nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒03‒26
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Competitive Personalized Pricing By Zhijun Chen; Chongwoo Choe; Noriaki Matsushima
  2. Patent Protection and Threat of Litigation in Oligopoly By Carlo Capuano; Iacopo Grassi
  3. Private Information and the Commitment Value of Unobservable Investment By Luigi Brighi; Marcello D'Amato
  4. Incentives through Inventory Control in Supply Chains By Raff, Horst; Schmitt, Nicolas; Qu, Zhan
  5. Prediction and Identification in Two-Sided Markets By Andre Boik
  6. Strategic Profit–Sharing in a Unionized Differentiated Goods Duopoly By Emmanuel Petrakis; Panagiotis Skartados
  7. Output and R&D subsidies in a mixed oligopoly By Lee, Sang-Ho; Tomaru, Yoshihiro
  8. The innovation theory of harm: an appraisal By Vincenzo Denicolò; Michele Polo
  9. How effective are remedies in merges cases? A European and national assessment By Polemis, Michael
  10. Pricing Mechanism in Information Goods By Xinming Li; Huaqing Wang
  11. Does Excellence Pay Off? Evidence from the Wine Market By Stefano Castriota
  12. Measuring the Demand Effects of Formal and Informal Communication : Evidence from Online Markets for Illicit Drugs By Luis Armona
  13. Preventives Versus Treatments Redux: Tighter Bounds on Distortions in Innovation Incentives with an Application to the Global Demand for HIV Pharmaceuticals By Kremer, Michael; Snyder, Christopher
  14. Credit risk and bank competition in Sub-Saharan Africa By M. Brei; L. Jacolin; A. Noah
  15. Concentration and Competition in Serbian Banking Sector By Bukvić, Rajko
  16. Market power and the risk-taking of banks: Some semiparametric evidence from emerging economies By Jeon, Bang Nam; Wu, Ji; Guo, Mengmeng; Chen, Minghua
  17. Competition in the Venture Capital Market and the Success of Startup Companies: Theory and Evidence By Hong, Suting; Serfes, Konstantinos; Thiele, Veikko

  1. By: Zhijun Chen; Chongwoo Choe; Noriaki Matsushima
    Abstract: We study a duopoly model where each firm chooses personalized prices for its targeted consumers, who can be active or passive in identity management. Active consumers can bypass price discrimination and have access to the price offered to non-targeted consumers, which passive consumers cannot. When all consumers are passive, personalized pricing leads to intense competition and total industry profit lower than that under the Hotelling equilibrium. But market is always fully covered. Active consumers raise the firm's cost of serving non-targeted consumers, which softens competition. When firms have sufficiently large and non-overlapping target segments, active consumers enable firms to extract full surplus from their targeted consumers through perfect price discrimination. With active consumers, firms also choose not to serve the entire market when the commonly non-targeted market segment is small. Thus active identity management can lead to lower consumer surplus and lower social welfare. We also discuss the regulatory implications for the use of consumer information by firms as well as the implications for management.
    Date: 2018–03
  2. By: Carlo Capuano; Iacopo Grassi
    Abstract: In recent years, the increasing awarding of patents has captured the attention of scholars operating in di?erent fields. Economic literature has studied the causes of this proliferation; we propose an entry game focusing on one of the consequences, showing how an incumbent may create a patent portfolio in order to control market entry and to collude. The incumbent fixes the level of patent protection and the threat of denunciation reduces the entrant’s expected profits; moreover, if the entrant deviates from collusion, the incumbent can strengthen punishment suing the competitor for patent infringement, reducing her incentive to deviate. Our analysis suggests that antitrust authorities should pay attention to the level of patent protection implemented by the incumbent and note whether the holder of a patent reacts to entry by either suing or not suing the competitor. In the model, we use completely general functional forms in analyzing the is- sues, and this allows us to obtain general results not depending on the assumptions about the kind of oligopolistic competition.
    Keywords: Patents, patent portfolio, litigation, collusion, foreclosing, entry game.
