nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒05‒21
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly By Volker Nocke; Nicolas Schutz
  2. How Accurate is the Coordinate Price Pressure Index to Predict Mergers’ Coordinated Effects? By Ivaldi, Marc; Lagos, Vicente
  3. New Evidence on the Markup of Prices over Marginal Costs and the Role of Mega-Firms in the US Economy By Robert E. Hall
  4. Sufficient Statistics for Unobserved Heterogeneity in Structural Dynamic Logit Models By Victor Aguirregabiria; Jiaying Gu; Yao Luo
  5. Strict duality and overlapping productivity distributions between formal and informal firms By Allen, Jeffrey; Nataraj, Shanthi; Schipper, Tyler C.
  6. Institutional Initiative of Functioning of Firms in Conditions of a Bilateral Monopoly By Meleshkina, Anna; Shastitko, Anastasia
  7. Trading Networks and Equilibrium Intermediation By Kotowski, Maciej H.; Leister, C. Matthew
  8. Neutralized Competition By Seungjin Han
  9. Are R&D subsidies effective? The effect of industry competition By Xin, Xiang
  10. Why factors facilitating collusion may not predict cartel occurrence: Experimental evidence By Fonseca, Miguel A.; Li, Yan; Normann, Hans-Theo
  11. The Static-Dynamic Efficiency Trade-off in the US Rail Freight Industry: Assessment of an Open Access Policy By Coublucq, Daniel; Ivaldi, Marc; Mccullough, Gerard J.
  12. Vertical integration in the e-commerce sector By Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Lozachmeur, Jean-Marie
  13. Choice and Competition in the Welfare State: Home Care as the Ideal Quasi-market By Bergman, Mats A.; Jordahl, Henrik; Lundberg, Sofia
  14. Excess Prices for Drugs in Medicare: Diagnosis and Prescription By Frank, Richard G.; Zeckhauser, Richard J.
  15. Incentives for New Drugs to Tackle Anti-Microbial Resistance By Ferraro, J.; Towse, A.; Mestre-Ferrandiz, J.
  16. Bidding for talent in sport. By Roberto Burguet; Jozsef Sakovics
  17. An Economic Perspective on Mexico's Nascent Deregulation of Retail Petroleum Markets By Lucas W. Davis; Shaun McRae; Enrique Seira Bejarano
  18. Simulation and Evaluation of Zonal Electricity Market Designs By Hesamzadeh, Mohammad Reza; Holmberg, Pär; Sarfati, Mahir
  19. The Performance of REIT Acquirers in the Post-Merger Period By Chris Ratcliffe; Bill Dimovski; Monica Keneley

  1. By: Volker Nocke; Nicolas Schutz
    Abstract: Using an aggregative games approach, we analyze horizontal mergers in a model of multiproduct-firm price competition with nested CES or nested logit demands. We show that the Herfindahl index provides an adequate measure of the welfare distortions introduced by market power, and that the induced change in the naively-computed Herfindahl index is a good approximation for the market power effect of a merger. We also provide conditions under which a merger raises consumer surplus, and conditions under which a myopic, consumer-surplus-based merger approval policy is dynamically optimal. Finally, we study the aggregate surplus and external effects of a merger.
    JEL: D43 L13 L40
    Date: 2018–05
  2. By: Ivaldi, Marc; Lagos, Vicente
    Abstract: The Coordinate Price Pressure Index (CPPI) measures the incentives of two competitors to engage in a particular type of Parallel Accommodating Conduct (PAC). Specifically, it measures the incentives of a leader firm to initiate a unilateral percentage price increase, with the expectation that a follower firm will match it. Using a large set of simulated markets, we measure the accuracy of the index in terms of predicting the impact of a merger on firms’ incentives to engage in PAC. Results suggest that the CPPI only displays a fair performance when predicting an increase in firm’s incentives to engage in PAC, and only in mergers in which the diversion ratio between the target and the acquiring firm is low. However, the index displays a poor performance when predicting mergers with a significant anticompetitive effect.
