nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒08‒06
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Endogenous Mergers in Markets with Vertically Diffeerentiated Products By Jaskold Gabszewicz, Jean; Marini, Marco A.; Tarola, Ornella
  2. The endogeneous choice of delegation in a duopoly with outsourcing to the rival By Luciano Fanti; Marcella Scrimitore
  3. ‘To sell or not to sell’: Licensing versus Selling by an outside innovator By Banerjee, Swapnendu; Poddar, Sougata
  4. Networks, Frictions, and Price Dispersion By Pablo Schenone; Gregory Veramendi; Javier Donna
  5. When Demand Increases Cause Shakeouts By Thomas N. Hubbard; Michael J. Mazzeo
  6. A Model of Third-Degree Price Discrimination with Positive Welfare Effects By Simon GB Cowan
  7. Core Existence in Vertically Differentiated Markets By Gabszewicz, Jean; Marini, Marco A.; Tarola, Ornella
  8. Market Power and Informational Efficiency By Savitar Sundaresan; Jaromir Nosal; Marcin Kacperczyk
  9. The Effect of Default Rates on Retail Competition and Pricing Decisions of Competitive Retailers: The Case of Alberta By Brown, David P.; Eckert, Andrew
  10. The Landscape of US Generic Prescription Drug Markets, 2004-2016 By Ernst R. Berndt; Rena M. Conti; Stephen J. Murphy
  11. Estimating Market Power: Evidence from the US Brewing Industry By Paul Scott
  12. Effects of concession revenue sharing contracts and airline alliances in airport competition By Adrian Nerja
  13. The competitive landscape of online platforms By Nestor Duch-Brown
  14. Opening the Retail Electricity Markets: Puzzles, Drawbacks and Policy Options By Anna Airoldi; Michele Polo
  15. Consolidations in the German interurban bus industry: Effects on prices and quantities By Samuel de Haas; Jan Thomas Schaefer
  16. A Formal Test of Competition in the Banking Sector of Pakistan: An Application of PR-H Statistic By Mahmood ul Hasan Khan; Muhammad Nadim Hanif
  17. Competition and Bank Fragility By Marsh, Blake; Sengupta, Rajdeep
  18. An Empirical Evaluation of ‘Structure-Conduct-Performance’ and ‘Efficient-Structure’ Paradigms in the Banking Sector of Pakistan By Mahmood ul Hasan Khan; Muhammad Nadim Hanif
  19. Measuring Competition in the Banking Sector of Pakistan: An Application of Boone Indicator By Mahmood ul Hasan Khan; Muhammad Nadim Hanif

  1. By: Jaskold Gabszewicz, Jean; Marini, Marco A.; Tarola, Ornella
    Abstract: This paper studies the incentives of firms selling vertically differentiated products to merge. To this aim, we introduce a three-stage game in which, at the first stage, three independent firms can decide to merge with their competitors via a sequential game of coalition formation and, at the second and third stage, they can optimally revise their qualities and prices, respectively. We study whether such binding agreements (i.e. full or partial mergers) can be sustained as subgame perfect equilibria of the coalition formation game, and analyze their effects on equilibrium qualities, prices and profits. We find that, although profitable, the merger-to-monopoly of all firms is not an outcome of the finite-horizon negotiation, where only partial mergers arise. Moroever, we show that all stable mergers always include the firm initially producing the bottom quality good and reduce the number of variants on sale.
    Keywords: Mergers, Price Collusion, Vertically Differentiated Products, Sequential Game of Coalition Formation.
    JEL: C7 D21 L1 L11 L13 L16 L4 L41 L43
    Date: 2017–07–20
  2. By: Luciano Fanti; Marcella Scrimitore
    Abstract: In a market in which a vertically integrated producer (VIP) also supplies an essential input to a retail rival, we explore the role of managerial delegation when it shapes downstream firms' incentives and determine the endogenous choice of delegation under both Cournot and Bertrand. The equilibrium choice of acting as a managerial firm, which is a standard result in literature of strategic delegation, is shown to be robust to the presence of a VIP in both the quantity competition and the price competition framework, regardless of the degree of product differentiation. The paper, however, highlights the different motives pushing the integrated firm and the independent retailer towards delegation, which also revert the standard result that delegation causes a prisoner's dilemma-type equilibrium under Cournot and a more profitable outcome under Bertrand. This result sheds new light on the role and implications of the managerial delegation in the real-world market structures.
