nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒05‒08
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Asymmetric Cost Pass-Through? Empirical Evidence on the Role of Market Power, Search and Menu Costs By Loy, Jens-Peter; Glauben, Thomas; Weiss, Christoph
  2. Strategic delegation effects on Cournot and Stackelberg competition By Michelacakis, Nickolas
  3. Collusion under Imperfect Monitoring with Asymmetric Firms By Luke, Garrod; Matthew, Olczak
  4. Welfare Effects of Endogenous Information Acquisition and Disclosure in Duopoly Markets By Kazunori Miwa
  5. An Efficient Mechanism for Competitive Markets with Adverse Selection By Dosis, Anastasios
  6. On the Pareto Efficiency of a Socially Optimal Mechanism for Monopoly Regulation By Saglam, Ismail
  7. Quantifying the Effects of Patent Protection on Innovation, Imitation, Growth, and Aggregate Productivity By Pedro Bento
  8. Subsidizing new technology adoption in a Stackelberg duopoly: Cases of substitutes and complements By Hattori, Masahiko; Tanaka, Yasuhito
  9. Is more competition always better? An experimental study of extortionary corruption By Dmitry Ryvkin; Danila Serra
  10. Protection in Government Procurement Auctions By Matthew T. Cole; Ronald Davies; Todd Kaplan
  11. Specialization vs Competition: An Anatomy of Increasing Returns to Scale By Alberto Bucci; Philip Ushchev
  12. Evidence production in merger control: The role of remedies By Dertwinkel-Kalt, Markus; Wey, Christian
  13. To the Highest Bidder: The Market for Talent in Sports Leagues By Roberto Burguet; József Sákovics
  14. Competition and Bank Liquidity Creation By Liangliang Jiang; Ross Levine; Chen Lin
  15. Banking Consolidation and Small Firm Financing for Research and Development By Chang, Andrew C.
  16. Assessing Banking Sector Competition in Zimbabwe Using a Panzar-Rosse Approach By Sanderson Abel & Pierre Le Roux

  1. By: Loy, Jens-Peter; Glauben, Thomas; Weiss, Christoph
    Abstract: We estimate cost pass-through rates based on data for store-level retail prices and wholesale costs. The data allows us to identify heterogeneity in cost pass-through across retailers and relate it to underlying explanatory factors such as retailer market power, measures of consumer search and menu costs. Results from a threshold-errorcorrection- model clearly provide empirical support for the ‘rockets and feathers’ phenomenon. In contrast to much of the literature which explains the ‘rockets and feathers’ phenomenon as a result of retailers’ market power, we find contrary find that the degree of asymmetry between costs and prices is negatively related to a measure of market power.
    Keywords: Asymmetric Cost Pass-Through, Market Power, Menu Costs, Search Costs, Milk, Food Retailing, Germany, Agricultural and Food Policy, Consumer/Household Economics, C32, D21, L11, L81,
    Date: 2015
  2. By: Michelacakis, Nickolas
    Abstract: This paper compares the outcomes of two three-stage games of two firms competing for quantity with managerial delegation. In fact, we prove that simultaneous choice of managers by the proprietors of the firms followed by Stackelberg-type competition is equivalent to sequential choice of managers followed by Cournot-type competition. We prove equivalence in a general setting, namely, when the duopolistic model is characterised by a non-linear inverse demand function.
    Keywords: Strategic delegation; Cournot competition; Stackelberg competition
    JEL: D43 L13 L21
    Date: 2016–05–01
  3. By: Luke, Garrod; Matthew, Olczak
    Abstract: We explore the effects of asymmetries in capacity constraints on collusion where market demand is uncertain and where firms must monitor the agreement through their privately observed sales and prices. In this private monitoring setting, we show that all firms can infer when at least one firm’s sales are below some firm-specific “trigger level”. This public information ensures that firms can detect deviations perfectly if fluctuations in market demand are sufficiently small. Otherwise, there can be collusion under imperfect public monitoring where punishment phases occur on the equilibrium path. We find that symmetry faciliates collusion. Yet, we also show that if the fluctuations in market demand are sufficiently large, then the collusive prices of symmetric capacity distributions are actually lower than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.
