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on Industrial Competition |
| By: | Fumagalli, Chiara; Motta, Massimo |
| Abstract: | This paper shows that vertical foreclosure can have a dynamic rationale. By refusing to supply an efficient downstream rival, a vertically integrated incumbent sacrifices current profits but can exclude the rival by depriving it of the critical profits (or sales) it needs to be successful. In turn, monopolising the downstream market may prevent the incumbent from losing its future profits because: (a) it allows the incumbent to extract rents from an efficient upstream rival if future upstream entry cannot be discouraged; or (b) it also deters future upstream entry by weakening competition for the input and reducing the post-entry profits of the prospective upstream competitor. |
| Keywords: | Exclusion; Inefficient foreclosure; Monopolisation; Refusal to supply |
| JEL: | K21 L41 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12498&r=com |
| By: | Paul Belleflamme; Martin Peitz |
| Abstract: | Competition between two-sided platforms is shaped by the possibility of multihoming. If initially both sides of platform singlehome, each platform provides users on one side exclusive access to its users on the other side. If then one side multihomes, platforms compete on the singlehoming side and exert monopoly power on the multihoming 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 in not always true, as the opposite may happen or both sides may benefit. |
| Keywords: | Network effects, two-sided markets, platform competition, competitive bottleneck, multihoming |
| JEL: | D43 L13 L86 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_001_2018&r=com |
| By: | Leal, Mariel; Garcia, Arturo; Lee, Sang-Ho |
| Abstract: | We study the effects of uniting two separated markets, each monopolized by a producer, into a single globalized duopoly market. When one of the firms is consumer-friendly before and after globalization, we examine certain conditions under which globalization turns out to be beneficial. Consumers in the local market which the consumer-friendly firm is from may have their surplus reduced under certain conditions. We also find conditions under which welfare of one market or the other can be reduced, even that of both simultaneously. If these conditions were met, it would be better, in a globalizing context, that the firm is friendly only with the consumers of its original market and not with those of the global market. |
| Keywords: | globalization, consumer-friendly firm, technical advantage, asymmetric mixed duopoly |
| JEL: | L12 L31 |
| Date: | 2017–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:83512&r=com |
| By: | Pau Roldan (New York University); Sophia Gilbukh (NYU Stern) |
| Abstract: | What is the relationship between the rate at which firms accumulate their stock of demand over time and the prices that they set for their products? This paper analyzes the implications of cus- tomer capital accumulation for firms’ pricing behavior and firm dynamics. We build an analytically tractable directed search model of the product market in which firms are ex-post heterogeneous in their customer base and commit to the prices they post. The model features dynamic contracts with endogenous customer reallocation, endogenous entry and exit of firms, and allows for an exact characterization of the firm distribution. Price rigidity at the firm level emerges as an equilibrium outcome, and there is price dispersion in the cross-section because firms of different sizes use differ- ent pricing strategies to strike a balance between attracting new customers and retaining incumbent ones. We show that our mechanism can generate realistic firm dynamics, a right-skewed firm size distribution, and size- and age-dependent markups which are in line with the data. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1235&r=com |
| By: | Leena Rudanko (Federal Reserve Bank of Philadelphia) |
| Abstract: | Recent research argues that a key factor limiting firm growth is the gradual accumulation of product market demand. Motivated by this evidence, this paper studies firm price setting and growth in a frictional product market where firms accumulate customers over time. In this competitive search model of firm growth, firms face a trade-off in setting prices each period, between making profits on existing customers with high prices, and attracting new customers with low prices. Firms with more existing customers choose higher prices, attract fewer new customers, and grow more slowly, than those with less. I show that if a new firm has full commitment to future prices, it can attain efficient growth through its lifetime. This plan is not time consistent, however: if a firm with existing customers reoptimizes, it will choose a higher price today than planned. I study firm pricing and growth when the firm does not have commitment to future prices, focusing on Markov perfect equilibria. The baseline model considers an industry with a single monopolistically competitive firm, but I also consider the impact of a competitive fringe on the monopolist’s pricing, a version with a continuum of firms within the industry that delivers an equilibrium theory of price dispersion, as well as the implications for firm responses to shocks to demand and costs. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1281&r=com |
| By: | Ernst R. Berndt; Mark R. Trusheim |
