nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒05‒07
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Advertising Response to New Entry By Azamat Valei
  2. Market Power and Growth through Vertical and Horizontal Competition By Gilad Sorek
  3. Price Discrimination and Dispersion under Asymmetric Profiling of Consumers By Paul Belleflamme; Wing Man Wynne Lam; Wouter Vergote
  4. Zone Pricing in Retail Oligopoly By Brian Adams; Kevin R. Williams
  5. Very Simple Markov-Perfect Industry Dynamics : Empirics By Abbring, Jaap; Campbell, J.R.; Tilly, J.; Yang, N.
  6. Cheap Talk Advertising in Auctions: Horizontally vs Vertically Differentiated Products By Ian Jewitt; Daniel Z. Li
  7. Empirical Models of Firms and Industries By Victor Aguirregabiria; Margaret Slade
  8. Mergers and Acquisitions and the Value of Control By Aminadav, Gur; Massa, Massimo; Zhang, Hong; Zhu, Weikang
  9. Equilibrium Competition, Social Welfare and Corruption in Procurement Auctions By Daniel Z. Li; Minbo Xu
  10. Ready-to-Mix: Horizontal Mergers, Prices, and Productivity By Robert Kulick
  11. Multimarket Competition and Profitability: Evidence from Ukrainian banking By Pham, Tho; Talavera, Oleksandr; Yang, Junhong
  12. Geographical Dispersion of Consumer Search Behavior By Hakan Yilmazkuday
  13. Pricing and Referrals in Diffusion on Networks By Matt V. Leduc; Matthew O. Jackson; Ramesh Johari
  14. Manipulation of Cursed Beliefs in Online Reviews By Ludmila Matyskova; Jan Sipek
  15. Understanding the New Philippine Competition Act By Medalla, Erlinda M.

  1. By: Azamat Valei
    Abstract: Empirical studies on advertising outlays report that incumbent firms change their advertising strategies in response to a new entry. While some incumbents reduce their advertising expenditures, others increase them in comparison to the preentry period. Existing literature on strategic advertising in entry games is mostly focused on entry deterrence, meanwhile no theoretical foundation is found in this literature to explain what determines a change in the advertising strategies in the case of entry accommodation. The present work considers four types of advertising and builds a model that examines how accommodating incumbents decide on advertising. The paper also provides results on how advertising is related to the size of the entry. Particularly, informative advertising and advertising enhancing product differentiation allow greater entry, while complementary and business-stealing advertising result in fewer entries since they reduce residual demand for potential entrants. Depending on whether post-entry competition variables are strategic substitutes or strategic complements, incumbent firms may increase or reduce their advertising outlays in response to new entries.
    Keywords: advertising; entry accommodation; industrial organization;
    JEL: D43 L13
    Date: 2017–04
  2. By: Gilad Sorek
    Abstract: I study the implications of innovators' market power to growth and welfare in a two-R&D-sector economy. In this framework either vertical or horizontal competition is binding in the price setting stage, depending on the model parameters and the implemented market-power policy. I consider two alternative policies that are commonly, yet separately, used in the literature to constraint innovators' market power: patent lagging-breadth protection and direct price controls. I show that (a) the alternative policies may have non-monotonic and contradicting effects on growth (b) unconstrained market power may yields either excessive or insufficient growth compared with social optimum and (c) the social optimum can be achieved by reducing innovators market power with the proper policy instrument, along with a corresponding flat rate R&D-subsidy.
    Keywords: Patent Breadth; Price control; Two-R&D-Sector; Growth
    JEL: O31 O40
    Date: 2017–04
  3. By: Paul Belleflamme (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille); Wing Man Wynne Lam (University of Liège); Wouter Vergote (CEREC, University Saint-Louis)
    Abstract: Two duopolists compete in price on the market for a homogeneous product. They can use a 'profiling technology' that allows them to identify the willingness-to-pay of their consumers with some probability. If both firms have profiling technologies of the exact same precision, or if one firm cannot use any profiling technology, then the Bertrand paradox continues to prevail. Yet, if firms have technologies of different precisions, then the price equilibrium exhibits both price discrimination and price dispersion, with positive expected profits. Increasing the precision of both firms’ technologies does not necessarily harm consumers.
    Keywords: price discrimination, price dispersion, Bertrand competition
    JEL: D11 D18 L12 L86
    Date: 2017–04
  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. 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: Abbring, Jaap (Tilburg University, Center For Economic Research); Campbell, J.R.; Tilly, J.; Yang, N. (Tilburg University, Center For Economic Research)
    Abstract: This paper develops an econometric model of firm entry, competition, and exit in oligopolistic markets. The model has an essentially unique symmetric Markov-perfect equilibrium, which can be computed very quickly. We show that its primitives are identified from market-level data on the number of active firms and demand shifters, and we implement a nested fixed point procedure for its estimation. Estimates from County Business Patterns data on U.S. local cinema markets point to tough local competition. Sunk costs make the industry's transition following a permanent demand shock last 10 to 15 years.
