nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒09‒17
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Market Power and Welfare in Asymmetric Divisible Good Auctions By Manzano, Carolina; Vives, Xavier
  2. Drip pricing and its regulation: Experimental evidence By Rasch, Alexander; Thöne, Miriam; Wenzel, Tobias
  3. Let's lock them in: Collusion under consumer switching costs By Fourberg, Niklas
  4. Pricing behavior in partial cartels By Odenkirchen, Johannes
  5. Private information, price discrimination, and collusion By Peiseler, Florian; Rasch, Alexander; Shekhar, Shiva
  6. Price Transmission At The Micro-level: What Accounts For The Heterogeneity? By Lan, Hao; Lloyd, Tim; McCorriston, Steve; Morgan, Wyn
  7. Avoiding Lemons in Search of Peaches: Designing Information Provision By Gardete, Pedro M.; Hunter, Megan
  8. Asset Bubbles and Product Market Competition By Francisco Queiros
  9. Market Expanding or Market Stealing? Platform Competition in Bike-Sharing By Guangyu Cao; Ginger Zhe Jin; Li-An Zhou
  10. Spatial Competition In A Mixed Market - The Case Of Milk Processors By Tribl, Christoph; Morawetz, Ulrich; Salhofer, Klaus
  11. Clear and Close Competitors? : On the Causes and Consequences of Bilateral Competition between Banks By de Haas, Ralph; Lu, Liping; Ongena, S.R.G.
  12. Competition and Regulation with Smart Grids By Marina Bertolini; Marco Buso; Luciano Greco
  14. Bertrand Competition in Oligopsonistic Market Structures - the Case of the Indonesian Rubber Processing Sector By Kopp, Thomas

  1. By: Manzano, Carolina (Rovira i Virgili University); Vives, Xavier (IESE Business School)
    Abstract: We analyze a divisible good uniform-price auction that features two groups each with a finite number of identical bidders. Equilibrium is unique, and the relative market power of a group increases with the precision of its private information but declines with its transaction costs. In line with empirical evidence, we .nd that an increase in transaction costs and/or a decrease in the precision of a bidding group.s information induces a strategic response from the other group, which thereafter attenuates its response to both private information and prices. A "stronger" bidding group -which has more precise private information, faces lower transaction costs, and is more oligopsonistic- has more market power and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payoff asymmetries. Market power and the deadweight loss may be negatively associated.
    Keywords: demand/supply schedule competition; private information; liquidity auctions; Treasury auctions; electricity auctions;
    JEL: D44 D82 E58 G14
    Date: 2017–01–16
  2. By: Rasch, Alexander; Thöne, Miriam; Wenzel, Tobias
    Abstract: We experimentally examine the effects of drip pricing on seller strategies and buyer behavior as well as the implications for regulation. Sellers set two prices: a base price and a drip price. At first, buyers only observe the base prices and make a tentative purchase decision. Revealing the sellers' drip prices, however, comes at a cost. We find that sellers only compete in base prices and set the highest possible drip price. This makes the base price a reliable indicator for the lowest total price, and few consumers invest in drip-price search. A comparison with Bertrand competition reveals significant effects: With drip pricing, consumer surplus is lower, and seller profits are higher. When there is uncertainty over possible drip sizes, sellers also compete over drips, and consumers more frequently fail to identify the cheapest offer. Bertrand competition also leads to higher consumer surplus and lower firm profits in this case. Hence, our results point to positive effects of drip-price regulation.
    Keywords: Drip pricing,Search,Regulation
    JEL: L13 M3 C9
    Date: 2018
  3. By: Fourberg, Niklas
    Abstract: Consumer switching costs cause the market demand of consumers who already bought a supplier's product to be less elastic while they simultaneously increase competition for new consumers. I study the effect of this twofold pricing incentive on firms' price setting behavior in a 2x2 factorial design experiment with and without communication and under present and absent switching costs. For Bertrand duopolies consumer switching costs reduce the price level vis-à-vis new consumers but do not affect price levels towards old consumers. Markets are overall less tacitly collusive which translates into higher incentives to collude explicitly. Text-mining procedures reveal linguistic characteristics of the communicated content which correlate with market outcomes and communication's effectiveness. The results have implications for antitrust policy, especially for the focus of cartel screening.