    Keywords: capacity constraints, mergers, collusion, imperfect monitoring
    JEL: D43 D82 K21 L12 L41
    Date: 2016–03–17
  4. By: Kazunori Miwa (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper investigates the interaction between firms' information acquisition decisions and disclosure of internally acquired information in a Cournot duopoly market. The results are as follows. Given that the precision of firms' private information is constant, mandatory disclosure of information about the industry-wide demand uncertainty can enhance social welfare. However, when the precision of firms' private information is endogenously determined, mandatory disclosure is not always desirable. This is because when disclosure is mandated, firms acquire less precise information compared to the case where acquired information is not disclosed, and hence their internal information environments are deteriorated. This can lead to "unintended consequences," such that disclosure regulation strictly decreases social welfare on the whole.
    Keywords: Information acquisition, Disclosure, Duopoly, Social welfare
    JEL: L13 M41 M48
    Date: 2016–03
  5. By: Dosis, Anastasios (Essec Business School, Economics Department)
    Abstract: I construct an efficient mechanism for competitive markets with adverse selection. In the mechanism, each company offers two menus of contracts: a public menu and a private menu. The union of all the public menus needs to be offered by every active company in the market. On the contrary, a private menu concerns only the company that offers it. I show that this simple mechanism reduces the set of profitable deviations to the extent that a pure-strategy equilibrium exists in every market with adverse selection. Furthermore, I characterise general, well-studied environments in which the set of equilibrium allocations coincides with the set of efficient allocations.
    Keywords: Efficiency; Adverse Selection; Competition Mechanism; Design; Existence;
    JEL: D02 D82 D86
    Date: 2016–02–22
  6. By: Saglam, Ismail
    Abstract: Baron and Myerson (BM) (1982)propose an incentive-compatible, individually rational and ex-ante socially optimal direct-revelation mechanism to regulate a monopolistic firm with unknown costs. We show that their mechanism is not ex-post Pareto dominated by any other feasible direct-revelation mechanism. However, there also exist an uncountable number of feasible direct-revelation mechanisms that are not ex-post Pareto dominated by the BM mechanism. To investigate whether the BM mechanism remains in the set of ex-post undominated mechanisms when the Pareto axiom is slightly weakened, we introduce the epsilon-Pareto dominance. This concept requires the relevant dominance relationships to hold in the support of the regulator's beliefs everywhere but at a set of points of measure epsilon, which can be arbitrarily small. We show that a modification of the BM mechanism which always equates the price to the marginal cost can epsilon-Pareto dominate the BM mechanism at uncountably many regulatory environments, while it is never epsilon-Pareto dominated by the BM mechanism at any regulatory environment.
    Keywords: Monopoly; Regulation; Asymmetric Information; Pareto Efficiency
    JEL: D82 L51
    Date: 2016–05–04
  7. By: Pedro Bento (Texas A&M University, Department of Economics)
    Abstract: I develop a general equilibrium model in which patent protection can increase or decrease the costs of sequential innovation, original innovation, and imitation. Depending on these relative effects, protection can in theory increase or decrease markups, imitation, innovation, growth, and aggregate productivity. I discipline the model using data from several different sources, and find that weakening protection in the U.S. would lead to no change in markups and imitation, no change in long-run growth, a more than doubling of the number of firms, and an increase in aggregate productivity of 9 percent.
