nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒02‒18
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Strategic Product Design under Duopoly By Didier Laussel
  3. Protecting vulnerable consumers in "switching markets" By Walter Beckert; Paolo Siciliani
  4. Credence Goods Markets with Heterogeneous Experts By Joachim Heinzel
  5. “Technological cooperation and R&D outsourcing at the firm level: The role of the regional context ” By Damián Tojeiro-Rivero; Rosina Moreno
  6. Market size asymmetry and industrial policy in an international duopoly: Environmental tax vs. production subsidy By Lidia Vidal-Meliá; Eva Camacho-Cuena; Miguel Ginés-Vilar
  7. Pro-competitive effects of globalisation on prices, productivity and markups: Evidence in the Euro Area By R. S.-H. LEE; M. PAK
  8. The impact of price adjustment costs on price dispersion in E-commerce By René Böheim; Franz Hackl; Michael Hölzl-Leitner
  9. Two-sided Market, R&D and Payments System Evolution By Li, Bin Grace; McAndrews, James J.; Wang, Zhu
  10. Who (Else) Benefits from Electricity Deregulation? Coal prices, natural gas and price discrimination By Jonathon E. Hughes; Ian Lange
  11. The impact of the ECB’s targeted long-term refinancing operations on banks’ lending policies: the role of competition By Desislava C. Andreeva; Miguel García-Posada
  12. Measuring multi-product banks' market power using the Lerner index By Sherrill Shaffer; Laura Spierdijk
  13. The good MOOC and the universities By Emilie Dargaud; Frédéric Jouneau-Sion
  14. Common values, unobserved heterogeneity, and endogenous entry in U.S. offshore oil lease auctions By Giovanni Compiani; Phil Haile; Marcelo Sant'Anna
  16. An Assessment of Product Turnover in the U.S. Food Industry and Effects on Nutrient Content By Martinez, Stephen W.; Levin, David
  17. Redistributive Effects of Gasoline Prices By Demet Yilmazkuday; Hakan Yilmazkuday
  18. Research funding and price negotiation for new drugs By Francesca Barigozzi; Izabela Jelovac

  1. By: Didier Laussel (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Two duopolists first decide in which proportions to incorporate in their product two different Lancasterian characteristics and then compete in quantities or prices. In the Cournot case, minimum differentiation obtains at equilibrium whatever the degree of substituability between the characteristics. In the Bertrand one, the equilibrium depends crucially on the degree of substituability/complementarity between the two characteristics. Maximal differential obtains if and only if the characteristics are strong enough substitutes. On the contrary as characteristics become closer and closer complements one obtains in the limit a minimal differentiation result. JEL Codes: L13. Keyword: Horizontal Product Differentiation, Lancasterian Characteristics.
    Keywords: Horizontal Product Differentiation,Lancasterian Characteristics.,Duopoly
    Date: 2018
  2. By: Creane, Anthony; Manduchi, Agostino
    Abstract: In their seminal paper Grossman and Shapiro (1984) find that informative advertising is socially excessive in an oligopoly (entry is also socially excessive). However, the analysis assumed that all consumers receive at least one advertisement. Christou and Vettas (2008), among others, present counter-examples in alternative settings, showing when the assumption does not hold, the equilibrium advertising may, instead, be inefficiently low. Christou and Vettas (2008) also show there may be non-existence due to discontinuities from undercutting, that quasiconcavity may not hold, and present examples in which the equilibrium does not exist as firms would deviate to a higher price. We revisit the question by modeling firms (like consumers) as a continuum, which mitigates the discontinuity that exists in both papers and allows the general analysis to include the cases when some consumers receive no advertisements. As a result, we are able to derive explicit and intuitive conditions for an equilibrium. More importantly, we find, instead, that advertising is socially insufficient regardless of the fraction of the consumers who receive an ad, including when all consumers receive at least one ad. We also find that there is insufficient entry instead of excess entry. We provide intuition for the difference between our and previous results.
