nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒09‒10
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Inference of Consumer Consideration Sets By Anna Lu
  2. Consumer Stockpiling and Sales Promotions By Anna Lu
  3. Prominence, Complexity, and Pricing By Chioveanu, Ioana
  4. Quality Pricing-to-Market By Raphael Auer; Thomas Chaney; Philip Sauré
  5. Large Spatial Competition By Matias Nunez; Marco Scarsini
  6. Monopsony Theory Revisited By Xavier Méra
  7. Collusion Detection in Public Procurement with Limited Information By Bedri Kamil Onur Tas
  8. Partial Cartels and Mergers with Heterogeneous Firms: Experimental Evidence By Gomez-Martinez, Francisco
  9. Standards and Market Power: Evidence from Tunisia By Hendrik W. Kruse; Inma Martínez-Zarzoso; Leila Baghdadi
  10. Optimal Licensing of Technology in the Face of (Asymmetric) Competition By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  11. Per Unit vs. Ad Valorem Royalty Licensing By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  12. Tariffs, R&D, and Two Merger Policies By ARZANDEH, Mehdi; GUNAY, Hikmet
  13. Fusions-acquisitions et création de valeur : Bilan des recherches et perspectives d'évolution By Mohamed-Larbi Aribou
  14. A Theoretical Approach to New Product Development Strategies By Yakup Durmaz; Merve Can Şirin
  15. Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets By Kate Ho; Robin Lee
  16. Privacy and Platform Competition By Philipp Dimakopoulos; Slobodan Sudaric
  17. Market Power in the Capacity Market? The Case of Ireland By Teirila, J.
  18. Governing supply relationships: evidence from the automotive industry By Alexander Schmitt; Jo Van Biesebroeck
  19. Competition and prudential regulation By Fisher, Paul; Grout, Paul

  1. By: Anna Lu
    Abstract: When consumers face a large number of alternatives, they tend to simplify the decision problem by reducing the number of available alternatives to a subset of relevant alternatives, i.e. a consideration set. Since consideration sets are typically unobserved, most studies in the demand literature have to assume a consideration model. If these consideration models are misspecified, the demand estimates can be biased. In this paper, we develop an approach to formally test any two competing models of consideration against one another in order to determine which model fits the data best. Our test follows the intuition of a menu approach and uses supplemental data on marginal cost-shifters to construct overidentifying restrictions. We show an application to German retailing of coffee and milk. We find that consideration sets are fundamentally different for coffee and milk, and relate our findings to differences in demand and supply conditions of the two product categories.
    Keywords: Demand Estimation, Consideration Set, Retailing
    JEL: D12 L13 M31
    Date: 2017
  2. By: Anna Lu
    Abstract: In retailing markets of storable goods, consumer behavior is typically characterized by stockpiling. While existing research has developed rich models for such strategic consumer behavior, little is known about how sellers should ideally respond to it. In this paper, we provide insights into how frequency and depth of promotions affect consumer purchases and seller revenues in the long run. We show an application to the U.S. market for laundry detergent. We use estimates from a structural dynamic demand model to simulate different pricing policies and find that in the detergent market, an increase in promotion depth is more effective than a change in promotion length. Our results suggest that this finding can be translated to markets with a large heterogeneity in storage costs and steady consumption rates.
    Keywords: Promotion, Frequency, Depth, Stockpiling, Storable Goods
    JEL: M31 D22 L11
    Date: 2017
  3. By: Chioveanu, Ioana
    Abstract: This paper analyzes prominence in a homogeneous product market where two firms simultaneously choose both prices and price complexity levels. Complexity limits competing offers' comparability and results in consumer confusion. Confused consumers are more likely to buy from the prominent firm. In equilibrium there is dispersion in both prices and price complexity. The nature of equilibrium depends on prominence. Compared to its rival, the prominent firm makes higher profit, associates a smaller price range with lowest complexity, puts lower probability on lowest complexity, and sets a higher average price. However, higher prominence may benefit consumers and, conditional on choosing lowest complexity, the prominent firm's average price is lower, which is consistent with confused consumers' bias.
    Keywords: oligopoly markets, consumer confusion, prominence, price complexity, price dispersion
    JEL: D03 D43 L13
    Date: 2017–08–31
  4. By: Raphael Auer; Thomas Chaney; Philip Sauré
    Abstract: This paper analyses firm's pricing-to-market decisions in vertically differentiated industries. We first present a model featuring firms that sell goods of heterogeneous quality levels to consumers who are heterogeneous in their income and thus their marginal willingness to pay for quality increments. We derive closed-form solutions for the unique pricing game under costly international trade. The comparative statics highlight how firms' pricing-to-market decisions are shaped by the interaction of consumer income and good quality. We derive two testable predictions. First, the relative price of high qualities compared to low qualities increases with the income of the destination market. Second, the rate of cost pass-through into consumer prices falls with quality if destination market income is sufficiently high. We present evidence in support of these two predictions based on a dataset of prices, sales, and product attributes in the European car industry.
