nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒07‒09
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. The Dynamic Provision of Product Diversity: under Duopoly By Ramon Caminal
  2. A New model of mergers and innovation By Piuli Roy Chowdhury
  3. Investment choice with managerial incentive schemes By Shubhro Sarkar; Suchismita Tarafdar
  4. Advertising Economics Under Uncertainty: An Alternative Approach By James P. Gander
  5. Learning in Crowded Markets By Peter Kondor; Adam Zawadowski
  6. Redistribution through Markets By Piotr Dworczak; Scott Duke Kominers; Mohammad Akbarpour
  7. How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift By Gutierrez, German; Philippon, Thomas
  8. The impact of submarket concentration in the US pharmaceutical industry in 1987-1998 By Francesca Di Iorio; Maria Letizia Giorgetti
  9. Price strategies of independent and branded dealers in retail gas market. The case of a contract reform in Spain By Pilar Cuadrado; Aitor Lacuesta; María de los Llanos Matea; F. Javier Palencia-González
  10. How Important Are Local Community Banks to Small Business Lending? Evidence from Mergers and Acquisitions By Jagtiani, Julapa; Maingi, Ramain Quinn
  11. Ubérisation des services : les clients sont-ils toujours gagnants ? By Catherine Viot
  12. Reclassification Risk in the Small Group Health Insurance Market By Sebastián Fleitas; Gautam Gowrisankaran; Anthony Lo Sasso
  13. Auction design and auction outcomes By Koutroumpis, Pantelis; Cave, Martin
  14. Política de competencia y convergencia de sectores: Tecnologías de la información y financieras By Núñez Reyes, Georgina; De Furquim, Júlia
  15. La concentración de los mercados en la economía digital By Núñez Reyes, Georgina; De Furquim, Júlia
  16. Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions By Giovanni Compiani; Philip A. Haile; Marcelo Sant'Anna
  17. The Strategies of Integration on the Textile Companies in the Meiji Period :A Case Study the Kyoto Cotton Flannel Co. Ltd By Taiki Kamei

  1. By: Ramon Caminal
    Abstract: This paper builds a dynamic duopoly model to examine the provision of new varieties over time. Consumers experience temporary satiation, and hence higher consumption of the current variety lowers demand for future varieties. The equilibrium can be characterized by a combination of monopolistic pricing and nearly zero profits (competitive timing). In particular, if the cost of producing a new variety is not too low then firms tend to avoid head-to-head competition and set the short-run profit-maximizing price. However, firms tend to introduce new varieties as soon as demand has grown sufficiently to cover costs. From a second best perspective, the equilibrium may exhibit excessive product diversity. However, if firms coordinate their frequency of new product introductions, then consumers are likely to be harmed. It is also shown that equilibrium prices are moderated by two factors. First, consumers' option value of waiting reduces their willingness to pay. Second, competition reduces firms' incentives to engage in intertemporal price discrimination.
    Keywords: temporary satiation, product diversity, dynamic duopoly, repeat purchases, endogenous timing
    JEL: L13
    Date: 2018–06
  2. By: Piuli Roy Chowdhury (Indira Gandhi Institute of Development Research; Institute of Economic Growth)
    Abstract: This paper reexamines the impact of merger on innovation. Unlike as in Federico et al (2017), it considers the scenario where merged firms combine their research labs. It shows that, in equilibrium, each firm chooses a higher R&D effort after the merger, while industry effort may rise or fall due to the merger. Furthermore, it shows that given a sufficient condition, profits of the merged firm falls and consumer surplus rises in the post merger scenario. These results are in sharp contrast to the findings of Federico et al (2017).
    Keywords: Innovation, R&D, Mergers
    JEL: D43 G34 L40 O30
    Date: 2018–03
  3. By: Shubhro Sarkar (Indira Gandhi Institute of Development Research); Suchismita Tarafdar (Shiv Nadar University)
    Abstract: In this paper we show that firms might get an additional strategic benefit from using marginal-cost-reducing investments in conjunction with a managerial incentive scheme. While both these instruments allow firms to \aggressively" participate in product market competition, we show that they act as strategic substitutes or complements depending on whether they are chosen simultaneously or sequentially under complete information. Given that the use of such instruments is inseparably linked with a Prisoner's Dilemma kind of situation, our analysis shows a way to mitigate such effects, through heir simultaneous use.
