nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒04‒23
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Ranking Supply Function and Cournot Equilibria in a Differentiated Product Duopoly with Demand Uncertainty By Saglam, Ismail
  2. How Product Innovation Can Affect Price Collusion By Andrew Smyth
  3. Equilibrium in a dynamic model of congestion with large and small users By Robin Lindsey; André De Palma; Hugo Silva
  4. Private information implications for acquirers and targets in horizontal mergers By Mittal, Amit; Garg, Ajay Kumar
  5. Standards of proofs in sequential merger control procedures By Gregor Langus; Vilen Lipatovz; Damien Neven
  6. Long-Term Priorities of Competition Policy: A Systematic Approach By Kurdin, Alexander
  7. Competition and the Racial Wage Gap: Testing Becker’s Model of Employer Discrimination By Guilherme Hirata; Rodrigo R. Soares
  8. Measuring Market Power in Gasoline Retailing: A Market- or Station Phenomenon? By Nguyen-Ones, Mai; Steen, Frode
  9. Search and Equilibrium Prices: Theory and Evidence from Retail Diesel By Cabral, Luís M B; Schober, Dominik; Woll, Oliver
  10. Competition in dual markets: Implications for banking system stability By Tastaftiyan Risfandy; Amine Tarazi; Irwan Trinugroho
  11. Dynamic Airline Pricing and Seat Availability By Kevin R. Williams
  12. Excess Capacity and Effectiveness of Policy Interventions: Evidence from the cement industry By OKAZAKI Tetsuji; ONISHI Ken; WAKAMORI Naoki
  13. Villains or Heroes? Private Banks and Railroads after the Sherman Act By Miguel Cantillo Simon
  14. Hospital Competition under Pay-for-Performance: Quality, Mortality and Readmissions By Domenico Lisi; Luigi Siciliani; Odd Rune Straume
  15. Dynamic Pricing and Learning with Competition: Insights from the Dynamic Pricing Challenge at the 2017 INFORMS RM & Pricing Conference By Ruben van de Geer; Arnoud V. den Boer; Christopher Bayliss; Christine Currie; Andria Ellina; Malte Esders; Alwin Haensel; Xiao Lei; Kyle D. S. Maclean; Antonio Martinez-Sykora; Asbj{\o}rn Nilsen Riseth; Fredrik {\O}degaard; Simos Zachariades

  1. By: Saglam, Ismail
    Abstract: In this paper, we provide a welfare ranking for the equilibria of the supply function and quantity competitions in a differentiated product duopoly with demand uncertainty. We prove that the expected consumer surplus is always higher under the supply function competition. By numerical simulations, we also show that if the degree of product substitution is extremely low, then the supply function competition can become a superior form of competition for the duopolistic producers, as well. However, if the degree of product substitution is not extremely low, then the expected producer profits under the supply function competition can be lower than under the quantity competition in situations where the size of the demand uncertainty is below a critical level. We find that this critical level is non-decreasing in the degree of product substitution, while non-increasing both in the marginal cost of producing a unit output and in the own-price sensitivity of each inverse demand curve. Our results imply that in electricity markets with differentiated products, the regulators should not intervene to impose the quantity competition in favor of the supply function competition unless the degree of product substitution is sufficiently high and the predicted demand fluctuations are sufficiently small.
    Keywords: Supply function competition; Cournot competition; duopoly; differentiated products; uncertainty
    JEL: D43 L13
    Date: 2018
  2. By: Andrew Smyth (Department of Economics, Marquette University and Economic Science Institute, Chapman University)
    Abstract: Price conspiracies appear endemic in many markets. This paper conjectures that low expected returns from product innovation can affect price collusion in certain markets. This conjecture is tested—and supported—by both archival and experimental data. In particular, average market prices in low innovation experiments are significantly greater than those in high innovation, but otherwise identical experiments, because price collusion is more successful in the low innovation experiments.
