nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒02‒12
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Vertical Mergers in Platform Markets By Jérôme Pouyet; Thomas Trégouët
  2. Cournot oligopoly with randomly arriving producers By Pierre Bernhard; Marc Deschamps
  3. Discount Pricing By Armstrong, Mark; Chen, Yongmin
  4. Reexamining the Schmalensee effect By Kim, Jeong-Yoo
  5. Upstream Monopoly and Downstream Information Sharing By Pio Baake; Andreas Harasser
  6. Price Changes - Stickiness and Internal Coordination in Multiproduct Firms. By Letterie, Wilko; Nilsen, Øivind A.
  7. Relational Contracts and Supplier Turnover in the Global Economy By Fischer, Christian; Suedekum, Jens; Defever, Fabrice
  8. Merger Incentives Under Yardstick Competition : a Theoretical Model By TEUSCH, Jonas
  9. Price-Linked Subsidies and Health Insurance Markups By Sonia P. Jaffe; Mark Shepard
  10. The Unexpected Consequences of Asymmetric Competition. An Application to Big Pharma By Castanheira, Micael; de Frutos, Maria-Angeles; Ornaghi, Carmine; Siotis, Georges
  11. The effects of competition on medical service provision By Brosig-Koch, Jeannette; Hehenkamp, Burkhard; Kokot, Johanna
  12. Kickbacks in Medical Expert Markets By Felder, Stefan
  13. Market Power, Contracts and Outcomes: The Case of Patients with Long-Term Diseases in the Colombian Health Care System By Juan Esteban Carranza; Álvaro J. Riascos; Natalia Serna
  14. The Economics of Zero-Rating and Net Neutrality By SOMOGYI, Robert
  15. On the effect of Cournot and Stackelberg competition in the banking sector on the investment cycle By Eleni Dalla
  16. The effect of price on electricity contract choice By Vesterberg, Mattias
  17. Tender Frequency and Market Concentration in Balancing Power Markets By Knaut, Andreas; Obermüller, Frank; Weiser, Florian
  18. Measuring the Intensity of Competition among Rice Exporters to Saudi Arabia By Alamri, Yosef; Saghaian, Sayed
  19. Spatial Pricing in Ride-Sharing Networks By Bimpikis, Kostas; Candogan, Ozan; Saban, Daniela

  1. By: Jérôme Pouyet (PSE - Paris-Jourdan Sciences Economiques - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC), PSE - Paris School of Economics); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - Université de Cergy Pontoise - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We analyze the competitive impact of vertical integration between a platform and a manufacturer when platforms provide operating systems for devices sold by manufacturers to customers, and, customers care about the applications developed for the operating systems. Two-sided network effects between customers and developers create strategic substitutability between manufacturers' prices. When it brings efficiency gains, vertical integration increases consumer surplus, is not profitable when network effects are strong, and, benefits the non-integrated manufacturer. When developers bear a cost to make their applications available on a platform, manufacturers boost the participation of developers by affiliating with the same platform. This creates some market power for the integrated firm and vertical integration then harms consumers, is always profitable, and, leads to foreclosure. Introducing developer fees highlights that not only the level, but also the structure of indirect network effects matter for the competitive analysis.
    Keywords: Vertical integration,two-sided markets,network effects
    Date: 2016–12
  2. By: Pierre Bernhard (BIOCORE - Biological control of artificial ecosystems - LOV - Laboratoire d'océanographie de Villefranche - UPMC - Université Pierre et Marie Curie - Paris 6 - INSU - CNRS - Centre National de la Recherche Scientifique - CRISAM - Inria Sophia Antipolis - Méditerranée - Inria - Institut National de Recherche en Informatique et en Automatique - INRA - Institut National de la Recherche Agronomique); Marc Deschamps (CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté, UBFC - Université Bourgogne Franche-Comté)
    Abstract: Cournot model of oligopoly appears as a central model of strategic interaction between competing firms both from a theoretical and applied perspective (e.g antitrust). As such it is an essential tool in the economics toolbox and always a stimulus. Although there is a huge and deep literature on it and as far as we know, we think that there is a ”mouse hole” wich has not already been studied: Cournot oligopoly with randomly arriving producers. In a companion paper [Bernhard and Deschamps, 2016b] we have proposed a rather general model of a discrete dynamic decision process where producers arrive as a Bernoulli random process and we have given some examples relating to oligopoly theory (Cournot, Stackelberg, cartel). In this paper we study Cournot oligopoly with random entry in discrete (Bernoulli) and continuous (Poisson) time, whether time horizon is finite or infinite. Moreover we consider here constant and variable probability of entry or density of arrivals. In this framework, we are able to provide algorithmes answering four classical questions: 1/ what is the expected profit for a firm inside the Cournot oligopoly at the beginning of the game?, 2/ How do individual quantities evolve?, 3/ How do market quantities evolve?, and 4/ How does market price evolve?
