nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒07‒16
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Endogenous heterogeneity in duopoly with deterministic one-way spillovers. By Adriana Gama; Isabelle Maret; Virginie Masson
  2. Competitive pricing despite search costs if lower price signals quality By Sander Heinsalu
  3. I will survive. Pricing strategies of financially distressed firms By Duca, Ioana A.; Montero, José M.; Riggi, Marianna; Zizza, Roberta
  4. Hotelling-Bertrand duopoly competition under firrm-specific network e effects By Marco Tolotti; Jorge Yepez
  5. Oligopoly, Macroeconomic Performance, and Competition Policy By Azar, José; Vives, Xavier
  6. Global Market Power By De Loecker, Jan; Eeckhout, Jan
  7. Intellectual Property Regimes and Firm Structure By Sourav Bhattacharya; Pavel Chakraborty; Chirantan Chatterjee
  8. Targeted Advertising in the Information Economy: A Complementary Approach By Lynne Pepall; Dan Richards
  9. Advertising as a Reminder: Evidence from the Dutch State Lottery By Chen He; Tobias J. Klein
  10. Selling Strategic Information in Digital Competitive Markets By David Bounie; Antoine Dubus; Patrick Waelbroeck
  11. Net Neutrality, Prioritization and the Impact of Content Delivery Networks By Baake, Pio; Sudaric, Slobodan
  12. A Fresh Look at Zero-Rating By Jan Krämer; Martin Peitz
  13. Welfare Effects of Switching Barriers Through Permanence Clauses: Evidence from the Mobiles Market in Colombia By Álvaro Riascos; Juan David Martín; Natalia Serna
  14. Trucks, Triangles and a Quiet Life: Welfare Implications of the European Trucks Cartel By Christian Beyer; Elke Kottmann; Korbinian von Blanckenburg
  15. Consumer Scores and Price Discrimination By Bonatti, Alessandro; Cisternas, Gonzalo
  16. Block sourcing By Jozsef Sakovics; Lluis Bru; Daniel Cardona
  17. The Market Power of Global Scientific Publishing Companies in the Age of Globalization. An Analysis Based on the OCLC Worldcat By Tausch, Arno
  18. Self-Regulation Under Asymmetric Cost Information By Saglam, Ismail
  19. A Model of Heterogeneous Firm Matches in Cross-Border Mergers & Acquisitions By Steven Brakman; Harry Garretsen; Michiel Gerritse; Charles van Marrewijk

  1. By: Adriana Gama; Isabelle Maret; Virginie Masson
    Abstract: This paper examines the standard symmetric two-period R&D duopoly model, but with a deterministic one-way spillover structure. Though the two firms are ex-ante identical, one obtains a unique pair of asymmetric equilibria of R&D investments, leading to inter-firm heterogeneity in the industry, in R&D roles as well as in unit costs. We analyze the impact of a change in the spillover parameter and R&D costs on firms’ levels of R&D and profits. We find that higher spillovers need not lead to lower R&D investments for both firms. In addition, equilibrium profits may improve due to the presence of spillovers, and it may be advantageous to be the R&D imitator rather than the R&D innovator.
    Keywords: One-way Spillovers, asymmetric R&D equilibria, R&D and interfirm heterogeneity, symmetry-breaking.
    JEL: D45 L10 C72
    Date: 2018
  2. By: Sander Heinsalu
    Abstract: I show that firms price almost competitively and consumers can infer product quality from prices in markets where firms differ in quality and production cost, and learning prices is costly. Bankruptcy risk or regulation links higher quality to lower cost. If high-quality firms have lower cost, then they can signal quality by cutting prices. Then the low-quality firms must cut prices to retain customers. This price-cutting race to the bottom ends in a separating equilibrium in which the low-quality firms charge their competitive price and the high-quality firms charge slightly less.
