nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒02‒26
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. On the merger paradox and asymmetric product differentiation By Tsuyoshi Toshimitsu; Tetsuya Nakajima
  2. The Effects of Entry under the Coexistence of Oligopolistic and Monopolistic Competition By Kenji Fujiwara
  3. Bait and Ditch: Consumer Naiveté and Salesforce Incentives By Herweg, Fabian; Rosato, Antonio
  4. Common Ownership Concentration and Corporate Conduct By Schmalz, Martin
  5. Common Ownership, Competition, and Top Management Incentives By Antón, Miguel; Ederer, Florian; Gine, Mireia; Schmalz, Martin
  6. Supply chain innovations and partial ownership By Hunold, Matthias; Shekhar, Shiva
  7. Parallel Imports and Repair Services By Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
  8. Bertrand Competition with Asymmetric Costs: A Solution in Pure Strategies By Demuynck, Thomas; Herings, P. Jean-Jacques; Saulle, Riccardo D.; Seel, Christian
  9. Subsidies to Public Firms and Competition Modes under a Mixed Duopoly By HIGASHIDA Keisaku
  10. Multimarket Competition and Profitability: Evidence from Ukrainian banking By Tho Pham; Oleksandr Talavera; Junhong Yang
  11. National Drug Policy Face-off: Some Notes Justifying the Regulations and Drug Price Control Regime in India By Motkuri, Venkatanarayana; Mishra, Rudra Narayana
  12. Static or dynamic efficiency: Horizontal merger effects in the wireless telecommunications industry By Michał Grajek; Klaus Gugler; Tobias Kretschmer; Ion Mişcişin
  13. Targeted Price Controls on Supermarket Products By Diego Aparicio; Alberto Cavallo
  14. Platform Price Parity Clauses with Direct Sales By BjØrn Olav Johansen; Thibaud Vergé
  15. Innovation Responses of Japanese Firms to Chinese Import Competition By YAMASHITA Nobuaki; YAMAUCHI Isamu
  16. Sharing is not caring: Backward integration of consumers By Spindler, Christian; Woll, Oliver; Schober, Dominik
  17. Labor Market Concentration By Azar, José; Marinescu, Ioana E.; Steinbaum, Marshall
  18. Does market structure trigger efficiency? Evidence for the USA before and after the financial crisis By Halkos, George; Polemis, Michael

  1. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University); Tetsuya Nakajima (Faculty of Economics, Osaka City University)
    Abstract: Assuming asymmetric product differentiation, we reconsider the merger paradox in the cases of quantity-setting and price-setting games. We investigate whether emergence of the merger paradox depends on the degree of product differentiation of the outsider, irrespective of the mode of competition. In particular, being different from the result of Deneckere and Davidson (1985), we show that the merger paradox arises in the case of price-setting games if the degree of product differentiation of the outsider is sufficiently small.
    Keywords: merger paradox; quantity-setting game, price-setting game, asymmetric product differentiation
    JEL: D43 L12 L13 L41
    Date: 2018–02
  2. By: Kenji Fujiwara (School of Economics, Kwansei Gakuin University)
    Abstract: This paper proposes a model of a continuum of industries in which some industries are monopolistically competitive, the others are oligopolistic, and they interact in a labor market. We use this model to examine the effects of an increase in the number of oligopolistic firms. We first show that this raises the equilibrium wage and induces exit of monopolistically competitive firms. Then, we find that the profits of each oligopolistic firm and the whole oligopolistic industry decrease. Finally, we establish that if the elasticity of substitution is the same in all industries, welfare improves as a result of an increase in the oligopolistic firms.
    Keywords: Monopolistic competition, oligopoly, general equilibrium, entry, welfare
    JEL: D43 L13 L40
    Date: 2018–02
  3. By: Herweg, Fabian; Rosato, Antonio
    Abstract: We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naive. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The retailers sell an identical base product, but the deceptive one also offers an add-on. Rational consumers never consider buying the add-on, yet naive ones can be talked into buying it. By offering its store manager a contract that pushes him to never sell the base good without the add-on, the chain can induce an equilibrium in which both retailers obtain more-than-competitive profits. The equilibrium features market segmentation with the deceptive retailer targeting only naive consumers whereas the transparent retailer serves only rational ones. Welfare is not monotone in the fraction of naive consumers in the market. Hence, policy interventions designed to de-bias naive consumers might backfire.