    Keywords: Strategic delegation, outsourcing, Cournot competition, Bertrand competition, vertical integration.
    JEL: D43 L13 L21
    Date: 2017–01–01
  3. By: Banerjee, Swapnendu; Poddar, Sougata
    Abstract: Abstract Study of patent licensing in spatial competition is relatively sparse. We study optimal licensing policies of an outside innovator in spatial framework when the potential licensees are asymmetric. We also introduce the notion of selling the property rights of innovation. We then examine the incentive of the innovator who sell the rights and compare that with conventional licensing contracts. We address this problem in linear city with two competing asymmetric firms (potential licensees). We show the optimal licensing policy is pure royalty to both firms when cost differentials between the firms are relatively small, otherwise it is fixed fee licensing to the efficient firm only. Interestingly, we show the innovator is always better-off selling innovation to one of the firms. This holds irrespective of the size of the innovation (drastic or non-drastic) and the degree of pre-innovation cost asymmetry between the firms. Social welfare is greater under selling than licensing.
    Keywords: Outside innovator, Cost-reducing innovation, Patent Licensing, Patent Selling, Welfare, Linear city model
    JEL: D43 D45 L13
    Date: 2017–07–19
  4. By: Pablo Schenone (Arizona State University); Gregory Veramendi (Arizona State University); Javier Donna
    Abstract: This paper studies price dispersion in buyer-seller markets using networks to model frictions, where buyers are linked with a subset of sellers and sellers are linked with a subset of buyers. Our approach allows for indirect competition, where a buyer who is not directly linked with a seller affects the price obtained by that seller. Indirect competition generates the central finding of our paper: price dispersion depends on both the number of links in the network and the structure of the network (how links are distributed). Networks with very few links can have no price dispersion, while networks with many links can still support significant price dispersion. We develop a decomposition of the network that characterizes which links are redundant (i.e. have no effect on prices). We show that a particular network structure (Hamiltonian Cycle) with only two links per node has no price dispersion. We then use a theorem from Frieze (1985) to show that this network structure arises asymptotically with probability one in a randomly drawn network, even as the probability of an individual link goes to zero. We also show the finite sample properties of this relationship and find that even small sparse networks can have very little price dispersion. In an application to eBay, we show that our model reproduces the price dispersion seen in the data quite well, and that 35-45 percent of the price dispersion at eBay can be explained by the network structure alone.
    Date: 2017
  5. By: Thomas N. Hubbard; Michael J. Mazzeo
    Abstract: Standard economic models that guide competition policy imply that demand increases should lead to more, not fewer firms. However, Sutton’s (1991) model illustrates that in some cases, demand increases can catalyze competitive responses that bring about shake-outs. This paper provides empirical evidence of this effect in the 1960s-1980s hotel and motel industry, an industry where quality competition increasingly took the form of whether firms supplied outdoor recreational amenities such as swimming pools. We find that openings of new Interstate Highways are associated with increases in hotel employment, but decreases in the number of firms, in local areas. We further find that while highway construction is associated with increases in hotel employment in both warm and cold places, it only leads to fewer firms in warm places (where outdoor amenities were more valued by consumers). Finally, we find no evidence of this effect in other industries that serve highway travelers, gasoline retailing or restaurants, where quality competition is either less important or quality is supplied more through variable costs. We discuss the implications of these results for competition policy, and how they highlight the importance and challenge of distinguishing between “natural” and “market-power-driven” increases in concentration.
    JEL: L11 L41
    Date: 2017–07
  6. By: Simon GB Cowan
    Abstract: Abstract Monopoly third-degree price discrimination raises social welfare above the level with a uniform price when direct demand functions have constant curvatures that differ across markets and are below 1, and the maximum willingness to pay is identical across markets.
