nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒01‒01
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Oligopolistic competition and welfare By Ritz, Robert; ; ;
  2. Vertical Licensing, Input Pricing, and Entry By Elpiniki Bakaouka; Chrysovalantou Milliou
  3. Competitive Cross-Subsidization By Zhijun Chen; Patrick Rey
  4. On Globally Optimal Punishments in the Repeated Cournot Game By F. Delbono; L. Lambertini
  5. Maximin and minimax strategies in symmetric oligopoly: Cournot and Bertrand By Satoh, Atsuhiro; Tanaka, Yasuhito
  6. On Competitive Nonlinear Pricing By Attar, Andrea; Mariotti, Thomas; Salanié, François
  7. Spatial competition with non-monotonic network effects and endogenous firm location decisions By Luca Savorelli; Jacob Seifert
  8. Bid Regulations in a Multi-unit Uniform Price Auction By Boom, Anette
  9. Interconnection and Prioritization By Pio Baake; Slobodan Sudaric
  10. Are Market-Share Contracts a Poor Man’s Exclusive Dealing? By Zhijun Chen; Greg Shaffer
  11. EU competition law in the regulated network industries By Pablo Ibáñez Colomo
  12. How Does Technological Change Affect Quality-Adjusted Prices in Health Care? Systematic Evidence from Thousands of Innovations By Kristopher J. Hult; Sonia Jaffe; Tomas J. Philipson
  13. Effects of Increased Competition on Quality of Primary Care in Sweden By Dietrichson, Jens; Ellegård, Lina Maria; Kjellsson, Gustav
  14. Does bank competition reduce cost of credit ? Cross-country evidence from Europe By Zuzana FUNGACOVA; Anastasiya SHAMSHUR; Laurent WEILL
  15. Selling gasoline as a by-product: The impact of market structure on local prices By Haucap, Justus; Heimeshoff, Ulrich; Siekmann, Manuel
  16. Stubbornness is unprofitable: On the role of consumer expectations in a monopoly network goods market By Tsuyoshi Toshimitsu
  17. Product mix and firm productivity responses to trade competition By Mayer, Thierry; Melitz, Marc J.; Ottaviano, Gianmarco I. P.

  1. By: Ritz, Robert; ; ;
    Abstract: This chapter provides a selective survey of recent developments in the study of social welfare under oligopoly. The main topics covered are (i) the rate of cost pass through as a tool to analyze market performance; (ii) the quantification of welfare losses due to market power in Cournot-style models; and (iii) new results from models with endogenous entry. The chapter highlights common themes across these topics and areas for future research.
    Keywords: monopoly, oligopoly, allocative efficiency, firm behaviour, antitrust policy
    JEL: D42 D43 D61 L20 L40
    Date: 2016–12–19
  2. By: Elpiniki Bakaouka; Chrysovalantou Milliou
    Abstract: We explore the incentives of a vertically integrated incumbent firm to license the production technology of its core input to an external firm. We find that it opts for licensing even when licensing induces the entry of the licensee in the final goods market. In fact, although the entry of the licensee reduces the licensor's efficiency and the competition that it faces, it reinforces, instead of weakens, the licensing incentives. Vertical licensing is always welfare-enhancing and it is even more welfare-enhancing when it triggers entry.
    Keywords: licensing, vertical relations, entry, two-part tariffs, outsourcing
    JEL: L22 L24 L13 L42
    Date: 2016–12–22
  3. By: Zhijun Chen; Patrick Rey
    Abstract: Cross-subsidization arises naturally when firms with different comparative ad- vantages compete for consumers with diverse shopping patterns. Firms then face a form of co-opetition, being substitutes for one-stop shoppers and complements for multi-stop shoppers. Competition for one-stop shoppers then drives total prices down to cost, but firms subsidize weak products with the profit made on strong products. While firms and consumers would bene.t from cooperation limiting cross- subsidization (e.g., through price caps), banning below-cost pricing instead increases firms profits at the expense of one-stop shoppers; this calls for a cautious use of below-cost pricing regulations in competitive markets.
    Keywords: cross-subsidization, shopping patterns, multiproduct competition,co-opetition.
    JEL: L11 L41
    Date: 2016–11
  4. By: F. Delbono; L. Lambertini
    Abstract: We challenge the global optimality of one-shot punishments in infi nitely repeated games with discounting. Speci fically, we show that the stick-and-carrot punishment à la Abreu (1986) may not be globally optimal. We prove our result by investigating tacit collusion in the infi nite repetition of a linear Cournot game. We illustrate the existence of the stick-and-carrot globally optimal punishment for large cartels, and fully characterise it. Then, we show that for mall cartels, global optimality may be reached only with two-period punishments.