    Keywords: Switching Costs,Cartels,Collusion,Experiments
    JEL: C7 C9 L13 L41
    Date: 2018
  4. By: Odenkirchen, Johannes
    Abstract: We analyze the pricing behavior of firms when explicit partial cartels have formed in experimental markets through communication. Using a repeated, asymmetric capacity constraint price game, we show that, in line with theory, a partial cartel is sufficient to increase market prices for all firms. Moreover, we find that prices of cartel insiders and outsiders are not necessarily on the same level what contradicts common theoretical predictions. This is because communication allows cartel members to overcome a potential coordination problem and enables an equilibrium in (joint) mixed strategies to emerge. The results therefore underline the importance of communication in explicit cartels and the resulting market outcomes.
    Keywords: partial cartels,explicit collusion,umbrella effects,experiments
    JEL: C92 D03 L13 L41
    Date: 2018
  5. By: Peiseler, Florian; Rasch, Alexander; Shekhar, Shiva
    Abstract: We analyze firms' ability to sustain collusion in a setting in which horizontally differentiated firms can price-discriminate based on private information regarding consumers' preferences. In particular, firms receive private signals which can be noisy (e.g., big data predictions). We find that there is a non-monotone relationship between signal quality and sustainability of collusion. Starting from a low level, an increase in signal precision first facilitates collusion. However, there is a turning point from which on any further increase renders collusion less sustainable. Our analysis provides important insights for competition policy. In particular, a ban on price discrimination can help to prevent collusive behavior as long as signals are sufficiently noisy.
    Keywords: Big Data,Collusion,Loyalty,Private Information,Third-Degree Price Discrimination
    JEL: L13 D43 L41
    Date: 2018
  6. By: Lan, Hao; Lloyd, Tim; McCorriston, Steve; Morgan, Wyn
    Abstract: We use high-frequency scanner data to estimate product-specific price transmission elasticities across product types, between national brands and private labels and across retail chains in the UK. The results provide new insights into the determinants of price transmission including the role of vertical control in the retail chain, the elasticity of retail mark-ups and retailer market power. Using data on 106 orange juice products over 130 weeks for 7 UK retail chains, we highlight significant variation in price transmission bychain and that the characteristics of pricing behaviour and differences in vertical control across are important determinants of price transmission.
    Keywords: Industrial Organization
    Date: 2017–08–29
  7. By: Gardete, Pedro M. (Stanford University); Hunter, Megan (Stanford University)
    Abstract: The increasing amount of data available to consumers has most likely aided in decision-making. However, it has also created an opportunity for sellers to design the information landscape that consumers navigate. This paper develops a novel search model for alternatives with multiple characteristics, and reports estimation results for an online used car seller. The model allows search over alternatives with multiple characteristics with arbitrary marginal distributions and correlation structures. For example, more expensive vehicles may feature fewer past owners, and vehicles with higher mileage may reveal more issues in their inspection reports. The model also allows for a rich set of consumer search behaviors, including (but not limited to) sequential search within vehicles and characteristic-by-characteristic search across. The estimated fundamentals are then used to consider different information design policies. We find that the choice of the characteristics to be made available to consumers upfront has significant economic implications. For example, featuring variance-reducing information upfront (in our application, vehicle histories) instead of other characteristics translates into an approximate conversion rate increase of 20%, in relative terms. In light of our results, we provide intuition on how different information design policies affect consumer and seller welfares. Additional counterfactual analyses confirm our intuition. Finally, we show that a simplified approach based on traditional choice models would produce low quality recommendations about information design policies.
    Date: 2018–06
  8. By: Francisco Queiros (Universitat Pompeu Fabra)
    Abstract: This paper studies the effects of rational bubbles in an economy characterized by imperfect competition in product markets. It provides two main insights. The first is that imperfect competition relaxes the conditions for the existence of rational bubbles. When they have market power, firms restrict output and investment to enjoy supernormal profits. This depresses the interest rate, making rational bubbles possible even when capital accumulation is dynamically efficient. The second is that by providing a production or entry subsidy, asset bubbles may have a pro-competitive effect and force firms to expand and cut profit margins. However, once they get too large they can lead to overinvestment and sustain corporate losses. I use anecdotal evidence from the British railway mania of the 1840s and the dotcom bubble of the late 1990s to support the model's hypotheses and predictions.
    Date: 2018
  9. By: Guangyu Cao; Ginger Zhe Jin; Li-An Zhou
    Abstract: The recent rise of dockless bike-sharing is dominated by two platforms: one started first in 82 Chinese cities, 59 of which were subsequently entered by the second platform. Using these variations, we study how the entrant affects the incumbent’s market performance. To our surprise, the entry expands the market for the incumbent, not only boosting its total number of trips but also allowing the incumbent to achieve higher revenue per trip, improve bike utilization rate, and form a wider and more evenly distributed network. These market expansion effects dominate a significant market-stealing effect on the incumbent’s old users. Our findings suggest that platform entry can divert the perceived path to winners-take-all in a market with positive network effects, and competition with the outside goods is at least as important as the competition between platforms, especially when users multi-home across compatible networks.
