nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒04‒30
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Simulating Mergers in a Vertical Supply Chain with Bargaining By Gloria Sheu; Charles Taragin
  2. Beliefs and consumer search in a vertical industry By Maarten Janssen; Sandro Shelegia
  3. Investment and Market Structure in Common Agency Games By Guillem Roig
  4. Excessive Search By Miao, Chun-Hui
  5. Pricing in Asymmetric Two-Sided Markets: A Laboratory Experiment By Jens Weghake; Claudia Keser; Martin Schmidt; Mathias Erlei
  6. A new irrelevance result in an endogenous timing with a consumer-friendly public firm By Garcia, Arturo; Leal, Mariel; Lee, Sang-Ho
  7. How Do Regulations of Entry and Credit Access Relate to Industry Competition? International Evidence By Deniz O Igan; Ali Mirzaei; Tomoe Moore
  8. The Negative Effects of Mergers and Acquisitions on the Value of Rivals By Derrien, François; Frésard, Laurent; Slabik, Victoria; Valta, Philip
  9. Leniency, Asymmetric Punishment and Corruption: Evidence from China By Maria Perrotta Berlin; Bei Qin; Giancarlo Spagnolo
  10. When Liability Becomes Potential: Intermediary Entrepreneurship in Dynamic Market Contexts By Tünde Cserpes
  11. Measuring Market Power in Gasoline Retailing: A Market- or Station Phenomenon? By Nguyen-Ones, Mai; Steen, Frode
  12. Supply Function Equilibrium over a Constrained Transmission Line I: Calculating Equilibria By Ruddell, Keith
  13. Analysing long-term interactions between demand response and different electricity markets using a stochastic market equilibrium model By Bertsch, Valentin; Devine, Mel; Sweeney, Conor; Parnell, Andrew C.
  14. The impact of China’s electricity deregulation on coal and power industries: Two-stage game modeling approach By HuiHui Liu; ZhongXiang Zhang; ZhanMing Chen; DeSheng Dou
  15. An Internally Consistent Approach to the Estimation of Market Power and Cost Efficiency with an Application to U.S. Banking By Tsionas, Mike; Malikov, Emir; Kumbhakar, Subal C.
  16. Примена индекса Линда у истраживању концентрације и конкуренције у банковном сектору Србије By Bukvić, Rajko
  17. Blockchain: The birth of decentralized governance By Benito Arruñada; Luis Garicano
  18. The digital platform: a research agenda By de Reuver, Mark; Sørensen, Carsten; Basole, Rahul C.
  19. Coordinating Separate Markets for Externalities By Jose-Miguel Abito; Christopher R. Knittel; Konstantinos Metaxoglou; André Trindade

  1. By: Gloria Sheu (U.S. Department of Justice); Charles Taragin (U.S. Department of Justice)
    Abstract: We model a two-level supply chain where Nash bargaining occurs upstream, while firms compete in a differentiated products logit setting downstream. The parameters of this model can be calibrated with a discrete set of data on prices, margins, and market shares. Using a series of numerical experiments, we illustrate how the model can simulate the outcome of both horizontal and vertical mergers. In addition, we extend the framework to allow for downstream competition via a second score auction.
    Date: 2018–04
  2. By: Maarten Janssen; Sandro Shelegia
    Abstract: This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation, equilibrium predictions are qualitatively di erent. For the robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), non-monotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.
    Keywords: Vertical relations, consumer search, double marginalization, product differentiation, price rigidities
    JEL: D40 D83 L13
    Date: 2018–03
  3. By: Guillem Roig
    Abstract: I study the incentives of a common buyer to undertake cooperative investment with a group of suppliers providing a homogeneous input. In my model, investment is not directed to increase the gains from trade but to enhance the competitive pressure among suppliers. At the same time, however, investment may strengthen the bargaining position of suppliers. Which effect dominates depends on the intensity of competition in the trading game, which also determines the equilibrium distribution of investment. Then, the model reproduces different market structures, and a firm may have higher incentives to become active in markets where competition is expected to be vigorous.