    Keywords: third-degree price discrimination, monopoly, social welfare
    JEL: D42 L12 L13
    Date: 2017–08–01
  7. By: Gabszewicz, Jean; Marini, Marco A.; Tarola, Ornella
    Abstract: We prove that a sufficient condition for the core existence in a n-firm vertically differentiated market is that the qualities of firms' products are equispaced along the quality spectrum. This result contributes to see that a fully collusive agreement among firms in such markets is more easily reachable when product qualities are not distributed too asymmetrically along the quality ladder.
    Keywords: Vertically Differentiated Markets; Price Collusion; Core; Grand Coalition; Coalition Stability; Games with Externalities; Partition Function Games.
    JEL: C7 C71 D21 D4 L1 L13
    Date: 2016–12–10
  8. By: Savitar Sundaresan (Columbia University); Jaromir Nosal (Boston College); Marcin Kacperczyk (Imperial College London)
    Abstract: Levels and concentration of institutional equity ownership have been growing steadily over the last few decades raising concerns of potential market insta- bility. We study theoretically and empirically the consequences of changes in ownership structure for informational content of prices, on average and across assets with di↵erent characteristics. Our theoretical framework is a general equilibrium portfolio-choice model with endogenous information acquisition and market power. We show that, in the cross section, an increase in institutional (informed) ownership increases price informativeness, and an increase in con- centration of ownership leads to lower informativeness. We confirm similar e↵ects in the data of U.S. stocks over the period 1980-2015. The policy ex- periments of changing ownership structure indicate a non-monotonic relation between the levels and concentration of ownership and price informativeness. We conclude that any policy targeting ownership structure should factor in its e↵ects on welfare through price informativeness.
    Date: 2017
  9. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics)
    Abstract: We investigate the impacts of default regulated products and their design on the development of competitive retail markets and retailers' pricing decisions. We analyze this question in the context of Alberta's competitive retail electricity market, using data on the prices and characteristics of both regulated and unregulated retail products from July 2006 to March 2017. Our analysis consists of a descriptive discussion of the evolution of market structure in the industry, followed by an econometric analysis of the effect of default prices on unregulated retail prices. We find that as the default product moved from being a long-term stable product, to one based on short-term forward market prices, the number of products and competitors increased substantially. This suggests that the change in the default product was successful at facilitating the development of a competitive retail market. However, our econometric analysis of the pricing of unregulated contracts suggests that competitive retailers may continue to exercise market power by adjusting prices upward in response to short-term changes in the regulated rate, even after controlling for changes in the costs of providing retail products.
    Keywords: Electricity; Retail Markets; Market Power; Regulation; Default Rates
    JEL: D43 L51 L94 Q40
    Date: 2017–08–03
  10. By: Ernst R. Berndt; Rena M. Conti; Stephen J. Murphy
    Abstract: Since the 1984 passage of the Waxman-Hatch Act, generic prescription drugs have become central to disease treatment and generic drug entry and price competition has been vigorous in the U.S. Nonetheless, recent policy concern has focused on potential supply inadequacy and price increases among selected generic drugs. Details regarding the supply of generic drugs throughout the product life cycle are surprisingly unstudied. Here, we examine manufacturer entry, exit, the extent of competition and the relationship between supply structure and inflation adjusted prices among generic drugs. Our empirical approach is descriptive and reduced form, following recent innovations on the older structure-conduct-performance tradition. We employ quarterly national data on quantities, wholesale dollar sales and manufacturers from QuintilesIMS National Sales Perspective data, 2004Q4–2016Q3. Defining a market as the molecule-dosage-form, we observe that median sizes of drug markets are predominantly small, with annual inflation adjusted sales revenues of less than $10 million but increasing over time. The median number of manufacturers in each market is about two, the mean about four. We find evidence to suggest decreasing numbers of suppliers over our study period, particularly following implementation of the Affordable Care Act in 2010 and the Generic Drug User Fee Amendments of 2012, attributable both to more exit and less entry. Approximately 40 percent of markets are supplied by one manufacturer; the share of markets supplied by one or two manufacturers is observed to increase over time and is more likely among non-oral drugs and those belonging to selected therapeutic classes. We find evidence to suggest prices of generic drugs are statistically significantly increasing over time, particularly following the implementation of the 2010 Affordable Care Act and the 2012 Generic Drug User Fee Amendments. Price increases are positively correlated with reduced manufacturer counts and alternative measures of increased supplier concentration, holding all else constant. Our results suggest the market for generic drugs is largely comprised of small revenue products the supply of which has tended towards duopoly or monopoly in recent years. Therefore, it is surprising generic drug prices have not been observed to be higher and potentially risen more over our study period. This issue merits further study; we suggest several testable hypotheses based in economic theory.
