nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒10‒23
twenty-two papers chosen by
Russell Pittman
United States Department of Justice

  1. Vertical differentiation and collusion: pruning or proliferation? By Jean Gabszewicz, Jean; Marini, Marco A.; Tarola, Ornella
  2. Entry into complementary good markets with network effects By Gaston Llanes; Andrea Mantovani; Francisco Ruiz-Aliseda
  3. Ordered Consumer Search By Armstrong, Mark
  4. Retail Channel Management in Consumer Search Markets By Garcia, Daniel; Janssen, Maarten
  5. Grantbacks, Territorial Restraints and the Type of Follow-On Innovation: The "But for..." Defence By Ambashi, Masahito; Régibeau, Pierre; Rockett, Katharine
  6. New and Improved? By Eric Schmidbauer
  7. Estimating the Heterogeneous Welfare Effects of Choice Architecture: An Application to the Medicare Prescription Drug Insurance Market By Jonathan D. Ketcham; Nicolai V. Kuminoff; Christopher A. Powers
  8. Multi-period competitive cheap talk with very biased experts By Eric Schmidbauer
  9. Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets By Herr, Annika; Suppliet, Moritz
  10. A generalized model of sales By Sandro Shelegia; Chris M. Wilson
  11. Evidence for the Effects of Mergers on Market Power and Efficiency By Bruce A. Blonigen; Justin R. Pierce
  12. The Mailstream as a Platform By Christian Jaag; Christian Bach
  13. Convergence of bank competition in Central and Eastern European countries: Does ownership matter? By Ion Lapteacru
  14. Behavior-based price discrimination and customer information sharing By Romain De Nijs
  15. Does Competition Lead to Agglomeration or Dispersion in EMR Vendor Decisions? By Seth Freedman; Haizhen Lin; Jeff Prince
  16. The Tragedy of the Last Mile: Congestion Externalities in Broadband Networks By Jacob Malone; Aviv Nevo; Jonathan Williams
  17. A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity By Mark Pauly; Kyle Myers
  18. Taxation or subsidization policy for new technology adoption in oligopoly By Hattori, Masahiko; Tanaka, Yasuhito
  19. The Market for Lemons: Costly Insurance, Coverage Denials, and Pooling By hector chade
  20. The Effect of a Merger on Investments By Motta, Massimo; Tarantino, Emanuele
  21. The political economy of interregional competition for firms By Daniel Hopp; Michael Kriebel
  22. Accounting for Price Endogeneity in Airline Itinerary Choice Models: An Application to Continental U.S. Markets By Virginie Lurkin; Laurie A. Garrow; Matthew J. Higgins; Jeffrey P. Newman; Michael Schyns

  1. By: Jean Gabszewicz, Jean; Marini, Marco A.; Tarola, Ornella
    Abstract: In this paper, we tackle the dilemma of pruning versus proliferation in a vertically differentiated oligopoly under the assumption that some firms collude and control both the range of variants for sale and their corresponding prices, likewise a multi-product firm. We analyse whether pruning emerges and, if so, a fighting brand is marketed. We find that it is always more profitable for colluding firms to adopt a pricing strategy such that some variants are withdrawn from the market. Under pruning, these firms commercialize a fighting brand only when facing competitors in a low-end market.
    Keywords: Vertically Differentiated Markets, Cannibalization, Market Pruning, Price Collusion.
    JEL: D4 D42 D43 L1 L12 L13 L4 L41
    Date: 2016–10–15
  2. By: Gaston Llanes (Pontificia Universidad Catolica de Chile, Escuela de Administracion, Vicuna Mackenna 4860, Macul, Santiago, Chile); Andrea Mantovani (Department of Economics, University of Bologna, Strada Maggiore 45, 40125 Bologna, Italy); Francisco Ruiz-Aliseda (Pontificia Universidad Catolica de Chile, Escuela de Administracion, Vicuna Mackenna 4860, Macul, Santiago, Chile)
    Abstract: We examine whether an incumbent active in a market with strong network effects can be challenged by an entrant already active in the market of a complementary good. When only the entrant benefits from such a complementarity in the network market, we find that it can conquer such a market if and only if the degree of complementarity is large enough. In such cases, the entrant may use the network good as a loss-leader so as to expand the market of the complementary good. When the incumbent's network good is enhanced too by the existence of the complementary good, we study if the entrant is better or worse off. Finally, we argue that, even though pure bundling may be an effective entry strategy and it may be socially desirable, it may be harmful for the entrant to use it.
