nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒07‒30
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Managing Competition on a Two-Sided Platform By Paul Belleflamme; Martin Peitz
  2. Demand uncertainty, product differentiation, and entry timing under spatial competition By Takeshi Ebina; Noriaki Matsushima; Katsumasa Nishide
  3. Optimal Cross-Licensing Arrangements: Collusion versus Entry Deterrence By Choi, Jay Pil; Gerlach, Heiko
  4. Import competition and vertical integration: Evidence from India By Stiebale, Joel; Vencappa, Dev
  5. Efficiency Wages in a Cournot-Oligopoly By Marco de Pinto; Laszlo Goerke
  6. A more general model of price complexity By Chioveanu, Ioana
  7. The Multiplier Effect in Two-Sided Markets with Bilateral Investments By Benny Moldovanu; Deniz Dizdar; Nora Szech
  8. Monopolistic Competition with GAS Preferences By Paolo Bertoletti; Federico Etro
  9. Endogenous Sunk Cost, Scale Economies, and Market Concentration By Yuichiro Matsumoto
  10. Technology Adoption in a Declining Market By Hagspiel, V.; Huisman, Kuno; Kort, Peter; Lavrutich, Maria; Nunes, Claudia; Pimentel, Rita
  11. Dynamic Price Competition in the Air Transport Market: An Analysis on Long-Haul Routes By Catherine Muller-Vibes; Chantal Roucolle; Miguel Urdanoz
  12. The HSR competition in Italy: How are the regulatory design and practices concerned? By Christian Desmaris; Fabio Croccolo
  13. Testing the quiet life hypothesis in the African banking industry By Asongu, Simplice A; Odhiambo, Nicholas M.
  14. Secrets for sale? Innovation and the nature of knowledge in an early industrial district: the Potteries, 1750-1851 By Lane, Joseph
  15. Retail Prices: New Evidence From Argentina By Daruich, Diego; Kozlowski, Julian
  16. Who benefits when inertia is reduced? Competition, quality and returns to skill in health care markets By Fleitas, Sebastián
  17. Measuring Airline Networks: Comprehensive Indicators By Chantal Roucolle; Tatiana Seregina; Miguel Urdanoz
  18. Assessing competition on Maritime Routes in the Liner Shipping Industry through multivariate analysis By Nikola Kutin; Patrice Guillotreau; Thomas Vallée
  19. Plant Breeders' Rights, Patents, and Incentives to Innovate By Adrien Hervouet; Corinne Langinier

  1. By: Paul Belleflamme; Martin Peitz
    Abstract: On many two-sided platforms, users on one side not only care about user participation and usage levels on the other side, but they also care about participation and usage of fellow users on the same side. Most prominent is the degree of seller competition on a platform catering to buyers and sellers. In this paper, we address how seller competition affects platform pricing, product variety, and the number of platforms that carry trade.
    Keywords: Network effects, two-sided markets, platform competition, intermediation, pricing, imperfect competition
    JEL: D43 L13 L86
    Date: 2018–07
  2. By: Takeshi Ebina; Noriaki Matsushima; Katsumasa Nishide
    Abstract: We investigate the entry timing and location decisions under market size uncertainty with Brownian motions in a continuous-time spatial duopoly competition. We show the following results. The entry threshold of the follower non-monotonically increases in volatility, implying that the leader's monopoly periods get longer with volatility. However, the leader is more likely to increase the degree of product differentiation as the volatility rises. A larger entry cost asymmetry between the firms places the leader closer to the edge in a preemption equilibrium although such an asymmetry places the leader closer to the center in a sequential equilibrium.
    Date: 2017–07
  3. By: Choi, Jay Pil (Michigan State University, Department of Economics); Gerlach, Heiko (University of Queensland)
    Abstract: This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.
