nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒05‒28
eleven papers chosen by
Russell Pittman
United States Department of Justice

  1. Entry Games and Free Entry Equilibria By Michele Polo
  2. Excessive Competition for Headline Prices By Inderst, Roman; Obradovits, Martin
  3. Moral Hazard, Bertrand Competition, and Natural Monopoly By Guha, Brishti
  4. Demand-Driven Integration and Divorcement Policy By Patrick Legros; Andrew F. Newman
  5. Buying frenzies in durable-goods markets By Ting Liu; Pasquale Schiraldi
  6. Coordinating R&D efforts for quality improvement along a supply chain By L. Lambertini
  7. A comment on 'Cross-border merger, vertical structure, and spatial competition' By Konstantinos Eleftheriou; Nickolas J. Michelacakis; Vassilios G. Papavassiliou
  8. When economics met antitrust: The second Chicago School and the economization of antitrust law By Patrice Bougette; Marc Deschamps; Frédéric Marty
  9. The Welfare Eff ects of Vertical Integration in Multichannel Television Markets By Crawford, Gregory S.; Lee, Robin S.; Whinston, Michael; Yurukoglu, Ali
  10. The impact of the market transparency unit for fuels on gasoline prices in Germany By Dewenter, Ralf; Heimeshoff, Ulrich; Lüth, Hendrik
  11. Assessing Firm Behavior in Carve-out Markets: Evidence on the Impact of Carve-out Policy By Gayle, Philip; Thomas, Tyson

