nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒11‒12
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Complex pricing and consumer-side transparency By Fischer, Christian; Rasch, Alexander
  2. Information and Market Power By Bergemann, Dirk; Heumann, Tibor; Morris, Stephen
  3. The Effects of Downstream Competition on Upstream Innovation and Licensing By Jean-Etienne de Bettignies; Bulat Gainullin; Hua Fang Liu; David T. Robinson
  4. Price Salience and Product Choice By Thomas Blake; Sarah Moshary; Kane Sweeney; Steven Tadelis
  5. Micro-responses to shocks: Pricing, promotion, and entry By Antoniades, Alexis; Clerides, Sofronis
  6. Re-examining the Asymmetric Gasoline Pricing Mechanism in EU: A Panel Threshold Analysis By Chen, Chaoyi; Polemis, Michael; Stengos, Thanasis
  7. Essays on the role and effects of advertising By He, Chen
  8. A Recent Development in Civil Enforcement of Competition Law in Ireland: Section 14B Court Orders By Gorecki, Paul
  9. The Impact of Industry Consolidation on Government Procurement: Evidence from Department of Defense Contracting By Rodrigo Carril; Mark Duggan
  10. The Case for Formation of ISP-Content Providers Consortiums by Nash Bargaining for Internet Content Delivery By Debasis Mitra; Abhinav Sridhar
  11. Conventional Power Plants in Liberalized Electricity Markets with Renewable Entry By Gerard Llobet; Jorge Padilla
  12. Promoting competition in the fertilizer industry in Africa: A global and local approach By Hernandez, Manuel A.; Torero, Maximo
  13. Worst-Case Bounds on R&D and Pricing Distortions: Theory and Disturbing Conclusions if Consumer Values Follow the World Income Distribution By Kremer, Michael
  15. Business Ecosystems and Innovation By abe Harraf

  1. By: Fischer, Christian; Rasch, Alexander
    Abstract: We analyze a situation in which two horizontally differentiated firms compete in two-part tariffs (i.e., a linear and fixed price), and some consumers are not informed about the linear per-unit price. We show that there is a non-monotone relationship between the degree of consumer-side transparency and firm profits. Moreover, different from a situation without uninformed consumers, firms may make higher profits under two-part tariffs than under fixed fees only. There is also a non-monotone relationship between transparency and consumer surplus. Our model can explain why firms are against the abolishment of roaming fees and why the European Commission (EC) promotes it.
    Keywords: fixed fee,linear price,roaming,transparency,two-part tariff
    JEL: D43 L13 L42
    Date: 2018
  2. By: Bergemann, Dirk; Heumann, Tibor; Morris, Stephen
    Abstract: We consider demand function competition with a finite number of agents and private information. We analyze how the structure of the private information shapes the market power of each agent and the price volatility. We show that any degree of market power can arise in the unique equilibrium under an information structure that is arbitrarily close to complete information. In particular, regardless of the number of agents and the correlation of payoff shocks, market power may be arbitrarily close to zero (so we obtain the competitive outcome) or arbitrarily large (so there is no trade in equilibrium). By contrast, price volatility is always less than the variance of the aggregate shock across agents across all information structures, hence we can provide sharp and robust bounds on some but not all equilibrium statistics. We then compare demand function competition with a different uniform price trading mechanism, namely Cournot competition. Interestingly, in Cournot competition, the market power is uniquely determined while the price volatility cannot be bounded by the variance of the aggregate shock.
    JEL: C72 C73 D43 D83 G12
    Date: 2018–11
  3. By: Jean-Etienne de Bettignies; Bulat Gainullin; Hua Fang Liu; David T. Robinson
    Abstract: We study how competition between two downstream firms affects an upstream innovator's innovation strategy, which includes selecting how much innovation to produce and whether to license this innovation to one (targeted licensing) or both (market-wide licensing) downstream competitors. Our model points to a U-shaped relationship between downstream competition and upstream innovation: at low levels of competition, market-wide licensing is optimal and competition reduces innovation, while at high levels of competition targeted licensing is optimal and competition increases innovation. Empirical analysis using a large panel of US data provides clear support for these predictions linking competition, innovation and licensing.
    JEL: L22 L24 O31 O32
    Date: 2018–10
  4. By: Thomas Blake; Sarah Moshary; Kane Sweeney; Steven Tadelis
    Abstract: We study the effect of price salience on whether a product is purchased and, conditional on purchase, the quality purchased. Consistent with our theoretical predictions, we find that making the full purchase price salient to consumers reduces both the quality and quantity of goods purchased. The effect of salience on quality accounts for at least 28% of the overall revenue decline. Evidence shows that the effects persist beyond the first purchase and impact even experienced users. Detailed click-stream data shows that price-obfuscation makes price comparisons difficult and results in consumers spending more than they otherwise would. We also find that sellers respond to the increased price obfuscation by listing higher quality tickets.