    Keywords: Strategic delegation, Cost-Reducing Investment, Strategic Substitutes, Strategic complements, Subgame perfection
    JEL: C72 L13 D43
    Date: 2018–03
  4. By: James P. Gander
    Abstract: The purpose of this paper is to present an alternative approach to analyzing firm advertising under uncertainty. The approach considers the simultaneity (orduality) of two effects of advertising, one effect on the probability associated with the bundle of goods the typical buyer purchases and the other effect on the probability associated with the time the buyer spends in the store making the purchases. While bundle and time are well explored in the literature, our simultaneity approach to determine the optimum level (and type) of advertising results in implications that are not present in the literature. The novelty of this alternative approach is that it shows that there can be the possibility of an equivalent dual optimal advertising effect on the expected value of the bundle and the expected value of the time spent. The implications of such an equivalence (or lack thereof) for advertising decision making are then explored.
    Keywords: Advertising, Uncertainty, Bundle, Time Spent,Equivalence JEL Classification: 022, 024, 511, 541
    Date: 2018
  5. By: Peter Kondor; Adam Zawadowski
    Abstract: We study a capital reallocation problem in which investors can enter into a new market where they compete with each other in identifying the best deals. While ex ante investors are uncertain about their relative advantage in identifying the best deals, they can devote costly resources to learning about their relative advantage in a fully flexible way. We find that investors might allocate too much or too little capital to the new market. Increasing competition between investors induces them to learn more, shifting the distribution of entrants towards those with a relative advantage. However, competition does not change overall entry, so it does not affect the efficiency of capital allocation. Thus, learning induced by competition turns out to be wasteful and welfare decreasing. Allowing investors to learn in a fully flexible way - as opposed to requiring Gaussian signals - is what makes our argument transparent. We study several extension.
    Date: 2018–04–03
  6. By: Piotr Dworczak (Stanford University); Scott Duke Kominers (Harvard Business School); Mohammad Akbarpour (Stanford University)
    Abstract: When macroeconomic tools fail to respond to wealth inequality optimally, regulators can still seek to mitigate inequality within individual markets. A social planner with distributional preferences might distort allocative efficiency to achieve a more desirable split of surplus, for example, by setting higher prices when sellers are poor--effectively, using the market as a redistributive tool. In this paper, we seek to understand how to design goods markets optimally in the presence of inequality. Using a mechanism design approach, we uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution in a setting where the second welfare theorem fails because of private information and participation constraints. We find that competitive equilibrium allocation is not always optimal. Instead, when there is substantial inequality across sides of the market, the optimal design uses a tax-like mechanism, introducing a wedge between the buyer and seller prices, and redistributing the resulting surplus to the poorer side of the market via lump-sum payments. When there is significant within-side inequality, meanwhile, it may be optimal to impose price controls even though doing so induces rationing.
    Keywords: optimal mechanism design, redistribution, Inequality, welfare theorems
    JEL: D61 D63 D82 H21
    Date: 2018–06
  7. By: Gutierrez, German; Philippon, Thomas
    Abstract: Until the 1990's, US markets were more competitive than European markets. Today, European markets have lower concentration, lower excess profits and lower regulatory barriers to entry. We document this surprising outcome and propose an explanation using a model of political support. Politicians care about consumer welfare but also enjoy retaining control over industrial policy. We show that politicians from different countries who set up a common regulator will make it more independent and more pro-competition than the national ones it replaces. Our comparative analysis of antitrust policy reveals strong support for this and other predictions of the model.
    Date: 2018–06
  8. By: Francesca Di Iorio (Department of Epolitical Sciences, University of Naples Federico II); Maria Letizia Giorgetti (Department of Economics, Management and Quantitative Methods, University of Milano)
    Abstract: Global market concentration is the result of the interplay of different sub-markets. According to this view, empirical analysis on the role of concentration as an incentive or as a barrier to entry must be conducted on a sub-market level, where the sub-markets are identified as specific technological trajectories. In this paper we investigate the role of 3-digit submarket concentration in the US pharmaceutical sector in 1987-1998. We take into account several sources of potential entry deterrence including the relative company size to the largest incumbent firm and the number of competing products in each submarket. The estimates of a panel logit model show that a concentrated industry at submarket level seems to act like a barrier to entry. The relative company size is not significant while the number of competing products is significantly positive.
    Keywords: submarket concentration, pharmaceuticals, product launches, logit
    JEL: L25 L65 C23 C25
    Date: 2018–06
  9. By: Pilar Cuadrado (Banco de España); Aitor Lacuesta (Banco de España); María de los Llanos Matea (Banco de España); F. Javier Palencia-González (UNED)
    Abstract: This paper analyses how the contract structure between gas stations and the wholesale operator affects price strategies. Using daily data on prices of different gas stations the paper finds that independent dealers charge lower margins than other dealers with different contracts. One potential hypothesis is that this is the case because independent stations react more to the number of competitors. We use the introduction of a discretional regional excise duty (IVMDH) on gas stations to check the reaction of markups to changes in marginal costs of the actual number of competitors. Results are consistent with the idea that regardless the type of contract all dealers react notably to the increases in relative marginal costs by decreasing average markups. We use those results to interpret the inexistent reduction in markups that followed a change in the Spanish regulation that took place in 2013 fostering competition in the retail sector. One potential interpretation is that the big increase in independent stations following the reform was not considered an increase in actual competition for most of the incumbent stations.
