nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒10‒16
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Collusion, Firm Numbers and Asymmetries Revisited By Garrod, Luke; Olczak, Matthew
  2. Contract contingency in vertically related markets By E. Bacchiega; O. Bonroy; E. Petrakis
  3. Overconfident CEOs, product market competition, and corporate investment decisions By Po-Hsin Ho
  4. The countervailing power hypothesis when dominant retailers function as sales promoters By Noriaki Matsushima; Shohei Yoshida
  5. Cartel cases and the cartel enforcement process in the European Union 2001-2015: A quantitative assessment By Hellwig, Michael; Hüschelrath, Kai
  6. Melons as Lemons: Asymmetric Information, Consumer Learning and Seller Reputation By Jie Bai
  7. The Formation of Consumer Brand Preferences By Bart J. Bronnenberg; Jean-Pierre H. Dubé
  8. Dual Market Competition and Deposit Rate Setting in Islamic and Conventional Banks By Céline Meslier-Crouzille; Tastaftiyan Risfandy; Amine Tarazi
  9. Prudent Equilibria and Strategic Uncertainty in Discontinuous Games By Philippe Bich
  10. Industrial diversification in Europe: The differentiated role of relatedness By Jing Xiao; Ron Boschma; Martin Andersson
  11. The question of the firm. Organizational forms and dimensions By Fusari, Angelo
  12. Price Transparency in Residential Electricity: Experiments for Regulatory Policy By Lunn, Pete; Bohacek, Marek
  13. Los efectos distributivos del poder de mercado: De vuelta a las andadas By Urzúa, Carlos M.
  14. Transmisión vertical de precios en la cadena comercial de la zanahoria orgánica y convencional en California By Quiroga, María Victoria
  15. Banking Competition and Financial Stability: Evidence from CIS Countries By Cavid Nabiyev; Kanan Musayev; Leyla Yusifzada

  1. By: Garrod, Luke; Olczak, Matthew
    Abstract: Despite the fact that competition law prohibits explicit cartels but not tacit collusion, theories of collusion often do not distinguish between the two. In this paper, we address this issue and ask: under which types of market structures are cartels likely to arise when firms can alternatively collude tacitly? To answer this question, we analyse an infinitely repeated game where firms with (possibly asymmetric) capacity constraints can make secret price cuts. Tacit collusion can involve price wars on the equilibrium path. Explicit collusion involves firms secretly sharing their private information in an illegal cartel to avoid such price wars. However, this runs the risk of sanctions. We find that, in contrast to the conventional wisdom but consistent with the available empirical evidence, cartels are least likely to arise in markets with a few symmetric firms, because tacit collusion is relatively more appealing in such markets. We discuss the implications for anti-cartel enforcement policy.
    Keywords: cartel, tacit collusion, imperfect monitoring, capacity constraints
    JEL: D43 D82 K21 L44
    Date: 2016–09–30
  2. By: E. Bacchiega; O. Bonroy; E. Petrakis
    Abstract: We study the optimal contract choice of an upstream monopolist producing an essential input that may sell to two vertically differentiated downstream firms. The upstream supplier can offer an exclusive contract to one of the firms or non-exclusive contracts to both firms. Each of the latter can be made contingent or not on the breakdown of the negotiations between the upstream supplier and the rival downstream firm. The distribution of bargaining power during the contract terms negotiations is the main driving force of the monopolist's choices. A powerful supplier always opts for an exclusive contract. By contrast, a weaker supplier offers non-exclusive contracts and makes each of them contingent or non-contingent such as to guarantee the most favorable outside option in its negotiations. Our main results hold under an horizontally differentiated downstream market too.