    JEL: D22 L1 L4 L9 R4
    Date: 2018–08
  10. By: Tribl, Christoph; Morawetz, Ulrich; Salhofer, Klaus
    Abstract: The spatial dimension of the raw milk market facilitates the exercise of oligopsonistic power of milk processors towards farmers. At the same time, the market is characterised by a high share of processing cooperatives (coops). Hence, coops compete with investor-owned firms (IOFs) in a mixed market. Assuming uniform delivered pricing, we theoretically analyse spatial competition in a mixed market. Our theoretical and empirical results for Bavarian milk processors confirm the so-called “competitive yardstick effect”, i.e. coops can mitigate the oligopsony power of IOFs. In our theoretical model, the strength of this effect depends on the behaviour of IOFs.
    Keywords: Industrial Organization
    Date: 2017–08–29
  11. By: de Haas, Ralph (Tilburg University, Center For Economic Research); Lu, Liping (Tilburg University, Center For Economic Research); Ongena, S.R.G. (Tilburg University, Center For Economic Research)
    Abstract: We interview 361 European bank CEOs to identify their banks’ main competitors. We then provide evidence on the drivers of bilateral bank competition, construct a novel competition measure at the locality level, and assess how well it explains variation in firms’ credit constraints. We find that banks identify another bank as a main competitor in small-business lending when their branch networks overlap, when both are foreign owned or relationship oriented, or when the potential competitor has fewer hierarchical layers. Intense bilateral bank competition increases local credit constraints, especially for small firms, as competition may impede the formation of lending relationships.
    Keywords: bilateral bank competition; multimarket contact; credit constraints
    JEL: D22 D40 F36 G21
    Date: 2018
  12. By: Marina Bertolini (University of Padova); Marco Buso (University of Padova); Luciano Greco (University of Padova)
    Abstract: In the last few decades, liberalization and energy transition have deeply reshaped crucial segments of the electric industry (e.g., power generation, energy trading and retail supply) in several countries around the world posing. The development of smart grids is considered a solution to face the new challenges that arise by such dynamics. Our critical analysis of interdisciplinary literature and governmental documents highlights that input-based or outputbased regulation is not implementable in the case of smart grids because of unclear deï¬ nition of smart performance. Thus, we introduce a new deï¬ nition of grid smartness that is based on the volatility of market energy prices and flows and we develop a simple industrial-organization model of the electric market to analyze the impact of smart grids on competition and to assess the incentives of distribution system operators to invest in smart grids. We ï¬ nd that smartgrid investments foster the aggregate supply of energy, though with controversial effects on suppliers’ proï¬ ts. We also ï¬ nd that the investments in smart grids implemented by the distribution system operators is suboptimal because they fail to internalize positive externalities on energy consumers and producers.
    Keywords: Electricity markets, investments, risk aversion, Distribution System Operator
    JEL: L13 L51 L94
    Date: 2018–09
  13. By: Gafarova, Gulmira; Perekhozhuk, Oleksandr; Glauben, Thomas
    Abstract: This study explores whether Kazakh and Russian wheat exporters use their privileges of being important players in the South Caucasus countries to exercise market power. We use a three-stage least squares (3SLS) estimation for systems of simultaneous equations and Zellner’s seemingly unrelated regression (SUR) thmethods for our residual demand elasticity (RDE) analysis. The results show that Kazakh exporters are able to exercise market power only in the Georgian wheat market, while Russian exporters are able to do so in both the Armenian and Georgian markets. Neither country is able to exercise market power in the Azerbaijani wheat market. Further, Kazakh and Russian wheat exporters constrain each other’s market powers in Azerbaijan and Georgia. Similarly, Ukrainian exporters are able to intervene to Kazakh and Russian exporters’ market powers in the Azerbaijani and Georgian wheat markets, but not in the Armenian market.
    Keywords: Industrial Organization
    Date: 2017–08–28
  14. By: Kopp, Thomas
    Abstract: Violations of the law of one price (LOP) appear to be more the rule than the exception in various markets.This paper models the interface between agricultural supply and processing to explain violations of the LOP due to a fixed cost component of changing buyers. The model is applied to the raw rubber market in the Jambi province in Indonesia and employs a unique dataset of spatially and temporally disaggregated data. Methods to test for and explain violations of the LOP are suggested. An emphasis is set on the implications of aggregation over time.
    Keywords: Industrial Organization, International Relations/Trade, Marketing
    Date: 2017–08–15

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