nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒12‒11
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. When should a winner take all, or pay some? Innovation and imitation incentives in a dynamic duopoly By Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
  2. Cournot oligopoly with randomly arriving producers By Pierre Bernhard; Marc Deschamps
  3. Information Acquisition, Signaling and Learning in Duopoly By Thomas D. Jeitschko; Ting Liu; Tao Wang
  4. Competitive Search with Ex-post Opportunism By Pedro Gomis-Porqueras; Benoit Julien; Liang Wang
  5. Distorted Monopolistic Competition By Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Suedekum
  6. Collusive Agreements in Vertically Differentiated Markets By Marini, Marco A.
  7. Strategic Obfuscation and Retail Pricing By Bonnet, Céline; Bouamra-Mechemache, Zohra; Klein, Gordon; Richards, Timothy
  8. Green Premium, Ecolabel, and Environmental Damage By Aditi Sengupta
  9. Price Transmission in Food and Non-Food Product Markets: Evidence from Mexico By Guerrero Santiago; Juárez-Torres Miriam; Sámano Daniel; Kochen Federico; Puigvert Jonathan
  10. Price Transmission in Vertical Dairy Chains: The Italian Case By Weaver, R. D.; Rosa, F.; Vasciaveo, M.
  11. Measuring competition in the UK deposit-taking sector By J A de-Ramon, Sebastian; Straughan, Michael
  12. Information Asymmetry and Market Power in the African Banking Industry By Boateng, Agyenim; Asongu, Simplice; Akamavi, Raphael; Tchamyou, Vanessa
  13. Drugs, Showrooms and Financial Products: Competition and Regulation when Sellers Provide Expert Advice By David Bardey; Denis Gromb; David Martimort; Jérôme Pouyet
  14. Mergers and Acquisitions in the Indian Pharmaceutical Sector By Santosh K. Sahu; Nitika Agarwal
  15. Foreign Competition and Domestic Innovation: Evidence from U.S. Patents By David Autor; David Dorn; Gordon H. Hanson; Pian Shu; Gary Pisano
  16. Optimal Taxation and R&D Policies By Akcigit, Ufuk; Hanley, Douglas; Stantcheva, Stefanie
  17. Whistleblowers on the Board? The Role of Independent Directors in Cartel Prosecutions By Murillo Campello; Daniel Ferrés; Gaizka Ormazabal

  1. By: Billette de Villemeur, Etienne; Ruble, Richard; Versaevel, Bruno
    Abstract: We develop a model of investment in duopoly with asymmetric costs of innovating and imitating and endogenous firm roles. Dynamic competition involves either attrition or preemption, the former being likelier with high demand growth and uncertainty. Industry value is maximized when firms neither stall nor hasten entry, and we show that social welfare has local maxima in both the attrition and preemption ranges. In all cases the socially optimal cost of imitation is positive. Attrition is optimal if consumer surplus rises sufficiently under duopoly, whereas with static business-stealing, preemption is optimal if discounting is important enough. Finally we discuss endogenous entry barriers and contracting, finding that firms are more likely to rely on secrecy and patents at low imitation costs and that simple licensing schemes are welfare improving.
    Keywords: Dynamic oligopoly; Knowledge spillover; Real options
    JEL: G31 L13 O33
    Date: 2016–12
  2. By: Pierre Bernhard (Université Côte d’Azur, INRIA); Marc Deschamps (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: Cournot model of oligopoly appears as a central model of strategic interaction between competing firms both from a theoretical and applied perspective (e.g antitrust). As such it is an essential tool in the economics toolbox and always a stimulus. Although there is a huge and deep literature on it and as far as we know, we think that there is a ”mouse hole” wich has not already been studied: Cournot oligopoly with randomly arriving producers. In a companion paper [Bernhard and Deschamps, 2016b] we have proposed a rather general model of a discrete dynamic decision process where producers arrive as a Bernoulli random process and we have given some examples relating to oligopoly theory (Cournot, Stackelberg, cartel). In this paper we study Cournot oligopoly with random entry in discrete (Bernoulli) and continuous (Poisson) time, whether time horizon is finite or infinite. Moreover we consider here constant and variable probability of entry or density of arrivals. In this framework, we are able to provide algorithmes answering four classical questions: 1/ what is the expected profit for a firm inside the Cournot oligopoly at the beginning of the game?, 2/ How do individual quantities evolve?, 3/ How do market quantities evolve?, and 4/ How does market price evolve?
