nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒09‒18
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Price Competition in Product Variety Networks By Ushchev, Philip; Zenou, Yves
  2. Product Differentiation with Multiple Qualities By F. Barigozzi; C. A. Ma
  3. Pozioma współpraca badawczo-rozwojowa a kartelizacja gałęzi By Jacek, Prokop; Adam, Karbowski
  4. The effect of entry on R&D networks By Emmanuel Petrakis; Nikolas Tsakas
  5. Strategic Real Options : Entry deterrence and exit inducement By Lavrutich, Maria
  6. Production networks, geography and firm performance By Andrew B. Bernard; Andreas Moxnes; Yukiko U. Saito
  7. Competition, Product Proliferation and Welfare: A Study of the U.S.\ Smartphone Market By Chenyu Yang; Ying Fan
  8. Hospital Network Competition and Adverse Selection: Evidence from the Massachusetts Health Insurance Exchange By Mark Shepard
  9. Does competition from private surgical centres improve public hospitals’ performance? Evidence from the English National Health Service By Zack Cooper; Stephen Gibbons; Matthew Skellern
  10. Price Setting in Online Grocery Markets: The Case of Chocolate By Grein, Theresa; Herrmann, Roland
  11. Bank Concentration, Competition, and Financial Inclusion By Owen, Ann L.; Pereira, Javier
  12. U.S. bank M&As in the post-Dodd-Frank Act era: Do they create value? By Leledakis, George N.; Pyrgiotakis, Emmanouil G.
  13. Information Asymmetry and Market Power in the African Banking Industry By Agyenim Boateng; Simplice Asongu; Raphael Akamavi; Vanessa Tchamyou
  14. (Non-)Insurance Markets, Loss Size Manipulation and Competition By Soetevent, Adriaan; Hinloopen, Jeroen
  15. Buying Reputation as a Signal of Quality: Evidence from an Online Marketplace By Lingfang (Ivy) Li; Steven Tadelis; Xiaolan Zhou
  16. The Legal Model of Economic Concentration in the Russian Legislation By Egorova, Maria A.

  1. By: Ushchev, Philip; Zenou, Yves
    Abstract: We develop a product-differentiated model where the product space is a network defined as a set of varieties (nodes) linked by their degrees of substitutability (edges). We also locate consumers into this network, so that the location of each consumer (node) corresponds to her “ideal” variety. We show that, even though prices need not to be strategic complements, there exists a unique Nash equilibrium in the price game among firms. Equilibrium prices are determined by both firms’ sign-alternating Bonacich centralities and the average willingness to pay across consumers. They both hinge on the network structure of the firm-product space. We also investigate how local product differentiation and the spatial discount factor affect the equilibrium prices. We show that these effects non-trivially depend on the network structure. In particular, we find that, in a star-shaped network, the firm located in the star node does not always enjoy higher monopoly power than the peripheral firms.
    Keywords: Networks, Product Variety, Monopolistic Competition, Spatial Competition, Research Methods/ Statistical Methods, D43, L11, L13,
    Date: 2016–09–07
  2. By: F. Barigozzi; C. A. Ma
    Abstract: We study subgame-perfect equilibria of the classical quality-price, multistage game of vertical product differentiation. Each firm can choose the levels of an arbitrary number of qualities. Consumers’ valuations are drawn from independent and general distributions. The unit cost of production is increasing and convex in qualities. We characterize equilibrium prices, and the equilibrium effects of qualities on the rival’s price in the general model. We present necessary and sufficient conditions for equilibrium differentiation in any of the qualities.