    Keywords: Coordinate Price Pressure Index ; Parallel Accommodating Conduct ; Merger Simulation
    JEL: K21 L41
    Date: 2018–04
  3. By: Robert E. Hall
    Abstract: The markup of price over marginal cost reveals market power. The distinction between marginal and average cost is key. Average cost is easy to measure, but the price/average cost ratio understates the price/marginal cost ratio when fixed costs are present. In particular, in free-entry equilibrium, where revenue equals cost, the price/average cost ratio is always one, while the price/marginal cost ratio may be above one. The idea here is to calculate marginal cost as the ratio of the adjusted expenditure on inputs to the adjusted change in output. The first adjustment is to remove the change in expenditure that arises from the changes in input costs. The second adjustment is to remove the change in output attributed to productivity growth. Application to KLEMS productivity data finds a typical markup ratio of 1.3. Markup ratios grew between 1988 and 2015. For mega-firms, the paper uses employment at firms with 10,000+ workers. Substantial heterogeneity occurs across sectors and in growth rates. There is no evidence that mega-firm-intensive sectors have higher price/marginal cost markups, but some evidence that markups grew in sectors with rising mega-firm intensity.
    JEL: D24 L1
    Date: 2018–05
  4. By: Victor Aguirregabiria; Jiaying Gu; Yao Luo
    Abstract: We study the identification and estimation of structural parameters in dynamic panel data logit models where decisions are forward-looking and the joint distribution of unobserved heterogeneity and observable state variables is nonparametric, i.e., fixed-effects model. We consider models with two endogenous state variables: the lagged decision variable, and the time duration in the last choice. This class of models includes as particular cases important economic applications such as models of market entry-exit, occupational choice, machine replacement, inventory and investment decisions, or dynamic demand of differentiated products. The identification of structural parameters requires a sufficient statistic that controls for unobserved heterogeneity not only in current utility but also in the continuation value of the forward-looking decision problem. We obtain the minimal sufficient statistic and prove identification of some structural parameters using a conditional likelihood approach. We apply this estimator to a machine replacement model.
    Date: 2018–05
  5. By: Allen, Jeffrey; Nataraj, Shanthi; Schipper, Tyler C.
    Abstract: This paper develops a multi-industry general equilibrium model where entrepreneurs within each industry can decide to operate formally or informally. The model generates a rich set of predictions including productivity cut-offs for formal and informal firms to operate within different industries. In doing so, it matches empirical research that finds an overlap in the aggregate productivity distributions of formal and informal firms, while being consistent with theoretical predictions of strict duality within industries. Our explanation for this outcome is that it is natural result of fixed costs varying across industries. We offer evidence that the overlap between formal and informal firms in the aggregate is larger than the overlaps within industries for the case of Indian manufacturing establishments. Our model is also consistent with other features of the data in that it can explain high levels of competition between formal and informal firms that decrease with formal firm size.
    Keywords: informality; competition; dual view; productivity
    JEL: E26 O17
    Date: 2018–04
  6. By: Meleshkina, Anna (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Shastitko, Anastasia (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The work is based on the methodology of a comprehensive economic analysis of the problems of resolving conflicts of interest in intermediate goods markets with high switching costs, both on the demand side and on the supply side. The research is based on developments in the field of theory of market organization, game theory and institutional economic theory. The work analyzes the range of issues related to the negotiation process in determining the price of the intermediate goods, as well as the development of contract terms that reduce the risk of antimonopoly disputes arising in the conditions of a bilateral monopoly.
    Keywords: antimonopoly policy, intermediate goods, market concentration, switching costs, transaction management mechanisms
    JEL: F12 L40 L41
    Date: 2018–04
  7. By: Kotowski, Maciej H. (Harvard University); Leister, C. Matthew (Monash University)
    Abstract: We study an economy where intermediaries facilitate exchange between a supplier and consumers. The set of feasible transactions is characterized by a network. Free entry helps form the network. There is under-entry of intermediaries in equilibrium due to complementarities among agents in distant parts of the economy. When intermediaries are speculators, equilibrium networks exhibit an asymmetric structure that amplifies certain traders’ importance. An extension of the model allows for disintermediation. Generally, free-entry and competition may fail to purge redundant intermediaries from the market. However, avoidance of a reseller’s curse deters superfluous speculators.
