nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒11‒13
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Endogenous product design and quality with rationally inattentive consumers By Mariana Cunha; António Osório; Ricardo Ribeiro
  2. Consumer Loss Aversion, Product Experimentation and Implicit Collusion By Salvatore Piccolo; Aldo Pignataro
  3. Search costs in concentrated markets: An experimental analysis By Möllers, Claudia; Stühmeier, Torben; Wenzel, Tobias
  4. Reputation and foreclosure with vertical integration: Experimental evidence By Möllers, Claudia
  5. A Generalized Model of Sales By Shelegia, Sandro; Wilson, Chris
  6. Publishing Retail Prices in an Inflationary Context: Evidence from Argentina By Horacio Larreguy; Robert Rodriguez; Laura Trucco
  7. On the relation between patent citations and patent value By Jurriën Bakker
  8. Innovation, Competition and Technical Efficiency By Elina Berghäll
  9. On leniency and markers in antitrust: how many informants are enough? By Konstantinos Charistos; Christos Constantatos
  10. Services Trade Restrictiveness, Mark-Ups and Competition By Dorothée Rouzet; Francesca Spinelli
  11. Price discrimination of ott providers under duopolistic competition and multi-dimmesional product differentiation in retail broadband access By José Marino García García; Aurelia Valiño Castro; A. Jesús Sánchez Fuentes
  12. Characterization of the relevant market in the media industry: some new evidence! By Bardey, David; Santos, Nicolas; Tovar, Jorge
  14. Music industry intermediation in the digital era and the resilience of the majors’ oligopoly: The role of transactional capabilities. By Rémy Guichardaz; Laurent Bach; Julien Penin
  15. A Blue Print for European Power Market Design By Neuhoff, Karsten; Richstein, Joern; May, Nils

  1. By: Mariana Cunha (Católica Porto Business School and CEGE, Universidade Católica Portuguesa); António Osório (Universitat Rovira i Virgili, Department d'Economia and CREIP); Ricardo Ribeiro (Católica Porto Business School, Universidade Católica Portuguesa)
    Abstract: In some markets, consumers do not know the attributes of all the products that are available in the market, or the prices at which they are offered. To overcome this uncertainty, consumers may gather and process information about those attributes and prices. In this paper, we examine the consequences of consumer costs of doing so on firms' product attribute and pricing decisions. To do so, we follow the rational inattention literature in assuming that, before entering the choice situation, consumers are in contact with all products, but may have an incomplete or imprecise prior idea about their attributes and prices. Further, we also assume that consumers can, at a cost, gather and process information in a non-random fashion about any (sub)set of products, with any precision about their attributes and prices. Furthermore, we assume that products are characterized by both horizontal and vertically differentiated attributes, which we address as design and quality, respectively. We find a number of interesting results. First, if the unit costs of gathering and processing information are homogeneous among consumers, firms should differentiate their products as those costs fall, so to relax the otherwise increasing price competition. This implies that equilibrium prices may increase as these costs decrease, because product differentiation countervails the otherwise negative impact on prices. Second, if the unit costs of gathering and processing information are heterogeneous among consumers, with a sizeable proportion of "informed" consumers, firms should always seek to differentiate their products as maximum as possible, independently of the level of information costs of the "uninformed" consumers. This implies that equilibrium price levels do not increase (and, in fact, tend to decrease) as the unit costs of those consumers decrease and that "informed" consumers serve as a "market competition guardian". Finally, in all the above cases, firms do not need to differentiate themselves along all attribute dimensions. Differentiation along one attribute dimension is more than enough to relax price competition.
    Keywords: Rational Inattention, Information Frictions, Product Differentiation, Pricing.
    JEL: D43 D83 L13 L15
    Date: 2016–10
  2. By: Salvatore Piccolo (Università Cattolica del Sacro Cuore (Milano), and CSEF); Aldo Pignataro (Università Cattolica del Sacro Cuore (Milano))
    Abstract: Two firms supplying experience goods compete to attract loss averse consumers that are uncertain about how well these goods fit their needs. To resolve valuation uncertainty, firms can allow perspective customers to test (experiment) their products before purchase. We investigate firms' dynamic incentives to allow experimentation and analyze the resulting effects on the profitability and the stability of horizontal price fixing. The analysis shows that, depending on the regulatory regime in place | i.e., whether experimentation is forbidden, mandated or simply allowed but not imposed (laissez-faire) | the degree of consumer loss aversion has ambiguous effects both on the profits that firms can achieve through implicit collusion and on the extent to which these agreements can be sustained. Moreover, we also show that while in static environments consumer welfare is always maximized by a policy that forbids experimentation, the opposite might happen in a dynamic environment.
