nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒12‒18
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. The Strategic Industry Supply Curve By Flavio M. Menezes; John Quiggin
  2. Brand positioning and consumer taste information By Arcan Nalca,; Tamer Boyaci,; Saibal Ray
  3. Entry Deterrence and Strategic Alliances By Gayle, Philip; Xie, Xin
  4. Platform competition : who benefits from multihoming? By Belleflamme, Paul; Peitz, Martin
  5. Exploitative Abuse and Abuse of Economic Dependence: What can we Learn from the Industrial Organization Approach? By Patrice Bougette; Oliver Budzinski; Frédéric Marty
  6. Quality discrimination in online multi-sided markets By Nestor Duch-Brown
  7. The Multiplier Effect in Two-Sided Markets with Bilateral Investments By Deniz Dizdar; Benny Moldovanu; Nora Szech
  8. Nash-2 equilibrium: selective farsightedness under uncertain response By Sandomirskaia, Marina
  9. Why do manufacturing firms produce services? Evidence for the servitization paradox in Belgium By Catherine Fuss; Pierre Blanchard; Claude Mathieu
  10. Platforms to business relations in online platform ecosystems By Nestor Duch-Brown
  11. Blurred boundaries: a flexible approach for segmentation applied to the car market By Laura Grigolon
  12. Congestion v Content Provision in Net Neutrality: The Case of Amazon's By José Francisco Tudón Maldonado
  13. Persuasion with Correlation Neglect: Media Power via Correlation of News Content By Inés Moreno de Barreda; Gilat Levy; Ronny Razin
  14. Does hospital competition improve efficiency? The effect of the patient choice reform in England By Francesco Longo; Luigi Siciliani; Giuseppe Moscelli; Hugh Gravelle
  15. Network Structure and Consolidation in the U.S. Airline Industry, 1990-2015 By Ciliberto, Federico; Cook, Emily; Williams, Jonathan
  16. "Excess Capacity and Effectiveness of Policy Interventions: Evidence from the Cement Industry" By Tetsuji Okazaki; Ken Onishi; Naoki Wakamori

  1. By: Flavio M. Menezes (School of Economics, The University of Queensland); John Quiggin (School of Economics, The University of Queensland)
    Abstract: In this paper we develop the concept of the strategic industry supply curve, representing the locus of Nash equilibrium outputs and prices arising from additive shocks to demand. We show that the standard analysis of partial equilibrium under perfect competition, including the graphical representa- tion of supply and demand due to Marshall, can be extended to encompass imperfectly competitive markets. Special cases include monopoly, Cournot and Bertrand oligopoly and competition in linear supply schedules. Our approach permits a unified treatment of monopoly, oligopoly and competi- tion, and that it satisfies the five principles of incidence set out by Weyl and Fabinger (2013).
    Keywords: industry supply, cost pass-through, oligopoly
    JEL: D4 L1
    Date: 2017–12–14
  2. By: Arcan Nalca, (Smith School of Business, Queen's University); Tamer Boyaci, (ESMT European School of Management and Technology); Saibal Ray (Desautels Faculty of Management, McGill University)
    Abstract: In this paper, we study how a retailer can benefit from acquiring consumer taste information in the presence of competition between the retailers store brand (SB) and a manufacturers national brand (NB). In our model, there is ex-ante uncertainty about consumer preferences for distinct product features, and the retailer has an advantage in resolving this uncertainty because of his close proximity to consumers. Our focus is on the impact of the retailers information acquisition and disclosure strategy on the positioning of the brands. Our analysis reveals that acquiring taste information allows the retailer to make better SB positioning decisions. Information disclosure, however, enables the manufacturer to make better NB positioning decisions – which in return may benefit or hurt the retailer. For instance, if a particular product feature is quite popular, then it is beneficial for the retailer to incorporate that feature into the SB, and inform the manufacturer so that the NB also includes this feature. Information sharing, in these circumstances, benefits both the retailer and the manufacturer, even though it increases the intensity of competition between the brands. But, there are situations in which the retailer refrains from information sharing so that a potentially poor positioning decision by the NB makes the SB the only provider of the popular feature. The retailer always benefits from acquiring information. However, it is beneficial to the manufacturer only if the retailer does not introduce an SB due to the associated high fixed cost.