    JEL: C93 D12 D83 L11
    Date: 2018–10
  5. By: Antoniades, Alexis; Clerides, Sofronis
    Abstract: We study the response of markets to a firm-specific shock in a natural experiment setting. In 2006, a boycott of Danish products in several Arab countries was devastating for Danish cheese firms. In Saudi Arabia their market share collapsed from 16.5% in January to
    Keywords: boycotts; demand shock; multi-product firms; Saudi Arabia
    JEL: L10
    Date: 2018–10
  6. By: Chen, Chaoyi; Polemis, Michael; Stengos, Thanasis
    Abstract: We employ a pooled panel threshold model along the lines of Seo and Shin (2016) within an error correction framework to re-investigate the “rockets and feathers” hypothesis. The empirical results confirm the superiority of the threshold model compared to the baseline linear specifications, while attributing the asymmetric gasoline adjustment mechanism to Exchange Rate Pass Through (ERPT).
    Keywords: Gasoline asymmetry; Threshold; ERPT; Error Correction Model; EU
    JEL: C24 L16
    Date: 2018–08–29
  7. By: He, Chen (Tilburg University, School of Economics and Management)
    Abstract: The Ph.D. dissertation consists of three essays on the role and effects of advertising. Chapter 2, “Optimizing Online Sales using Targeted Advertising”, studies how reallocating advertising budgets can increase online sales. Chapter 3, “Advertising as a Reminder: Evidence from the Dutch State Lottery”, studies the dynamic effects of advertising. The central idea is that advertisements can also remind consumers to buy. Chapter 4, “Advertising Match Values and Viewership Demand”, characterizes the heterogeneous responses of consumers to the advertisement and show how the broadcaster could improve its profit by re-ordering different types of advertisements.
    Date: 2018
  8. By: Gorecki, Paul
    Abstract: A new more effective civil enforcement tool – a Section 14B Court Order – was introduced in 2012 to enhance Ireland’s competition law. Breaching such an order is contempt of court. Fines can be imposed by the courts for contempt, but not for civil breaches of competition law. Notwithstanding the advantages of Section 14B Court Orders, since 2012 the Competition and Consumer Protection Commission, Ireland’s competition agency, has only used such orders on only one occasion – in 2012. There have, however, been a number of other cases where the evidence, albeit limited, suggests that such orders would have been a credible option.
    Keywords: Competition policy Ireland; civil enforcement; Section14B Orders; Competition (Amendment) Act 2012; civil fines.
    JEL: K21 K41 K42
    Date: 2018–10–23
  9. By: Rodrigo Carril; Mark Duggan
    Abstract: We study the relationship between market structure and public procurement outcomes. In particular, we ask whether and to what extent consolidation-driven increases in industry concentration affect the way in which the government procures its goods and services. We focus on the defense industry, by far the largest contributor to federal procurement spending in the U.S. This industry experienced a sharp increase in the level of concentration during the 1990s, driven by a series of large mergers between defense contractors. Using detailed microdata on Department of Defense (DoD) contract awards, we estimate the causal effect of industry concentration on a series of procurement outcomes, leveraging the differential impact of these mergers across product markets. We find that market concentration caused the procurement process to become less competitive, with an increase in the share of spending awarded without competition, or via single-bid solicitations. Increased concentration also induced a shift from the use of fixed-price contracts towards cost-plus contracts. However, we find no evidence that consolidation led to a significant increase in acquisition costs of large weapon systems, nor to increased spending at the product market level. We infer that the government’s buyer power, especially relevant in this context given the government is often the only purchaser, constrained firms from exercising any additional market power gained by consolidation.
    JEL: H56 H57 L41
    Date: 2018–10
  10. By: Debasis Mitra; Abhinav Sridhar
    Abstract: The formation of consortiums of a broadband access Internet Service Provider (ISP) and multiple Content Providers (CP) is considered for large-scale content caching. The consortium members share costs from operations and investments in the supporting infrastructure. Correspondingly, the model's cost function includes marginal and fixed costs; the latter has been important in determining industry structure. Also, if Net Neutrality regulations permit, additional network capacity on the ISP's last mile may be contracted by the CPs. The number of subscribers is determined by a combination of users' price elasticity of demand and Quality of Experience. The profit generated by a coalition after pricing and design optimization determines the game's characteristic function. Coalition formation is by a bargaining procedure due to Okada (1996) based on random proposers in a non-cooperative, multi-player game-theoretic framework. A necessary and sufficient condition is obtained for the Grand Coalition to form, which bounds subsidies from large to small contributors. Caching is generally supported even under Net Neutrality regulations. The Grand Coalition's profit matches upper bounds. Numerical results illustrate the analytic results.
