nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒01‒15
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Intermediaries and Consumer Search By Chen, Yongmin; Zhang, Tianle
  2. Price Dynamics with Customer Markets By Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
  3. Firm pricing with consumer search By Anderson, Simon P; Renault, Régis
  4. Intermediary Search for Suppliers in Procurement Auctions By Honda, Jun
  5. Market Power and Welfare in Asymmetric Divisible Good Auctions By Manzano, Carolina; Vives, Xavier
  6. Asymmetric information in the regulation of the access to markets By Ghislandi, Simone; Kuhn, Michael
  7. Mutual Recognition for Sale: International Bargaining over Product Standards By Cai, Dapeng; Jørgensen, Jan Guldager
  8. When do firms leave cartels? Determinants and the impact on cartel survival By Hellwig, Michael; Hüschelrath, Kai
  9. Market Structure and Competition in Transition: Results from a Spatial Analysis By Lábaj, Martin; Morvay, Karol; Silanic, Peter; Weiss, Christoph; Yontcheva, Biliana
  10. Optimal Incentives for Patent Challenges in the Pharmaceutical Industry By Enrico Böhme; Jonas Severin Frank; Wolfgang Kerber
  11. Non-Sequential Search, Competition and Price Dispersion in Retail Electricity By Gugler, Klaus; Heim, Sven; Liebensteiner, Mario
  12. Estimating call externalities in mobile telephony By Czajkowski, Mikołaj; Sobolewski, Maciej
  13. Is competition just a question of numbers? An analysis of the impact of the entry of Free Mobile into the French mobile telecommunications market By Berne, Michel; Vialle, Pierre; Whalley, Jason
  14. EU retail roaming regulation triggers competition mechanisms of wholesale roaming markets that make wholesale prices competitive By Deniau, Philippe; Jaunaux, Laure; Lebourges, Marc
  15. Show Me Yours and I’ll Show You Mine: Sharing Borrower Information in a Competitive Credit Market By Jaap Bos; Ralph De Haas; Matteo Millone
  16. The Impact of Merger Legislation on Bank Mergers By Carletti, Elena; Ongena, Steven; Siedlarek, Jan-Peter; Spagnolo, Giancarlo
  17. Det offentliga som konkurrent på kommersiella marknader - En samhällsekonomisk analys med exemplet konferensmarknaden By Granlund, David; Indén, Tobias; Lundberg, Johan; Lundberg, Sofia; Wikström, Magnus
  18. Rescuing the Golden Age of Antibiotics: Can Economics Help Avert the Looming Crisis? By Eswaran, Mukesh; Gallini, Nancy

  1. By: Chen, Yongmin; Zhang, Tianle
    Abstract: This paper discusses how intermediaries, such as a search engine and an online marketplace, may affect consumer search. We propose an analytical framework that encompasses several models of search for differentiated products, with a high-quality firm being more likely to offer a product that meets each consumer's need. An intermediary improves consumer search efficiency by providing a search platform on which positions are sold to high-quality firms through competitive bidding. While the intermediary may admit too many or too few firms to its platform, compared to what would maximize consumer surplus or total welfare, its presence can nevertheless benefit consumers and improve welfare. However, the intermediary may reduce search efficiency when firms are differentiated only horizontally, when they sell experience or credence goods, or when the intermediary is biased (possibly due to vertical integration).
    Keywords: consumer search, intermediary, search engine, search platform, online marketplace, vertical differentiation
    JEL: D8 L1
    Date: 2016–12
  2. By: Paciello, Luigi; Pozzi, Andrea; Trachter, Nicholas
    Abstract: The customer base of a firm is an important and persistent determinant of its performance. Using rich U.S. data on consumer shopping behavior and good prices, we document that customer turnover is sensitive to price variation. Motivated by this finding, we study an economy where the customer base of a firm is persistent because of search frictions preventing customers from freely relocating across suppliers of consumption goods, and firms set prices under customer retention concerns. The key feature of our model is that the elasticity of the customer base to price -the extensive margin elasticity of demand- depends on the customers' endogenous opportunity cost of search, and interacts with heterogeneity in firm productivity. More productive firms enjoy less customer attrition and lower elasticity of demand. An increase in customers' search intensity leads to higher demand elasticity and lower prices. This provides a new channel affecting the relationship between consumer search and price markups in response to aggregate shocks. In particular, an increase in the utility of consumption relatively to the cost of search results in higher demand elasticity and lower prices, amplifying the effects of demand shocks on output. We highlight that the price response to demand shocks is heterogeneous across firms affecting dispersion in prices and consumption across consumers.
