nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒02‒26
thirteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Endogenous Appropriability By Joshua S. Gans; Scott Stern
  2. Competing for Market Shares: Why the Order of Moves Matters Even When It Shouldn't By Stracke, Rudi; Hörtnagl, Tanja; Kerschbamer, Rudolf
  3. Competitive pricing and quality disclosure to cursed consumers By Schwardmann, Peter; Ispano, Alessandro
  4. An Empirical Analysis of Mergers: Efficiency Gains and Impact on Consumer Prices By Bonnet, Céline; Schain, Jan Philip
  5. Spatial Price Discrimination and Privatization on Vertically Related Markets By Eleftheriou, Konstantinos; Michelacakis, Nickolas
  6. Capacity precommitment and price transparency platforms. Theoretical benchmark and experimental evidence By Stadler, Manfred; Güth, Werner; Zaby, Alexandra
  7. Multi-Product Firms and Product Quality By Kalina Manova; Zhihong Yu
  8. International trade and domestic competition: Evidence from Belgium By Bramati, Maria Caterina; Gaggero, Alberto A.; Solomon, Edna
  9. Optimal Incentives for Patent Challenges in the Pharmaceutical Industry By Böhme, Enrico; Frank, Severin; Kerber, Wolfgang
  10. Markup and Product Differentiation in the German Brewing Sector. By Giannis Karagiannis; Magnus Kellermann; Simon Pröll; Klaus Salhofer
  11. Consumer Rating Dynamics By Stenzel, André; Wolf, Christoph
  12. Inside asset purchase programs: the effects of unconventional policy on banking competition By Koetter, Michael; Podlich, Natalia; Wedow, Michael
  13. One Lab, Two Firms, Many Possibilities: on R&D outsourcing in the biopharmaceutical industry By Billette de Villemeur, Etienne; Versaevel, Bruno

  1. By: Joshua S. Gans; Scott Stern
    Abstract: The appropriability of innovation depends not only on the instruments available to an innovator to protect private returns, but how those instruments interact with each other as part of the firm’s entrepreneurial strategy. We consider the interplay between two appropriability mechanisms available to start-up innovators: control, whereby the innovator earns rents from their establishment of formal intellectual property rights, versus execution, whereby innovators earn returns through a first-mover advantage that yields dynamic benefits allowing the firm to “get ahead, stay ahead.” While most prior work has taken these instruments to be independent, we establish that these two alternative appropriability instruments are substitutes on the margin. For example, if the learning advantage from execution is sufficiently high, an entrepreneur might choose not to invest in a patent, even if intellectual property protection is costless. Moreover, the endogenous choice between control and execution is interdependent with other strategic choices of start-up innovators, such as the choice to pursue a narrow or broad customer segment, or whether to commercialize a “minimal viable product” version of their innovation versus delay commercialization until a product is available with a higher level of technical functionality and reliability.
    JEL: O31 O34
    Date: 2017–02
  2. By: Stracke, Rudi; Hörtnagl, Tanja; Kerschbamer, Rudolf
    Abstract: This paper analyzes a contest for market shares where two homogeneous firms compete by investing either simultaneously or sequentially. Standard theory predicts that equilibrium investments and payoffs are independent of the order of moves. To test this prediction, we implement two treatments in the lab, one where firms chose investments simultaneously, and one where they invest sequentially. Our results suggest that it is an inherent advantage to move second rather than first even in the absence of strategic concerns. This is so because first movers face strategic uncertainty, while second movers have the power to ultimately determine relative payoffs through their investment choices. This power is particularly valuable in our experiments, since many first movers try to establish a collusive outcome and second movers not only care about own monetary earnings, but also about relative standing vis-\`a-vis the first mover.
    JEL: D47 L13 L22
    Date: 2016
  3. By: Schwardmann, Peter; Ispano, Alessandro
    Abstract: We study the disclosure decision and price-setting behavior of competing firms in the presence of cursed consumers, who fail to be sufficiently skeptical about a firm's quality upon observing non-disclosure of quality-relevant information. We show that neither competition nor the presence of sophisticated consumers necessarily offer protection to cursed consumers. Exploitation arises if markets are vertically differentiated, if there are many sophisticated consumers, and if it is more likely ex ante that product quality is high. Information campaigns that seek to educate consumers may encourage exploitation and decrease social welfare. Mandatory disclosure laws restore efficiency, but at the cost of redistributing rents from consumers to firms. Our simple model delivers a rich set of positive results, captures important markets, like those for food and consumer finance, and speaks to several recent policy initiatives aimed at consumer protection.