    Keywords: price collusion, product innovation, antitrust, experimental economics
    JEL: L41 L10 O33 C92
    Date: 2017
  3. By: Robin Lindsey (University of Alberta [Edmonton]); André De Palma (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Hugo Silva (Instituto Superior Técnico - Technical University of Lisbon)
    Abstract: Individual users often control a significant share of total traffic flows. Examples include airlines, rail and maritime freight shippers, urban goods delivery companies and passenger transportation network companies. These users have an incentive to internalize the congestion delays their own vehicles impose on each other by adjusting the timing of their trips. We investigate simultaneous trip-timing decisions by large users and small users in a dynamic model of congestion. Unlike previous work, we allow for heterogeneity of trip-timing preferences and for the presence of small users such as individual commuters and fringe airlines. We derive the optimal fleet departure schedule for a large user as a best-response to the aggregate departure rate of other users. We show that when the vehicles in a large user's fleet have a sufficiently dispersed distribution of desired arrival times, there may exist a pure-strategy Nash-equilibrium (PSNE) in which the large user schedules vehicles when there is a queue. This resolves the problem of non-existence of a PSNE identified in Silva et al. (2017) for the case of symmetric large users. We also develop some examples to identify under what conditions a PSNE exists. The examples illustrate how self-internalization of congestion by a large user can affect the nature of equilibrium and the travel costs that it and other users incur.
    Keywords: departure-time decisions,bottleneck model,congestion,schedule delay costs,large users,user heterogeneity,existence of Nash equilibrium $
    Date: 2018–04–06
  4. By: Mittal, Amit; Garg, Ajay Kumar
    Abstract: The paper presents a robust theory centered in Private information to assuage event study literature and confirm with Acquirer gains in Bank M&A. The ability of larger firms lies in investments in Intellectual capital, harnessing soft information and critically, purloin value in the deal through bargaining based on its own and the Target’s specific Private information. Recent literature has affirmed that private targets within the core industry generate Positive returns for acquirers, realizing the value of Private information through deal making. Recent evidence from large Bank mergers producing large Bidder gains and the robust theory of private information presented herein is likely to renew confidence in the merger and acquisitions strategy and deflect from theoretic literature relying on earlier analysis reflecting on event studies as a tool and on the effectiveness of M&A strategies for these acquirers based in limited gains in the Event study literature. The paper presents theoretic models centered around private information of both acquirer and targets and defend a robust theory supporting the large impact strategy of Mergers evidenced in Horizontal mergers in line with recent literature. As evidence, the paper utilizes the Private information construct to explain intuitive results verified in the literature Banking markets present a unique opportunity in robustly recreating results based on this theory especially in growth memes presented by Asian markets. Foreign portfolio exits are significant opportunity losses for Global players and may not be justified by myopic short term responses to a new policy superstructure.
    Keywords: Mergers and Acquisitions, Corporate Governance, Private Information, Asia, India, growth, Information asymmetry, Horizontal mergers
    JEL: G14 G24 G34
    Date: 2017–04
  5. By: Gregor Langus (CET, European Commission); Vilen Lipatovz (Compass Lexecon Brussels); Damien Neven (Graduate Institute of International and Development Studies)
    Abstract: We model merger control procedures as a process of sequential acquisition of information in which mergers can be cleared after a ?first phase of investigation. We fi?nd that the enforceability of clearance decisions at the end of the fi?rst phase is unattractive to the extent that it prevents the authorities to use their expectations as to whether evidence gathered in the fi?rst phase will be confi?rmed in the second phase. This deprives the ?first phase of its potential as an effective screening mechanism. We also fi?nd that when clearance decisions in the fi?rst phase are enforceable, a different (higher) standard in the fi?rst phase is only desirable when Phase I decisions are captured by merging parties (as opposed to complainants).