    JEL: D44 D85 L14
    Date: 2018–01
  8. By: Seungjin Han
    Abstract: This paper proposes a tractable competing mechanism game where each seller simultaneously posts a trading contract that specifies a menu of dominant strategy incentive compatible (DIC) direct mechanisms conditional on an array of messages sent by buyers, and each seller subsequently chooses a DIC direct mechanism from his menu. The complete set of a seller's profits that are supportable in a (symmetric) equilibrium is the interval between the minmax value of his profit with respect to DIC direct mechanisms and his profit in the joint profit maximization. The set of a seller's equilibrium profits is robust to the possibility of a seller's deviation to any arbitrary mechanism in the standard environment with linear utilities and independent private type. Further, with no limited liability or with no capacity constraints, the set of a seller's equilibrium profits coincides with the set of his feasible (i.e., individually rational and incentive compatible) profits. Given a number of buyers, the number of sellers can be endogenized and is equal to the largest number at which a seller's profit in the joint profit maximization is non-negative: As the number of buyers increases, competition is neutralized because only the monopoly terms of trade prevails in the market, whereas the range of a seller's equilibrium profits shrinks to his reservation profit.
    Keywords: competing mechanisms, dominant strategy incentive compatible direct mechanisms, robust equilibrium allocations, market information
    JEL: C72 D82
    Date: 2018–05
  9. By: Xin, Xiang
    Abstract: This study explores the effect of industry competition on public R&D subsidies' effectiveness. The author finds the non-linear threshold effect of industry competition on R&D subsidies' effectiveness. Specifically, R&D subsidies' effectiveness reaches its peak when industry competition lies between the two estimated thresholds.
    Keywords: social status,redistribution,externalities,optimal taxation
    JEL: H25 L11 G31 G38
    Date: 2018
  10. By: Fonseca, Miguel A.; Li, Yan; Normann, Hans-Theo
    Abstract: Factors facilitating collusion may not successfully predict cartel occurrence: when a factor predicts that collusion (explicit and tacit) becomes easier, firms might be less inclined to set up a cartel simply because tacit coordination already tends to go in hand with supra-competitive profits. We illustrate this issue with laboratory data. We run n-firm Cournot experiments with written cheap-talk communication between players and we compare them to treatments without the possibility to talk. We conduct this comparison for two, four and six firms. We find that two firms indeed find it easier to collude tacitly but that the number of firms does not significantly affect outcomes with communication. As a result, the payoff gain from communication increases with the number of firms, at a decreasing rate.
    Keywords: cartels,collusion,communication,experiments,repeated games
    JEL: L42 C90 C70
    Date: 2018
  11. By: Coublucq, Daniel; Ivaldi, Marc; Mccullough, Gerard J.
    Abstract: Considering the US railroad industry, which is characterized by seven integrated firms that provide freight services on tracks they own and maintain, this paper provides a structural model that allows to evaluate the potential effects of opening the rail network to new firms on prices and investment incentives. In particular, we propose a framework for analyzing the tension between static efficiency (pricing behavior) and dynamic efficiency (investment behavior). The investment behavior is rendered endogenous by means of a dynamic model where the current investment depends on the expected future profits. We then use a forward simulation procedure to analyze the effect of an open-access market structure where a new firm uses the network of one of the biggest railroad firm. Under a simple access charge equaled to the marginal cost of access, investment in network infrastructure decreases by 10% per year, leading to a significant decrease in network quality over time. Under this setting, despite the increase of price competition, the decrease in network quality leads to a fall in consumer welfare. Other types of (more evolved) access charges might even allow to relax the tension between static efficiency and dynamic efficiency, allowing more price competition while preserving investment incentives. This topic deserves further research and is beyond the scope of this paper.
    Keywords: competition; dynamic structural models; investment; open-access; railroad industry; static-dynamic efficiency trade-off
    JEL: L10 L51 L92
    Date: 2018–04
  12. By: Borsenberger, Claire; Cremer, Helmuth; Joram, Denis; Lozachmeur, Jean-Marie
    Abstract: This paper studies vertical integration of a retailer and an operator in the e-commerce sector. It shows first that the comparison between independent oligopoly and integrated monopoly involves a tradeoff between competition and double marginalization which will have the opposite effect. With linear demand we need at least 3 firms (upstream and downstream) for the independent oligopoly to yield larger surplus. With constant elasticity demand, on the other hand, this is always true. Second it considers a setting where the number of firms is endogenous and determined such that gross profits cover fixed costs. While the integration of a single retailer-delivery operator pair may initially be welfare improving, the resulting market structure may not be sustainable. Furthermore, there exist a range of fixed costs for which the integrated monopoly emerges (following a single integration) and is welfare inferior to the initial independent equilibrium even when the reduction in the number of fixed costs is taken into account. Within this setting it also shows that multiple integration is typically welfare superior (for a given total number of firms) to the integration of a single retailer-delivery operator. Third and last, it considers an extension wherein customers differ according to their location, urban or rural, involving di¤erent delivery costs. It shows that urban integration is more likely to have an adverse effect on welfare than full integration.
