nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒11‒26
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. We model a two-level supply chain where Nash bargaining occurs upstream, while firms compete in a differentiated products logit setting downstream. The parameters of this model can be calibrated with a discrete set of data on prices, margins, and market shares. Using a series of numerical experiments, we illustrate how the model can simulate the outcome of both horizontal and vertical mergers. In addition, we extend the framework to allow for downstream competition via a second score auction. By Gloria Sheu; Charles Taragin
  2. Long-Run Market Configurations in a Dynamic Quality-Ladder Model with Externalities By Mario Samano; Marc Santugini
  3. Could Vertical Integration Increase Innovation? By Chenyu Yang
  4. Segmentation versus agglomeration : competition between platforms with competitive sellers By Karle, Heiko; Peitz, Martin; Reisinger, Markus
  5. L'Economie des plateformes : dissipation ou concentration de la rente ? By Frédérique Marty
  6. Verifying High Quality: Entry for Sale By Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
  7. Recycling of a Primary Resource and Market Power: The Alcoa Case By Bocar Samba BA
  8. Markups and markdowns By Mauro Caselli; Stefano Schiavo; Lionel Nesta
  9. Sorry, We Don't Carry That Here By Linda Bui; James Dana
  10. Duopolistic Competition and Optimal Switching Time from Export to FDI in Uncertainty By Mankan M. Koné; Carl Gaigné; Lota Dabio Tamini
  11. Buyer-optimal learning and monopoly pricing By Roesler, Anne-Katrin; Szentes, Balázs
  12. Challenges and Pitfalls in Cartel Policy and Fining By Marcel Boyer; Anne Catherine Faye; Rachidi Kotchoni
  13. Bank Restructuring, Competition, and Lending Supply: Evidence from the Spanish Banking Sector By P. Giannoccolo; J. M. Mansilla-Fernández
  14. Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket By Matteo Benetton
  15. Evaluating market consolidation in mobile communications By Genakos, Christos; Valletti, Tommaso; Verboven, Frank
  16. Some Considerations in Respect to Customer-Centric Demand Response Market Design By Ekaterine Maglakelidze; Maia Veshaguri

  1. By: Gloria Sheu (U.S. Department of Justice); Charles Taragin (U.S. Department of Justice)
    Date: 2017–10
  2. By: Mario Samano; Marc Santugini
    Abstract: We analyze the type of market structures that arise in the long-run when quality externalities and asymmetric R&D capabilities exist in the context of a quality-ladder dynamic model. An example of such externalities is a patent release by the leading fi rm: an improvement of quality of this firm's good a ects the quality of the other fi rms' products. This externality can be thought of as an increase in compatibility in a network. We show that it is possible for this model to generate, in the long-run, multi-modal probability distributions over di fferent market structures from the same parameter values. In some cases, the lagging rm may even become the dominant fi rm depending on the degree of the externality. This may have implications for the estimation and simulation of this class of models.
    Keywords: Differentiated-good markets,Quality-ladder model,Externalities,Industry dynamics,Market structures,
    JEL: C61 C73 L13
    Date: 2017–11–15
  3. By: Chenyu Yang (University of Rochester)
    Abstract: This paper studies the effects of vertical integration on innovation in the chipset and smartphone industries. I formulate and estimate a dynamic structural model of the upstream chipset maker Qualcomm and downstream smartphone handset makers. The two sides make dynamic investment decisions and negotiate chipset prices via Nash bargaining. Using the estimates, I simulate market outcomes should Qualcomm merge with a downstream handset maker. I find that the vertical merger would increase innovation rates and social welfare, driven primarily by the investment coordination of the two merged firms.
    Date: 2017
  4. By: Karle, Heiko; Peitz, Martin; Reisinger, Markus
    Abstract: For many products, platforms enable sellers to transact with buyers. We show that the competitive conditions among sellers shape the market structure in platform industries. If product market competition is tough, sellers avoid competitors by joining different platforms. This allows platforms to sustain high fees and explains why, for example, in some online markets, several homogeneous platforms segment the market. Instead, if product market competition is soft, agglomeration on a single platform emerges, and platforms fight for the dominant position. These insights give rise to novel predictions. For instance, market concentration and fees are negatively correlated in platform industries, which inverts the standard logic of competition.