  1. By: Michele Polo
    Abstract: This Chapter reviews the theoretical liteature on entry games and free entry equilibria. We show that a wide range of symmetric oligopoly models share common comparative statics properties. Individual profits and quantities decrease in the number of firms, and tend to competitive or monopolistic competitive equilibria when the number of firms increases indefinitely. The maximum number of firms sustainable in a symmetric long run equilibrium depends on technology (economies of scale), preferences (market size) and strategies (toughness of price competition). On the normative side, in homogeneous product markets the business stealing effect drives the result of excessive entry, whereas adding product differentiation and the utillity from variety may revert the result. We then consider asymmetric free entry equilibria that exploit the aggregative nature of many oligopoly models. Finally, we discuss endogenous sunk costs and persistent concentration and frictionless entry and contestable markets.
    Keywords: Entry, Free entry equilibria, endogenous and exogsnous sunk costs, contestable markets
    JEL: L1 L13 D43
    Date: 2015
  2. By: Inderst, Roman; Obradovits, Martin
    Abstract: When firms' shrouding of charges, as in Gabaix and Laibson (2006), meets with consumers' salient thinking, as in Bordalo et al. (2013), this can have severe welfare implications. The ensuing excessive competition for headline prices tends to inefficiently bias consumers' choice towards low-quality products, which is compounded when firms react and reduce quality beyond what would be cost efficient. As more intense shopping leads to a greater pass through of shrouded charges into lower headline prices, which aggravates the problem, competition policy is no substitute for consumer protection policy. While in our model all consumers are potential victims of salient thinking and shrouded charges, salient thinking becomes effective only for those who are attentive to different offers. Attentive consumers are likely to show ex-post regret and they can be ex-ante worse off, even though their choice set is larger. The combination of shrouding and salient thinking can sufficiently disadvantage high-quality firms so as to make them willing to educate consumers and unshroud all charges. While there is no unshrouding on equilibrium, high-quality firms' threat of unshrouding may sufficiently discipline firms to make efficient product choices.
    Keywords: attention; hidden fees; price competition; salience; shopping; shrouded charges; unshrouding
    JEL: D11 D18 D21 D43 D60 L11 L13 L15
    Date: 2016–05
  3. By: Guha, Brishti
    Abstract: In the traditional model of Bertrand price competition among symmetric firms, there is no restriction on the number of firms that are active in equilibrium. A symmetric equilibrium exists with the different firms sharing the market. I show that this does not hold if we preserve the symmetry between firms but introduce moral hazard with a customer-sensitive probability of exposure; competition necessarily results in a natural monopoly with only one active firm. Sequential price announcements and early adoption are some equilibrium selection mechanisms that help to pin down the identity of the natural monopolist. If we modify the standard Bertrand assumptions to introduce decreasing returns to scale, a natural oligopoly will emerge instead of a natural monopoly. The insights of the basic model are robust to many extensions.
    Keywords: Bertrand competition, active firms, moral hazard, natural monopoly
    JEL: C73 D43 D82 L11
    Date: 2016–04–26
  4. By: Patrick Legros (Universite libre de Bruxelles (ECARES), Northeastern University and CEPR); Andrew F. Newman (Boston University & CEPR)
    Abstract: Traditionally, vertical integration has concerned industrial economists only insofar as it a ects market outcomes, particularly prices. This paper considers reverse causality, from prices and more generally, from demand to integra- tion in a model of a dynamic oligopoly. If integration is costly but enhances productive eciency, then a trend of rising prices and increasing integration could be due to growing demand, in which case a divorcement policy of forced divestiture may be counterproductive. Divorcement can only help consumers if it undermines collusion, but then there are dominating policies. We discuss well-known divorcement episodes in retail gasoline and British beer, as well as other evidence, in light of the model.
    Keywords: theory of the rm, reverse causality, vertical integration, OIO, regulation, antitrust
    JEL: D23 D43 L2 L4 L5
  5. By: Ting Liu; Pasquale Schiraldi
    Abstract: We explain why a durable-goods monopolist would like to create a shortage during the launch phase of a new product. We argue that this incentive arises from the presence of a second-hand market and uncertainty about consumers׳ willingness to pay for the good. Consumers are heterogeneous and initially uninformed about their valuations but learn about them over time. Given demand uncertainty, first period sales may result in misallocation and lead to active trading on the secondary market after the uncertainty is resolved. Trading on the second-hand market will generate additional surplus. This surplus can be captured by the monopolist ex-ante because consumers are forward-looking, and the price they are willing to pay incorporates the product׳s resale value. As a consequence, when selling to uninformed consumers, the monopolist faces the trade-off between more sales today and a lower profit margin. Specifically, because the product׳s resale value is negatively related to the stock of the good in the second-hand market, selling more units today will result in a lower equilibrium price of the product. Therefore, the monopolist may find it optimal to create a shortage and ration consumers to the second period. We characterize conditions under which the monopolist would like to restrict sales and generate buying frenzies.
    Keywords: buying frenzies; second-hand market; durable goods; consumer uncertainty
    JEL: N0 R14 J01 L81
    Date: 2014–08
  6. By: L. Lambertini
    Abstract: The optimal design of two-part tariffs is investigated in a dynamic model where two firms belonging to the same supply chain invest in R&D activities to increase the quality of the final product. It is shown that the replication of the vertically integrated monopolist’s performance can be attained using a TPT in which the fee is a linear function of either the upstream R&D effort or product quality itself. The possibility of relying on R&D figures appearing in the upstream firm’s balance sheet is desirable as quality enhancement might not be observable or verifiable.
    JEL: C73 L12 O31
    Date: 2016–02
  7. By: Konstantinos Eleftheriou (Department of Economics, University of Piraeus, Greece); Nickolas J. Michelacakis (Department of Economics, University of Piraeus, Greece); Vassilios G. Papavassiliou (University College Dublin, Ireland; The Rimini Centre for Economic Analysis, Italy)
    Abstract: The aim of this paper is to revise and correct the results obtained in Beladi et al. [Beladi, H., Chakrabarti, A., Marjit, S., 2010. Cross-border merger, vertical structure, and spatial competition. Economics Letters 109, 112-114]. Specifically, we prove that in the pre-merger free-trade case, Nash equilibrium locations coincide with the equilibrium locations of the two downstream firms, following a cross-border upstream merger.
    Date: 2016–05
  8. By: Patrice Bougette (Université Nice Sophia Antipolis (UNS)); Marc Deschamps (Université de Lorraine (UL)); Frédéric Marty (OFCE)
    Abstract: In this article, the authors interrogate legal and economic history to analyze the process by which the Chicago School of Antitrust emerged in the 1950s and became dominant in the United States. They show that the extent to which economic objectives and theoretical views shaped the inception of antitrust law. After establishing the minor influence of economics in the promulgation of U.S. competition law, they highlight U.S. economists’ caution toward antitrust until the Second New Deal and analyze the process by which the Chicago School developed a general and coherent framework for competition policy. They rely mainly on the seminal and programmatic work of Director and Levi (1956) and trace how this theoretical paradigm became collective—that is, the “economization” process in U.S. antitrust. Finally, the authors discuss the implications and possible pitfalls of such a conversion to economics-led antitrust enforcement.
    Keywords: Chicago School of Antitrust; Antitrust law
    Date: 2015–06
  9. By: Crawford, Gregory S.; Lee, Robin S.; Whinston, Michael; Yurukoglu, Ali
    Abstract: We investigate the welfare effects of vertical integration of regional sports networks (RSNs) with programming distributors in U.S. multichannel television markets. Vertical integration can enhance efficiency by reducing double marginalization and increasing carriage of channels, but can also harm welfare due to foreclosure and raising rivals' costs incentives. We estimate a structural model of viewership, subscription, distributor pricing, and affiliate fee bargaining using a rich dataset on the U.S. cable and satellite television industry (2000-2010). We use these estimates to analyze the impact of simulated vertical mergers and de-mergers of RSNs on competition and welfare, and examine the efficacy of regulatory policies introduced by the U.S. Federal Communications Commission to address competition concerns in this industry.
    Keywords: cable television; double marginalization; foreclosure; vertical integration
    JEL: L13 L42 L51 L82
    Date: 2016–03
  10. By: Dewenter, Ralf; Heimeshoff, Ulrich; Lüth, Hendrik
    Abstract: Increasing horizontal as well as vertical transparency in oligopolistic markets can be advantageous for consumers, due to reduced search costs. However, market transparency can also affect incentives to deviate from collusive agreements and the punishment by rival firms in the market. Using a panel of 27 European countries, we analyze the impact of increased market transparency via the introduction of a market transparency unit for fuels in Germany. Applying a difference-in-differences approach, we find evidence that both gasoline and diesel prices have increased. While consumers may be better off using a retail price app for fuels, gas stations are also able to compare prices at almost no cost.
    Keywords: market transparency unit,regulation,fuel prices,difference-in-differences
    Date: 2016
  11. By: Gayle, Philip; Thomas, Tyson
    Abstract: Airlines wanting to cooperatively set prices for their international air travel service must apply to the relevant authorities for antitrust immunity (ATI). While cooperation may yield benefits, it can also have anti-competitive effects in markets where partners competed prior to receiving ATI. A carve-out policy forbids ATI partners from cooperating in markets policymakers believe will be most harmed by anti-competitive effects. We examine carve-out policy applications to three ATI partner pairings, and find evidence more consistent with cooperative pricing in carve-out markets in spite of the policy, calling into question the effectiveness of the policy in achieving intended market outcomes.
    Keywords: Airline competition; Antitrust immunity; Carve-out Policy
    JEL: L13 L40 L93
    Date: 2016–04–27

This nep-com issue is ©2016 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.