nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒03‒26
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Bertrand Competition under Network Externalities By Masaki Aoyagi;
  2. Competitive foreclosure By Jozsef Sakovics; Roberto Burguet
  3. Market Definition of Platform Markets By Dewenter, Ralf; Heimeshoff, Ulrich; Löw, Franziska
  4. Zone Pricing in Retail Oligopoly By Brian Adams; Kevin R. Williams
  5. Multi-category competition and market power: a model of supermarket pricing By Øyvind Thomassen; Howard Smith; Stephan Seiler; Pasquale Schiraldi
  6. Testing for Competitive Effects of Common Ownership By Jacob P. Gramlich; Serafin J. Grundl
  7. When unionisation is profitable for firms in network industries By Fanti, Luciano; Buccella, Domenico
  8. Solving a hold-up problem may harm all firms: downstream R&D and transport-price contracts By Kazuhiro Takauchi; Tomomichi Mizuno
  9. Rewarding Mediocrity? Optimal Regulation of R&D Markets with Reputation Concerns By Chia-Hui Chen; Junichiro Ishida
  10. Innovation in risky markets. Multinational and domestic firms in the UK regions By Luisa Gagliardi; Simona Iammarino
  11. Promoting Innovation and Efficiencies through Changes to the Competition Bureau’s Merger Review Process By Brian Facey; Joshua Krane
  12. Applying Competition Policy to Optimize International Trade Rules By Lee , Hyo-young
  13. Private versus Social Incentives for Pharmaceutical Innovation By Inés Macho-Stadler; David Pérez-Castrillo; Paula González
  14. Hospital interdependence in a competitive institutional environment: Evidence from Italy By Lisi, D.; Moscone, F.; Tosetti, E.; Vinciotti, V.;
  15. Bank Market Power and Non-Interest Income in Emerging Markets By Canan Yildirim; Adnan Kasman
  16. Does Banking Market Power Matter on Financial (In)Stability? Evidence from the Banking Industry MENA Region By Widede Labidi; Sami Mensi
  17. Technology Choices in the U.S. Electricity Industry before and after Market Restructuring By Zsuzsanna Csereklyei; David I. Stern

  1. By: Masaki Aoyagi;
    Abstract: Two firms engage in price competition to attract buyers located on a network. The value of the good of either firm to any buyer depends on the number of neighbors on the network who adopt the same good. When the size of externalities increases linearly with the number of adoptions, we identify the set of price strategies that are consistent with an equilibrium in which one of the firms monopolizes the market. The set includes marginal cost pricing as well as bipartition pricing, which offers discounts to some buyers and charges markups to others. We show that marginal cost pricing fails to be an equilibrium under non-linear externalities but identify conditions for an equilibrium with bipartition pricing to be robust against perturbations in the externalities from linearity. The idea of bipartition pricing is then applied to the analysis of platform competition in a two-sided market under local and approximately linear externalities.
    Date: 2017–03
  2. By: Jozsef Sakovics; Roberto Burguet
    Abstract: We present a model where oligopolistic firms producing substitutes compete for inputs in a decentralized market. Input suppliers are capacity constrained (or produce under exclusivity). Compared to a price-taking input market, the incentive to foreclose downstream competitors not only leads to higher input prices, but it also results in a higher aggregate amount of input acquired. This novel feature mitigates the output reducing effect of downstream market power and may even restore e¢ ciency in the unique (input) market clearing equilibrium. Other equilibria where Örms endogenously coordinate on which suppliers to target result in excess input supply (involuntary unemployment, if input is labor) and even higher input prices. Our insights generalize to alternative vertical structures.
    Keywords: simultaneous auctions, targeted offers, vertical linkages, involuntary unemployment
    JEL: D43 L11 L13
    Date: 2017–02–15
  3. By: Dewenter, Ralf (Helmut Schmidt University, Hamburg); Heimeshoff, Ulrich (Düsseldorf Institute for Competition Economics); Löw, Franziska (Helmut Schmidt University, Hamburg)
    Abstract: Platform markets are characterized by the existence of indirect network effects that connect two or more market sides through a platform that internalizes these feedback effects. Conventional instruments of market definitions which consider price levels cannot easily applied in case of two-sided platform competition, as price structure of those markets are non-neutral. Instead of using prices, we use time series of quantities and simple correlation analysis to evaluate the substitutional relationship within two-sided media markets. As a benchmark model, we simulate a Cournot duopoly on order to calculate correlation coefficients for varying degrees of product differentiation and indirect network effects.
    Keywords: two-sided markets; market definition; printed media; network effects
    JEL: D43 L40 L82
    Date: 2017–03–14
  4. By: Brian Adams (Bureau of Labor Statistics); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel data covering the retail home improvement industry, we find that Home Depot would benefit from finer pricing but that Lowe’s would prefer coarser pricing. The use of zone pricing softens competition in markets where firms compete, but it shields consumers from higher prices in markets where firms might otherwise exercise market power. Overall, zone pricing produces higher consumer surplus than finer pricing discrimination does.
