nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒03‒05
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Integration versus Outsourcing with Vertical Linkages By Gaetano Alfredo Minerva
  2. How Effective Are Advertising Bans? On the Demand for Quality in Two-Sided Media Markets By Sahm, Marco; Greiner, Tanja
  3. Action revision, information and collusion in an experimental duopoly market By Roy, Nilanjan
  4. Market Regulation of Voluntary Add-on Contracts By Michel, Christian
  5. Competition, Patent Protection, and Innovation in an Endogenous Market Structure By Suzuki, Keishun
  6. Knowledge Spillovers and their Impact on Innovation Success - A New Approach Using Patent Backward Citations By Spyros Arvanitis; Florian Seliger; Martin Wörter
  7. Testing the Boundaries of the Double Auction By Erik O. Kimbrough; Andrew Smyth
  8. M&A negotiations with limited information: how do opaque firms buy and get bought? By Pierpaolo Battigalli; Carlo Chiarella; Stefano Gatti; Tommaso Orlando
  9. Microeconomic Simulator of Firm Behavior under Monopolistic Competition By Angelov, Aleks; Vasilev, Aleksandar
  10. Hunting Unicorns? Experimental Evidence on Predatory Pricing By Schmutzler, Armin; Edlin, Aaron; Roux, Catherine; Thoeni, Christian
  11. Exclusionary Practices in Two-Sided Markets: The Effect of Radius Clauses on Competition between Shopping Centers By Götz, Georg; Brühn, Tim
  12. Competing with Big Data By Prüfer, Jens; Schottmuller, C.
  13. Business models in commercial media markets: Bargaining, advertising, and mixing By Thöne, Miriam; Rasch, Alexander; Wenzel, Tobias
  14. Apple, Amazon, Google, Facebook, Microsoft: Market concentration - competition - innovation strategies By Dolata, Ulrich
  15. Maintaining Competition in Recurrent Procurement Contracts: A case study on the London Bus Market By Elisabetta Iossa; Michael Waterson
  16. Corruption, Market Quality and Entry Deterrence in Emerging Economies By Krishnendu Ghosh DASTIDAR; YANO Makoto
  17. Air transport in Africa: A portrait of capacity and competition in various market segments By Heinrich C. Bofinger
  18. Antitrust, Patents, and Cumulative Innovation: Evidence from Bell Labs By Nagler, Markus; Watzinger, Martin; Fackler, Thomas; Schnitzer, Monika

  1. By: Gaetano Alfredo Minerva (University of Bologna and Centro Studi Luca d’Agliano)
    Abstract: In the model by Grossman and Helpman (2002) no industry has both vertically integrated and specialized producers in equilibrium. I generalize their model by assuming that final goods producers (irrespective of whether they are vertically integrated with the upstream stage or specialized in the downstream stage only) need a basket of differentiated commodities, in addition to labor, as a fixed requirement for production. I then show the existence of an equilibrium populated simultaneously by vertically integrated and disintegrated firms.
    Keywords: Vertical integration; Outsourcing; Vertical linkages; Industry equilibrium; Contractual
    JEL: D23 D43 L24
    Date: 2017–02–21
  2. By: Sahm, Marco; Greiner, Tanja
    Abstract: We study a two-sided markets model of two competing television broadcasters that offer content of differentiated quality to ad-averse consumers and advertising space to firms. As all consumers prefer high over low quality content, competition for viewers is vertical. By contrast, competition for advertisers is horizontal, taking into account the firms' targeted advertising motive. Analyzing the impact of both, the strength of mutual externalities and advertisement regulation policies, we find the following results: First, broadcasters' profits increase and welfare decreases in the viewers' nuisance costs of advertising. Second, welfare may decrease in the effectiveness of informative advertisement, too. Third, an advertising ban on the high quality medium reduces its viewer market share and thereby the equilibrium reception of high quality content.