    Keywords: Add-On Pricing; Bait and Switch; Consumer Naiveté; Incentive Contracts.
    JEL: D03 D18 D21 L13 M52
    Date: 2018–01
  4. By: Schmalz, Martin
    Abstract: The question of whether and how partial common-ownership links between strategically interacting firms affect firm behavior has been the subject of theoretical inquiry for decades. Since then, consolidation and increasing concentration in the asset-management industry has led to more pronounced common ownership concentration (CoOCo). Moreover, recent empirical research has provided evidence consistent with the literature's key predictions. The resulting antitrust concerns have received much attention from policy makers worldwide. However, the implications are more general: CoOCo affects the objective function of the firm, and therefore has implications for all subfields of economics studying corporate conduct -- including corporate governance, strategy, industrial organization, and all of financial economics. This article connects the papers establishing the theoretical foundations, reviews the empirical and legal literatures, and discusses challenges and opportunities for future research.
    Keywords: Antitrust; control; industry concentration; network; objective of the firm; ownership; shareholder unanimity
    JEL: D21 D22 G10 G30 G32 G34 J41 K21 L10 L16 L21 L40 L41 L42
    Date: 2018–01
  5. By: Antón, Miguel; Ederer, Florian; Gine, Mireia; Schmalz, Martin
    Abstract: We show theoretically and empirically that managers have steeper financial incentives to exert effort and reduce costs when an industry's firms are controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. A side effect of steeper incentives is more aggressive competition. These findings inform a debate about the objective function of the firm.
    Keywords: CEO pay; Common ownership; Competition; corporate governance; management incentives
    JEL: D21 G30 G32 J31 J41
    Date: 2018–02
  6. By: Hunold, Matthias; Shekhar, Shiva
    Abstract: We show that competing downstream firms may rather invest in their inefficient inhouse production than help improve the technology of the efficient supplier, even if this is costless. Even worse, a downstream firm can have strong incentives to decrease the efficiency of the supplier in order to improve its outside options. We demonstrate that non-controlling partial backward ownership can align the incentives of the supplier and its customers with respect to supply chain innovations.
    Keywords: knowledge spillover,innovation,minority shareholdings,supply chain efficiency,vertical partial ownership
    JEL: L22 L40
    Date: 2018
  7. By: Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
    Abstract: This study explores the effect of parallel imports (PIs) when the producer may discriminate repair and maintenance services against PI units. This service discrimination weakens intra-brand competition and reduces the degree of price convergence between countries. If the producer makes costly activities to improve the quality of the good, permitting PIs in the presence of the service discrimination could lower the quality, because lower quality leads to a larger price gap. Consequently, it is possible that prices increase, consumers lose, and welfare deteriorates in both countries. This negative welfare effect is more likely to emerge as trade liberalization proceeds.
    Keywords: parallel imports, service discrimination, goods quality, welfare, trade liberalization
    JEL: F12 F13 F10 D42 L41
    Date: 2018
  8. By: Demuynck, Thomas (universite libre de bruxelles); Herings, P. Jean-Jacques (General Economics 1 (Micro)); Saulle, Riccardo D. (General Economics 1 (Micro)); Seel, Christian (General Economics 1 (Micro))
    Abstract: We consider two versions of a Bertrand duopoly with asymmetric costs and homogeneous goods. They differ in whether predatory pricing is allowed. For each version, we derive the Myopic Stable Set in pure strategies as introduced by Demuynck, Herings, Saulle, and Seel (2017). We contrast our prediction to the prediction of Nash Equilibrium in mixed strategies.