    JEL: C73 L13
    Date: 2016–12
  5. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: We examine maximin and minimax strategies for firms under symmetric oligopoly with differentiated goods. We consider two patterns of game; the Cournot game in which strategic variables of the firms are their outputs, and the Bertrand game in which strategic variables of the firms are the prices of their goods. We will show that the maximin strategy and the minimax strategy in the Cournot game, and the maximin strategy and the minimax strategy in the Bertrand game for the firms are all equivalent. However, the maximin strategy for the firms are not necessarily equivalent to their Nash equilibrium strategies in the Cournot game nor the Bertrand game. But in a special case, where the objective function of one firm is the opposite of the sum of the objective functions of other firms, the maximin and the minimax strategies for the firms constitute the Nash equilibrium both in the Cournot game and the Bertrand game.
    Keywords: maximin strategy, minimax strategy, oligopoly
    JEL: C72 D43
    Date: 2016–12–27
  6. 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
  7. By: Luca Savorelli (School of Economics and Finance, University of St Andrews); Jacob Seifert (University of Manchester)
    Abstract: We consider a spatial duopoly with non-monotonic network effects and extend the literature by endogenizing firms' location decisions. We show that the existence of equilibrium is ruled out due to displacement incentives at the location stage whenever network effects are sufficiently strong. Furthermore, unlike in exogenous location models, neither vertical product differentiation nor a monopoly outcome can arise endogenously in equilibrium. Relative to monotonic network effect models, our framework provides an additional rationale for a duopolistic market structure to be welfare-preferred to monopoly: for large population sizes, splitting demand between two firms can reduce the disutility from crowding.
    Keywords: product differentiation, network effects, welfare.
    JEL: L14 D62
    Date: 2016–12–23
  8. By: Boom, Anette (Department of Economics, Copenhagen Business School)
    Abstract: This paper examines the effect of bid regulations on the range of potential equilibrium prices in a multi-unit uniform price auction with heterogenous bidders. General bid caps destroy equilibria with prices above the bid cap and create new equilibria with prices way below the cap. A cap only for larger firms does not guarantee market prices below that cap. A sufficiently high bid floor only for smaller firms destroys some or all pure strategy equilibria despite their prices being above the bid floor. With a general bid floor this happens only with considerably higher bid floors.
    Keywords: Multi-unit Auctions; Heterogenous Bidders; Bid Regulation
    JEL: D43 D44 L12 L13 L51
    Date: 2016–12–01
  9. By: Pio Baake; Slobodan Sudaric
    Abstract: We analyze pricing and competition under paid prioritization within a model of interconnected internet service providers (ISPs), heterogeneous content providers (CPs) and heterogeneous consumers. We show that prioritization is welfare superior to a regime without prioritization (network neutrality) and yields higher incentives for investment in network capacities. As ISPs price discriminate between on-net and off-net CPs, their bottleneck property is propagated and competition for consumers increases resulting in a potential prisoner's dilemma when deciding whether to offer prioritization. We show that peering for prioritized traffic emerges as a collusive outcome and present off-net prices as a further collusive instrument.
    Keywords: interconnection, investment, network neutrality, prioritization
    JEL: L13 L51 L96
    Date: 2016
  10. By: Zhijun Chen; Greg Shaffer
    Abstract: Contracts that reference rivals have long been a focus of antitrust law and the subject of intense scholarly debate. This paper compares two such contracts, exclusive-dealing contracts and market-share contracts, in a model of naked exclusion. We discuss the different mecha-nisms through which each works and identify the fundamental tradeoff that arises: market-share contracts are better at maximizing a seller’s benefit from foreclosure whereas exclusive dealing is better at minimizing a seller’s cost of foreclosure. We give settings in which each is the more profitable contract and show that welfare can be worse with market-share contracts.
    Keywords: Exclusive dealing, Market-share contracts, Dominant Firm, Foreclosure
    JEL: L13 L41 L42 K21 D86
    Date: 2016–11
  11. By: Pablo Ibáñez Colomo
    Abstract: This piece considers the interface between EU competition law and the regulation of network industries. The two have been transformed as a result of their interactions. It is difficult to make sense of contemporary EU competition law without taking into account the consequences that the liberalisation process has had on it. Similarly, regulation sees EU competition law as a model and an aspiration. In this sense, the two disciplines can be said to be mutually compatible. In spite of the compatibility between EU competition law and sector-specific regulation, there is tension between them. The objectives of the two are not identical. Regulation is conceived to undermine the position of the incumbent and to introduce fragmentation. EU competition law, on the other hand, seeks to preserve the competitive constraints to which firms are subject. As a consequence of this tension, the substantive standards in EU competition law may vary to accommodate the features and demands of network industries. Finally, it appears that EU competition law and sector-specific regulation have a complementary relationship. Sectoral regimes often lack the tools to achieve their objectives. The substantive scope of regulation may be limited, or the range of measures insufficient to address all concerns. EU competition law is a versatile instrument that can remedy some of these gaps. It has proved to be an effective tool to preserve fragmentation in liberalised markets and to manage technological change.