    Keywords: Zone pricing, Market segmentation, Price discrimination in oligopoly, Micromarketing, Retailing
    JEL: C13 L61 L20 L67 L81
    Date: 2017–02
  5. By: Øyvind Thomassen; Howard Smith; Stephan Seiler; Pasquale Schiraldi
    Abstract: In many competitive settings consumers buy multiple product categories, and some prefer to use a single firm, generating complementary cross-category price effects. To study pricing in supermarkets, an organizational form where these effects are internalized, we develop a multi-category multi-seller demand model and estimate it using UK consumer data. This class of model is used widely in theoretical analysis of retail pricing. We quantify crosscategory pricing effects and find that internalizing them substantially reduces market power. We find that consumers inclined to one-stop (rather than multi-stop) shopping have a greater pro-competitive impact because they generate relatively large cross-category effects
    JEL: L11 L13 L81
    Date: 2017
  6. By: Jacob P. Gramlich; Serafin J. Grundl
    Abstract: We propose an alternative approach for analyzing the competitive effects of common ownership: to directly analyze the weights that firms place on each others' profits rather than using measures of industry concentration (MHHI and GHHI). Analyzing weights has at least three advantages: it places fewer restrictions on the nature of competition, it requires less data to test, and it circumvents endogeneity concerns with concentration measures. We apply our approach to data from the banking industry, and our preliminary results mixed and overall rather muted. The sign of the competitive effect is sensitive to specification, and the effects we estimate are economically quite small. Firms upon which significant weight is placed - either by themselves or competitors - move very little in price or quantity distributions.
    Keywords: Banking Competition ; Common Ownership ; GHHI ; MHHI
    JEL: L40 L20 L10 G34 G21
    Date: 2017–02–19
  7. By: Fanti, Luciano; Buccella, Domenico
    Abstract: In an industry characterised by the presence of network effects, this paper investigates a duopolistic game in which firms may choose whether to bargain over wages and employment with unions or to face a competitive labour market (i.e. without unions). If unions are sufficiently risk-averse, it is shown that the presence of strong network effects makes unionisation the Pareto-efficient sub-game perfect Nash equilibrium outcome for firms. The issue of entry is also investigated.
    Keywords: unionised oligopoly,competitive labour market,efficient bargaining,market entry and entry deterrence
    JEL: J51 L13 L20
    Date: 2017
  8. By: Kazuhiro Takauchi (Faculty of Business and Commerce, Kansai University); Tomomichi Mizuno (Graduate School of Economics, Kobe University)
    Abstract: In vertical relations, by raising input price after downstream research and development (R&D) investment, upstream rms can extract the R&D bene t and have an incentive to set higher input price. As downstream rms underinvest for fear of this hold-up by upstream rms, outputs and input-demand shrink, and all rms become worse off. Previous literature emphasizes that a xed-price contract in which upstream rms rst commit themselves to input prices and downstream rms subsequently invest can resolve the hold-up problem and make all rms better off. By contrast, we show that in a vertical relation between rm-speci c carriers and exporters, the xed-price contract of transport price can make all rms worse off because an efficiency improvement in exporters intensi es inter-regional competition. We also discuss the robustness of the result.
    Keywords: Transport-price contracts; Downstream R&D; Firm-specific carrier; Hold-up problem
    JEL: L13 F12 O31 R40
    Date: 2017–03
  9. By: Chia-Hui Chen; Junichiro Ishida
    Abstract: In this paper, we consider a dynamic signaling model of an R&D market in which a researcher can choose either a safe project (exploitation) or a risky project (exploration) at each instance. We argue that there are substantial efficiency gains from rewarding minor innovations above their social value and further that it is indeed superior to rewarding major innovations directly, even when those minor innovations are intrinsically valueless in themselves. When only major innovations are rewarded, the R&D market eventually shuts down due to a version of the lemons problem. Rewarding minor innovations is actually conducive to major innovations as it induces self-sorting among researchers, which is essential in providing time and resources necessary for more productive ones to take riskier but more ambitious approaches. This result draws clear contrast to the static counterpart where such a scheme can never be optimal. Our model also exhibits reputation dynamics which capture a pervasive view in academia that “no publications are better than a few mediocre publications” at an early stage of one's career.
    Date: 2017–03
  10. By: Luisa Gagliardi (London School of Economics and Political Science); Simona Iammarino (London School of Economics and Political Science)
    Date: 2017–03
  11. By: Brian Facey; Joshua Krane
    Keywords: Industry Regulation and Competition Policy
    JEL: L1 L4
  12. By: Lee , Hyo-young (Center for International Commerce and Finance, Seoul National University)
    Abstract: This paper delves into the relationship between trade and competition, which has long been a subject largely untouched since the issue had been dropped from the multilateral trade agenda in 2003. The need to incorporate elements of competition policy into international trade rules has long been discussed in the context of making the international trade regime more effective. The issue has gained more attention as state-owned enterprises (SOEs) began to emerge as new influential players in the international market, competing with private enterprises on an unequal footing. A growing number of bilateral trade agreements have included chapters on competition policy, albeit with rules that do not have sufficient binding force for disciplining the business practices of state-owned enterprises. The recently concluded Trans-Pacific Partnership (TPP), however, has introduced innovative rules for disciplining the competitive practices of SOEs by integrating the existing WTO disciplines on subsidies with competition rules. In this article, "competitive neutrality", the fundamental principle underlying the SOE disciplines, is used as a framework of analysis for understanding the new disciplines and obligations in the SOE rules. Several legal issues and challenges are identified that are relevant for applying the new rules in the real world, and implications are derived for future rule-making involving other new trade issues.