    JEL: I11
    Date: 2017–07
  11. By: Paul Scott (Toulouse School of Economics)
    Abstract: While inferring markups from demand data is common practice, estimation relies on difficult-to-test assumptions, including a specific model of how firms compete. Alternatively, markups can be inferred from production data, again relying on a set of difficult-to-test assumptions, but a wholly different set, including the assumption that firms minimize costs using a variable input. Relying on data from the US brewing industry, we directly compare markup estimates from the two approaches. After implementing each approach for a broad set of assumptions and specifications, we find that both approaches provide similar and plausible markup estimates in most cases. The results illustrate how using the two strategies together can allow researchers to evaluate structural models and identify problematic assumptions.
    Date: 2017
  12. By: Adrian Nerja (Universidad de Valencia. ERI-CES)
    Abstract: In the last decades the number of airports has grown substantially leading to situations where two or more airports share the same catchment area. On the other hand, the airlines market has been partially deregulated which has intensifi ed competition. All of these have motivated the formation of controversial vertical agreements as they raise possible anticompetitive issues. This paper considers a type of vertical agreement, concession revenue sharing contract, to analyze how airport-airline vertical structures compete for passengers when they share a catchment area. The analysis distinguishes the e ect of ownership structure of airports. Parallel alliances in the airlines market are also considered. Our results point out that airports have incentives to share the whole concession revenues, and that parallel alliances may improve Social Welfare. These results have policy implications because this kind of contract encourages Social Welfare, so they should to be leniently looked, just as the formation of alliances.
    Keywords: Concession revenues; Revenue shraing; Airport competition; Airport-airline vertical cooperation; Parallel alliances.
    Date: 2017–07
  13. By: Nestor Duch-Brown (European Commission – JRC)
    Abstract: This paper describes the different forces that shape the market structure of four different 'online platform ecosystems' and the competition between them. The paper focuses on the following categories of platforms, which represent a wide scope of online activities: (i) e-commerce marketplaces; (ii) app stores; (iii) social media; and (iv) online advertising platforms. A central concern is to provide descriptive, empirical evidence on the relative strength of the forces operating in each case. In the past decade or so, many theoretical and conceptual contributions have been very helpful in developing a clear understanding of many of the issues around multi-sided markets, and have analysed these activities from many different perspectives. Unfortunately, they have provided hardly any empirical evidence. This paper attempts to reduce the lack of empirical evidence available on online platforms.
    Keywords: digital single market, data economy, online platforms, multi-sided markets
    JEL: D23 K11 K12 L86
    Date: 2017–07
  14. By: Anna Airoldi; Michele Polo
    Abstract: The Italian electricity retail market is fully liberalized since 2007, allowing all households to choose between a regulated tariff and those offered in the free market. However, as of 2015, almost 70% of households remain with the regulated contract and only 4.5% moves every year to the free market. Moreover, contracts more costly than the regulated default one are offered and subscribed. In this paper we first analyze the best and worst offers on the free market, identifying significant potential gains but also losses when switching from the regulated tariff to the free market. Then we build up a sequential search model that extends Janssen et al. (2005) to explain this evidence. Consumers have zero (shoppers) and positive (non-shoppers) search costs. These latter receive upward (pessimistic) or downward (optimistic) biased signals of their current regulated price. We obtain a rich set of mixed strategy equilibria with continuous support and, in some cases, an atom, different level of participation of non-shoppers of either type and some contracts more costly than the regulated one. Equilibria with a larger participation of non-shoppers are associated with higher expected and minimum prices. Search costs and perception bias are key parameters in comparative statics, with policy implications to improve market performance. Finally, by mid 2019 the Government has planned to lift the regulated tariff. We use the model to predict possible outcomes including an initial increase in prices.
    Keywords: Search costs, liberalized retail markets, price dispersion, gains and losses from switching.