    JEL: D43 L13
    Date: 2016–09
  3. By: Jacek, Prokop; Adam, Karbowski
    Abstract: The objective of this paper is to investigate the impact of horizontal R&D cooperation on cartel formation in the product market. We analyze the case in which the R&D expenditures that precede the production process are aimed at the reduction of the unit manufacturing costs, and could create positive externalities for the potential competitors. We compare how the different degrees of R&D cooperation effect on firms’ incentives to create a cartel in the product market. Like the previous literature (Kaiser, 2002; Kamien et al., 1992), we analyze a two-stage game with two firms as players. In the first stage, firms simultaneously decide on R&D expenditures and, in the second stage, they meet in the final product market. It is assumed that without successful cartel formation in the industry, firms compete in the product market in Stackelberg fashion. The analysis was made for two variants: 1) linear functions of total costs of production and 2) quadratic functions of total costs of production. For both variants, the numerical analysis revealed that a closer cooperation at the R&D stage strengthens the incentives to create a cartel in the product market. As a consequence it should be supposed that the horizontal R&D cooperation brings the relatively high risk of industry cartelization. This fact raises serious antitrust issues. Industry cartelization translates thus into unbeneficial economic outcomes for customers on the given product market.
    Keywords: research and development, cooperation, cartels
    JEL: L24 O32
    Date: 2016–06
  4. By: Emmanuel Petrakis; Nikolas Tsakas
    Abstract: We investigate the effect of potential entry on the formation and stability of R&D networks considering farsighted firms. We show that the presence of a potential entrant often alters the incentives of incumbent firms to establish an R&D link. In particular, incumbent firms may choose to form an otherwise undesirable R&D collaboration in order to deter the entry of a new firm. Moreover, an incumbent firm may refrain from establishing an otherwise desirable R&D collaboration, expecting to form a more profitable R&D link with the entrant. Finally, potential entry may lead an inefficient incumbent to exit the market. We also perform a welfare analysisand show that market and societal incentives are often misaligned.
    Keywords: R&D Networks; Entry; Farsighted stability
    JEL: D85 L24 O33
    Date: 2016–09
  5. By: Lavrutich, Maria (Tilburg University, School of Economics and Management)
    Abstract: The focus of this thesis is the analysis of the strategic behavior of the firms undertaking an irreversible investment decision in an uncertain environment. In particular, this thesis contains three studies, in which we develop continuous-time investment models under uncertainty with lumpy investment. The first two studies analyze firms’ competitive strategies in a setting where they decide not only upon the optimal timing of the investment, but also upon the scale of its installment. In Chapter 2, we examine how hidden competition affects the capacity investment decisions in a duopoly. Chapter 3 extends the strategic investment model with capacity choice by incorporating the exit option. Chapter 4 presents a stochastic dynamic model of predatory pricing under firm-specific uncertainty.
    Date: 2016
  6. By: Andrew B. Bernard; Andreas Moxnes; Yukiko U. Saito
    Abstract: This paper examines the importance of buyer-supplier relationships, geography and the structure of the production network in firm performance. We develop a simple model where firms can outsource tasks and search for suppliers in different locations. Low search and outsourcing costs lead firms to search more and find better suppliers. This in turn drives down the firm’s marginal production costs. We test the theory by exploiting the opening of a high-speed (Shinkansen) train line in Japan which lowered the cost of passenger travel but left shipping costs unchanged. Using an exhaustive dataset on firms’ buyer-seller linkages, we find significant improvements in firm performance as well as creation of new buyer-seller links, consistent with the model.
    Keywords: production networks; trade; productivity; infrastructure
    JEL: D85 F14 L10 L14 R12
    Date: 2016–06
  7. By: Chenyu Yang (University of Michigan, Ann Arbor); Ying Fan (University of Michigan)
    Abstract: We develop and estimate a structural model of the U.S. smartphone market. Based on the estimates, we study (1) whether there are too few or too many products in the market from a welfare point of view; and (2) how competition affects product offerings in the market. We find that there are too few products and a reduction in competition further decreases the product offerings. These results suggest that merger policies should be stricter when we take into account the effect of merger on firms' product choices in addition to its effect on prices.