    Keywords: merger procedure, competition policy
    JEL: K21 K40 L40
    Date: 2018–01
  6. By: Kurdin, Alexander (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The work evaluates the main directions of Russia's competition policy on the basis of the current regulatory and legal framework and determines its long-term priorities using a systemic approach. The competitive policy of Russia is considered as a system that includes the norms of antimonopoly legislation and related branches of law, as well as a wide range of organizations that ensure their implementation. The paper identifies the functional priorities that ensure the stable functioning of this system, as well as sectoral priorities related to specific objects of competition policy and allow the most efficient distribution of efforts and resources to achieve the goals of state economic policy in general.
    Date: 2018–03
  7. By: Guilherme Hirata; Rodrigo R. Soares
    Abstract: According to Becker’s (1957) theory of taste-based employer discrimination, pure economic rents are necessary for discrimination to be observed in the labor market. Increased competition and reduced rents in the market for final goods should therefore lead to reduced labor market discrimination. We look at the natural experiment represented by the Brazilian trade liberalization from the early 1990s to study the effect of increased competition in the market for final goods on racial discrimination in the labor market. Changes in tariffs and initial employment structures are used to show that, in locations where there were relatively larger increases in exposure to foreign competition between 1990 and 1995, there were also relatively larger declines in the conditional racial wage gap between 1991 and 2000. As predicted by theory, the initial wage gap and its decline were more pronounced in regions with more employment in concentrated sectors. The effect of increased competition on the racial wage gap was not driven by changes in returns to productive attributes, in the structure of employment, or in other labor market outcomes. We find robust evidence of a negative and permanent effect of increased competition in the market for final goods on discrimination in the labor market.
    Keywords: Discrimination, racial wage gap, competition, labor market, trade reform, Brazil
    JEL: J31 J71 J78
    Date: 2018–04–05
  8. By: Nguyen-Ones, Mai (Dept. of Economics, Norwegian School of Economics and Business Administration); Steen, Frode (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: Applying detailed consecutive daily micro data at the gasoline station level from Sweden we estimate a structural model to uncover the degree of competition in the gasoline retail market. We find that retailers do exercise market power, but despite the high upstream concentration, the market power is very limited on the downstream level. The degree of market power varies with both the distance to the nearest station and the local density of gasoline stations. A higher level of service tends to raise a seller’s market power; self-service stations have close to no market power. Contractual form and brand identity also seem to matter. We find a clear result: local station characteristics significantly affect the degree of market power. Our results indicate that local differences in station characteristics can more than offset the average market Power found for the whole market.
    Keywords: Gasoline markets; market Power; markup estimation; local market competition
    JEL: D22 L13 L25 L81
    Date: 2018–04–13
  9. By: Cabral, Luís M B; Schober, Dominik; Woll, Oliver
    Abstract: We examine the relation between consumer search and equilibrium prices when collusion in endogenously determined. We develop a theoretical model and show that average price is a U-shaped function of the measure of searchers: prices are highest when there are no searchers (local monopoly power) or when there are many searchers (and sellers opt to collude). We test this prediction with diesel retail prices in Dortmund, Germany. We estimate a U-shaped relation with statistical precision and a Euro .025/liter price variation due to the variation in the measure of searchers.
    Date: 2018–03
  10. By: Tastaftiyan Risfandy (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Irwan Trinugroho (Faculty of Economics and Business - UNS - Universitas Sebelas Maret)
    Abstract: This paper examines the impact of market competition on the stability of Islamic and conventional banks in countries where these banks operate alongside one another. To investigate this issue, we use a sample of 100 Islamic and 390 conventional banks from 19 countries. Our baseline result shows that competition in a dual market erodes banks' stability. The heightened competitive pressure in a dual market encourages banks to engage in excessive risk-taking that can jeopardize their stability. However, the effect of competition is missing for Islamic banks, suggesting their superiority in having religious clients. Although our overall results support the 'competition-fragility' hypothesis, we find that competition can be beneficial for banks, especially at a low to medium competition level. Last, we also find that the adverse impact of competition can be reduced by having high capitalization, especially in the case of a conventional bank. Some policy implications are discussed in the paper.
