nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒07‒23
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Dynamic pricing for inventories with reference price effects By Chenavaz, Régis; Paraschiv, Corina
  2. Endogenous Timing in a Price-Setting Mixed Oligopoly By Haraguchi, Junichi; Hirose, Kosuke
  3. How Importers May Hedge Demand Uncertainty By Horst Raff; Nicolas Schmitt; Frank Stähler
  4. Social responsibility in a bilateral monopoly with R&D By Garcia, Arturo; Leal, Mariel; Lee, Sang-Ho
  5. Come together: firm boundaries and delegation By Alfaro, Laura; Bloom, Nick; Conconi, Paola; Fadinger, Harald; Legros, Patrick; Newman, Andrew F.; Sadun, Raffaella; Van Reenen, John
  6. Behavioral Industrial Organization By Heidhues, Paul; Köszegi, Botond
  7. Assessing Autonomous Algorithmic Collusion: Q-Learning Under Sequential Pricing By Timo Klein
  8. Signaling through public antitrust enforcement: A Generalization By Madhuparna Ganguly; Rupayan Pal
  9. Legal Issues Concerning Standard Essential Patents: International trends and Japan's strategy (Japanese) By SUZUKI Masabumi
  10. Product innovation by supplying in domestic and foreign markets By Bratti, Massimiliano; Felice, Giulia
  11. The importance of consumer multi-homing (joint purchases) for market performance: mergers and entry in media markets By Anderson, Simon P; Foros, Øystein; Kind, Hans Jarle
  12. The impact of the interchange fee regulation on merchants: evidence from Italy By Guerino Ardizzi; Michele Savini Zangrandi
  13. The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View By Françoise Vasselin
  14. Equilibrium in a dynamic model of congestion with large and small users By Robin Lindsey; André De Palma; Hugo Silva
  15. Collective Entry Deterrence and Free Riding: Airbus and Boeing in China By Patrice CASSAGNARD; Pierre REGIBEAU
  16. Nursing Homes'Competition and Distributional Implications when the Market is Two-Sided By Bardey, David; Siciliani, Luigi
  17. Markets in the Field of the State Defense Order: Opportunities and Limitations for the Development of Competition By Pavlova, Natalia; Morozov, Anton
  18. UK Electricity Market Reform and the Energy Transition: Emerging Lessons By Grubb, M.; Newbery, D.
  19. The European Single Market in Electricity: An Economic Assessment By Pollitt, M.
  20. State-Owned Enterprises: Rationales for Mergers and Acquisitions By Massimo FLORIO; Matteo FERRARIS; Daniela VANDONE

  1. By: Chenavaz, Régis; Paraschiv, Corina
    Abstract: This article presents a dynamic pricing model of a retailer selling an inventory, accounting for consumer behavior. The authors propose an optimal control model, maximizing the intertemporal profit with consumers sensitive to the selling price and to a reference price. The optimal dynamic pricing policy is solved with Pontryagin's maximum principle with a structural (general) demand function. They obtain an original pricing rule, which explicitly accounts for the impact of price and inventory on future profits. The dynamics of price do not have to imitate the dynamics of the reference price. Instead, the dynamics of price are tied to opposing effects linked to this reference price. The authors also discuss managerial implications with regards to behavioral pricing policies.
    Keywords: dynamic pricing,inventory,reference price,behavioral pricing,optimal control
    JEL: C61 D03 D40 M21 M37
    Date: 2018
  2. By: Haraguchi, Junichi; Hirose, Kosuke
    Abstract: We investigate the endogenous order of moves in a price-setting mixed oligopoly model, comprising two private firms and a public firm. We show that sequential moves emerge as the equilibrium in the observable delay game. Specifically, one of the private firms and the public firm set their prices in period 1, and the other private firm does so in period 2, in equilibrium, if their goods are not significantly differentiated. This is a clear contrast to a mixed duopoly where a simultaneous move game is a unique equilibrium. We also discuss a number of extensions and the robustness of our result.