    JEL: D43 K21 L13
    Date: 2018–03–03
  3. By: Luigi Brighi; Marcello D'Amato
    Abstract: The commitment value of unobservable investment with cost-reducing effects is examined in an entry model where the incumbent is privately informed about his costs of production. We show that when the price signals incumbent’s costs, unobservable investment can not have any commitment value and the limit price does not limit entry. By contrast, if the price does not reveal costs, which is the more likely outcome, unobservable investment has a magnified value of commitment and a less aggressive limit price deters profitable entry.
    Keywords: Commitment, entry deterrence, limit pricing, signaling
    JEL: D24 D82 L12 L41
    Date: 2018–02
  4. By: Raff, Horst; Schmitt, Nicolas; Qu, Zhan
    Abstract: The paper shows that taking inventory control out of the hands of competitive or exclusive retailers and assigning it to a manufacturer increases the value of a supply chain especially for goods whose demand is highly volatile. This is because doing so solves incentive distortions that arise when retailers have to allocate inventory across sales periods, and thus allows for better intertemporal price discrimination. Assigning inventory control to a manufacturer is also shown to have effects on total inventory and social welfare.
    Keywords: inventory,supply chain,demand uncertainty,storable good,price discrimination
    JEL: L11 L12 L22 L81
    Date: 2017
  5. By: Andre Boik
    Abstract: I introduce a reduced form two-sided market model to study prediction and identification in two-sided markets. The model generates the hallmark features of two-sided markets: potentially below cost or even negative prices to one side of the market, and the “see-saw” or “waterbed” effect of a tendency for price movements across sides to be negatively correlated. I show that the standard “one-sided” model of complements is a special case of the two-sided model, and that it generates those same hallmark features of two-sided markets. The model of complements also performs well in predicting price effects even when the data is actually generated by the two-sided market model; the “wrong” model often delivers the right answers and can be used to estimate market power and pass through rates. I show that even a naive one-sided model that ignores any relationship across goods/sides can perform well when prices to one side of the market are censored at zero, a very common outcome in two-sided markets. The main cost to using a model of complements to estimate cross-group effects in a two-sided market is that it invites the use of invalid instruments. I show that these findings are consistent with the empirical regularities and identification strategies in the existing two-sided market and indirect network effects literatures. I conclude by discussing the general difficulty of separately identifying whether price differences across subgroups of users of a platform are driven by pricing of network effects or simple price discrimination based on price elasticity.
    Keywords: two-sided markets, complements, prediction, identification
    JEL: L00 L13
    Date: 2018
  6. By: Emmanuel Petrakis (Department of Economics, University of Crete, Greece); Panagiotis Skartados
    Keywords: unionized oligopoly, bargaining, profit-sharing scheme
    JEL: J23 J33 J41
    Date: 2018–03–20
  7. By: Lee, Sang-Ho; Tomaru, Yoshihiro
    Abstract: We analyze an oligopoly where public and private firms compete in quantity and R&D. Using general functions, we show that an output subsidy and an R&D tax can achieve the first-best allocation. Moreover, the degree of privatization does not influence the optimal output subsidy but does influence the optimal R&D tax.
    Keywords: R&D subsidy; Output subsidy; Mixed oligopoly; Partial privatization
    JEL: H2 L3
    Date: 2017–03–01
  8. By: Vincenzo Denicolò; Michele Polo
    Abstract: In its recent decision on the Dow-DuPont case, the European Commission has adopted an innovation theory of harm (IToH), which holds that even horizontal mergers whose static effects are benign may be regarded as anticompetitive in a dynamic perspective, as mergers generally stifle innovation. This paper critically assesses the IToH, arguing that its theoretical foundations are too fragile to be the basis for radical policy changes. Antitrust authorities and the courts should continue to consider the impact of horizontal mergers on innovation, bearing in mind that the effect can go either way.