    Keywords: intermediation , two-sided markets , market structure , price competition , endogenous segmentation
    JEL: L13 D43
    Date: 2017
  5. By: Frédérique Marty (OFCE Sciences Po)
    Abstract: L’économie des plateformes semble s’opposer en tout point à l’économie de la rente. Dans une de ses acceptions non lucratives, elle place ses utilisateurs dans des logiques hors-marché permettant de mutualiser au mieux des actifs ou de partager des services. Dans une logique lucrative, elle garantit des appariements plus efficaces et permet de contourner des réglementations souvent défavorables aux consommateurs en termes de prix et de qualité de service. Cependant, une plateforme d’intermédiation électronique peut s’avérer non pas un lieu de dissipation de la rente mais au contraire un lieu de concentration de celle-ci. La difficulté qui se pose est alors celle de l’ultra-dominance, basée sur les données, et de la possibilité, via les algorithmes de prix, de se comporter comme un monopole parfaitement discriminant. Si les effets en termes de surplus collectif peuvent être positifs, cela pose un problème d’accaparement du surplus des utilisateurs. Il s’agit donc de discuter le degré de contestabilité de la position de marché des plateformes en envisageant les possibles réponses des utilisateurs, des modèles de concurrence étendue et la menace de rupture technologique avec les chaînes de blocs.
    Keywords: Plateformes, économie de la donnée, algorithmes, plateformes d’intermédiation électroniques, bien-être du consommateur, discrimination parfaite par les prix, marchés biface, chaînes de blocs.
    JEL: K21 K23 L41 L86
    Date: 2017–04
  6. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)); Svensson, Roger (Research Institute of Industrial Economics (IFN))
    Abstract: When and how do entrepreneurs sell their inventions? To address this issue, we develop an endogenous entry-sale asymmetric information oligopoly model. We show that lowquality inventions are sold directly or used for own entry. Inventors who sell post-entry use entry to credibly reveal information on quality. Incumbents are then willing to pay high prices for high-quality inventions to preempt rivals from obtaining them. Using Swedish data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under preemptive bidding competition, post entry.
    Keywords: Acquisitions; Innovation; Start-ups; Ownership; Patents; Verification; Quality
    JEL: G24 L10 L20 M13 O30
    Date: 2017–10–30
  7. By: Bocar Samba BA (CERDI)
    Abstract: The purpose of this paper is threefold. First, it investigates the influence of the prospect of recycling on the per-period market power of an extractor, which can be associated with Alcoa when the recycling sector it faces is competitive. Second, it analyzes whether or not the extractor’s first period market power is affected when it is capacity constrained. Third, it explores whether the structure of the recycling sector affects the extractor’s per-period market power or not. Toward these ends, we study a two-period Cournot framework where the extractor produces aluminum over two consecutive periods. In the second period, it engages in competition with a recycling sector that can be competitive or not. Our results run as follows. (1) When the recycling sector is not competitive, recycling does not affect the extractor’s first period market power but increases its second period market power. (2) When the recycling sector is competitive, the extractor’s second period market power increases with the recycled output but becomes lower (compared to the non-competitive case), while its first period market power can be lower or higher (compared to the non-competitive case). Then, it can increase or decrease with the recycled output. (3) In either case, the extractor’s first period market power further increases when the primary resource constraint is binding. (4) We also show that the extractor’s market power can increase or decrease over time.
    Keywords: Market Power, Recycling, Cournot Competition, Capacity Constraint,
    JEL: L13 L61 L72 D43
    Date: 2017–11
  8. By: Mauro Caselli (School of international studies, University of Tento, Italy); Stefano Schiavo (School of international studies, University of Tento, Italy,OFCE Sciences Po Paris, France); Lionel Nesta (OFCE Sciences Po Paris, France & GREDEG CNRS and SKEMA Business school, France)
    Abstract: This paper studies the high yet undocumented incidence of firms displaying markups lower than unity, i.e., prices lower than marginal costs, for protracted periods of time. Using a large sample of French manufacturing firms for the period 1990-2007, the paper estimates markups at the firm level and documents the extent to which firms exhibit negative price cost margins. The paper is able to provide an explanation for this phenomenon using the option value approach to investment decisions. The results suggest that firms facing higher investment irreversibility tend to continue operating even when prices fall below marginal costs as they wait for market conditions to improve. This effect is magnified in the presence of uncertainty.