    Keywords: Cooperative investment, Market structure, Competition, Bargaining position
    Date: 2018–04–01
  4. By: Miao, Chun-Hui
    Abstract: This paper nests "the contractors's game" in a simple consumer search model to study the impact of search cost in these markets. Under the assumption that the number of searches is private information, we find that, with a small search cost, there will be multiple search equilibria. Between the two price dispersion equilibria, only the Pareto-dominated one is stable. Moreover, in the stable equilibrium, (1) the expected equilibrium price decreases with the search cost of consumers; (2) consumers engage in excessive search that is detrimental to their own welfare, and (3) a decline in the search cost can leave consumers worse o¤, due to their lack of commitment. The model suggests the use of intermediaries as a commitment/coordination mechanism in such markets.
    Keywords: Bertrand competition, Contractors' game, Entry cost, Multiple equilibria, Search cost
    JEL: D40 L0
    Date: 2018–04–09
  5. By: Jens Weghake; Claudia Keser; Martin Schmidt; Mathias Erlei (Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal))
    Abstract: We conducted a laboratory experiment to study the price setting behavior in two-sided markets. We seek to answer two specific research questions: Do participants charge the equilibrium prices that can be derived from a theoretical model? How is the price setting affected by the characteristics of the Nash equilibrium? Our study shows that there are hardly any realizations of the Nash equilibrium. Participants seem to use simple heuristics. The increase in complexity caused by asymmetry has two effects: On the one hand, it makes finding the optimal pricing more difficult so that, on average, we find prices that are further away from optimal prices. On the other hand, higher complexity goes along with stronger signals against non-expedient heuristics so that, on an individual level, the equilibrium is reached in more markets.
    Keywords: two-sided market theory, experiment, duopoly, platform competition
    JEL: C72 C91 D43 L13
    Date: 2018
  6. By: Garcia, Arturo; Leal, Mariel; Lee, Sang-Ho
    Abstract: This study considers a mixed duopoly with a consumer-friendly public firm and analyzes an endogenous timing game in the presence of output subsidy and emission tax. We provide a new irrelevance result concerning the choice of government policy in which regardless of the policy mix, the equilibrium of endogenous market structure is determined by the public firm’s concern on consumer surplus. We also show that the optimal policy mix can attain the first-best allocation for social welfare only when both firms have symmetric payoffs, which results in simultaneous-move outcome.
    Keywords: Keywords: irrelevance result; endogenous timing game; consumer-friendly public firm; emission tax; output subsidy
    JEL: L13 L32
    Date: 2018–04–01
  7. By: Deniz O Igan; Ali Mirzaei; Tomoe Moore
    Abstract: We examine the extent to which regulations of entry and credit access are related to competition using data on 28 manufacturing sectors across 64 countries. A robust finding is that bureaucratic and costly entry regulations tend to hamper competition, as proxied by the price-cost margin, in the industries with a naturally high entry rate. Rigid entry regulations are also associated with a larger average firm size. Conversely, credit information registries are associated with lower price-cost margin and smaller average firm size in industries that rely heavily on external finance—consistent with access to finance exerting a positive effect on competition. These results suggest that incumbent firms are likely to enjoy the rent and market share arising from strict entry regulations, whereas regulations enhancing access to credit limit such benefits.
    Date: 2018–04–06
  8. By: Derrien, François; Frésard, Laurent; Slabik, Victoria; Valta, Philip
    Abstract: Average stock price reactions of industry rivals in horizontal U.S. mergers and acquisitions around deal announcements are robustly negative. This finding is in contrast to the results in the existing literature, which focuses on smaller samples of deals involving mostly publicly listed firms. Rivals’ returns are more negative in growing and concentrated industries. Moreover, the negative rivals’ stock price reactions are related to future decreases in operating performance, increased probability of bankruptcy and challenges by antitrust authorities, and increased probability of rivals’ future acquisitions. Overall, these results suggest that M&As have strong competitive effects for the rivals of target companies.