    JEL: L13 L82 L51
    Date: 2016
  3. By: Roy, Nilanjan
    Abstract: We report on an experiment designed to study a dynamic model of quantity competition where firms continuously revise their production targets prior to the play of the "one-shot" game. We investigate how the observability of rival firm's plans and the technology for implementation of revised actions affect market competitiveness. Under a real-time revision game where payoffs are determined only by the quantities prepared at the end, play converges to the Cournot-Nash output when rival's plans are unobservable. If plans cannot be hidden from competitors, choices are even more competitive than the static Nash equilibrium, thereby showing a negative value of information with lower profits. With stochastic revision, where opportunities to revise arrive according to a Poisson process and the quantities selected at the last opportunity are implemented, collusion is much frequent. This shows, more generally, that cooperation can be observed even when individuals interact only once.
    Keywords: Cournot duopoly, real-time revision, stochastic revision, experiment, information, imitation, best response
    JEL: C72 C92 D22 D43 D83 L13
    Date: 2017–02–23
  4. By: Michel, Christian
    Abstract: This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products at the point of sale. We develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown. Some consumers do not pay attention to extended warranties before making a base product choice, but they overestimate the value of such warranties at the point of sale. Under retail competition, if the resulting extended warranty profits are sufficiently high, a no-arbitrage condition prevents the full profits from being redistributed to consumers via a lower base product price. Inducing competition in the extended warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results of the paper are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators.
    JEL: D18 D21 L13
    Date: 2016
  5. By: Suzuki, Keishun
    Abstract: This study revisits the relationship between competition and innovation by incorporating an endogenous market structure (EMS) in a dynamic general equilibrium model. We consider that both innovative and non-innovative followers engage in Cournot competition with free entry. A competition-enhancing policy, which reduces entry cost, can stimulate the entry of innovative followers when the entry cost is high. However, when the entry cost is sufficiently low, the entry of non-innovative followers crowd-out innovative followers from the market. As a result, there is a non-monotonic relationship (inverted-V shape) between competition and innovation. Furthermore, we show that, while strengthening patent protection positively affects innovation when competition is sufficiently intense, the effect may be negative under milder competition. This suggests that a competition policy could complement a patent policy.
    Keywords: Competition, Patent Protection, Innovation, Endogenous Market Structure
    JEL: O30 O40
    Date: 2017–02–25
  6. By: Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Florian Seliger (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Martin Wörter (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: We propose a new patent-based measure of knowledge spillovers that calculates technological proximity based on firms that were identified via patent backward citations links. We argue that this measure has a couple of advantages as compared to the 'standard' measure proposed by Jaffe: First, it reflects spillovers from both domestic and foreign technologically 'relevant' firms, second, it is more precise because it only takes into account knowledge relations with technologically 'relevant' firms. Our empirical results indeed show that the measure performs better than the standard measure in an innovation model. We find - for a representative sample of Swiss firms - that knowledge spillovers measured in this way have a positive and significant impact on innovation success. However, the knowledge spillovers appear to be localized: Spillovers from geographically distant areas such as the USA and Japan matter less than spillovers from near destinations such as Europe and particularly Switzerland itself. Moreover, the spillover effect on innovation performance decreases with increasing number of competitors on the main product market so that this effect would appear only in niche markets or oligopolistic market structures. However, an additional effect of competition can only be detected for more radical innovation success.
    Keywords: Knowledge Spillovers, Innovation Success, Knowledge Capital, Patent Citations, Competition
    Date: 2016–10
  7. By: Erik O. Kimbrough (Simon Fraser University); Andrew Smyth (Marquette University)
    Abstract: We report boundary experiments testing the robustness of price convergence in double auction markets for non-durable goods in which there is extreme earnings inequality at the competitive equilibrium (CE). Following up on a conjecture by Smith (1980), we test whether the well-known equilibrating power of the double auction institution is robust to the presence of complete information about traders' values and costs and the presence of symmetric market power. Contra Smith's conjecture, we find that complete information is insufficient to impede convergence to CE prices; however, introducing market power consistently causes prices to deviate from the CE, whether or not subjects possess complete information. Our design highlights the value of boundary experiments in understanding how market institutions shape behavior, and our findings help delineate the limits of the double auction institution to generate competitive outcomes.
