nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒08‒07
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Collusion, Customization and Transparency By Francisco Martínez Sánchez
  2. Patent rights, product market reforms, and innovation By Aghion, Philippe; Howitt, Peter; Prantl, Susanne
  3. Endogenous Choice of Price or Quantity Contract with Upstream R&D Investment: Linear Pricing and Two-part Tariff Contract with Bargaining By Lee, DongJoon; Choi, Kangsik; Nariu, Tatsuhiko
  4. Innovation, Pricing and Targeting in Networks By Fabrizio Panebianco; Thierry Verdier; Yves Zenou
  5. Wybrane zagadnienia współpracy badawczo-rozwojowej przedsiębiorstw w ujęciu ekonomii gałęziowej By Karbowski, Adam; Prokop, Jacek
  6. Monopoly Power with a Short Selling Constraint By Robert Baumann; Bryan Engelhardt; David L. Fuller
  9. A regression model of product differentiation By Mogens, Fosgerau
  10. The Impact of Merger Legislation on Bank Mergers By Elena Carletti; Steven Ongena; Jan-Peter Siedlarek; Giancarlo Spagnolo
  11. Newspapers in Times of Low Advertising Revenues By Angelucci, Charles; Cagé, Julia
  12. The Strange Career of Independent Voting Trusts in U.S. Rail Mergers By Russell Pittman
  13. Product Mix and Firm Productivity Responses to Trade Competition By Thierry Mayer; Marc J. Melitz; Gianmarco I. P. Ottaviano
  14. Anticompetitive Practices in Romania, during 2012-2013 By Claudia BALAN
  15. Strengthening competition in network sectors and the internal market in Canada By Corinne Luu
  16. The Corporation Is Not a Nexus of Contracts. It’s an iPhone. By Richard N. Langlois

  1. By: Francisco Martínez Sánchez (Universidad de Alicante)
    Abstract: We analyze the e¿ect of customizing a product on the ability of firms to tacitly collude on prices when some consumers are not informed about price. Following Bar-Isaac et al. (2014), we allow firms to be located inside the circle in the Salop model (1979). Our analysis shows that the e¿ect of product customization on the stability of collusion depends on the sensitivity of consumers’ utility to the degree of customization. We also obtain that collusion becomes harder to sustain when more consumers are informed about prices. From our welfare analysis, we conclude that the e¿ects of customizing depend on the sensitivity of consumers’ utility to the degree of customization. Finally, we find that transparency has no e¿ect on the equilibrium outcome under collusion. However, at the punishment stage, the e¿ect of transparency is positive on the consumer surplus and negative on the producer surplus. Since these two e¿ects cancel each other out, we obtain that having more informed consumers on prices does not a¿ect welfare.
    Keywords: Collusion; Customization; The Salop model; Transparency
    JEL: D40 L10 L40
    Date: 2016–08
  2. By: Aghion, Philippe; Howitt, Peter; Prantl, Susanne
    Abstract: In this paper, we provide empirical evidence to the effect that strong patent rights may complement competition-increasing product market reforms in fostering innovation. First, we find that the product market reform induced by the large-scale internal market reform of the European Union in 1992 enhanced, on average, innovative investments in manufacturing industries of countries with strong patent rights since the pre-sample period, but not so in industries of countries with weaker patent rights. Second, the positive response to the product market reform is more pronounced in industries where, in general, innovators tend to value patent protection higher than in other industries, except for the manufacture of electrical and optical equipment. The observed complementarity between competition and patent protection can be rationalized using a Schumpeterian growth model with step-by-step innovation. In such a model, better patent protection prolongs the period over which a firm that successfully escapes competition by innovating, actually enjoys higher monopoly rents from its technological upgrade.
    Date: 2015
  3. By: Lee, DongJoon; Choi, Kangsik; Nariu, Tatsuhiko
    Abstract: We investigate the endogenous choice of strategic variable (a price or a quantity) by downstream firms in a two-tier industry in which an upstream firm performs the R&D investment. We show that when the upstream firm offers either linear discriminatory or uniform input price, it is a dominant strategy for each downstream firm to choose Bertrand competition when two products become relatively differentiated. Second, from the viewpoint of downstream firms, we show that Bertrand competition is more efficient than Cournot competition in some boundaries of Cournot equilibrium, which implies that each downstream firm faces a prisoners' dilemma under the Cournot equilibrium. However, when the downstream firms involve in centralized bargaining with an upstream firm to determine the two-part tariff discriminatory (uniform) input pricing contracts, we find that choosing price (quantity) contract is the dominant strategy for downstream firms. In this case, we further show that the level of social welfare is the same regardless of the mode of product market competition (i.e., Bertrand or Cournot).