    Keywords: Mixed Markets; Endogenous Timing; Stackelberg
    JEL: H44 L13
    Date: 2018–06–12
  3. By: Horst Raff (University of Kiel); Nicolas Schmitt (Simon Fraser University); Frank Stähler (University of Tübingen, University of Adelaide, CESifo and NoCeT)
    Abstract: This paper examines how firms deal with demand uncertainty when importing intermediate goods takes time, and orders have to be placed before the realization of demand is known. We consider two strategies to hedge this uncertainty: building up inventory of imported goods, and relying on more expensive domestic supplies to cover peak demand. Which strategy is optimal depends on the price of imported relative to domestic goods, and on the degree of demand uncertainty. We also show that there are relative import prices and degrees of demand uncertainty for which the firm chooses not to hedge uncertainty and may thus stock out. The optimal hedging strategy implies a non-monotonic relationship between firm-level output volatility and the relative import price.
    Keywords: International trade, dual sourcing, inventory, demand uncertainty, rm-level output volatility
    JEL: F12 L81
    Date: 2018–07
  4. By: Garcia, Arturo; Leal, Mariel; Lee, Sang-Ho
    Abstract: This note examines social responsibility in a linear bilateral monopoly by incorporating a cost-reducing R&D investment and investigates an endogenous timing game. We find that in the presence of R&D, the retailer always adopts social responsibility irrespective of the timing of the game, but the manufacturer adopts only with its leadership in a sequential game where it can take the first-mover advantage. We also show that two sequential choices will be subgame perfect equilibria, but the commitment to the social responsibility by manufacturer is a payoff dominance outcome.
    Keywords: social responsibility; R&D investment; fixed-timing game; endogenous-timing game
    JEL: D21 L13 L22 M14
    Date: 2018–05
  5. By: Alfaro, Laura; Bloom, Nick; Conconi, Paola; Fadinger, Harald; Legros, Patrick; Newman, Andrew F.; Sadun, Raffaella; Van Reenen, John
    Abstract: Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model’s predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.
    Keywords: vertical integration; delegation; real options; supply assurance
    JEL: D2 L2
    Date: 2018–05–01
  6. By: Heidhues, Paul; Köszegi, Botond
    Abstract: This discussion paper is a preliminary version of a survey written for the Handbook of Behavioral Economics.
    Date: 2018–06
  7. By: Timo Klein (University of Amsterdam)
    Abstract: A novel debate within competition policy and regulation circles is whether autonomous machine learning algorithms are able to tacitly collude on prices. Using a general framework, we show how autonomous Q-learning -- a simple but well-established machine learning algorithm -- is able to achieve supracompetitive profits in a stylized oligopoly environment with sequential price competition. This occurs without any communication or explicit instructions to collude, suggesting tacit collusion. The intuition is that the algorithm is able to learn and exploit the dynamics of Edgeworth price cycles, where periodic price increases reset a gradual downward spiral of price competition. The general framework used can guide future research into the capacity of various algorithms to collude in environments that are less stylized or more case-specific.
    Keywords: pricing algorithms; algorithmic collusion; machine learning; Q-learning; sequential pricing
    JEL: K21 L13 L49
    Date: 2018–06–21
  8. By: Madhuparna Ganguly (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: This note shows that the argument of Saljanin(2017) [Saljanin, 2017. "Signaling through public antitrust enforcement" , Economics Letters 169, 4 - 6] that public antitrust enforcement complements private investment is robust to allowing public investment in antitrust enforcement to be productive. However, unlike as in the case of unproductive public investment, over investment in public antitrust enforcement does not necessarily signal that the government is pro-competition: in pooling equilibria either only the anti-competition government or both types of government over invests, whereas in the separating equilibrium only the pro-competition government over invests.