    Keywords: Bertrand Competition, Asymmetric Costs, Myopic Stable Set
    JEL: C70 C72 D43
    Date: 2018–02–08
  9. By: HIGASHIDA Keisaku
    Abstract: This study experimentally examines whether subsidies to a state-owned enterprises (SOE) change the behavior of a private firm or the SOE under a mixed duopoly. Following Hampton and Sherstyuk (2012), we conducted a series of laboratory experiments adopting a two-stage capacity-price decision-making duopoly setting. We adopted two treatments in terms of types of subsidies: one is a subsidy for production/sales and the other is a subsidy for capacity building. The results indicate that even a small amount of subsidy can influence the choices of capacities and prices of both types of firms. Production subsidies increase capacities of both private firms and SOEs, and, accordingly, the prices of both types of firms decrease, while capacity subsidies decrease capacities of private firms. Because the competition for capacity building between two firms becomes less severe, the profits of both firms increase and, interestingly, the idle capacities of private firms decrease. Moreover, both social and domestic surpluses increase in the case of production subsidies, but decrease in the case of capacity subsidy. In the former case, severe competition mitigates the distortion caused by imperfect competition. We also find that the firm attributes and behavior in the past significantly influence capacity choices.
    Date: 2018–01
  10. By: Tho Pham (School of Management, Swansea University); Oleksandr Talavera (School of Management, Swansea University); Junhong Yang
    Abstract: This paper examines the impact of non-price competition, indicated by multimarket contacts, on bank performance. Using a unique data set of Ukrainian banks’ branch locations, we construct three measures of multimarket linkages. We find that banks with a higher level of multimarket contacts are more likely to have higher financial performance. The findings support the mutual forbearance hypothesis: when banks compete in multiple markets, they have incentives to cooperate instead of competing aggressively. This cooperative incentive is induced by the familiarity and the similarity among multimarket competitors. The positive effect of multimarket competition on bank profitability is stronger when banks interact in more competitive markets. However, the anti-competitive effect of multimarket contacts is lessened following an exogenous shock to banks' branch networks. Banks that were more exposed to the shock experience worsened competitive positions and no longer benefited from multimarket contacts.
    Keywords: Banking, Multimarket competition, Multimarket contact, Mutual forbearance hypothesis, Profitability, Difference-in-differences, Political conflict.
    JEL: G21 L11 L25 L40
    Date: 2018–01–25
  11. By: Motkuri, Venkatanarayana; Mishra, Rudra Narayana
    Abstract: This is an attempt in examining and carrying out the discussion and debate on regulations and prince control in pharmaceutical industry in the Indian context. Herein the above discussion presented the perspectives of the industry and the welfare of the poor population along with alternative options. Given its critical nature in existence of human race while protecting, maintaining and restoring health of human being, regulations on pharmaceutical industry are needed to ensure safety, quality and effectiveness of drugs they develop and produce. As pharmaceutical industry involved with the phenomenon of Induced-demand and it is one of the industries where the price competition may not be prevailing, hence price controls on certain essential and life-saving drugs are needed especially in the Indian context.
    Keywords: Drugs, Pharmaceuticals, Industry, India, Drug Development, Drug Discovery, Drug Marketing, Pharmaceuticalisation, Drug Regulations, Drug Price Control
    JEL: I10 I11 I18
    Date: 2018–02
  12. By: Michał Grajek (ESMT European School of Management and Technology); Klaus Gugler (Vienna University of Economics and Business); Tobias Kretschmer (Ludwig Maximilian University of Munich); Ion Mişcişin (University of Vienna)
    Abstract: This paper studies five mergers in the European wireless telecommunication industry and analyzes their impact on prices and capital expenditures of both merging carriers and their rivals. We find substantial heterogeneity in the relationship between increases in concentration and carriers’ prices. The specifics of each merger case clearly matter. Moreover, we find a positive correlation between the price and the investment effects; when the prices after merger increase (decrease), the investments increase (decrease) too. Thus, we document a trade-off between static and dynamic efficiencies of mergers.
    Keywords: telecom mergers, static and dynamic efficiency, difference-in-difference
    JEL: L22 O33 G34 L96
    Date: 2017–12–19
  13. By: Diego Aparicio; Alberto Cavallo
    Abstract: We study the impact of targeted price controls for supermarket products in Argentina from 2007 to 2015. Using web-scraping, we collected daily prices for controlled and non-controlled goods and measured the differential effects on inflation, product availability, and price dispersion. We first show that, although price controls are imposed on goods with significant CPI weight, they have a temporary effect on aggregate inflation and no downward effect on other goods. Second, contrary to common beliefs, we find that controlled goods are consistently available for sale. Third, firms compensate for price controls by introducing new product varieties at higher prices. This behavior, which increases price dispersion within narrow categories, is consistent with a standard vertical differentiation model in the presence of price controls.
