nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒06‒25
twelve papers chosen by
Russell Pittman
United States Department of Justice

  1. Competitive Search with Ex-post Opportunism By Pere Gomis-Porqueras; Benoit Julien; Liang Wang
  2. Entry under an information-gathering monopoly By Alex Barrachina
  3. Bidding for network size By Foucart, Renaud; Friedrichsen, Jana
  4. Regulation versus Regulated Monopolization of a Cournot Oligopoly with Unknown Costs By Saglam, Ismail
  5. Pricing Patterns over Product Life-Cycle and Quality Growth at Product Turnover: Empirical Evidence from Japan By Nobuhiro Abe; Yojiro Ito; Ko Munakata; Shinsuke Ohyama; Kimiaki Shinozaki
  6. Price and Quality Decisions by Self-Serving Managers By Halbheer , Daniel; Bertini , Marco; Koenigsberg, Oded
  7. New Firms and Post-Entry Performance: The Role of Innovation. By Colombelli, Alessandra; Krafft, Jackie; Vivarelli, Marco
  8. Patents: A Means to Innovation or Strategic Ends? By Jiri Schwarz; Martin Stepanek
  9. Insurance and the High Prices of Pharmaceuticals By David Besanko; David Dranove; Craig Garthwaite
  10. Integration and Efficiency of European Electricity Markets: Evidence from Spot Prices By Klaus Gugler; Adhurim Haxhimusa; Mario Liebensteiner
  11. Air Service Agreement Liberalisation and Airline Alliances By OECD
  12. Prices and Competition. Evidence from a Social Program By Emilio Aguirre; Pablo Blanchard; Fernando Borraz; Joaquín Saldain

  1. By: Pere Gomis-Porqueras (Deakin University); Benoit Julien (UNSW Australia); Liang Wang (University of Hawaii Manoa)
    Abstract: We consider a frictional market where buyers are uncoordinated and sellers cannot commit ex-ante to either a per-unit price or quantity of a divisible good. Sellers then can exploit their local monopoly power by adjusting prices or quantities once the local demand is realized. We find that when sellers can adjust quantities ex-post, there exists a unique symmetric equilibrium where the increase in the buyer-seller ratio leads to higher quantities and prices in equilibrium. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium does not exist.
    Keywords: Competitive Search, Price Posting, Quantity Posting
    JEL: D40 L10
  2. By: Alex Barrachina (Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: The effects of information-gathering activities on a basic entry model with asymmetric information are analyzed. In the basic entry game, an incumbent monopoly faces potential entry by one firm without knowing with certainty whether this potential entrant is weak or strong. If the entrant decides to enter, the monopoly must compete with him and decide whether to accommodate or to fight. To include information-gathering activities, it is considered that the monopoly has access to an Intelligence System (IS) of a certain precision (exogenous and common knowledge) that generates a noisy signal about the entrant's type. When the monopoly believes that the entrant is weak, the probability of market entry increases only for the relatively inaccurate precision of the IS and decreases for relatively accurate precision. If the monopoly is not sure about the entrant’s level of strength or considers him to be strong, the information-gathering activities either have no effect on market entry or decrease the probability of entry. Not only do these results suggest that to inform the entrant credibly about information-gathering activities can be considered as a monopoly’s entry deterrence strategy, but they also provide give an idea about when to allow or not allow monopoly’s information-gathering activities.
    Keywords: Entry Deterrence, Information-Gathering, Asymmetric Information, Credible Communication
    JEL: C72 D82 L10 L12
    Date: 2016
  3. By: Foucart, Renaud; Friedrichsen, Jana
    Abstract: We study a game were two firms compete on investment in order to attract consumers. Below a certain threshold, investment aims at attracting ex-ante indifferent users. Above this threshold firms also compete for users loyal to the other firm. We find that, in equilibrium, firms do not choose their investment deterministically but randomize over two disconnected intervals. These correspond to competing for either the entire population or only the ex-ante indifferent users. While the benefits of attracting users are identical for both firms, the value of remaining passive and not investing at all depends on a firm's loyal base. The firm with the smallest base bids more aggressively to compensate for its lower outside option and achieves a monopoly position with higher probability than its competitor.