    JEL: D43 L13 L14
    Date: 2016–09
  3. By: Po-Hsin Ho (National Taipei University)
    Abstract: This study further investigates the corporate investment decisions made by overconfident CEOs. The effect of overconfident CEOs on corporate investment decisions is widely examined in recent literature (Malmendier and Tate, 2005, 2008; Hirshleifer, Low, and Teoh, 2012; Chen, Ho and Ho, 2014; Ferris, Jayaraman, and Sabberwa, 2013; Kolasinski and Li, 2013). The literature indicates that overconfident CEOs overinvest. In a recent article, Kolasinski and Li (2013) find well governed firms could mitigate the overinvestment problem caused by overconfident CEOs. However, the literature ignores the role of product market competition in corporate investment decisions. Giround and Mueller (2010, 2011) find that competitive industries can substitute corporate governance to force managers to work hard. This study thus examines the influence of market competition on managerial overconfidence and reexamines the investment-cash sensitivity and merger activities of overconfident CEOs. We propose two competing hypotheses to study whether the investment behavior of overconfident CEOs differs under different competition structures. Our findings suggest that intense market competition mitigates the overinvestment and merger tendency of overconfident CEOs.
    Keywords: Product market competition; Overconfident CEOs; Investment decision
  4. By: Noriaki Matsushima; Shohei Yoshida
    Abstract: We consider a downstream oligopoly model with one dominant and several fringe retailers, who purchase a manufacturing product from a monopoly supplier. We then examine how the supplier's outside option influences the relation between the dominant retailer's bargaining power and the equilibrium retail price. If the market demand shrinks due to a breakdown of bargaining between the supplier and the dominant retailer, who works as a sales promoter for the product, there is a negative relation between the bargaining power and the retail price. Furthermore, retailers' efficiency improvements increase the retail price if the dominant retailer's bargaining power is strong.
    Date: 2016–10
  5. By: Hellwig, Michael; Hüschelrath, Kai
    Abstract: We provide a comprehensive quantitative assessment of cartels and the related cartel enforcement process in the European Union (EU) from 2001 to 2015. In a first step, we present a detailed characterization of all cartel cases decided by the European Commission (EC) with respect to various criteria such as the number of involved firm groups, cartel market shares and market share asymmetries, involved industries, affected countries, types of infringement, types of cartel breakdown as well as cartel duration. In a second step, we complement this cartel-based analysis with a quantitative assessment of the public cartel enforcement process in the European Union - subdivided further into its duration, types of cartel detection, the leniency program, the settlement procedure, overall fines imposed, and the conclusive appeals process with the General Court (GC) and the European Court of Justice (ECJ).
    Keywords: Competition Policy,Cartels,Collusion,Enforcement,European Union
    JEL: K21 L41
    Date: 2016
  6. By: Jie Bai
    Abstract: There is often a lack of reliable high quality provision in many markets in developing countries. I designed an experiment to understand this phenomenon in a setting that features typical market conditions in a developing country: the retail watermelon market in a major Chinese city. I begin by demonstrating empirically that there is substantial asymmetric information between sellers and buyers on sweetness, the key indicator of quality for watermelons, yet sellers do not sort and price watermelons by quality. I then randomly introduce one of two branding technologies into 40 out of 60 markets-one sticker label that is widely used and often counterfeited and one novel laser-cut label. I track sellers' quality, pricing and sales over an entire season and collect household panel purchasing data to examine the demand side's response. I find that laser branding induced sellers to provide higher quality and led to higher sales profits, establishing that reputational incentives are present and can be made to pay. However, after the intervention was withdrawn, all markets reverted back to baseline. To rationalize the experimental findings, I build an empirical model of consumer learning and seller reputation. The structural estimates suggest that consumers are hesitant to upgrade their perception about quality under the existing branding technology, which makes reputation building a low return investment. While the new technology enhances consumer learning, the resulting increase in profits is not sufficient to cover the fixed cost of the technology for small individual sellers. Counterfactual analysis shows that information frictions and fragmented markets lead to significant under-provision of quality. Third-party interventions that subsidize initial reputation building for sellers could improve welfare.