    Keywords: Cournot market structure, Bernoulli process of entry, Poisson density of arrivals, Dynamic Programming.
    JEL: C72 C61 L13
    Date: 2016–11
  3. By: Thomas D. Jeitschko; Ting Liu; Tao Wang
    Date: 2016
  4. By: Pedro Gomis-Porqueras (Deakin University); Benoit Julien (UNSW Australia); Liang Wang (University of Hawaii Manoa)
    Abstract: We consider a frictional market where an element of the terms of trade (price or quantity) is posted ex-ante (before the matching process) while the other is determined ex-post. By doing so, sellers can then exploit their local monopoly power by adjusting prices or quantities once the local demand is realized. We find that when sellers can adjust quantities ex-post, there exists a unique symmetric equilibrium where an increase in the buyer-seller ratio leads to higher quantities and prices. When buyers instead can choose quantity ex-post, higher buyer-seller ratio leads to higher price but lower quantity. These equilibrium allocations are generically not constrained efficient, in terms of both intensive and extensive margins. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium exists where buyers obtain no surplus. The equilibrium allocation is also constrained inefficient. If buyers choose prices ex-post, there is no equilibrium when entry is costly. This paper highlights how sellers ability to commit ex-ante to certain elements of the terms of trade is crucial in generating constrained efficient allocations.
    Keywords: Competitive Search, Price Posting, Quantity Posting
    JEL: D40 L10
    Date: 2016–11
  5. By: Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Suedekum
    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 labour allocation and firm entry between sectors and inefficient selection and output within sectors -- is equivalent to the contribution of 6-8% of the total labour input.
    Keywords: monopolistic competition, welfare distortion, intersectoral distortions, intrasectoral distortions
    JEL: D43 D50 L13
    Date: 2016–12
  6. By: Marini, Marco A.
    Abstract: This survey introduces a number of game-theoretic tools to model collusive agreements among firms in vertically differentiated markets. I firstly review some classical literature on collusion between two firms producing goods of exogenous different qualities. I then extend the analysis to a n-firm vertically differentiated market to study the incentive to form either a whole market alliance or partial alliances made of subsets of consecutive firms in order to collude in prices. Within this framework I explore the price behaviour of groups of colluding firms and their incentive to either pruning or proliferating their products. It is shown that a selective pruning within the cartel always occurs. Moreover, by associating a partition function game to the n-firm vertically differentiated market, it can be shown that a sufficient condition for the cooperative (or coalitional) stability of the whole industry cartel is is the equidistance of firms' products along the quality spectrum. Without this property, and in presence of large quality differences, collusive agreements easily loose their stability. In addition, introducing a standard infinitely repeated-game approach, I show that an increase in the number of firms in the market may have contradictory effects on the incentive of firms to collude: it can make collusion easier for bottom and intermediate firms and harder for the top quality firm. Finally, by means of a three-firm example, I consider the case in which alliances can set endogenously qualities, prices and number of variants on sale. I show that, in every formed coalition, (i) market pruning dominates product proliferation and (ii) partial cartelisation always arises in equilibrium, with the bottom quality firm always belonging to the alliance.
    Keywords: Vertically differentiated market, price collusion, product pruning, product proliferation, endogenous qualities, endogenous alliance formation, coalition structures, grand coalition, coalition stability, core, simultaneous and sequential game of coalition formation.