    Keywords: patent protection, firm size, productivity, innovation, imitation, competition
    JEL: O1 O3 O4
    Date: 2016–04–11
  8. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: Economic growth requires that firms adopt new technologies. However, it may be insufficient in less competitive industries from the social welfare point of view. In this case, a government subsidy is necessary. We present an analysis of firms' adoption of new technology and government subsidization policy in a Stackelberg duopoly with differentiated goods. The technology itself is free, but each firm must expend a fixed set-up cost, such as training employees. There are several cases related to optimal policies depending on the set-up costs and whether the goods are substitutes or complements. In particular, there are two cases. (1) Social welfare is maximized when only the Stackelberg leader adopts the new technology, but no firm adopts the new technology without a subsidy. Then, the government should subsidize only the leader, which is a discriminatory policy. (Case 5 of Theorem 1 and Case 3-(1)-ii of Theorem 2) (2) Social welfare is maximized when both firms adopt the new technology, but only the leader adopts the new technology without a subsidy. Then, the government should subsidize only the follower. This policy is not discriminatory because adoption is the dominant strategy for the leader. (Case 2 of Theorem 1)
    Keywords: Stackelberg duopoly \and adoption of new technology \and subsidization \and sub-game perfect equilibrium
    JEL: D43
    Date: 2016–05–02
  9. By: Dmitry Ryvkin (Department of Economics, Florida State University); Danila Serra (Department of Economics, Southern Methodist University)
    Abstract: We test the effectiveness of an anti-corruption policy that is often discussed among practitioners: an increase in competition among officials providing the same good or service. In particular, we investigate whether an increase in overlapping jurisdictions reduces extortionary corruption, i.e., bribe demands for the provision of services that clients are entitled to receive. We overcome measurement and identification problems by addressing our research question in the laboratory. We conduct an extortionary bribery experiment where clients apply for a license from one of many available offices and officials can demand a bribe on top of the license fee. By manipulating the number of available offices and the size of search costs we are able to assess whether increasing competition reduces extortionary corruption. We find that, if search costs are unaffected, increasing the number of providers may actually increase corruption. In particular, our results show that increasing competition has either no eeffect (if search costs are high) or a positive effect (if search costs are low) on bribe demands. We compare our findings to those obtained in a standard market environment and find evidence of different search behaviors in the two settings.
    Keywords: competition, extortionary corruption, experiment
    JEL: D73 D49 C91
    Date: 2015–10
  10. By: Matthew T. Cole (Department of Economics, California Polytechnic State University); Ronald Davies (School of Economics, University College Dublin); Todd Kaplan (Department of Economics, University of Exeter)
    Abstract: Discrimination against foreign bidders in procurement auctions has typically been achieved by price preferences, that is, a policy of accepting a range of higher prices from a domestic firm over a lower price from a foreign firm. We demonstrate that in the bidding game, each level of protection via a price preference can be achieved by an equivalent tariff. When government welfare depends only on net expenditures, this equivalence carries over to the government's decision. As such, agreements to eliminate price preferences may be unsuccessful unless accompanied by tariff limitations. On the other hand, if tariff collection is costly, then even without tariff limits banning price preferences lowers protection and increases global welfare.
    Keywords: Government Procurement, Tariffs, Price Preference
    JEL: F13 H57 F12
    Date: 2016
  11. By: Alberto Bucci (National Research University Higher School of Economics); Philip Ushchev (National Research University Higher School of Economics)
    Abstract: We develop a two-sector model of monopolistic competition with a dierentiated intermediate good and variable elasticity of technological substitution. This setting proves to be well-suited to studying the nature and origins of external increasing returns. We disentangle two sources of scale economies: specialization and competition. The former depends only on how TFP varies with input diversity, while the latter is fully captured by the behavior of the elasticity of substitution across inputs. This distinction gives rise to a full characterization of the rich array of competition regimes in our model. The necessary and sucient conditions for each regime to occur are expressed in terms of the relationships between TFP and the elasticity of substitution as functions of the input diversity. Moreover, we demonstrate that, despite the folk wisdom resting on CES models, specialization economies are in general neither necessary nor sucient for external increasing returns to emerge. This highlights the profound and non-trivial role of market competition in generating agglomeration economies, endogenous growth, and other phenomena driven by scale economies.
