nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒01‒08
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Welfare Analysis of Cournot and Bertrand Competition With(out) Investment in R & D By Tondji, Jean-Baptiste
  2. Clustering of R&D collaboration in Cournot oligopoly By Mauro Caminati
  3. Secret contracting in multilateral relations By Rey, Patrick; Verge, T.
  4. To spy or not to (fire the) spy: The benefits of acquiring information about rivals’ play in Bertrand competition By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  5. Another model of sales. Price discrimination in a differentiated duopoly market By Mehlum, Halvor
  6. Models of Consumer Demand for Differentiated Products By Bonnet, Céline; Richards, Timothy
  7. Growth Policy, Agglomeration, and (the Lack of) Competition By Wyatt J. Brooks; Joseph P. Kaboski; Yao Amber Li
  8. A comment on 'Cross-border merger, vertical structure, and spatial competition' By Konstantinos Eleftheriou; Nickolas J. Michelacakis; Vassilios G. Papavassiliou
  9. The more economic approach to predatory pricing By Michael Funk; Christian Jaag
  10. On the Use of Price-Cost Tests in Loyalty Discounts and Exclusive Dealing Arrangements: Which Implications from Economic Theory? By Chiara Fumagalli; Massimo Motta
  11. Optimal Licensing of Non-Drastic and (Super-)Drastic Innovations: The Case of the Inside Patent Holder By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  12. Patent buyout in a model of endogenous growth By Radhakrishnan, Ravi
  13. Firm patenting activity, metropolitan innovative environment and their effects on business survival in a high-tech industry By Tsvetkova, Alexandra; Thill, Jean-Claude; Conroy, Tessa
  14. A Theory of Bundling Advertisements in Media Markets By Kevin M. Murphy; Ignacio Palacios-Huerta
  15. As Seen on TV: Price Discrimination and Competition in Television Advertising By Gil, Ricard; Riera-Crichton, Daniel; Ruzzier, Christian
  16. Price asymmetry and retailers heterogeneity in Brazilian gas stations By Leonardo Cardoso; Mauricio Bittencourt; Elena Irwin
  17. Pricing behaviour of cooperatives and investor-owned dairies under spatial competition By Zavelberg, Yvonne; Storm, Hugo
  18. Estimating market power Evidence from the US Brewing Industry By Jan De Loecker; Paul T. Scott
  19. A stochastic frontier estimator of the aggregate degree of market power exerted by the U.S. beef and pork packing industries By Stavrakoudis, Athanassios; Panagiotou, Dimitrios
  20. Vertical price relationships between different cuts and quality grades in the U.S. beef marketing channel: a wholesale-retail analysis By Panagiotou, Dimitrios; Stavrakoudis, Athanassios

  1. By: Tondji, Jean-Baptiste
    Abstract: I consider the model of a differentiated duopoly with process R&D when goods are either substitute, complements or independent. I propose a non-cooperative two-stage game with two firms producing differentiated goods. In the first stage, firms decide their technologies and in the second stage, they compete in quantities or prices. I evaluate the social welfare within a framework of Cournot and Bertrand competition models with or without investment in research and development. I prove that the Cournot price can be lower than Bertrand price when the R&D technology is relatively inefficient; thus, Cournot market structure can generate larger consumer's surplus and welfare.
    Keywords: R&D, Cournot duopoly, Bertrand model, Welfare.
    JEL: D60 L13 O32
    Date: 2016–03–25
  2. By: Mauro Caminati
    Abstract: This paper complements the Cournot collaboration game outlined in Goyal and Joshi (2003, sect. 4), with the hypothesis that pairwise R&D alliance is constrained by knowledge distance. Potential asymmetry of distance between two knowledge sets is formalized through a quasi-metric in knowldge space. If the knowledge constraints to collaboration are weak enough, the paper replicates the result by Goyal and Joshi (2003, sect. 4), that a ?firm is either isolated, or is connected to every other ?firm in the industry. If absoprtion of ideas from one?s potential partner requires sufficiently high knowledge proximity, the stable R&D networks in Cournot oligopoly are shown to display the clustering property, that is characteristic of real-world industry networks, and of social networks more generally.