    Date: 2016
  8. By: Mark Shepard
    Abstract: Health insurers increasingly compete on their covered networks of medical providers. Using data from Massachusetts’ pioneer insurance exchange, I find substantial adverse selection against plans covering the most prestigious and expensive “star” hospitals. I highlight a theoretically distinct selection channel: these plans attract consumers loyal to the star hospitals and who tend to use their high-price care when sick. Using a structural model, I show that selection creates a strong incentive to exclude star hospitals but that standard policy solutions do not improve net welfare. A key reason is the connection between selection and moral hazard in star hospital use.
    JEL: I11 I13 I18 L13
    Date: 2016–09
  9. By: Zack Cooper; Stephen Gibbons; Matthew Skellern
    Abstract: This paper examines the impact of competition from government-facilitated entry of private, specialty surgical centres on the efficiency and case mix of incumbent public hospitals within the English NHS. We exploit the fact that the government chose the location of these surgical centres (Independent Sector Treatment Centres or ISTCs) based on nearby public hospitals’ waiting times – not length of stay or clinical quality – to construct treatment and control groups that are comparable with respect to key outcome variables of interest. Using a difference-in-difference estimation strategy, we find that ISTC entry led to greater efficiency – measured by presurgery length of stay for hip and knee replacements – at nearby public hospitals. However, these new entrants took on healthier patients and left incumbent hospitals treating patients who were sicker, and who stayed in hospital longer after surgery.
    Keywords: Hospital Competition; Public-Private Competition; Market Entry; Market Structure; Outsourcing; Hospital Efficiency; Risk Selection; Cherry Picking
    JEL: C23 H57 I11 L1 L33 R12
    Date: 2016–06
  10. By: Grein, Theresa; Herrmann, Roland
    Abstract: Online markets are developing rapidly in many industrialized countries and have already reached a rather mature status for some product categories. This, however, is not the case in the food sector. In Germany, the online food market captured still less than 1 % of total food sales in 2014. Despite this small share of the online market, the segment is clearly increasing and major players on the offline grocery market engage themselves on the online market, too, or they plan to do so. It is intended in this paper to contribute to our knowledge on competitive strategies of multichannel suppliers and pure online traders which are active on this growing market segment. A major element of competitive strategies on the online market for foods is pricing. We concentrate on pricing strategies of multichannel firms and pure online traders on the German online market and present evidence for the product group chocolate. More and quicker price information for consumers will become available with the development of online markets. Theory suggests that buyers’ search costs will be lowered and market efficiency will be improved. With lower search costs, it is expected that price dispersion will be reduced, i.e. markets will tend towards the law of one price for identical goods, and that the price level will decline and adjust rapidly. It may, however, happen that online markets induce new search costs for consumers as the variety of products offered will also increase substantially. It is an empirical question whether the level and the dispersion of prices will actually fall as the online supply of foods grows. The increasing empirical evidence on non-food markets indicates that remarkable differences between various suppliers persist with the growing importance of online markets and prices remain relatively rigid over time. Different explanations for these patterns are offered in the literature including a growing importance of product differentiation and non-price strategies on online and offline markets.
    Keywords: Agribusiness, Demand and Price Analysis,
    Date: 2016–05
  11. By: Owen, Ann L.; Pereira, Javier
    Abstract: Expanding access to financial services holds the promise to help reduce poverty and foster economic development. However, little is still known about the determinants of the outreach of financial systems across countries. Our study is the first attempt to employ a large panel of countries, several indicators of financial inclusion and a comprehensive set of bank competition measures to study the role of banking system structure as a determinant of cross-country variability in financial outreach for households. We use panel data from 83 countries over a 10-year period to estimate models with both country and time fixed effects. We find that greater banking industry concentration is associated with more access to deposit accounts and loans, provided that the market power of banks is limited. We find evidence that countries in which regulations allow banks to engage in a broader scope of activities are also characterized by greater financial inclusion. Our results are robust to changes in sample, data, and estimation strategy and suggest that the degree of competition is an important aspect of inclusive financial sectors.