    Keywords: competition, oligopoly, pass-through, gasoline, excise duty
    JEL: D40 H22 H23 L13 Q41
  10. By: Jagtiani, Julapa (Federal Reserve Bank of Philadelphia); Maingi, Ramain Quinn (Federal Reserve Bank of Philadelphia)
    Abstract: We investigate the shrinking community banking sector and the impact on local small business lending (SBL) in the context of mergers and acquisitions. From all mergers that involved community banks, we examine the varying impact on SBL depending on the local presence of the acquirers’ and the targets’ operations prior to acquisitions. Our results indicate that, relative to counties where the acquirer had operations before the merger, local SBL declined significantly more in counties where only the target had operations before the merger. This result holds even after controlling for the general local SBL market or local economic trends. These findings are consistent with an argument that SBL funding has been directed (after the mergers) toward the acquirers’ counties. We find even stronger evidence during and after the financial crisis. Overall, we find evidence that local community banks have continued to play an important role in providing funding to local small businesses. The absence of local community banks that became a target of a merger or acquisition by nonlocal acquirers has, on average, led to local SBL credit gaps that were not filled by the rest of the banking sector.
    Keywords: community banks; small business lending; bank mergers
    JEL: G21 G28 G34
    Date: 2018–06–29
  11. By: Catherine Viot (UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)
    Abstract: Uberization, defined as “the rethinking of the business model of a company or a business sector by the entry of a new actor proposing the same services at lesser prices" (Le Petit Larousse, 2018), extends to more and more varied services. Is this phenomenon of uberization always in favor of consumers? A reflection according to three axes brings a balanced answer to this question. The first axis underlines the difficulty in measuring the quality of “uberized” services and notices a generalization of uberization. But the access to this kind of offer is confined to the consumers connected to the Internet. The second axis questions the disruptive nature of uberization in terms of innovation, while recognizing an improvement of the customer experience. Finally, the third axis shows that the consumer is relatively winning in terms of appropriation of value, compared with the producer of the service. Nevertheless, the big winners, in this business model, are platforms.
    Abstract: L'ubérisation, définie comme "la remise en cause du modèle économique d'une entreprise ou d'un secteur d'activité par l'arrivée d'un nouvel acteur proposant les mêmes services à des prix moindres" (Le Petit Larousse, 2018), se propage à des services de plus en plus variés. Ce phénomène d'ubérisation est-il toujours favorable aux consommateurs ? Une réflexion menée selon trois axes permet d'apporter une réponse nuancée à cette question. Le premier axe souligne la difficulté de mesurer la qualité du service ubérisé et dresse le constat d'une généralisation de l'ubérisation. Mais l'accès à ce type d'offre est circonscrit aux consommateurs connectés à Internet. Le second axe questionne la nature disruptive de l'ubérisation en tant qu'innovation, tout en reconnaissant une amélioration de l'expérience client. Enfin, le troisième axe montre que le consommateur est relativement gagnant en termes d'appropriation de la valeur, par rapport au producteur du service. Néanmoins, les grands gagnants de ce modèle économique sont les plateformes. Abstract Uberization, defined as " the rethinking of the business model of a company or a business sector by the entry of a new actor proposing the same services at lesser prices" (Le Petit Larousse, 2018), extends to more and more varied services.
    Keywords: uberization,Service marketing,Value creation and capture,Business model,Ubérisation,Marketing des services,Valeur Ajoutée création/partage,Innovation,Plateforme numérique,Modèle d'affaires
    Date: 2018
  12. By: Sebastián Fleitas; Gautam Gowrisankaran; Anthony Lo Sasso
    Abstract: We evaluate reclassification risk and adverse selection in the small group insurance market from a period before ACA community rating regulations. Using detailed individual-level data from a large insurer, we find a pass through of 5-43% from expected health risk to premiums. This limited reclassification risk cannot be explained by market power or search frictions but may be due to implicit long-term contracts. We find no evidence of adverse selection generated by reclassification risk. The observed pricing policy adds $2,346 annually in consumer welfare over 10 years relative to experience rating. Community rating would not increase consumer welfare substantially.