    Keywords: M&As
    JEL: G34
    Date: 2017–05–01
  9. By: Maria Perrotta Berlin (SITE); Bei Qin (University of Hong Kong); Giancarlo Spagnolo (SITE-Stockholm School of Economics, EIEF, Tor Vergata & CEPR)
    Abstract: Fostering whistleblowing through leniency and asymmetric sanctions is regarded as a potentially powerful anti-corruption strategy in the light of its success in busting cartels. The US Department of Justice started a pilot program of this kind in 2016. It has been argued, however, that introduced in China in 1997, these policies did not help against corruption. We map the evolution of the Chinese anti-corruption legislation and aggregate enforcement data, documenting a large and stable fall in prosecuted cases after the 1997 reform. The fall is consistent with reduced corruption detection, but under specific assumptions also with improved deterrence. To resolve the ambiguity, we collect and analyze a random sample of case files from corruption trials. Results point indeed at a negative effect of the 1997 reform on corruption detection and deterrence, but plausibly linked to its poor design: contrary to what theory prescribes, it increased leniency also for bribe-taking bureaucrats that cooperate after being denounced, enhancing their ability to retaliate against whistleblowing bribe-givers.
    Date: 2018–04–23
  10. By: Tünde Cserpes
    Abstract: This paper analyzes how entrepreneurs fare in an intermediary market segment when the segment is closely attached to a single supplier market. While focusing on two structural constraints, organizational structure and competitive pressure, I build off of the fact that in the past thirty years in the U.S. beer industry, as the number of beer producers (i.e. brewers) proliferated, their intermediaries (i.e. wholesalers) declined. Using establishment-level restricted-access economic microdata from the Longitudinal Business Database, I examine what happens with intermediaries when (some) producers start competing on product variety instead of competing on scale. Piecewise exponential survival models show that Stinchcombe’s ‘liability of newness’ principle can get suspended and certain newcomers have better survival chances than industry incumbents. I call this effect the potential of newness under which entrepreneurial establishments fare better if they are part of well-resourced multiunit firms. Furthermore, I show that these resource-rich entrepreneurs benefit from the potential of newness especially in areas with competition-laden history and where the industry experiences shakeouts. For market incumbents, the more competition-laden the history of the local market, the higher the hazards of current time establishment failure. For multiunit entrepreneurs, however, a more competition-laden history of the local market is associated with a decrease in the hazards of current time establishment failure. This paper highlights that market structure not only enables but sometimes traps already existing organizations and make them less adaptive to changing logics of competition. The results highlight how organizational factors and geography create inequalities among intermediary organizations.
  11. By: Nguyen-Ones, Mai (Dept. of Business and Management Science, Norwegian School of Economics); Steen, Frode (Dept. of Economics, Norwegian School of Economics)
    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: 2018–04–19
  12. By: Ruddell, Keith (Research Institute of Industrial Economics (IFN))
    Abstract: Competition between oligopolist electricity generators is inhibited by transmission constraints. I present a supply function equilibrium (SFE) model of an electricity market with a single lossless, but constrained, transmission line. The market admits equilibria in which generator withhold energy in order to induce congestion, which further increases their local market power. Under appropriate assumptions on cost and demand functions, I obtain a planar autonomous system of ordinary differential equations for the SFE. Computational methods are developed to solve the system while respecting monotonicity constraints on the supply functions. Using these methods I can calculate SFE in network markets that range from fully isolated to fully integrated. I also find network markets for which the SFE is not unique.