    JEL: L1 L12 L13 L2 L22
    Date: 2016–12–01
  7. By: Bonnet, Céline; Bouamra-Mechemache, Zohra; Klein, Gordon; Richards, Timothy
    Abstract: Retailers often stock items that are only slightly di¤erentiated from others??di¤er- ent sizes of a popular brand, or di¤erent ?avors in a common product line for instance. We argue that this practice is a form of strategic obfuscation, intended to raise con- sumer search costs, and margins on non-comparable products. We test our hypothesis using examples from several product categories in German and French retail scanner data. We ?nd that, after controlling for other explanations for how margins can vary with package size, we cannot rule out strategic obfuscation as a feature of our retail sales data.
    Keywords: differentiation, price discrimination, retail pricing, search model, strategic obfuscation
    JEL: D43 L13 M31
    Date: 2016–11
  8. By: Aditi Sengupta
    Abstract: In markets where differences in environmental performance of competing firms arise due to differences in technology and other attributes that cannot be altered in the short run and firms have private information about these attributes, an ecolabel may allow firms to credibly communicate their private information to environmentally conscious uninformed consumers. This may ameliorate the distortion in pricing and consumption patterns in the market outcomes, when there is no credible direct disclosure mechanism and pricing is the only channel of signaling private information. In an incomplete information duopoly market with price competition, I show that even if a credible ecolabel is available freely, clean firms may not always find it individually advantageous to adopt the ecolabel. The adoption of the ecolabel by the clean firms removes price and welfare distortions (caused by price signaling); in this case, the availability of the ecolabel makes competition more intense, reduces market power, increases market shares of the clean firms, and lowers the expected environmental damage. The effect of the ecolabel on the incentives to invest in the development of a clean technology is more complex; the presence of an ecolabel may reduce the level of aggregate investment.
    Keywords: Financial Stress Index; Duopoly; Ecolabel; Green premium; Incomplete information; Investment; Mandatory disclosure; Signaling
    JEL: D43 D82 L51 Q55
    Date: 2016–12
  9. By: Guerrero Santiago; Juárez-Torres Miriam; Sámano Daniel; Kochen Federico; Puigvert Jonathan
    Abstract: We document the existence of asymmetric price transmission in Mexico for a wide variety of food and non-food products, in terms of magnitude and speed, for two segments of the supply chain: i) Producer (producer-wholesale) and ii) Consumer (wholesale-retail). We find that asymmetric price transmission is a common behavior in many of the good markets that we studied. However, there are important differences across stages of the supply chain: in the Producer segment, the analyzed food products exhibit larger asymmetries compared to non-food products, while we observe the opposite in the Consumer segment. The existence of these asymmetries may have important welfare effects on poor households, since they allocate a higher proportion of their expenditure for the acquisition of goods that present positive price asymmetries.
    Keywords: Price transmission;Positive price asymmetries;Food merchandises;Manufactured goods
    JEL: D43 L13 L11 C25
    Date: 2016–10
  10. By: Weaver, R. D.; Rosa, F.; Vasciaveo, M.
    Abstract: a theoretic level, price transmission does not provide a clear signal of competitiveness as many conditions may induce stickiness and even asymmetry in the speed of adjustment to positive and negative changes. While evidence from past EU studies for the dairy sector is mixed, several studies have found evidence of asymmetry in particular countries. However, none to our knowledge have considered evidence for Italy. We examine price dynamics within the chain and test for presence of asymmetry in the transmission of price changes along the chain. Using a parametric test of asymmetry in a multivariate VECM, we find strong evidence of symmetry in co-movement. To explore whether these results are robust with respect to nonlinearity we estimate threshold VECM models and also find strong evidence to reject asymmetry except for the transmission between raw milk and wholesale butter prices. While inference with respect to competitiveness of markets cannot be inferred from evidence of asymmetry, findings of symmetry confirm that the market organization and performance is not controlling price change to be asymmetric.
