nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒11‒27
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Why Mixed Qualities May Not Survive at Equilibrium: The Case of Vertical Product Differentiation By Georgi Burlakov
  2. The Competitive Effects of Information Sharing By John Asker; Chaim Fershtman; Jihye Jeon; Ariel Pakes
  3. The Inverse Cournot Effect in Royalty Negotiations with Complementary Patents By Llobet, Gerard; Padilla, Atilano Jorge
  4. Distorted monopolistic competition By Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Suedekum, Jens
  5. The Impact of Emerging Market Competition on Innovation and Business Strategy By Lorenz Kueng; Nicholas Li; Mu-Jeung Yang
  6. Product Variety, Across-Market Demand Heterogeneity, and the Value of Online Retail By Thomas W. Quan; Kevin R. Williams
  7. The Impact of Management Quality on Innovation Performance of Firms in Emerging Countries By Oleg Sidorkin
  8. Do vertical relations matter to fund flows under oligopolistic market structures? By Kang Baek
  9. Past Performance and Procurement Outcomes By Francesco Decarolis; Giancarlo Spagnolo; Riccardo Pacini
  10. Promotional allowances By Lømo, Teis Lunde; Ulsaker, Simen Aardal
  11. Complementarity without Superadditivity By Steven Berry; Philip Haile; Mark Israel; Michael Katz
  12. The extraterritorial reach of EU competition law revisited: The "effects doctrine" before the ECJ By Behrens, Peter
  13. Hospital Competition, Quality, and Expenditures in the U.S. Medicare Population By Carrie Colla; Julie Bynum; Andrea Austin; Jonathan Skinner
  14. Analysis on lock-in effects by estimating for the switching costs in telecommunications bundles. By Hyungjin Kim; Hyunchul Kim
  15. Consumer preferences and implicit prices of smartphone characteristics By José A. Montenegro; José L. Torres

  1. By: Georgi Burlakov
    Abstract: In the classical literature on vertical differentiation, goods are assumed to be single products each offered by a different firm and consumed separately one from another. This paper departs from the standard setup and explores the price competition in a vertically differentiated market where a firm's product is consumed not separately but in fixed one-to-one ratio with another complementary type of good supplied by a different producer. An optimal solution for market setting with two entrants of a type is proposed, to show that there could be an equilibrium at which the so-called "mixed-quality combinations", consisting of one high-quality good and one low-quality good each, remain unsold. For such an equilibrium to exist, it is suffcient the mixed-quality combinations to be at least as di erentiated from the best as from the worst combination which retains its positive market share. Thus, the mixed-quality exclusionary outcome appears as a further form in which the well-known maximum- differentiation principle could be implemented in a multi-market setting. It provides a new explanation of the self-selection bias in consumption observed in some industries for complementary goods.
    Keywords: complementary goods; vertical product differentiation; market foreclosure;
    JEL: L11 L13 L15
    Date: 2016–08
  2. By: John Asker; Chaim Fershtman; Jihye Jeon; Ariel Pakes
    Abstract: We investigate the impact of information sharing between rivals in a dynamic auction with asymmetric information. Firms bid in sequential auctions to obtain inputs. Their inventory of inputs, determined by the results of past auctions, are privately known state variables that determine bidding incentives. The model is analyzed numerically under different information sharing rules. The analysis uses the restricted experience based equilibrium concept of Fershtman and Pakes (2012) which we refine to mitigate multiplicity issues. We find that increased information about competitors’ states increases participation and inventories, as the firms are more able to avoid the intense competition in low inventory states. While average bids are lower, social welfare is unchanged and output is increased. Implications for the posture of antitrust regulation toward information sharing agreements are discussed.
