nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒12‒11
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Zone Pricing in Retail Oligopoly By Brian Adams; Kevin R. Williams
  2. Analysis of Merger Control in A Network Products Market By Tsuyoshi Toshimitsu
  3. Technological Spillovers, Product Market Rivalry and R&D Investment By Thomas Grebel; Lionel Nesta
  4. Cournot Competition in Wholesale Electricity Markets: The Nordic Power Exchange, Nord Pool By Lundin, Erik; Tangerås, Thomas
  5. Market Power and Forward Prices By Ruddell, Keith; Downward, Tony; Philpott, Andy
  6. Price-Linked Subsidies and Health Insurance Markups By Sonia Jaffe; Mark Shepard
  7. The Effects of a Day Off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing By Foros, Øystein; Nguyen-Ones, Mai; Steen, Frode
  8. Competing Combinatorial Auctions By Kittsteiner, Thomas; Ott, Marion; Steinberg, Richard
  9. The Organization of Global Supply Networks By Loredana Fattorini; Armando Rungi; Zhen Zhu
  10. Self-Control in the Retailing Industry: Inducing Rejection of Loyalty Schemes By Foschi, Matteo
  11. Heterogeneous Effects of Performance Pay with Market Competition: Evidence from a Randomized Field Experiment By Friebel, Guido; Heinz, Matthias; Khashabi, Pooyan; Kretschmer, Tobias; Zubanov, Nick
  12. Incumbents' responses to innovative entrants: A multi-country dynamic analysis By Diekhof, Josefine; Cantner, Uwe
  13. What twenty years of regulations have to say about M&As of U.S. banks? By Leledakis, George; Mamatzakis, Emmanuel; Pirgiotakis, Manos; Travlos, Nikolaos
  14. Identifying the Degree of Collusion Under Proportional Reduction By Oleksandr Shcherbakov; Naoki Wakamori
  15. Foreign Investment and Domestic Productivity: Identifying Knowledge Spillovers and Competition Effects By Vadym Volosovych; Carolina Villegas Sanchez; Bent Sorensen; Sebnem Kalemli-Ozcan

  1. By: Brian Adams (Bureau of Labor Statistics); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel data covering the retail home improvement industry, we find that Home Depot would benefit from finer pricing but that Lowe’s would prefer coarser pricing. Zone pricing softens competition in markets where firms compete, but it shields consumers from higher prices in rural markets, where firms might otherwise exercise market power. Overall, zone pricing produces higher consumer surplus than finer price discrimination does.
    Keywords: Zone pricing, Market segmentation, Price discrimination in oligopoly, Micromarketing, Retailing
    JEL: C13 L67 L81
    Date: 2017–02
  2. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Using a horizontally differentiated three-firm model, we consider horizontal merger and antitrust policy in a network products market, where we observe network externalities and compatibilities (interconnectivities) between products and services. In particular, if the degree of network compatibilities in the case of a merger is sufficiently larger than that of product substitutability, consumer surplus is larger than in the premerger case. Thus, the proposed merger is allowed by antitrust authorities based on the positive effect on consumer surplus. In this case, the merger is Pareto improving.
    Keywords: horizontal merger; antitrust policy; network externality; compatibility; consumer surplus standard; horizontally differentiated Cournot competition
    JEL: D43 K21 L12 L15 L41
    Date: 2017–11
  3. By: Thomas Grebel (Technische Universität Ilmenau, Germany); Lionel Nesta (Université Côte d'Azur; GREDEG CNRS; OFCE Sciences Po.; SKEMA Business School)
    Abstract: We investigate the determinants of the sign of R&D reaction functions of two rival firms. Using a two-stage Cournot competition game, we show that this sign depends on four types of environments in terms of product rivalry and technology spillovers. We test the predictions of the model on the world's largest manufacturing corporations. Assuming that firms make R&D investments based on the R&D effort of the representative rival company, we develop a dynamic panel data model that accounts for the endogeneity of the decision of the rival firm. Empirical results corroborate the validity of the theoretical model.