    Keywords: supply chain management, uncertain consumer taste, product introduction, product positioning, store brands, national brands, information acquisition, information sharing, vertical difierentiation, horizontal difierentiation
    Date: 2017–01–25
  3. By: Gayle, Philip; Xie, Xin
    Abstract: Researchers have written extensively on the impact that strategic alliances between airlines have on airfare, but little is known of the market entry deterrent impact of strategic alliances. Using a structural econometric model, this paper examines the market entry deterrent impact of codesharing, a form of strategic alliance, between incumbent carriers in domestic air travel markets. We find evidence of market entry deterrence, but deterrence impact depends on the specific type of codesharing between market incumbents as well as the identity of the potential entrant. We quantify the extent to which market incumbents’ codesharing influences potential entrants market entry cost and probability of market entry.
    Keywords: Entry Deterrence; Strategic Alliances; Dynamic Entry/Exit Model; Airline Competition
    JEL: L13 L93
    Date: 2017–12
  4. By: Belleflamme, Paul; Peitz, Martin
    Abstract: Competition between two-sided platforms is shaped by the possibility of multihoming. If users on both sides singlehome, each platform provides users on either side exclusive access to its users on the other side. In contrast, if users on one side can multihome, platforms exert monopoly power on that side and compete on the singlehoming side. This paper explores the allocative effects of such a change from single- to multihoming. Our results challenge the conventional wisdom, according to which the possibility of multihoming hurts the side that can multihome, while benefiting the other side. This is not always true: the opposite may happen or both sides may benefit.
    Keywords: Network effects , two-sided markets , platform competition , competitive bottle- neck , multihoming
    JEL: D43 L13 L86
    Date: 2017
  5. By: Patrice Bougette (Université Côte d'Azur; GREDEG CNRS); Oliver Budzinski (Technische Universität Ilmenau); Frédéric Marty (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: This article aims to provide a detailed analysis of the concept of economic dependence and exploitative abuse through their evolution in competition law and economics and in European case law. First, while the theoretical roots of these concepts may be found in economic theory, we show that the issue has long been ignored or only reluctantly considered in competition law enforcement, mainly because of a lack of available and reliable economic criteria. Second, although its primary objective was to measure market power in an oligopoly context, we examine how current empirical industrial organization methodology allows a sophisticated measure of the economic dependence among suppliers and distributors. Third, we discuss the possibility of relying on the industrial organization approach to address these issues.
    Keywords: exploitative abuse, abuse of economic dependence, competition law, European Commission, effects-based approach
    JEL: K21 L12 L40 L42
    Date: 2017–12
  6. By: Nestor Duch-Brown (European Commission – JRC)
    Abstract: The aim of this paper is to explain evidence of unfair practices by online platforms towards business users, particularly SME's. First, using survey data, we show that sellers operating with four different categories of platforms multi-home (marketplaces, app stores, social networks and online advertising). Hence, the appropriate competitive framework is the "competitive bottleneck" model. Second, we develop an empirical model of platform competition adding an additional dimension: service quality. The results indicate that the costs of providing quality to sellers are higher than the costs of providing quality to buyers. These differences may reflect different needs or preferences across groups. While buyers would require simple functionalities sellers would need more sophisticated services. When sellers' multi-home, platforms care more about buyers than sellers and while buyers will get an efficient level of quality, quality to sellers will be "degraded". We argue that this service quality degradation explain unfair trading practices simply because platforms are not willing to invest to take care of sellers.
    Keywords: digital single market, data economy, online platforms, multi-sided markets
    JEL: D23 K11 K12 L86
    Date: 2017–12
  7. By: Deniz Dizdar (University of Montreal); Benny Moldovanu (University of Bonn); Nora Szech (Karlsruher Institut für Technologie)
    Abstract: Agents in a finite two-sided market make costly investments and are then matched assortatively on the basis of these investments. Besides signaling complementary, privately known types, investments also generate benefits for partners. Our analysis sheds light on quantitative properties of the equilibrium investment behavior. The bilateral external benefits induce an investment multiplier effect. This multiplier effect depends in a complex way on agents’ uncertainty about their rank within their own market side and on their uncertainty about the types and investments of potential partners. Nevertheless, some key features of the effect are independent of the type distributions. We quantify how the strength of the multiplier effect depends on market size, and we study how it interacts with other important factors of the environment such as the costs and benefits of investment and the signaling incentives induced by the competition for more desirable partners. We use our results to characterize equilibrium utilities in large markets for cases in which investments are either partially wasteful or correspond to TU transfers, and also to provide bounds on the hold-up problem in small markets with productive investments.
