nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒07‒16
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Is Amazon the next Google? By Budzinski, Oliver; Köhler, Karoline Henrike
  2. The Nash bargaining solution in vertical relations with linear input prices By Aghadadashli, Hamid; Dertwinkel-Kalt, Markus; Wey, Christian
  3. Unprofitable horizontal mergers, external effects, and welfare By Budzinski, Oliver; Kretschmer, Jürgen-Peter
  4. Dynamic Demand Estimation in Auction Markets By Matthew Backus; Gregory Lewis
  5. Essays on bid rigging By Seres, Gyula
  6. "Auctions For Complements –An Experimental Analysis" By Daniel Marszalec
  7. Liquidity and Prices in Decentralized Markets with Almost Public Information By Anton Tsoy
  8. Risk and Loss Aversion, Price Uncertainty and the Implications for Consumer Search By Adriaan R. Soetevent; Tadas Bruzikas
  9. Semiparametric estimation of CES demand system with observed and unobserved product characteristics By Joonhwi Joo; Ali Hortacsu
  10. Incentive schemes, private information and the double-edged role of competition for agents By Christina Bannier; Eberhard Feess; Natalie Packham; Markus Walzl
  11. Offering Energy Efficiency under Imperfect Competition and Consumer Inattention By Tode, Christian
  12. Multimarket Competition and Profitability: Evidence from Ukrainian banking By Pham, Tho; Talavera, Oleksandr; Yang, Junhong
  13. Market power and media revenue allocation in professonal sports: The case of formula one By Budzinski, Oliver; Müller-Kock, Anika
  14. Do diversity, creativity and localized competition promote endogenous firm formation? Evidence from a high-tech US industry By Tsvetkova, Alexandra
  15. Ökonomische Anmerkungen zur aktuellen Netzneutralitätspolitik in den USA By Neute, Nadine; Budzinski, Oliver

  1. By: Budzinski, Oliver; Köhler, Karoline Henrike
    Abstract: Dominant or apparently dominant internet platform increasingly become subject to both antitrust investigations and further-reaching political calls for regulation. While Google is currently in the focus of the discussion, the next candidate is already on the horizon - the ubiquitous online trading platform Amazon. Competitors and suppliers but also famous economists like Paul Krugman unite in criticizing Amazon's market power and alleged abuse of it. In this paper, we collect the multitude of allegations against Amazon and categorize them according to types of potential anticompetitive conduct or types of market failure. We provide an economic analysis of these allegations based upon economic theory as well as publicly available information and data. As one of our main results, we find that the most severe allegations against Amazon do not hold from an economic perspective and, consequently, do not warrant regulation or other drastic interventions (like breaking the company up). However, several areas of conduct, in particular, the use of best price clauses and the (anti-) competitive interplay of Amazon and the major publishers in the e-book market require competition policy action. The standard antitrust instruments, enriched with modern economic theory, should suffice to disincentivize the identified anticompetitive conduct for now.
    Keywords: antitrust,internet,platform economics,media economics,competition policy,innovation,Amazon,Google,e-books,book industry,best-price clauses,abuse of dominance,pricing,regulation
    JEL: K21 L41 L42 L81 K23 L50 L82 L12 D40 L25 Z11 B52 L86 M21
    Date: 2015
  2. By: Aghadadashli, Hamid; Dertwinkel-Kalt, Markus; Wey, Christian
    Abstract: We re-examine the Nash bargaining solution when an upstream and a downstream firm bargain over a linear input price. We show that the profit sharing rule is given by a simple and instructive formula which depends on the parties' disagreement payoffs, the profit weights in the Nash-product and the elasticity of derived demand. A downstream firm's profit share increases in the equilibrium derived demand elasticity which in turn depends on the final goods' demand elasticity. Our simple formula generalizes to bargaining with N downstream firms when bilateral contracts are unobservable.
    Keywords: Nash Bargaining,Demand Elasticity
    JEL: L13
    Date: 2016
  3. By: Budzinski, Oliver; Kretschmer, Jürgen-Peter
    Abstract: Standard analysis of mergers in oligopolies along the lines of the popular Farrell-Shapiro-Framework (FSF) relies regarding its policy conclusions sensitively on the assumption that rational agents will only propose privately profitable mergers. If this assumption held, a positive external effect of a proposed merger would represent a sufficient condition to allow the merger. However, the empirical picture on mergers and acquisitions reveals a significant share of unprofitable mergers and economic theory, moreover, demonstrates that privately unprofitable mergers can be the result of rational action. Therefore, we drop this restrictive assumption and allow for unprofitable mergers to occur. This exerts a considerable impact on merger policy conclusions: while several insights of the original analysis are corroborated (f.i. efficiency defence), a positive external effect does not represent a sufficient condition for the allowance of a merger anymore. Applying such a rule would cause a considerable amount of false decisions.
