nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒04‒30
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Hierarchical competition and heterogeneous behavior in noncooperative oligopoly markets By Ludovic Alexandre Julien
  2. Auctions versus Negotiations By Herweg, Fabian; Schmidt, Klaus M.
  3. Competition and Incentives By Schmidt, Klaus; Fey, Lisa; Thoma, Carmen
  4. A Model of Directed Consumer Search By Haan, Marco A.; Moraga-González, José-Luis; Petrikaite, Vaiva
  5. How to license a downstream technology when upstream firms are capacity constrained? By SCHOLZ Eva-Marie
  6. Corporate social responsibility and supplier development By SCHOLZ Eva-Marie
  7. Delegating Pricing Power to Customers: Pay What You Want or Name Your Own Price? By Krämer, Florentin; Schmidt, Klaus M.; Stich, Lucas
  8. Certification and Market Transparency By Strausz, Roland
  9. Price-Linked Subsidies and Health Insurance Markups By Jaffe, Sonia; Shepard, Mark
  10. Do Price-Matching Guarantees with Markups Facilitate Tacit Collusion? Theory and Experiment By Andreas Pollak
  11. A Welfare Economic Interpretation of FRAND By Jens Leth Hougaard; Chiu Yu Ko; Xuyao Zhang
  12. Meta-Search and Market Concentration By Foucart, Renaud
  13. Assisted Self-Persuasion: Advertising with Consumer Adjustment to Choice By Matthew G. Nagler
  14. The 2016 Nobel Memorial Prize in Contract Theory By Schmidt, Klaus
  15. Content acquisition by streaming platforms: premium vs. freemium By CARRONI Elias; PAOLINI Dimitri
  16. Tieboutian market Structure and Collective Decision Process Within a Global Competition Policy By Ermelinda Lopes; Ermelinda Lopes Silva
  17. Local content, supply chains, and shared infrastructure By Olle Östensson
  18. Comportamiento oligopólico en el Mercado Mundial de Aceite de Palma 1961-2004 By Carmen E. Ocampo López; Luz A. Saumeth De Las Salas; Jorge L. Navarro España

  1. By: Ludovic Alexandre Julien
    Abstract: In this paper, we consider a sequential bilateral oligopoly market which embodies a finite number of leaders and followers who compete on quantities. We define a noncooperative equilibrium concept for this two-stage market game with complete and perfect information, namely the Stackelberg-Nash equilibrium (SNE). Then, we study the existence of a SNE with trade. The existence proof requires some steps as this market game displays a rich set of strategic interactions. In particular, to show the existence of a pure strategy subgame perfect Nash equilibrium, we have to determine the conditions under which there exist well defined continuously differentiable best responses. Some examples buttress the approach and discuss the assumptions made on the primitives.
    Keywords: Best responses, Stackelberg-Nash equilibrium, trade, autarky.
    JEL: C72 D51
    Date: 2017
  2. By: Herweg, Fabian (University of Bayreuth); Schmidt, Klaus M. (University of Munich)
    Abstract: For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation. If the buyer can specify the main characteristics of possible design improvements in a complete contingent contract, a scoring auction implements the efficient allocation. If this is not feasible, the buyer must choose between a price-only auction (discouraging early information exchange) and bilateral negotiations with a preselected seller (reducing competition). Bilateral negotiations are superior if potential design improvements are important, if renegotiation is particularly costly, and if the buyer\'s bargaining position is strong. Moreover, negotiations provide stronger incentives for sellers to investigate design improvements.
    Keywords: Adaptation costs; auctions; behavioral contract theory; loss aversion; negotiations; procurement; renegotiation; ;
    JEL: D03 D82 D83 H57
    Date: 2017–03–25
  3. By: Schmidt, Klaus (University of Munich); Fey, Lisa (University of Munich); Thoma, Carmen (University of Munich)
    Abstract: We report on two experiments that identify non-monetary incentive effects of competition. As the number of competitors increases, monetary incentives to engage in cost reduction tend to decrease. We test the hypothesis that there are non-monetary incentive effects of competition going in the opposite direction. In the experiments we change the number of competitors exogenously keeping the monetary incentives to spend effort constant. The first experiment shows that subjects spend significantly more effort in duopolistic and oligopolistic markets than in a monopoly. The second experiment focuses on social comparisons as one potential mechanism for this effect. It shows that competition turns the effort decisions of competing managers into strategic complements.