    Date: 2018–06
  3. By: Duca, Ioana A.; Montero, José M.; Riggi, Marianna; Zizza, Roberta
    Abstract: We consider a standard result of customer market theory: if firms have stable customer relations and face financial frictions, they may keep prices relatively high on their locked-in shoppers to maintain short-term profits at the expense of future market shares in times of low demand and vice versa in times of high demand. We extend this theoretical framework so that the countercyclical behaviour of price margins is strengthened by the expected persistence of demand and the procyclicality of competitive pressures. We test these predictions for Italian firms participating in the 2014 Wage Dynamics Network Survey. All things being equal, financially constrained firms charge higher markups when faced with low demand; this behaviour is more evident when demand is perceived as being persistent. Our findings suggest that the severity of financial constraints in Italy was one of the causes of the sustained growth of prices in 2010-2013. JEL Classification: C25, C26, D22, L11
    Keywords: customer market, financial frictions, markups
    Date: 2018–06
  4. By: Marco Tolotti (Dept. of Management, Università Ca' Foscari Venice); Jorge Yepez (Dept. of Economics, Università Ca' Foscari Venice)
    Abstract: When dealing with consumer choices, social pressure plays a crucial role; also in the context of market competition, the impact of network/social effects has been largely recognized. However, the effects of firm-specifc social recognition on market equilibria has never been addressed so far. In this paper, we consider a duopoly where competing firms are differentiated solely by the level of social (or network) externality they induce on consumers' perceived utility. We fully characterize the subgame perfect Nash equilibria in locations, prices and market shares. Under a scenario of weak social externality, the firms opt for maximal differentiation and the one with the highest social recognition has a relative advantage in terms of profits. Surprisingly, this outcome is not persistent; excessive social recognition may lead to adverse coordination of consumers: the strongest firm can eventually be thrown out of the market with positive probability. This scenario is related to a Pareto inefficient trap of no differentiation.
    Keywords: Consumer choice game, Duopoly price competition, Hotelling Location model, Network Externalities, Large Games, Social interaction
    JEL: L13 C72 C63 D71
    Date: 2018–06
  5. By: Azar, José; Vives, Xavier
    Abstract: We develop a macroeconomic framework in which firms are large and have market power with respect to both products and factors. Each firm maximizes a share-weighted average of shareholder utilities, which makes the equilibrium independent of price normalization. In a one sector economy, if returns to scale are non-increasing, then an increase in "effective" market concentration (which accounts for overlapping ownership) leads to declines in employment, real wages, and the labor share. Moreover, if the goal is to foster employment then (i) controlling common ownership and reducing concentration are complements and (ii) government jobs are a substitute for either policy. Yet when there are multiple sectors, due to an intersectoral pecuniary externality, an increase in common ownership can stimulate the economy when labor market oligopsony power is low relative to product market oligopoly power. We find that neither the monopolistically competitive limit of Dixit and Stiglitz nor the oligopolistic one of Neary (when firms become small relative to the economy) are attained unless there is incomplete portfolio diversification.
    Keywords: Antitrust Policy; Labor Share; market power; oligopsony; ownership; portfolio diversification
    Date: 2018–06
  6. By: De Loecker, Jan; Eeckhout, Jan
    Abstract: To date, little is known about the evolution of market power for the economies around the world. We extract data from the financial statements of over 70,000 firms in 134 countries, and we analyze and document the evolution of markups over the last four decades. We show that the average global markup has gone up from close to 1.1 in 1980 to around 1.6 in 2016. Markups have risen most in North America and Europe, and least in emerging economies in Latin America and Asia. We discuss the distributional implications of the rise in global market power for the labor share and for the profit share.
    Date: 2018–06
  7. By: Sourav Bhattacharya; Pavel Chakraborty; Chirantan Chatterjee
    Abstract: We use The Patents (Amendment) Act, 2002 in India as a quasi-natural experiment to identify the causal e¤ect of higher incentives for innovation on firm organizational features. We find that stronger intellectual property (IP) protection has a sharper impact on technologically advanced firms, i.e., firms that were a-priori above the industry median in terms of technology adoption. While there is an overall increase in managers' share of compensation, this increase is about 1.6-1.7% more for high-tech firms. This difference can be attributed to a larger increase in performance pay for high-tech firms. The reform also leads to a significant increase in number of managerial layers and number of divisions for high-tech firms relative to low-tech firms, but only the latter effect is correlated with the differential change in managerial compensation. Broadly, we demonstrate that stronger IP protection leads to an increase in both within-firm and between-firm wage inequality, with more robust evidence for between-firm inequality.
