nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒06‒11
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly By Nocke, Volker; Schutz, Nicolas
  2. On Supply Function Equilibria in a Mixed Duopoly By Carlos, Gutiérrez-Hita; Vicente-Pérez, José
  3. All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices By Joao Montez; Nicolas Schutz
  4. Identification of efficient equilibria in multiproduct trading with indivisibilities and non-monotonicity By Iván Arribas; Amparo Urbano
  5. Cascading Failures in Production Networks By Baqaee, David Rezza
  6. Competition over Cursed Consumers By Alessandro Ispano; Peter Schwardmann
  7. Price-cost tests and loyalty discounts By Calzolari, Giacomo; Denicolò, Vincenzo
  8. Coalition Loyalty Program Not Working? Maybe You're Doing It Wrong By Gardete, Pedro M.; Lattin, James M.
  9. An Experimental Analysis of the Complications in Colluding when Firms are Asymmetric By Charles F. Mason
  10. Innovation and business performance for Spanish SMEs: new evidence from a multi-dimensional approach. By Alfonso Expósito; Juan A. Sanchis-Llopis
  11. Price or Variety? An Evaluation of Mergers Effects in Grocery Retailing By Elena Argentesi; Paolo Buccirossi; Roberto Cervone; Tomaso Duso; Alessia Marrazzo
  12. Spatial competition and quality: Evidence from the English family doctor market By Gravelle, Hugh S; Liu, Dan; Propper, Carol; Santos, Rita
  13. Consumer Search with and without Tracking By Marcel Preuss
  14. Unbundling the Incumbent and Entry into Fiber: Evidence from France By Marc Bourreau; Lukasz Grzybowski; Maude Hasbi
  15. Distributed Generation in Unbundled Electricity Markets By Wagner, Johannes
  16. Development of Mechanisms for Increasing the Accessibility of the Electric Grid Infrastructure on the Basis of the Formation of a System of Mutual Responsibility of Consumers and Electric Grid Companies By Suyunchev, Marat; Mozgovaya, Olga; Fain, Boris
  17. Cash, Financial Flexibility, and Product Prices: Evidence from a Natural Experiment in the Airline Industry By Kim, Sehoon
  19. Competition for retail deposits between commercial banks and non-bank operators: a two-sided platform analysis By Siciliani, Paolo
  20. Open source hardware as a profit-maximizing strategy of downstream firms By Gambardella, Alfonso; von Hippel, Eric
  21. The Unilateral Accident Model under a Constrained Cournot-Nash Duopoly By Gérard Mondello; Evens Salies

  1. By: Nocke, Volker; Schutz, Nicolas
    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.
    Keywords: Aggregative Game; Herfindahl index; Horizontal Merger; market power; Multiproduct Firms; Oligopoly Pricing
    JEL: L13 L40
    Date: 2018–05
  2. By: Carlos, Gutiérrez-Hita (Departamento de Estudios Económicos y Financieros); Vicente-Pérez, José (Departamento Fundamentos Análisis Económico)
    Abstract: In this paper we present a mixed duopoly model of supply function competition under uncertainty with product differentiation. We find that, regardless the nature of product heterogeneity, the best response of the private firm always arises as strategic complement. Contrary to this, state-owned firm's best response arises either as strategic complement or substitute depending on the product heterogeneity. As a result of the ex post realization of the demand uncertainty, different equilibria are reached.
    Keywords: Supply Function Equilibria; Mixed oligopoly; Differentiated products
    JEL: D43 H42 L13
    Date: 2018–05–28
  3. By: Joao Montez; Nicolas Schutz
    Abstract: We study a class of games where stores source unobservable inventories in advance, and then simultaneously set prices. Our framework allows for firm asymmetries, heterogeneous consumer tastes, endogenous consumer information through advertising, and salvage values for unsold units. The payoff structure relates to a complete-information all-pay contest with outside options, non-monotonic winning and losing functions, and conditional investments. In the generically unique equilibrium, stores randomize their price choice and, conditional on that choice, serve all their targeted demand—thus, some inventories may remain unsold. As inventory costs become fully recoverable, the equilibrium price distribution converges to an equilibrium of the associated Bertrand game (where firms first choose prices and then produce to order). This suggests that with production in advance, the choice between a Cournot analysis and a Bertrand-type analysis, as properly generalized in this paper, should depend on whether or not stores observe rivals’ inventories before setting prices.