    Date: 2017–01
  3. By: Anderson, Simon P; Renault, Régis
    Abstract: Economists could not properly capture the impact of internet on markets without a proper theory of consumer search. As a result, this theory has been rediscovered and developed further since the early 2000s. It can address such critical questions as the impact of reduced search cost on prices, variety, and product choice as well as advertising practices (such as search advertising). This theoretical development has also fed into a rich empirical literature exploiting the wealth of data that is now available regarding both consumers' and firms' online activity. The goal of this chapter is to present the basic concepts underpinning the theory of imperfectly competitive markets with consumer search. We stress that appropriate theoretical frameworks should involve sufficient heterogeneity among agents on both sides of the market. We also explain why the analysis of ordered search constitutes an essential ingredient for modeling recent search environments.
    Keywords: Diamond paradox; internet; price dispersion; product differentiation; random/ordered search; Reservation rule; sequential/simultaneous search; two-sided market.
    JEL: D42 D82 D83 L11 L15 M37
    Date: 2016–12
  4. By: Honda, Jun
    Abstract: In many procurement auctions, entrants determine whether to participate in auctions accounting for their roles of intermediaries who search for the best (or the cheapest) input suppliers. We build on a procurement auction model with entry, combining with intermediary search for suppliers. The novel feature is that costs of bidders are endogenously determined by suppliers who strategically charge input prices. We show the existence of an equilibrium with price dispersion for inputs, generating cost heterogeneity among bidders. Interestingly, the procurement cost may rise as the number of potential bidders increases. (author's abstract)
    Keywords: Information Frictions; Search; Procurement; Auction; Vertical Relations; Entry Deterrence; Price Dispersion
    Date: 2015–08
  5. By: Manzano, Carolina; Vives, Xavier
    Abstract: We analyze a divisible good uniform-price auction that features two groups each with a finite number of identical bidders. Equilibrium is unique, and the relative market power of a group increases with the precision of its private information but declines with its transaction costs. In line with empirical evidence, we find that an increase in transaction costs and/or a decrease in the precision of a bidding group's information induces a strategic response from the other group, which thereafter attenuates its response to both private information and prices. A "stronger" bidding group -which has more precise private information, faces lower transaction costs, and is more oligopsonistic- has more market power and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payoff asymmetries. Market power and the deadweight loss may be negatively associated.
    Keywords: demand/supply schedule competition; electricity auctions; liquidity auctions; private information; Treasury auctions
    JEL: D44 D82 E58 G14
    Date: 2016–12
  6. By: Ghislandi, Simone; Kuhn, Michael
    Abstract: It is frequently argued that the high costs of clinical trials prior to the admission of new pharmaceuticals are stifling innovation. At the same time, regulation of the access to markets is often justified on the basis of consumers` inability to detect the true quality of a product. We examine these arguments from an information economic perspective by setting a framework where the incentives to invest in R&D are influenced by the information structure prevailing when the product is launched in the market at a later stage. In this setting, by changing the information structure, regulation (or the lack of) can thus indirectly affect R&D efforts. More formally, we construct a moral hazard - cum - adverse selection model in which a pharmaceutical firm exerts an unobservable effort towards developing an innovative (high quality) drug (moral hazard) and then announces the (unobservable) quality outcome to an uninformed regulator and/or consumers (adverse selection). We compare the outcomes in regard to innovation effort and expected welfare under two regimes: (i) regulation, where products undergo a clinical trial designed to ascertain product quality at the point of market access; and (ii) laissez-faire with free entry, where the revelation of quality is left to the market process. Results show that whether or not innovation is greater in the presence of entry regulation crucially depends on the efficacy of the trial in identifying (poor) quality, on the probability that unknown qualities are revealed in the market process, and on the preference and cost structure. The welfare ranking of the two regimes depends on the differential effort incentive and on the net welfare gain from implementing full information instantaneously. For example, in settings of vertical monopoly, vertical differentiation and horizontal differentiation with no variable cost of quality, entry regulation tends to be the preferred regime if the effort incentive under pooling is relatively low and profits do not count too much towards welfare. A complementary numerical Analysis shows how the outcomes vary with the market and cost structure. (authors' abstract)
    Keywords: adverse selection; (entry) regulation; moral hazard; pharmaceutical industry; R&D incentives
    Date: 2016–02
  7. By: Cai, Dapeng (Nanzan University); Jørgensen, Jan Guldager (Department of Business and Economics)
    Abstract: We model a two-country bargaining process over the coordination of a horizontally differentiated product standard. We show that the necessary conditions for bargaining to take place are (i) firm heterogeneity and (ii) sufficiently high complying costs. When firms compete à la Cournot in the Home market and when bargaining takes place, our results suggest that mutual recognition of standards, and not the harmonization of standards, inevitably emerges as Home’s optimal choice. We also demonstrate that mutual recognition can maximize global welfare. Our results largely hold when firms compete à la Bertrand.