    Keywords: Intellectual Property Regimes, High-tech and Low-tech firms, Managerial Com- pensation, Span of Control
    JEL: D21 D23 L23 O34
    Date: 2018
  8. By: Lynne Pepall; Dan Richards
    Abstract: We investigate market outcomes when firms have extensive information on consumer preferences and can use it in their pricing and advertising strategies. Advertising is considered, as in Becker and Murphy (1993), to be complementary product that consumers value. Consumer data enables the firm to customize and target its advertising to specific consumers. We show that such targeted advertising softens price competition and encourages greater initial entry, leading to a prisoners’ dilemma. Because of the value of advertising to consumers, targeted advertising raises consumer surplus and total welfare, but has an ambiguous effect on producer surplus.
    Date: 2018
  9. By: Chen He; Tobias J. Klein
    Abstract: We use high frequency data on TV and radio advertising together with data on online sales for lottery tickets to measure the short run effects of advertising. We find them to be strong and to last for up to about 4 hours. They are the bigger the less time there is until the draw. We develop the argument that this finding is consistent with the idea that advertisements remind consumers to buy a ticket and that consumers value this. Then, we point out that in terms of timing the interests of the firm and the consumers are aligned: consumers wish to be reminded in a way that makes them most likely to consider buying a lottery ticket. We present direct evidence that this does not only affect the timing of purchases, but leads to market expansion. Then, we develop a tractable dynamic structural model of consumer behavior, estimate the parameters of this model and simulate the effects of a number of counterfactual dynamic advertising strategies. We find that relative to the actual schedule it would be valued by the consumers and profitable for the firm to spread advertising less over time and move it to the last days before the draw.
    Keywords: dynamic demand, limited attention, reminder advertising, adoption model
    JEL: M37 D12 D83
    Date: 2018
  10. By: David Bounie; Antoine Dubus; Patrick Waelbroeck
    Abstract: This paper investigates the strategies of a data broker in selling information to one or to two competing firms that can price-discriminate consumers. The data broker can strategically choose any segment of the consumer demand (information structure) to sell to firms that implement third-degree price-discrimination. We show that the equilibrium profits of the data broker are maximized when (1) information identifies the consumers with the highest willingness to pay; (2) consumers with a low willingness to pay remain unidentified; (3) the data broker sells two symmetrical information structures. The data broker therefore strategically sells partial information on consumers in order to soften competition between firms. Extending the baseline model, we prove that these results hold under first-degree price-discrimination.
    Keywords: data broker, information structure, price-discrimination
    JEL: D40 D80 L50 D43
    Date: 2018
  11. By: Baake, Pio (DIW Berlin); Sudaric, Slobodan (HU Berlin)
    Abstract: We analyze competition between Internet Service Providers (ISPs) where consumers demand heterogeneous content within two Quality-of-Service (QoS) regimes, Net Neutrality and Paid Prioritization, and show that paid prioritization increases the static efficiency compared to a neutral network. We also consider paid prioritization intermediated by Content Delivery Networks (CDNs). While the use of CDNs is welfare neutral, it results in higher consumer prices for internet access. Regarding incentives to invest in network capacity we show that discriminatory regimes lead to higher incentives than the neutral regime as long as capacity is scarce, while investment is highest in the presence of CDNs.
    Keywords: content delivery network; investment; net neutrality; prioritization;
    JEL: L13 L51 L96
    Date: 2018–06–25
  12. By: Jan Krämer; Martin Peitz
    Abstract: We provide an economic assessment of zero-rating offers in the context of mobile internet access services and draw six lessons: (1) Zero-rating can have several different characteristics that crucially affect their economic and welfare assessment. Thus, regulatory interventions must be based on a careful case-by-case analysis. (2) In the context of zero-rating offers, it is often crucial to evaluate the extent to which users are able to activate and deactivate a (throttled) zero-rated tariff option. If activation/deactivation is easy and instantaneous, a sound economic theory of harm for consumers will in many cases be hard to establish. (3) Similarly, if access to zero-rated partner programs is non-discriminatory and entails low barriers to entry, a sound theory of harm for content providers will usually not be given. (4) Zero-rating can be beneficial for consumers and (legal) content providers alike by contributing to a reduction of illegal content. Combined with throttling it can mitigate congestion problems. However, by requiring all content belonging to the same content category to be treated equally with respect to throttling, independent of whether a content provider opted for zero-rating or not, the existing regulation creates a negative externality on those content providers that do not wish to be zero-rated for some reason. (5) Particular attention should be paid to the impact of throttled zero-rating tariffs on the competition between mobile network operators (MNOs) and MVNOs. The latter may not be able to compete on equal footing with MNOs, because they benefit less from the traffic management aspects of zero-rating. (6) Competition among (infrastructure-based) ISPs provides a safeguard against severe rent extraction and, thus, an abuse of throttling and zero-rating as an exploitative device. Therefore, regulators should carefully account for the competitive environment and the existing tariff portfolio and options before deciding to intervene. Competition policy, rather than ex-ante regulation, may be more suitable for this task.