    Keywords: cross-licensing arrangements; patent litigation; collusion; entry deterrence
    JEL: D43 L13 O30
    Date: 2018–07–10
  4. By: Stiebale, Joel; Vencappa, Dev
    Abstract: Recent theoretical contributions provide conflicting predictions about the effects of product market competition on firms' organizational choices. This paper uses a rich firm-product-level panel data set of Indian manufacturing firms to analyze the relationship between import competition and vertical integration. Exploiting exogenous variation from changes in India's trade policy, we find that foreign competition, induced by falling output tariffs, increases backward vertical integration by domestic firms. The effects are concentrated in rather homogenous product categories, among firms that mainly operate on the domestic market, and in relatively large firms. Our results are robust towards different sub-samples and hold with or without conditioning on various firm- and product-level characteristics including input tariffs and firm-year fixed effects. We also provide evidence that vertical integration is associated with higher physical productivity, lower marginal costs and rising markups.
    Keywords: Trade Liberalization,Competition,Vertical Integration,Innovation
    JEL: F14 L25 L22 L23
    Date: 2018
  5. By: Marco de Pinto (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University); Laszlo Goerke (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: In a Cournot-oligopoly with free but costly entry and business stealing, output per firm is too low and the number of competitors excessive, assuming labor productivity to depend on the number of employees only or to be constant. However, a firm can raise the productivity of its workforce by paying higher wages. We show that such efficiency wages accentuate the distortions occurring in oligopoly. Specifically, excessive entry is aggravated and the welfare loss due to market power rises
    Keywords: Oligopoly, Efficiency Wages, Excessive Entry, Welfare
    JEL: D43 J31 L13
    Date: 2018–07
  6. By: Chioveanu, Ioana
    Abstract: This paper considers a model of competition in prices and price complexity levels, which accommodates concave and convex confusion technologies. In symmetric equilibrium, the probability of using high complexity increases in the number of firms. In the limit, as the number of competitors goes to infinity, firms use high complexity almost surely but the impact on consumer welfare depends on the characteristics of the confusion technology. Specifically, industry profits converge to the highest level with concave confusion technologies and to the lowest level when with convex confusion technologies. An improvement in consumer sophistication increases consumer welfare but does not reduce market complexity.
    Keywords: price complexity, confusion technology, oligopoly markets
    JEL: L13
    Date: 2018–06–18
  7. By: Benny Moldovanu; Deniz Dizdar; Nora Szech
    Abstract: Agents in a finite two-sided market are matched assortatively, based on costly investments. Besides signaling private, complementary types, investments generate direct benefits for partners. We explore quantitative properties of the equilibrium investment behavior. The bilateral external benefits induce an investment multiplier effect. This multiplier effect depends in a complex way on agents’ uncertainty about their own rank and about the types and investments of potential partners. We characterize how the multiplier effect hinges on market size, and how it interacts with other important factors such as the costs of investment and the signaling incentives induced by competition.
    Keywords: two-sided matching, signaling, investment, multiplier effect
    JEL: C78 D44 D82
    Date: 2018–07
  8. By: Paolo Bertoletti (Department of Economics and Management, University of Pavia); Federico Etro (Ca' Foscari University, University of Florence and C.R.A.)
    Abstract: We study monopolistic competition equilibria with free entry under symmetric Generalized Additively Separable preferences, whose demand systems feature a single aggregator of prices or quantities. They include Gorman-Pollak preferences (which nest directly and indirectly additive preferences, a homothetic family and other preferences) and implicit CES preferences. With heterogeneous ?rms our extension of the Melitz model produces a variety of pricing and selection effects, and allows us to solve the social planner problem. We illustrate the inefficiency of the market equilibrium for a new speci?cation of generalized translated power preferences, and show its optimality for the entire class of implicit CES preferences.