    Keywords: mergers & acquisitions,oligopoly theory,horizontal merger policy,profitability of mergers,antitrust
    JEL: L13 L41 K21 D43
    Date: 2015
  4. By: Matthew Backus; Gregory Lewis
    Abstract: Economists have developed empirically tractable demand systems for fixed price markets. In contrast, empirical auction techniques treat each auction in isolation, ignoring market interactions. We provide a framework for estimating demand in a large auction market with a dynamic population of buyers with unit demand and heterogeneous preferences over a finite set of differentiated products. We offer an empirically tractable equilibrium concept under which bidders behave as though they are in a steady-state, characterize bidding, and prove existence of equilibrium. Having developed a demand system, we show that it is non-parametrically identified from panel data, and that this result is robust to typical data limitations, reserve prices, random coefficient demand, public signals that refine beliefs about market conditions, unobserved heterogeneity, idiosyncratic preferences, and random latent outside options. We apply the model to estimate demand and measure consumer surplus in the market for compact cameras on eBay. Our analysis highlights the importance of both dynamic bidding strategies and panel data sample selection issues when analyzing these markets.
    JEL: C57 D44 L0
    Date: 2016–06
  5. By: Seres, Gyula (Tilburg University, School of Economics and Management)
    Abstract: Manipulating prices in auctions raises antitrust concerns. Collusion lowers the revenue of the auctioneer and creates information rents. Bid rigging is a prevalent phenomenon and the affected market is enormous. Public procurement amounts to between 10 and 25 percent of national GDP in industrialized countries. This doctoral thesis contributes to the literature by showing that the source of information asymmetry between cartel members has a profound effect on the feasibility and form of collusion. This point is not without policy relevance. Results of this thesis can contribute to our understanding on combating collusion and promoting allocative efficiency. Chapter 1 builds up a model showing public revelation of information by the auctioneer may foster cartel formation and decrease expected revenue, contradicting the Linkage Principle. Chapter 2 investigates the form of cartel mechanisms. A theoretical model shows why knockout auctions are the prevalent form of bid rigging. Full information revelation within cartel is generally not possible in equilibrium. Chapter 3 is an experimental study focusing on the effect of auction cartels on allocative efficiency. Robust estimates show that the effect is negative and significant.
    Date: 2016
  6. By: Daniel Marszalec (Faculty of Economics, The University of Tokyo)
    Abstract: I evaluate the performance of four static sealed-bid package auctions in an experimental setting with complementarities. The valuation model comprises two items, and three bidders: two `local bidders demand one item only, while the third (global) bidder only wants both. The rules I compare include the Vickrey and first-price auctions, Vickrey Nearest Rule and the Reference Rule. Auction-level tests find the first-price auction revenue dominant overall, while the Vickrey auction performs worst; the other two rules rank intermediate. Bidder-level tests of the experimental data reject the competitive equilibrium bidding functions: overbidding is widespread in all four auctions, and bidders are averse to submitting boundary bids. I also observe behaviour consistent with collusive bidding in the Vickrey auction. Contrary to theoretical predictions, the Vickrey auction performs worst on efficiency, primarily for this reason.
  7. By: Anton Tsoy (EIEF)
    Abstract: This paper develops a dynamic equilibrium model of decentralized asset markets with both search delays and endogenous bargaining delays arising in the limit of almost public information about the asset quality. The model has several implications for liquidity and prices. First, conditional on the public information, the liquidity is U-shaped in the quality and assets in the middle of the quality range may not be traded at all. Second, search and bargaining frictions have opposite effects on the market liquidity showing that transparency, while welfare improving, may also hurt the market liquidity. Third, the substitutability of different asset classes leads to flights-to-liquidity during periods of market uncertainty and reveals adverse effects of gradual transparency policies. Finally, the paper derives the effect of asset liquidity, market liquidity and market tightness on asset prices.
