nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒01‒22
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. The different effect of consumer learning on incentives to differentiate in Cournot and Bertrand competition By Conze, Maximilian; Kramm, Michael
  2. The Benefit of Collective Reputation By Zvika Neemam; Aniko Ory; Jungju Yu
  3. Factor Market Rivalry and Inter-Industry Competitive Dynamics By Gideon Markman; Peter Gianiodis; Andreas Panagopoulos
  4. Type of entry choice and firm initial size By Francesca Melillo; Timothy B. Folta; Frédéric Delmar
  5. Three Economist’s Tools for Antitrust Analysis: A Non-Technical Introduction By Pittman, Russell
  6. Too Much Waste: A Failure of Stochastic, Competitive Markets By de Meza, David; Reito, Francesco
  7. Practical contribution for the assessment and monitoring of product market competition in the Portuguese Economy – estimation of price cost margins By Luis Folque
  8. Licensing Terms of Standard Essential Patents: A Comprehensive Analysis of Cases By Chryssoula Pentheroudakis; Justus A. Baron
  9. From publishers to self-publishing: The disruptive effects of digitalisation on the book industry By Hviid, Morten; Izquierdo Sanchez, Sofia; Jaques, Sabine
  10. Optimal Market Structure in the Mobile Industry By Jeanjean, François; Houngbonon, Georges Vivien
  11. Does net neutrality work? The Dutch case By van Eijk, Nico
  12. Estimating Market Power: Evidence from the US Brewing Industry By Jan De Loecker; Paul T. Scott
  13. Defining the Relevant Product Market: An Application of Price Tests to the Beer Market in Barbados By Hippolyte, Rommell
  14. Financial Inclusion, Bank Concentration and Firm Performance. By L. Chauvet; L. Jacolin
  15. Is information diffusion a threat to market power for financial access? Insights from the African banking industry By Asongu, Simplice; Batuo, Enowbi; Nwachukwu, Jacinta; Tchamyou, Vanessa
  16. Competition and hospital quality: Evidence from a French natural experiment By Gobillon, Laurent; Milcent, Carine

  1. By: Conze, Maximilian; Kramm, Michael
    Abstract: We combine two extensions of the differentiated duopoly model of Dixit (1979), namely Caminal and Vives (1996) and Brander and Spencer (2015a,b), to analyze the effect of consumer learning on firms' incentives to differentiate their products in models of Cournot and Bertrand competition. Products are of different quality, consumers buy sequentially and are imperfectly informed about the quality of the goods. Before simultaneously competing in quantities, firms simultaneously choose their investment into differentiation. Late consumers can observe earlier consumers' decisions and extract information about the quality of the goods. This influences the firms' incentives to differentiate. If firms compete in quantities, they are more likely to invest in differentiation with consumer learning than without. This is in line with implications of the recommendation effect introduced in Conze and Kramm (2016) in a model of spatial differentiation. We also examine the case in which firms compete in prices. Here, the effect of consumer learning is reversed, so that differentiation is less likely with consumer learning. Thus, we find an information-based difference between Cournot and Bertrand competition: in the Bertrand setting consumer learning increases the competition, i.e. products are more likely to be substitutes, and it weakens it in the Cournot model.
    Keywords: principle of minimum differentiation,consumer learning,Bayesian observational learning
    JEL: L13 L15 D83
    Date: 2017
  2. By: Zvika Neemam (Tel Aviv University); Aniko Ory (Cowles Foundation, Yale University); Jungju Yu (Yale School of Management)
    Abstract: We study a model of collective reputation and use it to analyze the benefit of collective brands. Consumers form beliefs about the quality of an experience good that is produced by one firm that is part of a collective brand. Consumers’ limited ability to distinguish among firms in the collective and to monitor firms’ investment decisions creates incentives to free-ride on other firms’ investment efforts. Nevertheless, we show that collective brands induce stronger incentives to invest in quality than individual brands under two types of circumstances: if the main concern is with quality control and the baseline reputation of the collective is low, or if the main concern is with the acquisition of specialized knowledge and the baseline reputation of the collective is high. We also contrast the socially optimal information structure with the profit maximizing choice of branding if branding is endogenous. Our results can be applied to country-of-origin, agricultural appellation, and other collective brands.