    Keywords: vertical integration; parcel delivery; e-commerce
    JEL: L42 L81 L87
    Date: 2018–05
  13. By: Bergman, Mats A. (Södertörn University); Jordahl, Henrik (Research Institute of Industrial Economics (IFN)); Lundberg, Sofia (Umeå University)
    Abstract: We study a reform by which a standardized model of choice and competition was introduced in tax-financed home care in a majority of Swedish municipalities. The market for home care is of particular interest since it is close to the ideal quasi-market. For identification, we exploit the different timing of reform implementation across municipalities. We find that the introduction of free choice and free entry in home care increased perceived quality by about one quarter of a standard deviation without affecting costs. Since satisfaction is unrelated to the private market share, the underlying mechanism seems to be new choice opportunities rather than competition or an advantage of private providers.
    Keywords: Choice; Competition; Privatization; Elderly care; New public management
    JEL: H42 H75 I11 L33
    Date: 2018–05–03
  14. By: Frank, Richard G. (Harvard University); Zeckhauser, Richard J. (Harvard University)
    Abstract: Excess prices for drugs in the U.S. is a persistently vexing policy problem. While there is agreement among most policy analysts that supra competitive prices are necessary to promote innovation; significant disagreements arise over how much pricing discretion prescription drug manufacturers should be permitted, and what portion of the sum of producer plus consumer surplus in the prescription drug market should be claimed by manufacturers relative to consumers and other payers. This analysis first diagnoses the causes of the high costs in Medicare Part D. It then makes use of that diagnosis to provide a prescription for policy measures that have the potential to simultaneously reduce these costs without significantly sacrificing incentives to bring valuable new drugs to market. This paper focuses on an extremely costly component of the Medicare Part D program, the region of coverage that kicks in once a consumer has spent $4,950 on drugs in a calendar year (roughly $8,100 in total drug spending). At that point there are high levels of insurance for the consumer and reinsurance for the prescription drug plan. Consumers pay 5% of costs; plans pay 15% and the government 80%. That design generates serious inefficiencies. The significant subsidies to plans in the reinsurance region combined with the launch of unique high cost prescription drugs could be expected to lead to and has led to substantial departures from cost-effective outcomes in treatments delivered. As would be expected, spending has been growing rapidly in this so called “reinsurance region†. What is less well known is that a small number of very high-cost drugs account for almost all of this growth. Following this diagnosis, we present two, possibly complementary, prescriptions for reducing these inefficiencies. The first follows on the MedPac recommendation that the government reduce its share of risk bearing for the Part D reinsurance benefit. The second focuses on curbing price inefficiencies for those very high-cost drugs. That prescription has two components: eliminating monopolistic overpricing, and promoting the quality of drugs brought to market. It is grounded in the economics of two part tariffs, research on innovation prizes, performance-based contracts, and draws on the mechanism design literature. Such pricing could save substantially on costs without curtailing the most important R&D efforts for pharmaceuticals. Market conditions and political forces appear ripe for significant new approaches to pricing high cost drugs in Medicare Part D. We believe that the prescription discussion here, which draws on this paper’s diagnosis, identifies some promising approaches to a vexing problem.
    Date: 2018–01
  15. By: Ferraro, J.; Towse, A.; Mestre-Ferrandiz, J.
    Abstract: A new OHE Briefing has just been published entitled - Incentives for New Drugs to Tackle Anti-Microbial Resistance. Resistance to antibiotics is growing, posing a major health risk in rich and poor countries. Additional ways of rewarding R&D are required. Mechanisms designed to encourage companies to undertake R&D on new medicines are generally characterised as either "push" or "pull" programs. Push funding alone will not generate new medicines. Pull incentives are key to stimulating R&D for new antibiotics and vaccines. In this Briefing we look at the proposals in the 2016 O'Neill Report commissioned by the UK government and the 2017 GUARD Report commissioned by the German government. Our assessment is that both Transferable Intellectual Property Rights and the Market Entry Reward should be further explored for use in the EU as a regional "pull" incentive. A lead group of countries need to work together to develop a set of pull incentives to drive new antibiotic and vaccine R&D in Europe and globally.