    Keywords: Cournot collaboration game, directed knowledge distance, R&D networks, degree assortativity, clustering
    JEL: D85 L13 O30
    Date: 2016–10
  3. By: Rey, Patrick; Verge, T.
    Abstract: We develop a flexible and tractable framework of (secret) vertical contracting between multiple upstream suppliers and downstream retailers. This framework does not put any restriction on the tari¤s that can be negotiated, and yet does take account of the impact of these tariffs on downstream firms'behavior. We show that equilibrium tariffs must be cost-based; as a result, retail prices are the same as with a multi-brand oligopoly. Interestingly, this finding is in line with the empirical analysis of a recent Norwegian merger. We then use this flexible framework to endogenize market structure as well as to analyze the e¤ects of various vertical restraints, such as resale price maintenance and retail price parity clauses. Finally, we show that our framework also applies to the agency relationships that characterize most online platforms.
    Keywords: Bilateral contracting, vertical relationships, agency, resale price maintenance, price parity clauses.
    Date: 2016–12
  4. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Korea University, Seoul); Elmar G. Wolfstetter (Humboldt-University at Berlin and Korea University, Seoul)
    Abstract: The present paper explores the impact of planting a spy in a competing firm who discloses operational information about pricing in a Bertrand market game with differentiated products under incomplete information. The results depend upon whether the presence of the spy is common knowledge and whether the identity of the spy has been disclosed. Altogether, spying may benefit both the spying and the spied at firm. Although the spied at firm would prefer not to be spied at if its cost is low, firing the spy, which is an option if the spy’s identity has been disclosed, adversely affects beliefs and is never profitable.
    Keywords: Industrial espionage, price leadership, collusion, antitrust policy, incomplete information
    JEL: L41 D43 D82
    Date: 2016
  5. By: Mehlum, Halvor (Dept. of Economics, University of Oslo)
    Abstract: Using a model of horizontal differentiation where a variety dimension is added to Hotelling's (1929) "linear city" duopoly model, I show that even when costs and demand are symmetric, price discrimination may be an equilibrium phenomenon. In the model each customer have a preferred variety and a preferred firm. They have perfect information about all prices and may be induced to switch variety and firm given a sufficient price difference. Price discrimination equilibrium exists when a sufficient fraction of consumers are elastic both with respect to variety and firm.
    Keywords: Duopoly; price discrimination
    JEL: D43
    Date: 2016–09–23
  6. By: Bonnet, Céline; Richards, Timothy
    Abstract: Advances in available data, econometric methods, and computing power have created a revolution in demand modeling over the past two decades. Highly granular data on household choices means that we can model very specific decisions regarding purchase choices for differentiated products at the retail level. In this chapter, we review the recent methods in modeling consumer demand, and their application to problems in industrial organization and strategic marketing.
    Keywords: consumer demand, discrete choice, discrete-continuous choice, shopping basket models, machine learning.
    JEL: D43 L13 L81 M31
    Date: 2016–12
  7. By: Wyatt J. Brooks; Joseph P. Kaboski; Yao Amber Li
    Abstract: Industrial clusters are promoted by policy and generally viewed as good for growth and development, but both clusters and policies may 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 test 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, a firm's markup depends on its market share, but in the cartel, markups across firms converge and depend instead on the total market share of the cartel. Empirically, we validate the test using plants with common owners, and 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 about four times higher in Chinese special economic zones than outside those zones.
