nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒05‒21
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. License or entry with vertical differentiation in duopoly By Hattori, Masahiko; Tanaka, Yasuhito
  2. Vertical Differentiation With Consumers Misperceptions And Information Disparities By Alberto Cavaliere; Giovanni Crea
  3. On the (in)stability of nonlinear feedback solutions in a dynamic duopoly with renewable resource exploitation By L. Lambertini; A. Mantovani
  4. Two-echelon supply chain coordination under information asymmetry with multiple types By Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
  5. Welfare-Enhancing Trade Unions in an Oligopoly with Excessive Entry By Marco de Pinto; Laszlo Goerke
  6. (Non-)Insurance Markets, Loss Size Manipulation and Competition - Experimental Evidence By Jeroen Hinloopen; Adriaan R. Soetevent
  7. Are Settlements in Patent Litigation Collusive? Evidence from Paragraph IV Challenges By Eric Helland; Seth A. Seabury
  8. The impact of state aid on the survival and financial viability of aided firms By Heim, Sven; Hüschelrath, Kai; Schmidt-Dengler, Philipp; Strazzeri, Maurizio
  9. Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing By Sharat Ganapati; Joseph S. Shapiro; Reed Walker
  10. Market Power and Duration of R&D Investment in a Panel of Italian Firms By M. E. Bontempi; L. Lambertini; E. Medeossi
  11. Wolves in Sheep's Clothing: Is non-profit status used to signal quality? By Jones, Daniel; Propper, Carol; Smith, Sarah
  12. Vertical Integration and Market Foreclosure: Empirical Evidence in the Korean Movie Industry By Yun Jeong Choi; Jong-Hee Hahn; Hojung Kim
  13. Profit-reducing fixed-price contract: The role of the transport sector By Takauchi, Kazuhiro
  14. The Dawn of the Plastic Jungle: The Introduction of the Credit Card in Europe and North America, 1950-1975 By Bernardo Batiz-Lazo; Gustavo A. Del Angel
  15. How Much Does Speed Matter in the Fixed to Mobile Broadband Substitution in Europe ? By Michele Cincera; Lauriane Dewulf; Antonio Estache
  16. The War on Drugs: An Analysis of the Effects of Supply Disruption on Prices and Purity By Rose, Christiern

  1. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: We consider choice of options for a foreign innovating firm to license its technology for producing the high quality good to a domestic firm, or to enter the market of the domestic country with or without license. Under the assumption of uniform distribution about taste parameters of consumers; when cost functions are linear, if the low quality good’s quality is sufficiently high, license without entry strategy is optimum; if the low quality good’s quality is low, both of entry without license strategy and license without entry strategy are optimum; when cost functions are quadratic, if the high quality good’s quality is high, license without entry strategy is optimum; if the high quality good’s quality is low, entry with license strategy is optimum.
    Keywords: license, entry, duopoly, vertical differentiation, foreign innovating firm
    JEL: D4 D43
    Date: 2016–05–01
  2. By: Alberto Cavaliere (Department of Economics and Management, University of Pavia); Giovanni Crea (Department of Economics and Management, University of Pavia)
    Abstract: We consider vertical differentiation with quality uncertainty and information disparities, in a duopoly where firms supply a product with credence attributes. Consumers choice is affected by misperceptions, but equilibrium prices and qualities depend also on the behavior and the share of informed consumers. With optimistic misperceptions uninformed consumers are cheated in equilibrium as we observe less price competition and minimum differentiation. Alternatively some product differentiation is provided when informed consumers buy high quality goods and the incentive to increase quality is positively affected by optimistic misperceptions. With more informed consumers we find more price competition but less incentive to product differentiation. In most cases the share of informed consumers asymmetrically affects equilibrium prices, to the detriment of the high quality firm. Pessimistic misperceptions prevent more product differentiation and adverse selection arises, but it can be eliminated if the share of informed consumers is high enough. However with pessimistic consumers, information disparities can also lead to inelastic demands and market segmentation, such that externalities
    Keywords: Asymmetric information, Brand premium, Quality uncertainty
    JEL: L15 L13 D82
    Date: 2016–04
  3. By: L. Lambertini; A. Mantovani
    Abstract: We revisit Fujiwara's (2008) differential duopoly game to show that the degenerate nonlinear feedback identi ed by the tangency point with the stationary state line is indeed unstable, given the dynamics of the natural resource exploited by fi rms. To do so, we fully characterise the continuum of nonlinear feedback solution via Rowat's (2007) method, characterising the in finitely many stable nonlinear feedback equilibria.
