nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒12‒18
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Incomplete Contracts and Control By Hart, Oliver
  2. Multiproduct Pricing Made Simple By Armstrong, Mark; Vickers, John
  3. On Competitive Nonlinear Pricing By Attar, Andrea; Mariotti, Thomas; Salanié, François
  4. Vertical Mergers in Platform Markets By Pouyet, Jérôme; Trégouët, Thomas
  5. Agglomeration and (the Lack of) Competition By Yao Amber Li; Joseph Kaboski; Wyatt Brooks
  6. Alternative Objectives in an Oligopoly Model : An Aggregative Game Approach By Itaya, Jun-ichi; Cornes, Richard
  7. Some Efficiency Aspects of Monopolistic Competition: Innovation, Variety and Transaction Costs By Todorova, Tamara
  8. A Note on Consumer Surplus and the Structure of Preferences By Paolo Bertoletti
  9. Optimal Taxation and R&D Policies By Ufuk Akcigit; Douglas Hanley; Stefanie Stantcheva
  10. Deterring corruption and cartels : in search of a coherent approach By Auriol, Emmanuelle; Hjelmeng, Erling; Søreide, Tina
  11. Resale price maintenance post Leegin: A model of rpm incentives By Comanor, William; salant, david j
  12. Essays on mergers and acquisitions By Faelten, A.
  13. Non-linear competitive pricing: evidence from the automobile market By Isis Durrmeyer
  14. Hospitals and the generic versus brand-name prescription decision in the outpatient sector By Gerald J. Pruckner; Thomas Schober

  1. By: Hart, Oliver (Harvard University)
    Abstract: Oliver Hart delivered his Prize Lecture on 8 December 2016 at the Aula Magna, Stockholm University.
    Keywords: Contract Theory;
    JEL: D86
    Date: 2016–12–08
  2. By: Armstrong, Mark; Vickers, John
    Abstract: We study multiproduct firms in the contexts of unregulated monopoly, regulated monopoly and Cournot oligopoly. Using the concept of consumer surplus as a function of quantities (rather than prices), we present simple formulas for optimal prices and show that Cournot equilibrium exists and corresponds to a Ramsey optimum. We then discuss a tractable class of preferences that involve a generalized form of homotheticity. Profit-maximizing quantities are proportional to efficient quantities. We discuss optimal monopoly regulation when the firm has private information about its cost vector, and find situations where optimal regulation leaves relative price decisions to the firm.
    Keywords: cost passthrough; Cournot oligopoly; homothetic preferences; monopoly regulation; multidimensional screening; Multiproduct pricing; Ramsey pricing
    JEL: D42 D43 D82 L12 L13 L51
    Date: 2016–12
  3. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We study a discriminatory limit-order book in which uninformed market makers compete in nonlinear tariffs to serve an informed insider. Our model allows for general nonparametric specifications of preferences and for arbitrary discrete distributions for the insider's private information. We show that adverse selection severely restricts possible equilibrium outcomes: in any pure-strategy equilibrium, tariffs must be linear and at most one type may trade, leading to an extreme form of market breakdown. As a result, such equilibria only exist under exceptional circumstances. The Bertrandlike logic underlying these results markedly differs from Cournot-like analyses of the limit-order book that postulate a continuum of types. We argue that these contrasting outcomes can be reconciled when one considers "-equilibria of either the game with a large number of market makers or the game with a large number of insider types. Mixed-strategy equilibria, by contrast, lead to a new class of equilibrium predictions that calls for further analysis.
    Keywords: Adverse Selection, Competing Mechanisms, Limit-Order Book.
