nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒07‒23
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Cournot Oligopoly, Price Discrimination and Total Output By Aguirre, Iñaki
  2. Uncertain merger synergies, passive partial ownership, and merger control By Shekhar, Shiva; Wey, Christian
  3. Regulating False Disclosure By Maarten C. W. Janssen; Santanu Roy
  4. On the benefits of set-asides By Philippe Jehiel; Laurent Lamy
  5. Whistleblowers on the Board? The Role of Independent By Campello, Murillo; Ferrés, Daniel; Ormazabal, Gaizka
  6. From few to many: product differentiation in the Italian mortgage market By Silvia Del Prete; Cristina Demma; Paola Rossi
  7. Spatial effects in the bid price setting strategies of the wholesale electricity markets: The case of Colombia By John J. García; Jesús López-Rodríguez; Jhonny Moncada-Mesa
  8. Identification in Ascending Auctions, with an Application to Digital Rights Management By Joachim Freyberger; Bradley J. Larsen
  9. The Economic Functioning of Online Drugs Markets By V. Bhaskar; Robin Linacre; Stephen Machin
  10. Nonlinear and asymmetric pricing behaviour in the Spanish gasoline market By Torrado, María; Escribano Sáez, Álvaro
  11. Towards a Political Theory of the Firm By Luigi Zingales
  12. Declining Competition and Investment in the U.S. By Germán Gutiérrez; Thomas Philippon
  13. A Macroeconomic Theory of Banking Oligopoly By Stella Xiuhua Huangfu; Hongfei Sun; Chenggang Zhou; Mei Dong
  14. Market Structure and Monetary Non-Neutrality By Simon Mongey

  1. By: Aguirre, Iñaki
    Abstract: This paper extends the traditional analysis of the output effect under monopoly (third-degree) price discrimination to a multimarket Cournot oligopoly. Under symmetric Cournot oligopoly (all firms selling in all markets) similar results to those under monopoly are obtained: in order for price discrimination to increase total output the demand and inverse demand of the strong market (the high price market) should be, as conjectured by Robinson (1933), more concave than the demand and inverse demand of the weak market (the low price one). When competitive pressure (measured by the number of firms) varies across markets the effect of price discrimination on total output crucially depends on what market, the strong or the weak, is more competitive.
    Keywords: Third-Degree Price Discrimination, Output, Oligopoly, Welfare.
    JEL: D43 D61 L13
    Date: 2017–07–13
  2. By: Shekhar, Shiva; Wey, Christian
    Abstract: We examine the competitive effects of a passive partial ownership (PPO) when it serves as an instrument for the acquirer firm to learn the merger synergies with the target firm in advance. The realization of a synergy is uncertain ex ante, so that a direct merger exhibits a downside risk not only for the merging candidates but also for consumers. We show that minority shareholdings can reduce this downside risk as they allow for a sequential takeover where the acquirer takes an initial minority share, becomes an insider, and learns the merger synergy. We show how this feature of PPOs affects a firm's takeover strategy and the decision problem of the antitrust authority. We derive implications for a merger control approach to PPO acquisitions, where we examine a forward looking price test and a safeharbor rule.
    Keywords: Merger Control,Passive Partial Ownership,Synergies
    JEL: L13 L41
    Date: 2017
  3. By: Maarten C. W. Janssen; Santanu Roy
    Abstract: Firms communicate private information about product quality through a combination of pricing and disclosure where disclosure may be deliberately false. In a competitive setting, we examine the effect of regulation penalizing false disclosure. Stronger regulation reduces the reliance on price signaling, thereby lowering market power and consumption distortions; however, it often creates incentives for excessive disclosure. Regulation is suboptimal unless disclosure itself is inexpensive and even in the latter case, only strong regulation is welfare improving. Weak regulation is always worse than no regulation. Even high quality firms suffer due to regulation.
    JEL: L13 L15 D82 D43
    Date: 2017–05
  4. By: Philippe Jehiel (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Laurent Lamy (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CIRAD - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Set-asides programs consist in forbidding access to specific participants, and they are commonly used in procurement auctions. We show that when the set of potential participants is composed of an incumbent (who bids for sure if allowed to) and of entrants who show up endogenously (in such a way that their expected rents are fixed by outside options), then it is always beneficial for revenues to exclude the incumbent in the second-price auction. This exclusion principle is generalized to auction formats that favor the incumbent in the sense that he would always gets the good when he values it most. By contrast, set-asides need not be desirable if the incumbent's payoff is included into the seller's objective or in environments with multiple incumbents. Various applications are discussed.