    Keywords: Economics of Industry; Economics of Health Care Systems
    JEL: I1
    Date: 2017–05–01
  16. By: Roberto Burguet; Jozsef Sakovics
    Abstract: We present a novel micro-structure for the market for athletes. Clubs simultaneously target bids at the players, in (Nash) equilibrium internalizing whether - depending on the other clubs' bids - a player not hired would play for the competition. For low/inelastic talent supply, we support - and generalize to heterogeneous players - the Coasian results of Rottenberg (1956) and Fort and Quirk (1995): talent allocation is efficient and independent of initial "ownership" and revenue sharing arrangements. We also characterize equilibria for high/elastic supply. The analysis uses a non-specic club objective with an endogenously derived trade-off between pecuniary and non-pecuniary benefits.
    Keywords: competitive balance, competitive foreclosure, contested work-
    JEL: J4 L1 L2
    Date: 2018–01
  17. By: Lucas W. Davis; Shaun McRae; Enrique Seira Bejarano
    Abstract: Retail petroleum markets in Mexico are on the cusp of a historic deregulation. For decades, all 11,000 gasoline stations nationwide have carried the brand of the state-owned petroleum company Pemex and sold Pemex gasoline at federally regulated retail prices. This industry structure is changing, however, as part of Mexico's broader energy reforms aimed at increasing private investment. Since April 2016, independent companies can import, transport, store, distribute, and sell gasoline and diesel. In this paper, we provide an economic perspective on Mexico's nascent deregulation. Although in many ways the reforms are unprecedented, we argue that past experiences in other markets give important clues about what to expect, as well as about potential pitfalls. Turning Mexico's retail petroleum sector into a competitive market will not be easy, but the deregulation has enormous potential to increase efficiency and, eventually, to reduce prices.
    JEL: L11 L51 Q31 Q48
    Date: 2018–04
  18. By: Hesamzadeh, Mohammad Reza (Royal Institute of Technology (KTH)); Holmberg, Pär (Research Institute of Industrial Economics (IFN)); Sarfati, Mahir (Research Institute of Industrial Economics (IFN))
    Abstract: Zonal pricing with countertrading (a market-based redispatch) gives arbitrage opportunities to the power producers located in the export-constrained nodes. They can increase their profit by increasing the output in the dayahead market and decrease it in the real-time market (the inc-dec game). We show that this leads to large inefficiencies in a standard zonal market. We also show how the inefficiencies can be significantly mitigated by changing the design of the real-time market. We consider a two-stage game with oligopoly producers, wind-power shocks and real-time shocks. The game is formulated as a two-stage stochastic equilibrium problem with equilibrium constraints (EPEC), which we recast into a two-stage stochastic Mixed-Integer Bilinear Program (MIBLP). We present numerical results for a six-node and the IEEE 24-node system.
    Keywords: Two-stage game; Zonal pricing; Wholesale electricity market; Bilinear programming
    JEL: C61 C63 C72 D43 L13 L94
    Date: 2018–05–03
  19. By: Chris Ratcliffe; Bill Dimovski; Monica Keneley
    Abstract: Mergers and acquisitions are a feature of modern economies. However, research on conventional bidding firms in mergers and acquisitions (M&As) has shown, on average, shareholders are worse off in the long-run (Alexandridis, Mavrovitis and Travlos, 2012). This study examines the long-term post merger performance of US Equity Real Estate Investment Trusts (REITs) to see if this under-performance extends to the largest REIT sector in the world. In contrast to the earlier REIT data samples used by Campbell, Giambona and Sirmans (2009), we find, prior to the macroeconomic event of the financial crisis, that existing shareholders of bidding firms earn significant and positive abnormal returns. This outcome supports the synergy motive for M&As in the REIT sector. Results from announcements occurring after the onset of the financial crisis show signs of negative and significant abnormal returns, suggesting these M&As were driven by the agency and/or hubris motive.
    Keywords: Equity REITs; Mergers and acquisitions; Post-merger abnormal returns
    JEL: R3
    Date: 2017–07–01

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