    JEL: D43 D82 D86
    Date: 2016–11
  4. By: Pouyet, Jérôme; Trégouët, Thomas
    Abstract: We analyze the competitive impact of vertical integration between a platform and a manufacturer when platforms provide operating systems for devices sold by manufacturers to customers, and, customers care about the applications developed for the operating systems. Two-sided network effects between customers and developers create strategic substitutability between manufacturers' prices. When it brings efficiency gains, vertical integration increases consumer surplus, is not profitable when network effects are strong, and, benefits the non-integrated manufacturer. When developers bear a cost to make their applications available on a platform, manufacturers boost the participation of developers by affiliating with the same platform. This creates some market power for the integrated firm and vertical integration then harms consumers, is always profitable, and, leads to foreclosure. Introducing developer fees highlights that not only the level, but also the structure of indirect network effects matter for the competitive analysis.
    Keywords: foreclosure; network effects; Two-sided markets; vertical integration
    JEL: D43 L10 L40
    Date: 2016–12
  5. By: Yao Amber Li (Hong Kong University of Science and Tech); Joseph Kaboski (University of Notre Dame); Wyatt Brooks (University of Notre Dame)
    Abstract: Industrial clusters are generally viewed as good for growth and development, but clusters can also enable non-competitive behavior. This paper studies the presence of non-competitive pricing in geographic industrial clusters. We develop, validate, and apply a novel identification strategy for collusive behavior. We derive the test from the solution to a partial cartel of perfectly colluding firms in an industry. Outside of a cartel, markups depend on a firm’s market share but not on the total market share of firms in the agglomeration, but in the cartel, markups are constant across firms and depend only on the overall market share of the agglomeration. Empirically, we validate the test using plants with a common owner, and we then test for collusion using data from Chinese manufacturing firms (1999-2009). We find strong evidence for non-competitive pricing within a subset of industrial clusters, and we find the level of non-competitive pricing is roughly four times higher in China’s “special economic zones†.
    Date: 2016
  6. By: Itaya, Jun-ichi; Cornes, Richard
    Abstract: A rapidly growing literature analyzes models in which firms maximize objectives other than profit and enjoy market power. Examples include the labor-managed firm, mixed oligopoly, and delegation models. These models typically retain the aggregative structure of the conventional Cournot model of imperfect competition. We exploit this fact and apply the framework recently developed by Cornes and Hartley (2005, 2011) to analyze the properties of the equilibrium in such games. We show that existing treatments often make more restrictive assumptions than necessary to generate their results. Specifically, we identify conditions sufficient to ensure the existence of a unique equilibrium, and we explore the comparative static properties of these conditions.
    Keywords: Aggregative Game, Oligopoly, Hahn’s Condition, Non-profit Maximization, Share Function,
    Date: 2016–11–06
  7. By: Todorova, Tamara
    Abstract: We stress some efficiency aspects of monopolistic competition justifying it on account of its tendency to innovate and the questionable excess capacity paradigm. Some further efficiency aspects revealed are product variety and transaction cost savings. We view the monopolistically competitive firm as an essential source of technological innovation, product variety and cost economies. While perfect competition is universally considered a benchmark and a social optimum, we consider it a strongly unrealistic theoretical setup where the monopolistically, rather than the perfectly, competitive firm turns out to be the true type of competition and social optimum in the real world of positive transaction costs. The monopolistically competitive firm not only offers product variety and innovation but is the optimal institutional arrangement under positive transaction costs.
    Keywords: monopolistic competition,variety
    JEL: D23 D24
    Date: 2016
  8. By: Paolo Bertoletti (Department of Economics and Management, University of Pavia)
    Abstract: We represent quasi-linear preferences by the dual measure of consumer surplus, and investigate demand and the associated multiproduct pricing. In particular, we discuss the role of substitutability "within group" and with the outside commodity, deriving a Slutsky-like decomposition of the price effect. We use our results to show that Ramsey prices are proportional to marginal costs only if preferences are fully homothetic, and that commodities with larger outside substitutability have smaller Lerner indexes.
    Keywords: Quasi-Linear Preferences; Homotheticity; Ramsey Pricing
    JEL: D11 D43 D61
    Date: 2016–12
  9. By: Ufuk Akcigit; Douglas Hanley; Stefanie Stantcheva
    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.