    Keywords: network effects; complementarities; bundling; incumbency advantage; entry
    JEL: L13 L14 L41
    Date: 2016–09
  3. By: Armstrong, Mark
    Abstract: The paper discusses situations in which consumers search through their options in a deliberate order, in contrast to more familiar models with random search. Topics include: the existence of ordered search equilibria with symmetric sellers (all consumers first inspect the seller they anticipate sets the lowest price, and a seller which is inspected first by consumers will set the lowest price); the use of price and non-price advertising to direct search; the impact of consumers starting a new search at their previous supplier; and the incentive a seller can have to raise its own search cost. I also show how ordered search can be reformulated as a simpler discrete choice problem without search frictions or dynamic decision making.
    Keywords: advertising; consumer search; directed search; discrete choice; obfuscation; oligopoly; ordered search; sequential search
    JEL: D21 D43 D83 L11 L15 M37
    Date: 2016–10
  4. By: Garcia, Daniel; Janssen, Maarten
    Abstract: We study how a monopoly manufacturer optimally manages her contractual relations with retailers in markets with consumer search. By choosing wholesale prices, the manufacturer affects the degree of competition between retailers and the incentives of consumers to search. We show that depending on whether or not the manufacturer can commit to her price decisions and on the search cost, the manufacturer may be substantially better off choosing her wholesale prices not independent of each other, consciously allowing for asymmetric contracts. Thus, our analysis may shed light on when we may expect sales across different retailers to be positively or negatively correlated. Our model may be able to generate loss leaders at the wholesale level and show the rationale for creating ”premium resellers”.
    Keywords: Consumer Search, Retailing, Pricing
    JEL: D43 L13 M30
    Date: 2016–10–09
  5. By: Ambashi, Masahito; Régibeau, Pierre; Rockett, Katharine
    Abstract: We analyse the effect of grantback clauses in licensing contracts. While competition authorities fear that grantback clauses might decrease the licensee’s ex post incentives to innovate, a standard defence is that grantback clauses are required for the patent-owner to agree to license its technology in the first place. We examine the validity of this “but for†defence and the equilibrium effect of grantback clauses on the innovation incentives of the licensee for both non-severable and severable innovations. Under the 2004 EU Technology Transfer Guidelines , and the guidelines for some other jurisdictions, grantback clauses that apply to “non - severable†(read “infringing†) innovations are considered to be less controversial than clauses that apply to “severable†innovations. We show, to the contrary, that grantback clauses do not increase the patent- holder’s incentives to license when non-severable innovations are at stake but they do when severable innovations are concerned – suggesting that the “but for†defence might be valid for severable innovations but not for non-severable ones. Moreover we show that, for severable innovations, grantback clauses can increase the range of parameters for which follow-on innovation by the licensee occurs.
    Date: 2016–10
  6. By: Eric Schmidbauer (University of Central Florida, Orlando, FL)
    Abstract: Are new versions of products necessarily better? We analyze product innovation by a rm that engages in research and development designed to improve an existing product, the outcome of which is uncertain. If the rm adopts the innovation its modi ed product appears to consumers as \new and improved," but consumers do not immediately know whether or how much the product is better. We nd that new products are on average improved and therefore command a pricing premium. This induces some types to exploit the innovation signal by selling new versions that are only trivially di erent from their older version or that require ineciently high upgrade costs. Nevertheless, the incentive to \show o " by introducing a new product may improve total welfare by inducing more innovation adoption and thereby mitigating the standard monopoly underinvestment problem. Firms bene t ex-ante from better consumer information about quality or from committing to not exploit their informational advantage.
    Keywords: asymmetric information, signaling, innovation
    JEL: D82 O31
    Date: 2016–03
  7. By: Jonathan D. Ketcham; Nicolai V. Kuminoff; Christopher A. Powers
    Abstract: We develop a structural model for bounding welfare effects of policies that alter the design of differentiated product markets when some consumers may be misinformed about product characteristics and inertia in consumer behavior reflects a mixture of latent preferences, information costs, switching costs and psychological biases. We use the model to analyze three proposals to redesign markets for Medicare prescription drug insurance: (1) reducing the number of plans, (2) providing personalized information, and (3) defaulting consumers to cheap plans. First we combine administrative and survey data to determine which consumers make informed enrollment decisions. Then we analyze the welfare effects of each proposal, using revealed preferences of informed consumers to proxy for concealed preferences of misinformed consumers. Results suggest that each policy produces large gains and losses for some consumers, but the menu reduction would unambiguously harm most consumers whereas personalized information would unambiguously benefit most consumers.