    Keywords: demand uncertainty; dynamic oligopoly; firm entry and exit; nested fixed point estimator; sunk costs; toughness of competition; cunterfactual plicy analysis
    JEL: L13 C25 C73
    Date: 2017
  6. By: Ian Jewitt (Oxford University); Daniel Z. Li (Durham Business School)
    Abstract: This paper explores the possibilities for sellers to usefully transmit product information to buyers by cheap talk public advertising. We explore two polar cases, contrasting vertically differentiated products (a la Milgrom Weberís (1982) general symmetric model) with horizontally di§erentiated products (a la Hotellingís (1929) line). We consider both the message only case and where reserve price-message pairs can be chosen by the seller. For horizontally di§erentiated products partitional messageonly informative equilibria are shown to exist providing the number of bidders is sufficiently large. The equilibrium is characterized by more precise information provided for less popular product attributes. The seller optimal disclosure policy displays a complementarity relationship between the number of bidders and the amount of product information disclosed. In contrast, for the vertically di§erentiated products benchmark, message-only informative equilibria do not exist. With reserve prices, informative equilibria exist in both cases. For the vertical case these equilibria yield lower seller revenue than uninformative equilibria. In the horizontal case with sufficiently large number of bidders higher revenue is possible and full disclosure becomes feasible and seller optimal in the limit.
    Keywords: Cheap Talk; Information Disclosure; Auction; Horizontal Differentiation; Vertical Differentiation; Informative Equilibrium
    JEL: D44 D82 D83 L10 M37
    Date: 2017–04
  7. By: Victor Aguirregabiria; Margaret Slade
    Abstract: We review important developments in Empirical Industrial Organization (IO) over the last three decades. The paper is organized around six topics: collusion, demand, productivity, industry dynamics, interfirm contracts, and auctions. We present models that are workhorses in empirical IO, and describe applications. For each topic, we discuss at least one empirical application using Canadian data.
    Keywords: Empirical Industrial Organization; Collusion; Demand for differentiated products; Production functions; Dynamic structural models; Interfirm contracts; Empirical auction models
    JEL: C57 L10 L20 L30 L40 L50
    Date: 2017–04–25
  8. By: Aminadav, Gur; Massa, Massimo; Zhang, Hong; Zhu, Weikang
    Abstract: We study how value affects the bargaining game in the market for corporate control. We focus on business groups and propose a novel approach in which we can directly quantify the difference in value between what the buyer gets and what the seller gives. If a firm helps to retain control of a group through a network of cross-ownership, another firm buying such firm does not necessarily acquire control of the group. This implies that if another firm buys such firm, the seller loses control of the group but the buyer does not necessarily acquire it. Therefore, the value of the firm for the buyer is lower than it is for the seller. In these conditions it is not likely that the deal will ever go though. We argue and show that the difference in the value for the buyer and that for the seller is always strongly negatively related to the target market and offer premia as well as to the probability of completion of the deal. The relative bargaining power of bidder and target also affects the probability of the deal being initiated: a greater bargaining power makes it more likely to bid for another one and less likely to be the target itself of a deal. Our results provide a new way of thinking about the value of control in the M&A bargaining game and more in general about the value of firms, showing a dimension that is not directly related to cash flows and that is linked to the pure value of control within groups.
    Keywords: bargaining power; Business Groups; M&As; value of control
    JEL: G12 G3 G32
    Date: 2017–04
  9. By: Daniel Z. Li (Durham Business School); Minbo Xu (Beijing Normal University)
    Abstract: We study the effects of corruption on equilibrium competition and social welfare in a public procurement auction. In our model, firms are invited to the auction at positive costs, and a bureaucrat who runs the auction on behalf of a government may request a bribe from the winning Örm. We Örst present the over-invitation results in the absence of corruption, in which more than a socially optimal number of firms will be invited. Second, we show that the e§ects of corruption on equilibrium outcomes vary across di§erent forms of bribery. For a Öxed bribe, corruption has no e§ect on equilibrium competition, although it does induce social welfare loss. For a proportional bribe, a corrupt bureaucrat may invite fewer or more firms to the auction depending on how much he weights his personal interest relative to the government payoff. Thus, corruption may result in either Pareto-improving or deteriorating allocations. Finally, we show that information disclosure may consistently induce more firms to be invited, regardless of whether there is corruption.
    Keywords: procurement auction; competition; corruption; Öxed bribe; proportional bribe
    JEL: D44 D73 H57
    Date: 2017–04
  10. By: Robert Kulick
    Abstract: I estimate the price and productivity effects of horizontal mergers in the ready-mix concrete industry using plant and firm-level data from the US Census Bureau. Horizontal mergers involving plants in close proximity are associated with price increases and decreases in output, but also raise productivity at acquired plants. While there is a significant negative relationship between productivity and prices, the rate at which productivity reduces price is modest and the effects of increased market power are not offset. I then present several additional new results of policy interest. For example, mergers are only observed leading to price increases after the relaxation of antitrust standards in the mid-1980s; price increases following mergers are persistent but tend to become smaller over time; and, there is evidence That firms target plants charging below average prices for acquisition. Finally, I use a simple multinomial logit demand model to assess the effects of merger activity on total welfare. At acquired plants, the consumer and producer surplus effects approximately cancel out, but effects at acquiring plants and non-merging plants, where prices also rise, cause a substantial decrease in consumer surplus.