    Keywords: Product standards; mutual recognition; harmonization; international bargaining; lobbying; horizontal differentiation
    JEL: C71 D72 F12 F13
    Date: 2017–01–06
  8. By: Hellwig, Michael; Hüschelrath, Kai
    Abstract: We use a dataset of 615 firms which participated in 114 illegal cartels - convicted by the European Commission between 1999 and 2016 - to investigate the determinants of the duration of a firm's participation in a cartel. Applying a Weibull proportional hazard model with a particular focus on the impact of internal and external time-varying determinants, we find that firms show an increased probability to leave a cartel if prior exits occurred as well as in periods of high demand growth. However, we find a reduced exit probability in situations of prior entries to the cartel or in periods of high interest rates. Additional estimations on the cartel level further suggest that firm exits increase the probability of a cartel breakdown substantially.
    Keywords: Survival Analysis,Cartels,Duration,European Union
    JEL: C41 K21 L41
    Date: 2017
  9. By: Lábaj, Martin; Morvay, Karol; Silanic, Peter; Weiss, Christoph; Yontcheva, Biliana
    Abstract: The present paper provides first microlevel (indirect) empirical evidence on changes in the determinants of firm profitability, the role of fixed and sunk costs, as well as the nature of competition for a transition economy. We estimate size thresholds required to support different numbers of firms for four retail and professional service industries in a large number of geographic markets in Slovakia. The three time periods in the analysis (1995, 2001 and 2010) characterize different stages of the transition process. Specific emphasis is given to spatial spill-over effects between local markets. Estimation results obtained from a spatial ordered probit model suggest that entry barriers have declined considerably (except for restaurants) and the intensity of competition has increased. We further find that demand spill-overs and/or the effects associated with a positive correlation in unobservable explanatory variables seem to outweigh negative spill-over effects caused by competitive forces between neighboring cities and villages. The importance of these spatial spill-over effects differs across industries.
    Keywords: entry thresholds; competition; Slovakia; transition; geographic markets
    Date: 2016–02
  10. By: Enrico Böhme (University of Marburg); Jonas Severin Frank (University of Marburg); Wolfgang Kerber (University of Marburg)
    Abstract: Since the patent system relies on private litigation for challenging weak patents, and patent settlements might influence the incentives for challenging patents, the question arises whether the antitrust assessment of patent settlements should also consider their impact on the incentives to challenge potentially invalid patents. Patent settlements in the pharmaceutical industry between originator and generic firms have been scrutinized critically by competition authorities for delaying the market entry of generics and therefore harming consumers. In this paper we present a model that analyzes the tradeoff between limiting the delay of generic entry through patent settlements and giving generic firms more incentives for challenging weak patents of the originator firms. We show that allowing patent settlements with a later market entry of generics than the expected market entry under patent litigation can increase consumer welfare under certain conditions. We introduce a policy parameter for determining the optimal additional period for collusion that would maximize consumer welfare and show that the size of this policy parameter depends on the size of the challenging costs, the intensity of competition, and the duration between the generics’ market entry decisions.
    Keywords: patent settlements, collusion, patent challenges
    JEL: L10 L40 O34
    Date: 2017
  11. By: Gugler, Klaus; Heim, Sven; Liebensteiner, Mario
    Abstract: We investigate the impact of consumer search and competition on pricing strategies in Germany's electricity retail. We utilize a unique panel dataset on spatially varying search requests at major online price comparison websites to construct a direct measure of search intensity and combine this information with zip code level data on electricity tariffs between 2011 and 2014. The paper stands out by explaining price dispersion by differing pricing strategies of former incumbents and entrant firms, which are distinct in their attributable shares in informed versus uninformed consumers. Our empirical results suggest causal evidence for an inverted U-shape effect of consumer search intensity on price dispersion in a clearinghouse environment as in Stahl (1989). The dispersion is caused by opposite pricing strategies of incumbents and entrants, with incumbents initially increasing and entrants initially decreasing tariffs as a reaction to more consumer search. We also find an inverted U-shape effect of competition on price dispersion, consistent with theoretical findings by Janssen and Moraga-González (2004). Again, the effect can be explained by opposing pricing strategies of incumbents and entrants. (authors' abstract)
    Keywords: Search; Information; Competition; Price Dispersion; Electricity Retail
    Date: 2016–05
  12. By: Czajkowski, Mikołaj; Sobolewski, Maciej
    Abstract: Recent theoretical models of network competition with call externalities demonstrate strategic incentives of incumbent providers to reduce receiver benefits in rival network by excessive off-net pricing. Such anti-competitive pricing practices have a potentially damaging impact on financial standing of a late entrant, leading to non-convergence of long-run market shares – an outcome that has been observed in many European mobile markets. The theoretical reasoning behind call externalities assumes that receiving calls contribute to consumer utility hence, receiver benefits drive subscription choices. So far no attempts have been made to test this critical assumption in a rigorous manner. We use data elicited from prepaid and postpaid users of mobile telephony in Poland in a discrete choice experiment designed specifically to model subscription choices when operators set termination-based discriminatory tariffs under calling party pays regime. Receiver benefits are controlled with an incoming price – a variable informing about the cost of off-net calls paid by subscribers originating a call from other networks. The model also accounts for switching costs and network effects. We find that call externalities are significant driver of subscription choices, albeit their influence has smaller magnitude than direct price effects. Next, we assess the impact of excessive off-net pricing on the structure of market shares of mobile operators in Poland and estimate customer base stealing effect encountered by the late entrant. Our empirical findings support a widespread view that call externalities might have indeed limited market competition and late entrants' growth in many European countries.
