nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒11‒20
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Identifying Price-Leadership Structures in Oligopoly By Paul W. Dobson; Sang-Hyun Kim; Hao Lan
  2. Vertical integration and upstream horizontal mergers By Ioannis Pinopoulos
  3. Price Competition in Product Variety Networks By Philip Ushchev; Yves Zenou
  4. Shopping Malls, Platforms and Consumer Search By Alexei Parakhonyak; Maria Titova
  5. Platforms and network effects By Belleflamme, Paul; Peitz, Martin
  6. You are judged by the company you keep : reputation leverage in vertically related markets By Choi, Jay Pil; Peitz, Martin
  7. A Leverage Theory of Tying in Two-Sided Markets By CHOI, Jay Pil; JEON, Doh-Shin
  8. De-targeting: advertising an assortment of products to loss-averse consumers By Karle, Heiko; Peitz, Martin
  9. Price Discrimination with Loss Averse Consumers By Jong-Hee Hahn; Jinwoo Kim; Sang-Hyun Kim; Jihong Lee
  10. Dispersion and Skewness of Bid Prices By Albert Menkveld; Boyan Jovanovic
  11. Sourcing Co-Created Products: Should your Suppliers Collaborate? By Dinah Cohen-Vernik; Oksana Loginova; Niladri B. Syam
  12. On the Use of Price-Cost Tests in Loyalty Discounts and Exclusive Dealing Arrangements: Which Implications from Economic Theory? By Chiara Fumagalli; Massimo Motta
  13. Instrument-free Identification and Estimation of Differentiated Products Models By David P. Byrne; Susumu Imai; Vasilis Sarafidis; Masayuki Hirukawa
  14. On the Direction of Innovation By Francesco Squintani; Hugo A. Hopenhayn
  15. Net neutrality: a fast lane to understanding the trade-offs By Greenstein, Shane; Peitz, Martin; Valletti, Tommaso M.
  16. Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets By Herr, Annika; Suppliet, Moritz
  17. Competition and bank stability By Goetz, Martin
  18. Choice and Competition in Public Service Provision By James Malcomson; Timothy Besley
  19. Is Home Sharing Driving up Rents? Evidence from Airbnb in Boston By Mark Merante; Keren Mertens Horn

  1. By: Paul W. Dobson (University of East Anglia); Sang-Hyun Kim (University of East Anglia); Hao Lan (University of East Anglia)
    Abstract: Oligopoly can give rise to complex patterns of price interaction and price adjustment. While firms in oligopolistic markets may divide into price leaders and price followers, it is not inconceivable that some may take on dual roles, being a leader to one group but a follower to a different group. Thus who leads and who is led can be complicated and hierarchical. To help disentangle such pricing relationships, this paper develops a method to empirically identify price-leadership structures in n-firm oligopolistic markets by generalizing the duopoly method proposed by Seaton and Waterson (2013). Applying the method to UK food retailing industry, our analysis finds that it has a three-tier structure in which the two largest players (Tesco and Asda), tend to price-lead other retailers, while the other two of the Big 4 major chains (Sainsbury and Morrisons) play both follower (to the top two) and leader (to the smaller, premium/convenience positioned supermarket chains).
    Keywords: Price leadership, oligopolistic markets, UK food retailing industry
    JEL: D43 L13 L41 L81
    Date: 2016–11
  2. By: Ioannis Pinopoulos (Department of Economics, University of Macedonia)
    Abstract: In this paper, we study upstream horizontal mergers in vertically related markets. A key aspect of our analysis is that one of the merging parties is a vertically integrated firm. We consider a two-tier market consisting of two competing vertical chains, with one upstream and one downstream firm in each chain. We assume that one vertical chain is vertically integrated whereas the other chain is vertically separated. We also assume that the vertically integrated chain is more cost-efficient in its downstream operations than the independent downstream firm. We show that a horizontal merger between the vertically integrated firm and the independent upstream supplier will increase the equilibrium input price and reduce both consumer and total welfare. When an upstream competitive fringe exists, however, the merger still decreases consumer surplus but it may increase total welfare. The latter finding is important since it implies that whether antitrust authorities favor a consumer or total welfare objective can lead to very different conclusions regarding the merger’s desirability.