    Keywords: dairy sector, CMO, time series analysis, industrial organization, market efficiency, Agribusiness,
    Date: 2015–05
  11. By: J A de-Ramon, Sebastian (Bank of England); Straughan, Michael (Bank of England)
    Abstract: We use a new regulatory dataset to measure the intensity competition in the UK deposit-taking sector. The novelty of this study is two-fold. First, the dataset allows us to explore trends in competition intensity over an extended, 24-year period from 1989 to 2013 using data for UK-regulated firms which encompasses a wider range of firms than for previous studies. Second, we take a portmanteau approach and estimate a number of different performance-based competition measures common in the literature to support conclusions on the intensity of competition over the period. Our estimates of the Lerner index, the Panzar-Rosse H-statistic and the Boone indicator suggest that competition intensity was strong at the beginning of our sample, but became less intense in the early 2000s. However, the deposit-taker business model bundles together activities in several markets simultaneously, so strong competition in some markets can be offset by the extraction of market rents in others. Importantly, competition intensity decreased (and the ability of UK deposit-takers to extract market rents from customers increased) in the period immediately ahead of the financial crisis (2003–07).
    Keywords: Competition; banks; deposit-takers
    JEL: D22 D24 G21 L11 N20
    Date: 2016–12–02
  12. By: Boateng, Agyenim; Asongu, Simplice; Akamavi, Raphael; Tchamyou, Vanessa
    Abstract: This study investigates the role of information sharing offices and its association with market power in the African banking industry. The empirical evidence is based on a panel of 162 banks from 42 countries for the period 2001-2011. Five simultaneity-robust estimation techniques are employed, namely: (i) Two Stage Least Squares; (ii) Instrumental Fixed effects to control for the unobserved heterogeneity; (iii) Instrumental Tobit regressions to control for the limited range in the dependent variable; (iv) Generalised Method of Moments (GMM) to control for persistence in market power and (v) Instrumental Quantile Regressions (QR) to account for initial levels of market power. The following findings have been established from non-interactive regressions. First, the effects of information sharing offices are significant in Two Stage Least Squares, with a positive effect from private credit bureaus. Second, in GMM, public credit registries increase market power. Third, from Quintile Regressions, private credit bureaus consistently increase market power throughout the conditional distributions of market power. Given that the above findings are contrary to theoretical postulations, we extended the analytical framework with interactive regressions in order to assess whether the anticipated effects can be established if information sharing offices are increased. The extended findings show a: (i) negative net effect from public credit registries on market power in GMM regressions and; (ii) negative net impacts from public credit registries on market power in the 0.25th and 0.50th quintiles of market power.
    Keywords: Financial access; Market power; Information asymmetry
    JEL: G20 G29 L96 O40 O55
    Date: 2016–09
  13. By: David Bardey (Toulouse School of Economics, Universidad de Los Andes); Denis Gromb (HEC Paris - GROUPE HEC); David Martimort (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), PSE - Paris School of Economics); Jérôme Pouyet (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), PSE - Paris School of Economics)
    Abstract: We consider a market in which sellers can exert an information-gathering effort to advise buyers about which of two goods best fits their needs. Sellers may steer buyers towards the higher margin good. We show that for sellers to collect and reveal information, profits on both goods must be sufficiently close to each other, i.e., lie within an implementability cone, which competition or regulation may ensure. Instruments to do so vary with the context. Controlling market power while improving the quality of advice is more difficult when sellers have private information on the profitability of the goods.
    Keywords: Mis-Selling, Expertise, Retailing, Competition, Regulation, Asymmetric Information Keywords Mis-Selling, Asym- metric Information
    Date: 2016–11
  14. By: Santosh K. Sahu (Madras School of Economics); Nitika Agarwal (Madras School of Economics)
    Abstract: Mergers and acquisitions (M and A) are common strategies of firms to increase its performance. Although, the motives of M and A are different however, the determinants are discreet. This study tries to determine the factors affecting M and A activities in the Indian pharmaceutical sector. The empirical findings suggest; export intensity, import intensity, firm size and research and development intensity as the major determinants of M and A in the Indian pharmaceutical sector. In the context of acquisition, there is a riskiness associated with any business strategy, for to which a firm may choose to finance the deal either via cash, stock or assets. This study further looks at the firm’s decision on the types of acquisitions and arrives at the determinants of such decisions. The factors such as capital intensity was found more important when acquisition by share was undertaken compared to others. The success of the M and A is observed by considering the financial performance of the firm measured in terms of profit margin at firm level. Using propensity score matching technique, this study concludes that M and A have positive effect on the profit margin in the post M and A scenario.
