|
on Industrial Competition |
| By: | Laura Alfaro (Harvard Business School, Business, Government and the International Economy Unit); Nicholas Bloom (Stanford University); Paola Conconi (ECARES, Université Libre de Bruxelles); Harald Fadinger (University of Mannheim); Patrick Legros (ECARES, Université Libre de Bruxelles); Andrew F. Newman (Boston University); Raffaella Sadun (Harvard Business School, Strategy Unit); John Van Reenen (Massachusetts Institute of Technology) |
| Abstract: | Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers or keep them centralized. We test the predictions of this model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms operating in many countries and industries. In line with the model's predictions, we find that integration and delegation co-vary positively, and that producers are more likely to integrate suppliers in input sectors with greater productivity variation. |
| Keywords: | Vertical integration, delegation, real options. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:18-051&r=com |
| By: | Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong |
| Abstract: | This paper develops a framework for studying the optimal product range choice of a multiproduct intermediary when consumers demand multiple products. In the optimal product selection, the intermediary uses exclusively stocked high-value products to increase store tra¢ c, and at the same time earns pro?t mainly from non-exclusively stocked products which are relatively cheap to buy from upstream suppliers. By doing this the intermediary can earn strictly positive pro?t, including in situations where it does not improve e¢ ciency in selling products. A linkage between product selection and product demand features such as size and shape is established. It is also shown that relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively. |
| Keywords: | intermediaries; product range; multiproduct demand; search; exclusive contracts |
| JEL: | D83 L42 L81 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32174&r=com |
| By: | Guillem Roig |
| Abstract: | I study a bilateral investment game where a buyer privately trades with several suppliers who compete by offering menus of non-exclusive contracts. When market trading is structured so that competition among suppliers is the most intense, the hold-up problem disappears for an extensive range of the investment costs. The investment of the supplier does not affect its bargaining position, and both the supplier and the buyer have the right incentives to invest. In any other equilibria, the efficient investment is not implemented: the reallocation of bargaining power as a result of investment distorts the incentives to invest efficiently. However, because under some parameters of the model investment decisions are strategic complements welfare is maximised for an intermediate level of competition. |
| Keywords: | Bilateral Investment; Hold-up; Non-Exclusive Contracts; Competition. |
| JEL: | D44 L11 |
| Date: | 2017–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:015892&r=com |
| By: | Markus Dertwinkel-Kalt; Mats Köster |
| Abstract: | We provide a novel intuition for the observation that many brand manufacturers have restricted their retailers’ ability to resell brand products online. Our approach builds on models of salience according to which price disparities across distribution channels guide a consumer’s attention toward prices and lower her appreciation for quality. Thus, absent vertical restraints, one out of two distortions - a quality or a participation distortion - can arise in equilibrium. The quality distortion occurs if the manufacturer provides either an inefficiently low quality under price salience or an inefficiently high quality in order to prevent price salience. The participation distortion arises as offline sales might be entirely abandoned in order to prevent prices from becoming salient. Both distortions are ruled out if vertical restraints are imposed. As opposed to the current EU legislation that considers a range of vertical restraints as being hardcore restrictions of competition per se, we show that these constraints can be socially desirable if salience effects are taken into account. |
| Keywords: | salience, online sales, antitrust, vertical restraints, distribution channels |
| JEL: | D21 K21 L42 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6787&r=com |
| By: | Vanhuele, Marc; Ataman, Berk; Pauwels, Koen; Srinivasan, Shuba |
| Abstract: | Advertising often aims at creating and reinforcing brand differentiation, which should translate into reduced price competition. Currently unknown are the boundary conditions for long-term advertising benefits, the route through which advertising effects materialize, and the role of competitive advertising in the category. The authors develop a Hierarchical Dynamic Linear Model that links own and others’ advertising in the category to brand price elasticity directly and indirectly through their impact on own and competitive mindset metrics. The model accommodates dynamic dependencies in mindset metrics, controls for endogeneity in marketing, captures competitive reactions and performance feedback in marketing, and explains cross-sectional variation as a function of brand and category characteristics. Model estimation on seven years of data for 350 brands in 39 categories shows that both own and all competitive advertising in the category lower price sensitivity for the average brand, both directly and through advertising awareness. The attenuation of price sensitivity is more pronounced for niche brands in complex and more expensive categories, with higher concentration and purchase frequency. A financial simulation based on the estimates shows that while the price elasticity effect is positive and substantial for high-price brands, it hurts the advertising returns for low-price brands. |