    JEL: L11 O1 O25 R11
    Date: 2016–12
  8. By: Konstantinos Eleftheriou; Nickolas J. Michelacakis; Vassilios G. Papavassiliou
    Abstract: The aim of this paper is to revise and correct the results obtained in Beladi et al. [Beladi, H., Chakrabarti, A., Marjit, S., 2010. Cross-border merger, vertical structure, and spatial competition. Economics Letters 109, 112-114]. Specifically, we prove that the Nash equilibrium locations of the downstream firms are the same in the pre-merger free-trade case as they are following a cross-border upstream merger.
    Keywords: Price-discrimination; Spatial-competition; Firm-location; Cross-border merger
    JEL: L13 L42 D43 R32 F10 F12
    Date: 2016–09
  9. By: Michael Funk; Christian Jaag
    Abstract: The “more economic approach” was introduced to antitrust in order to achieve a more effect-based and theoretically grounded enforcement. However, related to predatory pricing it resulted in systematic over- and under-enforcement: Economic theory does not require dominance for pre-dation to be a rational (and harmful) strategy while an ex ante dominant firm would often refrain from predation. Hence, within the current legal framework, a more effect-based and theoretically grounded antitrust en-forcement with respect to predatory pricing will result in systematic over- and under-enforcement. Therefore, we suggest separating predatory pric-ing from exclusionary abuse of a dominant firm, both legally and analyti-cally. Instead, predatory pricing should be analyzed along the same logic as a merger. In particular, we argue that three elements from merger con-trol should be adopted: in absence of dominance, market share and/or turnover thresholds may serve as a de minimis rule; recoupment should be analyzed similarly to the competitive effect of a merger between the predator and its prey; and a stronger efficiency defense should be estab-lished.
    Keywords: Predatory pricing, competition policy, antitrust, more economic approach, predation
    JEL: L11 L41
    Date: 2016–12
  10. 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, Ine?cient Foreclosure, Exclusive Dealing, Antitrust Policy
    JEL: K21 L41
    Date: 2016
  11. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Korea University, Seoul); Elmar G. Wolfstetter (Humboldt-University at Berlin and Korea University, Seoul)
    Abstract: We reconsider the inside innovators’ optimal licensing problem, assuming incomplete information and unit cost profiles that may or may not have the potential to propel a monopoly, taking into account restrictions concerning royalty rates and the use of exclusive licenses implied by antitrust rules. We analyze optimal licensing mechanisms using methods developed in the analysis of license auctions with downstream interaction. The optimal mechanism differs significantly from the mechanisms reported in the literature, which assumed complete information or particular cost profiles or probability distributions.
    Keywords: Innovation, licensing, optimal contracts, asymmetric information
    JEL: D21 D43 D44 D45
    Date: 2016
  12. By: Radhakrishnan, Ravi
    Abstract: This paper considers the prospect of a government patent buyout in a model of endogenous growth. To this end, the author modifies a standard quality ladder growth model by incorporating possibility of imitation, and rent protection activities (RPAs) by the innovator. The government finances the buyout by imposing a per unit sales-tax on the goods. The author shows that in this set-up, patent buyout by the government can lead to higher level of welfare without lowering an economy's growth rate along the balanced path. He highlights two sources of welfare improvement: elimination of monopoly pricing, and reduction in RPAs.
    Keywords: innovation,imitation,patent,growth
    JEL: O31 O34 O38
    Date: 2016
  13. By: Tsvetkova, Alexandra; Thill, Jean-Claude; Conroy, Tessa
    Abstract: This paper distinguishes between internal (produced within the firm) and external (produced by other firms) knowledge and studies the effects of both knowledge types on survival in a cohort of computer and electronic product manufacturing companies started in 1991 in the continental US metropolitan statistical areas (MSAs). Estimation results suggest that innovative companies face lower hazard but this effect seems to be driven by company’s initial characteristics, as producing more knowledge measured by successful patent applications does not translate into a higher likelihood of survival. In contrast, an innovative environment decreases survival likelihood in the whole sample, yet this result appears to be driven by non-patenting establishments. In the subset of non-patenting firms an innovative environment has a strong negative effect on survival whereas no significant relationship is identified in the subset of innovative firms.