    Keywords: Markups, irreversibility, uncertainty, negative price-cost margins, French manufacturing data
    JEL: D22 D24 D81 E22 L11
    Date: 2017–04
  9. By: Linda Bui (Brandeis University); James Dana (Northeastern University)
    Abstract: Retailers vary considerably in many dimensions, including the variety and selection of the products that they offer. In this paper we argue that the availability of energy-efficient products in retailers is shaped by market forces that often favor horizontal characteristics like convenience or geographic variety over vertical characteristics like product variety and energy efficiency. Specifically, we find evidence that stores carrying more energy-efficient products are located in neighborhoods in which consumers have low travel costs and care relatively more about product selection than convenience. The paper is one of the first to describe this equilibrium trade off between vertical and horizontal product differentiation and to find empirical evidence that supports it.
    Date: 2017–09
  10. By: Mankan M. Koné; Carl Gaigné; Lota Dabio Tamini
    Abstract: This paper aimed to extend previous real option models to features of multinational firms' activities such as market competition and trade barriers. Few researchers have studied multinationals' optimal switching time from export to FDI using real options, and those who have done so have ignored trade policies and strategic interactions between firms. Yet, the presence of local competitors and trade costs influences the option value of waiting. We finnd that FDI in host countries with uncertain demand, strong competition and few barriers to trade will likely to be delayed with respect to immediate investment. In terms of policy implications, we nd that the trade and competition policies of host countries have lower deterrent e ffects on FDI when uncertainty is reduced.
    Keywords: Foreign Direct Investment,Imperfect Competition,Trade Liberalization,Real Options,
    JEL: F23 D21
    Date: 2017–11–15
  11. By: Roesler, Anne-Katrin; Szentes, Balázs
    Abstract: This paper analyzes a bilateral trade model where the buyer’s valuation for the object is uncertain and she observes only a signal about her valuation. The seller gives a take-it-or-leave-it offer to the buyer. Our goal is to characterize those signal structures which maximize the buyer’s expected payoff. We identify a buyer-optimal signal structure which generates (i) efficient trade and (ii) a unitelastic demand. Furthermore, we show that every other buyer-optimal signal structure yields the same outcome as the one we identify: in particular, the same price
    JEL: J1
    Date: 2017–07–01
  12. By: Marcel Boyer; Anne Catherine Faye; Rachidi Kotchoni
    Abstract: We analyze significant challenges and pitfalls faced by antitrust authorities in the implementation of competition policies particularly against naked cartels and propose measures principled in economic theory to circumvent these issues. We review leniency programs in different jurisdictions, the private versus public control of cartels, as well as the determination of cartel fines and other punishment instruments. Regarding cartel fines, we first discuss the sometimesconflicting objectives of restitution and deterrence, then the economic-based versus legal- and proportional-based punishment. Moreover, we assess the proper modeling of cartel dynamics including the probability of detection and conviction, the relevant cartel duration, and the estimation of but-for prices and cartel overcharges.
    Keywords: Competition Policy,Industrial Economics,Regulations,Cartels,Fines,Leniency,Antitrust,Dynamics,
    JEL: K21 K42 L22 L40
    Date: 2017–11–15
  13. By: P. Giannoccolo; J. M. Mansilla-Fernández
    Abstract: This article analyses the effects of the bank restructuring process performed in Spain between 2010 and 2016. First, we create a unique dataset by combining information from Bankscope and the Table of Public Financial Assistance released by the Bank of Spain. Second, we investigate whether these reforms affected (i) the stability, (ii) the degree of competition, and (iii) lending and liquidity supply of the Spanish banking industry. The main results suggest that the restructuring process reduced the degree of competition but increased financial stability in the Spanish banking industry. In particular, we find that two divergent forces affected the Spanish financial stability. On the one hand, the bail out dampened financial instability. On the other hand, the increasing bank market power fostered financial stability (i.e., lower risk-taking behaviour). Furthermore, we demonstrate that the restructuring process: (i) increased the Lerner index, (ii) did not increase the collusion among banks (iii) diminished the gap in cost efficiency between weak and healthy banks. Finally, we find that there are not improvements in lending and liquidity supply.