| Keywords: | advertising; price elasticity; mindset metrics; long-term effects; dynamic linear models; and empirical generalization |
| JEL: | M31 M37 |
| Date: | 2016–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1153&r=com |
| By: | Marie-Laure Cabon-Dhersin (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - URN - Université de Rouen Normandie - NU - Normandie Université); Nicolas Drouhin (CREST - Centre de Recherche en Économie et Statistique - INSEE - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique) |
| Abstract: | We propose a general model of oligopoly with firms relying on a two factor production function. In a first stage, firms choose a certain fixed factor level (capacity). In the second stage, firms compete on price, and adjust the variable factor to satisfy all the demand. When the factors are substitutable, the capacity constraint is " soft " , implying a convex cost function in the second stage. We show that there is a unique equilibrium prediction in pure strategies, whatever the returns to scale, characterized by a price that increases with the number of firms up to a threshold. The main propositions are established under the general assumption that the production function is quasi-concave but the paper provides a general methodology allowing the model to be solved numerically for special parametrical forms. |
| Keywords: | price competition,tacit collusion,convex cost,capacity con- straint,limit pricing strategy,returns to scale |
| Date: | 2017–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01622930&r=com |
| By: | ISKAKOV, Mikhail; ISKAKOV, Alexey; d'ASPREMONT, Claude (Université catholique de Louvain, CORE, Belgium) |
| Abstract: | A non-cooperative solution, the Equilibrium in Secure Strategies (EinSS), is defined that extends the Nash equilibrium in pure strategies when it does not exist and is meant to solve games where players are "cautious", i.e. looking for secure positions and avoiding threats. This concept abstracts and unifies various ad hoc solutions already formulated in various applied economic games that have been discussed extensively in the literature. It complements usefully mixed strategy Nash equilibria that are usually not explicit and difficult to interpret in these games. Like the Nash equilibrium, the EinSS is a static concept, and the basic requirement of excluding at equilibrium some deviations remains. But it also appeals to dynamic intuitions, tolerating at equilibrium the possibility of some deviations, which would be blocked by counter-deviations punishing the deviator. This is in line with the "objection-counter- objection" rationale first introduced in cooperative games. A general existence theorem is provided and then applied to the price-setting game in Hotelling location model, to Tullock's rent-seeking contests and to Bertrand-Edgeworth duopoly. Finally competition in the insurance market game is re-examined and the Rothchild-Stiglitz- Wilson contract shown to be an EinSS even when the Nash equilibrium breaks down. |
| Keywords: | Noncooperative games, Equilibrium existence, Discontinuous games, Equilibrium in secure strategies, Hotelling model, Tullock contest, Insurance market, Bertrand-Edgeworth duopoly |
| JEL: | C72 D03 D43 D72 L12 L13 |
| Date: | 2016–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2016051&r=com |
| By: | JOHNEN, Johannes (CORE, Université catholique de Louvain) |
| Abstract: | In many deceptive markets, firms design contracts to exploit mistakes of naive consumers. These contracts also attract less profitable sophisticated consumers. I study such markets when firms compete repeatedly and gather usage data about their customers which is informative about the likelihood of a customer being sophisticated. I show in a benchmark model that firms do not benefit from private information in this setting when all consumers are rational. I find that in sharp contrast to a model with only rational consumers, this customer information mitigates competition and is of great value to its owner despite intense competition. I discuss several implications of the value of customer information on naiveté. Private information on customers’ sophistication induces profits that are bell-shaped in the share of naive consumers. Firms prefer an even mix of both customer types. I also show that if firms can educate (some) naives about hidden fees, competition is already mitigated when firms compete for customers with initially symmetric information. I analyze a policy that discloses customer information to all firms and thereby increases consumer surplus. I discuss how the UK governments’ midata program might induce crucial aspects of this policy, and illustrate the obustness of results through several extensions. |
| Keywords: | Consumer mistakes, deceptive products, shrouded attributes, big data, targeted pricing, consumer data, add-on pricing, price discrimination, industry dynamics |
