nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒08‒28
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Monopolistic competition without apology By Thisse, Jacques-François; Ushchev, Philip
  2. Quality and Competition between Public and Private Firms By Liisa Laine; Ching-to Albert Ma
  3. Firms’ Heterogeneity, Incomplete Information, and Pass-Through By Stefania Garetto
  4. Marketmaking Middlemen By Gautier, Pieter A.; Hu, Bo; Watanabe, Makoto
  5. Consumer choice under limited attention when options have different information costs By Frank Huettner,; Tamer Boyacı,; Yalçın Akçay
  6. Dividing Goods or Bads Under Additive Utilities By Anna Bogomolnaia; Herve Moulin; Fedor Sandomirskiy; Elena Yanovskaya
  7. Choice and Competition in Public Service Provision By Timothy Besley; James M. Malcolmson
  8. Procurement with specialized firms By Boone, Jan; Schottmuller, C.
  9. Working Paper, Rents and Inefficiency in the Patent and Copyright System: Is There a Better Route? By Dean Baker
  10. Competition in Retail Electricity Markets : An Assessment of Ten Years Dutch Experience By Willems, Bert; Mulder, M.
  11. Does Organizational Form Drive Competition? Evidence from Coffee Retailing By Brian Adams; Joshua Gans; Richard Hayes; Ryan Lampe
  12. The Impact of Price Discrimination on Major League Baseball Team’s Revenue By Brian P Soebbing; Nicholas M Watanabe; Chad S Seifried
  13. Performance of mixed oligopoly model in the context of Indian telecom industry By Chatterjee, Susmita; Datta, Debabrata; Banerjee, Ranjan
  14. Credit market competition and liquidity crises By Carletti, Elena; Leonello, Agnese
  15. Managing Innovation under Competitive Pressure from Informal Producers Managing Innovation under Competitive Pressuire from Informal Producers By Pedro Mendi; Rodrigo Costamagna
  16. Post Catch-up with Market Cultivation and Product Servicizing: Case of Taiwan’s Transportation Equipment Industries By Chen, Shin-Horng; Wen, Pei-Chang

  1. By: Thisse, Jacques-François; Ushchev, Philip
    Abstract: We provide a selective survey of what has been accomplished under the heading of monopolistic competition in industrial organization and other economic fields. Among other things, we argue that monopolistic competition is a market structure in its own right, which encompasses a much broader set-up than the celebrated constant elasticity of substitution (CES) model. Although oligopolistic and monopolistic competition compete for adherents within the economics profession, we show that this dichotomy is, to a large extend, unwarranted.
    Keywords: monopolistic competition; oligopoly; product differentiation; the negligibility hypothesis
    JEL: D43 L11 L13
    Date: 2016–08
  2. By: Liisa Laine (University of Jyvaskyla); Ching-to Albert Ma (Boston University)
    Abstract: We study a multi-stage, quality-price game between a public firm and a private firm. The market consists of a set of consumers who have di§erent quality valuations. A public firm aims to maximize social surplus, whereas the private firm maximizes profit. In the first stage, both firms simultaneously choose qualities. In the second stage, both firms simultaneously choose prices. Consumers' qualty valuations follow a general distribution. Firms' unit production cost is a an increasing and convex function of quality. There are multiple equilibria. In some, the public firm chooses a low quality, and the private firm chooses a high quality. In others, the opposite is true. We characterize subgame-perfect equilibria, and provide conditions on consumer valuation distribution for first-best equilibrium qualities. Various policy implications are drawn.
    Keywords: price-quality competition, quality, public firm, private firm
    JEL: D4 L1 L2 L3
    Date: 2016–03
  3. By: Stefania Garetto (Boston University)
    Abstract: A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass-through). I present a Ricardian model of trade and international price-setting with heterogeneous firms, Bertrand competition and incomplete information. The model implies that: 1) firm-level pass- through is incomplete and a U-shaped function of firm-level productivity and market share; and 2) controlling for firm market share, producers operating under incomplete information, like for example new entrants in a market, exhibit lower pass-through rates than producers operating under complete information. Estimates from a panel data set of cars prices support the predictions of the model.