    Keywords: Monopolistic competition, GAS preferences, Heterogeneous fi?rms
    JEL: D11 D43 L11
    Date: 2018–07
  9. By: Yuichiro Matsumoto (Osaka University)
    Abstract: This paper offers a theoretical explanation of the recent sales concentration in the U.S. economy. The model is based on in-house R&D, which is involved in scale economies. An R&D subsidy helps the expansion of larger firms and allows them to take higher markups. Thus, it induces a concentrated market structure.
    Keywords: Endogenous Sunk Cost; Firm Size Distribution; Heterogenous Firms; Markup; Quality Upgrading
    JEL: D61 L11 L13 L16 O3
    Date: 2018–07
  10. By: Hagspiel, V. (Tilburg University, Center For Economic Research); Huisman, Kuno (Tilburg University, Center For Economic Research); Kort, Peter (Tilburg University, Center For Economic Research); Lavrutich, Maria (Tilburg University, Center For Economic Research); Nunes, Claudia; Pimentel, Rita
    Abstract: Rapid technological developments are inducing the shift in consumer demand from existing products towards new alternatives. When operating in a declining market, the profitability of incumbent firms is largely dependent on the ability to correctly time the introduction of product innovations. This paper contributes to the existing literature on technology adoption by considering the optimal innovation investment in the context of the declining market. We study the problem of a firm that has an option to undertake the innovation investment and thereby either to add a new product to its portfolio (add strategy) or to replace the established product by the new one (replace strategy). We are able to quantify the value of the option to adopt a new technology, as well as the optimal timing to exercise it. We find that it can be optimal for the firm to innovate not only because of the significant technological improvement, but also due to demand saturation. In the latter case profits of the established product may become so low that the firm will adopt a new technology even if the newest available innovation has not improved for some time. This way, our approach allows to explicitly account for the effect of a decline in the established market on technology adoption. Furthermore, we find that under certain conditions an inaction region exists, in which the firm does not innovate, while for lower technology levels it applies the add strategy and for higher technology levels the replace strategy.
    Keywords: Technology adoption; Declining demand; Product innovation; Dynamic programming
    JEL: C61 D81 O33
    Date: 2018
  11. By: Catherine Muller-Vibes (Toulouse Business School); Chantal Roucolle (ENAC - Ecole Nationale de l'Aviation Civile); Miguel Urdanoz (Toulouse Business School)
    Abstract: The pricing policy of airlines is based on revenue management. Revenue management analysts daily observe competitive prices and strategically adjust their own tariffs. One could expect this behavior to lead to a sound homogenization of airline prices evolution while competing on a market. We test empirically whether airline pricing strategies evolve on a similar manner, on a particular set of long-haul routes. Using new and original data including information on ticket prices paid, purchasing and departure dates, we estimate a model for the effect of dynamic factors on the evolution of ticket prices, based on economic theory. We use a 3 rd degree polynomial regression between prices and number of days to departure for each airline operating on the routes, and control for key revenue management variables, competition factors and individual effects. Our results show that competing airlines pricing strategies are statistically distinct during their ticket sale period. Airlines maximize their profits by sequentially increasing or decreasing their prices, but they do so in a non-synchronized fashion, and with different magnitudes.
    Keywords: Panel data,Air transportation, Price discrimination, Revenue management
    Date: 2018–07–02
  12. By: Christian Desmaris (IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon, LAET - Laboratoire Aménagement Économie Transports - UL2 - Université Lumière - Lyon 2 - ENTPE - École Nationale des Travaux Publics de l'État - CNRS - Centre National de la Recherche Scientifique); Fabio Croccolo (Dirigente Generale - Ufficio per la regolazione dei Servizi Ferroviari - Ministero delle Infrastrutture e Trasporti)
    Abstract: Italy is nowadays the only European country to have organized a head-on competition on its whole high speed railway (HSR) network. This paper discusses the issues of this new market structure for the Italian Rail Regulator, both in terms of regulatory design and economic regulation practices. Such HSR competition and regulation took place in a very specific and ambivalent context (including declining Italian railway demand, negative European macroeconomic environment), together with a new ambitious and innovating private competitor (NTV) and strong reactions from the incumbent (Trenitalia). The Italian Rail Regulator's interventions look like more or less a set of everyday life decisions and empirical trade-off than a duly achieved economic doctrine and policy. The level of access charges seems to be a strategic variable to enlarge the scope for profitable entry in Italy. However, this new context still does not answer the question whether HSR operators reach their economic equilibrium in open access competition.