    Keywords: Cournot market structure,Bernoulli process of entry,Poisson density of arrivals,Dynamic Programming
    Date: 2016–11–01
  3. By: Armstrong, Mark; Chen, Yongmin
    Abstract: We investigate the marketing practice of framing a price as a discount from an earlier price. We discuss two reasons why a discounted price---rather than a merely low price---can make a rational consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, a seller with limited stock runs a clearance sale, later consumers infer that an unsold product may be poor quality, but if the initial price was higher they do not downgrade their evaluation of quality as much. In either case, if able to do so a seller has an incentive to engage in fictitious pricing, where the reported initial price is exaggerated.
    Keywords: Reference dependence, sales tactics, false advertising, fictitious pricing, consumer protection
    JEL: D42 D83 L15 M31 M37
    Date: 2017–01
  4. By: Kim, Jeong-Yoo
    Abstract: The author reexamines the Schmalensee effect from a dynamic perspective. Schmalsensee's argument suggesting that high quality can be signaled by high prices is based on the assumption that higher quality necessarily incurs higher production cost. In this paper, the author argues that firms producing high-quality products have a stronger incentive to lower the marginal cost of production cost because they can then sell larger quantities than low-quality firms can. If this dynamic effect is large enough, then the Schmalensee effect degenerates and, thus, low prices signal high quality. This result is different from the Nelson effect relying on the assumption that only the high-quality product can generate repeat purchase, because the result is valid even if low-quality products can also be purchased repeatedly. The author characterizes a separating equilibrium in which a high-quality monopolist invests more to reduce cost and, as a result, charges a lower price. Separation is possible due to a difference in quantities sold in the second period across qualities.
    Keywords: experience good,quality,signal,Schmalensee effect
    JEL: D82 L15
    Date: 2017
  5. By: Pio Baake; Andreas Harasser
    Abstract: We analyze a vertical structure with an upstream monopoly and two downstream retailers. Demand is uncertain but each retailer receives an informative private signal about the state of the demand. We construct an incentive compatible and ex ante balanced mechanism which induces the retailers to share their information truthfully. Information sharing can be profitable for the retailers but is likely to be detrimental for social welfare.
    Keywords: information sharing, upstream monopoly, vertical relations
    JEL: D82 L13 L14
    Date: 2017
  6. By: Letterie, Wilko (Maastricht University); Nilsen, Øivind A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: We assess empirically the micro-foundations of producers’ sticky pricing behaviour. We account for various functional forms of menu costs. The focus is on the analysis of multiproduct plants, and the menu costs therefore also allow for economies of scope. The structural model developed is tested using monthly product- and plant-specific producer prices for Norwegian plants. We find evidence of linear and fixed menu costs that account for inaction of price adjustment. Convex menu costs are statistically significant but of moderate importance. Finally, our estimates suggest economies of scope in adjusting prices resulting in (incomplete) synchronization of price changes.
    Keywords: Price Setting; Micro Data; Multiproduct Firms
    JEL: E30 E31
    Date: 2016–12–23
  7. By: Fischer, Christian; Suedekum, Jens; Defever, Fabrice
    Abstract: Headquarters and their specialized component suppliers have a vital interest in establishing long-term collaborations. When formal contracts are not enforceable, such efficiency-enhancing cooperations can be established via informal agreements, but relational contracts have been largely ignored in the literature on the international organization of value chains. In this paper, we develop a dynamic property rights model of global sourcing. A domestic headquarter collaborates with a foreign input supplier and makes two decisions in every period: i) whether to engage in a costly search for a better partner, and ii) whether to make a non-binding offer to overcome hold-up problems. Our key result is that the possibility to switch partners crucially affects the contractual nature of buyer-supplier relationships. In particular, some patient firms do not immediately establish a relational contract, but only when they decide to stop searching and thus launch a long-term collaboration with their supplier. From our model, we develop an instrumental variable estimation strategy that we apply using transaction-level data of fresh Chinese exporters to the US. We obtain empirical evidence in line with the theoretical prediction of a positive causal effect of match durations on relational contracting.