    Keywords: Business survival, knowledge creation, patents, innovative environment
    JEL: L63 O3 O51
    Date: 2016–12–23
  14. By: Kevin M. Murphy; Ignacio Palacios-Huerta
    Abstract: Watching TV and other forms of media consumption represent, after sleeping and working, the main activity that adults perform in developed countries. We present a dynamic theory of commercial broadcasting where the media trade utility-raising goods (programs, information, and services) with audiences in exchange for their exposure to advertisements (utility-decreasing bads), and where goods are otherwise free to the audience except for their opportunity cost of time. Goods and bads are dynamically arranged, and as such traded in an intertemporal bundle. No monetary transfers take place between media and audiences, and this barter exchange is not contractually sustained. We study this dynamic problem in a model that captures the central characteristics of how commercial media markets operate. The model is rich enough to account for a variety of disparate evidence in television, radio, print media and the web.
    JEL: D11 D21 L21 L82
    Date: 2016–12
  15. By: Gil, Ricard; Riera-Crichton, Daniel; Ruzzier, Christian
    Abstract: In this paper we examine the empirical relationship between price discrimination and competition in television advertising. While most empirical papers on the topic document a positive relationship, we find that price discrimination is negatively related to competition (as measured by the number of competing firms), a result that is consistent with conventional wisdom. Our results also show that only incumbent stations (unlike entrants) respond by engaging less in price discrimination when faced with a more competitive environment. Our evidence suggests that incumbents may use price discrimination as a strategic tool to accommodate entry - a strategy that has received scant attention in the existing entry literature.
    Keywords: competition, price discrimination, Spanish television
    JEL: D22 D43 L11 L82
    Date: 2016–12–21
  16. By: Leonardo Cardoso; Mauricio Bittencourt; Elena Irwin
    Abstract: In a competitive market situation, a symmetric price transmission is expected, and the speed of adjustment of the market should be equal, no matter in which direction input prices are going (up or down). When inputs? prices increase, firms need to pass on costs to avoid negative profit situation. When they go down, firms? reaction is in a direction to avoid market share losses. Therefore, if firms react faster when inputs? prices increase than when they decrease (positive asymmetry), it means a capture of consumers? surplus by the firms. When firms? reaction is slowly when inputs? prices decrease than when they decreases (negative asymmetry), the surplus transfer is from firms to consumers. So far, studies regarding price asymmetry in Brazil used only aggregated database, which likely suffers by summation bias. In a hypothetical city with just two gas stations, one with positive asymmetric behavior and other with negative one, there is high chance that this city accepts the null of a symmetric behavior. The present study will try to overcome this problem with a gas station level dataset. The National Agency for Petroleum, Natural Gas and Biofuels (ANP) has a detailed database with weekly information for gas stations in an unbalanced database, where more than 40% of population is covered every week. This firm-level database has information as purchase and selling price for gasoline, name of gas stations, brand and complete address. This information allows answering if there is price asymmetry in Brazil at firm level. Because database has more than 2 million of observations for more than 17.000 different gas stations, it is also possible to obtain results of price asymmetry against fixed effects to check which of these effects matter to change the likelihood of firms to have price asymmetry. Results indicate that there is heterogeneity regarding price transmission among firms: 71% of gas stations had no asymmetry, 23% had a positive asymmetry pattern and 6% of them had negative asymmetry. Regarding which fixed effects could explain the probability to have a positive asymmetry, higher margins, and a minor number of rivals nearby and be a non-white flag increase the probability of having positive asymmetry. These results strength relations between market power and positive asymmetry and inaugurate a link between spatial competition and price asymmetry transmission.