    Keywords: Call externalities,personal network effects,switching costs,mobile telephony,stated preference,discrete choice experiment,random parameters logit model
    JEL: L1 L86 O3
    Date: 2016
  13. By: Berne, Michel; Vialle, Pierre; Whalley, Jason
    Abstract: In recent years across Europe, mobile operators have made a number of attempts to consolidate. Consolidation, whether it is successful or not, inevitably focuses on the number of mobile network operators present in a market. Largely overlooked in the discussion of how many mobile network operators should be permitted in a market is the strategy(s) adopted by these operators. An operator may have a disruptive impact on the market, necessitated by its late entrance, that takes the form of price, handset or bundling based competition. In this paper we explore the impact that one such disruptive mobile operator, Free Mobile, has had on the French mobile telecommunications market. Drawing on a wide range of secondary sources, our analysis finds that the growth of Free has come at the expense of the incumbent mobile operators. Its innovative approach to selling its products and providing customer support have been copied by its rivals, as has its low cost strategy. While consolidation has often been rumoured, it has not occurred with the consequence that Bouygues Telecom finds itself in a particularly precarious situation as it is squeezed between larger rivals like Orange and price focused competitors like Free Mobile.
    Keywords: competition,mobile telecommunications,Free Mobile,France,entry
    Date: 2016
  14. By: Deniau, Philippe; Jaunaux, Laure; Lebourges, Marc
    Abstract: The European Commission (EC) draft Regulation (2016)2 on wholesale roaming market proposes a massive decrease of the regulated roaming wholesale price caps for data with a drop from €5ct/MB to €0.85 ct/MB to enable the abolition of retail roaming surcharges in Europe by 15 June 2017. However, according to both the “TSM” Regulation text (2015/2120 25th November 2015) itself which imposes the implementation of Roaming Like At Home (RLAH) in Europe and to the decision of the European Court of Justice upholding the first European roaming regulation (ECJ C-58/08 8 June 2010), a wholesale roaming regulation can be justified in parallel of retail regulation only in case of market failure in the wholesale market and in order to prevent the existence of competitive distortions between mobile operators on the internal market. Therefore, wholesale roaming markets regulation should only address identified competitiveness issues. This paper deals with the question of the competitiveness of the wholesale roaming market regarding two angles: the existence of competitive mechanisms and incentives in wholesale roaming markets and the average level of wholesale roaming market prices in comparison with the corresponding level of full production costs. It shows that wholesale roaming markets exhibit competition mechanisms and incentives triggered by roaming volume growth resulting from the perspective of RLAH retail regulation. It also shows that in 2015, the average level of wholesale roaming market prices in Europe is equivalent to the average level of wholesale roaming production costs. Therefore the wholesale roaming market is competitive. Strong regulatory intervention such as large decrease of wholesale roaming caps is neither justified nor proportionate, generates serious risk of distortion of visited markets and jeopardises investments in mobile networks.
    Date: 2016
  15. By: Jaap Bos; Ralph De Haas; Matteo Millone
    Abstract: We exploit detailed data on approved and rejected small business loans to assess the impact of the introduction of a credit registry in Bosnia and Herzegovina. Our findings are threefold. First, mandatory information sharing tightens lending at the extensive margin as more applications are rejected, in particular in areas with strong credit market competition. These rejections are increasingly based on hard information—especially positive borrower information from the new registry—and less on soft information. Second, lending standards also tighten at the intensive margin: the registry leads to smaller, shorter and more expensive loans. Third, the tightening of lending along both margins improves loan quality. Default rates go down in particular in high competition areas and for first-time borrowers. This suggests that a reduction in adverse selection is an important channel through which information sharing affects loan quality.