    Keywords: Heterogeneous firms, incomplete information, incomplete pass-through
    JEL: F12 F31 L13 D44
    Date: 2016–04–18
  4. By: Gautier, Pieter A.; Hu, Bo; Watanabe, Makoto
    Abstract: This paper develops a model in which market structure is determined endogenously by the choice of intermediation mode. We consider two representative business modes of intermediation that are widely used in real-life markets: one is a middleman mode where an intermediary holds inventories which he stocks from sellers for the purpose of reselling to buyers; the other is a market-making mode where an intermediary offers a platform for buyers and sellers to trade with each other. In our model, buyers and sellers can simultaneously search in an outside market and use the intermediation service. We show that a marketmaking middleman, who adopts the mixture of these two intermediation modes, can emerge in a directed search equilibrium.
    Keywords: directed search; Marketmakers; Middlemen; Platform
    JEL: D4 G2 L1 L8 R1
    Date: 2016–08
  5. By: Frank Huettner, (ESMT European School of Management and Technology); Tamer Boyacı, (ESMT European School of Management and Technology); Yalçın Akçay (College of Administrative Sciences and Economics, Koç University)
    Abstract: Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers have to trade-off the value of better information against its cost, and make their final choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer’s choice behavior when she faces options with different information costs. To this end, we introduce an information cost function that distinguishes between direct and inferential information. We then analytically characterize the optimal behavior and derive the choice probabilities in closed-form. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. It can also lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product. Furthermore, it provides a new explanation for strong failure of regularity of consumer behaviour, which occurs if the addition of an inferior – never chosen – product to the choice set increases the market share of another existing product.
    Keywords: discrete choice, rational inattention, information acquisition, non-uniform information costs, strong failure of regularity
    Date: 2016–08–18
  6. By: Anna Bogomolnaia (National Research University Higher School of Economics); Herve Moulin (National Research University Higher School of Economics); Fedor Sandomirskiy (National Research University Higher School of Economics); Elena Yanovskaya (National Research University Higher School of Economics)
    Abstract: The Competitive Equilibrium with Equal Incomes is an especially appealing ecient and envy-free division of private goods when utilities are additive: it maximizes the Nash product of utilities and is single-valued and continuous in the marginal rates of substitution. The CEEI to divide bads captures similarly the critical points of the Nash product in the ecient frontier. But it is far from resolute, allowing routinely many divisions with sharply di erent welfare consequences. Even the much more permissive No Envy property is profoundly ambiguous in the division of bads: the set of ecient and envy-free allocations can have many connected components, and has no single-valued selection continuous in the marginal rates. The CEEI to divide goods is Resource Monotonic (RM): everyone (weakly) bene ts when the manna increases. But when we divide bads eciently, RM is incompatible with Fair Share Guarantee, a much weaker property than No Envy.
    Keywords: fair division of goods, fair division of bads, competitive equilibrium with equal incomes, Nash product, envy-freeness, resource monotonicity, independence of lost bids.
    JEL: D61 D63 D82
    Date: 2016
  7. By: Timothy Besley; James M. Malcolmson
    Abstract: In spite of a range of policy initiatives in sectors such as education, health care and legal services, whether choice and competition is valuable remains contested territory. This paper studies the impact of choice and competition on different dimensions of quality, examining the role of not-for-profit providers. We explore two main factors which determine whether an alternative provider enters the market: cost efficiency and the preferences of an incumbent not-for-profit provider (paternalism). The framework developed can incorporate standard concerns about the downside of choice and competition when consumer choice is defective (an internality) or choice imposes costs on those who do not switch (an externality). The paper considers optimal funding levels for incumbents and entrants showing when the "voucher" provided for consumers to move to the incumbent should be more or less generous than the funding for consumers who remain with the incumbent. Finally, the model also offers an insight into why initiatives are frequently opposed by incumbent providers even if the latter have not-for-profit objectives.