    Keywords: Rail market,Regulation,High-speed,Open access,Competition,Italy
    Date: 2018
  13. By: Asongu, Simplice A; Odhiambo, Nicholas M.
    Abstract: The Quiet Life Hypothesis (QLH) is the pursuit of less efficiency by firms. In this study, we assess if powerful banks in the African banking industry are increasing financial access. The QLH is therefore consistent with the pursuit of financial intermediation inefficiency by large banks. To investigate the hypothesis, we first estimate the Lerner index. Then, using Two Stage Least Squares, we assess the effect of the Lerner index on financial access proxied by loan price and loan quantity. The empirical evidence is based on a panel of 162 banks from 42 African countries for the period 2001-2011. The findings support the QLH, although quiet life is driven by the below-median Lerner index sub-sample. Policy implications are discussed.
    Keywords: Financial access; Bank performance; Africa
    Date: 2018–05–07
  14. By: Lane, Joseph
    Abstract: This paper investigates innovation and knowledge in the North Staffordshire Potteries during the eighteenth and early nineteenth centuries. It evaluates new empirical evidence of formal and informal patterns of knowledge creation and dissemination in order to highlight tensions between forms of open knowledge sharing and the appropriation of returns to innovative activity. By presenting new patent data it shows that formal protection was not a widespread strategy in the industry. It uses patent specifications to determine what specific types of knowledge were, and could be, patented in the district, and by whom. A range of sources are used to demonstrate evidence of innovation and knowledge appropriation outside of the patent system. The paper identifies distinct types of knowledge in the industry and shows how differences in these led to a range of strategies being employed by potters, with the role of secrecy highlighted as a particularly prevalent and effective strategy.
    Keywords: Industrial Revolution; Intellectual Property; Patents; Innovation; Earthenware; Industrial District; Technology; Knowledge
    JEL: D83 L61 N63 N73 N91 O34
    Date: 2018–07
  15. By: Daruich, Diego (New York University); Kozlowski, Julian (Federal Reserve Bank of St. Louis)
    Abstract: We create a new database of retail prices in Argentina with over 10 million observations per day. Our main novel finding is that, different from Kaplan, Menzio, Rudanko, and Trachter (2016), chains, rather than stores, explain most of the price variation in our data. We show this in three ways: (a) Even though chains have on average 158 stores, there are on average less than 2.5 unique prices per product by chain; (b) Among products that change prices in one store, the probability that other stores of the same chain also change the price of the same product in the same day is 2.4 times the probability for other stores of any chain; and (c) A formal variance decomposition shows that only 28% of the price dispersion (for the same product, day, and city) is explained by stores setting different prices within a chain. This finding is relevant for retail-pricing theories since there are significantly fewer chains than stores, which matters for the degree of competition in the market. This paper also studies the heterogeneity in price changes and price dispersion across product categories.