    Keywords: exchange rate pass-through, intra-industry trade, monopolistic competition, pricing-to-market, vertical differentiation
    JEL: E3 E41 F12 F4 L13
    Date: 2017–08
  5. By: Matias Nunez (LAMSADE - Laboratoire d'analyse et modélisation de systèmes pour l'aide à la décision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique); Marco Scarsini (Dipartimento di Economia e Finanza - LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma])
    Abstract: We consider spatial competition when consumers are arbitrarily distributed on a compact metric space. Retailers can choose one of finitely many locations in this space. We focus on symmetric mixed equilibria which exist for any number of retailers. We prove that the distribution of retailers tends to agree with the distribution of the consumers when the number of competitors is large enough. The results are shown to be robust to the introduction of (i) randomness in the number of retailers and (ii) different ability of the retailers to attract consumers.
    Keywords: Location,Equilibrium,Hotelling games,Large games,Poisson games,Valence
    Date: 2017
  6. By: Xavier Méra (Granem - Groupe de Recherche ANgevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)
    Abstract: Standard monopsony theory, old and new, lacks a realistic criterion to distinguish between monopsony and competitive prices. Consequently, prominent Austrian critics have by and large dismissed it. However, the idea that human action occurs in discrete steps, and consequently that the elasticity of the supply schedules for factors of production, as well as the elasticity of the demand schedules for their products, can be altered as a result of coercion, lead to a theory of "monopoly price-gap", with monopoly and monopsony prices as two features of the same phenomenon.
    Keywords: Monopsony, monopoly
    Date: 2017
  7. By: Bedri Kamil Onur Tas (TOBB University of Economics and Technology)
    Abstract: Public procurement data sets usually lack detailed data that are needed to implement existing methods. We design a method to identify and test for bid rigging in procurement auctions with limited information. The method can be applied to limited data sets using standard econometric tools and software. We implement the methodology to a unique data set about all Turkish public procurement auctions in years 2005-2012, numbering 565,297. We uncover the structure of collusive behavior in Turkish public procurement auctions. We find that collusion significantly increases procurement costs and decreases procurement efficiency.
    Date: 2017–10–08
  8. By: Gomez-Martinez, Francisco
    Abstract: A usual assumption in the theory of collusion is that cartels are all-inclusive. In contrast, most real-world collusive agreements do not include all firms that are active in the relevant industry. This paper studies both theoretically and experimentally the formation and behavior of partial cartels. The theoretical model is a variation of Bos and Harrington’s (2010) model where firms are heterogeneous in terms of production capacities and where individual cartel participation is endogenized. The experimental study has two main objectives. The first goal is examine whether partial cartels emerge in the lab at all, and if so, which firms are part of it. The second aim of the experiment is to study the coordinated effects of a merger when partial cartels are likely to operate. The experimental results can be summarized as follows. We find that cartels are typically not all-inclusive and that various types of partial cartels emerge. We observe that market prices decrease by 20% on average after a merger. Our findings suggest that merger analysis that is based on the assumption that only full cartels forms produces misleading results. Our analysis also illustrates how merger simulations in the lab can be seen as a useful tool for competition authorities to back up merger decisions.
    Keywords: Bertrand oligopoly; Cartels; Mergers; Experiments
    JEL: C92 G34 L13 L41 L44
    Date: 2016–11–23
  9. By: Hendrik W. Kruse (University of Jordan); Inma Martínez-Zarzoso; Leila Baghdadi
    Abstract: We develop a theoretical model and derive conditions under which firms with market power try to influence the setting of quality standards and describe the political equilibrium. We show that in political equilibrium the positive association only holds for a restricted set of initial values of the firm’s market share, if the government ascribes a positive value to consumer welfare. We test our hypothesis using Tunisian data for the years 2002-2010. In our main results, we find a higher incidence of SPS measures in sectors where firms connected to former president Ben Ali have a higher share in imports. However, this association only holds for sectors with high tariffs. For low tariff sectors, we find that Ben Ali firms are associated with more TBTs. A higher concentration of market power in itself does not lead to higher standards, leading us to the conclusion that political power is essential.