    Keywords: Private and public enforcement, Signaling, Antitrust
    JEL: H1 H4 K1 L1 L4
    Date: 2018–04
  9. By: SUZUKI Masabumi
    Abstract: This paper analyzes legal disputes and policy responses in major countries (Japan, Europe, United States, and China) in regard to standard essential patents (SEPs) with fair, reasonable, and non-discriminatory (FRAND) declarations, and examines Japan's strategy based on these analyses. In particular, recent court decisions in the European Union (EU), Germany, United States, and China, as well as competitive policy and other policy measures in Japan, United States, and EU are analyzed. In light of this, the paper discusses the legal principles that restrict the enforcement of SEPs and other specific issues including (i) how to negotiate between the patentee and the standard implementers, (ii) how to calculate the royalty that meets the FRAND conditions, (iii) how to settle disputes, and (iv) legal consequences of transfer of SEPs. The paper focuses on the legal principles that restrict the enforcement of SEPs, highlighting the existence of two approaches seen internationally: the contract law approach and the competition law approach, and then analyzing the differences between the two approaches. The paper concludes with a proposal that Japan adopts the contract law approach.
    Date: 2018–05
  10. By: Bratti, Massimiliano (European Commission – JRC); Felice, Giulia (Politecnico di Milano)
    Abstract: This paper uses European firm-level survey data to provide some robust empirical evidence that suppliers engaged in production to order (PTO) for foreign firms are more likely to introduce product innovations than those engaged in PTO for domestic firms, even when differences in size, R&D and productivity are controlled for. We propose a demand-driven theoretical explanation based on the interactions between an upstream producer of a specialized input and a downstream producer in a framework of incomplete contracts, agency frictions, and imperfect information.
    Keywords: buyer, supplier, product innovation, production to order, foreign market
    JEL: D21 D22 F21 L23 O31
    Date: 2018–06
  11. By: Anderson, Simon P; Foros, Øystein; Kind, Hans Jarle
    Abstract: Consumer "multi-homing" (watching two TV channels, or buying two news magazines) has surprisingly important effects on market equilibrium and performance in (two-sided) media markets. We show this by introducing consumer multi-homing and advertising-finance into the classic circle model of product differentiation. When consumers multi-home (attend more than one platform), media platforms can charge only incremental-value prices to advertisers. Entry or merger leaves consumer prices unchanged under consumer multi-homing, but leaves advertiser prices unchanged under single-homing: multi-homing flips the side of the market on which platforms compete. In contrast to standard circle results, equilibrium product variety can be insufficient under multi-homing.
    Keywords: circle model; equilibrium product variety; media platforms; multi-homing; two-sided markets; media platforms; incremental-value prices; merger; single-homing
    Date: 2018–06
  12. By: Guerino Ardizzi (Bank of Italy); Michele Savini Zangrandi (Bank of Italy)
    Abstract: Interchange fees (IF) are fees that a cardholder’s bank (issuer) receives from the merchant’s bank (acquirer) when a card payment is executed. Interchange fees are an important part of the fees charged to merchants by acquirers. Because of their level and fragmentation, interchange fees can restrict competition and have thus been regulated in the EU. The Interchange Fee Regulation (IFR) came into effect for all EU member states in 2015 and sets maximum limits on interchange fees. By using a panel of Italian banks we assess the impact of introducing the IF regulation on the fees that acquiring banks charge to merchants (merchant fees), and on the merchants’ acceptance of card-based payments. We find that, in line with the regulatory intent, the ceiling imposed on interchange fees has led to a sizeable drop in merchant fees and to an increase in the acceptance of card payments, measured as transactions per terminal.
    Keywords: interchange fee, payment card, acquiring, point of sale, banking panel data
    JEL: E41 G14 G21 G38 L14 L42 L51
    Date: 2018–06
  13. By: Françoise Vasselin (MATISSE - Modélisation Appliquée, Trajectoires Institutionnelles et Stratégies Socio-Économiques - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: A payment platform provides mobile money (M-money) to buyers who can also use cash to transact. An exogenous fraction of " traditional sellers " only accepts cash and creates no partnership with buyers while the remainder fraction consists of " mobile sellers " who accept M-money only and create partnerships with buyers to reduce search frictions. So, buyers without a partner must use cash and buyers with a partner must use M-money to trade. Buyers without a partner may hold cash, M-money, both monies or none while buyers with a partner always choose to hold M-money only or both monies. Hence, we obtain different equilibria where M-money always circulates, alone or in addition to cash. So, the partnership is a valuable coordination mechanism that makes M-money circulation permanent. Our model can explain why it may be useful to implement prescribed usages to trigger the adoption of a new payment instrument that aims to replace cash and why retailers implement partnerships through loyalty programs before the launching of their own M-money application. However, cash disappears only if traditional sellers have almost all disappeared.