    JEL: C63 C73 D43 K21 L41
    Date: 2016–11
  3. By: Llobet, Gerard; Padilla, Atilano Jorge
    Abstract: It has been commonly argued that the decision of a large number of inventors to license complementary patents necessary for the development of a product leads to excessively large royalties. This well-known Cournot-complements or royalty-stacking effect would hurt efficiency and downstream competition. In this paper we show that when we consider patent litigation and introduce heterogeneity in the portfolio of different firms these results change substantially due to what we denote the Inverse Cournot effect. We show that the lower the total royalty that a downstream producer pays, the lower the royalty that patent holders restricted by the threat of litigation of downstream producers will charge. This effect generates a moderation force in the royalty that unconstrained large patent holders will charge that may overturn some of the standard predictions in the literature. Interestingly, though, this effect can be less relevant when all patent portfolios are weak making royalty stacking more important.
    Keywords: Intellectual Property; Patent Licensing; Patent Pools; R&D Investment; Standard Setting Organizations
    JEL: L15 L24 O31 O34
    Date: 2016–11
  4. By: Behrens, Kristian; Mion, Giordano; Murata, Yasusada; Suedekum, Jens
    Abstract: We characterize the equilibrium and optimal resource allocations in a general equilibrium model of monopolistic competition with multiple asymmetric sectors and heterogeneous firms. We first derive general results for additively separable preferences and general productivity distributions, and then analyze specific examples that allow for closed-form solutions and a simple quantification procedure. Using data for France and the United Kingdom, we find that the aggregate welfare distortion due to inefficient labor allocation and firm entry between sectors and inefficient selection and output within sectors is equivalent to the contribution of 68% of the total labor input.
    Keywords: monopolistic competition,welfare distortion,intersectoral distortions,intrasectoral distortions
    JEL: D43 D50 L13
    Date: 2016
  5. By: Lorenz Kueng; Nicholas Li; Mu-Jeung Yang
    Abstract: How do firms in high-income countries adjust to emerging market competition? We estimate how a representative panel of Canadian firms adjusts innovation activities, business strategies, and exit in response to large increases in Chinese imports between 1999 and 2005. On average, process innovation declines more strongly than product innovation. In addition, initially more differentiated firms that survive the increase in competition have better performance ex-post, but are ex-ante more likely to exit. Differentiation therefore does not ensure insulation against competitive shocks but instead increases risk.
    JEL: F14 L2 O3
    Date: 2016–11
  6. By: Thomas W. Quan (University of Georgia); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data - sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 30% lower than previous studies.
    Keywords: Product Variety, Demand Estimation, Long Tail, Online Retail
    JEL: C13 L67 L81
    Date: 2016–11
  7. By: Oleg Sidorkin
    Abstract: I study the impact of management quality on innovation input and output of manufacturing firms in ten emerging countries using data from the Management, Organization and Innovation (MOI) Survey. I find effects of management quality on the decisions of firms to invest in R&D hold for both EU and non-EU emerging countries. An improvement in management quality from the 25th percentile to the median is associated with a 4.5 percentage point increase in the propensity to invest in R&D and a 5.7 percent increase in R&D spending per employee. Furthermore, there are positive but weak effects of management quality on product innovation. The empirical results for individual management practices show that the quality of monitoring management is intimately connected with innovation input and output. The quality of incentive management is related to higher input into innovation, but not to innovation output. The overall effects of operations and targeting management quality do not prove to be significant. All results hold after controlling for differences in management quality by industries. Additional analysis of management quality asymmetry shows that the results are driven mainly by firms with low quality management.
    Keywords: management quality; R&D; innovation; emerging countries;
    JEL: L2 M2 O3 P2
    Date: 2015–12
  8. By: Kang Baek (Hanbat National University)
    Abstract: Uninformed investors preferentially select distribution companies to purchase funds that suit their investment objectives, because they cannot evaluate each product themselves. Thus, the investment decision depends significantly on their chosen fund distributor’s recommendation. It may lead to conflicts of interest between fund distributors and their customers because distribution professionals and their affiliated financial companies have an incentive to prioritize their profits over investors under oligopolistic market structures. This study demonstrates that money flows into a fund, fund management company and fund distributor have significantly different patterns according to distribution channels, and this distinction is affected by vertical relations among financial companies. Money flows from affiliated distribution channels are less sensitive to the determinants of investment decision compared with non-affiliated ones. This result contributes by providing the insight that changes in the incentive structure of distribution channels result in different outcomes in terms of investor protection and market competition under oligopolistic distribution structures.