| Abstract: | Precision medicines inherently fragment treatment populations, generating small-population markets, creating high-priced "niche busters" rather than broadly prescribed "blockbusters". It is plausible to expect that small markets will attract limited entry in which a small number of interdependent differentiated product oligopolists will compete, each possessing market power. Multiple precision medicine market situations now resemble game theory constructs such as the prisoners' dilemma and Bertrand competition. The examples often involve drug developer choices created by setting the cut-off value for the companion diagnostics to define the precision medicine market niches and their payoffs. Precision medicine game situations may also involve payers and patients who attempt to change the game to their advantage or whose induced behaviors alter the payoffs for the developers. The variety of games may predictably array themselves across the lifecycle of each precision medicine indication niche and so may become linked into a sequentially evolving meta-game. We hypothesize that certain precision medicine areas such as inflammatory diseases are becoming complex simultaneous multi-games in which distinct precision medicine niches compete. Those players that learn the most rapidly and apply those learnings the most asymmetrically will be advantaged in this ongoing information pharms race. |
| JEL: | I11 L13 L65 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24020&r=com |
| By: | Imke Reimers (Northeastern University); Benjamin R. Shiller (Brandeis University) |
| Abstract: | Firms are increasingly able to monitor and collect proprietary data on their customers' behaviors, raising concerns among antitrust autorities that incumbents may use such data to soften competition. Focusing on auto insurance monitoring programs which offer tailored discounts to consumers driving safely, we examine the impact of proprietary data collection on incumbent profits. We find that incumbents' profits initially increase but are eroded by competition from other firms offering similar programs. We further find that these monitoring programs reduce fatal accidents. Yet the benefits are short lived. Incumbents, who do not necessarily internalize the full costs of accidents, typically monitor their customers only temporarily. Thus, regulation incentivizing permanent monitoring may improve welfare by reducing moral hazard. |
| Keywords: | Proprietary data, competition, asymmetric information, switching costs, car insurance, privacy |
| JEL: | D43 D82 L13 L40 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:brd:wpaper:119&r=com |
| By: | Erich Muehlegger; Richard L. Sweeney |
| Abstract: | The advent of hydraulic fracturing lead to a dramatic increase in US oil production. Due to regulatory, shipping and processing constraints, this sudden surge in domestic drilling caused an unprecedented divergence in crude acquisition costs across US refineries. We take advantage of this exogenous shock to input costs to study the nature of competition and the incidence of cost changes in this important industry. We begin by estimating the extent to which US refining’s divergence from global crude markets was passed on to consumers. Using rich microdata, we are able to decompose the effects of firm-specific, market-specific and industry-wide cost shocks on refined product prices. We show that this distinction has important economic and econometric significance, and discuss the implications for prospective policy which would put a price on carbon emissions. The implications of these results for perennial questions about competition in the refining industry are also discussed. |
| JEL: | H22 H23 Q40 Q54 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24025&r=com |
| By: | Eugenio J. Miravete; Katja Seim; Jeff Thurk |
| Abstract: | Government often chooses simple rules to regulate industry even when firms and consumers are heterogeneous. We evaluate the implications of this practice in the context of alcohol pricing where the regulator uses a single markup rule that does not vary across products. We estimate an equilibrium model of wholesale pricing and retail demand for horizontally differentiated spirits that allows for heterogeneity in consumer preferences based on observable demographics. We show that the single markup increases market power among upstream firms, particularly small firms whose portfolios are better positioned to take advantage of the policy. For consumers, the single markup acts as a progressive tax by overpricing products favored by the rich. It also decreases aggregate consumer welfare though 16.7% of consumers are better off under the policy. These consumers tend to be older, less wealthy or educated, and minorities. Simple policies therefore generate significant cross-subsidies and may be an effective tool for government to garner favor of key constituencies. |
| JEL: | D42 D63 H23 L43 L66 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24124&r=com |
| By: | José Azar; Ioana Marinescu; Marshall I. Steinbaum |
| Abstract: | A product market is concentrated when a few firms dominate the market. Similarly, a labor market is concentrated when a few firms dominate hiring in the market. Using data from the leading employment website CareerBuilder.com, we calculate labor market concentration for over 8,000 geographic-occupational labor markets in the US. Based on the DOJ-FTC horizontal merger guidelines, the average market is highly concentrated. Using a panel IV regression, we show that going from the 25th percentile to the 75th percentile in concentration is associated with a 15-25% decline in posted wages, suggesting that concentration increases labor market power. |