    Date: 2018–10
  11. By: Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros); Jorge Padilla (Compass Lexecon)
    Abstract: This paper examines the optimal capacity choices of conventional power generators after the introduction of renewable production. We start with a basic and generally accepted model of the liberalized wholesale electricity market in which firms have insufficient incentives to invest and we illustrate how the entry of renewable generation tends to aggravate that problem. We show that the incentives to invest in firm capacity (e.g. conventional thermal plants) may be restored by means of a capacity auction mechanism. That mechanism is vulnerable and, hence, may prove ineffective unless governments can credibly commit not to sponsor the entry of new capacity outside the auction mechanism. We explain that such commitment may be particularly difficult in the current political context where energy policy is conditioned by environmental and industrial-policy goals. We finally propose a way to enhance the credibility of capacity auctions by committing to optimally retire idle (conventional) power plants in response to entry outside the auction.
    Keywords: Conventional generation, renewable energy, security of supply, missing-money problem, environmental goals, capacity payments.
    JEL: L51 L94
    Date: 2018–01
  12. By: Hernandez, Manuel A.; Torero, Maximo
    Abstract: Given the central role that agriculture plays in the rural economy of Africa, several countries have implemented supply– and demand-driven policies and programs to promote sustainable fertilizer use, with mixed results. However, not much has been said about the market structure or competitive behavior along the supply chain in the highly concentrated fertilizer industry, nor about how this affects fertilizer uptake in the region. Globally, the industry has only a few producers, and African countries are highly and increasingly dependent on imported fertilizer. Locally, fertilizer distribution channels are also characterized by a limited number of market actors, often with a poor dealer network.
    Keywords: AFRICA; fertilizer industry; fertilizers; economic competition; market structure; market concentration
    Date: 2018
  13. By: Kremer, Michael
    Abstract: We prove that, for general demand and cost conditions and market structures, the fraction of first best surplus that a monopolist is unable to extract in a market provides a tight upper bound on the relative distortions arising from firms' equilibrium decisions at all margins (entry and pricing). Continuing with this worst-case perspective, we show that a symmetrically truncated Zipf (STRZ) distribution of consumer values generates the lowest producer surplus among those with a given mean and maximum value. This allows us to relate potential deadweight loss from all margins in a market to the Zipf-similarity of its demand curve. The STRZ distribution also bounds deadweight loss at just the pricing margin. We leverage existing results from industrial organization (e.g., on demand curvature) and statistics (e.g., on the relation between means and medians) to bound producer surplus in an array of important special cases. Calibrations based on the world distribution of income generate extremely Zipf-similar demand curves, with disturbing consequences for potential deadweight loss in global markets. We gauge the extent to which various policies-such as progressive taxation or price discrimination-can ameliorate potential deadweight loss.
    Keywords: Firm behavior; Incentives for Invention; Innovation and Invention; market structure; Monopoly; Pricing
    JEL: D21 D42 L11 O31
    Date: 2018–10
  14. By: Tanel Rebane
    Abstract: This paper examines the complementary relationship between product innovation, marketing innovation and cooperation with clients, based on data from Estonian firms. The author evaluated complementary relationship in terms of its effect on the firm’s total factor productivity. This study uses the Community Innovation Survey (CIS) and Estonian Business Register data from the years 2002–2012 and the Heckman selection model to research the complementarity effect between studied innovation activities using the supermodularity approach. The results show that product innovation and marketing innovation are complementary in the service industry, but in manufacturing industry there is lack of evidence for the effect of complementarity. Cooperation with clients showed inconclusive complementarity test results involving both innovation types in both industries. Using panel data as a robustness test showed more insights into the complementary effects between cooperation with clients and the studied forms of innovation. However, the results show a weak complementarity effect between cooperation and innovation and suggest that there is still no clear complementarity effect.
    Keywords: Product innovation, Marketing innovation, Cooperation with clients, Complementarity, Performance
    JEL: C13 D24 L25 O30
    Date: 2018
  15. By: abe Harraf (University of Northern Colorado - Monfort Collge of Business)
    Abstract: The concept of Business Ecosystems has become a topic that has received increased attention within management literature and amongst practitioners. This concept refers to the idea that the nature of competition within our contemporary economy has fundamentally changed. No longer do organizations compete with one another in a zero-sum game. Today, organizations are simultaneously collaborating and competing with one another in order to co-create value, co-evolve capabilities with one another, and develop innovations in a more effective, timely and efficient manner. Although this concept has been praised for its ability to create value and share that value amongst ecosystem members, including customers, little research has been conducted to investigate the potential drawbacks of this new form of competition. This paper identifies that business ecosystems can have negative effects on innovation and competition as they develop oligopolistic market structures.
    Keywords: Business Ecosystems, Keystone organizations, innovation, Oligopoly
    JEL: O31
    Date: 2018–07

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