nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒04‒16
eleven papers chosen by
Russell Pittman
United States Department of Justice

  1. New Product Introduction and Slotting Fees By Claire Chambolle; Clémence Christin
  2. Salience in Retailing: Vertical Restraints on Internet Sales By Helfrich, Magdalena; Herweg, Fabian
  3. Markups and markdowns By Mauro Caselli; Stefano Schiavo; Lionel Nesta
  4. Royalty stacking in the U.S. freight railroads: Cournot vs. Coase By Alexandrov, Alexei; Pittman, Russell; Ukhaneva, Olga
  5. When Hotelling meets Vickrey Service timing and spatial asymmetry in the airline industry. By André De Palma; Carlos Criado; L Randrianarisoa
  6. Urban Distribution Centres and Competition among Logistics Providers: a Hotelling Approach By Daniele Crotti; Elena Maggi
  7. Global Banking: Risk Taking and Competition By Faia, Ester; Ottaviano, Gianmarco
  8. Collusion in Auctions with Constrained Bids: Theory and Evidence from Public Procurement By Sylvain Chassang; Juan Ortner
  9. Collusion and Information Revelation in Auctions By Llorente-Saguer, Aniol; Zultan, Ro'i
  10. Competition Issues in India's Online Economy. By Parsheera, Smriti; Shah, Ajay; Bose, Avirup
  11. Measuring the M&A Value of Control and Synergy in Central and Eastern European Transition Economies with the Case of Avast -AVG Acquisition By Moreira, David; Janda, Karel

  1. By: Claire Chambolle (UR 1303 Alimentation et Sciences Sociales - INRA - Institut National de la Recherche Agronomique - ALISS - Alimentation et Sciences Sociales, Departement d'Economie de l'Ecole Polytechnique - Ecole Polytechnique - X); Clémence Christin (CREM - Centre de Recherche en Economie et Management - UNICAEN - Université Caen Normandie - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The availability of a new product in a store creates, through word-of-mouth ad- vertising, an informative spillover that may go beyond the store itself. We show that, because of this spillover, each retailer is able to extract a slotting fee from the manu- facturer at product introduction. Slotting fees may discourage innovation and in turn harm consumer surplus and welfare. We further show that the spillover may facilitate the use of pay-to-stay fees by an incumbent to deter entry. Finally, a manufacturer is likely to pay lower slotting fees when it can heavily advertize or when it faces larger buyers.
    Keywords: Buyer Power, Innovation, Informative Advertising, Slotting Fees
    Date: 2017–01–22
  2. By: Helfrich, Magdalena; Herweg, Fabian
    Abstract: We provide an explanation for a frequently observed vertical restraint in e-commerce, namely that brand manufacturers partially or completely prohibit that retailers distribute their high-quality products over the internet. Our analysis is based on the assumption that a consumer's purchasing decision is distorted by salient thinking, i.e. by the fact that he overvalues a product attribute -- quality or price -- that stands out in a particular choice situation. In a highly competitive low-price environment like on an online platform, consumers focus more on price rather than quality. Especially if the market power of local (physical) retailers is low, price tends to be salient also in the local store, which is unfavorable for the high-quality product and limits the wholesale price a brand manufacturer can charge. If, however, the branded product is not available online, a retailer can charge a significant markup on the high-quality good. As the markup is higher if quality rather than price is salient in the store, this aligns the retailer's incentives with the brand manufacturer's interest to make quality the salient attribute and allows the manufacturer to charge a higher wholesale price. We also show that, the weaker are consumers' preferences for purchasing in the physical store and the stronger their salience bias, the more likely it is that a brand manufacturer wants to restrict online sales. Moreover, we find that a ban on distribution systems that prohibit internet sales increases consumer welfare and total welfare, because it leads to lower prices for final consumers and prevents inefficient online sales.
    Keywords: Internet competition; Relative thinking; Retailing; salience; Selective distribution; Vertical restraints
    JEL: D43 K21 L42
    Date: 2017–03
  3. By: Mauro Caselli (University of Trento); Stefano Schiavo (Department of Economic Geography); Lionel Nesta (Observatoire français des conjonctures économiques)
    Abstract: This paper studies the high yet undocumented incidence of firms displaying markups lower than unity, i.e., prices lower than marginal costs, for protracted periods of time. Using a large sample of French manufacturing firms for the period 1990-2007, the paper estimates markups at the firm level and documents the extent to which firms exhibit negative price cost margins. The paper is able to provide an explanation for this phenomenon using the option value approach to investment decisions. The results suggest that firms facing higher investment irreversibility tend to continue operating even when prices fall below marginal costs as they wait for market conditions to improve. This effect is magnified in the presence of uncertainty.