    Keywords: Informative advertising, product differentiation, monopolistic competition, welfare.
    JEL: D83 L13 L15
    Date: 2019–02–11
  3. By: Walter Beckert (Institute for Fiscal Studies and Birkbeck, University of London); Paolo Siciliani (Institute for Fiscal Studies)
    Abstract: This paper studies regulatory policy interventions aimed at protecting vulnerable consumers who are disengaged and thus exposed to exploitation. We model heterogeneous consumer switching costs alongside asymmetric market shares. This setting encompasses many markets in which established rms are challenged by new entrants. We identify circumstances under which such interventions can be counterproductive, both with regard to the stated consumer protection objective and the complementary aim to promote competition.
    Keywords: switching costs, price discrimination, uniform pricing, most-favoured customer clauses, price regulation, competition
    Date: 2018–10–08
  4. By: Joachim Heinzel (Paderborn University)
    Abstract: In this paper, we analyze a credence goods model adjusted to the health care market with regulated prices and heterogeneous experts. Experts are physicians and are assumed to differ in their cost of treating a small problem. We investigate the effects of this heterogeneity on the physicians’ level of fraud and on the patients’ search for second opinions. We find that introducing a fraction of more efficient low-cost physicians always increases social welfare, but in some cases only because of the raised physicians’ surplus. When the low-cost physicians’ cost advantage is small, imposing a share of low-cost physicians does not change the equilibrium fraud level. When the cost advantage is large, however, different changes in the fraud level occur depending on the share of generated low-cost physicians, the search rate and the initial level of fraud.
    Keywords: credence goods, treatment efficiency, heterogeneous experts, overcharging
    JEL: D82 I11 L15
    Date: 2019–01
  5. By: Damián Tojeiro-Rivero (AQR-IREA Research Group, University of Barcelona. Department of Econometrics, Statistics and Applied Economics. Av. Diagonal 690, 08034 Barcelona, Spain. Tel.(+34) 934 021 412.); Rosina Moreno (AQR-IREA Research Group, University of Barcelona. Av. Diagonal 690 - 08034 Barcelona (Spain). Tel. +34934021823 - Fax +34934021821.)
    Abstract: Much has been said about the role that technological networking activities play on the innovative performance of firms, but little is known about the relevance of the context where the firm is locate shaping the efficiency of such networking activities. In this article we hypothesize that the transformation of firms' networking activities into innovation may vary depending on the regional environment in which the firm is located. For Spanish manufactures in the period 2000-12 and through the use of a multilevel framework, we obtain that after controlling for the firm's characteristics, the regional context has not only a direct effect on firms' innovation performance, but it also conditions the returns to firms' networking activities, although differently in the case of cooperation and outsourcing. Cooperating in innovation activities is more beneficial for those firms located in a knowledge intensive region, whereas R&D outsourcing seems to be more profitable for firms in regions with a low knowledge pool.
    Keywords: Technological cooperation, R&D Outsourcing, Local Knowledge Spillovers; Multilevel; Panel data; Spanish Firms, Manufactures. JEL classification: D21, D22, O31, R10, R15
    Date: 2019–02
  6. By: Lidia Vidal-Meliá (LEE & Department of Economics, Universitat Jaume I, Castellón, Spain); Eva Camacho-Cuena (LEE & Department of Economics, Universitat Jaume I, Castellón, Spain); Miguel Ginés-Vilar (LEE & Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: This paper analyzes how international trade affects the governments’ decision on their industrial policy in the context of bilateral international trade and imperfect competition. We model an international duopoly with market size asymmetry and product heterogeneity. Each firm produces two different products, one for the domestic market and the other one for the foreign market, where the firms’ production generates local emissions. The findings of our paper show the important role of market asymmetry in determining the optimal industrial policy in a setting where both, firms and regulators, act strategically. The government in each country decides, as industrial policy between two option: an emission tax or a production subsidy. We find that the governments in small countries have incentives to set an environmental tax to the firms competing in international markets with similar size. This is the case even if the government in the large market decided to set a production subsidy, as long as market size asymmetry is low enough. Instead, if firms in a small country compete in large markets, that is, increasing the market size asymmetry between countries, it is then optimal for the government in the small country to give up emission taxes and pay productions subsidies to keep the firms’ competitiveness in the home and foreign markets if the government in the big country subsidizes production. In this case, an increase in the firms’ profits offsets the effects of emission damages on the country social welfare.
