nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒12‒03
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Strategic advance sales, demand uncertainty and overcommitment By Sebastien Mitraille; Henry Thille
  2. Market exit through divestment: the effect of accounting bias on competition By Chen, Hui; Jorgensen, Bjorn
  3. Multi-product firms and product quality By Manova, Kalina; Yu, Zhihong
  4. Uniform Pricing in US Retail Chains By Stefano DellaVigna; Matthew Gentzkow
  5. Buyer Power and Non-Binding Retail Price Recommendations By In Kyung Kim; Vladyslav Nora
  6. Partial Privatization under Multimarket Price Competition By Masuda, Taku; Sato, Susumu
  7. Marketing Agencies and Collusive Bidding in Online Ad Auctions By Francesco Decarolis; Maris Goldmanis; Antonio Penta
  8. Four cases in sports competition policy: Baseball, judo, football, and motor racing By Budzinski, Oliver
  9. Market-internal financial regulation in sports as an anticompetitive institution By Budzinski, Oliver
  10. The Competitive Effect of a Bank Megamerger on Credit Supply By Hombert, Johan; Fraisse, Henri; Lé, Mathias
  11. Global banking: Risk taking and competition By Faia, Ester; Ottaviano, Gianmarco I. P.
  12. Supply Function Equilibria and Nonprofit-Maximizing Objectives By Haraguchi, Junichi; Yasui, Yuta
  13. Costly Information Intermediation as a Natural Monopoly By Pinheiro, Roberto; Monte, Daniel
  14. Technology, Market Structure and the Gains from Trade By Giammario Impullitti; Omar Licandro; Pontus Rendahl

  1. By: Sebastien Mitraille (Toulouse Business School); Henry Thille (Department of Economics and Finance, University of Guelph, Guelph ON Canada)
    Abstract: We study a game in which producers can sell in two periods: one before a random demand is fully revealed and one after. This type of game corresponds to models of strategic forward trading or of advance sales to intermediaries or consumers. Demand variations and committed advance sales results in the possibility that the net residual demand in the final stage may be so low that it is not profitable for producers make additional sales, or indeed, may even drive the final period price to zero, introducing some convexity into producers’ payoffs. If this possibility of ex post overcommitment occurs on the equilibrium path, it reduces the level of advance sales chosen by producers, muting the pro-competitive effects found under deterministic demand. We establish a condition that determines whether or not demand uncertainty is “minor”, in the sense that the equilibrium depends only on the expected value of the demand shock. In addition, we demonstrate that when the support of demand shocks is narrow enough compared to the marginal cost of production, there exists a unique symmetric subgame-perfect equilibrium in pure strategies. When the support of demand shocks is wider, we establish a regularity condition on the distribution of demand shocks and the model parameters that ensures the existence of a unique equilibrium in pure strategies. We illustrate through examples that commonly used uni-modal distributions satisfy this condition, while bi-model distributions may not.
    Keywords: Oligopoly, advance sales, uncertainty, overcommitment
    JEL: C72 D43 L13
    Date: 2017
  2. By: Chen, Hui; Jorgensen, Bjorn
    Abstract: We analyze the effect of accounting bias on the competition and market structure of an industry. In our model, firms interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system. We find that this bias strictly decreases firm's profits when investors do not have an abandonment option, but different results emerge when we allow the investors to divest in the interim. Specifically, a conservative accounting regime may increase the likelihood of projects being discontinued, inducing some firms to exit from the product market and leaving rivals to capture their market share. A conservative regime can thus soften market competition and result in ex ante higher investment payoff, higher consumer surplus, and higher total social welfare. Since industries often have common reporting standards, we also identify the degrees of industry-wide accounting bias that maximize the expected investor payoffs. Finally, we allow for investors to coordinate their divestment decisions when both firms report unfavorable costs and show an improvement to both firms profits and consumer surplus.
    JEL: M40
    Date: 2016–11–08
  3. By: Manova, Kalina; Yu, Zhihong
    Abstract: We examine the global operations of multi-product firms. We present a flexible heterogeneous-firm trade model with either limited or strong scope for quality differentiation. Using customs data for China during 2002-2006, we empirically establish that firms allocate activity across products in line with a product hierarchy based on quality. Firms vary output quality across their products by using inputs of different quality levels. Their core competence is in varieties of superior quality that command higher prices but nevertheless generate higher sales. In markets where they offer fewer products, firms concentrate on their core varieties by dropping low-quality peripheral goods on the extensive margin and by shifting sales towards top-quality products on the intensive margin. The product quality ladder also governs firms' export dynamics, both in general and in response to the exogenous removal of MFA quotas on textiles and apparel. Our results inform the drivers and measurement of firm performance, the effects of trade reforms, and the design of development policies.