    Keywords: Markups; Irreversibility; Uncertainty; Negative price; Costs margine; French manufacturing data
    JEL: D2 D24 D81 E22 L11
    Date: 2017–04
  4. By: Alexandrov, Alexei; Pittman, Russell; Ukhaneva, Olga
    Abstract: Monopolists selling complementary products charge a higher price in a static equilibrium than a single multiproduct monopolist would, reducing both the industry profits and consumer surplus. However, firms could instead reach a Pareto improvement by lowering prices to the single monopolist level. We analyze administrative nationally-representative pricing data of railroad coal shipping in the U.S. We compare a coal producer that needs to ship from A to C,with the route passing through B, in two cases: (1) the same railroad owning AB and BC and (2) different railroads owning AB and BC. We find no price difference between the two cases, suggesting that the complementary monopolist pricing inefficiency is absent in this market. For our main analysis, we use a specification used by previous literature; however, we confirm our findings using propensity score blocking and machine learning algorithms. Finally, we confirm the results by using a difference-in-differences analysis to gauge the impact of a merger that made two routes wholly-owned (switched from case 2 to case 1). Our results have implications for royalty stacking and patent thickets, vertical mergers, tragedy of anti-commons, and mergers of firms selling complements.
    Keywords: Vertical mergers, complementary products mergers, railroads, end-to-end mergers, royalty stacking, patent thickets, Cournot, Coase
    JEL: D43 K21 L42 L92 O31
    Date: 2017–03–20
  5. By: André De Palma (ENS Cachan - École normale supérieure - Cachan); Carlos Criado (Department of Economics, Université Laval - Université Laval); L Randrianarisoa (Sauder - Sauder School of Business [British Columbia] - UBC - University of British Columbia)
    Abstract: This paper analyzes rivalry between transport facilities in a model that includes two sources of horizontal differentiation: geographical space and departure time. We explore how both sources influence facility fees and the price of the service offered by downstream carriers. Travellers' costs include a fare, a transportation cost to the facility and a schedule delay cost, which captures the monetary cost of departing earlier or later than desired. One carrier operates at each facility and schedules a single departure time. The interactions in the facility-carrier model are represented as a sequential three-stage game in fees, times and fares with simultaneous choices at each stage. We find that duopolis-tic competition leads to an identical departure time across carriers when their operational cost does not vary with the time of day, but generally leads to distinct service times when this cost is time dependent. When a facility possesses a location advantage, it can set a higher fee and its downstream carrier can charge a higher fare. Departure time differentiation allows the facilities and their carrier to compete along an additional differentiation dimension that can reduce or strengthen the advantage in location. By incorporating the downstream carriers into the analysis, we also find that a higher per passenger commercial revenue at one facility induces a lower fee charged by both facilities to their carrier and a lower fare charged by both carriers at their departure facility, while a lower marginal operational cost for one carrier implies a higher fee at its departure facility, a lower fee at the other facility served by the rival carrier and a lower fare at both facilities. JEL Classification: D43, L13, L22, L93, R4
    Keywords: Spatial asymmetry,Horizontal differentiation,Location model,Airline and facility competition,Service timing
    Date: 2017–01–27
  6. By: Daniele Crotti (University of Genoa); Elena Maggi (University of Insubria)
    Abstract: In recent years several European municipalities have paired market-based measures with urban distribution centres (UDC) in order to reduce CO2 emissions and make more sustainable urban freight ‡ows. However, UDCs may add reloading costs and extra delivery times which have relevant impact on both urban supply chains and the competition among traditional and UDC-based logistics service providers in terms of service quality and freight rates. By using a duopolistic Hotelling framework, we show that market-based measures and subsidies might be substitutes to enhance the demand for UDC-based providers but public funding can be reduced by improving the quality of UDC services. These results can enlarge the scope for investments in UDC value-adding services in order to decrease private crowding-out effects in the long run.