    JEL: G21 G28 G32 G34
    Date: 2017–11
  14. By: Matteo Benetton (London School of Economics)
    Abstract: This paper develops and estimates an empirical model of the UK mortgage market and studies the effect of macro-prudential regulation on lending activity. We estimate a discrete-continuous choice demand model of mortgages with a new administrative dataset of the universe of residential mortgage originations. Borrowers decide jointly the lender, the rate type and the leverage, facing a non-linear price schedule and affordability constraints on their choice sets. We find: 1) 10 basis points increase in the interest rate decreases the market share of a product by 6% on average; 2) a 1% increase in the interest rate decreases loan demand by about 4%; 3) both elasticities are heterogeneous across leverage levels, borrower types and lenders. We derive a pricing equation that takes into account default and refinancing risk and we characterise the Nash-Bertrand equilibrium, subject to risk-adjusted capital constraints. We use the estimated parameters to study the pass-through of capital requirements in two different counterfactual regimes.
    Date: 2017
  15. By: Genakos, Christos; Valletti, Tommaso; Verboven, Frank
    Abstract: We study the dual relationship between market structure and prices and between market structure and investment in mobile telecommunications. Using a uniquely constructed panel of mobile operators’ prices and accounting information across 33 OECD countries between 2002 and 2014, we document that more concentrated markets lead to higher end user prices. Furthermore, they also lead to higher investment per mobile operator, though the impact on total investment is not conclusive. Our findings are not only relevant for the current consolidation wave in the telecommunications industry. More generally, they stress that competition and regulatory authorities should take seriously the potential trade-off between market power effects and efficiency gains stemming from agreements between firms.
    Keywords: mobile telecommunications; market structure; prices; investments; mergers
    JEL: F3 G3
    Date: 2017–06
  16. By: Ekaterine Maglakelidze (University of Georgia); Maia Veshaguri (Ivane Javakhishvili Tbilisi State University (TSU))
    Abstract: For already of the past decade, the Georgia?s electricity sector has been engaged in a complex process to bring increased competition to the business of electric generation, sales, and service delivery. But initial legislative and regulatory efforts to promote competition have focused on the supply side of the market: creating trading floors for energy and capacity sales, removing barriers to independent generators and marketers, and promoting open and non-discriminatory access to the transmission grid. It is assumed by many that robust competition among a variety of suppliers would be sufficient to ensure reasonable electricity rates and service options to customers. But the principal lesson learned from New England?s, French, Germany, Austria and other power systems and markets is that competition among electricity suppliers alone (without an active demand response) is not enough to create efficiently competitive electricity markets. Demand response provides a fair reward to consumers for demand flexibility without compensation of suppliers and relies on available technical solutions. But customers benefit alone is not enough to make demand response to participate in balancing market. Suppliers could also gain by making use of demand response, if they chose to do so. Thus, the purpose of Our study is twofold: to show that robust competition among a variety of suppliers without an active demand response is not enough to create efficiently competitive electricity markets, and to test the hypothesis that ?Only under the fully liberalized customer-centric demand response electricity market with ?Aggregators? on place Georgia?s domestic customers can reap the benefits from their ?demand response? behavior in the form of reduced energy bills without the need of compensating suppliers?.In order to test our hypothesis, empirical analyses have been applied. Based exclusively on secondary data obtained from various sources, We have made the modification to the Georgian Electricity Market Model (GEMM2015) developed by Deloitte Consulting in collaboration with Pierce Atwood Attorneys LLC in 2012. Our considerations are based mainly on the cost-benefit analysis commissioned by Regulatory Assistance Project (RAP) aiming to prove that all customers benefit from explicit demand response, not just those customers who reduce their demand.Thus, instead of paying to generators that sell energy in the balancing market a ?market-clearing price? (in the event of ?over-scheduling?) or compensating generators to reduce generation (in the event of ?under-scheduling?), it would be more reasonable to deploy responsive demand for balancing purposes.
    Keywords: Keywords: Demand response market design, explicit demand, implicit demand, peak demand, demand flexibility, energy policy, aggregator.
    JEL: M31 Q41
    Date: 2017–10

This nep-com issue is ©2017 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.