    JEL: H0 H2 H21 H23 H25 O0 O31 O32 O33 O38
    Date: 2016–12
  10. By: Auriol, Emmanuelle; Hjelmeng, Erling; Søreide, Tina
    Abstract: This article addresses how the rules intended to protect consumers and taxpayers from economic crime, namely leniency and cartel settlements in competition law, criminal sanctions and debarment of suppliers from participation in public tenders for bribery, work together. While the economic reasoning behind these rules makes sense when considering each one of them in isolation, their impact is weaken when they are opposing each other. Competition authorities are narrowly mandated to control competition, and they do not seek out corruption. For criminal law investigators problems are created if they interfere (because it would undermine the leniency program); conversely, there are problems if they stay away (because that would undermine enforcement of corruption and other economic crimes). We propose to strengthen the regulation of corporate misconduct through better collaboration and integration of the other law enforcement functions and institutions that exist. The first step is to maintain and share a centralized database on firms’ offenses and settlements with anti-trust and procurement authorities. The second step is to expand the mandate and competence of competition authorities to search for, and react against, corruption.
    Date: 2016–11
  11. By: Comanor, William; salant, david j
    Abstract: The prominent Babies R Us decision (McDonough et al., v. Toys R US, Inc., 2009) was the first to explore the economic consequences of resale price maintenance after the Supreme Court’s Leegin Decision. Previously, litigation concerned the presence or absence of an agreement; but that changed with the new jurisprudence which instead emphasized the restraint’s direct anti-competitive effects. While the district court’s decision in the Babies R Us case rested on the factual circumstances of the case, it did not have before it an economic model through which those facts could be integrated. This paper offers such a mode, the predicates of which are drawn from the case. The conclusions that are drawn from the model are fully consistent with the court’s decision
    Keywords: Leegin Decision, RPM Incentives, Dominant Distributors
    JEL: L42
    Date: 2016–12–01
  12. By: Faelten, A.
    Abstract: “Essays on Mergers and Acquisitions" tackles some of the most prominent business challenges related to M&A activity. The Introduction examines the reasons why deals fail through well-known case studies; Chapter 1 presents a new index measuring countries M&A maturity worldwide; Chapter 2 focus on the importance of corporate governance when conducting deals in unknown territories; whilst Chapter 3 and 4 conduct research on companies’ decision to tap capital markets and their subsequent M&A activity.
    Date: 2016
  13. By: Isis Durrmeyer (U Mannheim)
    Abstract: We develop a new empirical model of market equilibrium with second-degree price discrimination and oligopolistic competition based on an extension of Rochet & Stole (2002) non-linear pricing theory to multiproduct firms. The demand system is semi-parametrically identified. We estimate the model using French automobile data and take advantage of observing prices and market shares at the car model version level. We test the existence of second-degree price discrimination under imperfect competition. We extend the structural analysis of nonlinear pricing to an oligopolistic setting (see Luo, Perrigne & Vuong). Our demand estimate is semi-parametric and does not rely on the exogeneity of characteristics assumptions and on instruments.
    Date: 2016
  14. By: Gerald J. Pruckner; Thomas Schober
    Abstract: Healthcare payers try to reduce costs by promoting the use of cheaper generic drugs. We show strong interrelations in drug prescriptions between the inpatient and outpatient sectors by using a large administrative dataset from Austria. Patients with prior hospital visits have a significantly lower probability of receiving a generic drug in the outpatient sector. The size of the effect depends on both the patient and doctor characteristics, which could be related to the differences in hospital treatment and heterogeneity in the physicians’ adherence to hospital choices. Our results suggest that hospital decisions create spillover costs in healthcare systems with separate funding for inpatient and outpatient care.
    Keywords: Prescription decision, generic drugs, physician behavior, hospitals.
    JEL: I11 I13 I18 H51
    Date: 2016–11

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