    Keywords: Process R&D, Spillovers, Product substitution, Reaction function, GMM
    JEL: D43 L13
    Date: 2017–11
  4. By: Lundin, Erik (Research Institute of Industrial Economics (IFN)); Tangerås, Thomas (Research Institute of Industrial Economics (IFN))
    Abstract: Horizontal shifts in bid curves observed in wholesale electricity markets are consistent with Cournot competition. Quantity competition reduces the informational requirements associated with evaluating market performance because the markups of all producers then depend on the same inverse residual demand curve instead of one for each firm. We apply the model to the day-ahead market of the Nordic power exchange, Nord Pool, for the years 2011–2013. Results suggest that mark-ups were 8–11 percent. We find some support for the hypothesis that the division of Sweden into price areas in 2011 increased the exercise of market power.
    Keywords: Cournot competition; Market design; Market performance; Nord Pool; Walrasian auction; Wholesale electricity market
    JEL: D22 D40 D43 D44
    Date: 2017–11–21
  5. By: Ruddell, Keith (Research Institute of Industrial Economics (IFN)); Downward, Tony (University of Auckland); Philpott, Andy (University of Auckland)
    Abstract: We construct a model of strategic behavior in sequential markets which exhibits a persistent forward price premium. On the spot market, producers wield market power while purchasers are price takers. Producers with forward commitments have less incentive to raise prices on the spot market. Purchasers are thus willing to pay a premium to producers for forward contracts. We argue that this type of forward premium is not susceptible to arbitrage by speculators on the forward market, since purchasers prefer forward contracts backed by producers.
    Keywords: Forward pricing; Electricity markets; Market power; Arbitrage
    JEL: D43 G13 L12 L13 Q41
    Date: 2017–11–29
  6. By: Sonia Jaffe (Becker Friedman Institute For Research in Economics); Mark Shepard (Harvard University)
    Abstract: Subsidies in many health insurance programs depend on prices set by competing insurers – as prices rise, so do subsidies. We study the economics of these “price-linked” subsidies compared to “fixed” subsidies set independently of market prices. We show that price-linked subsidies weaken competition, leading to higher markups and raising costs for the government or consumers. However, price-linked subsidies have advantages when insurance costs are uncertain and optimal subsidies increase as costs rise. We evaluate this tradeoff empirically using a model estimated with administrative data from Massachusetts’ health insurance exchange. Relative to fixed subsidies, price-linking increases prices by up to 6% in a market with four competitors, and about twice as much when we simulate markets with two insurers. For levels of cost uncertainty reasonable in a mature market, we find that the losses from higher markups outweigh the benefits of price-linking.
    Keywords: health insurance, health care pricing
    JEL: I11 I13 L11
    Date: 2017–11
  7. By: Foros, Øystein; Nguyen-Ones, Mai; Steen, Frode
    Abstract: First, we analyze how regular days off from competition and a time-dependent price pattern affect firm performance. Second, we examine the effects on firms' profitability from consumers' changing search- and timing behavior. We use microdata from gasoline retailing in Norway. Since 2004, firms have practiced an industry-wide day off from competition, starting on Mondays at noon, by increasing prices to a common level given by the recommended prices (decided and published in advance). In turn, a foreseeable low-price window is open before every restoration. During the data period, we observe an additional weekly restoration on Thursdays at noon. The additional day off from competition increases firm performance. As expected, a conventional price search of where to buy reduces firms' profitability. In contrast, consumers who are aware of the cycle and spend effort on when to buy have a positive impact on firms' profitability. If consumers spend effort on when to buy, they attempt to tank during low price windows. By its very nature, this shrink consumers' ability to compare prices at several outlets. Consequently, more attention to when to buy may soften price competition.