    Keywords: Endogenous Choice, Bertrand competition, Cournot competition, Upstream Investment, Bargaining
    JEL: D43 L13 M21
    Date: 2016–07–22
  4. By: Fabrizio Panebianco; Thierry Verdier; Yves Zenou
    Abstract: Consider a network of firms where a firm T is given the opportunity to innovate a product (first-generation innovation). If successful, this firm can temporarily sell this innovation to her direct neighbors because this will give her access to a larger market. However, if her direct neighbors innovate themselves on top of firm T's innovation (second-generation innovations), then firm T loses the right to sell her initial innovation to the remaining firms in the market. We analyze this game where each firm (T and her direct neighbors) has to decide at which price they want to sell their innovation. We show that the optimal price policy of each firm depends on the level of property rights protection, the position of firm T in the network, her degree and the size of the market. We then analyze the welfare implications of our model where the planner that maximizes total welfare has to decide which firm to target. We show that it depends on the level of property rights protection and on the network structure in a non-trivial way. JEL classification: D85, L1, Z13. Keywords: Networks, diffusion centrality, targets, innovation.
    Date: 2016
  5. By: Karbowski, Adam; Prokop, Jacek
    Abstract: The aim of this paper is to analyze selected problems of interfirm R&D cooperation discussed in the industrial organization literature. Analyzed interrelated problems are: (i) stability of interfirm R&D cooperation, (ii) organization of interfirm R&D cooperation, (iii) asymmetries between cooperating firms and (iv) the impact of interfirm R&D cooperation on industry cartelization. On the basis of the literature review it can be concluded that the necessary condition for reaching benefits from interfirm R&D cooperation is to (1) successfully solve the free-rider problem arising in the process of knowledge sharing between collaborating firms and further (2) maintain stable cooperation. Obstacles to stable R&D cooperation can be, however, too low or too high values of asymmetries occurring between cooperating firms. Effective stabilization of interfirm R&D cooperation can be achieved, among others, by licensing of know-how, intensification of knowledge sharing between cooperating firms and various organizational forms of R&D cooperation (research joint-ventures and R&D cartels). From the social welfare perspective it should be also noted that tightening up of an interfirm cooperation at the R&D stage can result in the cartelization of industry (cartel on the market of a final good can be formed).
    Keywords: interfirm cooperation, research and development, industrial organization
    JEL: L24 O32
    Date: 2016
  6. By: Robert Baumann (Department of Economics, College of the Holy Cross); Bryan Engelhardt (Department of Economics, College of the Holy Cross); David L. Fuller (College of Business, University of Wisconsin - Oshkosh)
    Abstract: We show if a speculator can benefit from reducing a monopoly’s rents through short selling, then a speculator may take a short position in a monopoly, overcome the barriers to entry, and compete with the monopoly. The competition drives down the monopoly’s rents, and as a result, the short position becomes profitable and covers the cost of entry. If entry is impossible, then the speculator may coordinate and pay the firm’s counter-parties to stop trading with the monopoly rather than entering. Either way, increasing a speculator’s ability to short a firm’s rents results in a constraint on the monopoly and forces it to act more like a price taker. The mechanism is a market based approach to antitrust.
    Keywords: antitrust, monopoly, short selling
    JEL: L12 K21
    Date: 2016–04
  7. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Prescott (1975) hotels model to explain variations in price dispersion across items sold by supermarkets in Chicago. The effect of demand uncertainty on price dispersion is highly significant and quantitatively important: My estimates suggest that more than 40% of the cross sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good. Temporary sales are modeled as a reaction to "unwanted inventories" that are accumulated when the realization of demand is low. The effect of demand uncertainty on the frequency of temporary sales is also highly significant and quantitatively important: Items with more demand uncertainty tend to accumulate "unwanted inventories" more often and tend to have temporary sales more often.