    Keywords: Vertical relations; vertical integration; horizontal mergers; welfare.
    JEL: L11 L13 L41 L42
    Date: 2016–11
  3. By: Philip Ushchev (NRU-Higher School of Economics); Yves Zenou (Monash University, Stockholm University, IFN and CEPR)
    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
    JEL: D43 L11 L13
    Date: 2016–09
  4. By: Alexei Parakhonyak; Maria Titova
    Abstract: Abstract: We consider a general model of a market for differentiated goods, in which firms are located in marketplaces: shopping malls or platforms. There are search frictions between the marketplaces, but not within them. Marketplaces differ in their size. We show that consumers prefer to start their search from the largest marketplace and continue in the descending order of their size. We show that the descending search order is the only search order which can be a part of an equilibrium for any market cofiguration. Despite charging lower prices, firms at larger marketplaces earn higher profits, and under free entry all firms cluster at one place. If a marketplace determines the price of entry, the equilibrium marketplace size depends negatively on search costs.
    Keywords: Shopping Malls, Consumer Search, Platforms
    JEL: D43 D83 L13
    Date: 2016–10–23
  5. By: Belleflamme, Paul; Peitz, Martin
    Abstract: In many markets, user benefits depend on participation and usage decisions of other users giving rise to network effects. Intermediaries manage these network effects and thus act as platforms that bring users together. This paper reviews key findings from the literature on network effects and two-sided platforms. It lays out the basic models of monopoly platforms and platform competition, and elaborates on some routes taken by recent research.
    Keywords: Network effects , digital platforms , two-sided markets , tipping , platform competition , intermediation , pricing , imperfect competition
    JEL: D43 L13 L86
    Date: 2016
  6. By: Choi, Jay Pil; Peitz, Martin
    Abstract: This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier`s adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality vis-à-vis the supplier. The supplier may enter the market by initially renting the downstream firm`s reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs.
    Keywords: Adverse Selection , Certification Intermediaries , Incumbency Advantage , Experience Goods , Outsourcing , Branding , Barriers to Entry
    JEL: D4 L12 L4 L43 L51 L52
    Date: 2016
  7. By: CHOI, Jay Pil; JEON, Doh-Shin
    Abstract: Motivated by the recent antitrust investigations concerning Google, we develop a leverage theory of tying in two-sided markets. In a setting where the "one monopoly profit result" holds otherwise, we uncover a new channel through which tying allows a monopolistic firm in one market to credibly leverage its monopoly power to another competing market if the latter is two-sided. In the presence of the nonnegative price constraint, tying provides a mechanism to circumvent the constraint in the tied product market without inviting an aggressive response by the rival firm. We identify conditions under which tying in two-sided markets is promotable and explore its welfare implications. In addition, we show that our model can be applied more widely to any markets in which sales to consumers in one market can generate additional revenues that cannot be competed away due to non-negative price constraints.
    Keywords: Tying, Leverage of monopoly power, Two-sided markets, Zero pricing,, Non-negative pricing constraint
    JEL: D4 L1 L5
    Date: 2016–11
  8. By: Karle, Heiko; Peitz, Martin
    Abstract: We consider product markets in which consumers are interested only in a specific product category and initially do not know which product category matches their tastes. Using sophisticated tracking technologies, an intermediary can make inferences about a consumer’s preferred product category and offer advertising firms the possibility to target their ads to match the consumer’s taste. Such targeting reduces overall advertising costs and, as a direct effect, increases industry profits. However, as we show in this paper, when consumers form reference prices and are loss averse, more precise targeting may intensify competition between firms. As a result, firms may earn higher profits from “de-targeted” advertising; i.e., when the intermediary deliberately informs about some products and their price quotes from outside a consumer’s preferred product category.