    Keywords: Branding, Collective reputation, Commitment, Country of origin
    JEL: C70 D21 D40 D70 L10 L50
    Date: 2016–12
  3. By: Gideon Markman; Peter Gianiodis; Andreas Panagopoulos (Department of Economics, University of Crete, Greece)
    Abstract: Competitive dynamics research tends to study engagements by focusing on firms that share a certain level of commonality—often related to product offerings, technological domains, and, thus, competitive contexts. Following industrial-organizational (IO) economic frameworks (cf. Chen and Miller, 2012; Porter, 1980), researchers have predominantly taken a product-market view, focusing on fairly homogenous firms from the same industry (Chen, 1996). Thus, prevailing competitive dynamics research classifies firms as rivals when they proffer substitutable offerings to similar buyers in comparable markets—e.g., Coke vs. Pepsi, Ford vs. Toyota, P&G vs. Unilever, etc. (cf. Chen and Miller, 2012; Ketchen, Snow, and Hoover, 2004). Such scholarly effort has contributed greatly to our understanding of rivalry. However, if rivalrous behavior is not limited to similar firms – i.e. that compete over customers in the same or related product markets – but in fact, entails competitors from different industries, then what are the implications for competitive dynamics research and theory? We anticipate several implications because—at least under the current view of competition—it is not trivial to anticipate and explain why firms from different industries and strategic groups can still contest each other (Markman, Gianiodis, and Buchholtz, 2009; Ndofor, Sirmon, and He, 2011). Thus, continuing to rely on a restricted definition of rivalrous behavior hinders the theoretical advancement in the literature (Chen and Miller, 2012). By addressing this question, we seek to make two main contributions. First, we extend theory by clarifying why and how even very different firms—in terms of size, strategic groups, and customer base—can still act as rivals (e.g., a small, biotech startup competing with a multinational, telecommunication firm) (Markman et al., 2009). Hence, we employ a factor market rivalry perspective, which broadens the scope of competitive dynamics to explicitly include engagements between dissimilar, and thus unexpected combatants (Chen and Miller, 2015). By relaxing industry designations as a boundary condition to study competitive interactions, we can examine friction points that are often overlooked. This helps to reduce firms’ “blind spots”, which can be the source of intensifying rivalry (Zajac and Bazerman, 1991). Second, we add nuance to the factor market rivalry perspective by highlighting how two important firm-level factors – resource portfolio composition and inter-firm partnerships – affect a firm’s vulnerability to attacks and its proclivity to attack competitors in factor markets (Markman et al., 2009). This is an important distinction; by emphasizing adversarial engagements that research often overlooks, scholars can apply a more complete model of competitive dynamics (Chen and Miller, 2015). For example, while the link between resource acquisition and competitive advantage is not new (cf. Peteraf, 1993), to date competitive dynamics research has neither sufficiently theorized nor empirically tested how rivalry represents a means to secure resource positions (Carmeli and Markman, 2011). In the next section we briefly describe the factor market rivalry perspective of competitive dynamics, which includes definitions, constructs and assumptions related to factor market interactions.
    Keywords: Competitive dynamics, factor market rivalry, patent litigation, value chain
    JEL: M10 M20 L23
    Date: 2016–09–24
  4. By: Francesca Melillo; Timothy B. Folta; Frédéric Delmar
    Abstract: This paper develops and tests a model where the performance of an entrepreneur as employee explains why she/he decides to venture outside the industry of the parent firm and what are the implications of this type of entry choice on the initial size of the founded firm. Our findings (1) assist in building a more nuanced theoretical understanding of how individuals determine type of entry, and initial size; (2) have implications for how we interpret the relationship between employee performance and entrepreneurial entry process; and (3) suggest initial size as an important mechanism behind the performance advantage of spinouts.
    Date: 2017–01
  5. By: Pittman, Russell
    Abstract: The importance of economics to the analysis and enforcement of competition policy and law has increased tremendously in the developed market economies in the past forty years. In younger and developing market economies, competition law itself has a history of twenty to twenty-five years at most – sometimes much less – and economic tools that have proven useful to competition law enforcement in developed market economies in focusing investigations and in assisting decision makers in distinguishing central from secondary issues are inevitably less well understood. This paper presents a non-technical introduction to three economic tools that have become widespread in competition law enforcement in general and in the analysis of proposed mergers in particular: critical loss analysis, upward pricing pressure, and the vertical arithmetic.