    Keywords: Price Dispersion, Demand Uncertainty, Sequential Trade, temporary sales.
    JEL: D4 E3
    Date: 2016–08–04
  8. By: Krupa Mehta
    Abstract: The store brands, otherwise known as private labels, are changing the future of modern trade outlets in India. Started on a low key profile, such as low price, low quality and limited movement, the store brands have gone a long way in establishing its credentials. The private labels have 50 % or more than 50% market share in many parts of the developed world. The private labels are pervasive in personal care, home care, processed food, groceries and consumer durables etc. Key words: FMCG, Grocery, Private brands, Retail chains
    Date: 2016–06
  9. By: Mogens, Fosgerau
    Abstract: This note develops a model of product differentiation that can be estimated using standard regression techniques and applies it to a panel data set of new car sales. The model allows for complex substitution patterns according to an overlapping nest structure that makes cars closer substitutes if the share brand, body type, and/or quality level. A nest comprising all the car alternatives ensure that they are closer substitutes with each other than with the outside good. In addition, the model comprises fixed effects by car model, controlling for unobserved car quality.
    Keywords: Market shares; complex substitution; endogeneity; discrete choice; new cars
    JEL: C23 C25 C26 D12 L62
    Date: 2016–07–01
  10. By: Elena Carletti (Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Jan-Peter Siedlarek (Federal Reserve Banks - Federal Reserve Bank of Cleveland); Giancarlo Spagnolo (Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF)
    Abstract: We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.
    Keywords: banks; mergers and acquisitions; merger control; antitrust
    JEL: G21 G34 K21 L40
  11. By: Angelucci, Charles; Cagé, Julia
    Abstract: Newspapers' advertising revenues have declined sharply in recent decades. We build a model to investigate the consequences on newspapers' pricing and quality choices of a reduction in advertisers' willingness to pay for readers' attention. In our model, selling subscriptions in addition to newsstand issues allows to price discriminate between readers. We show that lower advertising revenues decrease newspapers' incentives to provide quality, which increases newspapers' incentive to price discriminate whenever readers' sensitivity to quality is sufficiently high. We build a unique dataset on French newspapers between 1960 and 1974 and perform a difference-in-differences analysis using a "quasi-natural experiment": the introduction of advertising on television in 1968, which affects national newspapers more severely than local ones. We find robust evidence of increased price discrimination and decreased quality as a result of the drop in advertising revenues, which may help rationalize current industry trends.
    Keywords: advertising; Newspaper industry; Newspaper quality; price discrimination; Two-sided markets
    JEL: L11 L15 M37
    Date: 2016–07
  12. By: Russell Pittman (Antitrust Division, U.S. Department of Justice)
    Abstract: Voting trust arrangements have a long history at both the Interstate Commerce Commission and the Surface Transportation Board as devices to protect the incentives of acquiring firms and maintain the independence of acquiring and target firms during the pendency of regulatory investigation of the merger proposal
    Date: 2016–07
  13. By: Thierry Mayer; Marc J. Melitz; Gianmarco I. P. Ottaviano
    Abstract: We document how demand shocks in export markets lead French multi-product exporters to re-allocate the mix of products sold in those destinations. In response to positive demand shocks, those French firms skew their export sales towards their best performing products; and also extend the range of products sold to that market. We develop a theoretical model of multi-product firms and derive the specific demand and cost conditions needed to generate these product-mix reallocations. Our theoretical model highlights how the increased competition from demand shocks in export markets .and the induced product mix reallocations - induce productivity changes within the firm. We then empirically test for this connection between the demand shocks and the productivity of multi-product firms exporting to those destinations. We find that the effect of those demand shocks on productivity are substantial .and explain an important share of aggregate productivity fluctuations for French manufacturing.
    Keywords: productivity, trade, competition
    Date: 2016–07
  14. By: Claudia BALAN (Student, Masters Financial Management, Faculty of Economics, Ecological University of Bucharest)
    Abstract: At national level, but also at European level, the market economy has the competition as the main regulating force. Of course, there are practices that distort this force of the economy, unfair practices (anticompetitive deals and the abuse of dominant position) that worsen the competitive environment. Romania, as a European state, is guided to comply with the competition policy. We, as European consumers, are involved directly in maintaining the internal balance because the anticompetitive practices are affecting us directly. The Romanian state needs, like any other state, competitiveness and performance. But can the rules of the competition policy ensure the success of an economic market given that a market economy without competition is unthinkable?