    Keywords: double auction, market power, institutions, information, experimental economics
    JEL: C92 D02 D43 D44 L13
    Date: 2017–02
  8. By: Pierpaolo Battigalli; Carlo Chiarella; Stefano Gatti; Tommaso Orlando
    Abstract: We model theoretically and quantify empirically the impact of informational frictions on managerial decisions in the context of mergers and acquisitions. In particular, we focus on how bid premiums and methods of payment are affected by the bidder and target firms' degrees of opacity. To this end, we model the negotiation between bidder and target as a signaling game with two-sided private information. We then empirically test the model's predictions concerning the effects of target and bidder opacity on the simultaneous determination of the method of payment and the bid premium, by conditioning cross-sectionally on the basis of firms' stock trading properties, which we interpret as representative of individual firm opacity. Consistently with the predictions of our model, we find, by studying a sample of bids by and for U.S. publicly listed firms over the period 1985-2014, that both the likelihood of a stock bid and the bid premium increase with the opacity of the target, while the opacity of the bidder is related to lower bid premiums. JEL classification: G34, G14 Keywords: Asymmetric information, mergers and acquisitions, method of payment, bid premium
    Date: 2017
  9. By: Angelov, Aleks; Vasilev, Aleksandar
    Abstract: Computer simulators are proving to be indispensable education tools as they enable their users to readily apply theoretical knowledge and to automatically receive immediate feedback, which is invaluable both to learners and to their instructors. Yet at present, there is virtually no publically available software for teaching economics to people who are new to this discipline. The Microeconomic Simulator of Firm Behavior under Monopolistic Competition is an interdisciplinary project which tries to fill this niche by providing an interactive means of strengthening and assessing a person’s grasp of fundamental economic concepts. It simulates the dynamic conditions of real-world markets that exhibit characteristics both of monopoly and of perfect competition, and demonstrates how choices made by a company’s executives affect its profitability. This is done in an intuitive manner through a user-friendly web application, which can be accessed from any device with an HTML5-compliant browser. The application is based on a proprietary algorithm which transforms the abstract economic model of monopolistic competition into a series of easy-to-follow steps and supplies diagrams and pop-ups, which help users comprehend the consequences of their actions. The parameters of the model are fully customizable so that different economic environments can be explored. After the end of a simulation, users are presented with a summary of their performance, which they can use to measure their progress over time, or to see how they rank among their peers.
    Keywords: monopolistic competition,computer simulators
    JEL: A1
    Date: 2017
  10. By: Schmutzler, Armin; Edlin, Aaron; Roux, Catherine; Thoeni, Christian
    Abstract: The paper provides an experimental analysis of above-cost predatory pricing in a multi-period interaction between a monopolistic incumbent and a potential entrant. It shows that, without policy interventions, the threat of post-entry price cuts discourages entry without forcing incumbents to abstain from monopoly pricing. A policy suggested by Edlin that curtails such price cuts encourages entry and reduces the prices set by monopolistic incumbents. An alternative policy suggested by Baumol that prohibits post-exit price increases does less to encourage entry, and it does not prevent high pre-entry prices. However, as expected, it keeps post-exit prices low.
    JEL: L13 D43 C92
    Date: 2016
  11. By: Götz, Georg; Brühn, Tim
    Abstract: This paper analyzes exclusionary conduct of platforms in two-sided markets. Motivated by recent antitrust cases against shopping centers introducing radius restrictions on their tenants, we provide a discussion of the likely positive and normative effects of exclusivity clauses, which prevent tenants from opening outlets in other shopping centers covered by the clause. In a standard two-sided market model, we analyze the incentives of an incumbent shopping center to introduce exclusivity clauses when faced by entry of a rival shopping center. We show that exclusivity agreements are especially profitable and detrimental to social welfare if competition is intense between the two shopping centers. We argue that the focus of courts on market definition is misplaced in markets determined by competitive bottlenecks.
    JEL: D43 D62 L13
    Date: 2016
  12. By: Prüfer, Jens (Tilburg University, TILEC); Schottmuller, C. (Tilburg University, TILEC)
    Abstract: This paper studies competition in data-driven markets, that is, markets where the cost of quality production is decreasing in the amount of machine-generated data about user preferences or characteristics, which is an inseparable byproduct of using services offered in such markets. This gives rise to data-driven indirect network effects. We construct a dynamic model of R&D competition, where duopolists repeatedly determine their innovation investments, and show that such markets tip under very mild conditions, moving towards monopoly. In a tipped market, innovation incentives both for the dominant firm and for competitors are small. We also show under which conditions a dominant firm in one market can leverage its position to a connected market, thereby initiating a domino effect. We show that market tipping can be avoided if competitors share their user information.