| JEL: | J2 J3 L1 L4 |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24147&r=com |
| By: | Banal-Estanol, Albert; Kretschmer, Tobias; Meloso, Debrah; Seldeslachts, Jo |
| Abstract: | A core question in alliance research is how alliance design influences alliance success. Two underexplored aspects of this question are whether the effect of alliance design is contingent on the external competitive environment and how alliance design affects the behavioral dynamics in an alliance. We address these aspects by studying two core dimensions of alliance design, the level of commitment in an alliance and the number of alliance partners. We match two competitive environments, high and low competition, with different alliance designs and vary the number of alliance partners and the level of commitment and experimentally study the aggregate performance and behavioral dynamics of the different alliance designs. We find that with low competition, alliance design does not affect performance much, while with high competition, alliance performance depends heavily on alliance design. Regarding dynamics, we find that aggregate performance is most strongly affected by first-period behavior, while the willingness to forgive a partner's non-cooperative behavior has a more muted effect on alliance performance. |
| Keywords: | laboratory experiment; Organization Design; Strategic Alliances |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12512&r=com |
| By: | Kevin x.d. Huang (Vanderbilt University); Zhe Li (Shanghai University of Finance and Economics); Jianfei Sun (Shanghai Jiao Tong University) |
| Abstract: | We develop a theory of loan sales based on bank competition and entrepreneur directed search. We show how the interplay of the two can reduce interest rate on loans financed through on-balance-sheet activities and how this can motivate loan sales as a strategy of financing through off-balance-sheet activities. The results shed some light on the shift over the years preceding the recent financial crisis in the practice of U.S. and European banks, from the traditional ‘originate to hold' model of credit provision, towards the ‘originate to distribute' approach for credit extension, that is, the emergence of a ‘shadow banking system'. |
| Keywords: | Bank competition; Directed search; Loan sales; Shadow banking |
| JEL: | E4 |
| Date: | 2018–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-sub-18-00001&r=com |
| By: | Denicolò, Vincenzo; Polo, Michele |
| Abstract: | We show that in the model of Federico, Langus and Valletti (2017) [A simple model of mergers and innovation, Economics Letters, 157, 136-140] horizontal mergers may actually spur innovation by preventing duplication of R&D efforts. This possibility is more likely, the greater is the value of innovations, the less rapidly diminishing are the returns to R&D, and the more highly correlated are the R&D projects of different firms. Federico, Langus and Valletti (2017) do not obtain this result because they focus only on the case in which the merged firm spreads total R&D expenditure evenly across the individual research units of the merging firms -- a strategy which is optimal, however, only if the returns to R&D diminish sufficiently rapidly. |
| Keywords: | Horizontal mergers; Innovation |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12511&r=com |
| By: | Maissa Tamraz; Yaming Yang |
| Abstract: | This contribution is concerned with price optimisation of the new business for a non-life product. Due to high competition in the insurance market, non-life insurers are interested in increasing their conversion rates on new business based on some profit level. In this respect, we consider the competition in the market to model the probability of accepting an offer for a specific customer. We study two optimisation problems relevant for the insurer and present some algorithmic solutions for both continuous and discrete case. Finally, we provide some applications to a motor insurance dataset. |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1711.07753&r=com |
| By: | Chao Luo; Yih-Fang Huang; Vijay Gupta |
| Abstract: | This paper studies the problem of multi-stage placement of electric vehicle (EV) charging stations with incremental EV penetration rates. A nested logit model is employed to analyze the charging preference of the individual consumer (EV owner), and predict the aggregated charging demand at the charging stations. The EV charging industry is modeled as an oligopoly where the entire market is dominated by a few charging service providers (oligopolists). At the beginning of each planning stage, an optimal placement policy for each service provider is obtained through analyzing strategic interactions in a Bayesian game. To derive the optimal placement policy, we consider both the transportation network graph and the electric power network graph. A simulation software --- The EV Virtual City 1.0 --- is developed using Java to investigate the interactions among the consumers (EV owner), the transportation network graph, the electric power network graph, and the charging stations. Through a series of experiments using the geographic and demographic data from the city of San Pedro District of Los Angeles, we show that the charging station placement is highly consistent with the heatmap of the traffic flow. In addition, we observe a spatial economic phenomenon that service providers prefer clustering instead of separation in the EV charging market. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.02129&r=com |