    Keywords: Zero-rating, net neutrality, throttling, traffic management, mobile communications
    JEL: L51 L86
    Date: 2018–06
  13. By: Álvaro Riascos; Juan David Martín; Natalia Serna
    Abstract: During 2014, the Comisión de Regulación de Comunicaciones in Colombia enacted a Resolution by which permanence clauses or fixed-length terms in mobile telecommunications contracts were prohibited for network operators offering bundled mobile terminals and voice plans. Prohibition was enacted under the argument permanence clauses create switching costs, reduce competition, and generate information asymmetries. In this study we measure the impact of the Resolution on consumer, firm, and social welfare by estimating the structural demand for mobile terminals and conducting two counterfactual scenarios. We show switching costs by means of permanence clauses reduce consumer utility and increase the variance of the utility distribution. We also show the Colombian market for mobile terminals has been better off without permanence clauses, with both consumers and firms experiencing gains from the prohibition. However, variation in firm surplus is explained mostly by the variation in profits of incumbent network operators than by the variation in profits of firms selling terminals at cash price. Our study contributes to the literature of bundled sales and switching costs and is crucial from the perspective of regulation and industrial policy in the telecommunications sector.
    Keywords: switching costs; permanence clauses; structural demand; telecommunications; fixed-length contracts
    JEL: L50 L13 L11
    Date: 2017–07–03
  14. By: Christian Beyer (Ostwestfalen-Lippe University of Applied Sciences); Elke Kottmann (Ostwestfalen-Lippe University of Applied Sciences); Korbinian von Blanckenburg (Ostwestfalen-Lippe University of Applied Sciences)
    Abstract: We present a pragmatic approach to calculating the total economic loss induced by a cartel, focusing on the European trucks cartel (1997-2011). Overall, we estimate a net welfare loss of approximately €0.7 bn. and an overcharge below 1% (€1.8 bn.). The cartel overcharge is surprisingly low. We explain this by (1) the existence of a reference market with an already elevated price level and (2) by other industry-specific factors that encourage cartel arrangements. In the case of the trucks cartel, the companies involved have apparently preferred the Hicksian "quiet life" of the monopolist to a further maximization of profits.
    Keywords: Cartel, Welfare, Efficiency, Overcharge, Trucks
    JEL: D43 D61 L62
    Date: 2018
  15. By: Bonatti, Alessandro; Cisternas, Gonzalo
    Abstract: A long-lived consumer interacts with a sequence of firms in a stationary Gaussian setting. Each firm relies on the consumer's current score--an aggregate measure of past quantity signals discounted exponentially--to learn about her preferences and to set prices. In the unique stationary linear Markov equilibrium, the consumer reduces her demand to drive average prices below the no-information benchmark. The firms' learning is maximized by persistent scores, i.e., scores that overweigh past information relative to Bayes' rule when observing disaggregated data. Hidden scores--those only observed by firms--reduce demand sensitivity, increase expected prices, and reduce expected quantities.
    Keywords: Consumer Scores; information design; Persistence; price discrimination; Ratchet Effect; signaling; transparency
    JEL: C73 D82 D83
    Date: 2018–06
  16. By: Jozsef Sakovics; Lluis Bru; Daniel Cardona
    Abstract: We study how a buyer should structure his demand in the presence of diseconomies of scale in production. Compared to an efficient market with n (identical) suppliers, he benefits from auctioning large blocks of contracts and sourcing only the remainder via the market. Optimally, he sets n - 2 or n - 1 lots, depending on his bargaining power vs. a single supplier. The distortion leads to overproduction and to the misallocation of production. When he has commitment power and can strategically set the quantity, block sourcing is still beneficial, but - unless his bargaining power is very high - it leads to underproduction.