    JEL: I13 L13
    Date: 2018–05
  13. By: Koutroumpis, Pantelis; Cave, Martin
    Abstract: We study the impact of spectrum auction design on the prices paid by telecommunications operators for two decades across 85 countries. Our empirical strategy combines information about competition in the local market, the level of adoption and a wide range of socio-economic indicators and process specific variables. Using a micro dataset of almost every mobile spectrum auction performed so far—both regional and national—we show that auction design affects final prices paid. Two designs (SMRA with augmented switching and CCA with core pricing) result in auctions with systematically higher normalized returns. Further, we document that spectrum ownership appears to affect prices paid in subsequent auctions. We discuss the mechanisms of cost minimization and foreclosure faced by operators in different regulatory environments. Our findings have implications for policy-makers and regulators.
    Keywords: Auction; Digital communications; Spectrum; Market power
    JEL: C78 D44 L96
    Date: 2018–06
  14. By: Núñez Reyes, Georgina; De Furquim, Júlia
    Abstract: En este documento se define el marco de un ecosistema de competencia que, además del ámbito regulatorioinstitucional, incluye el desarrollo tecnológico y la innovación. Se analizan las plataformas tecnológicas y su papel como nuevos modelos de negocio, la protección de datos y los efectos de red. El análisis evidencia un proceso de convergencia entre sectores que también impacta en la política de competencia, y destaca dos sectores producto del proceso de convergencia: las tecnologías de la información y las comunicaciones (TIC) y las tecnologías financieras (fintech), ambos caracterizados por altas concentraciones que afectan la libre competencia.
    Date: 2018–06–07
  15. By: Núñez Reyes, Georgina; De Furquim, Júlia
    Abstract: En este documento se analizan distintas formas de concentración de los mercados de la Argentina, el Brasil, Chile, Colombia, México y el Perú, y su relación con el proceso de patentes de empresas. Se identifican elementos para el análisis de la figura de poder de mercado de empresas tecnológicas y no tecnológicas en sectores de la economía y los grados de concentración por sector económico, a partir de datos financieros de las empresas.
    Date: 2018–06–07
  16. By: Giovanni Compiani (niversity of California, Berkeley, Haas School of Business); Philip A. Haile (Cowles Foundation, Yale University); Marcelo Sant'Anna (FGV EPGE)
    Abstract: An oil lease auction is the classic example motivating a common values model. However, formal testing for common values has been hindered by unobserved auction-level heterogeneity, which is likely to affect both participation in an auction and bidders' willingness to pay. We develop and apply an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. The approach also accommodates spatial dependence and sample selection. Following Haile, Hong and Shum (2003), we specify a reduced form for bidder entry outcomes and rely on an instrument for entry. However, we relax their control function requirements and demonstrate that our specification is generated by a fully specified game motivated by our application. We show that important features of the model are nonparametrically identified and propose a semiparametric estimation approach designed to scale well to the moderate sample sizes typically encountered in practice. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present and important in U.S. offshore oil and gas lease auctions. We find that ignoring unobserved heterogeneity in the empirical model obscures the presence of common values. We also examine the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.
    Date: 2018–06
  17. By: Taiki Kamei (Graduate School of Economics, Osaka University)
    Abstract: The purpose of this study is to discuss the significance of the vertically and horizontal integration focus on the textile companies in the Meiji Period. It has been widely accepted that the process was initiated by those formed as spinning companies, which later acquired the weaving sector by mergers and acquisitions because of recession. This paper is to show an alternative way of vertical integration of spinning and weaving processes in cotton industry in early Meiji Japan through a case study of the Kyoto Cotton Flannel Co., Ltd(the Kyomen). Cotton flannel is a finished cotton textile napped on side made to imitate wool flannel. Full-fledged, factory-based machine printing in Japan started to develop when the Kyomen was established in 1895. The Kyomen actively transferred technology for raising the nap of the cloth, dyeing and processing to European. The industry faced various quality problems caused by inexperience in machine printing technique and copper roller engraving. This study provide evidence that the Kyomen was the first Japanese company which overcame these challenges. It was worthwhile to note that the Kyomen achieve vertical integration process by acquisition of Kyoto Spinning Company. Since then, it internalized the spinning process and became able to improve the self-manufactured cotton yarn to fit in printing and napping. It made it possible to improve the quality of cotton flannels. When the competition in this industry is fierce after the Russo-Japanese War, the Kyomen was developing aggressive horizontal integration in order to break out of dependence on the sales cotton flannels. Although the Kyomen failed to finance them and went bankrupt in 1909, it filled an importance role in the rise of the machine textile printing industry in Japan.
    Keywords: vertical integration, technology transfer, machine textile printing, integrated spinning andweaving, Kyoto Nisijin
    JEL: N65 N75 N85
    Date: 2018–06

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