    Keywords: cash,mobile payments,search theory,partnerships,investment cost,mobile money
    Date: 2018–03–03
  14. By: Robin Lindsey (University of Alberta [Edmonton]); André De Palma (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Hugo Silva (Instituto Superior Técnico - Technical University of Lisbon)
    Abstract: Individual users often control a significant share of total traffic flows. Examples include airlines, rail and maritime freight shippers, urban goods delivery companies and passenger transportation network companies. These users have an incentive to internalize the congestion delays their own vehicles impose on each other by adjusting the timing of their trips. We investigate simultaneous trip-timing decisions by large users and small users in a dynamic model of congestion. Unlike previous work, we allow for heterogeneity of trip-timing preferences and for the presence of small users such as individual commuters and fringe airlines. We derive the optimal fleet departure schedule for a large user as a best-response to the aggregate departure rate of other users. We show that when the vehicles in a large user's fleet have a sufficiently dispersed distribution of desired arrival times, there may exist a pure-strategy Nash-equilibrium (PSNE) in which the large user schedules vehicles when there is a queue. This resolves the problem of non-existence of a PSNE identified in Silva et al. (2017) for the case of symmetric large users. We also develop some examples to identify under what conditions a PSNE exists. The examples illustrate how self-internalization of congestion by a large user can affect the nature of equilibrium and the travel costs that it and other users incur.
    Keywords: departure-time decisions,bottleneck model,congestion,schedule delay costs,large users,user heterogeneity,existence of Nash equilibrium $
    Date: 2018–04–06
  15. By: Patrice CASSAGNARD; Pierre REGIBEAU
    Abstract: We propose a simple two-stages duopoly game where two firms produce an homogeneous good to satisfy the demand in a foreign market. First they decide whether to serve this market with exports or with foreign direct investments and then they play a one-shot Cournot-Nash game. This game has been made even more complex by the fact that foreign direct investments induce technological spillovers which imply the possible entry of a third firm. From the complete characterization of the equilibria we show that a small disadvantage of one of the both firms can conduce this firm to invest alone in the foreign country rather than export. In this case, the investment is motivated by the fact that the dissipation risk of both firm-specific assets to a local potential entrant -triopoly payoffs- is beared by the two firms whereas the gain -increased market share in duopoly- is captured by the firm which chooses to invest abroad. We have in mind the competition between Airbus and Boeing in China.
    Keywords: Entry Deterrence ; FDI ; Export ; Cournot duopoly ; Spillovers ; Airbus and Boeing
    Date: 2018–07
  16. By: Bardey, David; Siciliani, Luigi
    Abstract: We investigate the effect of competition in the nursing homes sector with a two-sided market approach. More precisely, we investigate the distributional implications across the three key actors involved (residents, nurses and nursing homes) that arise from the two- sidedness of the market. Within a Hotelling set up, nursing homes compete for residents and for nurses, who provide quality to residents, by setting residents price and nurses wage. Nurses are assumed altruistic and therefore motivated to provide quality. The market is two- sided because: i) a higher number of residents a¤ects nurses workload, which affects their willingness to provide labour supply; and ii) a higher number of nurses affects residents? quality through a better matching process and by relaxing nurses time constraints. Our key findings are that i) the two-sidedness of the market leads to higher wages for nurses, which makes the nurses better off; ii) this is then passed to residents in the form of higher prices, which makes residents worse off; iii) nursing homes profits are instead unaffected. In contrast, when nurses wages are regulated, the two-sidedness of the market implies a transfer between residents and nursing homes. When residents price are regulated, it implies a transfer between nurses and nursing homes. These results are robust to institutional settings which employ pay-for-performance schemes (that reward either nursing homes or nurses): the two-sidedness of the market is strengthened and residents are still worse off.