    Keywords: Oligopoly, inventories, production in advance, all-pay contests, Bertrand convergence
    JEL: L13 D43
    Date: 2018–05
  4. By: Iván Arribas (ERI-CES, IVIE, University of Valencia); Amparo Urbano (ERI-CES, University of Valencia)
    Abstract: This paper focuses on multiproduct trading with indivisibilities and where a representative agent may have non-monotonic preferences. In this framework, the set of firms' profits (which comes from efficient subgame perfect Nash equilibria) is the Pareto frontier of some projection of the core of the game. We show that under monotonicity efficient subgame perfect Nash equilibria are achieved by single offers and the equilibrium characterization is easy to obtain. When dealing with non-monotonic preferences the problem becomes more challenging. Then, we define a pair of primal-dual linear programming problems that fully identifies the core of the game. A set of modified versions of the dual programming problem characterizes the Pareto-optimal frontier of the core projection on firms' coordinates. Although this approach gives us the payoff-equivalence class (Strong Nash equilibria) of all the efficient subgame perfect Nash equilibria, the number of problems to be solved may be huge.
    Keywords: Multiproduct trading, Package assignment problem, Subgame perfect Nash equilibrium, Strong Nash equilibrium
    JEL: C72 D43 L13
    Date: 2018–05
  5. By: Baqaee, David Rezza
    Abstract: This paper analyzes a general equilibrium economy featuring input-output connections, imperfect competition, and external economies of scale owing to entry and exit. The interaction of input-output networks with industry-level market structure affects the amplification of shocks and the pattern of diffusion in the model, generating cascades of firm entry and exit across the economy. In this model, sales provide a poor measure of the systemic importance of industries. Unlike the relevant notions of centrality in competitive constant-returns to-scale models, systemic importance depends on the industry's role as both a supplier and as a consumer of inputs, as well as the market structure of industries. A basic calibration of the model suggests that aggregate output is three times more volatile in response to labor productivity shocks when compared to a perfectly competitive model.
    Date: 2018–05
  6. By: Alessandro Ispano; Peter Schwardmann
    Abstract: We model firms’ quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that neither competition nor the presence of sophisticated consumers necessarily protect cursed consumers from being exploited. Exploitation arises if markets are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common policy measures aimed at consumer protection, i.e. mandatory disclosure, third party disclosure and consumer education may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus.
    Keywords: naïve, cursed, disclosure, consumer protection, labeling, competition
    JEL: C72 D03 D82 D83
    Date: 2018
  7. By: Calzolari, Giacomo; Denicolò, Vincenzo
    Abstract: We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.
    Keywords: Loyalty discounts; As-efficient competitor; Price-cost tests; Sacrifice of profit; Contestable share.
    JEL: D42 D82 L42
    Date: 2018–05
  8. By: Gardete, Pedro M. (Stanford University); Lattin, James M. (Stanford University)
    Abstract: In this paper we explore the determinants of profitability for coalition loyalty programs. We consider a setting in which each of two firms competing in one market may form a coalition loyalty program with one of two firms in a different market. Firms in the same program jointly set the reward to consumers who buy from both coalition partners, but they set their own prices independently. We find that these programs are profitable for all firms, even when no value is created by the mere existence of rewards (i.e., when firms and consumers value $1 worth of rewards equally). The intuition is that joint loyalty programs allow each participating firm to leverage its partner's market power and charge higher prices. This result, however, depends crucially on several design elements of the program. First, rewards must be structured so that consumers earn more when they shop broadly across firms in the coalition than when they shop at only a single firm. Second, the reward program manager must be able to take into account the prices of individual firms when setting the value of rewards. Third, firms joining a coalition must be able to negotiate the share of program costs they will carry; firms must be charged according to their value added to the coalition (e.g., firms with greater market power will bear a lower share of program costs) and not taxed as a proportion of their revenues. Our theoretical findings provide insight into the forces underlying coalition loyalty programs in competitive settings and are suggestive of the impact of practical design decisions on program profitability.