    Keywords: Collusion, Loss Aversion, Product Experimentation, Vertical Differentiation
    JEL: L12 L15 L44 M30
    Date: 2016–11–07
  3. By: Möllers, Claudia; Stühmeier, Torben; Wenzel, Tobias
    Abstract: This paper experimentally studies the role of search cost in duopoly markets where sellers may be able to coordinate pricing decisions. We vary the level of search cost and whether sellers can communicate. While we find that consumers are more likely to invest in search when cost is reduced, we find that a reduction of search cost does not influence prices. This effect is not influenced by the availability of seller communication. Our results suggest that policy interventions that aim to increase the competitiveness of markets via reducing search cost may not be effective in concentrated markets.
    Keywords: Search,Collusion,Regulation
    JEL: K23 L13 L51
    Date: 2016
  4. By: Möllers, Claudia
    Abstract: Building on the seminal paper of Ordover, Saloner and Salop (1990), I study the role of reputation building on foreclosure in laboratory experiments. In one-shot interactions, upstream firms can choose to build a reputation by revealing their price history to the current upstream competitor. In particular, integrated firms can establish a reputation to foreclose the input outcome that would otherwise not be tenable due to a commitment problem. I get three main results: First, withdrawal from the input market is three times more common with reputation building of the integrated firm. Second, the anticompetitive effects are much stronger when the integrated firm builds a reputation. Third, integrated firms choose to build a reputation significantly more often than non-integrated firms. Markets with reputation building of the integrated firm are ten times more often monopolized than without.
    Keywords: vertical restraints,commitment,reputation,experiments
    JEL: L42 D43 C90 D83 C72
    Date: 2016
  5. By: Shelegia, Sandro; Wilson, Chris
    Abstract: To provide a more flexible 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
  6. By: Horacio Larreguy; Robert Rodriguez; Laura Trucco
    Abstract: When inflation is high, the dispersion of prices across sellers of the same good increases, and both sellers and consumers lose sight of reference prices. As a result, the degree of competition in the market weakens. The government of Argentina, a country with a current 35% annual inflation rate, has recently launched a program that provides consumers with store-level daily-updated information on prices for goods sold in major supermarkets across the entire nation. In this project, we use a unique dataset with this rich information on daily geolocated prices in order to study the effect of publishing prices on competition across stores, and its consequences on price dispersion.
    Date: 2016–01
  7. By: Jurriën Bakker
    Abstract: This paper reports the results of an analysis of patent citation and patent renewal data, advancing a log-linear relation between patent citations and patent value. A complementary analysis of firms’ patent portfolios confirms that modelling the relation between citations and firm value benefits from the adoption of the log-linear form.
    Keywords: patent citations, patent value, patent renewal, Tobin’s Q
    Date: 2016–10
  8. By: Elina Berghäll
    Abstract: Contradictory empirical and theoretical evidence on the relationship between innovation and competition has been reconciled in a model that yields an inverted U-shaped curve. I test whether the predictions of the model are supported by the data with an unbalanced panel of firms for 1990-2003 in a high productivity growth, high-tech industry, Finnish ICT manufacturing. In particular, I investigate how well alternative, yet rigorous measures of innovation and the technology gap, such as R&D intensity, R&D elasticity, technical change, technical efficiency and total factor productivity fare with respect to competition measured by the Lerner index. The results prove sensitive to the choice of variable. Overall, the model is not supported by the empirical evidence of the industry.
    Keywords: competition, innovation, technical efficiency, technology frontier, R&D intensity
    JEL: O25 L50 L60 D20 O30
    Date: 2016–10–12
  9. By: Konstantinos Charistos (Department of Economics, University of Macedonia); Christos Constantatos (Department of Economics, University of Macedonia)
    Abstract: In this paper we investigate the impact of leniency programs on firms’ decision to collude. We depart from previous literature by relaxing the assumption that evidence provided by a single firm suffices to convict an existing cartel with certainty. Assuming the conviction-probability to be increasing in the number of reporting firms, we show first that efficient cartel deterrence requires incentives for all firms to report. Under a regime that secures a marker for the first in line applicant, eligibility for leniency should be extended to at least a second informant. Further, we show that the introduction of the marker system has an ambiguous impact on cartel deterrence. In relation to the manner that the marker is secured and the cartel-related evidence is allocated, we derive the conditions under which allowing the first applicant to secure a marker enhances cartel deterrence.
    Keywords: antitrust enforcement, collusion, leniency programs.