    Keywords: Targeted advertising , Informative advertising , Consumer loss aversion , Reference prices , Contextual inference , Consumer recognition , Behavioral industrial organization
    JEL: L13 D43 M3
    Date: 2016
  9. By: Jong-Hee Hahn (Yonsei University); Jinwoo Kim (Seoul National University); Sang-Hyun Kim (University of East Anglia); Jihong Lee (Seoul National University)
    Abstract: This paper proposes a theory of price discrimination based on consumer loss aver- sion. A seller offers a menu of bundles before a consumer learns his willingness to pay, and the consumer experiences gain-loss utility with reference to his prior (rational) ex- pectations about contingent consumption. With binary consumer types, the seller fnds it optimal to abandon screening under an intermediate range of loss aversion if the low willingness-to-pay consumer is suffciently likely. We also identify suffcient conditions under which partial or full pooling dominates screening with a continuum of types. Our predictions are consistent with several observed practices of price discrimination.
    Keywords: Reference-dependent preferences, loss aversion, price discrimination, per- sonal equilibrium, preferred personal equilibrium.
    JEL: D03 D42 D82 D86 L11
    Date: 2016–11
  10. By: Albert Menkveld (VU University Amsterdam); Boyan Jovanovic (New York University)
    Abstract: Competitive bidding by homogeneous agents in a first-price auction can yield a non-degenerate bid price distribution. This price dispersion is the unique equilibrium in a setting where bidders “pay to play.†Ex ante, bidders decide simultaneously on whether to play or not. Ex post, those who play submit their bid simultaneously not knowing who else is in the market. The price-dispersion result is applied to high-frequency bidding in limit-order markets. The parsimonious model fits the bid-price dispersion for S&P 500 stocks remarkably well.
    Date: 2016
  11. By: Dinah Cohen-Vernik (Department of Marketing, Jones Graduate School of Business, Rice University); Oksana Loginova (Department of Economics, University of Missouri); Niladri B. Syam (Department of Marketing, Trulaske College of Business, University of Missouri)
    Abstract: We investigate the phenomenon of sourcing co-created products. Specifically, we study how a multi-product downstream firm should source from the upstream market, that is single-source versus multi-source, in a situation where the products are co-created with the suppliers. In business-to-business markets it is increasingly common for downstream firms to co-create the products with the help of their suppliers, and we contribute to the literature on sourcing strategies by incorporating product co-creation. We also model whether the downstream firm should establish a collaborative environment for it suppliers, and this is novel to the literature. Finally, we compare the sourcing strategies for co-created products with the case when the downstream firm makes a straight purchase. We find that the downstream firm may be worse off when the upstream suppliers collaborate, unless the cross-effect of its and its suppliers' investments is very large. Importantly, we derive this result for a completely general cost function. We have considered a very rich strategy space for the firm's sourcing strategy, which includes, (a) co-creation or straight purchase, (b) single-sourcing or multi-sourcing, and (c) collaboration or no collaboration in the case of multi-source co-creation. We find that for an additively separable cost function, the downstream firm's optimal strategy is multi-source co-creation without collaboration. An important economic force that our analysis has uncovered is that single-sourcing of co-created products completely destroys the downstream firm's incentives to invest in co-creation. This result too has been derived for a completely general cost function, and thus we also contribute to the economics literature on holdup, which has not considered co-created products. This economic force is instrumental in ensuring that multi-sourcing dominates single-sourcing. Finally, we find that the incentives of the downstream firm to multi-source are stronger for co-created products than for straight purchase of standard products. Since the downstream firm internalizes some of the production in the case of co-created products, reducing its dependence on suppliers, one might speculate that the incentives to multi-source may be less for co-created products. Counter-intuitively, we show that the incentives to multi-source are even stronger, and are driven by endogenous investments of the firms.