    Keywords: firm performance; Gasoline markets; Pricing cycles
    JEL: D22 L25 L42 L81
    Date: 2017–12
  8. By: Kittsteiner, Thomas; Ott, Marion; Steinberg, Richard
    Abstract: We investigate if and how revenue-maximizing auctioneers restrict combinatorial bidding in the presence of auctioneer competition. Two sellers offer the same set of two heterogeneous items to six bidders in a VCG mechanism. Each bidder desires either the first item, the second item, or the package of both items. First, each seller decides on which packages to allow bids. Then, each bidder selects which of the two sellers’ auctions to participate in. We find that, in contrast to a monopolistic seller, duopolistic sellers do not both offer an unrestricted VCG mechanism, i.e., a combinatorial auction. Rather they segment the market via their respective choice of allowable package bids: One seller attracts bidders who desire a single item; the other seller attracts bidders who desire both items.
    Keywords: Auctioneer competition,Combinatorial auctions,VCG mechanism
    JEL: D44 C72 D82
    Date: 2017
  9. By: Loredana Fattorini (IMT School for advanced studies); Armando Rungi (IMT School for advanced studies); Zhen Zhu (IMT School for advanced studies)
    Abstract: In this contribution, we introduce a network approach for the organization of global production across national borders, beyond the sequential industry-level metrics proposed in the previous literature. First, we show and argue that several characteristics of global production processes would be lost in the analysis when assuming that they could be proxied as linear sequences. Hence, we propose an index that assesses the relevance of any input for the target output, including its role as an input of inputs. Thereafter, we exploit an own-built firm-level dataset of about 20,489 U.S. parent companies integrating more than 154,000 affiliates worldwide. Results show that the technological relevance of an input in a directed supply network is also a good predictor for: i) the probability that an input industry is actually integrated within a firm boundary; ii) the number of affiliates that are controlled by the parent company and active in that input industry.
    Keywords: global value chains, supply networks, vertical integration, upstreamness, firm theory
    JEL: F23 L23 L22 D57 F14
    Date: 2017–11
  10. By: Foschi, Matteo (European University Institute)
    Abstract: When consumers register with loyalty schemes, or open a `customer account', offered by large retailers, they allow retailers to study their purchasing behaviour over time. Via personalised offers and discounts, retailers can then use this information to price discriminate. I study the effect on consumer welfare of this discrimination, assuming several different levels of informativeness within the schemes. When schemes are uninformative about consumer preferences they are certain to hurt consumer surplus. When they are fully or partially informative, an increase in aggregate consumer surplus can take place under some conditions. Pareto Improvements are never possible. The model studies groceries and online industries where temptation and self-control are an issue.
    Keywords: Individual Pricing ; Consumer Tracking ; Price Discrimination ; Impulse Purchasing, Self-Control ; Loyalty Schemes ; Hard Evidence. JEL Classification numbers: D21 ; D42 ; D43 ; D82 ; D86 ; L11 ; L81
    Date: 2017
  11. By: Friebel, Guido; Heinz, Matthias; Khashabi, Pooyan; Kretschmer, Tobias; Zubanov, Nick
    Abstract: It is well established that the effectiveness of pay-for-performance (PfP) schemes depends on employee- and firm-specific factors. Much less is known about the role of factors outside the firm. We investigate the role of market competition on the effectiveness of PfP. Our theory posits that there are two counteracting effects, a business stealing and a competitor response effect, that jointly generate an inverted U-shape relationship between PfP effectiveness and competition. Weak competition creates low incentives to exert effort because there is little extra market to gain, while strong competition creates low incentives as competitors respond more. PfP hence has the strongest effect for moderate competition. We test this prediction with a field experiment on a retail chain which confirms our theory and refutes alternative explanations.