    JEL: D02 D61 D81 I11
    Date: 2016–10
  8. By: Eric Schmidbauer (University of Central Florida, Orlando, FL)
    Abstract: Each of n experts communicates with a principal about the privately observed quality of the expert's own project via cheap talk, with new independently drawn projects available each period until the principal adopts one. Even when experts are very biased in that they only receive a positive payoff if their own project is selected, we show that informative equilibria may exist, characterize the set of stationary equilibria, and nd the Pareto dominant symmetric equilibrium. Experts face a tradeoff between inducing acceptance now versus waiting for a better project should the game continue. When the future is more highly valued experts send more informative messages, increasing the average quality of an adopted project and resulting in a Pareto improvement, while communication is harmed and payoffs can decline when there is more competition between experts.
    Keywords: cheap talk, multiple senders, competition
    JEL: D23 D74 D82
    Date: 2016–10
  9. By: Herr, Annika; Suppliet, Moritz (Tilburg University, Center For Economic Research)
    Abstract: Health insurances curb price insensitive behavior and moral hazard of insureds through different types of cost-sharing, such as tiered co-payments or reference pricing. This paper evaluates the effect of newly introduced price limits below which drugs are exempt from co-payments on the pricing strategies of drug manufacturers in reference price markets. We exploit quarterly data on all prescription drugs under reference pricing available in Germany from 2007 to 2010. To identify causal effects, we use instruments that proxy regulation intensity. A difference-in-differences approach exploits the fact that the exemption policy was introduced successively during this period. Our main results first show that the new policy led generic firms to decrease prices by 5 percent on average, while brand-name firms increase prices by 7 percent after the introduction. Second, sales increased for exempt products. Third, we find evidence that differentiated health insurance coverage (public versus private) explains the identifed market segmentation.
    Keywords: pharmaceutical prices; cost-sharing; co-payments; reference pricing; regulation; firm behavior; health insurance
    JEL: I1 L11
    Date: 2016
  10. By: Sandro Shelegia; Chris M. Wilson
    Abstract: To provide a more exible workhorse model of temporary price reductions or "sales", this paper presents a substantially generalized "clearinghouse" sales framework. Our framework permits multiple dimensions of firm heterogeneity, and views firms as competing directly in utility rather than prices. The paper i) reproduces and extends many equilibria from the existing literature, ii) offers a range of new results on how firm heterogeneity affects market outcomes, iii) provides original insights into the number and type of firms that use sales, and iv) extends a "cleaning" procedure that is commonly used in empirical studies of sales and price dispersion.
    Keywords: Sales; Price Dispersion; Advertising; Clearinghouse; Heterogeneity.
    JEL: L13 D43 M3
    Date: 2016–10
  11. By: Bruce A. Blonigen; Justin R. Pierce
    Abstract: Study of the impact of mergers and acquisitions (M&As) on productivity and market power has been complicated by the difficulty of separating these two effects. We use newly-developed techniques to separately estimate productivity and markups across a wide range of industries using detailed plant-level data. Employing a difference-in-differences framework, we find that M&As are associated with increases in average markups, but find little evidence for effects on plant-level productivity. We also examine whether M&As increase efficiency through reallocation of production to more efficient plants or through reductions in administrative operations, but again find little evidence for these channels, on average. The results are robust to a range of approaches to address the endogeneity of firms' merger decisions.
    Keywords: Acquisitions ; Efficiency ; Market Power ; Markups ; Mergers ; Productivity
    JEL: D24 G34 L41
    Date: 2016–10
  12. By: Christian Jaag; Christian Bach
    Abstract: This paper interprets the postal mailstream as a platform with two market sides in a theoretical model: On the one side of the market, advertisers (senders of direct mail) and senders of transactional mail are customers for mail services. On the other side of the market, there are the recipients. The value of direct mail for its sender depends on the quality of the mailmix, i.e. the number of transactional mail items in the mailstream. Hence, there is an interdependency between the two types of mail. This interdependency effects the equilibrium allocation, especially optimal prices. The paper analyzes these effects in two frameworks: A postal monopoly and (direct) postal competition within the mailstream as a platform. It also discusses their implications for (indirect) competition with other communication platforms. A postal monopolist has a strong incentive to lower transactional mail's price in order to increase the mail platform's attractiveness for direct mail. Electronic substitution of transactional mail thwarts these efforts. In addition, direct competition degrades the mailmix because new postal operators tend to focus on bulk and direct, rather than transactional mail. Thereby, direct competition indirectly contributes to the substitution of direct mail.