    Keywords: Mergers, Acquisitions, Indian Pharmaceutical Sector Classification-JEL: G34, L65, C13
    Date: 2015–09
  15. By: David Autor; David Dorn; Gordon H. Hanson; Pian Shu; Gary Pisano
    Abstract: Manufacturing is the locus of U.S. innovation, accounting for more than three quarters of U.S. corporate patents. The rise of import competition from China has represented a major competitive shock to the sector, which in theory could benefit or stifle innovation. In this paper we empirically examine how rising import competition from China has affected U.S. innovation. We confront two empirical challenges in assessing the impact. We map all U.S. utility patents granted by March 2013 to firm-level data using a novel internet-based matching algorithm that corrects for a preponderance of false negatives when using firm names alone. And we contend with the fact that patenting is highly concentrated in certain product categories and that this concentration has been shifting over time. Accounting for secular trends in innovative activities, we find that the impact of the change in import exposure on the change in patents produced is strongly negative. It remains so once we add an extensive set of further industry- and firm-level controls. Rising import exposure also reduces global employment, global sales, and global R&D expenditure at the firm level. It would appear that a simple mechanism in which greater foreign competition induces U.S. manufacturing firms to contract their operations along multiple margins of activity goes a long way toward explaining the response of U.S. innovation to the China trade shock.
    JEL: F14 F6 O31 O34
    Date: 2016–12
  16. By: Akcigit, Ufuk; Hanley, Douglas; Stantcheva, Stefanie
    Abstract: We study the optimal design of R&D policies and corporate taxation when the outputs of innovation are not appropriable in the absence of intellectual property rights policies and there are non-internalized technology spillovers across firms. Firms are heterogeneous in their research productivity, i.e., in the efficiency with which they convert a given set of R&D inputs into successful innovations. There is asymmetric information about firm productivity and about its stochastic evolution over time that prevents the first best solution to the technology spillover. The problem is thus posed as one of dynamic mechanism design with externalities. We characterize the optimal constrained efficient allocations over firms' life cycles and for firms of different productivities. We show that the constrained efficient allocations can be implemented either by a patent system plus a price subsidy for the monopolists' products, together with a parsimonious R&D subsidy function or, equivalently, by a prize mechanism. We estimate our model using firm-level data matched to patent data and quantify the optimal policies. Simpler innovation policies, such as linear R&D subsidies and linear profit taxes, lead to large revenue losses relative to the optimal mechanism.
    Keywords: Corporate taxation; innovation; patents; R&D; Subsidies; Tax credits
    JEL: H21 H23 H25 H32 O31 O32 O33 O38
    Date: 2016–12
  17. By: Murillo Campello; Daniel Ferrés; Gaizka Ormazabal
    Abstract: Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors serving on their boards. This finding is robust to self-selection and is more pronounced when those directors hold more outside directorships and have fewer stock options — when they have fewer economic ties to the indicted firms. Results are stronger when independent directors’ appointments were attributable to SOX, preceded the CEO’s appointment, or followed class action suits — when they have fewer direct ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support across their directorships in other firms. Moreover, firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs and to dismiss CEOs after cartel indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to reduce those costs. Understanding these incentives is key for antitrust authorities in designing strategies for cartel prosecution.
    Keywords: Cartel Prosecution; Antitrust Policy; Leniency Programs; Independent Directors; Reputational Costs; Heckman Selection Test

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