    Keywords: Information sharing, credit market competition, hazard model
    JEL: D04 D82 G21 G28
    Date: 2015
  16. By: Carletti, Elena; Ongena, Steven; Siedlarek, Jan-Peter; Spagnolo, Giancarlo
    Abstract: We study the impact on bank merger activity of the strengthening in merger control legislation introduced in Europe between 1989 and 2004. We find that strengthening merger control increases the abnormal returns on bank target stocks in the days around the merger announcement by 7 percentage points relative to before the new legislation.We discuss several potential explanations for this effect of the change in legislation by studying changes in merger characteristics. We find a weak increase in the pre-merger profitability of target banks, a decrease in the size of acquirers and a decrease in the share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rival banks in the country appear unaffected. The evidence is consistent with legislation changes leading to transactions being undertaken that are more profitable and more pro-competitive.
    Date: 2015–11
  17. By: Granlund, David (Department of Economics, Umeå University); Indén, Tobias (Department of Law, Umeå University); Lundberg, Johan (Department of Economics, Umeå University); Lundberg, Sofia (Department of Economics, Umeå University); Wikström, Magnus (Department of Economics, Umeå University)
    Abstract: I den här rapporten analyseras samhällsekonomiska effekter av att det offentliga konkurrerar med privata företag på kommersiella marknader. Den innehåller även en pilotstudie av marknaden för en – och tvådagarskonferenser tillämpad på Umeåregionen. Svensk konkurrenslagstiftning inkluderar regler om konkurrensbegränsande offentlig säljverksamhet. Reglerna gäller för den offentliga sektorn i sin helhet, dvs stat, primärkommuner (kommun) eller landstingskommuner (landsting) och juridiska personer vars verksamhet den offentliga sektorn har ett dominerande inflytande över. Inflytandet kan ta sig formen av ägande, finansieringsvillkor, styrelse, lag och avtal. Frågan om det offentliga som konkurrent är även samhällsekonomiskt relevant då snedvridning av konkurrens i form av exempelvis underprissättning till följd av stöd, kan innebära en samhällsekonomisk förlust. Sammantaget visar den samhällsekonomiska analysen att det inte går att dra några generella slutsatser om att konkurrens från den offentliga sektorn på marknader med en etablerad kommersiell verksamhet alltid är problematisk. Även i situationer där konkurrensen sker på olika villkor kan fördelarna med den offentliga aktörens medverkan överväga nackdelarna. Baserat på pilotstudien och olika scenarios avseende konferensmarknaden i Umeå, är det möjligt att dra slutsatsen att fördelarna med offentliga aktörer kan dominera nackdelarna under förutsättning att den offentliga aktörens produktionskostnad maximalt är en procent högre än en privat aktörs produktionskostnad för motsvarande konferens. Analysen visar att subventioner till offentliga aktörer överskridande 1,3 miljoner kronor inte kan motiveras utifrån ett samhällsekonomiskt perspektiv i något scenario. I scenariot där den offentliga aktören ägnar sig åt underprissättning överväger nackdelarna även om verksamheten klarar sig utan subvention.
    Keywords: Elasticitet; Entry; Exit; Konkurrens; Konkurrenslagen; Kommunallagen; Monopol; Prisdiskriminering; Subventioner; Underprissättning
    JEL: D42 D43 L12 L13 L44
    Date: 2017–01–02
  18. By: Eswaran, Mukesh; Gallini, Nancy
    Abstract: Countries world wide face an imminent global health crisis. As resistant bacteria render the current stock of antibiotics ineffective and the pipeline of back-up drugs runs dry, pharmaceutical companies are abandoning their research in antibiotics. In this paper we ask: Why are pharmaceutical companies closing antibiotic research labs when the stakes are so high? Implementing a simple dynamic framework, we show that the environment for new antibiotics is relatively hostile, compared to other medicines, due to market failures that result in excessive use and acceleration of natural selection. The analysis reveals, however, that increased competition between drugs can actually slow down the rate of resistance without, in some cases, diluting research incentives. Bolstered by scientific evidence, this result arises from a fundamental interplay between economic and biological externalities. We propose a patent-antitrust regime for achieving efficient drugrnresearch and usage that calls for a revised justification of the patent system.rn
    Keywords: antibiotic resistence, market competition, R&D incentives, patents
    JEL: I11 I12 I13 O31 O38
    Date: 2016–07–04

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