    Keywords: trade; trade reforms; multi-product firms; product quality; export prices
    JEL: L81
    Date: 2017–02
  4. By: Stefano DellaVigna; Matthew Gentzkow
    Abstract: We show that most US food, drugstore, and mass merchandise chains charge nearly-uniform prices across stores, despite wide variation in consumer demographics and the level of competition. Estimating a model of consumer demand reveals substantial within-chain variation in price elasticities and suggests that the average chain sacrifices seven percent of profits relative to a benchmark of flexible prices. In contrast, differences in average prices between chains broadly conform to the predictions of the model. As possible explanations for nearly-uniform pricing, we discuss advertising, tacit collusion, fairness concerns, and managerial fixed costs, and find the most support for the last explanation. We show that the uniform pricing we document significantly increases the prices paid by poorer households relative to the rich, likely dampens the overall response of prices to local economic shocks, and may also shift the incidence of intra-national trade costs.
    JEL: D9 L1 L2 M31
    Date: 2017–11
  5. By: In Kyung Kim (Nazarbayev University); Vladyslav Nora (Nazarbayev University)
    Abstract: We study how the use of non-binding retail price recommendations (RPRs) is affected by buyer power in grocery retail market. Adopting the idea that RPRs serve as information sharing device between manufacturers and retailers, we show that increasing buyer power discourages the use of RPRs. Using the hand collected data set on the presence of RPRs for grocery products in Korea, we find that the more the sales of a product rely on powerful retailers, the less likely the manufacturer is to recommend a price, and hence share the information.
    Keywords: buyer power, manufacturer suggested retail prices, and grocery retailing
    JEL: L11 L13 L81
    Date: 2017–07
  6. By: Masuda, Taku; Sato, Susumu
    Abstract: We investigate the effect of multimarket contacts on the privatization policy in mixed duopoly with price competition. There are two markets, one of which is served solely by the state-owned public firm, and the other is served by both public and private firms. Two markets are linked by the production technology of the public firm. In the general model, we first show that privatization is never optimal in the absence of multimarket contacts, i.e., if there is only one monopoly market or one duopoly market. Then, using a linear-quadratic specification, we show that a positive degree of privatization can be optimal in the presence of multimarket contacts. This result has an implication for the privatization policy in universal service sectors.
    Keywords: Multimarket contacts, partial privatization, state-owned public enterprise
    JEL: H42 L33
    Date: 2017–10–30
  7. By: Francesco Decarolis; Maris Goldmanis; Antonio Penta
    Abstract: The transition of the advertising market from traditional media to the internet has induced a proliferation of marketing agencies specialized in bidding in the auctions that are used to sell ad space on the web. We analyze how collusive bidding can emerge from bid delegation to a common marketing agency and how this can undermine the revenues and allocative efficiency of both the Generalized Second Price auction (GSP, used by Google and Microsoft-Bing and Yahoo!) and the of VCG mechanism (used by Facebook). We find that, despite its well-known susceptibility to collusion, the VCG mechanism outperforms the GSP auction both in terms of revenues and efficiency.
    JEL: C72 D44 L81 M37
    Date: 2017–10
  8. By: Budzinski, Oliver
    Abstract: Practices and conducts in professional and even amateur sports can be subject to competition laws as soon as commercial activities are involved. From an economic perspective, this implies that both directly commercial activities like the sale of broadcasting/media rights and indirectly commercial activities like defining and enforcing the rules of the games can be hit by competition policy interventions. Setting and enforcing the rules of the game is an activity with commercial effects because it influences attractiveness and marketability of the sports in question. After discussing fundamental issues, this contributions reviews selected landmark cases in sports competition policy from an economic perspective. This includes the U.S. baseball antitrust exemption, access rules to Judo tournaments, sale systems of media rights in European football as well as a unique combination of long-run exclusivity contracts, skewed allocation of common revenues, and special influences on rule-setting by some competitors in Formula One motor racing. Eventually, the areas of state aid to football clubs and mergers in Danish football are sketched.
    Keywords: sports economics,antitrust,competition policy,baseball,judo,football,soccer,motor racing,formula one,media rights,sports broadcasting,competitive balance,cartels,abuse of dominance
    JEL: K21 L40 L83 L82
    Date: 2017
  9. By: Budzinski, Oliver
    Abstract: Financial regulation in sports is usually discussed in the context of representing an instrument against "financial doping". Notwithstanding the merits of this discussion, this paper takes the opposite perspective and analyses how market-internal financial regulation itself may anticompetitively influence sporting results. Virtually every regulative financial intervention distorts sporting competition to some extent and creates beneficiaries and losers. Sometimes, the actual winners and losers of financial regulation stand in line with the (legitimate) goals of the regulation like limiting financial imbalances or preventing distortive midseason insolvencies of teams. However, financial regulation may also display unintended side-effects like protecting hitherto successful teams from new challengers, cementing the competitive order, creating foreclosure and entry barriers, or serving vested interests of powerful parties. All of these effects may also be hidden agendas by those who are implementing and enforcing market-internal financial regulation or influencing it. This paper analyses various types of budget caps (including salary caps) with respect to potentially anticompetitive effects. UEFA's so-called Financial Fair Play Regulations are highlighted as an example. Furthermore, the paper discusses allocation schemes of common revenues (like from the collective sale of broadcasting rights) as another area of financial regulation with potentially anticompetitive effects. Eventually, the effects of standards for accounting, financial management, and auditing are discussed.