    Keywords: Fund Flow; Distribution Channel; Investor Protection; Oligopolistic Market Structure; Vertical Relation.
    JEL: G20 G28 L40
  9. By: Francesco Decarolis; Giancarlo Spagnolo; Riccardo Pacini
    Abstract: Reputational incentives may be a powerful mechanism for improving supplier performance. We analyze their role in contract awarding, exploiting an experiment run by a firm which introduced a new vendor rating system scoring suppliers' past performance and linking it to the award of future contracts. We study responses in both price and performance to the announcement of the switch from price-only to price-and-rating auctions. Across the 136 parameters scored, overall compliance improves from 25 percent to 80 percent. Improvements involve all parameters and suppliers, but are more pronounced for parameters receiving a higher weight in the announced scoring auction. Prices do not significantly change overall, but we find some evidence of lower prices right after the announcement when suppliers compete to win contracts to get scored, and of higher prices once they have established a good reputation. Even under an upper bound estimate for this price increase, however, the cost of the policy is below its lower bound benefit estimate, which derives from a reduction in fatal accidents driven by improvements on the subset of parameters involving worksite safety.
    JEL: D44 D47 D82 H54 H57 I18 K12 L22 L74
    Date: 2016–11
  10. By: Lømo, Teis Lunde (Department of Economics, University of Bergen); Ulsaker, Simen Aardal (Department of Economics, Norwegian School of Economics)
    Abstract: We study a setting of repeated trade between an upstream manufacturer and two downstream retailers that can exert valuable but noncontractible sales effort. Our focus is the manufacturer’s use of relational contracts with discretionary promotional allowances – payments that reward retailers for effort provision. We show that such contracts enable a sufficiently patient manufacturer to, in equilibrium, provide retailers with the correct incentives and extract the maximal industry profit in every period, and that this outcome cannot be replicated with formal two-part tariffs. These results have implications for the policy treatment of lump-sum payments from manufacturers to retailers, as well as for resale price maintenance.
    Keywords: Vertical restraints; Retail services; Repeated games; Relational contracts; Competition policy
    JEL: C73 L14 L42 L81
    Date: 2016–10–07
  11. By: Steven Berry; Philip Haile; Mark Israel; Michael Katz
    Abstract: The distinction between complements, substitutes, and independent goods is important in many contexts. It is well known that when consumers’ conditional indirect utilities for two goods are superadditive, the goods are gross complements. Generalizing insights in Gans and King (2006) and Gentzkow (2007), we show that superadditivity between one pair of goods can also introduce complementarity between competing pairs of goods. One implication is that lower prices can result from a merger between producers of goods that themselves offer no superadditivity.
    JEL: L13 L4
    Date: 2016–11
  12. By: Behrens, Peter
    Abstract: The protection of a "system of undistorted competition" within the internal market is one of the core elements of EU law that institutionalizes economic integration. The addressees of the prohibitions regarding restraints of competition such as Articles 101 and 102 TFEU are "undertakings". Hence the question arises whether such undertakings must be located within the EU, whether at least their anticompetitive conduct must be completed within the EU or whether it is sufficient that the effects of restraints of competition are felt on the internal market. These problems have been discussed for many decades, but the ECJ has still not come to a fully satisfactory conclusion. This paper sets out the public international law ramifications, briefly describes the development in the US and analyzes the jurisprudence of the ECJ up to the recent Intel judgment of the General Court which is now, upon appeal, before the ECJ.