    Keywords: competition, anticompetitive practices, Competition Council
    JEL: D40 L40
    Date: 2016–04
  15. By: Corinne Luu
    Abstract: Canada’s productivity performance has lagged that of many other OECD countries, despite some improvement in recent years. One measure to enhance overall efficiency would be to strengthen competition on the domestic market to drive future multi-factor productivity improvements. The potential gains are large: about a half a percent per year over a fairly long horizon. This paper focuses on increasing competition in network sectors, including energy, telecommunication services and broadcasting, and transportation, which are key inputs to production in the broader economy. Improving regulatory conditions, efficiency and/or cost competitiveness could yield more productive outcomes in these sectors, as well as in downstream industries. Competition could also be increased by lowering barriers to interprovincial trade and the movement of labour, which act to fragment Canada’s already small domestic market. To this end, reforms of the Agreement on Internal Trade and measures to reduce sectoral barriers to trade are also discussed. This Working Paper relates to the 2016 OECD Economic Survey of Canada ( Concurrence dans les industries de réseau et renforcement du marché intérieur au Canada La productivité canadienne est inférieure à celle de nombreux pays de l’OCDE malgré quelques progrès ces dernières années. Il serait possible d’accroître l’efficience globale en renforçant la concurrence sur le marché intérieur afin de favoriser les futurs gains de productivité globale. Ces gains sont importants, de l’ordre d’un demi pour cent par an sur une période plutôt longue. Ce document porte principalement sur l’intensification de la concurrence dans les industries de réseau, comme l’énergie, les télécommunications, la diffusion audiovisuelle et les transports, qui jouent un rôle essentiel dans le processus de production de l’ensemble de l’économie. L’amélioration de la réglementation, l’augmentation de l’efficience et/ou le renforcement de la compétitivité-coût pourraient accroître la productivité dans ces secteurs, ainsi que dans les secteurs d’aval. La concurrence pourrait également être intensifiée par la réduction des obstacles aux échanges entre provinces et à la mobilité de la main-d’oeuvre, qui fragmentent un marché intérieur déjà petit. Ce document examine donc également les réformes possibles de l’Accord sur le commerce intérieur et les mesures visant à réduire les obstacles sectoriels aux échanges. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Canada 2016 ( ique-canada.htm)
    Keywords: productivity, network industries, competition, regulation, integration, productivité, concurrence, intégration, industries de réseaux, réglementation
    JEL: J44 L1 L3 L5 L66 L9 O43 Q18
    Date: 2016–08–03
  16. By: Richard N. Langlois (University of Connecticut)
    Abstract: A dominant view in the Coasean law-and-economics tradition is that the firm (including in its form as the corporation) is nothing but a nexus of contracts: the firm is entirely a matter of contract law, and the corporate entity, the legal fiction of corporate personhood, is nothing but a name for a bundle of contracts. This view has implication both for the theory of the firm and for the political economy of the corporation – for the question of the “rights” of corporate entities. By asserting that the corporation is nothing but a set of contractual arrangements, the nexus-of-contracts view implies that any rights possessed by contracting individuals “pass through” to the corporation itself. Unsurprisingly, the powerful phalanx of writers who wish to limit the rights of the corporation take square and largely exclusive aim at the nexus-of-contracts view, assuming that arguments against that view are necessarily arguments against all kinds of “bottom up” accounts of the corporate form. I will argue that critics of the nexus-of-contracts view are indeed right in one sense (though by no means in every sense). Yet, despite this, the fact that the corporation cannot be constructed solely out of voluntary contract narrowly understood does not destroy the argument that the corporation is ultimately “nothing but” a form of cooperation among rights-holding individuals. The corporation understood from the perspective of property rights is both an object of ownership and a form of ownership. Much of the confusion in the literature arises from a procrustean attempt to appraise the corporation in light of simplified and partial accounts of the rights involved.
    Date: 2016–08

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