    Date: 2018–03
  9. By: Charles F. Mason
    Abstract: I study an indefinitely repeated game where firms differ in size. Attempts to form cartels in such an environment, for example by rationing outputs in a manner linked to firm size differences, have generally struggled. Any successful cartel has to set production shares in a manner that ensures no firm will defect. But this can require allocating sellers disproportionate shares, which in turn makes these tacit agreements difficult to create and enforce. I analyze some experimental evidence in support of this last proposition.
    Keywords: asymmetric cartel, repeated game, experiments
    JEL: D80 L15
    Date: 2018
  10. By: Alfonso Expósito (Department of Economic Analysis and Political Economy, University of Seville, Calle San Fernando 4, 41004 Sevilla (Spain).); Juan A. Sanchis-Llopis (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).)
    Abstract: This paper examines the impacts of product, process, and organisational innovations on two alternative dimensions of business performance: finance and operations. Two indicators capture financial performance: sales increase and production cost reduction. Operational firm performance is captured by two alternative indicators: productive capacity augmentation and quality improvement of product/service provided by the firm. Using a wide-ranging sample of Spanish SMEs, our findings highlight the existence of significant impacts of innovation on both these dimensions of business performance, although these impacts differ regarding the type of innovation and the performance indicator considered. Furthermore, our results indicate that the relationship between innovation choices in SMEs and business performance should be analysed from a multidimensional approach. These findings reveal significant implications for innovation policies and innovation strategies for SMEs.
    Keywords: innovation, business performance, multi-dimensional analysis, SME, Spain
    JEL: O32 L25 C25
    Date: 2018–05
  11. By: Elena Argentesi; Paolo Buccirossi; Roberto Cervone; Tomaso Duso; Alessia Marrazzo
    Abstract: Assortment decisions are key strategic instruments for firms responding to local market conditions. We assess this claim by studying the effect of a national merger between two large Dutch supermarket chains on prices and on the depth as well as composition of assortment. We adopt a difference-in-differences strategy that exploits local variation in the merger’s effects, controlling for selection on observables when defining our control group through a matching procedure. We show that the local change in competitive conditions due to the merger did not affect individual products’ prices but it led the merging parties to reposition their assortment and increase average category prices. While the low-variety and low-price target’s stores reduced the depth of their assortment when in direct competition with the acquirer’s stores, the latter increased their product variety. By analyzing the effect of the merger on category prices, we find that the target most likely dropped high priced products, while the acquirer added more of them. Thus, the merging firms reposition their product offerings in order to avoid cannibalization and lessen local competition. Further, we show that other dimensions of heterogeneity, such as market concentration, whether a divestiture was imposed by the Dutch competition authority, and the re-branding strategy of the target stores, are important for explaining the post-merger dynamics. A simple theoretical model of local-market variety competition explains most of our findings.
    Keywords: variety, assortment, mergers, ex-post evaluation, retail sector, supermarkets, grocery
    JEL: L10 L41 L66 L81 D22 K21 C23
    Date: 2018
  12. By: Gravelle, Hugh S; Liu, Dan; Propper, Carol; Santos, Rita
    Abstract: We examine whether family doctor firms in England respond to local competition by increasing their quality. We measure quality in terms of clinical performance and patient-reported satisfaction to capture its multi-dimensional nature. We use a panel covering 8 years for over 8000 English general practices, allowing us to control for unobserved local area effects. We measure competition by the number of rival doctors within a small distance. We find that increases in local competition are associated with increases in clinical quality and patient satisfaction, particularly for firms with lower quality. However, the magnitude of the effect is small.