    Keywords: sports economics,financial regulation,budget caps,salary caps,financial fair play,financial doping,collective sale of media rights,sports broadcasting rights,revenue sharing
    JEL: L40 L83 K21
    Date: 2017
  10. By: Hombert, Johan; Fraisse, Henri; Lé, Mathias
    Abstract: We study the effect of a merger between two large banks on credit market competition. We identify the competitive effect of the merger using matched loan-level and firm-level data and exploiting variation in the merging banks' market overlap across local lending markets. On the credit market side, we find a reduction in lending, in particular through termination of relationships. In the average market, bank credit decreases by 2.7%. On the real side, firm exit increases by 4%, whereas firms that do not exit and firms that start up experience no adverse real effect on investment and employment.
    Keywords: Bank megamerger; Banking competition; Credit Supply; Merger
    JEL: G21 L13
    Date: 2017–04–01
  11. By: Faia, Ester; Ottaviano, Gianmarco I. P.
    Abstract: Direct involvement of global banks in local retail activities can reduce risk-taking by promoting local competition. We develop this argument through a model in which multinational banks operate simultaneously in different countries with direct involvement in imperfectly competitive local deposit and loan markets. The model generates predictions that are consistent with the foregoing argument as long as the expansionary impact of competition on multinational banks’ aggregate profits through larger scale is strong enough to offset its parallel contractionary impact through lower loan-deposit return margin (a result valid with both perfectly and imperfectly correlated loans’ risk). When this is the case, banking globalization also moderates the credit crunch following a deterioration in the investment climate. Compared with multinational banking, the beneficial effect of cross-border lending on risk-taking is weaker.
    Keywords: global bank; oligopoly; oligopsony; endogenous risk taking; expectation of rents; extraction; appetite for leverage
    JEL: G32 F3 G3
    Date: 2017–03
  12. By: Haraguchi, Junichi; Yasui, Yuta
    Abstract: We examine the supply function equilibrium (SFE), which is often used in the analysis of multi-unit auctions such as wholesale electricity markets, among (partially) public firms. In a general model, we characterize the SFE of such firms and examine the properties of symmetric SFE. We show, analyzing an asymmetric SFE in a duopoly model with linear demand and quadratic cost functions, that, when a partially public firm weighs more on the social welfare, the supply functions of not only the partially public firm but also a profit maximizing firm are flatter at the equilibrium. We also confirm that in a linear-quadratic model, the SFE converges to the (inverse) marginal cost function when the firms' social concerns increase symmetrically in the industry.
    Keywords: supply function equilibrium, electricity markets, partial privatization, corporate social responsibility, mixed oligopoly
    JEL: H42 L13 L33
    Date: 2017–11–03
  13. By: Pinheiro, Roberto (Federal Reserve Bank of Cleveland); Monte, Daniel (São Paulo School of Economics, FGV)
    Abstract: In this paper, we show that information trade has similar characteristics to a natural monopoly, where competition may be detrimental to efficiency due either to the duplication of direct costs or the slowing down of information dissemination. We present a model with two large populations in which consumers are randomly matched to providers on a period-by-period basis. Despite a moral hazard problem, cooperation can be sustained through an institution that gives incentives to information exchange. We consider different information pricing mechanisms (membership vs. buy and sell) and different competitive environments. In equilibrium, both pricing and competitive schemes affect the direct and indirect costs of information transmission, represented by directed fees paid by consumers and the expected loss due to imperfect information, respectively.
    Keywords: Information; pricing; monopoly;
    JEL: D83 D85
    Date: 2017–11–16
  14. By: Giammario Impullitti; Omar Licandro; Pontus Rendahl
    Abstract: We study the gains from trade in an economy with oligopolistic competition, firm heterogeneity, and innovation. Oligopolistic competition together with free entry make markups responsive to firm productivity and trade costs. Lowering trade costs reduces markups on domestic sales but increases markups on export sales, as firms do not pass the entire reduction in trade costs onto foreign consumers. Nevertheless, the downward pressure dominates and the average markup declines, deterring firms from entering the market and leading to higher market concentration. Neither the increased concentration nor the incomplete pass-through of trade costs to export markups are strong enough to compensate for the increase in competition on domestic sales. Thus the overall effect of trade on markups is pro-competitive and a key source of the associated welfare gains. In addition to markups, selection and innovation provide additional channels through which the trade-induced effect on competition impacts welfare. In a quantitative exercise, we decompose the total gains from trade into these three contributing channels; we find that innovation plays a small but non-negligible role, while the main component is equally split between the pro-competitive and the selection channel.
    Keywords: gains from trade, heterogeneous firms, oligopoly, innovation, endogenous markups, endogenous market structure
    JEL: F12 F13 O31 O41
    Date: 2017

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