    Date: 2016
  8. By: Adriaan R. Soetevent (University of Groningen, The Netherlands); Tadas Bruzikas (University of Groningen, The Netherlands)
    Abstract: Do the choices of consumers who search for a product's best price exhibit risk neutral, risk averse or loss averse risk attitudes? We study how in a problem of sequential search with costless recall the relation between a consumer's willingness to pay for continued search and the level of price uncertainty depends on her risk preferences. Independent of the current best price, an increase in price uncertainty encourages continued search when consumers are risk neutral. However, we prove that theory predicts an inversion when consumers are either risk or loss averse. In those cases, an increase in price uncertainty only increases the consumer's willingness to pay (WTP) for continued search if the current best price is sufficiently low. We subsequently use this observation in an empirical test to identify between different risk preferences in a stylized problem of sequential search. In line with the inversion, we find that a reduction in price uncertainty decreases the WTP for continued search when the current best price is low but increases the WTP when it is high. While at odds with the assumption of risk neutrality, this finding is consistent with models of consumer risk and/or loss aversion. Moreover, the model parameters of risk and loss aversion that lead to the best empirical fit have values similar to those estimated for other decision domains.
    Keywords: consumer search; risk aversion; loss aversion; price uncertainty
    JEL: D11 D12 D83 M31
    Date: 2016–07–04
  9. By: Joonhwi Joo (University of Chicago); Ali Hortacsu (University of Chicago)
    Abstract: We develop a demand estimation framework with observed and unobserved product char- acteristics based on CES preferences. We show that our demand system can nest the logit demand system with observed and unobserved product characteristics, which has been widely used since Berry (1994); Berry et al. (1995). Furthermore, the demand system we develop can directly accommodate zero market shares by separating the extensive and the intensive margins. We apply our framework to the scanner data of cola sales, which shows that the estimated demand curves can even be upward sloping if zero market shares are not properly accommodated.
    Date: 2016
  10. By: Christina Bannier; Eberhard Feess; Natalie Packham; Markus Walzl
    Abstract: This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard and risk-averse agents, who have private information on their productivity. Two vertically differentiated firms compete for agents by offering contracts with fixed and variable payments. The superior firm employs both agent types in equilibrium, but the competitive pressure exerted by the inferior firm has a strong impact on contract design: For high degrees of vertical differentiation, i.e. low competition, low-ability agents are under-incentivized and exert too little effort. For high degrees of competition, high-ability agents are over-incentivized and bear too much risk. For a range of intermediate degrees of competition, however, agents' private information has no impact and both contracts are second-best. Interim efficiency of the least-cost separating allocation in the inferior firm is a sufficient condition for equilibrium existence. If this is violated, there can only be equilibria where the inferior firm ''overbids'', i.e. where it would not break even when attracting both agent types. Adding horizontal differentiation allows for pure-strategy equilibria even when there would be no equilibrium without overbidding in the pure vertical model, but equilibria with overbidding fail to exist.
    Keywords: Incentive compensation, screening, imperfect labor market competition, vertical differentiation, horizontal differentiation, risk aversion
    JEL: D82 D86 J31 J33
    Date: 2016–07
  11. By: Tode, Christian (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))
    Abstract: Energy efficiency is considered to be a win-win situation for both the economy and the environment. Producing products and services at lower energy input and related input costs can contribute to climate change abatement and economic competitiveness. Actual implementation of energy efficiency falls short to expectations, though. For one thing, research suggests that consumer inattention is an underlying force for underinvestments. For another thing, energy supply markets are often characterized by imperfect competition. Do firms in the energy retail market have incentives to voluntarily introduce energy efficiency? Or should informational regulation inform inattentive consumers? In this article I show that consumer inattention and imperfect competition are the crucial drivers for firms' decisions to introduce or conceil energy efficiency to customers. I find two symmetric equilibria: One in which both firms introduce energy efficiency and one in which both firms conceil energy efficiency. Equilibrium coordination depends on the distribution of consumers that are attentive to energy effienciency and consumers that are not. Further, mandatory disclosure laws are found to be weakly welfare increasing.
    Keywords: Imperfect Competition; Consumer Inattention; Product Differentiation; Disclosure; Energy Efficiency
    JEL: D83 L13 L41
    Date: 2016–07–06
  12. By: Pham, Tho; Talavera, Oleksandr; Yang, Junhong
    Abstract: This paper examines the impacts of non-price competition on bank performance in the Ukrainian banking industry from 2009 Q1 to 2015 Q4. The competition is proxied by three measures of multimarket contacts. Our data reveal that banks with higher level of multiple market contacts are more likely to be profitable. The findings support the mutual forbearance hypothesis. When banks compete with rivals that are similar in size in multiple markets, they have incentives to cooperate instead of competing aggressively. Moreover, the effect is stronger when multimarket competitors are highly similar in size and interact in more competitive markets. Furthermore, we develop an identification strategy in which military actions are treated as an exogenous shock to banks with branches in those regions. The results suggest that after the conflict, the less affected banks do not have incentives to mutual forbear with more affected banks that experienced a sharper decline in number of branches.