    JEL: D22 E31
    Date: 2018–02
  14. By: BjØrn Olav Johansen (Department of Economics, University of Bergen); Thibaud Vergé (CREST; ENSAE; Université Paris-Saclay; Norwegian School of Economics)
    Abstract: We analyze the effects of price parity clauses in a setting where competing sellers distribute their products directly as well as through competing platforms. These clauses prevent a seller from offering its product at a lower price on other platforms or through its own direct sales channel. We show that when we account for the sellers? participation constraints, price parity clauses do not always lead to higher commissions and ?final prices. Instead, we fi?nd that they may simultaneously bene?fit all the actors (platforms, sellers and consumers), even in the absence of traditional efficiency arguments.
    Date: 2016–09–01
  15. By: YAMASHITA Nobuaki; YAMAUCHI Isamu
    Abstract: This paper examines innovation response of a panel of Japanese firms to the intensified import competition from China for the period 1994-2009. We build a comprehensive firm-level dataset linking innovation activities including patenting and research and development (R&D) merged to cross-industry measures of Chinese import competition. Carefully accounting for a simultaneity bias between innovation and importing and the possible heterogeneous effects across firms, it is found that firms filed for more patents in response to increased import competition from China. However, this effect is only evident for a group of globally engaged firms. At the same time, Chinese import competition has adversely affected the quality of innovation as measured by citations. Overall, firms with a more domestic market focus are the ones who have felt most of the Chinese import competition, which is also reflected in their declined R&D efforts.
    Date: 2017–12
  16. By: Spindler, Christian; Woll, Oliver; Schober, Dominik
    Abstract: A new type of player occurs in the sharing economy: a vertically integrated consumer who owns production facilities and has direct market access, often termed "active prosumer". The prosumer faces a trade-off between market transaction cost and substantial strategic potential to influence both market demand and supply by her decisions. We discuss optimal marketing and production decisions in light of this trade-off. An empirical application to the German-Austrian electricity market demonstrates substantial incentives for active market participation by recently added decentralized renewables production. Prosumers can achieve considerable profit increases by switching roles of net market supplier or customer.
    Keywords: Active Prosumer,Capacity Withholding,Self-Supply,Vertical Integration,Consumer Production,Market Participation Cost
    Date: 2018
  17. By: Azar, José (IESE Business School); Marinescu, Ioana E. (University of Pennsylvania); Steinbaum, Marshall (Roosevelt Institute)
    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, 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 17% decline in posted wages, suggesting that concentration increases labor market power.
    Keywords: monopsony, oligopsony, labor markets, competition policy
    JEL: J30 J42 L40
    Date: 2017–12
  18. By: Halkos, George; Polemis, Michael
    Abstract: This paper investigates the relationship between efficiency and market structure for a sample of industrial facilities dispersed among the USA states. In order to measure the relevant efficiency scores, we use a Data Development Analysis (DEA) allowing for the inclusion of desirable and undesirable (toxic chemical releases) outputs in the production function. In the next stage, we utilise the bootstrapped quantile regression methodology to uncover possible non-linear relationships between efficiency and competition at the mean and at various quantiles before and after the global financial crisis (2002 and 2012). In this way, we impose no functional form constraints on parameter values over the conditional distribution of the dependent variable (efficiency). At the same time, we estimate at which part of its conditional distribution function, the efficiency is located and draw substantial conclusions about the range of policy measures obtained. The empirical findings, indicate that the relationship between efficiency and market concentration did not remain unchanged in the aftermath of the economic crisis. The empirical results survived robustness checks under the inclusion of an alternative market concentration indicator (CR8).
    Keywords: Market concentration; Industrial Toxic Releases; Efficiency, Financial crisis; Bootstrapped quantile regression.
    JEL: C14 L1 Q52
    Date: 2018–02–09

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