    Keywords: choice, competition, public Service, not-for-profit
    JEL: H11 H44 L21 L31
    Date: 2016–08
  8. By: Boone, Jan (Tilburg University, School of Economics and Management); Schottmuller, C. (Tilburg University, School of Economics and Management)
    Abstract: We analyze optimal procurement mechanisms when firms are specialized. The procurement agency has incomplete information concerning the firms' cost functions and values high quality as well as low price. Lower type firms are cheaper (more expensive) than higher type firms when providing low (high) quality. With specialized firms, distortion is limited and a mass of types earns zero profits. The optimal mechanism can be inefficient: types providing lower second-best welfare win against types providing higher second-best welfare. As standard scoring rule auctions cannot always implement the optimal mechanism, we introduce a new auction format implementing the optimal mechanism.
    Date: 2016
  9. By: Dean Baker
    Abstract: This paper analyzes the evidence for rents due to the patent and copyright systems for financing innovation and creative work. It notes research suggesting that in both the patent and copyright system, the costs in the form of monopoly pricing and rent-seeking activity outweigh the benefits. It then proposes alternatives to the patent and copyright system. The Kauffman Foundation helped support this work.
    JEL: I I1 I18 I14 O O31 O33 O34 K K11
    Date: 2016–08
  10. By: Willems, Bert (Tilburg University, TILEC); Mulder, M.
    Abstract: This paper examines a decade of retail competition in the Dutch electricity market and discusses market structure, regulation, and market performance. We find a proliferation of product variety, in particular by the introduction of quality-differentiated green-energy products. Product innovation could be a sign of a well-functioning market that caters to customer’s preferences, but it can also indicate a strategic product differentiation to soften price competition. Although slightly downward trending, gross retail margins remain relatively high, especially for green products. Price dispersion across retailers for identical products remains high, as also across products for a single retailer. We do not find evidence of asymmetric pass-through of wholesale costs. Overall, the retail market matured as evidenced by fewer consumer complaints and higher switching rates. A fairly intensive regulation of mature energy retail markets appears to be needed to create benefits for consumers.
    Keywords: retail electricity market; competition; regulation; ex-post assessment
    JEL: L94 L43 L11
    Date: 2016
  11. By: Brian Adams; Joshua Gans; Richard Hayes; Ryan Lampe
    Abstract: This article examines patterns of entry and exit in a relatively homogeneous product market to investigate the impact of entry on incumbent firms and market structure. In particular, we are interested in whether the organizational form of entrants matters for the competitive decisions of incumbents. We assess the impact of chain stores on independent retailers in the Melbourne coffee market using annual data on the location and entry status of 4,768 coffee retailers between 1991 and 2010. The long panel enables us to include market fixed effects to address the endogeneity of store locations. Logit regressions indicate that chain stores have no discernible effect on the exit or entry decisions of independent stores. However, each additional chain store increases the probability of another chain store exiting by 2.5 percentage points, and each additional independent cafe increases the probability of another independent cafe exiting by 0.5 percent. These findings imply that neighboring independents and chains operate almost as though they are in separate markets. We offer additional analysis suggesting consumer information as a cause of this differentiation.
    JEL: L11 L15
    Date: 2016–08
  12. By: Brian P Soebbing (Faculty of Physical Education and Recreation, University of Alberta); Nicholas M Watanabe (Department of Health, Exercise Science, and Recreation Management, University of Mississippi); Chad S Seifried (School of Kinesiology, Louisiana State University)
    Abstract: The empirical evidence supporting the impact that second degree price discrimination has on a firm’s revenue has received little attention. The present research examines ticket data from Major League Baseball from 1990 through 2010. Estimating a two-staged least squares model, we find neither price discrimination variable has an impact on team revenues. However, we find that both of these price discrimination variables impact revenues when examining different facility types. We discuss the impact on the role that price behavior and venues have on price dispersion.