    Keywords: Quality; healthcare; choice; competition; family physicians
    JEL: I11 I18
    Date: 2018–05
  13. By: Marcel Preuss
    Abstract: In this paper, I develop a tractable framework with sequential consumer search to address the effect of tracking on market outcomes. Tracking search histories is informative about consumers’ valuations because different consumer types have different stopping probabilities. With tracking, the unique equilibrium price path is increasing whereas without tracking, an average uniform price prevails. Welfare effects largely depend on how tracking affects consumers’ search persistence. For intermediate search costs, tracking based price discrimination exacerbates the holdup problem and leads to inefficiently low search persistence. For high search costs instead, tracking prevents a market breakdown as low prices conditional on short search histories secure consumers a positive surplus from search. Tracking prevails endogenously when consumers can dynamically opt out from tracking. This holds since disclosing their search history is always individually rational for consumers, irrespective of the overall effect on consumer surplus.
    Keywords: consumer search, privacy, dynamic price discrimination
    JEL: D11 D18 D83 L13 L86
    Date: 2018–05
  14. By: Marc Bourreau; Lukasz Grzybowski; Maude Hasbi
    Abstract: We use panel data on 36,104 municipalities in metropolitan France over the period 2010-2014 to estimate two models of entry into local markets by: (i) alternative operators using wholesale access to the legacy copper network via local loop unbundling (LLU), and (ii) the incumbent and two alternative operators using the fiber technology. We find that a higher number of LLU competitors, and hence a less concentrated local market, has a positive impact on entry by fiber operators. Moreover, the presence of upgraded cable network in the local municipality stimulates fiber deployment. However, firms may choose to upgrade copper lines instead of investing in fiber networks. We use the estimates to calculate entry thresholds into local markets, which are substantially lower for broadband provision via LLU than via fiber and decrease over time. Fiber deployment becomes cheaper over time, but according to our estimates it will remain unprofitable for the vast majority of municipalities in France within the next years.
    Keywords: fiber broadband, local loop unbundling, market entry
    JEL: K23 L13 L51 L96
    Date: 2018
  15. By: Wagner, Johannes (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))
    Abstract: Electricity systems are increasingly characterized by distributed generation technologies, e.g. rooftop photovoltaic systems, which are used by end consumers to directly produce electricity. Additionally, empirical evidence suggests that electricity retailers exercise market power in many unbundled electricity markets. Against this backdrop this articles analyzes the impact of distributed generation on imperfect retail markets for electricity in a spatial competition framework. I find that distributed generation puts competitive pressure on retailers and induces lower retail prices. Therefore even consumers, who do not use distributed generation, benefit. Based on this effect regulators can shift welfare to consumers by subsidizing distributed generation in order to position it as a competitor to grid based electricity. However, if only a limited share of demand can be supplied with distributed generation, there is a point at which retailers disregard the substitutable share of demand and focus on the non-substitutable consumption in order to realize higher mark-ups. As a result, increased subsidies for distributed generation can increase retail prices and harm consumers. With optimal subsidies this strategy of retailers is prevented by limiting usage of distributed generation.
    Keywords: Distributed Generation; Renewable Energy; Retail Unbundling; Spatial Competition
    JEL: D43 L13 L50 L94 Q48
    Date: 2018–06–07
  16. By: Suyunchev, Marat (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Mozgovaya, Olga (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Fain, Boris (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The research «Development of the Electricity Distribution Network Connection Accessibility Instruments based on Market Participants Mutual Responsibility» study current situation at the electricity distribution network connection market in Russian Federation including connection market participants mutual responsibility aspects. This paper studies practical examples of the competitive markets contracts conditions which stipulated the modernization and the infrastructure expansion in the aim to meeting demand of the single customer; identifies risks of signing long turn contracts, providing investments. Finally, the research suggests the proposals and recommendations to the electricity distribution network connection markets participant mutual responsibility instruments development.
