricing strategies in Germany's electricity retail. We utilize a unique panel dataset on spatially varying search requests at major online price comparison websites to construct a direct measure of search intensity and combine this information with zip code level data on electricity tariffs between 2011 and 2014. The paper stands out by explaining price dispersion by differing pricing strategies of former incumbents and entrant firms, which are distinct in their attributable shares in informed versus uninformed consumers. Our empirical results suggest causal evidence for an inverted U-shape effect of consumer search intensity on price dispersion in a clearinghouse environment as in Stahl (1989). The dispersion is caused by opposite pricing strategies of incumbents and entrants, with incumbents initially increasing and entrants initially decreasing tariffs as a reaction to more consumer search. We also find an inverted U-shape effect of competition on price dispersion, consistent with theoretical findings by Janssen and Moraga-González (2004). Again, the effect can be explained by opposing pricing strategies of incumbents and entrants.
    Keywords: Search,Information,Competition,Price Dispersion,Electricity Retail
    JEL: D43 D83 L11 L13 Q40
    Date: 2016
  12. By: Hellström, Jörgen (Umeå School of Business and Economics); Liu, Yuna (Department of Economics, Umeå University); Sjögren, Tomas (Department of Economics, Umeå University)
    Abstract: In this paper we study whether the creation of a uniform Nordic and Baltic stock trading platform has affected weak-form information efficiency. In the study, a time-varying measure of return predictability for individual stocks is used in a panel-data setting to test for stock market merger effects. The results indicate that the stock market consolidations have had a positive effect on the information efficiency and turnover for an average firm. The merger effects are, however, asymmetrically distributed which indicates a flight to liquidity effect in the sense that relatively large (small) firms located on relatively large (small) markets experience an improved (reduced) information efficiency and turnover. Although the results indicate that changes in the level of investor attention (measured by turnover) may explain part of the changes in information efficiency, they also lend support to the hypothesis that merger effects may partially be driven by changes in the composition of informed versus uninformed investors following a stock.
    Keywords: Time-varying return predictability; market structure
    JEL: G12 G14 G15
    Date: 2016–03–16
  13. By: Denise Scheld (University of Giessen); Johannes Paha (University of Giessen); Nicolas Fandrey (Protiviti GmbH)
    Abstract: Competition law compliance has become increasingly important in the banking industry as the number of infringements and the associated fines imposed by the European Commission are rising. This article shows that not only governments and regulators, but also shareholders and managers, should be interested in managing antitrust risks in banks in order to avoid competition law infringements. Therefore, this article sets out an approach to assessing the residual risk of antitrust non-compliance as well as the costs associated with such conduct, in order to be able to identify the required intensity of risk management activities. It also shows how antitrust risk management can be implemented in banks’ governance structures using the Three Lines of Defence model and the COSO ERM framework. As a result, it demonstrates how to integrate antitrust risk management activities into existing structures and processes, thus improving the efficiency and effectiveness of overall risk management, in particular antitrust risk management.
    Keywords: risk management, antitrust, compliance, banks, competition
    JEL: G20 G30 G32 L21 K21
    Date: 2015
  14. By: Imhof, David; Karagök, Yavuz; Rutz, Samuel
    Abstract: This paper proposes a method to detect bid-rigging by applying mutually reinforcing screens to a road construction procurement data set from Switzerland in which no prior information about collusion was available. The screening method is particularly suited to deal with the problem of partial collusion, i.e. collusion which does not involve all firms and/or all contracts in a specific data set, implying that many of the classical markers discussed in the corresponding literature will fail to identify bid-rigging. In addition to presenting a new screen for collusion, it is shown how benchmarks and the combination of different screens may be used to identify subsets of suspicious contracts and firms in a data set. The discussed screening method succeeds in isolating a group of “suspicious” firms exhibiting the characteristics of a local bid-rigging cartel operating with cover bids and a – more or less pronounced – bid rotation scheme. Based on these findings the Swiss Competition Commission (ComCo) decided to open an investigation.
    Keywords: bid-rigging; screening method; variance screen; cover bidding screen; bid rotation test; partial collusion
    JEL: C00 C40 D22 D40 K40 L40
    Date: 2016–04–07

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