    Keywords: incentive effects of competition; behavioral industrial organization;
    JEL: D03 L10 O31
    Date: 2017–04–28
  4. By: Haan, Marco A.; Moraga-González, José-Luis; Petrikaite, Vaiva
    Abstract: We present a framework to study directed consumer search. Firms sell products with two attributes. One is readily observable, the other only after visiting a firm. Search is directed as the order of search is influenced by the observable characteristics. Moreover, if prices are readily observable, firms also influence search direction by their choice of price. We show that when consumers observe prices before search, prices and profits are lower than when they do not. A lower price then not only retains more consumers, but is also more likely to attract them; the latter effect makes demand more elastic. When prices are observable before search, prices decrease in search costs. Consumer surplus initially increases in search costs, but may ultimately decrease.
    Keywords: differentiated products; ordered/directed search; price observability
    JEL: D83 L13
    Date: 2017–04
  5. By: SCHOLZ Eva-Marie (Université catholique de Louvain, CORE, Belgium)
    Abstract: In this paper, we study the relationship between capacity constraints and licensing strategies. To doso, we focus on the licensing strategy of an outside innovator who licenses a process innovation to the downstream sector of a vertical Cournot oligopoly. Downstream firms soruce an essential production factor from a capacity constrained upstream sector. In this setting, we show that the innovator optimally licenses large innovations via per-unit royalty contracts and small innovations via fixed fee contracts. Moreover, an increase in the strength of the capacity constraints makes it more likely that hte optimal licensing contract includes a strictly positive per-unit royalty rate. As a final point, we discuss the relationship between capacity constraints and the social optimality of the innovator’s licensing strategy as measured by aggregate welfaore or the diffusion of the innovation on the downstream market
    Keywords: capacity constraints; licensing contracts, vertical Cournot oligopoly
    JEL: D43 L13
    Date: 2017–02–27
  6. By: SCHOLZ Eva-Marie (Université catholique de Louvain, CORE, Belgium)
    Abstract: We study final good producers’ incentives and capabilities for implementing corporate social responsibility (CSR) activities with their input suppliers via supplier codes of conduct (SCoC). In this context, we first analyze the implicaitons of SCoC on the market equilibrium outcome in terms of the competition among final good producers as well as their supply relationships. We then derive the conditions under which SCoC are successfully implemented in the industry’s supply chains and clarify their implications for consumer welfare. In this context, we study endogenous as well as exogenous standards and further contrast two scenarios in which the input supplier either pricei discriminates or sets a uniform input price. In the case of endogenous standards, SCoC are set to maximize final good producers’ profits and, in equilibrium, are adopted in all supply chains. When standards are exogenous, either no, some or all final good producers successfully implement a SCoC. Here, the equilibrium may be characterized by an underprovision of SCoC, in the sense that not all final good producers that have incentives to adopt a SCoC also succeed to do so. In this context, we study the effectiveness and desirability of public and private initiatives that aim at overcoming this underprovision. In terms of the input suppplier’s pricing policy, we observe that input price discrimination may provide firms with greater incentivesi to adopt SCoC and, as a corollary, may maximize consumer surplus.
    Keywords: corporate social responsibility; Cournot oligopoly, supply chains
    JEL: D43 L13 L15 M14
    Date: 2017–02–27
  7. By: Krämer, Florentin (University of Munich); Schmidt, Klaus M. (University of Munich); Stich, Lucas (University of Munich)
    Abstract: Pay What You Want (PWYW) and Name Your Own Price (NYOP) are customer driven pricing mechanisms that give customers (some) pricing power. Both have been used in service industries with high fixed costs to price discriminate without setting a reference price. Their participatory and innovative nature gives rise to promotional benefits that do not accrue to posted-price sellers. We explore the nature and effects of these benefits and compare PWYW and NYOP using controlled lab experiments. We show that PWYW is a very aggressive strategy that achieves almost full market penetration. It can be profitable if there are promotional benefits and if marginal costs are low. In contrast, NYOP can be used profitably also if marginal costs are high and if there are no such benefits. It reduces price competition and segments the market. In a second experiment, we generate promotional benefits endogenously. We show that PWYW monopolizes the follow-up market but fails to be profitable. NYOP is less successful in penetrating the market but yields much higher profits.