    Keywords: business stealing; competitor response; Management Practices; market competition; pay for performance (PfP)
    Date: 2017–11
  12. By: Diekhof, Josefine; Cantner, Uwe
    Abstract: The influence of innovative entrants on incumbents is considered important for technological change. We analyze this influence for the global transition towards alternative technology vehicles (ATVs). Our results indicate that entrants' ATV-related knowledge accumulation stimulates average incumbent's ATV-related research. Regarding global entrants, incumbents with higher ATV patent stocks increased patenting stronger; supporting previous literature on competitive reactions to entry. Responding to domestic entrants, however, incumbents with low ATV patent stocks increased whereas incumbents with high stocks decreased patenting; suggesting that advanced incumbents outsource research or overtake entrants. Further, certain characteristics and not merely the quantity of entrants drive incumbents' responses.
    Keywords: Environmental Economics,Sustainable Development,Technological Innovation,Firm Behavior: Empirical Analysis,Entrepreneurship,Industry Dynamics,Automobile Industry,Electric Vehicle
    JEL: Q01 Q55 D22 L26 L62 O31
    Date: 2017
  13. By: Leledakis, George; Mamatzakis, Emmanuel; Pirgiotakis, Manos; Travlos, Nikolaos
    Abstract: We extend the U.S. bank M&As literature by examining announcement returns for acquisitions of both listed and unlisted targets by U.S. banking firms for a long period of time from the eighties till to date. Over these decades there have been implemented several regulation changes, notably the Dodd-Frank Act that would be of interest to examine whether they have any impact, and if indeed they have to which direction, on value creation in M&As in the U.S. banking industry. Contrary to the conventional wisdom that bidding banks lose upon the announcement of a merger, we find positive abnormal returns for these firms that choose to acquire privately-held targets. Further, returns for acquirers in private offers do not depend on the method of payment, legislative changes, size, or geographical scope. However, we find that the use of a financial advisor on the part of the bidder can better explain the variation in abnormal returns for such offers. Our results are not influenced by any unobserved bidder-specific component or sample selection issues.
    Keywords: Mergers and Acquisitions; Regulations, Banks; Value Creation
    JEL: G2 G3 G34
    Date: 2017–11–27
  14. By: Oleksandr Shcherbakov; Naoki Wakamori
    Abstract: Proportional reduction is a common cartel practice in which cartel members reduce their output proportionately. We develop a method to quantify this reduction relative to a benchmark market equilibrium scenario and relate the reduction to the traditional conduct parameter. Our measure is continuous, allowing us to have an intuitive interpretation as the “degree of collusion” and nesting the earlier models in the existing literature. Furthermore, our methodology addresses Corts’ (1999) critique by estimating time-varying degree of collusion from a short panel of firm-level observations, exploiting firms’ ex post heterogeneity. We illustrate the method using the Joint Executive Committee railroad cartel data.
    Keywords: Econometric and statistical methods, Market structure and pricing
    JEL: D22 L41 C36
    Date: 2017
  15. By: Vadym Volosovych (Erasmus University Rotterdam); Carolina Villegas Sanchez (ESADE Business School); Bent Sorensen (University of Houston); Sebnem Kalemli-Ozcan (University of Maryland)
    Abstract: We identify knowledge spillovers from foreign investment to domestic firms using novel measures of ``closeness'' of foreign-owned and domestic and domestic firms in product space and in technology space. We rely on a new data set that spans six advanced countries connecting firms internationally in order to, a) separate competition effects on domestic firms from knowledge spillovers when domestic and foreign-owned firms are close in product space, and b) identify spillovers from foreign-owned firms that are close to domestic firms in technology space. We find strong negative competition effects on domestic firms that produce in the same {four-digit} sector as the foreign firms and positive knowledge spillovers to domestic firms operating in the same {two-digit} sector (but in different four-digit sectors). Using a measure of ``technological closeness,'' building on the work of Bloom, Schankerman, and van Reenen (2013), we find significant knowledge spillovers to firms which are close in technology space. On average, knowledge spillovers explain 60 percent of the total factor productivity improvement for domestic firms that are technologically close to foreign firms.
    Date: 2017

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