    Keywords: Mergers, Innovation
    JEL: L13 L40 K21 O31
    Date: 2018
  9. By: Polemis, Michael
    Abstract: Remedies form an essential tool of any enforcement action and need to be devised with great caution from National Competition Authorities (NCAs). If the remedy is ineffective, the enforcement action does not reach the desired objective and resources will have been wasted. If the remedy is disproportionate, the decision is put at risk in a possible subsequent appeal. Remedies either behavioural or structural imposed by competition authorities seek to eliminate unilateral or/and coordinated effects as a result of the merger and restore competition on the relevant market(s) to the status quo ante. Moreover, remedy packages have typically included extensive structural divestments to remove competition concerns. The scope of this paper is to examine various issues relating to the imposition of remedies in merger cases focusing on the gas and electricity sectors (commodity and capacity release programmes, customer release schemes, network related remedies). This paper relies on the energy sector with a view to developing general principles for imposing effective remedies in other sectors as well. Given the nature of competition in energy markets, particularly effective remedies are those that involve gas release programmes, the sale of price-setting generation plants, network assets, and controlling stakes in merging parties’ competitors.
    Keywords: Merger remedies; competition; energy sector; Gas release programs; European Union
    JEL: G34 K21 L10 L40
    Date: 2018–01–02
  10. By: Xinming Li; Huaqing Wang
    Abstract: We study three pricing mechanisms' performance and their effects on the participants in the data industry from the data supply chain perspective. A win-win pricing strategy for the players in the data supply chain is proposed. We obtain analytical solutions in each pricing mechanism, including the decentralized and centralized pricing, Nash Bargaining pricing, and revenue sharing mechanism.
    Date: 2018–03
  11. By: Stefano Castriota (Free University of Bolzano‐Bozen, Faculty of Economics and Management)
    Abstract: Product excellence is often considered a fundamental variable to increase prices, revenues and firm performance. However, while the effect of excellence on consumers’ willingness to pay and on revenues is not surprising, that on profits and especially on profitability is uncertain. In fact, excellence is expensive since production costs and capital requirements often increase at an exponential rate and could end up overwhelming the positive effects due to the additional revenues. The degree of vertical integration could reduce quality and profitability in sectors where final goods are complex and require specialized suppliers, or rather increase them if the good is more simple and the control of the full chain solves the problems of asymmetric information. Using Italian data from the 2004-2009 Veronelli wine guides we show that excellence – as measured by wine quality – and vertical integration – as measured by private instead of cooperative ownership – do lead to higher prices of the bottles sold. However, in a second exercise we study the determinants of Italian wineries’ Return of Invested Capital (ROIC) using AIDA 2006-2015 data merged with additional information from telephone surveys and wine guides. Using a number of econometric techniques we obtain mixed results. We show that excellence – as measured by firm and collective reputation – is irrelevant. Vertical integration – as measured by in house production of grapes and wine – ensures higher profitability, but the most profitable firms are bottlers which deliver the worst products. The most important driver of profitability is firm size, which allows realizing economies of scale and implementing effective export strategies.
    Keywords: Profitability; excellence; vertical integration; reputation; quality; price; wine
    JEL: L11 L14 L15 L23 L25
    Date: 2018–03
  12. By: Luis Armona
    Abstract: I present evidence that communication between marketplace participants is an important influence on market demand. I find that consumer demand is approximately equally influenced by communication on both formal and informal networks- namely, product reviews and community forums. In addition, I find empirical evidence of a vendor's ability to commit to disclosure dampening the effect of communication on demand. I also find that product demand is more responsive to average customer sentiment as the number of messages grows, as may be expected in a Bayesian updating framework.
    Date: 2018–02
  13. By: Kremer, Michael; Snyder, Christopher
    Abstract: Kremer and Snyder (2015) show that demand curves for a preventive and treatment may have different shapes though they target the same disease, biasing the pharmaceutical manufacturer toward developing the lucrative rather than the socially desirable product. This paper tightens the theoretical bounds on the potential deadweight loss from such biases. Using a calibration of the global demand for HIV pharmaceuticals, we demonstrate the dramatically sharper analysis achievable with the new bounds, allowing us to pinpoint potential deadweight loss at 62% of the global gain from curing HIV.We use the calibration to perform policy counterfactuals, assessing welfare effects of government policies such as a subsidy, reference pricing, and price-discrimination ban. The fit of our calibration is good: we find that a hypothetical drug monopolist would price an HIV drug so high that only 4% of the infected population worldwide would purchase, matching actual drug prices and quantities in the early 2000s before subsidies in low-income countries ramped up.