    Date: 2016
  7. By: Bart J. Bronnenberg; Jean-Pierre H. Dubé
    Abstract: Brands and brand capital have long been theorized to play an important role in the formation of the industrial market structure of consumer goods industries. We summarize several striking empirical regularities in the concentration, magnitude and persistence of brand market shares in consumer goods categories. We then survey the theoretical and empirical literatures on the formation of brand preferences and how brand preferences contribute to our understanding of these empirical regularities. We also review the literature on how brand capital creates strategic advantages to firms that own established brands.
    JEL: A3 D12 D4 L0 L00 L11 L15 M31 M37 Y1 Y10 Y5 Y50
    Date: 2016–09
  8. By: Céline Meslier-Crouzille (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Tastaftiyan Risfandy (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: This paper addresses the issue of competition in dual banking markets by analyzing the determinants of deposit rates in Islamic and conventional banks. Using a sample of 20 countries with dual banking systems over the 2000-2014 period, our results show significant differences in the drivers of Islamic and conventional banks' pricing behavior. Conventional banks with stronger market power set lower deposit rates but market power is not significant for Islamic banks. In predominantly Muslim environments, conventional banks set higher deposit rates and further higher when their market power is lower. Whereas conventional banks are influenced by the competitiveness of Islamic banks, Islamic banks are only affected by their peers in predominantly Muslim countries. Our findings have important implications regarding competition and bank stability in dual banking markets.
    Keywords: deposit rate,competition,dual banking market,Islamic and conventional banks
    Date: 2016–09–05
  9. By: Philippe Bich (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)
    Abstract: We introduce the new concept of prudent equilibrium to model strategic uncertainty, and prove it exists in large classes of discontinuous games. When the game is better-reply secure, we show that prudent equilibrium refines Nash equilibrium. In contrast with the current literature, we don't use probabilities to model players' strategies and beliefs about other players' strategies. We provide examples (first-price auctions, location game, Nash demand game, etc.) where the prudent equilibrium is the intuitive solution of the game.
    Keywords: prudent equilibrium,Nash equilibrium,refinement,strategic uncertainty,better-reply secure
    Date: 2016–06–24
  10. By: Jing Xiao; Ron Boschma; Martin Andersson
    Abstract: There is increasing interest in the drivers of industrial diversification, and how these depend on economic and industry structures. This paper contributes to this line of inquiry by analyzing the role of relatedness in explaining variations in industry diversification, measured as the entry of new industry specializations, across 173 European regions during the period 2004-2012. There are significant differences across regions in Europe in terms of industrial diversification. Relatedness has a robust positive influence on the probability that new industry specialization develops in a region. A novel finding is that the influence of relatedness on the probability of new industrial specializations depends on innovation capacity. We find that relatedness is a more important driver of diversification in regions with a weaker innovation capacity. The effect of relatedness appears to decrease monotonically as the innovation capacity of a local economy increases. This is consistent with the argument that high innovation capacity allows an economy to ‘break from its past’ and to develop, for the economy, truly new industry specializations. We infer from this that innovation capacity is a critical factor for economic resilience.
    Keywords: industrial diversification, related diversification, evolutionary economic geography, unrelated diversification, European regions, resilience
    JEL: B52 L16 O14 O18 R11
    Date: 2016–10
  11. By: Fusari, Angelo
    Abstract: The paper will dedicate some development to the theory of the firm, that is: general considerations on organization, capabilities and uncertainty, with particular reference to interactions among entrepreneurship, uncertainty and innovation. Particular attention will be paid to the idea of radical uncertainty in order to clarify frequent misconceptions as to the meaning and substance of this variable, its links with the question of competence and profit and – one of the most abstruse of questions – its measurability and the possible implications of deriving such a measure, primarily on the management of the business cycle. The treatment of these subjects will lead into a discussion of the size of the firm, the connected organizational problems and, hence, the nature of the corporation, the question of its responsibilities, the monitoring role of the profit rate intended as an accountability (not distributive) variable, i.e. as an expression of a firm’s results and hence of the success of its decision making and some considerations on optimization .