    Keywords: set-asides, entry restrictions, auctions with endogenous entry,entry deterrence, asymmetric buyers, incumbents, government procurement,procurement competition policy
    Date: 2017–07
  5. By: Campello, Murillo; Ferrés, Daniel; Ormazabal, Gaizka
    Abstract: Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors on their boards. This finding is robust to self-selection and is pronounced when independent directors hold more outside directorships and fewer stock options -when those directors have fewer economic ties to indicted firms. Results are even stronger when independent directors' appointments were attributable to SOX, preceded their CEO's own appointment, or followed class action suits|when directors have fewer ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support in other firms. Firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs. They are also more likely to dismiss scandal-laden CEOs after public indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to mitigate those costs. We argue that understanding these incentive-compatible dynamics is key in designing strategies for cartel detection and prosecution.
    Keywords: Cartel Prosecution; Antitrust Policy; Leniency Programs; Independent Directors;
    JEL: G30 K21 L41
    Date: 2017–07
  6. By: Silvia Del Prete (Bank of Italy); Cristina Demma (Bank of Italy); Paola Rossi (Bank of Italy)
    Abstract: Nowadays Italian borrowers can choose among a variety of mortgage contracts. Using a special Bank of Italy survey on 400 Italian banks over the period 2006-2013, we analyse the supply of ‘non-conventional’ mortgages (loan-to-value ratio greater than 80 per cent, duration longer than 30 years or with a flexible maturity). We build a synthetic indicator measuring the degree of differentiation of mortgages across banks to examine how local market competition and bank-specific characteristics have influenced this process. Our findings – potentially influenced also by customer preferences we cannot control for – suggest that larger, less risky banks and those that have adopted scoring systems are more likely to offer non-conventional mortgages. Moreover, banks operating in more competitive markets and in markets where other banks offer non-conventional loans tend to diversify their supply more. Most of these indications are confirmed by analysing the quantities actually granted. These results suggest that the structure of the local markets does matter and that there could be a non-price competition effect among banks in providing differentiated mortgage contracts.
    Keywords: Households’ mortgages, financial crisis, bank heterogeneity
    JEL: G21 G01 D12 D14
    Date: 2017–06
  7. By: John J. García; Jesús López-Rodríguez; Jhonny Moncada-Mesa
    Abstract: Weather conditions in Colombia vary greatly throughout the territory and therefore the location of electricity generating plants plays a key role in their bid pricing strategies. To account for these location-specific pricing strategies this paper estimates a Spatial Durbin Model (SDM) with monthly data gathered from the 17th largest hydraulic electricity generating plants of Colombia on bid prices, generation, energy inputs and positive reconciliation over the period January 2005-August 2015 and controlling also for the system marginal prices and the economy cycle. The paper reports three main results. First, firms ? bid prices are negatively affected by the energy inputs of the rivals, second they are unaffected by positive reconciliation payments to the rivals and third they are negatively affected by the generation amounts of the rivals. One potential policy recommendation of these results is the need to implement balancing markets to signal more efficiently the pricing strategies in these markets.
    Keywords: Bid Price, wholesale electricity market, Spatial Durbin, Colombia
    JEL: C23 D43 L25
    Date: 2017–03–03
  8. By: Joachim Freyberger; Bradley J. Larsen
    Abstract: This study provides new identification and estimation results for ascending (traditional English or online) auctions with unobserved auction-level heterogeneity and an unknown number of bidders. When the seller's reserve price and two order statistics of bids are observed, we derive conditions under which the distributions of buyer valuations, unobserved heterogeneity, and number of participants are point identified. We also derive conditions for point identification in cases where reserve prices are binding (in which case bids may be unobserved in some auctions) and present general conditions for partial identification. We propose a nonparametric maximum likelihood approach for estimation and inference. We apply our approach to the online market for used iPhones and analyze the effects of recent regulatory changes banning consumers from circumventing digital rights management technologies used to lock phones to service providers. We find that buyer valuations for unlocked phones dropped after the unlocking ban took effect.
    JEL: C1 C57 D44 L0 L96 O3
    Date: 2017–07
  9. By: V. Bhaskar; Robin Linacre; Stephen Machin
    Abstract: The economic functioning of online drug markets using data scraped from online platforms is studied. Analysis of over 1.5 million online drugs sales shows online drugs markets tend to function without the significant moral hazard problems that, a priori, one might think would plague them. Only a small proportion of online drugs deals receive bad ratings from buyers, and online markets suffer less from problems of adulteration and low quality that are a common feature of street sales of illegal drugs. Furthermore, as with legal online markets, the market penalizes bad ratings, which subsequently lead to significant sales reductions and to market exit. The impact of the well-known seizure by law enforcement of the original Silk Road and the shutdown of Silk Road 2.0 are also studied, together with the exit scam of the market leader at the time, Evolution. There is no evidence that these exits deterred buyers or sellers from online drugs trading, as new platforms rapidly replaced those taken down, with the online market for drugs continuing to grow.