    JEL: D40 D03 D83
    Date: 2016
  4. By: Bonnet, Céline; Schain, Jan Philip
    Abstract: In this article, we extend the literature on merger simulation models by incorporating its potential synergy gains into structural econometric analysis. We present a three-step integrated approach. We estimate a structural demand and supply model, as in Bonnet and Dubois (2010). This model allows us to recover the marginal cost of each differentiated product. Then we estimate potential efficiency gains using the Data Envelopment Analysis approach of Bogetoft and Wang (2005), and some assumptions about exogenous cost shifters. In the last step, we simulate the new price equilibrium post merger taking into account synergy gains, and derive price and welfare effects. We use a homescan dataset of dairy dessert purchases in France, and show that for two of the three mergers considered, synergy gains could offset the upward pressure on prices post. Some mergers could then be considered as not harmful for consumers.
    Date: 2017–02
  5. By: Eleftheriou, Konstantinos; Michelacakis, Nickolas
    Abstract: We consider a vertically structured market with two retail firms of mixed ownership competing against each other exercising spatial price discrimination. We examine the strategic behavior of downstream rivals as well as the effect of privatization on the intensity of competition and welfare in two cases; when location decisions are taken sequentially and when location decisions are taken simultaneously. We show that production cost differentials are crucial in determining the Nash equilibrium locations (hence market shares) and the impact of the degree of privatization on the level of downstream competition. Privatization leads to stiffer competition when the mixed ownership firm has the cost advantage. However, it can be welfare enhancing only when decisions are taken sequentially with the follower being the semi-public firm having a moderate production cost advantage over the market leader. The results of our model generalize to capture the case of vertical mergers.
    Keywords: mergers; mixed oligopoly; privatization; spatial competition
    JEL: L13 L33 L42 R32
    Date: 2017–02–19
  6. By: Stadler, Manfred; Güth, Werner; Zaby, Alexandra
    Abstract: Price transparency in the sense of ‘more information for customers’ is known to increase efficiency. However, the introduction of price transparency platforms does not only providemore information for customers but also for rival firms—who may (mis)use the legal information channel to collude. We experimentally investigate transparency platforms in the context of a capacity-then-price setting game. Price transparency is implemented by allowing firms to send non-binding price messages after capacity but before price choices. As such messages are cheap talk they do not affect the subgame perfect equilibrium of the game. In our experiment, however, we find collusive price choices when price messages are possible, especially when they are truthful. While we find strong support for the theoretically predicted negative relation between capacities and prices, participants frequently install excessive capacities, which, in turn, induce collusive pricing behavior.
    JEL: C72 C91 L41
    Date: 2016
  7. By: Kalina Manova; Zhihong Yu
    Abstract: We examine the global operations of multi-product firms. We present a flexible heterogeneous-firm trade model with either limited or strong scope for quality differentiation. Using customs data for China during 2002-2006, we empirically establish that firms allocate activity across products in line with a product hierarchy based on quality. Firms vary output quality across their products by using inputs of different quality levels. Their core competence is in varieties of superior quality that command higher prices but nevertheless generate higher sales. In markets where they offer fewer products, firms concentrate on their core varieties by dropping low-quality peripheral goods on the extensive margin and by shifting sales towards top-quality products on the intensive margin. The product quality ladder also governs firms' export dynamics, both in general and in response to the exogenous removal of MFA quotas on textiles and apparel. Our results inform the drivers and measurement of firm performance, the effects of trade reforms, and the design of development policies.
    Keywords: trade, trade reforms, multi-product firms, product quality, export prices
    JEL: D22 F10 F12 F14 L10 L11 L15
    Date: 2017–02
  8. By: Bramati, Maria Caterina; Gaggero, Alberto A.; Solomon, Edna
    Abstract: We investigate the effect of domestic market competition on firm-level export intensity. We employ a comprehensive dataset of Belgian firms from 2005–2008, when the fall in the number of firms engaged in trade was accompanied by a growing amount of transactions. The resulting increase in the domestic concentration of Belgian firms has sparked numerous debates, since the direction of causality between domestic market structure and export performance is unclear. We apply the fractional logit estimator and control for both self-selection and simultaneity bias. We find that a positive linkage exists between the level of competition and export intensity.