    Keywords: Urban Distribution Centre, City logistics, Sustainable Urban Transport Policy, Hotelling Spatial Competition Model, Market-Based Measures, Public Subsidy
    JEL: D43 H23 L13 Q58 R41 R48
    Date: 2017–04
  7. By: Faia, Ester; Ottaviano, Gianmarco
    Abstract: Direct involvement of global banks in local retail activities can reduce risk-taking by promoting local competition. We develop this argument through a model in which multinational banks operate simultaneously in different countries with direct involvement in imperfectly competitive local deposit and loan markets. The model generates predictions that are consistent with the foregoing argument as long as the expansionary impact of competition on multinational banks'aggregate profits through larger scale is strong enough to o¤set its parallel contractionary impact through lower loan-deposit return margin (a result valid with both perfectly and imperfectly correlated loans'risk). When this is the case, banking globalization also moderates the credit crunch following a deterioration in the investment climate. Compared with multinational banking, the beneficial effect of cross-border lending on risk-taking is weaker.
    Keywords: appetite for leverage; endogenous risk taking; expectation of rents extraction; global bank; oligopoly; oligopsony
    JEL: G21 G32 L13
    Date: 2017–03
  8. By: Sylvain Chassang (New York University); Juan Ortner (Boston University)
    Abstract: We study the mechanics of cartel enforcement and its interaction with bidding constraints in the context of repeated procurement auctions. Under collusion, bidding constraints weaken cartels by limiting the scope for punishment. This yields a test of repeated collusive behavior exploiting the counter-intuitive prediction that introducing minimum prices can lower the distribution of winning bids. The model’s predictions are borne out in procurement data from Japan, where we find evidence that collusion is weakened by the introduction of minimum prices. A robust design insight is that setting a minimum price at the bottom of the observed distribution of winning bids necessarily improves over a minimum price of zero.
    Keywords: collusion, cartel enforcement, minimum prices, entry deterrence, procurement
    JEL: D44
    Date: 2017–02
  9. By: Llorente-Saguer, Aniol; Zultan, Ro'i
    Abstract: The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. However, such analyses neglect to consider the effects of failed collusion attempts, wherein information revealed in the negotiation process may affect bidding behavior. We experimentally test a setup in which theory predicts no collusion and no information revelation in first-price auctions. The results reveal a hitherto overlooked failing of the first-price mechanism: failed collusion attempts distort bidding behavior, resulting in a loss of seller revenue and efficiency. Moreover, the first-price mechanism does not result in less collusion than the second-price mechanism. We conclude that, while the features of the first-price mechanism may have the potential to deter bidder collusion, the role of beliefs in guiding bidding behavior make it highly susceptible to distortions arising from the informational properties of collusive negotiation. Auction designers should take this phenomenon into account when choosing the auction mechanism.
    Keywords: auctions; Collusion; Experiment
    JEL: C72 C91 D44
    Date: 2017–03
  10. By: Parsheera, Smriti (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy); Bose, Avirup (Jindal Global Law School)
    Abstract: The world of high technology companies is seen as a dynamic area with a rapid pace of creative destruction. There is, however, a class of industries where there are strong network effects, where the market tends to collapse into a narrow set of players. After one burst of innovation where a new online business is born, there is the possibility of entrenched market power with the extraction of consumer surplus.Many firms, global and Indian, have resorted to the strategy of making large losses by subsidising users, as a way to obtain those network effects. This has created a new class of concerns about predatory pricing, with unprecedented negative profit margins on a sustained basis, being supported by equity capital infusions. In the short run,discounts are popular, but recoupment is inevitable and market power will adversely affect consumers in the future. We argue that the existing competition law regime in India needs to be fine tuned, for technology-enabled markets with significant network effects, to address the possibility of new kinds of abusive conduct. We offer a series of tangible proposals through which the Competition Commission of India can better handle these emerging situations. We also look into the role and responsibilities of the investors who back these online businesses and the impact of their conduct on competition in the underlying markets.
    Date: 2017–04
  11. By: Moreira, David; Janda, Karel
    Abstract: We examine the valuation of synergies and control in mergers and acquisitions (M&A) in Central and Eastern European (CEE) transition economies. We determine this value based on comprehensive contemporaneous financial findings extracted from the Thomson Reuters database. Worldwide the market of mergers and acquisitions (M&A) is increasing, reaching in 2016 a value of 6.000 billion EUR globally. Among the CEE transition economies, the M&A total value in the same period was 50 billion EUR. It is widely accepted that between 60% and 80% of M&As are unsuccessful in value creation, so we further research evidences about an alternative framework to value the M&A also qualitatively. We develop a valuation model for prediction of the value of control and synergy in M&A deals. We suggest further directions for analysis in the field of M&A value creation, and recommend an alternative to the most used earning per share metric to enhance the predictability and transparency of valuation worldwide.
    Keywords: Mergers, Acquisitions, Synergy, Control, Corporate Governance
    JEL: G24 G34 P23
    Date: 2017–03–30

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