    Keywords: firms, quality competition, all-pay auction, status-quo bias
    JEL: D43 D44 M13
    Date: 2016–06–21
  4. By: Saglam, Ismail
    Abstract: This paper studies whether a Cournot oligopoly with unknown costs should be left unregulated, or regulated according to the optimal mechanism of Gradstein (1995), or first monopolized and then regulated according to the optimal mechanism of Baron and Myerson (1982). We show that the answer to this question depends on the number of the oligopolistic firms and the size of their fixed costs, as well as on the weight of the producer welfare in the social objective function.
    Keywords: Monopoly; Oligopoly; Cournot Competition; Regulation; Asymmetric Information
    JEL: D82 L51
    Date: 2016–06–06
  5. By: Nobuhiro Abe (Bank of Japan); Yojiro Ito (Bank of Japan); Ko Munakata (Bank of Japan); Shinsuke Ohyama (Bank of Japan); Kimiaki Shinozaki (Bank of Japan)
    Abstract: This paper examines pricing patterns over the product life-cycle and quality growth at the time of product turnover regarding a wide range of durable consumer goods sold in Japan. Applying hedonic regressions with time dummies to large granular data sets obtained from, the most popular price comparison website in Japan, we find out that sellers tend to raise product prices more than those justified by quality improvements to ensure the profitability at product turnover. A glance at the pricing patterns reveals that the prices of new products decrease gradually with the elapse of time, however, the pace of falling in prices varies considerably among commodities. The quality improvement ratio, which measures the contribution of quality growth to the price difference between matched pair of a new product and an old one by commodities, exhibits a unimodal distribution slightly fat-tailed to the right. The mode value of the distribution is about 0.5-0.6 for home electrical appliances and about 0.6-0.7 for digital consumer electronics. Those results provide an empirical support to the existing quality adjustment method in the field of the price index, so-called 50% rule, which has been implemented by some statistical agencies. Our findings bring significant implications for improving quality adjustment methods under uncertainty of quality evaluation and lead to the better understanding of the firms' price setting behavior.
    Keywords: price index; quality adjustment; price setting; hedonic approach
    JEL: C43 D22 L15
    Date: 2016–06–14
  6. By: Halbheer , Daniel; Bertini , Marco; Koenigsberg, Oded
    Abstract: This research studies the possibility that managers attribute firm performance to price and quality decisions in a self-serving manner: they tend to credit success in the market to the product characteristic that matches the commercial orientation of the business, but blame failure on the other. The problem with this reasoning is that managers then carry out adjustments based on biased information, which is suboptimal. The paper first models the phenomenon to clarify the cost of self-serving attributions to a firm. It then reports experiments that provide empirical support for the theory.
    Keywords: Causal inference; self-serving bias; managerial decision-making
    Date: 2016–03–20
  7. By: Colombelli, Alessandra; Krafft, Jackie; Vivarelli, Marco (University of Turin)
    Abstract: This paper investigates the reasons why entry per se is not necessarily good and the evidence showing that innovative startups survive longer than their non-innovative counterparts. In this framework, our own empirical analysis shows that greater survival is achieved when startups engage successfully in both product innovation and process innovation, with a key role of the latter. Moreover, this study goes beyond a purely microeconomic perspective and discusses the key role of the environment within which innovative entries occur. What shown and discussed in this contribution strongly supports the proposal that the creation and survival of innovative start-ups should become one qualifying point of the economic policy agenda.
    Date: 2016–03
  8. By: Jiri Schwarz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Martin Stepanek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: This paper utilizes a data set of over 208,000 U.S. patents applied for between 1975 and 2010 to study development of strategic patenting over time and across industries. With received citations as a measure of patent social value, we use data envelopment analysis to estimate firm-level relative importance of strategic versus protective patenting. Our novel identification strategy reveals there was an almost universal drop in patent social value in the second half of the 1990s, signaling a shift towards the strategic use of patents. But the development of patenting strategies continued even after 2000 with semiconductor companies increasing their focus on patent value relative to companies from other industries. On average, aerospace and software companies preferred the production of valuable patents, but patenting strategies can differ vastly even among companies operating within one industry. The results confirm our expectations regarding the focus of aerospace companies on socially valuable patents.
