nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒09‒04
eight papers chosen by
Russell Pittman
United States Department of Justice

  1. An Equilibrium Selection Theory of Monopolization By Eckert, Andrew; Klumpp, Tilman; Su, Xuejuan
  2. A Model of Biased Intermediation By de Cornière, Alexandre; Taylor, Greg
  3. The gradual evolution of buyer-seller networks and their role in aggregate fluctuations By Ryohei Hisano; Tsutomu Watanabe; Takayuki Mizuno; Takaaki Ohnishi; Didier Sornette
  4. Network externalities and process R&D: A Cournot-Bertrand comparison By Mili Naskar; Rupayan Pal
  5. An Optimal Rule for Patent Damages Under Sequential Innovation By Chen, Yongmin; Sappington, david
  6. Busted! Now What? Effects of Cartel Enforcement on Firm Value and Corporate Policies By Dong, Ailin; Massa, Massimo; Zaldokas, Alminas
  7. Direct-to-Consumer Advertising and Online Search By Matthew Chesnes; Ginger Zhe Jin
  8. Competition in Swedish passenger railway : entry in an open-access market By Vigren, Andreas

  1. By: Eckert, Andrew (University of Alberta, Department of Economics); Klumpp, Tilman (University of Alberta, Department of Economics); Su, Xuejuan (University of Alberta, Department of Economics)
    Abstract: We develop a duopoly model in which firms compete for the market (e.g., investing in process innovation or product development) as well as in the market (e.g., setting quantities or prices). Competition for the market generates multiple equilibria that differ in the firms' investment levels, relative size, and profi tability. We show that monopolization that affects competition in the market can act as an equilibrium selection device in competition for the market. In particular, it eliminates equilibria that are undesirable for the monopolizing rm, while not generating new equilibria. This result complicates the task of determining whether a rm's dominance in a given market is the result of fair competition or unlawful monopolization. We discuss a number of implications for antitrust policy and litigation, and illustrate these by means of two well-known antitrust cases.
    Keywords: Monopolization; antitrust; multiple equilibria; indeterminacy; firm behavior
    JEL: D40 K20 L40
    Date: 2016–08–29
  2. By: de Cornière, Alexandre; Taylor, Greg
    Abstract: This paper studies situations in which some consumers rely on a potentially biased intermediary to choose among downstream firms. We introduce the notion that firms' and consumers' payoffs can be congruent or conflicting, and show that this has important implications for the effects of bias. Under congruence, the firm towards which the intermediary is biased invests more than its rival and consumers can be better-off than under no bias. Under conflict, bias hurts consumers and the favored firm charges higher prices. We study various oft-proposed policies for dealing with a biased intermediary and show that the efficacy of each intervention depends strongly on whether the environment exhibits congruence or conflict. We discuss how the model relates to recent issues in online markets.
    Keywords: bias; intermediary; regulation
    JEL: D21 L15 L40
    Date: 2016–08
  3. By: Ryohei Hisano (The University of Tokyo); Tsutomu Watanabe (The University of Tokyo); Takayuki Mizuno (National Institute of Informatics); Takaaki Ohnishi (The University of Tokyo); Didier Sornette (Swiss Federal Institute of Technology)
    Abstract: Buyer-seller relationships among firms can be regarded as a longi- tudinal network in which the connectivity pattern evolves as each firm receives productivity shocks. Based on a data set describing the evolu- tion of buyer-seller links among 55,608 firms over a decade and structural equation modeling, we find some evidence that interfirm networks evolve reflecting a firm's local decisions to mitigate adverse effects from neigh- bor firms through interfirm linkage, while enjoying positive effects from them. As a result, link renewal tends to have a positive impact on the growth rates of firms. We also investigate the role of networks in aggregate fluctuations.
    Date: 2016–08
  4. By: Mili Naskar (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: This paper examines the implication of the nature of competition in a market with network externalities on strategic investment in process R&D by firms. It shows that network externalities have a positive effect on process R&D, regardless of the nature of product market competition; but, that effect is larger under Bertrand competition than under Cournot competition. If network externalities are sufficiently strong, regardless of the degree of product differentiation, Bertrand firms have a stronger incentive for process R&D than Cournot firms. Otherwise, if network externalities are not sufficiently strong, the higher the degree of product differentiation, the greater is the possibility of Bertrand R&D to be higher than Cournot R&D.