    Keywords: financial inclusion, bank concentration, market power
    JEL: G21 L11 O16
    Date: 2016–09–08
  12. By: Leledakis, George N.; Pyrgiotakis, Emmanouil G.
    Abstract: The Dodd-Frank Act has produced a new wave of bank M&As. This consolidation trend is mainly driven by mergers of small banks, since small banks feel the need to merge in order to absorb the compliance costs of the new regulation. We document that the $10 billion asset-size threshold has become the ceiling of the optimal scale for bank combinations, given that banks below this $10 billion mark avoid several regulatory hurdles imposed by the Dodd-Frank Act. Results for these “less than $10 billion mergers” suggest significant value creation for both firms’ shareholders: Bidders experience large anticipated wealth gains during the passage of the legislation since the market had ex-ante identified these bids. Consequently, at the deal announcement date, bidders experience insignificant returns, targets experience large abnormal returns and the combined abnormal returns are statistically positive. Finally, bidders experience positive abnormal returns at the deal completion date. On the contrary, results for larger bank mergers indicate a redistribution of wealth from the bidder to the target firm.
    Keywords: Dodd-Frank regulation; shareholder wealth; market anticipation; event study;
    JEL: G14 G21 G28 G34
    Date: 2016–08–23
  13. By: Agyenim Boateng (Glasgow Caledonian University, UK); Simplice Asongu (Yaoundé, Cameroon); Raphael Akamavi (Hull, UK); Vanessa Tchamyou (Yaoundé, Cameroon)
    Abstract: This study investigates the role of information sharing offices and its association with market power in the African banking industry. The empirical evidence is based on a panel of 162 banks from 42 countries for the period 2001-2011. Five simultaneity-robust estimation techniques are employed, namely: (i) Two Stage Least Squares; (ii) Instrumental Fixed effects to control for the unobserved heterogeneity; (iii) Instrumental Tobit regressions to control for the limited range in the dependent variable; (iv) Generalised Method of Moments (GMM) to control for persistence in market power and (v) Instrumental Quantile Regressions (QR) to account for initial levels of market power. The following findings have been established from non-interactive regressions. First, the effects of information sharing offices are significant in Two Stage Least Squares, with a positive effect from private credit bureaus. Second, in GMM, public credit registries increase market power. Third, from Quintile Regressions, private credit bureaus consistently increase market power throughout the conditional distributions of market power. Given that the above findings are contrary to theoretical postulations, we extended the analytical framework with interactive regressions in order to assess whether the anticipated effects can be established if information sharing offices are increased. The extended findings show a: (i) negative net effect from public credit registries on market power in GMM regressions and; (ii) negative net impacts from public credit registries on market power in the 0.25th and 0.50th quintiles of market power.
    Keywords: Financial access; Market power; Information asymmetry
    JEL: G20 G29 L96 O40 O55
    Date: 2016–09
  14. By: Soetevent, Adriaan; Hinloopen, Jeroen (Groningen University)
    Date: 2016
  15. By: Lingfang (Ivy) Li; Steven Tadelis; Xiaolan Zhou
    Abstract: Reputation is critical to foster trust in online marketplaces, yet leaving feedback is a public good that can be under-provided unless buyers are rewarded for it. Signaling theory implies that only high quality sellers would reward buyers for truthful feedback. We explore this scope for signaling using Taobao's "reward-for-feedback" mechanism and find that items with rewards generate sales that are nearly 30% higher and are sold by higher quality sellers. The market design implication is that marketplaces can benefit from allowing sellers to use rewards to build reputations and signal their high quality in the process.
    JEL: D47 D82 L15 L86
    Date: 2016–09
  16. By: Egorova, Maria A. (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: This paper presents the first monographic study on antimonopoly regulation of transactions on economic concentration; It justified the original doctrine of the subjective market, on the basis of which there are basic principles and approaches to the legal assessment of transactions on economic concentration, their relationship with other transactions and activities that are relevant to antimonopoly regulation; The basic directions of improvement of antimonopoly legislation in this area.
    Keywords: regulation of transactions, economic concentration
    Date: 2016–05–18

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