| JEL: | C22 C58 |
| Date: | 2017–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2017036&r=com |
| By: | Boyer, Marcel; Faye, Anne Catherine; Kotchoni, Rachidi |
| 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 sometimes-conflicting 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: | Cartels; Fines; Competition Policy; Antitrust; Dynamics |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32121&r=com |
| By: | Agnosteva, Delina (Towson University); Syropoulos, Constantinos (Drexel University); Yotov, Yoto (Drexel University) |
| Abstract: | We build a model of tacit collusion between firms that operate in multiple markets to study the effects of trade costs. A key feature of the model is that cartel discipline is endogenous. Thus, markets that appear segmented are strategically linked via the incentive compatibility constraint. Importantly, trade costs affect cartel shipments and welfare not only directly but also indirectly through discipline. Using extensive data on international cartels, we find that trade costs exert a negative and significant effect on cartel discipline. In turn, cartel discipline has a negative and significant impact on trade flows, in line with the model. |
| Keywords: | endogenous cartel discipline; competitiveness; multimarket contact; welfare; trade costs; trade policy; gravity |
| JEL: | D43 F10 F12 F13 F15 F42 L12 L13 L41 |
| Date: | 2017–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2017_012&r=com |
| By: | D'Haultfoeuille, Xavier; Durrmeyer, Isis; Février, Philippe |
| Abstract: | In markets where sellers are able to price discriminate, individuals pay different prices that may be unobserved by the econometrician. This paper considers the structural estimation of a demand and supply model à la Berry et al. (1995) with such price discrimination and limited information on prices taking the form of, e.g., observing list prices from catalogues or average prices. Within this framework, identification is achieved by using supply-side conditions, provided that the marginal costs of producing and selling the goods do not depend on the characteristics of the buyers. The model can be estimated by GMM using a nested fixed point algorithm that extends BLP’s algorithm to our setting. We apply our methodology to estimate the demand and supply in the French new automobile market. Our results suggest that discounting arising from price discrimination is important. The average discount is estimated to be 9.6%, with large variation depending on buyers’ characteristics and cars’ specifications. Our results are consistent with other evidence on transaction prices in France. |
| Keywords: | demand and supply; unobserved transaction prices; price discrimination; automobiles |
| JEL: | C51 D12 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:32136&r=com |
| By: | Hélène Le Cadre (EnergyVille) |
| Abstract: | In this paper, we analytically compare centralized and decentralized market designs involving a national and local market operators, strategic generators having market power and bidding sequentially in local markets , to determine which design is more efficient for the procurement of energy. In the centralized design, used as benchmark, the national market operator optimizes the exchanges between local markets and the genera-tors' block bids. In the decentralized design, generators act as Stackelberg leaders, anticipating the local market prices and the flows on the transmission lines. Clearing of the local markets can be either simultaneous or sequential. The resulting two-stage game with competitive leaders that are not price takers is formulated as a bilevel mathematical programming problem which is reformulated as a Nash-Cournot game, and conditions for existence and uniqueness of market equilibrium are studied. Imperfect information is also considered, resulting from the lack of incentives from the generators to share their RES-based generations. Through a case study, we determine that the decentralized design is as efficient as the centralized one with high share of renewables, using as performance measure the Price of Anarchy, and that imperfect information has a limited impact on the efficiency of the decentralized market design. Furthermore, we check numerically that there exists an upper-limit on the block bid length maximizing the social welfare under both centralized and decentralized designs. |
| Keywords: | Bilevel Mathematical Programming,Complementarity Theory,Electricity Market,Bidding,Price of Anarchy |
| Date: | 2017–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01619885&r=com |
| By: | Alexandre Volle (Laboratoire CEE-M, Université Montpellier) |
| Abstract: | The present paper investigates the pricing behavior of a green firm competing against a brown firm where the polluting quality is sell in a perfect competitive market. The distorsion of the price to signal a green product is too high to face any demand. Pooling price equilibria emerge as most plausible as long as the brown firm has the possibility to mimic the pricing behavior of the green firm. A green producer is thus constrained to practice uninformative prices which can conduct it to leave the market. |
| Keywords: | Environmental Quality, Asymmetric Information, Price Signaling |
| JEL: | D43 D82 Q5 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:fae:wpaper:2017.30&r=com |