    Keywords: Environmental tax, Production subsidy, Market size asymmetry, Product heterogeneity, Imperfect markets
    JEL: F18 H23 L13 Q56
    Date: 2019
  7. By: R. S.-H. LEE (Insee, Polytechnique et Crest-LMA); M. PAK (OCDE)
    Abstract: Global trade has recently slowed down after a peak in the 1990s and early 2000s. Existing literature shows evidence of pro-competitive effects of trade liberalisation during this booming period on prices, productivity and markups. The goal of this paper is to assess whether such pro-competitive effects are still carried on in the manufacturing industry of five Euro Area countries (Austria, Germany, Spain, France and Italy). Our analysis is based on Melitz and Ottaviano’s (2008) theoretical framework and its empirical setup by Chen et al. (2004, 2009). Our contribution is twofold. First, we use traditional trade indicators (gross and value added exports and imports) but also novel indicators that account for the development of global value chains. Second, from the findings of Chen et al. (2004, 2009), we go further by investigating the effect of trade at sector level with respect to quality upgrading and firm concentration. We find that pro-competitive effects are more significant when using import penetration in value-added terms and such effects are particularly strong in sectors with low concentration. Indeed, higher concentration seems to mitigate the trade-induced competition. However, our model focuses on price competition and further research on the quality upgrading would be complementary to our results.
    Keywords: inflation, markups, productivity, competition, globalisation
    JEL: E31 F12 F14 L11 L16
    Date: 2018
  8. By: René Böheim; Franz Hackl; Michael Hölzl-Leitner
    Abstract: We analyze price dispersion using panel data from a large price comparison site. We use past pricing behavior to instrument for potential endogeneity that might result from the selection of firms to certain product markets. We find that greater price adjustment costs result in greater price dispersion. Although the impact of price adjustment costs on price dispersion became weaker over time, the causal effect of price adjustment costs on price dispersion is still present at the end of the period. Our results are robust to many alternative empirical speciffications. We also test a range of alternative explanations of price dispersion, such as search cost, service differentiation, obfuscation, vertical restraints, and market structure.
    Keywords: price dispersion, price adjustment costs, menu costs, e-commerce
    JEL: D40 L11
    Date: 2019–02
  9. By: Li, Bin Grace (International Monetary Fund); McAndrews, James J. (TNBUSA); Wang, Zhu (Federal Reserve Bank of Richmond)
    Abstract: It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time. We address these puzzles by studying payments system evolution with a dynamic model in a two-sided market setting. We calibrate the model to the U.S. payment card data, and conduct welfare and policy analysis. Our analysis shows that the market power of electronic payment networks plays important roles in explaining the slow adoption and asymmetric price changes, and the welfare impact of regulations may vary significantly through the endogenous R&D channel.
    Keywords: payments system; technology adoption; two-sided market
    JEL: E4 G2 O3
    Date: 2019–02–08
  10. By: Jonathon E. Hughes (Department of Economics, University of Colorado at Boulder); Ian Lange (Division of Economics and Business, Colorado School of Mines)
    Abstract: The movement to deregulate major industries over the past 40 years has produced large efficiency gains. However, distributional effects have been more difficult to assess. In the electricity sector, deregulation has vastly increased information available to market participants through the formation of wholesale markets. We test whether upstream suppliers, specifically railroads that transport coal from mines to power plants, use this information to capture economic rents that would otherwise accrue to electricity generators. Using natural gas prices as a proxy for generators' surplus, we find railroads charge higher markups when rents are larger. This effect is larger for deregulated plants, highlighting an important distributional impact of deregulation. This also means policies that change fuel prices can have substantially different effects on downstream consumers in regulated and deregulated markets.