    Keywords: Customer-driven pricing mechanisms; pay what you want; name your own price; competitive strategies; marketing; laboratory experiment;
    JEL: D03 D21 D22 D40 L11 M31
    Date: 2017–03–25
  8. By: Strausz, Roland (Humboldt University Berlin)
    Abstract: In markets with quality unobservable to buyers, third-party certification is often the only instrument to increase transparency. While both sellers and buyers have a demand for certification, its role differs fundamentally: sellers use it for signaling, buyers use it for inspection. Seller induced certification leads to more transparency, because it is informative - even if unused. By contrast, buyer induced certification incentivizes certifiers to limit transparency, as this raises demand for inspection. Whenever transparency is socially beneficial, seller certification is preferable. It also yields certifiers larger profits, so that regulating the mode of certification is redundant.
    Keywords: Market transparency; certification; information and product quality; asymmetric information;
    JEL: D82 G24 L15
    Date: 2017–03–25
  9. By: Jaffe, Sonia (University of Chicago); Shepard, Mark (Harvard University)
    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.
    Date: 2017–01
  10. By: Andreas Pollak
    Abstract: This paper studies how competitive prices are affected by price-matching guarantees allowing for markups on the lowest competing price. This new type of low-price guarantee was recently introduced in the German retail gasoline market. Using a sequential Hotelling model, we show that such guarantees, similar to perfect price-matching guarantees, can induce collusive prices. In particular, this occurs if the first mover provides a price guarantee with a markup which is below a threshold value. In these cases, prices are on average set at the monopoly level. A laboratory experiment supports the theoretical predictions.
    Date: 2017–03–01
  11. By: Jens Leth Hougaard (Department of Food and Resource Economics, University of Copenhagen); Chiu Yu Ko (Department of Economics, National University Singapore); Xuyao Zhang (Lee Kuan Yew School of Public Policy, National University Singapore)
    Abstract: Setting an industry-wide standard is crucial for information and communication technologies for interoperability, compatibility and efficiency. To minimize holdup problems, patent holders are often required to ex-ante commit to licensing their technologies under Fair, Reasonable and Non-Discriminatory (FRAND) terms. Yet, there is little consensus, in both courtrooms and industries, on the exact meaning of FRAND. We propose a welfare economic framework that enables a precise distinction: fairness in the distribution of royalty payments among patent users, and reasonableness in setting the size of the compensation to the patent holder, where both the size and the distribution of payments are determined in a non-discriminatory way making sure that similar firms are treated similarly. We illustrate our approach in various classic models from industrial organization, and discuss further potential applications.
    Keywords: FRAND-licensing, Fair royalties, Standard setting, Patent, Shapley value
    JEL: D63 K2 L3 L44
    Date: 2017–04
  12. By: Foucart, Renaud (HU Berlin)
    Abstract: Competing intermediaries search on behalf of consumers among a large number of horizontally differentiated sellers. Consumers either pick the best deal offered by a random intermediary, or compare the intermediaries. A higher number of deal finders has the direct effect of decreasing their search effort, but also increases the incentives for consumers to become informed. A higher share of informed consumers in turns increases the search effort of deal finders, so that the sign of the total effect is ambiguous. If the total effect of lower concentration is to increase search effort, it always decreases the price offered by sellers.