    Date: 2017–01
  11. By: Pham, Tho; Talavera, Oleksandr; Yang, Junhong
    Abstract: This paper examines the impacts of non-price competition on bank performance in the Ukrainian banking industry from 2009 Q1 to 2015 Q4. The competition is proxied by three measures of multimarket contacts. Our data reveal that banks with higher level of multiple market contacts are more likely to be profitable. The findings support the mutual forbearance hypothesis. When banks compete with rivals that are similar in size in multiple markets, they have incentives to cooperate instead of competing aggressively. Moreover, the effect is stronger when multimarket competitors are highly similar in size and interact in more competitive markets. Furthermore, we develop an identification strategy in which military actions are treated as an exogenous shock to banks with branches in those regions. The results suggest that after the conflict, the less affected banks do not have incentives to mutual forbear with more affected banks that experienced a sharper decline in number of branches.
    Keywords: Banking; Multimarket competition; Multimarket contact; Mutual forbearance hypothesis; Profitability; Identification strategy; Exogenous shock; Political conflict
    JEL: G21 L11 L25 L40
    Date: 2016–07–05
  12. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates whether consumer search behavior differs across zip codes within the U.S.. As an application, daily gasoline price data covering virtually all gas stations within the U.S. are employed to estimate the distribution of search costs in each zip code. The results show that there are significant differences across zip codes regarding the expected number of searches achieved before consumers purchase gasoline. In order to have a systematic explanation, such differences are further connected to geographic, demographic and economic conditions of the zip codes in a secondary analysis. The corresponding results imply several strategies for gas stations in order to maximize profits/markups; suggestions follow for policy makers and regulators to reduce redistributive effects of information barriers across locations.
    Keywords: Consumer Search, Price Dispersion, Retail Gasoline
    JEL: D12 D83 L81
    Date: 2017–04
  13. By: Matt V. Leduc; Matthew O. Jackson; Ramesh Johari
    Abstract: When a new product or technology is introduced, potential consumers can learn its quality by trying the product, at a risk, or by letting others try it and free-riding on the information that they generate. We propose a dynamic game to study the adoption of technologies of uncertain value, when agents are connected by a network and a monopolist seller chooses a policy to maximize profits. Consumers with low degree (few friends) have incentives to adopt early, while consumers with high degree have incentives to free ride. The seller can induce high-degree consumers to adopt early by offering referral incentives - rewards to early adopters whose friends buy in the second period. Referral incentives thus lead to a `double-threshold strategy' by which low and high-degree agents adopt the product early while middle-degree agents wait. We show that referral incentives are optimal on certain networks while inter-temporal price discrimination (i.e., a first-period price discount) is optimal on others, and discuss welfare implications.
    Date: 2015–09
  14. By: Ludmila Matyskova; Jan Sipek
    Abstract: Consumer reviews may have perverse effects, including delays of adoption in new products of unknown quality when consumers are boundedly rational. When consumers fail to take into account that past reviewers self-select to purchases, a monopolist may manipulate the posterior beliefs of consumers who observe the reviews, because the product price determines the self-selection bias. The monopolist will charge a relatively high price because the positive selection of the early adopters increases the quality reported in the reviews.
    Keywords: cursed equilibrium; online social learning; two-sided learning
    JEL: D42 D82 D83 L15
    Date: 2017–04
  15. By: Medalla, Erlinda M.
    Abstract: After numerous attempts over more than a decade, the Philippine government finally enacted a comprehensive competition law, the Philippine Competition Act (Republic Act 10667) in July 2015. Before this breakthrough legislation, competition policy and law was scattered in about 30 different laws (for instance, the Philippine Constitution, Revised Penal Code, Consumer and Price Acts, and sector-specific regulations), with outdated provisions and hardly any jurisprudence. The passing of the law is only the first step. Much needs to be done to establish a truly working competition policy, including capacity building, and dissemination, information, and education for the law. This paper attempts to contribute in this regard by examining the provisions of the new law and providing an overview of what it covers, what it can do, and what could be the possible implications for related policies. As such, this paper has three major sections. The first provides an overview of the rationale and objectives of competition law. The second discusses the major provisions of the new law, including some comments to highlight important provisions. The third section provides an overall assessment of the act and additional comments and observations. The section also briefly looks at the case of PLDT/Globe acquisition of the San Miguel Corporation's telecommunications assets.
    Keywords: Philippines, Philippine Competition Act, competition policy and law, anticompetitive behavior, San Miguel Corporation, PLDT, Globe
    Date: 2017

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