    Keywords: Supply function equilibrium; Electricity markets; Market power; Locational pricing of electricity
    JEL: C62 C65 D43 L13 L94
    Date: 2018–04–20
  13. By: Bertsch, Valentin; Devine, Mel; Sweeney, Conor; Parnell, Andrew C.
    Date: 2018
  14. By: HuiHui Liu (Academy of Chinese Energy Strategy, China University of Petroleum, Beijing); ZhongXiang Zhang (Ma Yinchu School of Economics and China Academy of Energy, Environmental and Industrial Economics, Tianjin University, Tianjin); ZhanMing Chen (Department of Energy Economics, School of Economics, Renmin University of China, Beijing); DeSheng Dou (Academy of Chinese Energy Strategy, China University of Petroleum, Beijing)
    Abstract: The regulated price mechanism in China’s power industry has attracted much criticism because of its incapability to optimize the allocation of resources. To build an “open, orderly, competitive and complete” power market system, the Chinese government launched an unprecedented marketization reform in 2015 to deregulate the electricity price. This paper examines the impact of the electricity price deregulation in the industry level. We first construct two-stage dynamic game models by taking the coal and coal-fired power industries as the players. Using the models, we compare analytically the equilibriums with and without electricity regulation, and examine the changes in electricity price, electricity generation, coal price and coal traded quantity. The theoretical analyses show that there are three intervals of the regulated electricity sales prices which influence the impact of electricity price deregulation. Next, we collect empirical data to estimate the parameters in the game models, and simulate the influence of electricity deregulation on the two industries in terms of market outcome and industrial profitability. Our results suggest that the actual regulated electricity price falls within the medium interval of the theoretical results, which means the price deregulation will result in higher electricity sales price but lower coal price, less coal traded amount and less electricity generation amount. The robustness analysis shows that our results hold with respect to the electricity generation efficiency and price elasticity of electricity demand.
    Keywords: China, electricity deregulation, reform, coal industry, power industry
    JEL: Q41 Q43 Q48 L94 L98
    Date: 2018–04
  15. By: Tsionas, Mike; Malikov, Emir; Kumbhakar, Subal C.
    Abstract: We develop a novel unified econometric methodology for the formal examination of the market power -- cost efficiency nexus. Our approach can meaningfully accommodate a mutually dependent relationship between the firm's cost efficiency and marker power (as measured by the Lerner index) by explicitly modeling the simultaneous determination of the two in a system of nonlinear equations consisting of the firm's cost frontier and the revenue-to-cost ratio equation derived from its stochastic revenue function. Our framework places no a priori restrictions on the sign of the dependence between the firm's market power and efficiency as well as allows for different hierarchical orderings between the two, enabling us to discriminate between competing quiet life and efficient structure hypotheses. Among other benefits, our approach completely obviates the need for second-stage regressions of the cost efficiency estimates on the constructed market power measures which, while widely prevalent in the literature, suffer from multiple econometric problems as well as lack internal consistency/validity. We showcase our methodology by applying it to a panel of U.S. commercial banks in 1984-2007 using Bayesian MCMC methods.
    Keywords: Productivity, Competitiveness, Efficiency, Market Power, Lerner Index, Banks, Quiet Life Hypothesis
    JEL: C11 C30 D24 D40 G21
    Date: 2018
  16. By: Bukvić, Rajko
    Abstract: Serbian. У раду се анализирају степен концентрације и конкуренција у банковном сектору Србије. За основу анализе послужили су финансијски извештаји банака за 2016. годину. Као показатељи концентрације коришћени су најпре традиционални индекси концентрације (CRn, и то CR3, CR4 и CR8, као и HH индекси), које користи у својим анализама и Народна банка Србије. Поред тога, концентрација је оцењивана и помоћу релативно ретко коришћених индекса Линда, који су у нашој литератури готово непознати. Степен концентрације је обрачунат на основу пет променљивих, односно билансних величина: укупна актива, депозити, капитал, оперативни (пословни) приходи и кредити. Показано је да је уз постојање релативно великог броја банака у Србији постојећи степен концентрације низак, и поред генералног раста концентрације у текућој деценији. То представља добру основу за развој здраве конкуренције међу банкама. Међутим, указује се и на повећање вредности показатеља концентрације за све билансне величине. То је упозоравајуће кретање, и структуру на банковном тржишту Србије приближава средњеконцентрисаној. Као упозорење истичу се и вредности индекса Линда, обрачунате за капитал банака, које сугеришу сумњу на постојање лабавог олигопола. English. 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, among them CR3, CR4, and CR8, as well as HH indices), which are used by the National Bank of Serbia. In addition to these, the degree of concentration is measured by the relatively rarely used Linda indices, which are not present in Serbian literature. 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, in spite of a general upward trend present in this decad. This provides suitable conditions for the development of healthy competition among different banks. However, this paper also warns of an increase in concentration degree in all the observed variables. This is a worrying tendency since it brings the structure of the Serbian banking to a moderately concentrated one. Another alarming trend are the values of Linda indices for bank capital, which suggest the presence of a loose oligopoly.