    Date: 2017–08–24
  10. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We then introduce more general mechanisms and design a dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees' payoff to the minimum level that they can assure themselves. That mechanism can be viewed as a generalized "chutzpah" mechanism, generalized because it employs royalties to maximize the industry profit. It awards licenses to all firms and prescribes maximum permitted royalty rates plus positive fixed fees.
    Keywords: Patent licensing, innovation, optimal contracts, dynamic mechanisms.
    JEL: D21 D43 D44 D45
    Date: 2017
  11. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We consider the licensing of a non-drastic innovation by an innovator who interacts with a potential licensee in a downstream Cournot market. We compare two kinds of license contracts: per unit and ad valorem, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem royalty license contracts which they apply to per unit royalty license contracts, we show that per unit royalty licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem royalty licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.
    Keywords: Innovation, patent licensing, royalty contracts.
    JEL: D21 D43 D44 D45
    Date: 2017
  12. By: ARZANDEH, Mehdi; GUNAY, Hikmet
    Abstract: In an international Cournot oligopoly model, we compare two different merger policies when firms are merging endogenously and engage in research and development (R&D). In the benchmark model, countries set optimal tariff levels but do not have merger policy. If ex-ante identical firms merge internationally, they have an ex-post cost advantage over the outsiders due to tariff savings. This gives the merger an incentive to increase its R&D investment, which increases the cost dispersion further; therefore, the merger paradox, where each firm wants to be an outsider, disappears when R&D is efficient. As a result, we find different equilibrium market structures depending on the efficiency of R&D. In the second part, we compare two different merger policies, one that puts emphasis on welfare (roughly the Canadian merger policy) and another one that puts emphasis on consumer surplus (roughly the European Union’s merger policy). We show that under the “welfare-increasing” merger policy, monopoly is the equilibrium market structure when R&D is very efficient. This explains why a merger, which created a monopoly, was approved in Canada. As R&D becomes less efficient, the equilibrium market structures become less concentrated under the two different merger policies. Each merger policy can be global welfare maximizing depending on the efficiency of R&D; however, the “consumer-surplus-increasing” merger policy is optimal for a wider range of parameters.
    Keywords: Competition Policy, Merger Policy, R&D, Endogenous Mergers, Tariff, Trade, Policy, Cournot oligopoly, Merger Paradox
    Date: 2017–09
  13. By: Mohamed-Larbi Aribou (CESAG - Centre d'études des sciences appliquées à la gestion - Université de Strasbourg)
    Abstract: La plupart des recherches financières s’accordent sur le fait que les stratégies de fusions & acquisitions (F&A) profitent davantage aux actionnaires de la cible qu’à ceux de l’acquéreur. Le caractère mitigé des résultats relatifs aux actionnaires de l’acquéreur rencontre plusieurs explications dans la littérature empirique. Cet article propose une synthèse des recherches consacrées à l’étude des déterminants de performance des F&A, en combinant des arguments empiriques et théoriques. Il tente d’apporter un éclairage complémentaire sur les facteurs clés de réussite de ces opérations en se focalisant sur la phase d’intégration post-fusion et le phénomène du transfert de connaissances.
    Keywords: Fusions & acquisitions, intégration, transfert des connaissances, performance
    Date: 2017–01–01
  14. By: Yakup Durmaz (Hasan Kalyoncu University); Merve Can Şirin (Hasan Kalyoncu University)
    Abstract: Companies have to develop their products on a constant basis to keep up with the technologic developments, respond to clients' demands, and keep the advantage over the rivals. A decrease in the product lifespan forces the manufacturers to change constantly. However the design, production and marketing of the developed product are all tedious processes. That's why companies have to make careful decisions and make competitive choices to keep the advantage over rivals .Otherwise a process where there's no turning back will emerge to set a failure in profit loss, against all the forecasts of benefit .
    Keywords: product development,new product,new product development process
    Date: 2017
  15. By: Kate Ho (Columbia University); Robin Lee (Harvard University Department of Economics)
    Abstract: Why do insurers choose to exclude medical providers, and when would this be socially desirable? We examine network design from the perspective of a profit-maximizing insurer and a social planner to evaluate the welfare effects of narrow networks and restrictions on their use. An insurer may engage in exclusion to steer patients to less expensive providers, cream-skim enrollees, and negotiate lower reimbursement rates. Private incentives for exclusion may diverge from social incentives: in addition to the standard quality distortion arising from market power, there is a “pecuniary” distortion introduced when insurers commit to restricted networks in order to negotiate lower rates. We introduce a new bargaining solution concept for bilateral oligopoly, Nash-in-Nash with Threat of Replacement, that captures such bargaining incentives and rationalizes observed levels of exclusion. Pairing our framework with hospital and insurance demand estimates from Ho and Lee (2017), we compare social, consumer, and insurer-optimal hospital networks for the largest non-integrated HMO carrier in California across several geographic markets. We find that both an insurer and consumers prefer narrower networks than the social planner in most markets. The insurer benefits from lower negotiated reimbursement rates (up to 30% in some markets), and consumers benefit when savings are passed along in the form of lower premiums. A social planner may prefer a broader network if it encourages the utilization of more efficient insurers or providers. We predict that, on average, network regulation prohibiting exclusion has no significant effect on social surplus but increases hospital prices and premiums and lowers consumer surplus. However, there are distributional effects, and regulation may prevent harm to consumers living close to excluded hospitals.