| By: | Chao Luo; Yih-Fang Huang; Vijay Gupta |
| Abstract: | This paper presents a dynamic pricing and energy management framework for electric vehicle (EV) charging service providers. To set the charging prices, the service providers faces three uncertainties: the volatility of wholesale electricity price, intermittent renewable energy generation, and spatial-temporal EV charging demand. The main objective of our work here is to help charging service providers to improve their total profits while enhancing customer satisfaction and maintaining power grid stability, taking into account those uncertainties. We employ a linear regression model to estimate the EV charging demand at each charging station, and introduce a quantitative measure for customer satisfaction. Both the greedy algorithm and the dynamic programming (DP) algorithm are employed to derive the optimal charging prices and determine how much electricity to be purchased from the wholesale market in each planning horizon. Simulation results show that DP algorithm achieves an increased profit (up to 9%) compared to the greedy algorithm (the benchmark algorithm) under certain scenarios. Additionally, we observe that the integration of a low-cost energy storage into the system can not only improve the profit, but also smooth out the charging price fluctuation, protecting the end customers from the volatile wholesale market. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.02783&r=com |
| By: | Chao Luo; Yih-Fang Huang; Vijay Gupta |
| Abstract: | This paper presents a multi-stage approach to the placement of charging stations under the scenarios of different electric vehicle (EV) penetration rates. The EV charging market is modeled as the oligopoly. A consumer behavior based approach is applied to forecast the charging demand of the charging stations using a nested logit model. The impacts of both the urban road network and the power grid network on charging station planning are also considered. At each planning stage, the optimal station placement strategy is derived through solving a Bayesian game among the service providers. To investigate the interplay of the travel pattern, the consumer behavior, urban road network, power grid network, and the charging station placement, a simulation platform (The EV Virtual City 1.0) is developed using Java on Repast.We conduct a case study in the San Pedro District of Los Angeles by importing the geographic and demographic data of that region into the platform. The simulation results demonstrate a strong consistency between the charging station placement and the traffic flow of EVs. The results also reveal an interesting phenomenon that service providers prefer clustering instead of spatial separation in this oligopoly market. |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1801.02135&r=com |
| By: | Manuel Adelino; Kristopher Gerardi; Barney Hartman-Glaser |
| Abstract: | A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through trade delays using the residential mortgage market as a laboratory. We find a strong relationship between mortgage performance and time to sale for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the "Alt-A" segment of the market, where mortgages are often sold with incomplete hard information, and in cases where the originator and the issuer of mortgage-backed securities are not affiliated. |
| JEL: | D0 G0 |
| Date: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24180&r=com |
| By: | Hunold, Matthias; Kesler, Reinhold; Laitenberger, Ulrich; Schlütter, Frank |
| Abstract: | We analyze the best price clauses (BPCs) of online travel agents (OTAs) using meta-search price data of nearly 30,000 hotels in different countries. We find that BPCs influence the pricing and availability of hotel rooms across online sales channels. In particular, hotels publish their offers more often at Booking.com when it does not use the narrow BPC, and also tend to promote the direct online channel more actively. Moreover, the abolition of Booking.com's narrow BPC is associated with the direct channel of chain hotels having the strictly lowest price more often. |
| Keywords: | best price clauses,hotel booking,MFN,OTA,vertical restraints |
| JEL: | D40 L42 L81 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:278&r=com |
| By: | Benigno, Pierpaolo (LUISS Guido Carli and Einaudi Institute of Economics and Finance); Karantounias, Anastasios G. (Federal Reserve Bank of Atlanta) |
| Abstract: | We study the implications of overconfidence for price setting in a monopolistic competition setup with incomplete information. Our price-setters overestimate their abilities to infer aggregate shocks from private signals. The fraction of uninformed firms is endogenous; firms can obtain information by paying a fixed cost. We find two results: (1) overconfident firms are less inclined to acquire information, and (2) prices might exhibit excess volatility driven by nonfundamental noise. We explore the empirical predictions of our model for idiosyncratic price volatility. |
| Keywords: | overconfidence; imperfect common knowledge; information acquisition; inflation volatility |
| JEL: | D4 D8 E3 |
| Date: | 2017–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2017-14&r=com |