    Keywords: концентрација, конкуренција, банковни сектор, Србија, индекси Линда, Херфиндал-Хиршманов индекс, коефицијенти концентрације, олигопол, concentration, competition, banking sector, Serbia, indices Linda, Herfindahl-Hirschman index, concentration ratio, oligopoly
    JEL: C38 G21 L10
    Date: 2017–12
  17. By: Benito Arruñada; Luis Garicano
    Abstract: By allowing networks to split, decentralized blockchain platforms protect members against hold up, but hinder coordination, given that adaptation decisions are ultimately decentralized. The current solutions to improve coordination, based on “premining” cryptocoins, taxing members and incentivizing developers, are insufficient. For blockchain to fulfill its promise and outcompete centralized firms, it needs to develop new forms of “soft” decentralized governance (anarchic, aristocratic, democratic, and autocratic) that allow networks to avoid bad equilibria.
    Keywords: blockchain, platforms, networks, hold‐up, coordination, relational capital, incomplete contracts, decentralized governance
    JEL: D23 L12 L22 L86
    Date: 2018–04
  18. By: de Reuver, Mark; Sørensen, Carsten; Basole, Rahul C.
    Abstract: As digital platforms are transforming almost every industry today, they are slowly finding their way into the mainstream information systems (ISs) literature. Digital platforms are a challenging research object because of their distributed nature and intertwinement with institutions, markets and technologies. New research challenges arise as a result of the exponentially growing scale of platform innovation, the increasing complexity of platform architectures and the spread of digital platforms to many different industries. This paper develops a research agenda for digital platforms research in IS. We recommend researchers seek to (1) advance conceptual clarity by providing clear definitions that specify the unit of analysis, degree of digitality and the sociotechnical nature of digital platforms; (2) define the proper scoping of digital platform concepts by studying platforms on different architectural levels and in different industry settings; and (3) advance methodological rigour by employing embedded case studies, longitudinal studies, design research, data-driven modelling and visualisation techniques. Considering current developments in the business domain, we suggest six questions for further research: (1) Are platforms here to stay? (2) How should platforms be designed? (3) How do digital platforms transform industries? (4) How can data-driven approaches inform digital platforms research? (5) How should researchers develop theory for digital platforms? and (6) How do digital platforms affect everyday life?
    Keywords: digital platforms; digital infrastructures; digital ecosystems; digital innovation; research agenda
    JEL: J50
    Date: 2017–04–11
  19. By: Jose-Miguel Abito; Christopher R. Knittel; Konstantinos Metaxoglou; André Trindade
    Abstract: We show that inefficiencies from having separate markets to correct an environmental externality are significantly mitigated when firms participate in an integrated product market. Firms take into account the distribution of externality prices and reallocate output from markets with high prices to markets with low prices. Investment in cleaner and more efficient capacity serves as an additional mechanism to reallocate output, which increases the marginal benefit of investment, and consequently improves longer-term outcomes. Using data from an integrated wholesale electricity market, we estimate a dynamic structural model of production and investment to bound the loss from separate markets for carbon dioxide emissions, and quantify the extent to which optimal investment can compensate for the loss. Despite the lack of the “invisible hand” of a single emissions market, profit-maximizing firms can play a crucial role in coordinating otherwise uncoordinated environmental regulations.
    JEL: L2 L5 L94 Q48 Q53 Q54
    Date: 2018–04

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