    Keywords: deadweight loss; pharmaceuticals; product development
    JEL: F23 I14 L65 O31
    Date: 2018–02
  14. By: M. Brei; L. Jacolin; A. Noah
    Abstract: This paper investigates the impact of bank competition in Sub-Saharan Africa on bank non-performing loans, a measure of credit risk. Using bank-level data for a sample of 221 banks from 33 countries over the period 2000-15, we find a non-linear or U-shaped relationship between bank competition (measured by the Lerner Index) and credit risk. In other words, increased bank competition has the potential to lower credit risk via efficiency gains (lower credit cost, operational gains). However, the positive effects may be outweighed by adverse effects of excessive competition (lower profit margins, increased risk incentives). We also find that credit risk in Sub-Saharan Africa is not only related to macroeconomic determinants, such as growth, public debt, economic diversification, financial deepening and inclusion, but also to the regulatory environment. These results may provide useful insights on how to design and adapt prudential and regulatory frameworks to the specific needs in developing countries.
    Keywords: Bank competition, Credit risk, Bank stability, Lerner index, Africa.
    JEL: G21 G28 D4 O55
    Date: 2018
  15. By: Bukvić, Rajko
    Abstract: The paper analyzes the degree of concentration and competition in Serbian banking sector on the basis of bank financial statements for year 2016. It uses the traditional concentration indicators (CRn and HH indices), as well as the relatively rarely used Linda indices. The concentration degree is calculated based on five variables: total assets, deposits, capital, bank operating income and loans. It was demonstrated that in the case of the relatively large number of banks in Serbia, the existing concentration degree is low, which provides suitable conditions for the development of healthy competition among them.
    Keywords: Concentration, competition, banking sector, Serbia, indices Linda, Herfindahl-Hirschman index, concentration ratio
    JEL: C38 G21 L10
    Date: 2017
  16. By: Jeon, Bang Nam (Drexel University); Wu, Ji (Southwestern University of Finance and Economics); Guo, Mengmeng (Southwestern University of Finance and Economics); Chen, Minghua (Southwestern University of Finance and Economics)
    Abstract: We investigate the nexus between the market power of banks and their risk-taking, using bank-level data from 35 emerging economies during the period of 2000-2014. Under a Bayesian framework, we employ the semiparametric method, which allows for a nonlinear risk impact of banks' market power. Our results suggest a significant nonlinear relationship between the market power and the risk-taking of banks.
    Keywords: Market power; bank risk-taking; emerging economies
    JEL: D53 G15 G21
    Date: 2018–01–22
  17. By: Hong, Suting (Shanghai Tech University); Serfes, Konstantinos (Drexel University); Thiele, Veikko (Queen's University)
    Abstract: We examine the effect of a competitive supply of venture capital (VC) on the success rates of VC-backed startup companies (e.g. IPOs). We first develop a matching model of the VC market with heterogeneous entrepreneurs and VC firms, and double-sided moral hazard. Our model identifies a non-monotone relationship between VC competition and successful exits: a more competitive VC market increases the likelihood of a successful exit for startups with low quality projects (backed by less experienced VC firms in the matching equilibrium), but it decreases the likelihood for startups with high quality projects (backed by more experienced VC firms). Despite this non-monotone effect on success rates, we find that VC competition leads to higher valuations of all VC-backed startups. We then test these predictions using VC data from Thomson One, and find robust empirical support. The differential effect of VC competition has a profound impact on entrepreneurship policies that promote VC investments.
    Keywords: entrepreneurship; venture capital; matching; double-sided moral hazard; exit; IPO
    JEL: C78 D86 G24 L26 M13
    Date: 2018–02–01

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