    Keywords: Theories of the firm; Radical uncertainty; Dynamic competition process; The question of optimization; Size of the firm; Dimensional boundaries
    JEL: A1 D8 P0 Z00
    Date: 2015
  12. By: Lunn, Pete; Bohacek, Marek
    Abstract: Two laboratory studies investigated the effect of price transparency on consumers’ decision-making in the residential electricity market. The first tested whether consumers have difficulties when confronted with unit prices expressed as discounts from standard rates, which vary between suppliers. Results showed that consumers were much more likely to choose packages with low unit prices when unit prices were presented explicitly rather than as discounts. When discounts were described as percentages, consumers’ decisions were also less accurate. The second study pre-tested the likely impact of a potential mandatory “estimated annual bill” (EAB) on marketing material, calculated for a customer with average usage. Results demonstrated that consumers were more likely to judge value according to unit prices when an EAB appeared on advertisements. Moreover, when unit prices were communicated via an EAB rather than a discount, consumers chose lower unit price offerings and were more precise in their decision-making. The findings suggest that the EAB is likely to be beneficial for consumers’ decision-making.
    Date: 2016–10
  13. By: Urzúa, Carlos M. (Tecnológico de Monterrey)
    Abstract: Este artículo evalúa dos críticas recientes a los trabajos del autor sobre los efectos distributivos del poder de mercado en México.
    Keywords: poder de mercado, bienestar social, efectos distributivos, México
    JEL: L1 L4 O54
    Date: 2015–12
  14. By: Quiroga, María Victoria
    Abstract: Este trabajo tiene como principal objetivo el análisis de la transmisión vertical de precios en la cadena comercial de la zanahoria orgánica y convencional fresca en el Estado de California, Estados Unidos. Se pretende examinar de forma empírica la evolución de los precios, así como el grado de vinculación entre el mercado de origen y el mercado mayorista. Para la consecución del objetivo mencionado anteriormente, se analizaron los precios mensuales de la zanahoria orgánica y convencional a nivel productor y mercado central en California, durante el período comprendido entre octubre de 2007 a enero de 2016. Durante el análisis, se utilizaron métodos regresivos y de cointegración. Se llegó a la conclusión de que los mercados de zanahoria no se encuentran integrados verticalmente y el margen comercial no se mantuvo constante durante el periodo bajo estudio. Los resultados obtenidos en este trabajo fueron consistentes con otros estudios realizados previamente en el sector agrícola estadounidense.
    Keywords: Integración Vertical; Canales de Comercialización; Precios; Margen Comercial; Zanahoria;
    Date: 2016–06
  15. By: Cavid Nabiyev (Central Bank of Azerbaijan Republic); Kanan Musayev (Central Bank of Azerbaijan Republic); Leyla Yusifzada (Central Bank of Azerbaijan Republic)
    Abstract: The study provides empirical analysis of the cross-country relationship between a direct measure of competitive conduct of banking system and financial system in CIS countries during the period from 2001 to 2013. We determine the level of banking competition by using Panzar and Rosse H-statistic. Estimation results from Logit probability analysis reveal that the level of competition does not significantly affect the probability of banking crisis in such countries. However, a number of macroeconomic and institutional factors have a significant influence in financial stability. According to empirical results, higher inflation increases the probability of a banking crisis. On the other hand, credit growth decreases the probability of banking crisis in the investigated countries. These results are robust to the methodology when the interaction of concentration and h-statistic is used. The institutional factors have significant influence on preventing banking crises. Specifically, improvement in government effectiveness decreases the probability of banking crisis.
    Keywords: banking competition, concentration, competition-stability, competition-fragility, h-statistics, financial stability
    JEL: G21 D41
    Date: 2016–06–28

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