    JEL: L13 L15 L94
    Date: 2017
  15. By: Samuel de Haas (Justus-Liebig-University Giessen); Jan Thomas Schaefer (Justus-Liebig-University Giessen)
    Abstract: We study effects on prices and quantities of a takeover in the rather concentrated German interurban bus industry. We empirically asses the effect of the takeover of Postbus by Flixbus on industry key features, using a route-level price data set containing prices for more than 6,000 routes in Germany for a period between September and December 2016. We find that average prices significantly increase and quantities decrease in the post-takeover phase. However, these results are mainly driven by the fact that Postbus was a low-cost supplier. The remaining providers do not seem to have increased their prices significantly in the post-takeover phase. This absence of a price increase despite the removal of a close competitor could be an indication of a strong impact of intermodal competition. This suggestion is confirmed by our empirical findings.
    Keywords: Competition, Takeover, Interurban Bus Services, Germany
    JEL: L11 L41 L92 K21 K23
    Date: 2017
  16. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: This study explores competition in the banking sector of Pakistan in the context of transformation in its structure and business environment since the implementation of financial sector reforms in the country. Instead of relying on the changes in the market structure indicators (like concentration ratio), we employ widely used Panzar and Rosse H statistic as a formal test of competition. PR-H statistic is estimated by using a balanced panel data comprising 24 commercial banks operating in Pakistan from the year 1996 to 2015. The results suggest that the banking sector of Pakistan exhibits the characteristics of monopolistic and perfectly competitive market structures.
    Keywords: Competition, Banking Market Structure, Panzar and Rosse H statistic
    JEL: C12 D40 E50 G20
    Date: 2017–07
  17. By: Marsh, Blake (Federal Reserve Bank of Kansas City); Sengupta, Rajdeep (Federal Reserve Bank of Kansas City)
    Keywords: Bank lending; Bank regulation; Commercial real estate
    JEL: E44 G21 G28
    Date: 2017–06–01
  18. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: Based upon the indicators of market structure, this paper tests the relevance of Structure-Conduct-Performance (SCP), Relative Market Power (RMP), and the Efficient Structure (ES) paradigms for banking industry of Pakistan. We use a (balanced) panel data from 24 commercial banks of Pakistan from the year 1996 to 2015. Descriptive statistics and the formal tests suggest that: (a) there is a weak association between the indicators of market structure and banks’ performance in case of Pakistan; (b) the empirical evaluation results do not provide meaningful support to SCP or RMP paradigms; and (c) the ES paradigm is more relevant in case of Pakistan. At policy level, the findings of this paper suggest that the focus of policymakers should be to improve the efficiency of banking sector, as the excessive focus on indicators of market structure like concentration ratio to improve competition in the banking sector could be counterproductive.
    Keywords: Structure-Conduct-Performance, Efficient-Structure, Competition, Banking Sector
    JEL: D40 E50
    Date: 2017–07
  19. By: Mahmood ul Hasan Khan (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: The banking sector of Pakistan has witnessed a notable transformation in its structure and business activities following the implementation of financial sector reforms since the early 1990s. Specifically, the reforms helped transform a repressed financial sector into a market oriented and sound financial sector, predominantly owned and managed by the private sector. How these developments have impacted competition among the banks is still an open question. This study attempts to answer this question with the application of a new approach to measure competition: Boone Indicator of competitiveness. This measure postulates that inefficient firms (banks) in a competitive environment are punished harshly, and there is an output reallocation from inefficient to efficient firms/banks. We have estimated elasticity of market share to marginal costs for 24 banks in Pakistan, using a balanced panel of bank level (annual) data for the year 1996 to 2015. Marginal costs are obtained indirectly by first estimating a translog cost function using earning assets as an output, and cost of financial capital, physical capital and labor as inputs. The estimated Boone Indicator value of negative 0.31 is significant and suggests that inefficient banks have been losing their market share to efficient banks over the estimation period: a reflection of underlying competitive environment. Increasing value of Boone Indicator (in absolute terms) over the period of study suggests that competition among the banks in Pakistan has increased over time.
    Keywords: Boone Indicator, Translog Cost Function, Competition in Banking Sector
    JEL: D40 E50
    Date: 2017–07

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