    Keywords: Banking; Multimarket competition; Multimarket contact; Mutual forbearance hypothesis; Profitability; Identification strategy; Exogenous shock; Political conflict
    JEL: G21 L11 L25 L40
    Date: 2016–07–05
  13. By: Budzinski, Oliver; Müller-Kock, Anika
    Abstract: Recent allegations from participants of the FIA Formula One World Championship (F1) suggest that the promoter of F1 (possibly together with the sports association) violates European competition law in two ways. First, it alleged-ly abuses its market power by deducting an inappropriate high share from the rev-enues of the collective sale of media rights in order to boost the profits of its pri-vate equity parent company (vertical allocation of media revenue). Second, it alleg-edly forms a cartel with selected top teams at the detriment of smaller teams by providing both unjustified extra payments to these teams and enforcing a heavily biased horizontal allocation of media revenues, benefitting the cartel teams. Pro-fessional sports championships typically receive common revenue, for instance, from trademark rights and marketing, but often also from the sale of broadcasting and other media rights. This common revenue needs to be allocated in two ways: (i) vertical allocation between the sports authority and the participants, and (ii) hor-izontal allocation among the participants. Different professional sports champion-ships employ vastly differing schemes for both types of allocation. In this paper, we present an empirical assessment whether the current antitrust allegations against F1 may be valid. We employ concentration measures from empirical economics, like the Hirshman-Herfindahl-Index (HHI), the concentration ratio and the standard de-viation in order to assess different allocation schemes from different commercial sports. With the help of these indices we show that the allocation scheme em-ployed in F1 considerably differs from such used in other professional sports championships. We find the empirical picture to be consistent with an anticompetitive interpretation of F1 media revenue structures and policies. We conclude that there is merit in starting an in-depth antitrust investigation of Formula One motor racing, which would also represent an opportunity for the European Commission to cor-rect earlier mistakes.
    Keywords: competition,antitrust,abuse of market power,sports economics,formula one motor racing,sports business,media revenue,football
    JEL: K21 L12 L40 L83 Z20
    Date: 2016
  14. By: Tsvetkova, Alexandra
    Abstract: This paper tests the effect of diversity, creativity and localized competition on firm formation in US computer and electronic product manufacturing within the knowledge spillover theory of entrepreneurship (KSTE) framework. Fixed effects instrumental variable estimation results support the KSTE contention of a positive relationship between knowledge and entrepreneurship. Industrial diversity and diversity of knowledge tend to promote endogenous firm entry, whereas evidence on other factors is mixed. This points to sensitivity of conclusions in the KSTE literature to regional and industrial environments and calls for caution in interpreting and generalizing findings obtained in various settings.
    Keywords: innovation, entrepreneurship, firm formation, knowledge spillover theory of entrepreneurship, computer and electronic product manufacturing
    JEL: O1 O3 R1 R11
    Date: 2016–04–19
  15. By: Neute, Nadine; Budzinski, Oliver
    Abstract: Following the FCC Notice of proposed Rulemaking and the request for public comments a lively debate on how to protect the open Internet ensued and has now been closed by the approval of strong net neutrality rules by the FCC. This paper discusses the economic merit of alternative forms of regulation and points out implications of the current rules for further proceedings. We particularly highlight the parallels between the European and the American legal contexts and discuss un-der which circumstances prioritization influences the likelihood of market failure. From the (non)available empirical evidence on attempts to foreclose downstream markets and from the fact that interference with the freedom of opinion has been dealt with swiftly we conclude that the former legal framework was sufficient to deal with those concerns, while the new framework has severe drawbacks. Although a binding formalization of prioritization rules is necessary to reduce uncertainty and to close a debate which has been going on now since 2003 it will not pacify the ongoing debate, as H.R.2666 - No Rate Regulation of Broadband Internet Access Act has passed the House of Representatives and might counteract the FCCs net neutrality priciples.
    Keywords: Netzneutralität,Internetökonomie,Medienökonomik,Wettbewerb
    JEL: L86 L82 L40 K21 D80
    Date: 2016

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