    Keywords: Competition Policy; State-owned Enterprises; Subsidies; WTO; TPP
    JEL: K33 L32 L41
    Date: 2017–02–27
  13. By: Inés Macho-Stadler; David Pérez-Castrillo; Paula González
    Abstract: We provide a theoretical framework to contribute to the current debate regarding the tendency of pharmaceutical companies to direct their R&D toward marketing products that are ?follow-on? drugs of already existing drugs, rather than toward the development of breakthrough drugs. We construct a model with a population of patients who can be treated with drugs that are horizontally and vertically differentiated. In addition to a pioneering drug, a new drug can be marketed as the result of an innovative process. We analyze physician prescription choices and the optimal pricing decision of an innovative ?firm. We also characterize the incentives of the innovative firm to conduct R&D activities, disentangling the quest for breakthrough drugs from the firm effort to develop follow-on drugs. Our results offer theoretical support for the conventional wisdom that pharmaceutical firms devote too many resources to conducting R&D activities that lead to incremental innovations.
    Keywords: pharmaceuticals, R&D activities, me-too drugs, breakthrough drugs, incremental innovation, radical innovation
    JEL: I11 I18 O31 H51
    Date: 2015–12
  14. By: Lisi, D.; Moscone, F.; Tosetti, E.; Vinciotti, V.;
    Abstract: In this paper we study the impact of competition on hospital adverse health outcomes, using data on patients admitted to hospitals located in the Lombardy region in Italy between 2004 and 2013. We propose an economic framework that incorporates both short and long range forms of competition among hospitals. In a set up where prices are regulated, and under the assumption that hospitals are profit maximisers, hospital managers compete locally in quality to attract more patients. At the same time, managers have an incentive to compete with all other hospitals within the Lombardy region as their relative quality performance will potentially affect their future states. Our empirical model exploits methods from the graphical modelling literature to estimate local rivals, as well as the degree of local and global interdependence among hospitals. Our results show a significant positive degree of short and long range dependence, which suggests the existence of forms of local and global competition among hospitals with relevant implications for the healthcare policy.
    Keywords: hospital interdependence; stochastic games; graphical modelling; spatial econometrics;
    JEL: I11 I18 C31 C73
    Date: 2017–03
  15. By: Canan Yildirim (Kadir Has University); Adnan Kasman
    Abstract: This paper examines how market power in traditional intermediation affects Turkish banks’ involvement in non-interest income generating activities, in particular, fee and commission income. The results show that banks have different levels of market power in the loan and deposit markets and these, in turn, affect banks’ commitment to non-interest generating activities differently. While banks with a limited market power in the loan market are engaged more in fee and commission generating activities, banks with a high market power in the deposit market are able to generate higher commission and fee income.
    Date: 2015–07
  16. By: Widede Labidi; Sami Mensi (University of Manouba)
    Abstract: The various financial crises during the last two decades, and particularly since the 2007-2008 Global Financial Crisis, have revealed the complexity of the interaction between bank market structure, regulation and the stability of the banking industry. Due to its effects on financial stability, banking market structure has been a focus of academic and policy debates of which we prefer the market power paradigm. More precisely, the impact of competition and market concentration on the probability of financial crisis emerges as a crucial topic. Despite their importance, little is known about the relationship between Banking Market Power and Bank Soundness of banks in the MENA region. This paper tries to overcome the tradeoff between banking market power and financial (in) stability among 157 commercial banks chosen from 18 countries in the MENA region between 2000 and 2008. The results indicate that although the banks operate in a competitive market, they suffer from financial instability. The results also reveal a non-significant negative relationship between the rather low degree of market power and financial instability. In other words, we concluded that financial instability is not affected by competition in the banking market in the MENA region.
    Date: 2015–05
  17. By: Zsuzsanna Csereklyei (Crawford School of Public Policy, The Australian National University); David I. Stern
    Abstract: We study the drivers of the adoption of electricity generation technologies between 1970 and 2014 in the lower 48 U.S. states. Since the 1990s, major electricity market restructuring took place in some parts of the United States. We explore the implications of changing from a regulated “cost-of-service” or rate of return system to a partly and fully deregulated market on technology and fuel choices. We find that electricity market deregulation resulted in significant immediate investment in various natural gas technologies, and a reduction in coal investments. However, market deregulation impacted less negatively on high efficiency coal technologies. In states that adopted wholesale electricity markets, high natural gas prices resulted in more investment in coal and renewable technologies.
    JEL: Q40
    Date: 2017–03

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