    Keywords: ;
    Date: 2017–03–25
  13. By: Matthew G. Nagler (Ph.D. Program in Economics, Graduate Center, and Department of Economics and Business, City College of New York)
    Abstract: I develop a new theory of persuasive advertising in which consumers rationally adjust to (i.e., improve their attitude toward) the products they choose and advertising facilitates adjustment. Advertisings price effects depend on whether marginal or inframarginal consumers are most heavily targeted, consistent with the literature. But they also depend on advertisings role as an overall adjustment intensifier, whence variation in the cost of adjustment with the strength of the consumers initial product preference determines the equilibrium price level. Whether too much or too little advertising is provided in equilibrium depends on the sign and size of advertisings price effect, the relative density of marginal consumers, and the relative extent to which advertisings adjustment cost reductions benefit marginal consumers.
    Keywords: Persuasive advertising, Hotelling model, consumer decision-making, pricing, welfare
    JEL: D03 D11 L10 M37
    Date: 2017–03–09
  14. By: Schmidt, Klaus (University of Munich)
    Abstract: Oliver Hart and Bengt Holmström were awarded the 2016 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for their fundamental contributions to contract theory. This article offers a short summary and discussion of their path breaking work.
    Keywords: contract theory; nobel prize; optimal incentive schemes; incomplete contracts;
    JEL: B21 D23 D82 L20
    Date: 2017–03–25
  15. By: CARRONI Elias (Universita di Bologna); PAOLINI Dimitri (Universita di Sassari, CRENoS and CORE, UCL)
    Abstract: We analyze the optimal decision of a monopolistic streaming platform. The platform obtains contents from copyright owners (artists) who are paid with a per-user royalty. Advertisers pay a per-user fee to display their commercials. Users value the variety of contents and are heterogeneously bothered by ads. We show that when commercials generate an intermediate nuisance and the size of the potential market is large, the platform finds it optimal to offer only a paying subscription without displaying any ads. In contrast, a small potential market results in the offer of a menu of subscriptions, with ad-intolerant users paying a positive price and moderately-averse users opting for a free-of-charge solution. The second (first) solution is always preferred when commercials generate a strong (weak) nuisance. We also show that there may emerge a misalignment of the platform’s and artists’ interests.
    Date: 2017–03–01
  16. By: Ermelinda Lopes; Ermelinda Lopes Silva
    Abstract: To pay attention to the new market structures within the global economy. Tieboutian analysis and collective decision process. The optimal size of the market can be lower using the Tieboutian decision process.
    Keywords: Global economy., Optimization models, Trade issues
    Date: 2016–07–04
  17. By: Olle Östensson
    Abstract: Local content policies in the context of extractive industries have attracted increased interest in recent years. Most countries with a significant extractive industry have included local content requirements either in their legislation or exploitation contracts. Such efforts may be constrained by low capacity of potential suppliers, low skills, and a number of other factors constituting the general business environment. A number of extractive industry companies have introduced supplier development programmes that attempt to reduce the constraints and skill gaps. Government policies on local content vary, with some prescribing quantitative targets for local content, while others focus on improving skills and raising the capacity of domestic industry. Infrastructure built for extractive industries can often be used by local populations and other economic activities. Difficulties in finding suitable financing arrangements have, however, limited the number of successful greenfield multi-client/multi-user extractive industry-related infrastructure projects.
    Date: 2017
  18. By: Carmen E. Ocampo López; Luz A. Saumeth De Las Salas; Jorge L. Navarro España
    Abstract: El mercado de aceite de palma ha adquirido una dinámica alta en las décadas recientes. Ha sido tradicionalmente dominado por Malasia e Indonesia quienes producen más del 75% del total mundial. Por medio de una regresión de datos aparentemente no relacionados (seemingly unrelated regression, SUR) con estadísticas entre 1961 y 2004, se hallaron ecuaciones de demanda para analizar el comportamiento oligopólico de estos países en dicho mercado. Los resultados indican que en el período analizado, los dos países habrían estado siguiendo un comportamiento, líder (Malasia)- seguidor (Indonesia), con una tendencia a terminar asumiendo conductas tipo Cournot, repartiéndose al mercado por partes iguales.
    Keywords: Aceite de palma; Malasia; Indonesia; Oligopolio.
    JEL: D43 F14 L11 L13 Q11
    Date: 2016–06–30

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