    JEL: L81
    Date: 2016–03–15
  12. By: Kristopher J. Hult; Sonia Jaffe; Tomas J. Philipson
    Abstract: Medical innovations have improved survival and treatment for many diseases but have simultaneously raised spending on health care. Many health economists believe that technological change is the major factor driving the growth of the heath care sector. Whether quality has increased as much as spending is a central question for both positive and normative analysis of this sector. This is a question of the impact of new innovations on quality-adjusted prices in health care. We perform a systematic analysis of the impact of technological change on quality-adjusted prices, with over six thousand comparisons of innovations to incumbent technologies. For each innovation in our dataset, we observe its price and quality, as well as the price and quality of an incumbent technology treating the same disease. Our main finding is that an innovation’s quality-adjusted prices is higher than the incumbent’s for about two-thirds (68%) of innovations. Despite this finding, we argue that quality-adjusted prices may fall or rise over time depending on how fast prices decline for a given treatment over time. We calibrate that price declines of 4% between the time when a treatment is a new innovation and the time when it has become the incumbent would be sufficient to offset the observed price difference between innovators and incumbents for a majority of indications. Using standard duopoly models of price competition for differentiated products, we analyze and assess empirically the conditions under which quality-adjusted prices will be higher for innovators than incumbents. We conclude by discussing the conditions particular to the health care industry that may result in less rapid declines, or even increases, in quality-adjusted prices over time.
    JEL: I1 O3
    Date: 2016–12
  13. By: Dietrichson, Jens (The Danish National Centre for Social Research (SFI)); Ellegård, Lina Maria (Department of Economics, Lund University); Kjellsson, Gustav (Department of Economics, University of Gothenburg)
    Abstract: In the last decades, many health systems have implemented policies to make care providers engage in quality competition. But care quality is a multi-dimensional concept, and competition may have different impacts on different dimensions of quality. The empirical evidence on competition and care quality is scarce, in particular regarding primary care. This paper adds evidence from recent reforms of Swedish primary care that affected competition in municipal markets differently depending on the pre- reform market structure. Using a difference-in-differences strategy, we demonstrate that the reforms led to substantially more entry of private care providers in municipalities where there were many patients per provider before the reforms. The effects on primary care quality in these municipalities are modest: we find small improvements in subjective measures of overall care quality, but no significant effects on the rate of avoidable hospitalizations or patients’ satisfaction with access to care. We find no indications of quality reductions.
    Keywords: Competition; Patient choice; Primary health care; Quality
    JEL: D04 H75 I11 I18
    Date: 2016–12–14
  14. By: Zuzana FUNGACOVA (Bank of Finland); Anastasiya SHAMSHUR (University of East Anglia); Laurent WEILL (LaRGE Research Center, Université de Strasbourg)
    Abstract: Despite the extensive debate on the effects of bank competition, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl-Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition is however influenced by the institutional and economic framework, as well as by the crisis.
    JEL: G21 L11
    Date: 2016
  15. By: Haucap, Justus; Heimeshoff, Ulrich; Siekmann, Manuel
    Abstract: We use a novel data set with exact price quotes from virtually all German gasoline stations to empirically investigate how a temporary variance in local market structure - induced by restricted opening hours of specific players - affects price competition. We focus on stations selling gasoline as a by-product and find that, during their exogenously determined hours of opening, they have a significant negative price effect on nearby major-brand competitors. Applying a difference-in-difference framework with hourly average prices, our findings explicitly account for counterfactual market scenarios.
    Keywords: Gasoline Markets,Intraday Pricing,Supermarkets,Difference-in-Difference
    JEL: L11 L71
    Date: 2016
  16. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: We consider the formation (or timing) of consumer expectations regarding network size. Using a simple monopoly model with network externalities, we examine how the formation of consumer expectations, i.e., either stubborn or flexible expectations, affects the fulfilled expected monopoly equilibrium. We demonstrate that an increase in stubbornness reduces both output and consumer surplus. Furthermore, it is unprofitable for the monopolist that consumers have stubborn expectations.
    Keywords: stubbornness, consumer expectations, network externality, monopoly
    JEL: L12 L15
    Date: 2016–12
  17. By: Mayer, Thierry; Melitz, Marc J.; Ottaviano, Gianmarco I. P.
    Abstract: We document how demand shocks in export markets lead French multi-product exporters to re-allocate the mix of products sold in those destinations. In response to positive demand shocks, those French firms skew their export sales towards their best performing products; and also extend the range of products sold to that market. We develop a theoretical model of multiproduct firms and derive the specific demand and cost conditions needed to generate these product-mix reallocations. Our theoretical model highlights how the increased competition from demand shocks in export markets - and the induced product mix reallocations - induce productivity changes within the firm. We then empirically test for this connection between the demand shocks and the productivity of multi-product firms exporting to those destinations. We find that the effect of those demand shocks on productivity are substantial - and explain an important share of aggregate productivity fluctuations for French manufacturing.
    Date: 2016

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