    Keywords: matching, signaling, Investment, multiplier effect
    JEL: C78 D44 D82
    Date: 2017–11
  8. By: Sandomirskaia, Marina
    Abstract: This paper provides an extended analysis of an equilibrium concept for non-cooperative games with boundedly rational players: a Nash-2 equilibrium. Players think one step ahead and account all profitable responses of player-specific subsets of opponents because of both the cognitive limitations to predict everyone's reaction and the inability to make more deep and certain prediction even about a narrow sample of agents. They cautiously reject improvements that might lead to poorest profit after some possible reasonable response. For $n$-person games we introduce a notion of reflection network consisting of direct competitors to express the idea of selective farsightedness. For almost every 2-person game with a complete reflection network, we prove the existence of Nash-2 equilibrium. Nash-2 equilibrium sets in the models of price and quantity competition, and in Tullock's rent-seeking model with 2 players are obtained. It is shown that such a farsighted behavior may provide a strategic support for tacit collusion.
    Keywords: Iterated thinking; Improving deviation; Direct competitor; Heterogeneous farsightedness; Tacit collusion
    JEL: C72 D03 D43 D70 L13
    Date: 2017–12–05
  9. By: Catherine Fuss (Economics and Research Department, NBB); Pierre Blanchard (UPEC); Claude Mathieu (UPEC)
    Abstract: The increasing role of services in GDP results from the growing share of service industries, but also from the fact that firms produce services along with goods. This paper investigates the determinants of service provision by manufacturing firms. First, it develops a model of differentiated products with, on the demand side, complementarities between the firm’s goods and services, and, on the supply side, rivalry in the allocation of expertise between the production of goods and the provision of services. Second, it provides an econometric assessment of the determinants of servitization for manufacturing firms, using a fractional Probit model with heterogeneity, controlling for endogeneity with respect to unobserved firm characteristics. Both the theoretical model and empirical estimates point to a non-linear relationship between servitization and firm productivity. The relationship is further shaped by the sector environment as well as intrinsic characteristics of the goods and services supplied.
    Keywords: Services, multi-product firms, firm behavior, Total Factor Productivity, panel data analysis, non linear model.
    JEL: D24 D29 L11 L22 L23 L25
    Date: 2017–11
  10. By: Nestor Duch-Brown (European Commission – JRC)
    Abstract: This report presents evidence on the relationship between online platforms and businesses using these platforms to reach consumers or conduct their operations. First, we review the literature on vertical relationships both from a classic approach and from a multi-sided market perspective. Second, we use survey data to explain the factors behind firms’ choice of online channel. Third, we explore the results of a survey passed to firms using platforms to understand their concerns about the behaviour of some of these online gatekeepers. Finally, we offer some conclusions.
    Keywords: digital single market, data economy, online platforms, multi-sided markets
    JEL: D23 K11 K12 L86
    Date: 2017–12
  11. By: Laura Grigolon
    Abstract: Prominent features of differentiated product markets are segmentation and product proliferation that blurs the boundaries between segments. I develop a tractable demand model,the Ordered Nested Logit, which allows for over lap between neighboring segments.I apply the model to the automobile market where segments are ordered from small to luxury. I find that consumers, when substituting outside their vehicle segment, are more likely to switch to a neighboring segment. Accounting for such a symmetric substitution matters when evaluating the impact of new product introduction or studying the effect of subsidies on fuel-efficient cars.
    Date: 2017–11–30
  12. By: José Francisco Tudón Maldonado
    Abstract: Net neutrality encourages content provision but also creates congestion externalities from the increase in data traffic. I study the consequences of net neutrality in, a popular internet platform. Twitch is non-neutral because it gives priority to the most popular content providers by compressing their data, which makes them accessible to more consumers. I estimate a two-sided-market model that considers the interactions between content provision, its consumption, and congestion. Using an exogenous technological upgrade that increased data traffic, I identify the costs of congestion for content providers and for their consumers and, using exogenous time-series variations within panels, I identify the benefits of prioritization. I use the estimated preferences and technological parameters to study the counterfactual in which net neutrality is imposed in the platform, which requires priority to be allocated anonymously. Consumer welfare drops 5%, whereas content provision does not increase, but its average quality drops. I then consider a counterfactual rent-extractive platform that charges for prioritization under the non-neutral regime. In this case, net neutrality, which prohibits priority charges, increases content provision, but consumer welfare still drops due to lower content quality and congestion externalities.