    Keywords: Merger enforcement; Critical loss analysis; Upward pricing pressure; Vertical arithmetic; Horizontal mergers; Vertical mergers; Antitrust economics.
    JEL: K21 L4 L40 L41 L42
    Date: 2017–01–13
  6. By: de Meza, David; Reito, Francesco
    Abstract: The equilibrium of a competitive market in which firms must choose prices ex ante and demand is stochastic is shown to be second-best inefficient. Even under risk neutrality, equilibrium price exceeds the welfare-maximising predetermined price. Competition tends to eliminate rationing, but at the greater welfare cost of creating excess capacity. Entry incentives are also distorted. In low states, entrants obtain a share of revenue without increasing consumption, giving rise to a version of the common pool problem. In high states, firms do not appropriate the consumer surplus gained from marginal reductions in rationing. As a result of these o¤setting externalities, the number of firms may be excessive or insufficient. Inefficiency arises whether or not the rationing rule is efficient.
    Keywords: stochastic demand, rationing, waste, e¢ ciency.
    JEL: D61 D81 H23
    Date: 2016–01–10
  7. By: Luis Folque (NOVA – School of Business and Economics)
    Abstract: This work project estimates price-cost margins for 163 Portuguese markets (defined at 3-digit level of CAE), with the aim of assessing the degree of product market competition. During the Economic and Financial Assistance Program of 2011-14, a set of product market reforms was implemented, with the objective of increasing competition in output markets. We provide a first assessment of the effectiveness of these reforms. We use Portuguese firm-level data to estimate price-cost margins, allowing for worker’s bargaining power. By then aggregating markets into sectors, our results allow us to conclude that the degree of competition did increase in most sectors
    Keywords: competitiveness, Portuguese Economy, product market reform, mark-up
    JEL: L10 L60 O50
    Date: 2016–05
  8. By: Chryssoula Pentheroudakis; Justus A. Baron (Northwestern University; Pritzker School of Law; Searle Center on Law, Regulation and Economic Growth)
    Abstract: The prospect of licensing patents that are essential to standards on an industry-wide scale is a major incentive for companies to invest in standardization activities. Most standard development organizations (SDOs) have defined intellectual property rights (IPR) policies whereby SDO members must commit to licensing their standard-essential patents (SEPs) on Fair, Reasonable and Non-Discriminatory (FRAND) terms. This study aims to provide a consistent framework for both the interpretation of FRAND commitments and the definition of FRAND royalties. Our methodology is built on the analysis of landmark and significant decisions taken by courts and competition authorities in Europe and worldwide. The purpose of the comparative analysis is to provide a comprehensive overview of how FRAND licensing terms have been defined in the evolving case law, while testing the economic soundness of the concepts and methodologies applied by courts and antitrust authorities.
    Keywords: patents, innovation, standardisation, standard essential patents, FRAND licensing
    Date: 2016–12
  9. By: Hviid, Morten; Izquierdo Sanchez, Sofia; Jaques, Sabine
    Abstract: This paper explores the structure of the book publishing industry post- digitalisation. We argue that the introduction of successful e-book readers has belatedly given digitalisation the characteristics of a disruptive technology by making self-publishing a serious option for authors. This has been supported by the entry of new types of intermediaries and the strengthening of others. These changes have reduced the overall complexities for an author to get a book self-published. As a result, a larger share of the surplus from the book industry is likely going to authors, explaining the significant increase in the supply of books. The potential over-supply of books has created a new problem by making consumer search more difficult. We argue that digitalisation has shifted the potential market failure from inadequate supply of books to asymmetric information about quality. It remains to be seen whether the market will provide appropriate intermediaries to solve the associated asymmetric information problem and, if not, what appropriate interventions should be contemplated.
    Keywords: Book industry; self publishing; traditional publishing; retailers
    JEL: D22 D4 L82
    Date: 2016–12
  10. By: Jeanjean, François; Houngbonon, Georges Vivien
    Abstract: The optimal market structure in the mobile industry is an important topic in the mobile industry. In this paper, we use two theoretical frameworks and a structural estimation approach to assess the effects of market structure on consumer surplus in symmetric mobile markets. When mobile services are viewed as homogeneous products under Cournot competition, we find that consumer surplus falls with the number of operators. However, when mobile services are considered as differentiated products under Salop competition, we find an inverted-U relationship between consumer surplus and the number of mobile operators. These findings call for a case-by-case analysis of the optimal market structure in the mobile industry.