    JEL: K21 L12 L41
    Date: 2016–11
  10. By: Dorothée Rouzet; Francesca Spinelli
    Abstract: This report explores the relationship between services trade policies and mark-ups at the firm level, taken as a measure of competitive pressure. Restrictive regulations are found to enable firms to charge higher mark-ups in a majority of services sectors, suggesting ample scope for pro-competitive gains from trade liberalisation. Barriers to establishment consistently enable incumbent firms shielded from competition to raise their prices, while a lack of regulatory transparency and complex administrative procedures tend to add to all firms’ operating expenses. A “tax equivalent” of trade-restrictive regulations is then inferred from the abnormal price-cost margin of domestic firms in each service sector. These estimates indicate the magnitude of the welfare costs of regulatory trade restrictions across sectors and countries. The sectors with the highest average tax equivalents of STRI indices are broadcasting, construction, storage, and air and maritime transport, while those with the lowest averages are road transport, architecture and cargo-handling. There is however considerable variation between countries in all sectors.
    Keywords: competition, trade liberalisation, regulation, services trade restrictions
    JEL: D22 F13 F14 F61 L11 L8 L9
    Date: 2016–11–09
  11. By: José Marino García García; Aurelia Valiño Castro; A. Jesús Sánchez Fuentes
    Abstract: Network neutrality regulation prevents price discrimination from Access Providers to Content Providers and product differentiation in terms of connection quality in the retail broadband access market. This paper analyzes the economic implications of price discrimination under duopolistic competition and multi-dimensional product differentiation in retail internet access using a sequential-moves game theoretic model. Under this framework, we discuss the impact of product differentiation and price discrimination on social welfare, and offer systematic simulations using feasible ranges for parameters value to help discern the impact of departing from network neutrality regulation on social welfare.
    Keywords: network neutrality, two sided markets, price discrimination, product differentiation, queuing theory, network congestion, duopoly, competition policy.
    JEL: C70 D43 L10 L13 L51 L86 L96
    Date: 2016–11
  12. By: Bardey, David; Santos, Nicolas; Tovar, Jorge
    Abstract: In this paper we estimate the degree of substitutability for advertisers across different media outlets. The estimates are motivated by the need that competition agencies have to properly characterize the relevant market when dealing with mergers in the media industry. As technology changes the industry, advertisers may not view a given media outlet as independent from those operating in other media platforms. Indeed, our results show that advertisers see outlets across platforms, either as substitutes or complements. From a policy perspective, our findings imply that competition agencies, particularly when defining relevant markets, should not assume that advertisers operate independently within a single media platform.
    Keywords: Media substitution, Cross Price elasticity, Advertising.
    JEL: D4 L L4
    Date: 2016–10
  13. By: Banu Külter DemirgüneÅŸ (Ahi Evran University); Bülent Özsaçmacı (Çankaya University)
    Abstract: It is important for marketers to understand the individuals’ buying decisions in a competitive environment. The concept of decision making style is one of the key determinants of consumers’ behavioral patterns. This study aims to explore the effects of consumers’ decision making styles on buying national and store branded food products. To examine consumer decision making styles, Sproles and Kendall’s (1986) The Consumer Style Inventory (CSI) is adopted in the study. The framework of this study is based on eight consumer decision making style, expected to shape consumers’ national and store brand choice on food products. The empirical analysis is based on data obtained from consumers living in Kırşehir, a city in Turkey. Questionnaires was handed over to 500 customer of retail stores both selling national and their own brands. Firstly, exploratory factor analysis is used to confirm the model, then multiple regression analysis is used to test the hypothesis and to compare consumer’s national and store brand choice, in the context of their decision making styles. The study is expected to help retailers develop suitable strategies for national and store branded food products. In fact it is important to develop a certain and an accurate understanding of consumers’ decision making styles for successful marketing and advertising strategies. Besides, different marketing strategies for both national and store branded food products can be tailored to the characteristics of consumers.
    Keywords: Consumer Decision Making Styles, The Consumer Style Inventory, Store Brand, National Brand
    JEL: M31
  14. By: Rémy Guichardaz; Laurent Bach; Julien Penin
    Abstract: The digital revolution has significantly impacted the traditional business model of the music industry by lowering barriers to market entry. This change is usually depicted as a comeback to “the old-time”: artists would have more control and more autonomy in the business thanks to a new range of web intermediaries that challenges the big incumbent firms, the so-called majors (Universal, Sony and Warner). This paper argues that such diagnostic is incomplete and does not take into account the recent changes that the majors have successfully implemented on their business model. Based on a case study of the French major’s filial of Sony Music Entertainment the paper shows how and why majors are still playing competitive intermediary functions thanks to the development of transactional capabilities.
    Keywords: Research Productivity, Creativity, Collaboration.
    JEL: I23 O31 O32
    Date: 2016
  15. By: Neuhoff, Karsten; Richstein, Joern; May, Nils
    Date: 2016

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