    JEL: F23 D23 L23
    Date: 2016
  8. By: TEUSCH, Jonas (Université de Liège; KUL)
    Abstract: Are the incentives for firms to merge horizontally under yardstick regulation actually aligned with social and consumer welfare? Natural monopoly operators regulated by yardstick competition, such as electric- ity network operators and water distribution utilities, have merged re- peatedly in recent years. In the context of regulated network industries, yardstick competition implies that firms compete on costs, given that their revenue allowance is based on cost observations from similar firms (peers). Whereas regulators have raised concerns about horizontal merg- ers under yardstick competition, traditional economic theory suggests that this restructuring should not lead to (unilateral) anticompetitive e ects. In our theoretical model, by contrast, firm incentives for horizontal merg- ers involving peers are only aligned with social and consumer welfare if efficiency gains are sufficiently large. We go on to show how regulators can better align firm incentives with welfare considerations and limit the need for costly merger control by adapting the yardstick regime to the domestic industry structure.
    Keywords: Yardstick Competition, Merger Analysis, Utility Regulation
    JEL: L51 L40 L11
    Date: 2016–10–14
  9. By: Sonia P. Jaffe; Mark Shepard
    Abstract: Subsidies in many health insurance programs depend on prices set by competing insurers – as prices rise, so do subsidies. We study the economics of these “price-linked” subsidies compared to “fixed” subsidies set independently of market prices. We show that price-linked subsidies weaken price competition, leading to higher markups and subsidy costs for the government. We argue that price-linked subsidies make sense only if (1) there is uncertainty about costs/prices, and (2) optimal subsidies increase as prices rise. We propose two reasons why optimal health insurance subsidies may rise with prices: doing so both insures consumers against cost risk and indirectly links subsidies to market-wide shocks affecting the cost of “charity care” used by the uninsured. We evaluate these tradeoffs empirically using a structural model estimated with data from Massachusetts’ health insurance exchange. Relative to fixed subsidies, price-linking increase prices by up to 5%, and by 5-10% when we simulate markets with fewer insurers. For levels of cost uncertainty that are reasonable in a mature market, we find that the losses from higher prices outweigh the benefits of price-linking.
    JEL: I11 I13 L11
    Date: 2017–01
  10. By: Castanheira, Micael; de Frutos, Maria-Angeles; Ornaghi, Carmine; Siotis, Georges
    Abstract: This paper shows that a pro-competitive shock leading to a steep price drop in one market segment may benefit substitute products. Consumers move away from the cheaper product and demand for the substitutes increases, possibly leading to a drop in consumer surplus. The channel leading to this outcome is non-price competition: the competitive shock on thefirst set of products decreases the firms' ability to invest in promotion, which cripples their ability to lure consumers. To assess the empirical relevance of these findings, we study the effects of generic entry into the pharmaceutical industry by exploiting a large product-level dataset for the US covering the period 1994Q1 to 2003Q4. We find strong empirical support for the model's theoretical predictions. Our estimates rationalize a surprising finding, namely that a molecule that loses patent protection (the originator drug plus its generic competitors) typically experiences a drop in the quantity market share-despite being sold at a fraction of the original price.
    Keywords: Asymmetric competition; Generic entry; Pharmaceutical industry
    JEL: D22 I11 L13
    Date: 2017–01
  11. By: Brosig-Koch, Jeannette; Hehenkamp, Burkhard; Kokot, Johanna
    Abstract: We explore how competition between physicians affects medical service provision. Previous research has shown that, in the absence of competition, physicians deviate from patient-optimal treatment under payment systems like capitation and fee-for-service. While competition might potentially eliminate or reduce these distortions, physicians usually interact with each other repeatedly over time. This leaves scope for collusive behavior. Moreover, only a fraction of patients switches providers at all. Both patterns might prevent competition to work in the desired direction. To analyze the behavioral effects of competition, we develop a theoretical benchmark which is then tested in a controlled laboratory experiment. Experimental conditions vary regarding physician payment (fee-for-service vs. capitation) and the severity of patients’ illness (low vs. high). In our setting, two physicians repeatedly treat patients from a homogeneous patient population. While half of the patients always attend the physician providing the highest patient benefit, the other ones always visit the same physician. Treatment decisions made in the experiment affect real patients’ health. Our results reveal that, in line with the theoretical prediction, introducing competition can reduce overprovision and underprovision, respectively. The observed effects depend on patient characteristics, though. Compared to related experimental research on price competition, collusive behavior is less frequently observed in our setting of medical service provision.