    Date: 2018–05
  17. By: Kim, Sehoon (University of Florida)
    Abstract: Corporate cash holdings impact firms' product pricing strategies. Exploiting the Aviation Investment and Reform Act of the 21st Century as a quasi-natural experiment to identify exogenous shocks to competition in the airline industry, I find that firms with more cash than their rivals respond to intensified competition by pricing more aggressively, especially when there is less concern of rival retaliation. Financially flexible firms based on alternative measures respond similarly. Moreover, cash-rich firms experience greater market share gains and long-term profitability growth. The results highlight the importance of strategic interdependencies across firms in the effective use of flexibility provided by cash.
    JEL: G30 G32 G35 L10
    Date: 2017–02
  18. By: Alphonse Noah; Luc Jacolin; Michael Brei
    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 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 concentration, financial deepening and inclusion, but also to the business and 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, Africa
    JEL: G21 G28 D4 O55
    Date: 2018
  19. By: Siciliani, Paolo (Bank of England)
    Abstract: Commercial banks’ mainstream business model, which is reliant on a stable supply of retail deposits, continues to be challenged by new and innovative sources of non-bank competition. This paper examines the implications of one such source: a substitute for commercial banks’ personal and saving accounts that provides a safer money storage option thanks to access to a central bank’s balance sheet. I model competition for retail deposits between a bank and a non-bank payment service operator by adopting the two-sided platform framework to capture the payment functionality between consumers and merchants under various configurations. I show that banks’ mainstream business model is most vulnerable when consumers perceive the two service providers as close substitutes; they have the option to sign up with both service providers; their distribution of deposit is skewed; and they are not allowed to make payments across platforms.
    Keywords: Two-sided platforms; retail deposit; non-bank payment service operator; central bank digital currency
    JEL: D43 G21 L15 L20 L50
    Date: 2018–05–25
  20. By: Gambardella, Alfonso; von Hippel, Eric
    Abstract: This paper characterizes and explores a corporate strategy in which downstream firms collaborate to develop open substitute designs for proprietary hardware they would otherwise purchase from upstream suppliers. This strategy centrally involves customers themselves distributing design costs over multiple customers – a strategy that is routine to producers selling to multiple customers, but which has been impractical for coalitions of customers until fairly recently. Today customers find it increasingly feasible to co-design products they may all purchase due to two technological trends. First, CAD-CAM and other design technologies are lowering downstream firms' costs to develop designs for purchased hardware inputs. Second, better communication technologies are lowering the costs of doing such projects collaboratively, even among large groups of downstream customer firms. Customer firms collaborating to develop a design for a hardware input they all purchase could in principle choose to protect their design as a club good. However, opening up collaboratively-created designs to free riders can increase the profits of the contributing firms for several reasons that we explore and model. Important among these is that free revealing draws free riders away from purchases of proprietary software or hardware to customer-developed free substitutes. This reduces the markets of upstream suppliers of competing proprietary inputs. Free riders also, in the case of hardware only, contribute to reducing the average manufacturing costs of the open hardware by increasing purchase volumes and so creating increased economies of scale. Resulting reduced unit purchase costs benefit customers contributing to the free design as well as free riders.
    Keywords: Competitive Advantage; Competitive Strategy; Corporate Strategy; Open Innovation; Technology Strategy
    JEL: L21 M21 O32
    Date: 2018–04
  21. By: Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS); Evens Salies (OFCE)
    Abstract: This paper extends the basic unilateral accident model to allow for Cournot competition. Two firms compete with production input and prevention as strategic variables under asymmetric capacity constraints. We find that liability regimes exert a crucial influence on the equilibrium price and outputs. Strict liability leads to higher output and higher risk compared to negligence. We also study the conditions under which both regimes converge.
    Keywords: Tort Law, Strict Liability, Negligence Rule, Imperfect Competition, Oligopoly, Cournot Competition
    JEL: D43 L13 L52 K13
    Date: 2018–06

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