    JEL: C73 L13 Q2
    Date: 2016–02
  4. By: Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
    Abstract: We analyse a principal-agent contracting model with asymmetric information between a supplier and a retailer. Both the supplier and the retailer have the classical non-linear economic ordering cost functions consisting of ordering and holding costs. We assume that the retailer has the market power to enforce any order quantity. Furthermore, the retailer has private holding costs. The supplier wants to minimise his expected costs by offering a menu of contracts with side payments as an incentive mechanism. We consider a general number of discrete single-dimensional retailer types with type-dependent default options. A natural and common model formulation is non-convex, but we present an equivalent convex formulation. Hence, the contracting model can be solved efficiently for a general number of retailer types. We also derive structural properties of the optimal menu of contracts. In particular, we completely characterise the optimum for two retailer types and provide a minimal list of candidate contracts for three types. Finally, we prove a sufficient condition to guarantee unique contracts in the optimal solution for a general number of retailer types.
    Keywords: economic order quantity, mechanism design, asymmetric information, hidden convexity
    Date: 2016–05–10
  5. By: Marco de Pinto (Institute for Labour Law and Industrial Relations in the EU, University of Trier); Laszlo Goerke (Institute for Labour Law and Industrial Relations in the EU, University of Trier)
    Abstract: If input markets are competitive and output per firm declines with the number of firms (business stealing effect), there will be excessive entry into a Cournot oligopoly for a homogeneous commodity. However, input markets are often imperfectly competitive and the price of labor is determined by collective bargaining. The resulting rise in wages reduces output and profits and can deter entry. We analyze under which conditions greater bargaining power by the trade union reduces entry and raises welfare. Furthermore, we show that collective bargaining loosens the linkage between business stealing and excessive entry.
    Keywords: Endogenous Entry, Oligopoly, Trade Unions, Wage Bargaining, Welfare
    JEL: D43 J51 L13
    Date: 2016–03
  6. By: Jeroen Hinloopen (Utrecht University, the Netherlands); Adriaan R. Soetevent (University of Groningen, the Netherlands)
    Abstract: The common view that buyer power of insurers may effectively counteract provider market power critically rests on the idea that consumers and insurers have a joint interest in extracting price concessions. However, in markets where the buyer is an insurer, the interests of insurers and consumers to reduce prices may be importantly misaligned. The positive dependence between loss size and the insurer's expected profits limits the insurer's incentives to reign in loss sizes; in markets with small initial loss sizes, insurers may try to raise these in order to create demand for insurance. After having defined insurance and non-insurance markets based on the initial loss size, we develop theory to show that insurers with buyer power have incentives to create insurance markets. Insurer competition will push their profits to zero but markets do not return to the initial non-insurance state. This constitutes a welfare loss. We design experimental insurance markets to test our theory and find support. Monopolistic insurer-subjects in non-insurance markets increase loss sizes to establish insurance markets. Insurer competition eliminates profits but not the loss size to uninsured consumers. This provides an additional reason to be careful in granting insurers buyer power.