    Keywords: Price Discrimination, Price Dispersion, Information, Revenue, Facilities, Tickets
    JEL: D42 L12 L83
    Date: 2016–08
  13. By: Chatterjee, Susmita; Datta, Debabrata; Banerjee, Ranjan
    Abstract: The logic for state monopoly of public utilities arises from increasing returns to scale and the concern that private business in these areas results in monopolistic exploitation of consumers. The state monopoly however is fraught with the danger of production inefficiency. In this backdrop, the market form of mixed oligopoly is contemplated in markets like health, education, electricity, gas, telecommunications, etc, where public and private sector coexists. The private firms maximize profit but the public firm maximizes social welfare. Despite this theoretical exposition, it is often observed that public firms fail to make contributions according to their potentiality. As a result the issue of social welfare gets a short shrift. While assessing the behaviour and performance of the firm in this setup we must know the objective functions and the constraints. The asymmetry of objectives between private and public firms and the asymmetry of constraints may explain the below par performance of public firms. This needs focus on the existing theoretical construct on mixed oligopoly and empirical consideration of the performance of some specific public firm. In this paper we study the state owned Indian telecom company Bharat Shanchar Nigam Limited (BSNL) to get an understanding of performance of mixed oligopoly.
    Keywords: Mixed oligopoly, public sector firm, welfare
    JEL: D63 H83
    Date: 2016–07–31
  14. By: Carletti, Elena; Leonello, Agnese
    Abstract: We develop a model where banks invest in reserves and loans, and trade loans on the interbank market to deal with liquidity shocks. Two types of equilibria emerge, depending on the degree of credit market competition and the level of aggregate liquidity risk. In one equilibrium, all banks keep enough reserves and remain solvent. In the other, some banks default with positive probability. The latter equilibrium exists when competition is not too intense and high liquidity shocks are not too likely. The model delivers several implications concerning the severity of crises and credit availability along the business cycle. JEL Classification: G01, G20, G21
    Keywords: cash-in-the-market pricing, interbank market, price volatility, systemic crises
    Date: 2016–07
  15. By: Pedro Mendi (Navarra Center for International Development); Rodrigo Costamagna (INALDE Business School, Universidad de la Sabana)
    Abstract: This paper studies the impact on innovation of competition against firms in the informal sector. Using the World Bank’s Enterprise Survey data from a sample of African and Latin American countries, we find that the marginal impact of informality on innovation by formal firms decreases with the intensity of competitive pressure from informal firms, consistent with an inverted-U relationship between propensity to innovate and competitive pressure from firms in the informal sector.
    Date: 2015–11–20
  16. By: Chen, Shin-Horng; Wen, Pei-Chang
    Abstract: This paper sets out to examine a key issue: how a latecomer, like Taiwan may develop its industry in a post catch-up manner. We make intensive inquiries into this issue via case studies on two sectors in Taiwan, namely the bicycle industry and the electric vehicle industry. One challenge to post catch-up is related to the situation where innovation model and path are at the fluid phase and where scarce opportunity for imitation is present. This has led us to giving special account to fuzzy front-end at the industrial level and how market cultivation and innovative business models come to play an important role in shaping the innovation path for post catch-up. For a couple of leading players in Taiwan’s bicycle industry, a key issue they faced was how to transform themselves and local setting in Taiwan to become a leader in high-end bicycles, in an attempt to fend off escalated international competition. In the emerging EV industry, the Taiwanese players try to overcome its structural weaknesses in the mainstream automotive industry to explore the possibility of levelling the playing field with the forerunners in the advanced countries. Our case studies suggest that technological catch-up is not necessarily a prelude to post catch-up, depending on the nature of new innovation trajectory and entry modes of the emerging industry. While the way in which a latecomer’s industry to rise in a post-catch-up manner has something to do with path dependence, something can be done to overcome the path dependence. Our analyses also lend support to the importance of product servicizing as a means of post catch-up, especially from the perspective of market cultivation. On balance, for post catch-up at an industrial level, a latecomer’s innovation system and its boundaries have to be shaped in line with the country’s level of technological accumulation, constituent firm’s strategy, the complexity of the innovation at issue, and the way in which the focal industry is emerging.
    Keywords: Post catch-up, technological catch-up, product servicizing, market cultivation, business model, Post catch-up, technological catch-up, product servicizing, market cultivation, business model
    Date: 2016–08

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