    JEL: I10 C91 C72
    Date: 2016
  12. By: Felder, Stefan
    Abstract: This paper examines patient and overall welfare effects of kickbacks paid by a monopolistic hos-pital to competitive physicians in return for patient referrals. This practice is regarded as unethical and illegal in most cases. On the other hand, kickbacks can also enhance the distribution of labor in the production of medical services. In the context of medical services modelled as credence goods where patients need one of two possible treatments (minor or major), it is shown that pa-tient welfare is always lower with kickbacks than without. When the use of kickbacks is allowed, an equilibrium with overcharging (the patient requires the minor treatment but is charged for the expensive one) and one with overtreatment (the patient receives but does not require the major treatment) are possible. The latter results if patients can verify the treatment but not the diagno-sis, the former arises when no verifiability applies. Overall welfare is lowest in the equilibrium with overtreatment. Overcharging does not necessarily reduce overall welfare, as it depends on the degree of altruism among referring physicians. If they are solely extrinsically motivated, al-lowing kickbacks increases overall welfare. If physicians behave altruistically, a tradeoff arises between resource savings and guilt disutility from referrals. Additional equilibria emerge if the hospital can differentiate prices and post its own price for inexpensive treatments. Kickbacks continue to be predicted if physicians are not overly altruistic and no or only partial verifiability applies. In these cases, a prohibition of kickbacks improves the allocation. Kickbacks disappear, however, if treatment and diagnosis are verifiable, or if the hospital market is competitive.
    JEL: I11 I18 D80
    Date: 2016
  13. By: Juan Esteban Carranza; Álvaro J. Riascos; Natalia Serna
    Abstract: The Colombian health system has two main types of agents: the insurers and the service providers, which interact with each other through bilateral contracts. The types of contracts that these agents can write is restricted to a limited menu established by the regulator. The two most prevalent types of contract in the data are, by far, capitation contracts and fee-for-service contracts, which distribute risk and incentives differentially across both parties. We use a detailed data set of services and payments of all insurers and service providers at the individual user level to study the determinants of contract choice and their effect on health outcomes of a large sample of patients with chronic diseases. We focus on patients who are identical at the type of diagnosis, except for the contract type under which they are served, and show that capitation contracts are strongly correlated with lower rates of return to emergency care and lower rates of reincidence, compared with fee-for-service contracts. Both types of contracts lead to statistically different treatment paths. These results are consistent with contract theory and the economics of asymmetric information. Moreover, we show that the contract type depends on the market power of insurers and providers as predicted by a bargaining model. More generally, the results highlight the relevance of vertical contracts for the performance of health systems.
    Keywords: Vertical contracts, health insurance, asymmetric information
    JEL: D86 I11 L14
    Date: 2017–01–30
  14. By: SOMOGYI, Robert (Université catholique de Louvain, CORE, Belgium)
    Abstract: This paper studies zero-rating, an emerging business practice consisting in a mobile internet service provider (ISP) excluding the data generated by certain content providers (CPs) from its consumers' monthly data cap. Being at odds with the principle of net neutrality, these arrangements have recently attracted regulatory scrutiny all over the word. I analyze zero-rating incentives of a monopolistic ISP facing a capacity constraint in a two-sided market where consumption provides utility for homogeneous consumers as well as advertising revenue for CPs. Focusing on a market with two CPs competing with each other and all other content which is never zero-rated, I identify parameter regions in which zero, one or two CPs are zero-rated. Surprisingly, the ISP may zero rate content when content is either very unattractive or very attractive for consumers, but not in the intermediary region. I show that zero-rating harms consumers if content is unattractive, whereas it improves social welfare in the case of attractive content.