    Keywords: insurance markets; risk elicitation; experiment; buyer power
    JEL: C92 D81 G22 I11 L13
    Date: 2016–04–26
  7. By: Eric Helland; Seth A. Seabury
    Abstract: The use of “pay-for-delay” settlements in patent litigation – in which a branded manufacturer and generic entrant settle a Paragraph IV patent challenge and agree to forestall entry – has come under considerable scrutiny in recent years. Critics argue that these settlements are collusive and lower consumer welfare by maintaining monopoly prices after patents should have expired, while proponents argue they reinforce incentives for innovation. We estimate the impact of settlements to Paragraph IV challenges on generic entry and evaluate the implications for drug prices and quantity. To address the potential endogeneity of Paragraph IV challenges and settlements we estimate the model using instrumental variables. Our instruments include standard measures of patent strength and a measure of settlement legality based on a split between several Circuit Courts of Appeal. We find that Paragraph IV challenges increase generic entry, lower drug prices and increase quantity, while settlements effectively reverse the effect. These effects persist over time, inflating price and depressing quantity for up to 5 years after the challenge. We also find that eliminating settlements would result in a relatively small reduction in research and development (R&D) expenditures.
    JEL: I1 K0
    Date: 2016–04
  8. By: Heim, Sven; Hüschelrath, Kai; Schmidt-Dengler, Philipp; Strazzeri, Maurizio
    Abstract: We estimate the causal impact of restructuring aid granted by the European Commission between 2003 and 2012 on the survival and financial viability of aided firms. Using a comprehensive dataset we find that restructuring aid increases a firm's average survival time by 8 to 15 years and decreases the hazard rate by 58 to 68 percent, depending on the definition of firm survival. Further analysis finds strong support that, in the longer run, aid receiving firms have a significantly higher probability to improve their financial viability than the counterfactual group.
    Keywords: government policy,state aid,ex-post evaluation,survival,European Union
    JEL: C41 D62 D73 G33 G38 H23 L52 L98 O52
    Date: 2016
  9. By: Sharat Ganapati (Dept. of Economics, Yale University); Joseph S. Shapiro (Cowles Foundation, Yale University); Reed Walker (University of California, Berkeley, IZA, & NBER)
    Abstract: This paper studies how increases in energy input costs for production are split between consumers and producers via changes in product prices (i.e., pass-through). We show that in markets characterized by imperfect competition, marginal cost pass-through, a demand elasticity, and a price-cost markup are sucient to characterize the relative change in welfare between producers and consumers due to a change in input costs. We find that increases in energy prices lead to higher plant-level marginal costs and output prices but lower markups. This suggests that marginal cost pass-through is incomplete, with estimates centered around 0.7. Our confidence intervals reject both zero pass-through and complete pass-through. We find heterogeneous incidence of changes in input prices across industries, with consumers bearing a smaller share of the burden than standards methods suggest.
    Date: 2016–05
  10. By: M. E. Bontempi; L. Lambertini; E. Medeossi
    Abstract: Studies about innovation find evidence of a positive relationship between technological advancement and firm performance, in particular when the innovative effort is continuous. This paper aims to further the analysis on the duration of R&D investment at the firm level. The contribution of this study is threefold: first, we extend Máñez et al. [2014], Triguero et al. [2014] analysis for Spain to the Italian case: we use a panel of manufacturing and service companies, thus enlarging the view of R&D duration within the European countries. Secondly, from a methodological point of view, we employ both discrete- and continuous-time duration models, in order to test the Proportional Hazards (PH) assumption, i.e. the assumption that the hazard rate is equivalent over time across groups. Last, but not least, we assess whether a firm’s likelihood of continuing investment in R&D depends on the market power of companies. We test alternative measures for market power: the classical price-cost margin and a new proxy for the firm demand elasticity, obtained from a specific survey question. Results are in line with the hypothesis that R&D presents considerable temporal spill overs and strong persistence, even once unobserved heterogeneity is controlled for. Also, we argue that the appropriate proxy for market power is the firm demand elasticity, and we find support for the Schumpeterian hypothesis.