    Keywords: co-creation, sourcing strategy, collaboration, holdup, game theory
    JEL: C72 D4 L1 M31
    Date: 2016–11–08
  12. By: Chiara Fumagalli; Massimo Motta
    Abstract: Recent cases in the US (Meritor, Eisai) and in the EU (Intel ) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts. Keywords: Market-Share Discounts, Inefficient Foreclosure, Exclusive Dealing, Antitrust Policy JEL Classification: K21, L41
    Date: 2016
  13. By: David P. Byrne (Department of Economics, University of Melbourne); Susumu Imai (Economics Discipline Group, University of Technology, Sydney); Vasilis Sarafidis (Department of Econometrics and Business Statistics, Monash University); Masayuki Hirukawa (Department of Economics, Setsunan University)
    Abstract: We propose a new methodology for estimating the demand and cost functions of differentiated products models when demand and cost data are available. The method deals with the endogeneity of prices to demand shocks and the endogeneity of outputs to cost shocks, but does not require instruments for identification. We establish non-parametric identification, consistency and asymptotic normality of our estimator. Using Monte-Carlo experiments, we show our method works well in contexts where instruments are correlated with demand and cost shocks, and where commonly-used instrumental variables estimators are biased and numerically unstable.
    Keywords: Differentiated Goods Oligopoly; Instrument-free; Parametric Identification; Nonparametric Identification; Cost data
    JEL: C13 C14 L13 L41
    Date: 2015–01–16
  14. By: Francesco Squintani (University of Warwick); Hugo A. Hopenhayn (University of California Los Angeles)
    Abstract: Research on the efficiency of innovation markets is usually concerned on whether the level of R&D firm investment is socially optimal. Instead, this paper studies whether R&D resources are employed optimally across research areas. Under weak assumptions, we find that competitive equilibrium innovative efforts are biased excessively into high returns areas. This form of market inefficiency is a novel result, and would take place even if innovators' profits coincided with the social value of innovations. We first demonstrate it in a simple, fundamental model. Then we embed our analysis in a canonical dynamic framework directly comparable with extant R&D models, and precisely identify the features of R&D competition that lead to the market failure we identify.
    Date: 2016
  15. By: Greenstein, Shane; Peitz, Martin; Valletti, Tommaso M.
    Abstract: The “net neutrality” principle has triggered a heated debate and advocates have proposed policy interventions. In this paper, we provide perspective by framing issues in terms of the positive economic factors at work. We stress the incentives of market participants, and highlight the economic conflicts behind the arguments put forward by the different parties. We also identify several key open questions.
    Keywords: Network neutrality , internet , regulation
    JEL: L51 L86
    Date: 2016
  16. By: Herr, Annika; Suppliet, Moritz
    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
  17. By: Goetz, Martin
    Abstract: Does an increase in competition increase or decrease bank stability? I exploit how the state-specific process of interstate banking deregulation lowered barriers to entry into urban banking markets and find that greater competition significantly increases bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as merger and acquisitions or diversification. Moreover, I find that greater competition reduces banks' nonperforming loans and increases bank profitability. These findings suggest that competition increases stability as it improves bank profitability and asset quality.
    Keywords: Risk,Stability,Competition,Contestability,Entry,Bank Deregulation,Lending
    JEL: G21 G28 G32
    Date: 2016
  18. By: James Malcomson; Timothy Besley
    Abstract: In spite of a range of policy initiatives in sectors such as education, health care and legal services, whether choice and competition is valuable remains contested territory. This paper studies the impact of choice and competition on different dimensions of quality, examining the role of not-for-profit providers. We explore two main factors which determine whether an alternative provider enters the market: cost efficiency and the preferences of an incumbent not-for-profit provider (paternalism). The framework developed can incorporate standard concerns about the downside of choice and competition when consumer choice is defective (an internality) or choice imposes costs on those who do not switch (an externality). The paper considers optimal funding levels for incumbents and entrants showing when the “voucher” provided for consumers to move to the incumbent should be more or less generous than the funding for consumers who remain with the incumbent. Finally, the model also offers an insight into why initiatives are frequently opposed by incumbent providers even if the latter have not-for-profit objectives.
    Keywords: Choice, Competition, Public Service, Not-for-profit
    Date: 2016–08–15
  19. By: Mark Merante; Keren Mertens Horn
    Date: 2016–11

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