    Keywords: Postal Sector, Platform, Two-sided market
    JEL: L43 L51
    Date: 2016–04
  13. By: Ion Lapteacru (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux 4)
    Abstract: Many reforms of banking market liberalization in CEE countries raised the question on the convergence of banks’ competitive behaviour, particularly because of the presence of foreign banks from same European regions. We find within-country convergence of three used bank competition measures, with higher convergence levels of market power and of competitive behaviour, and with faster convergence trend for foreign banks. Despite the efforts for banking market integration, there is no general movement toward across-countries convergence of competitive behaviour of CEE banks, neither for foreign nor for domestic institutions, higher dispersion of countries being however observed for the former.
    Keywords: Banking, competition, convergence, Central and Eastern European countries.
    Date: 2016
  14. By: Romain De Nijs (Ecole Polytechnique [Palaiseau] - Ecole Polytechnique, PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC))
    Abstract: This article investigates the incentives and the effects of information sharing among rival firms about the identities of their past customers in a two-period model with behaviorbased price discrimination (BBPD). An unilateral information exchange between the two periods takes place in a subgame-perfect equilibrium. This exchange increases the ability of the industry to price discriminate consumers according to their profiles and boosts the profitability of BBPD at the expense of consumers.
    Keywords: Price discrimination,Dynamic pricing,Privacy,Information sharing
    Date: 2015–10–28
  15. By: Seth Freedman (Indiana University, School of Public and Environmental Affairs, 1315 E. 10th St., Bloomington, IN 47405, USA); Haizhen Lin (Indiana University, Kelley School of Business, 1309 E. 10th St., Bloomington, IN 47405, USA); Jeff Prince (Indiana University, Kelley School of Business, 1309 E. 10th St., Bloomington, IN 47405, USA)
    Abstract: We examine hospital Electronic Medical Record (EMR) vendor adoption patterns and how they relate to market structure. Hospitals have incentives to both coordinate with, and differentiate from, local competitors in their choice of vendors, with some of these incentives even linked to receipt of government subsidies through the HITECH Act of 2009. We find that hospitals tend to agglomerate in their vendor choices, and the level of agglomeration grows stronger with competition. These findings suggest that incentives to coordinate dominate incentives to differentiate overall, and the relative balance grows stronger in favor of coordination as markets become more competitive. Hence, a potential downside of hospital competition, i.e., increased difficulty in information sharing due to increased incentive to differentiate, does not appear to materialize in this market.
    Keywords: health information technology, network externalities, business stealing
    JEL: I11 O33
    Date: 2016–09
  16. By: Jacob Malone (University of Georgia, Department of Economics); Aviv Nevo (University of Pennsylvania, Department of Economics); Jonathan Williams (University of North Carolina - Chapel Hill, Department of Economics)
    Abstract: We exibly estimate demand for residential broadband accounting for congestion externalities that arise among consumers due to limited network capacity, as well as dynamics arising from nonlinear pricing. Our high frequency data permits insight into temporal patterns in usage across the day that are impacted by network congestion, and how usage responds to efforts to mitigate congestion. To estimate demand, we build a dynamic model of consumer choice and rely on variation in the timing of network upgrades and nonlinear pricing to identify the model. Using the model estimates, we calculate the welfare changes associated with different economic and technological solutions for reducing congestion, including peak-use pricing, throttling connectivity speeds, and local-cache technologies.
    Keywords: demand; broadband; congestion; peak-use pricing
    JEL: L11 L13 L96
    Date: 2016–09
  17. By: Mark Pauly; Kyle Myers
    Abstract: This paper examines trends in the aggregate productivity of the pharmaceutical sector over the past three decades. We incorporate Ricardo’s insight about demand-driven productivity in settings of variable scarce resources, and estimate the industry’s responsiveness to changes in demand over this timeframe using therapeutic class-specific data. In contrast to many analyses, our empirical estimates indicate that the industry has “met demand” with remarkable consistency since the late-1980s. The growth in total R&D spending, and therefore R&D costs per new drug, appear to have been profitable and productive investments. While we identify a significant increase in the industry’s fixed costs - the intercept of the production function - we find no decline in the marginal productivity of industry investments that might suggest significant supply-side frictions. While we cannot diagnose in detail why average, but not marginal, productivity declined, the data suggests that firms have finally begun to compete down returns from the supranormal levels of decades past.