    JEL: D22 D62 L13 L14
    Date: 2017–11–23
  13. By: Inés Moreno de Barreda; Gilat Levy; Ronny Razin
    Abstract: Abstract We model the power of media owners to bias readers’ opinions. In particular we consider readers that have “correlation neglect†, i.e., fail to understand that content across news outlets might be correlated. We study how a media owner who controls several outlets can take advantage of the readers’ neglect. Specifically, we show that the owner can manipulate readers’ beliefs even when readers understand the informativeness of news outlet by outlet. The optimal strategy of the owner is to negatively correlate good news and positively correlate bad news. The owner’s power is increasing in the number of outlets she owns but is constrained by the limited attention of readers. Importantly, our analysis suggests several new insights about welfare in media markets. First, measures of media bias have to take into account the correlation between news outlets. Second, media-market competition curbs the ability of owners to bias readers’ beliefs. In particular, we show that readers always benefit from breaking conglomerates, even when all the new media owners share the same bias. Finally, we highlight a potential cost of media diversity. When readers have correlation neglect, diversity in the interests of owners might lower the informativeness of news content.
    Date: 2017–09–25
  14. By: Francesco Longo (Centre for Health Economics, University of York, York, UK.); Luigi Siciliani (Department of Economics and Related Studies, University of York, York, UK.); Giuseppe Moscelli (Centre for Health Economics, University of York, York, UK.); Hugh Gravelle (Centre for Health Economics, University of York, York, UK.)
    Abstract: We use the 2006 relaxation of constraints on patient choice of hospital in the English NHS to investigate the effect of hospital competition on dimensions of efficiency including indicators of resource management (admissions per bed, bed occupancy rate, proportion of day cases, cancelled elective operations, proportion of untouched meals) and costs (cleaning services costs, laundry and linen costs, reference cost index for overall and elective activity). We employ a quasi difference-indifference approach and estimate seemingly unrelated regressions and unconditional quantile regressions with data on hospital trusts from 2002/03 to 2010/11. Our findings suggest that increased competition had mixed effects on efficiency. An additional equivalent rival increased admissions per bed and the proportion of day cases by 1.1 and 3.8 percentage points, and reduced the proportion of untouched meals by 3.5 percentage points, but it also increased the number of cancelled elective operations by 2.6%. Unconditional quantile regression results indicate that hospitals with low efficiency, as measured by few
    Keywords: competition, efficiency, choice, hospital, difference-in-difference
    JEL: C21 H51 I11 I18 L1
    Date: 2017–11
  15. By: Ciliberto, Federico; Cook, Emily; Williams, Jonathan
    Abstract: We study the effect of consolidation on airline network connectivity using three measures of centrality from graph theory: Degree, Closeness, and Betweenness. Changes in these measures from 1990 to 2015 imply: i) the average airport services a greater proportion of possible routes, ii) the average origin airport is fewer stops away from any given destination, and iii) the average hub is less often along the shortest route between two other airports. Yet, we find the trend toward greater connectivity in the national network structure is largely una ffected by consolidation, in the form of mergers and codeshare agreements, during this period.
    Date: 2017–12
  16. By: Tetsuji Okazaki (Faculty of Economics, The University of Tokyo); Ken Onishi (School of Economics, Singapore Management University); Naoki Wakamori (Faculty of Economics, The University of Tokyo)
    Abstract: Excess production capacity has been a major concern in many countries, in particular, when an industry faces declining demand. Strategic interaction among firms might delay efficient scrappages of production capacity and policy interventions that eliminate such strategic incentives may improve efficiency. This paper empirically studies the effectiveness of policy interventions in such an environment, using plant-level data on the Japanese cement industry. Our estimation results show that a capacity coordination policy that forces firms to reduce their excessive production capacity simultaneously can effectively reduce excess capacity without distorting firms' scrappage decisions or increasing the market power of the firms.
    Date: 2017–12

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