    Keywords: health insurance, narrow networks, selective contracting, hospital prices, bargaining, bilateral oligopoly
    JEL: C78 I11 L13
    Date: 2017–09
  16. By: Philipp Dimakopoulos (Humboldt-Universität zu Berlin); Slobodan Sudaric (Humboldt-Universität zu Berlin)
    Abstract: We analyze platform competition where user data is collected to improve adtargeting. Considering that users incur privacy costs, we show that the equilibrium level of data provision is distorted and can be inefficiently high or low: if overall competition is weak or if targeting benefits are low, too much private data is collected, and vice-versa. Further, we find that softer competition on either market side leads to more data collection, which implies substitutability between competition policy effects on both market sides. Moreover, if platforms engage in two-sided pricing, data provision would be efficient.
    Keywords: platform competition, user data, nuisance costs, ad targeting, privacy
    JEL: D43 L13 L40 L86
    Date: 2017–08–07
  17. By: Teirila, J.
    Abstract: An electricity market coupled with a capacity market is modelled as a two-stage game that allows for strategic behaviour both in the electricity market and in the capacity market. The model is applied to the Irish electricity market, where a capacity market based on reliability options is established by the end of 2017. As Ireland has one dominant firm in the electricity market, there have been concerns that the new market design provides it an opportunity to abuse market power in these two markets. Using Ireland as an example this article examines the kinds of strategic behaviours that can be expected if a capacity market is implemented in an imperfectly competitive market. It is found that the potential for the abuse of market power in the capacity market is significant for the dominant firm in Ireland and that there is no simple way to mitigate it. The relative amount of procured capacity, the amount and characteristics of potential entrants, and the competitiveness of the electricity market are the main determinants of the possibilities and incentives for abusing market power in the capacity market.
    Keywords: capacity market, strategic behaviour, competitive benchmark analysis, procurement auction
    JEL: D43 D44 H57 L13 L94
    Date: 2017–06–30
  18. By: Alexander Schmitt; Jo Van Biesebroeck
    Abstract: A large empirical literature analyzes determinants of the make-or-buy decision. Transaction cost economics highlights the role of asset specificity, the property rights theory focuses on the relative marginal contributions to joint surplus creation, and some evidence suggests that making transactions more contractible facilitates outsourcing. We use a unique transaction-level dataset of outsourced automotive components to predict carmakers’ choices between four distinct ways of organizing sourcing relationships. We derive conditional predictions for three characteristics: (i) the complexity or contractibility of a transaction, (ii) how objectively codifiable performance is, and (iii) the supplier’s capabilities. For example, while dominant buyer investments might predict vertical integration, as in the property rights theory, other characteristics might convince a buyer to simply re-organize the collaboration with the supplier in a more suitable way. Our results suggest that “buy” relationships differ systematically and that the predictive power of our variables extend from the make-or-buy decision to how-to-buy.
    Date: 2017–08
  19. By: Fisher, Paul (PRA); Grout, Paul (Bank of England)
    Abstract: In 2014 the Prudential Regulation Authority, Bank of England, was given a new secondary objective to facilitate effective competition when it advances its primary objectives related to safety and soundness and policyholder protection. Given the concerns around conflict between competition and stability, there has been considerable interest in the new objective. After discussing the precise form of the competition objective and its background, we consider how best it should be interpreted and implemented. Amongst other points we argue that (i) secondary objectives should be seen as mechanisms for forcing, or at least encouraging, co-ordination across agencies and therefore such objectives have a significant role to play in this context, (ii) that time and proportionality are the key dimensions that provide discretion to pursue primary and secondary objectives, (iii) that there is nothing overtly special about competition as a second best tool when it comes to mitigating risk in the absence of good prudential regulation, and (iv) if prudential regulation is set at the same time that the competition objective is ‘in play’, then the conflict between stability and competition tends to disappear, although some ‘tension’ remains at the margins.
    Keywords: Competition; stability; prudential regulation
    JEL: G02 G28
    Date: 2017–09–01

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