    Keywords: Market structure,Investment,Mobile Telecommunications
    JEL: D21 D22 L13 L40
    Date: 2016
  11. By: van Eijk, Nico
    Date: 2016
  12. 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.
    Keywords: Markups; Demand systems; Production Functions; Conduct
    Date: 2017–01
  13. By: Hippolyte, Rommell
    Abstract: This paper attempts to determine if beer is a separate relevant product market from rum and soft drinks. Three conventional statistical tests - Pearson’s correlation, unit root and Granger causality - are applied to average monthly retail price data from Barbados for the three categories of beverages for the period January 2012 to July 2015. The results of both the correlation and Granger causality tests suggest that beer is a distinct product market from rum and soft drinks, while the result of the unit root test was inconclusive. The results of the paper should interest practitioners of competition law in the Caribbean region as it shows that price tests could be used as quantitative proof on market boundaries to support the intuition and evidence the traditional Small but Significant Non-transitory Increase in Price (SSNIP) test provides.
    Keywords: price tests, relevant market, beverages, competition law, Barbados
    JEL: K21 L40
    Date: 2016–10–24
  14. By: L. Chauvet; L. Jacolin
    Abstract: This study focuses on the impact of financial inclusion and bank concentration on the performance of firms in developing and emerging countries. Using firm-level data for a sample of 55,596 firms in 79 countries, we find that financial inclusion, i.e. the distribution of financial services across firms, has a positive impact on firm growth. This positive impact is magnified when bank markets are less concentrated, a proxy for more competition among banks. We also find that more competitive banks favor firm growth only at high levels of financial inclusion, while bank concentration is particularly favorable to foreign and state-owned firms, and increases firm growth for low levels of financial inclusion. In countries with limited financial deepening, the quality of the banking system (financial inclusion and bank competition) may be as important to promote firm performance as its overall size.
    Keywords: Financial inclusion, Bank concentration, Firm performance
    JEL: G10 O16 O50
    Date: 2016
  15. By: Asongu, Simplice; Batuo, Enowbi; Nwachukwu, Jacinta; Tchamyou, Vanessa
    Abstract: This study assesses how information diffusion dampens the adverse effect of market power on the price and quantity of loans provided by a panel of 162 banks from 39 African countries for the period 2001-2011. The empirical evidence is based on three endogenity-robust estimation techniques, namely: (i) Two Stage Least Squares (2SLS), (ii) Generalised Method of Moments (GMM) and (iii) Instrumental Variable Quantile Regressions (QR). Three key results emerge. First, from the GMM results, a mobile phone penetration rate of 54.29, rising to 57 per 100 people are predicted to neutralise the adverse effect of market power on the average loan price and quantity respectively. Second, from the QR, mobile phone penetration rates of 56.20, 52.04 and 42.76 per 100 people is needed to nullify the negative effect of market power on loan quantity at the 0.10th, 0.25th and 0.90th quintiles respectively. Third, a considerably lower internet penetration rate of 9.49 per 100 people is required to counteract the negative impact of market power on loan quantity at the 0.90th quintile.
    Keywords: Financial access; Market power; Information asymmetry; ICT; Africa
    JEL: G20 G29 L96 O40 O55
    Date: 2016–10
  16. By: Gobillon, Laurent; Milcent, Carine
    Abstract: We evaluate the effect of a pro-competition reform gradually introduced in France over the 2004-2008 period on hospital quality measured with the mortality of heart-attack patients. Our analysis distinguishes between hospitals depending on their status: public (university or non-teaching), non-profit or for-profit. These hospitals differ in their degree of managerial and financial autonomy as well as their reimbursement systems and incentives for competition before the reform, but they are all under a DRG-based payment system after the reform. For each hospital status, we assess the benefits of local competition in terms of decrease in mortality after the reform. We estimate a duration model for mortality stratified at the hospital level to take into account hospital unobserved heterogeneity and censorship in the duration of stays in a flexible way. Estimations are conducted using an exhaustive dataset at the patient level over the 1999-2011 period. We find that non-profit hospitals, which have managerial autonomy and no incentive for competition before the reform, enjoyed larger declines in mortality in places where there is greater competition than in less competitive markets.
    Keywords: Competition; heart attack; hospital ownership; policy evaluation
    JEL: I11 I18
    Date: 2017–01

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