    JEL: D20 I11 L10 L65 O31
    Date: 2016–10
  18. By: Hattori, Masahiko; Tanaka, Yasuhito
    Abstract: Adoption of new technology by firms is very important for economic growth of a country. However, it may be insufficient or excessive in less competitive industries from the point of view of social welfare. Then, subsidization or taxation by the government is necessary. We present an analysis about subsidy or tax policy for adoption of new technology in an oligopoly with a homogeneous good. The unit cost with the new technology is lower than that with the present technology, but each firm must expend a fixed set-up cost to adopt and use the new technology. We will show that if the number of firms is small, and the set-up cost is large, subsidization to promote adoption of new technology may be the optimum policy. However, if the number of firms is not so small, or the set-up cost is not so large, taxation to prevent adoption of new technology is likely to be the optimum policy.
    Keywords: subsidy or tax policy, new technology adoption, oligopoly
    JEL: D43 L13
    Date: 2016–10–13
  19. By: hector chade (arizona state university)
    Abstract: We introduce costly insurance provision into a standard monopoly insurance model with adverse selection, where the consumer has private information about the probability of suffering a loss. We obtain two main results that do not arise in the standard model. First, we derive a general comparative statics result about coverage denial only to those likely to be the worst risks. Second, we show that the optimal menu the insurer offers can entail complete pooling of all types. We also show that these results do not hold in a costly provision version of the competitive model of Rothschild-Stiglitz. Finally, we discuss the implications of these results for empirical work on insurance with adverse selection.
    Date: 2016
  20. By: Motta, Massimo; Tarantino, Emanuele
    Abstract: It has been suggested that mergers, by increasing profitability, will also result in higher investments. To deal with this claim, we first study a general model with simultaneous cost-reducing investments and price choices. Absent scope economies, the merger is anti-competitive: it lowers both total output and investment. With sequential choices, we provide a sufficient condition in a general model for the merger to be anti-competitive. The results are confirmed in a standard Shubik-Levitan parametric model. Only if the merger entails sufficient scope economies, will it be pro-competitive. We also show that a Network Sharing Agreement (by which parties set their investment cooperatively) is preferable to a merger. Finally, we identify a class of models where the same qualitative results extend to quality-enhancing investments.
    Keywords: Horizontal mergers; innovation; Investments; Network-sharing Agreements
    Date: 2016–10
  21. By: Daniel Hopp; Michael Kriebel
    Abstract: This paper studies interregional competition for firms when the bidding is decided upon majority voting. We model the competition as an auction under full information between two asymmetric regions inhabited by low- and high-skilled individuals. We derive two results: First, the location decision is inefficient in most cases, especially when the median voter is high-skilled. Second, winning the auction is harmful for the region if the political process and a strong competition lead to subsidies which exceed the surplus created by a firm's location. This implies that restricting interregional competition for firms, e.g. regulating subsidies, may enhance welfare. Furthermore, our model shows that countries with high redistributive taxes and a low-skilled majority have an advantage to attract foreign firms.
    Keywords: median voter, political economy, subsidy competition, spillover
    JEL: H23 H25 H31 P16 R11
    Date: 2016–10
  22. By: Virginie Lurkin; Laurie A. Garrow; Matthew J. Higgins; Jeffrey P. Newman; Michael Schyns
    Abstract: Network planning models, which forecast the profitability of airline schedules, support many critical decisions, including equipment purchase decisions. Network planning models include an itinerary choice model that is used to allocate air total demand in a city pair to different itineraries. Multinomial logit (MNL) models are commonly used in practice and capture how individuals make trade-offs among different itinerary attributes; however, none that we are aware of account for price endogeneity. This study formulates an itinerary choice model that is consistent with those used by industry and corrects for price endogeneity using a control function that uses several types of instrumental variables. We estimate our model using a database of more than 3 million tickets provided by the Airlines Reporting Corporation. Results based on Continental U.S. markets for May 2013 departures show that models that fail to account for price endogeneity overestimate customers’ value of time and result in biased price estimates and incorrect pricing recommendations. The size and comprehensiveness of our database allows us to estimate highly refined departure time of day preference curves that account for distance, direction of travel, number of time zones traversed, departure day of week and itinerary type (outbound, inbound or one-way). These time of day preference curves can be used by airlines, researchers, and government organizations in the evaluation of different policies such as congestion pricing.
    JEL: L11 L9 L93 M2
    Date: 2016–10

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