    Keywords: Process R&D, Network Externalities, Cournot, Bertrand, Product Differentiation
    JEL: L13 D43 O31
    Date: 2016–07
  5. By: Chen, Yongmin; Sappington, david
    Abstract: We analyze the optimal design of damages for patent infringement in settings where the patent of an initial innovator may be infringed by a follow-on innovator. We consider damage rules that are linear combinations of the popular "lost profit" (LP) and "unjust enrichment" (UE) rules, coupled with a lump-sum transfer between the innovators. We identify conditions under which a linear rule can induce the socially optimal levels of sequential innovation and the optimal allocation of industry output. We also show that, despite its simplicity, the optimal linear rule achieves the highest welfare among all rules that ensure a balanced budget for the industry, and often secures substantially more welfare than either the LP rule or the UE rule.
    Keywords: Patents, sequential innovation, infringement damages, linear rules for patent damages.
    JEL: D4 K2 O3
    Date: 2016–08–30
  6. By: Dong, Ailin; Massa, Massimo; Zaldokas, Alminas
    Abstract: In a cross-country study we look at the staggered passage of national leniency laws over 1990-2012. We show that these laws lead to more convictions of cartels, and generally increase the costs of collusion by reducing the average gross margins of the affected firms. We further examine how changing costs of collusion shape firm boundaries and show that firms reorganize their activities by engaging in more horizontal acquisitions, both in the roles as the acquirer and the target. These acquisitions tend to be associated with higher announcement returns. We find little evidence of the increase in strategic alliances or greenfield investments.
    Keywords: cartels; Collusion; firm boundaries; leniency laws; M&A
    JEL: D22 D43 G34 G38
    Date: 2016–08
  7. By: Matthew Chesnes; Ginger Zhe Jin
    Abstract: Beginning in 1997, the Food and Drug Administration (FDA) allowed television advertisements to make major statements about a prescription drug, while referring to detailed drug information on the internet (FDA 1997; 2015). The hope was that consumers would seek additional information online to fully understand the risks and benefits of taking the medication. To better understand the effects of the policy, we analyze direct-to-consumer advertising (DTCA) and search engine click-through data on a set of drugs over a three-year period. Regression analysis shows that advertising on a prescription drug serves to increase the frequency of online search and subsequent clicks for that drug, as well as search for other drugs in the same class. We find the relationship between DTCA and search is stronger for younger drugs, for those drugs that treat acute conditions, those drugs that are less likely to be covered by insurance, and those whose searcher population tends to be older. These findings suggest that DTCA motivates consumers to search online for drug information, but the magnitude of the effect is heterogeneous and potentially associated with clicks on websites that are more promotional in nature.
    JEL: D83 I12 K32 L81
    Date: 2016–08
  8. By: Vigren, Andreas (VTI)
    Abstract: The Swedish market for passenger railway services has been open to competition since the year 2010. Although minor entries have been made since this date, the incumbent SJ only faced substantial competition when MTR Express entered the Stockholm-Gothenburg line in March 2015. Using unique Sweden ticket price data from operators' websites, this paper investigates what effects this entry has had on market prices. The results show that the incumbent's prices decreased by 12.8 percent on average between March 2015 and June 2016. The price level of the competitor is well below the average price that was offered on the railway market in the pre-entry period. Further, the largest price reduction, in percentage terms, was found on tickets booked 10 days before the departure date. Finally, the decrease in the average price of the incumbent seems to be an ongoing process, and a further drop in price would not be unexpected.
    Keywords: Railway; Entry; Open access; Competition; Prices; Web crawler
    JEL: C10 L19 L92 R40
    Date: 2016–08–29

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