    Keywords: dark web, drugs
    JEL: K42
    Date: 2017–07
  10. By: Torrado, María; Escribano Sáez, Álvaro
    Abstract: Over the last decades a transition from a state-own monopoly to a private business took placein the Spanish fuel sector. To figure out whether downstream prices react differently toupstream price increases than to price decreases, alternative dynamic nonlinear andasymmetric error correction models are applied to weekly price data. This paper analyse theexistence of price asymmetries in the fuel market in Spain during the 2011-2016 period. Incomparison with traditional asymmetric price theory literature, this paper introduces a newdouble threshold error correction (ECM) model (DT-ECM) and new double logistic ECMmodels and compares them with more common linear ECM, time varying parameter models(TV-ECM), threshold autoregressive models (T-ECM), smooth transition autoregressive(STAR) models and nonlinear error correction (Logistic-ECM) and double threshold Logistic(DT-Logistic ECM). The nonlinear and asymmetric results found show that sophisticatedbivariate long-run asymmetries are present in the prices of the fuel sector and that those pricereactions depend on whether the oil price increases or decreases, on the stage of theproduction, the distribution chain as well as on the period considered.
    Keywords: Rockets and Feathers; Nonlinear Error Correction Models; Logistic-STAR Models; Double-Threshold-ECM models; Threshold-ECM models; Gasoline Price Asymmetries
    JEL: L71 L13 D43 C52 C24 B23
    Date: 2017–07–01
  11. By: Luigi Zingales
    Abstract: Neoclassical theory assumes that firms have no power of fiat any different from ordinary market contracting, thus a fortiori no power to influence the rules of the game. In the real world, firms have such power. I argue that the more firms have market power, the more they have both the ability and the need to gain political power. Thus, market concentration can easily lead to a “Medici vicious circle,” where money is used to get political power and political power is used to make money.
    JEL: G3
    Date: 2017–07
  12. By: Germán Gutiérrez; Thomas Philippon
    Abstract: The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. We argue that declining competition is partly responsible for this phenomenon. We use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, we show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing we show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, we provide some evidence that the increase in concentration can be explained by increasing regulations.
    JEL: D4 E22 G31
    Date: 2017–07
  13. By: Stella Xiuhua Huangfu (University of Sydney); Hongfei Sun (Queen's University); Chenggang Zhou (University of Waterloo); Mei Dong (University of Melbourne)
    Abstract: We study the behavior and economic impact of oligopolistic banks in a tractable macro environment with solid micro-foundations for money and banking. Our model has three key features: (i) banks as oligopolists; (ii) liquidity constraint for banks that arises from mismatched timing of payments; and (iii) search frictions in credit, labor and goods markets. Our main ndings are: First, both bank prot and welfare react non-monotonically to the number of banks in equilibrium. Strategic interaction among banks may improve welfare as in standard Cournot competition. Nevertheless, competition among oligopolistic banks does not always improve welfare. As the number of banks rises, each bank has stronger marginal incentives to issue loans, yet each receives a smaller share of the aggregate demand deposit used to make loans. When the number is su¢ ciently high, banks become liquidity constrained in that the amount they lend is limited by the amount of deposits they can gather. In this case, welfare is dampened as banks are forced to reduce lending, which leads to fewer rms getting funded, higher unemployment, and thus ultimately lower output. Second, with entry to the banking sector, there may exist at most three equilibria of the following types: one is stable and Pareto dominates, another is unstable and ranks second in welfare, and the third is stable yet Pareto inferior. The number of banks is the lowest in the equilibrium that Pareto dominates. Finally, ination can change the nature of the equilibrium. Low ination promotes a unique good equilibrium, high ination cultivates a unique bad equilibrium, but medium ination can induce all three equilibria of the aforementioned types.
    Date: 2017
  14. By: Simon Mongey (NYU)
    Abstract: Canonical macroeconomic models of pricing under nominal rigidities assume markets consist of atomistic firms. Most US retail markets are dominated by a few large firms. To bridge this gap, I extend an equilibrium menu cost model to allow for a continuum of sectors with two large firms in each sector. Compared to a model with monopolistically competitive markets, and calibrated to the same good-level data on price adjustment, the duopoly model generates output responses to monetary shocks that are more than twice as large. Firm-level prices respond equally to idiosyncratic shocks, but less to aggregate shocks in the calibrated duopoly model. Under duopoly, the response of low priced firms to an increase in money is dampened: a falling real price at its competitor weakens both the incentive to increase prices, and price conditional on adjustment. The dynamic duopoly model also implies (i) large first order welfare losses from nominal rigidities, (ii) lower menu costs, (iii) a U-shaped relationship between market concentration and price flexibility, forwhich I find strong evidence in the data, (iv) a source of downward bias in markup estimates attained from inverting a static oligopoly model.
    Date: 2017

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