    Keywords: Firms heterogeneity; asymmetric price; gas stations; gasoline
    JEL: C24 D22 L11 R32
    Date: 2016–12
  17. By: Zavelberg, Yvonne; Storm, Hugo
    Abstract: This paper analyses differences in the pricing behaviour between cooperatives and investor-owned dairies for raw milk in a spatial market setting. We systemize the theoretical literature concerning the relations between price and space in oligopsonistic markets. This provides the foundation for empirically analysing the price-space relationship in the German raw milk market. Space represents the distance to competing dairies and transportation cost. We differentiate between cooperatives and investor-owned dairies in North and South Germany. Specifically, the impact of a dairy’s own legal form and that of neighbouring competitors on the pricing behaviour is assessed. For the South of Germany, a negative relationship between space and raw milk price is found while for the North the relationship is positive. In both North and South the effect is stronger for cooperatives compared to investor-owned firms. Overall, our findings do not necessarily suggest an increase in market power and a decrease in raw milk prices when the concentration process of the dairy sector is progressing. Further, this paper provides the first spatial analysis of the competitive yardstick effect, for which we find weak evidence in the South. For the north, the theory of the competitive yardstick effect cannot be supported empirically. The estimation is based on a panel-data set covering all German dairies from 2001 to 2012 providing information on raw milk prices, processing quantities, legal and production form.
    Keywords: imperfect competition, spatial competition, competitive yardstick, Agricultural and Food Policy, Demand and Price Analysis, D43, R32, C51,
    Date: 2016–12–05
  18. By: Jan De Loecker; Paul T. Scott
    Abstract: While inferring markups from demand data is common practice, estimation relies on difficult-to-test assumptions, including a specific model of how firms compete. Alternatively, markups can be inferred from production data, again relying on a set of difficult-to-test assumptions, but a wholly different set, including the assumption that firms minimize costs using a variable input. Relying on data from the US brewing industry, we directly compare markup estimates from the two approaches. After implementing each approach for a broad set of assumptions and specifications, we find that both approaches provide similar and plausible markup estimates in most cases. The results illustrate how using the two strategies together can allow researchers to evaluate structural models and identify problematic assumptions.
    JEL: D2 L1 L2 L40
    Date: 2016–12
  19. By: Stavrakoudis, Athanassios; Panagiotou, Dimitrios
    Abstract: The objective of this study is to measure the amount of market power exercised by the U.S. red meatpacking industry using the recently developed stochastic frontier estimator of market power. The aggregate degree of market power in both the input market (cattle and hogs) and the output market (beef and pork) is estimated using annual time series data for the period 1970- 2009. The empirical results reveal that the farm-to-wholesale price spread is 4.91% and 4.16% above the marginal processing costs, in the beef and pork packing industries, respectively. These findings indicate that rather a small percentage of the farm-to-wholesale price spread can be attributed to market power in both U.S. meat packing sectors.
    Keywords: beef; pork; stochastic frontier analysis; market power
    JEL: C13 L66 Q11
    Date: 2016
  20. By: Panagiotou, Dimitrios; Stavrakoudis, Athanassios
    Abstract: The present article offers an empirical assessment of the degree and the structure of price dependence between wholesale and retail market levels in the U.S. beef industry, while accounting for product differentiation. This is pursued using the statistical tool of copulas and monthly rates of price changes for different cuts and quality grades of the beef product for the time period 2002–2016. Six wholesale–retail pairs were formed based on different cuts and quality grades. The empirical results suggest that prices at retail level respond differently to extreme negative and positive wholesale price shocks. More specifically, extreme price increases at the wholesale level are transmitted to the retail level in five out of six pairs whereas extreme price decreases are not passed from the wholesale to the retail market level in five out of six pairs. Based on these findings, there is evidence of asymmetric price relationships between wholesale–retail market levels in the U.S. beef marketing channel, when quality differences in cuts and grades is considered.
    Keywords: Price relationships; Beef cuts; Wholesale-Retail; Asymmetries; Copulas
    JEL: C14 L66 Q13
    Date: 2017–01–04

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