    Keywords: competition law,antitrust law,extraterritorial application,international jurisdiction,public international law principles,territoriality principle,personality principle,jurisprudence,single economic entity doctrine,implementation doctrine,effects doctrine,conflicts of jurisdiction,positive comity
    Date: 2016
  13. By: Carrie Colla; Julie Bynum; Andrea Austin; Jonathan Skinner
    Abstract: Theoretical models of competition with fixed prices suggest that hospitals should compete by increasing quality of care for diseases with the greatest profitability and demand elasticity. Most empirical evidence regarding hospital competition is limited to heart attacks, which in the U.S. generate positive profit margins but exhibit very low demand elasticity – ambulances usually take patients to the closest (or affiliated) hospital. In this paper, we derive a theoretically appropriate measure of market concentration in a fixed-price model, and use differential travel-time to hospitals in each of the 306 U.S. regional hospital markets to instrument for market concentration. We then estimate the model using risk-adjusted Medicare data for several different population cohorts: heart attacks (low demand elasticity), hip and knee replacements (high demand elasticity) and dementia patients (low demand elasticity, low or negative profitability). First, we find little correlation within hospitals across quality measures. And second, while we replicate the standard result that greater competition leads to higher quality in some (but not all) measures of heart attack quality, we find essentially no association between competition and quality for what should be the most competitive markets – elective hip and knee replacements. Consistent with the model, competition is associated with lower quality care among dementia patients, suggesting that competition could induce hospitals to discourage unprofitable patients.
    JEL: I11 L31 L4
    Date: 2016–11
  14. By: Hyungjin Kim (Sungkyunkwan University); Hyunchul Kim (Sungkyunkwan University)
    Abstract: As digital convergence is spreading more than ever, the lock-in effects of bundled services in the broadcasting and telecommunication market are receiving considerable attention. Antitrust authorities have questioned whether lock-in effects impede competition in telecommunications markets. However, the answer to this question remains indecisive because few studies have attempted to quantify the switching costs in bundles. We use novel consumer level data to examine switching costs of bundled products. We use the mixed logit model to estimate the demand for bundled packages, which include mobile, Internet, and paid-TV services. We measure switching cost by the decrease in utility when consumers change their service providers from period t-1 to period t. The results show that consumers experience additional costs when they switch from bundles. Our estimates indicate that consumers pay 3,238 KRW (about 3 USD) per month for changing from Double Play Service (paid TV with Internet) to other services and 3,510 KRW for Triple Play Service. The estimates of switching costs are smaller for the bundles without any commitment period requirement. This implies that stipulated service period and penalty intensify the lock-in effects. In the counterfactuals where we remove the penalty for switching from bundles, we find that consumer surplus increases by 3,714 KRW per month. We proposed policies which reduce penalties for cancellations or shorter stipulated service periods in order to reduce switching costs.
    Keywords: Switching costs, Lock-in, Bundles, Mixed logit model
  15. By: José A. Montenegro (Department of Computer Science, University of Málaga); José L. Torres (Department of Economics, University of Málaga)
    Abstract: This paper applies the hedonic pricing approach to study the implicit prices of smartphone characteristics and consumer preferences. Currently, mobile phones are the most widespread technological product worldwide and their performance and technical characteristics have changed dramatically over a short period. The development of smartphones has been a revolution in itself in the mobile telecommunication industry, expanding the capabilities of handsets beyond those of a simple mobile phone. Competition between smartphone producers is erce and knowledge concerning consumers' preferences regarding smartphone features is vital to survival in this fast-changing market. This paper uses a hedonic pricing model to estimate the implicit prices of smartphone characteristics. A large set of characteristics are analysed including design, communication, connectivity, camera, display, hardware, multimedia, and power. The characteristics most valued by consumers are the screen, followed by memory, battery capacity, and weight. Consumers are willing to pay up to a 95% premium for an Apple smartphone.
    Keywords: Smartphones, hedonic pricing approach, characteristics' implicit prices, consumer preferences.
    Date: 2016–11

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