    Keywords: Procurement; Price competition; Split awards; Strategic sourcing
    JEL: C72 D44 L14
  17. By: Tausch, Arno
    Abstract: This article evaluates tendencies and trends of the global academic publishing industry, vital for any reasonable long-term publication strategy planning in research. Such analyses are made possible today by the OCLC Worldcat. Our multivariate attempt, combining Worldcat global library circulation figures of publisher companies with results from earlier publisher ranking studies, is based on factor analysis of 32 variables, and our promax factor analytical model establishes that there are eight factors of global publisher impact, explaining almost 86% of total variance: 1. overall global standing of the company 2. company as a factor on the market 3. company impact on the global political and economic debate 4. successfully distributing best-sellers 5. impact on the scholarly community 6. successfully distributing production to more than 50 global Worldcat libraries 7. output during the last 5 years 8. outstanding academic quality Of the 51 companies with complete data under investigation here, the following companies are classified in the upper half: Oxford University Press; Springer; Cambridge University Press; Routledge; World Bank; Princeton University Press; Elsevier; CRC Press; University of Chicago Press; University of California Press; Palgrave Macmillan; MIT Press; Yale University Press; University of North Carolina Press; De Gruyter; Wiley-Blackwell; Kluwer Academic Publishers; University of Pennsylvania Press; Johns Hopkins University Press; Brill; Nova Science Publishers; University of Illinois Press; Duke University Press; University of Washington Press; and Edward Elgar. Scientists, wanting to get global audiences, are well advised to publish with those companies; and journal editors, wanting to get a global distribution for their journals, are equally well advised to cooperate with them.
    Keywords: Role of Economics; Role of Economists; History of Thought: Individuals; Entertainment; Media (Performing Arts, Visual Arts, Broadcasting, Publishing)
    JEL: A11 B31 L82
    Date: 2018–06–16
  18. By: Saglam, Ismail
    Abstract: In this paper, we study how a monopolistic firm with unknown costs may behave under the threat of regulation. To this aim, we integrate the self-regulation model of Glazer and McMillan (1992) with the optimal regulatory mechanism devised by Baron and Myerson (1982) for the case of asymmetric information. Simulating the equilibrium outcome of our integrated model for a wide range of parameter values, we show that the firm threatened with regulation always constrains its price; moreover, it does so more stringently if it is less efficient. If the marginal cost of the firm is sufficiently close to the highest possible value according to the beliefs of the legislators and the regulator, the price the firm charges under the threat of regulation can be even lower than the price it has to charge when it is regulated. Our simulations also reveal how the welfares of consumers and the threatened firm may be affected in the short-run and long-run by possible variations in several attributes of our model, involving the marginal cost of production, the number of legislators, each legislator's cost of proposing a regulatory bill, the size of the market, and the weight of the firm's welfare in the social welfare function.
    Keywords: Monopoly; regulation; self-regulation; asymmetric information.
    JEL: D42 D82 L51
    Date: 2018–06–03
  19. By: Steven Brakman; Harry Garretsen; Michiel Gerritse; Charles van Marrewijk
    Abstract: In contrast to empirical evidence, recent theories of cross-border mergers and acquisitions (M&As) assume perfect knowledge transfers – from high to low productivity firms – between acquirer and target. Using the Melitz (2003) model of heterogeneous firms, we develop a matching model of cross-border M&As which allows for both perfect and imperfect knowledge transfers, where the latter leads to assortative matching on productivity for firms in cross-border M&As. This is in line with stylized facts (because M&As frequently occur between firms of similar productivity) and in contrast to the proximity-concentration trade-off (in which only the most productive firms have a physical presence in foreign markets). Allowing for M&As raises the firm viability cut-off level, average productivity and welfare in our model. The welfare benefits are weaker for more imperfect knowledge transfers.
    Keywords: cross-border merger & acquisitions, knowledge transfers, productivity differences
    JEL: F20 L10
    Date: 2018

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