    Keywords: Zero-rating; Sponsored Data; Net Neutrality; Data Cap; Capacity Constraint
    JEL: D21 L12 L51 L96
    Date: 2016–12–31
  15. By: Eleni Dalla (Department of Economics, University of Macedonia)
    Abstract: Following the industrial organization approach to banking, we investigate the effects of banking conduct on the investment cycle. To achieve this, we extend the second order accelerator (SOA) model in discrete time, introducing the interest rate on loans. To the extent that the banking sector is concerned, we consider two different types of banking conduct: a Cournot game where the banks make their decision on the quantities of loans and deposits simultaneously, and a Stackelberg game in which they decide over these amounts sequentially. In addition, we follow a simulation process to confirm the dynamic properties of our theoretical findings and examine the effects of monetary policy on capital over time..
    Keywords: Cournot game, Stackelberg game, investment cycle, second order accelerator, monetary policy.
    JEL: G21 L13 D92 E32 E52
    Date: 2017–12
  16. By: Vesterberg, Mattias (Department of Economics, Umeå University)
    Abstract: I explore how households switch between fixed-price and variable-price electricity contracts in response to variations in price and temperature, conditional on previous contract choice. Using panel data with roughly 54000 Swedish households, a dynamic probit model is estimated. The results suggest that the choice of contract exhibits substantial state dependence, with an estimated marginal effect of previous contract choice of 0:96, and that the short-run effects of variation in prices and temperature on the choice of electricity contract are small. Further, the state dependence and price responsiveness are similar across housing types, income levels and other dimensions. A plausible explanation of these results is that transaction costs are perceived to be larger than the relatively small cost savings from switching between contracts.
    Keywords: Electricity demand; electricity contract choice; demand flexibility
    JEL: D10 D12 Q41 Q48
    Date: 2017–01–22
  17. By: Knaut, Andreas (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Obermüller, Frank (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)); Weiser, Florian (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))
    Abstract: Balancing power markets ensure the short-term balance of supply and demand in electricity markets and their importance may increase with a higher share of fluctuating renewable electricity production. While it is clear that shorter tender frequencies, e.g. daily or hourly, are able to increase the efficiency compared to a weekly procurement, it remains unclear in which respect market concentration will be affected. Against this background, we develop a numerical electricity market model to quantify the possible effects of shorter tender frequencies on costs and market concentration. We find that shorter time spans of procurement are able to lower the costs by up to 15%. While market concentration decreases in many markets, we – surprisingly – identify cases in which shorter time spans lead to higher concentration.
    Keywords: Balancing Power; Market Design; Market Concentration; Tender Frequency; Provision Duration; Mixed Integer Programming
    JEL: D47 L94
    Date: 2017–01–31
  18. By: Alamri, Yosef; Saghaian, Sayed
    Abstract: The objective of this research is to estimate the residual demand elasticity that rice exporters face in Saudi Arabia. We conducted an empirical exercise to assess the intensity of competition in Saudi Arabian rice import market during the 1993-2014 period. A model using the inverse residual demand method was specified and estimated. Estimation results show that Australia, India and Pakistan, acting as exporters, exercise market power and maintain marketing margins throughout the study period.
    Keywords: Inverse demand, Residual demand, Saudi Arabia, Imperfect competition, Rice, Agribusiness,
    Date: 2016
  19. By: Bimpikis, Kostas (Stanford University); Candogan, Ozan (Chicago University); Saban, Daniela (Stanford University)
    Abstract: We explore spatial price discrimination in the context of a ride-sharing platform that serves a network of locations. Riders at different locations are heterogeneous in terms of their destination preferences, as captured by the demand pattern of the underlying network. Drivers decide whether, when, and where to provide service so as to maximize their expected earnings given the platform's pricing policy. Our findings highlight the impact of the demand pattern of the underlying network on the platform's optimal profits and aggregate consumer surplus. In particular, we establish that both profits and consumer surplus are maximized when the demand pattern is "balanced" across the network's locations. In addition, we show that profits and consumer surplus are monotonic with the balancedness of the demand pattern (as formalized by the pattern's structural properties). Furthermore, we explore the widely adopted compensation scheme that allocates a constant fraction of the fare to drivers and identify a class of networks for which it can implement the optimal equilibrium outcome. However, we also showcase that generally this scheme leads to significantly lower profits for the platform than the optimal pricing policy especially in the presence of heterogeneity among the demand patterns in different locations. Together, these results illustrate the value of accounting for the demand pattern across a network's locations when designing the platform's pricing policy, and complement the existing focus on the benefits of dynamic (surge) pricing to deal with demand fluctuations over time.
    Date: 2016–11

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