    Keywords: big data; datafication; data-driven indirect network effects; dynamic competition; regulation
    JEL: D43 D92 L13 L43 L86
    Date: 2017
  13. By: Thöne, Miriam; Rasch, Alexander; Wenzel, Tobias
    Abstract: We consider a product and a media market and show how a change in the business model employed by the media platforms affects consumers, producers (or advertisers), and price negotiations for advertisements. On both markets, two firms differentiated á la Hotelling compete for consumers. On the media market, consumers can mix between the two outlets whereas on the product market, consumers have to decide for one supplier. With pay-tv, as opposed to free-to-air, mixing by consumers disappears, product prices and advertising rates increase while the number of advertisements declines and media firms' profits increase. These effects are driven by the improved bargaining position of media firms, induced by charging a subscription fee to viewers.
    JEL: L10 D21 L21
    Date: 2016
  14. By: Dolata, Ulrich
    Abstract: Based on a systematic review and evaluation of business reports, documents, statistics, literature and press releases, this paper analyzes the market concentration and the expansion and innovation strategies of the leading internet companies Google, Facebook, Apple, Amazon and Microsoft. The findings invalidate any claims that a decentralization of the market and a democratization of the internet is taking place, or that research, development and innovation processes are becoming more open and collaborative. The five examined companies, as the operators of the core infrastructures of the worldwide web, shape the overall products and services offer of the internet, determine access to the web, structure the communication possibilities for users, and are the main drivers of innovation in this field. Not decentralization, democratization and open innovation, but market concentration, control and power struggles are categories to adequately describe the fundamental dynamics of the commercial internet.
    Date: 2017
  15. By: Elisabetta Iossa (CEIS & DEF, University of Rome "Tor Vergata",Proxenter,CEPR,IEFE-Bocconi); Michael Waterson (University of Warwick)
    Abstract: Under recurrent procurement, the awarding of a contract to a firm may put it in an advantageous position in future tenders, which may reduce competition over time. The objective of this paper is to study the dynamics of competition for tendered contracts, focusing on factors that may generate incumbent advantage. Particular attention is given to learning economies, sunk costs of entry and switching costs for the procurer. The paper then applies these insights to analyse empirically the evolution of competition in the market for local bus services in London.
    Keywords: Dynamic Competition, Procurement and Incumbent advantage
    JEL: L24 L92 L40
    Date: 2017–02–24
  16. By: Krishnendu Ghosh DASTIDAR; YANO Makoto
    Abstract: We extend the Yano (2009) concept of market quality to analyze the effects of corruption in a three-stage game of entry deterrence. The incumbent has incomplete information on the entrant's costs but can increase these costs by resorting to unfair means (e.g., bribing a politician who harms the entrant). The effectiveness of the bribe depends on the "fairness index" prevailing in the economy. The entrant observes these costs and decides whether or not to enter. We completely characterize the optimal bribe and show that this depends on the index of fairness. We also show that zero bribes need not maximize welfare and market quality. Our results seem to be compatible with anecdotal evidence from emerging economies such as India.
    Date: 2017–02
  17. By: Heinrich C. Bofinger
    Abstract: Sub-Saharan Africa’s air transport, though low in overall volume when compared to other regions in the world, has experienced significant growth in the last decade, both in international and domestic traffic. The sector, in part because of its relatively small size, still faces the challenges of high concentration in services and lack of competition, with only a few dominant airlines providing international services within the continent. In addition, Africa faces challenges in safety oversight, as well as having many smaller non-viable state-owned carriers
    Date: 2017
  18. By: Nagler, Markus; Watzinger, Martin; Fackler, Thomas; Schnitzer, Monika
    Abstract: How large is the impact of intellectual property on cumulative innovation in electronics, computers and communications? Following an antitrust lawsuit against Western Electric and AT&T, Bell Labs had to license all patents published by 1956 for free. We find that this removal of patent rights increased subsequent citations to Bell’s patents by 7%. Patenting in affected patent subclasses increased by 17%. The effect comes from young and small firms in fields in which Bell did not remain commercially active. Placebo regressions support the identification assumption of parallel trends in citations.
    JEL: O31 O33 L43
    Date: 2016

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