    JEL: C23 C41 D22 G32 L10 O30
    Date: 2016–02
  11. By: Jones, Daniel; Propper, Carol; Smith, Sarah
    Abstract: Why do firms adopt non-profit status? One argument is that non-profit status serves as a signal of quality when consumers are not well informed. A testable implication is that an increase in consumer information may lead to a reduction in the number of non-profits in a market. We test this idea empirically by exploiting an exogenous increase in consumer information in the US nursing home industry. Indeed, we find that the information shock led to a reduction in the share of non-profit homes in the market, driven by a combination of home closure and sector switching. The lowest quality non-profits were the most likely to exit. Our results have important implications for the effects of reforms to increase consumer provision in a number of public services.
    Keywords: non-profit; nursing homes; quality disclosure
    JEL: I11 I18 L31
    Date: 2016–04
  12. By: Yun Jeong Choi (Yonsei University); Jong-Hee Hahn (Yonsei University); Hojung Kim (Korea Information Society Development Institute)
    Abstract: This paper examines how the firms¡¯ foreclosure incentive is affected by the degree of vertical integration, measured by the number of vertically integrated firms, in vertically-related markets. Using seven-year daily screening data in the Korean movie industry, we empirically investigate how the exhibition behavior of vertically integrated and separated theaters respectively responds to the change in the degree of vertical integration. The vertical separation of a formerly integrated firm in 2007 serves as a structural break in the market structure. Our results show that the foreclosure incentive of vertically integrated firms generally decreases as the degree of vertical integration decreases (i.e., the market is composed of more separated independent firms). However, we find the integrated firms strengthened foreclosure to the newly separated firm after the breakup event. This seems to indicate the strategic behavior of existing integrated theaters to weaken the market position of their formerly integrated rival. We also observe the newly separated firms behave more like other independent firms with no sign of foreclosing behavior.
    Keywords: Vertical Integration, Foreclosure, Market Structure, Movie Industry
    Date: 2016–05
  13. By: Takauchi, Kazuhiro
    Abstract: We show that under a fixed-price contract where an upstream firm first sets the input price and downstream firms subsequently invest in R&D, all firms can become worse off when considering two-way trade with firm-specific carriers.
    Keywords: Fixed-price contract; Firm-specific carriers; R&D; Two-way trade
    JEL: F12 L13 O31 R40
    Date: 2016–05–18
  14. By: Bernardo Batiz-Lazo; Gustavo A. Del Angel
    Abstract: In this paper we discuss the genesis and early international expansion of the bank issued credit card. Empirical evidence documents the limits of a single firm building a proprietary network, because success came to a constellation of participants that combined three characteristics namely a critical mass of both retail customers and retail merchants; the capacity to adopt and implement new technological solutions; and the ability to forge resilient collaboration across national borders. This evidence provides further support to the importance of collaboration in retail financial services as means to appropriate network externalities. We also argue that initial conditions for this industry had greater implications for long-term success than has been acknowledged by other conceptual and empirical studies (in particular the literature around two-sided markets, which has focused attention on the determinants of the interchange fee).
    Keywords: Credit card, payments, cashless, two sided markets, payment tolls, Bank of America, Barclays, Banamex, Bancomer, Banco de Bilbao, British banks, Mexican banks, Spanish banks
    JEL: E51 L5 N1 N2 N8
    Date: 2016–03
  15. By: Michele Cincera; Lauriane Dewulf; Antonio Estache
    Keywords: mobile; fixed; broadband; substitution; speed; econometrics; Europe; deregulation; competition; ICT
    JEL: D43 L43 L86
  16. By: Rose, Christiern
    Abstract: Retail prices of illicit drugs have fallen despite rising supply disruption. This article presents and empirically tests a model which may explain the price puzzle. Supply disruption increases the cost of purity. Illicit drugs are experience goods, with demand depending on the seller’s purity reputation. There is an equilibrium in which seizures decrease purity, reducing future demand and prices. These predictions are tested using monthly data for crack cocaine in Washington DC. Persistence of the series is exploited to handle endogeneity resulting from seizures mirroring supply. A 10% increase in seizures reduces purity by 4.7% and future prices by 2.3%.
    Keywords: Illicit drugs, seizures, seller reputation
    JEL: K14 L11 L14
    Date: 2016–04

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