    Keywords: Competition,stability,dual banking,Islamic banks,Z-score,Lerner index
    Date: 2018–04–04
  11. By: Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: Airfares are determined by both intertemporal price discrimination and dynamic adjustment to stochastic demand. I estimate a model of dynamic airline pricing accounting for both forces with new flight-level data. With model estimates, I disentangle key interactions between the arrival pattern of consumer types and remaining capacity under stochastic demand. I show that the forces are complements in airline markets and lead to significantly higher revenues, as well as increased consumer surplus, compared to a more restrictive pricing regime. Finally, I show that abstracting from stochastic demand leads to a systematic bias in estimating demand elasticities.
    Keywords: Dynamic pricing, Intertemporal price discrimination, Price discrimination, Stochastic demand, Pricing, Airlines, Dynamic discrete choice
    JEL: L11 L12 L93
    Date: 2017–08
  12. By: OKAZAKI Tetsuji; ONISHI Ken; WAKAMORI Naoki
    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 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: 2018–03
  13. By: Miguel Cantillo Simon (Universidad de Costa Rica)
    Abstract: This paper analyzes and measures the value that American private banks added as directors of non financial companies. Using data between 1874 and 1913, and an event study from 1906, I find that bank directors added about 20% of a firm’s market capitalization. Collusive practices encouraged by private banks accounted for 65% of this value, and were the equivalent of creating a three player market among railroads. About 35% of the value added by banks came from better governance. I argue that although policymakers were partly right in sidelining private banks as activist investors, this helped entrench managers.
    Keywords: Antitrust, Collusion, Corporate Governance, Financial History
    Date: 2017–01
  14. By: Domenico Lisi; Luigi Siciliani; Odd Rune Straume
    Abstract: Health outcomes, such as mortality and readmission rates, are commonly used as indicators of hospital quality and as a basis to design pay-for-performance (P4P) incentive schemes. We propose a model of hospital behaviour under P4P where patients differ in severity and can choose hospital based on quality. We assume that risk-adjustment is not fully accounted for and that unobserved dimensions of severity remain. We show that the introduction of P4P which rewards lower mortality and/or readmission rates can weaken or strengthen hospitals’ incentive to provide quality. Since patients with higher severity have a different probability of exercising patient choice when quality varies, this introduces a selection bias (patient composition effect) which in turn alters quality incentives. We also show that this composition effect increases with the degree of competition. Critically, readmission rates suffer from one additional source of selection bias through mortality rates since quality affects the distribution of survived patients. This implies that the scope for counterproductive effects of P4P is larger when financial rewards are linked to readmission rates rather than mortality rates. We also show that our results are robust in the presence of public reporting, and discuss welfare implications.
    Keywords: quality; pay-for-performance; health outcomes; performance indicators; heterogeneous severity; selection bias.
    JEL: I12 I18
    Date: 2018–04
  15. By: Ruben van de Geer; Arnoud V. den Boer; Christopher Bayliss; Christine Currie; Andria Ellina; Malte Esders; Alwin Haensel; Xiao Lei; Kyle D. S. Maclean; Antonio Martinez-Sykora; Asbj{\o}rn Nilsen Riseth; Fredrik {\O}degaard; Simos Zachariades
    Abstract: This paper presents the results of the Dynamic Pricing Challenge, held on the occasion of the 17th INFORMS Revenue Management and Pricing Section Conference on June 29-30, 2017 in Amsterdam, The Netherlands. For this challenge, participants submitted algorithms for pricing and demand learning of which the numerical performance was analyzed in simulated market environments. This allows consideration of market dynamics that are not analytically tractable or can not be empirically analyzed due to practical complications. Our findings implicate that the relative performance of algorithms varies substantially across different market dynamics, which confirms the intrinsic complexity of pricing and learning in the presence of competition.
    Date: 2018–03

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