    Keywords: External Increasing Returns; Variable Elasticity of Substitution; Specialization Eect; Competition Eect
    JEL: D24 D43 F12 L13
    Date: 2016
  12. By: Dertwinkel-Kalt, Markus; Wey, Christian
    Abstract: We analyze evidence production in merger control as a delegation problem under an inquisitorial and an adversarial competition policy system. Agents' incentives to produce evidence depend critically on the action set of the decision maker. In an inquisitorial system, allowing ex ante for a compromising remedy reduces incentives when compared with the case in which the merger can be either approved or prohibited. In an adversarial system, no such unambiguous results can be derived because the remedial option is never a best-fit for one of the parties. Comparison of both systems reveals that an adversarial system creates larger incentives when the conflict of interest between the involved parties is large. We relate our results to merger control in the US and the EU.
    Keywords: Remedies,Merger Control,Institutions
    JEL: L13 L40 K21
    Date: 2016
  13. By: Roberto Burguet; József Sákovics
    Abstract: We present a realistic and novel micro-structure for the market for athletes in league sports. In our trading mechanism the clubs bid for individual players, internalizing the effect that a player not hired might play for the competition. For inelastic talent supply, our (wage-minimizing) equilibrium supports the Coasian results of Rottenberg (1956) and Fort and Quirk (1995): talent allocation is independent of initial "ownership" and revenue sharing arrangements. When talent supply is elastic, revenue sharing decreases the aggregate amount of talent hired. This negative effect on the talent level may be efficiency enhancing when the competition for talent results in excess talent being hired. For the first time in the literature, we carry out our entire analysis using a newly formulated, unified club objective, incorporating both pecuniary and non-pecuniary benefits.
    Keywords: sports leagues, club objectives, revenue sharing
    JEL: D43 J31 L13 L22 L83
    Date: 2016–04
  14. By: Liangliang Jiang; Ross Levine; Chen Lin
    Abstract: Does an intensification of competition among banks increase or decrease liquidity creation? By integrating the dynamic process of interstate bank deregulation that lowered barriers to competition across U.S. states over the 1980s and 1990s with the gravity model of the geographic expansion of banks, we construct time-varying measures of the competitive pressures facing each individual bank. We find that regulatory-induced competition reduced liquidity creation. Consistent with some theories, we also find that the liquidity-destroying effects of competition are mitigated among more profitable banks and heightened among smaller banks.
    JEL: G21 G28 G32 G38
    Date: 2016–04
  15. By: Chang, Andrew C.
    Abstract: This paper examines the effect of increased market concentration of the banking industry caused by the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) on the availability of finance for small firms engaged in research and development (R&D). I measure the financing decisions of these small firms using a balanced panel of Small Business Innovation Research (SBIR) applications. Using difference-in-differences, I find IBBEA decreased the supply of finance for small R&D firms. This effect is larger for late adopters of IBBEA, which tended to be states with stronger small banking sectors pre-IBBEA.
    Keywords: Banking Deregulation ; IBBEA ; Interstate Bank Branching Deregulation ; Market Concentration ; Research and Development ; Riegle-Neal ; Small Business Innovation Research
    JEL: G21 G28 G39 O30
    Date: 2016–04–08
  16. By: Sanderson Abel & Pierre Le Roux
    Abstract: This paper assesses the level of competition in Zimbabwe’s banking sector using the Panzar-Rosse H-statistic. The H-Statistic has been assessed, using the total revenues regression equation, and applying the panel least square regression model with fixed effects. The H-statistics is estimated at 0.56, which result is confirmed, using bank random effects and the General methods of moments, yield similar results. The H-statics obtained from the two methods are 0.54 and 0.51 for the random effect and generalised methods of moments, respectively. The results confirm the presence of a monopolistic competition. On an annual basis, the results show that the Zimbabwean banking sector is evolving towards perfect competition. The increased competition was evident through aggressive promotions, increased marketing of banking products, and increased tenure of loans from one year to three years for individuals as banks tried to outclass each other. The study recommends that the government should desist from tampering with market forces as this reduces the amount of competition.
    Keywords: banking, Competition, Zimbabwe, Panzar-Rosse
    Date: 2016

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