    Keywords: nursing homes; competition; two-sided markets; distribution
    JEL: I18
    Date: 2018–06
  17. By: Pavlova, Natalia (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Morozov, Anton (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: In the context of the development of measures to improve the efficiency of the state defense order, the question arises as to how much the development of competition can help in this: in the whole sphere of the state defense order there are prerequisites for developing competition, is it possible to define the boundaries beyond which the development of competition becomes inexpedient and whether the prospect of development of competition in the long-term period of costs and possible net losses in the short-term period is worth? In order to obtain answers to these questions, theoretical and empirical studies on the effects of competition in the defense sphere are systematized. Criteria have been singled out on the basis of which it is possible to typify defense products markets from the point of view of opportunities and prospects for the development of competition: buyer dependence, information openness, degree of production regulation, availability of analogues and potential product substitutes, technological cycle features, regularity of supplies and product lifetime. A methodology for assessing the prospects for competition in markets in the sphere of state defense order is proposed in accordance with the specified criteria.
    Keywords: competitive policy, state defense order, military-industrial complex
    Date: 2018–06
  18. By: Grubb, M.; Newbery, D.
    Abstract: The 2013 Electricity Market Reform (EMR) was a response to problems of delivering reliability with a growing share of renewables in its energy only market. Four EMR instruments combined to revolutionise the sector; stimulating unprecedented technological and structural change. Competitive auctions for both firm capacity and renewable energy have seen prices far lower than predicted and the entry of unexpected new technologies. A carbon price floor displaced coal, whose share fell from 46% in 1995 to 7% in 2017, halving CO2. Renewables grew from under 4% in 2008 to 22% by 2017, projected at 30+% by 2020 despite a political ban on onshore wind. Neither the technological nor regulatory transitions are complete, and the results to date highlight other challenges, notably to transmission pricing and locational signals. EMR is a step forwards, not backwards; but it is not the end of the story.
    Keywords: Electricity market design, capacity auctions, renewables support
    JEL: L94 D44
    Date: 2018–06–19
  19. By: Pollitt, M.
    Abstract: The European single market in electricity has been promoted vigorously by the European Commission since 1996. We discuss how national electricity markets and cross border electricity markets have been reshaped by the process. We examine the Commission’s own work on evaluating the benefits of the single market. We look at the wider evidence of impact on prices, security of supply, the environment and on innovation. We conclude that the institutional changes are extensive and there has been significant market harmonisation and integration. However, the measured benefits are difficult to identify, but likely to be small. This is partly because over the same period there has been a large rise in subsidised renewable generation driven by the decarbonisation agenda.
    Keywords: electricity single market, decarbonisation
    JEL: L94
    Date: 2018–05–24
  20. By: Massimo FLORIO (Department of Economics, Management and Quantitative methods, Università degli Studi di Milano, Italy); Matteo FERRARIS (Istituto Superiore Mario Boella, Turin, Italy); Daniela VANDONE (Department of Economics, Management and Quantitative methods, Università degli Studi di Milano, Italy)
    Abstract: The paper contributes to the empirical literature on M&A deals performed by SOEs with a detailed analysis of the reported rationales from a sample of SOE-led acquisitions over the last decade. The sample includes 355 worldwide M&A deals performed by SOEs as acquirers over the period 2002-2012. The data set was obtained by combining firm-level information from two sources, Zephyr and Orbis (Bureau Van Dijk). The analysis is on a case-by-case basis for the rationales of the sample. Overall, the most important message arising from our analysis is that rescue of firms in financial distress is a relatively minor one role played by contemporary SOEs in spite of the Great Recession, while shareholder value maximization and long term strategic goals are more frequently the objective of the observed deals.
    Keywords: State-owned enterprises, M&As, nationalization, privatization
    JEL: L32 L33 G34
    Date: 2018–01

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