    Keywords: Retail Prices; Price Adjustment; Price Dispersion
    JEL: D40 E31 L11
    Date: 2018–07–13
  16. By: Fleitas, Sebastián
    Abstract: Increased competition may lead to incentives for firms to increase quality by incorporating higher quality inputs. This is particularly relevant in health care markets, since the supply of high quality physicians is relatively inelastic in the short run. Therefore, an increase in the relative demand for high-quality physicians could lead to an increase in their relative wages without increasing their total hours of work. Using a policy change in the Uruguayan health care system, I assess the effects of increased competition via lock-in reductions on a market for inputs. I leverage the facts that insurance companies, hospitals and physician services are completely vertically integrated in Uruguay and that in 2009 the government generated an exogenous change in the regulated mobility regime, increasing the competition in the market and providing incentives to increase quality. I combine administrative records on wages and hours of work in all hospitals for all specialists with data on the scores that specialists obtained in the test they must take to be admitted into the medical specialty graduate school, which I use as an exogenous measure of their quality. Consistent with the idea of an inelastic relative supply in the short run, I show that the increased competition shifted the relative demand for high-quality medical specialists, increasing the returns to skill. I do not find strong evidence of an increase in quality, approximated as relative hours of high-skill versus low-skill physicians
    Keywords: Medición de impacto, Salud,
    Date: 2018
  17. By: Chantal Roucolle (ENAC - Ecole Nationale de l'Aviation Civile); Tatiana Seregina (ENAC - Ecole Nationale de l'Aviation Civile, Toulouse Business School - ESC Toulouse); Miguel Urdanoz (Toulouse Business School - Toulouse Business School)
    Abstract: The literature on airlines presents few studies analyzing the airlines network evolution and its impact on prices, costs or profitability. We believe that this gap is due to the difficulty of capturing the network complexity in a simple manner. This paper proposes new simple and continuous indicators to measure the airlines network structure. The methodology to build them is based on graph theory and principal component analysis. We apply this approach to the US domestic market for 2005-2015, and obtain three network indicators. The first one measures how close the network is to a hub-and-spoke structure. The second indicator measures the airline's ability to provide alternative routes. The third indicator captures the network size. We analyze how the carriers' network evolution can be described by those indicators. We show that low-cost carriers (LCCs) and legacy carriers' network choices differ for the second indicator, while our results exhibit no difference in strategies for the other two indicators. We also show that economic conditions affect differently the three indicators and the magnitude of the impact depends on the airline type. Highlights: ● Combine graph theory and principal component analysis ● Obtain three indicators to characterize airline network structure for US domestic market ● Compare these indicators for low-cost and legacy carriers ● Estimate evolution in the indicators over time ● Analyze the impact of the main US mergers on the network structure
    Keywords: Airline,Graph theory,Hub,Network,Principal Component Analysis (PCA)
    Date: 2017–07–05
  18. By: Nikola Kutin (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes, National University of Management); Patrice Guillotreau (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes); Thomas Vallée (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)
    Abstract: The current paper investigates the level of competition on maritime routes in the liner shipping industry by applying multivariate and cluster analyses on maritime indicators. We use a dataset which includes maritime routes between 153 ports for the year 2014, described by several characteristics regarding the number of operators, the number of ships and trips, the size of ships, the sea distance, the bilateral countries' connectivity. Some clusters of maritime routes are identified along two key components, a first one related to the number of competing firms, and a second one where the average size of firms is positively correlated with distance. The first one indicates somehow the degree of competition while the second one is related to the efficiency of carriers. Another way of looking at competition is to consider the region-based trade and to see whether indicators respond differently from region to region.
    Keywords: multivariate analysis,clusters,competition,shipping
    Date: 2018–07–03
  19. By: Adrien Hervouet (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes); Corinne Langinier (University of Alberta [Edmonton])
    Abstract: Both patents and Plant Breeders' Rights (PBRs) can protect plant innovations. Unlike patents, PBRs allow farmers to save part of their harvest to replant. We analyze the impact of this exemption on prices and innovation in a monopoly setting. In a PBR regime, a monopolist might let farmers self-produce, and he over-or under-invests compared to socially optimal investments. Under a PBR and patent regime, large (small) innovations are more likely to be patented (protected with PBRs), but self-production is not completely prevented, private investments are often socially optimal, and incentives to innovate are boosted. However, overall effects on welfare are ambiguous.
    Keywords: seed saving,plant breeders' rights,durable good,innovation,patents
    Date: 2018

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