    Keywords: Competition; Domestic rivalry; Exports; National champion
    Date: 2015–06
  9. By: Böhme, Enrico; Frank, Severin; Kerber, Wolfgang
    Abstract: 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 being therefore potentially anticompetitive. In this paper we present a model that analyzes the tradeoff between limiting the delaying of generic entry through patent settlements and giving generic firms more incentives for challenging weak patents of the originator firms. We can show that under general assumptions allowing patent settlements with a later market entry of generics than the expected market entry under patent litigation would increase consumer welfare. 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 market entries of the first and second generic.
    JEL: L10 L40 O34
    Date: 2016
  10. By: Giannis Karagiannis (University of Macedonia, Department of Economics); Magnus Kellermann (The Bavarian State Research Center for Agriculture); Simon Pröll (University of Natural Resources and Life Sciences Vienna, Institute of Sustainable Economic Development); Klaus Salhofer (University of Natural Resources and Life Sciences Vienna, Institute of Sustainable Economic Development)
    Abstract: In this paper we provide a method to separate the markup from product differentiation from other sources of market power, i.e. collusive behavior or market intransparency, based on the estimation of a single reduced form equation. We apply this method to a sample of 118 German breweries, since beer is a differentiated product and at the same time the sector has repeatedly been subject to collusive behavior. Our empirical results show that the “general” markup goes beyond the markup from product differentiation, but the latter accounts for most of the deviation of prices from marginal costs. Moreover, typically for a market with monopolistic competition, we observe average costs above marginal costs and, hence, a high markup does not necessarily translate into a high a profit margin.
    Keywords: markup, product differentiation, monopolistic competition, Germany, brewing
    JEL: L13 L66
    Date: 2017–02
  11. By: Stenzel, André; Wolf, Christoph
    Abstract: We consider dynamic price-setting by firms in the presence of rating systems and asymmetric information about product quality. The current price determines the set of purchasing consumers and thereby affects future ratings and continuation profits. We outline the effects of prices on consumers' beliefs about quality as well as their review upon purchase. We provide a characterization of the firm's pricing decision in the presence of naive consumers who infer quality based on the observed aggregate rating, which reflects past consumers' gross utility, and price. We show that the firm charges a mark-up compared to the myopically optimal price: It restricts purchase to those consumers with a high degree of horizontal taste for the product which boosts reviews and hence future ratings and profits. Moreover, we show that if the firm takes the price's effect on reviews into account, the rating will not perfectly reveal the product's quality. If consumers hold a correct belief in the current period, future consumers will overestimate the product's quality.
    JEL: L00 D21 D83
    Date: 2016
  12. By: Koetter, Michael; Podlich, Natalia; Wedow, Michael
    Abstract: We test if unconventional monetary policy instruments influence the competitive conduct of banks. Between q2:2010 and q1:2012, the ECB absorbed €218 billion worth of government securities from five EMU countries under the Securities Markets Programme (SMP). Using detailed security holdings data at the bank level, we show that banks exposed to this unexpected (loose) policy shock mildly gained local loan and deposit market shares. Shifts in market shares are driven by banks that increased SMP security holdings during the lifetime of the program and that hold the largest relative SMP portfolio shares. Holding other securities from periphery countries that were not part of the SMP amplifies the positive market share responses. Monopolistic rents approximated by Lerner indices are lower for SMP banks, suggesting a role of the SMP to re-distribute market power differentially, but not necessarily banking profits. JEL Classification: C30, C78, G21, G28, L51
    Keywords: competition, security markets program, unconventional monetary policy
    Date: 2017–02
  13. By: Billette de Villemeur, Etienne; Versaevel, Bruno
    Abstract: We draw from documented characteristics of the biopharmaceutical industry to construct a model where two firms can choose to outsource R&D to an external unit, and/or engage in internal R&D, before competing in a final market. We investigate the tension between outsourced and internal operations, the distribution of profits among market participants, and the incentives to coordinate outsourcing activities, or to integrate R&D and production. Consistent with the empirical evidence, we find that: (1) each firm’s internal R&D activity is monotonic in the technology received from the external unit, and the sign of the relationship does not depend on the technology received or generated by the competitor; (2) a measure of direct and indirect technological externalities drives the distribution of industry profits, with lower returns to an external unit involved in research (drug discovery) than in development (clinical trials); (3) upstream entry is stimulated by the long-term perspective for the external unit’s owners to earn a larger share of industry profits by selling out assets to a client firm than by running operations. However, in the case of early-stage research, the delinkage of investment incentives from industry value, and the vulnerability of investors’ returns to negative shocks, both suggest the abandonment of projects with economic and medical value as a likely consequence of R&D outsourcing.
    Keywords: research; development; biotechnology; pharmaceuticals; externalities
    JEL: C72 L13 O31
    Date: 2017–01

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