    Keywords: Patents, patent value, strategic patenting, intellectual property rights
    JEL: D23 K11 O32 O34
    Date: 2016–04
  9. By: David Besanko; David Dranove; Craig Garthwaite
    Abstract: We present a model in which prospective patients are liquidity constrained, and thus health insurance allows patients access to treatments and services that they otherwise would have been unable to afford. Consistent with large expansions of insurance in the U.S. (e.g., the Affordable Care Act), we assume that policies expand the set of services that must be covered by insurance. We show that the profit-maximizing price for an innovative treatment is greater in the presence of health insurance than it would be for an uninsured population. We also show that consumer surplus is less than it would be if the innovation was not covered. These results show that even in the absence of moral hazard, there are channels through which insurance can negatively affect consumer welfare. Our model also provides an economic rationale for the claim that pharmaceutical firms set prices that exceed the value their products create. We empirically examine our model's predictions by studying the pricing of oncology drugs following the 2003 passage of Medicare Part D. Prior to 2003, drugs covered under Medicare Part B had higher prices than those that would eventually be covered under Part D. In general, the trends in pricing across these categories were similar. However, after 2003 there was a far greater increase in prices for products covered under Part D, and as result, products covered by both programs were sold at similar prices. In addition, these prices were quite high compared to the value created by the products---suggesting that the forced bundle of Part D might have allowed firms to capture more value than their products created.
    JEL: H0 H51 I0 I1 I11 L1 L13
    Date: 2016–06
  10. By: Klaus Gugler (Department of Economics, Vienna University of Economics and Business); Adhurim Haxhimusa (Research Institute for Regulatory Economics, Vienna University of Economics and Business); Mario Liebensteiner (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper seeks to investigate the current state of market integration among European electricity day-ahead spot prices. We provide reasoning that market integration brings about benefits, such as lower average prices and increased welfare from allocative efficiency. Yet, price convergence leads to higher prices in the low-price market and to lower prices in the high-price market, which creates winners and losers and thus makes the political implementation of market integration cumbersome. In our empirical analysis, we utilize a large sample of hourly spot prices of 25 European markets for the period 01.01.2010–30.06.2015 and combine it with other relevant data such as interconnector capacities and the existence of market coupling. Firstly, empirical results from cointegration analysis indicate that market integration increased from 2010 to 2012 but then declined until 2015, most likely due to increased feed-in from intermittent renewables. Secondly, we empirically assess the speed of adjustment from price shocks and reach the conclusion that the resulting efficiency of integration is rather modest. In general, our findings suggest that integration among European electricity markets has a large potential for improvements from additional capacity investments and further promotion of market coupling.
    Keywords: Market integration, Spot Price, Convergence, Internal Market, Electricity
    JEL: F15 L81 L98 Q48
    Date: 2016–06
  11. By: OECD
    Abstract: This document explores the key elements of bilateral air service agreements (ASAs) and recent trends towards increasing liberalisation and examines linkages between ASAs and cross border airline alliance. It discusses issues related to antitrust reviews of proposed alliances and summarises and comments on the impacts of international airline alliances.
    Date: 2014–12–01
  12. By: Emilio Aguirre (Ministerio de Desarrollo Social (Uruguay)); Pablo Blanchard (Ministerio de Desarrollo Social (Uruguay)); Fernando Borraz (Banco Central del Uruguay); Joaquín Saldain (Banco Central del Uruguay)
    Abstract: We use a micro-price dataset to analyze the impact on prices of a social program in Uruguay that allow the beneficiaries to purchase food, beverages and cleaning items exclusively in certain small retailers. We find that the beneficiaries pay significantly higher prices in relation to prices in other retailers. We find this result for the whole country with the exception of areas with the highest retailer density in the capital city, Montevideo.
    Keywords: market structure, market power, prices, social program; estructura de mercado, poder de mercado, precios, programa social
    JEL: D4 I3 L1
    Date: 2015

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