    Keywords: Deregulation, Price Discrimination, Electricity Markets, Procurement Contracts
    JEL: L11 L51 Q48
    Date: 2018–11
  11. By: Desislava C. Andreeva (European Central Bank); Miguel García-Posada (Banco de España)
    Abstract: We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. To guide our empirical research, we build a theoretical model in which banks compete à la Cournot in the credit and deposit markets. According to the model, we distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets and are a priori ambiguous. We then test these theoretical predictions with a sample of 130 banks from 13 countries and the confidential answers to the ECB’s Bank Lending Survey. Regarding direct effects on bidders, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders but, contrary to the direct effects, the transmission of the TLTROs takes place through an easing of credit standards, and it is mainly concentrated in banks facing high competitive pressures. We also find evidence of positive funding externalities.
    Keywords: unconventional monetary policy, TLTROs, lending policies, competition
    JEL: G21 E52 E58
    Date: 2019–02
  12. By: Sherrill Shaffer; Laura Spierdijk
    Abstract: The aggregate Lerner index is a popular composite measure of multi-product banks’ market power, based on the assumption that banks’ single aggregate output factor is total assets. This study identifies three limitations of the aggregate Lerner index that potentially distort its interpretation as a composite measure of market power. We investigate the empirical relevance of these limitations for a sample of U.S. banks covering the years 2011–2017. We establish an economically relevant bias in the value of the aggregate Lerner index and show that this bias may also affect regressions that use the Lerner index as a dependent or explanatory variable.
    Keywords: multi-product banks, market power, Lerner index, consistent aggregation
    JEL: D43 L13 G21
    Date: 2019–02
  13. By: Emilie Dargaud (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Frédéric Jouneau-Sion (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: We propose a model to analyze competition between an on-line course and a traditional brick-and-mortar supply for higher education. The brick and mortar supplier is physically located and students pay a transportation cost to attend the traditional course. On the contrary, the on-line course is free, without transportation cost but students incurred a fixed homogeneous disutility when choosing this type of course. We derive the optimal fee policy of a single university as a function of its location and the fixed cost associated with the on-line course. We also study the impact of distant learning on the competition between two brick and mortar universities. One university is assumed to enjoy a central position, whereas the other one is located at the extreme left of the town. We discuss equilibria and market sharing in non-regulated (i.e pure fee competition) and regulated (i.e. quantity competition) settings. Finally, public issues are addressed. In particular, the socially optimal provision of MOOC and the supply of MOOC by universities are carefully discussed.
    Keywords: On-line learning, spatial competition
    JEL: I21 I23 L13 L17 R12 R39
    Date: 2019
  14. By: Giovanni Compiani (Institute for Fiscal Studies); Phil Haile (Institute for Fiscal Studies and Yale University); Marcelo Sant'Anna (Institute for Fiscal Studies)
    Abstract: An oil lease auction is the classic example motivating a common values model. However, formal testing for common values has been hindered by unobserved auction-level heterogeneity, which is likely to affect both participation in an auction and bidders' willingness to pay. We develop and apply an empirical approach for fi rst-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. The approach also accommodates spatial dependence and sample selection. Following Haile, Hong and Shum (2003), we specify a reduced form for bidder entry outcomes and rely on an instrument for entry. However, we relax their control function requirements and demonstrate that our specifi cation is generated by a fully speci fied game motivated by our application. We show that important features of the model are nonparametrically identifi ed and propose a semiparametric estimation approach designed to scale well to the moderate sample sizes typically encountered in practice. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present and important in U.S. offshore oil and gas lease auctions. We find that ignoring unobserved heterogeneity in the empirical model obscures the presence of common values. We also examine the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.
    Date: 2018–07–03
  15. By: Jaelani, Ali Musthohir; Juhari, Juhari
    Abstract: With this technological advancement and competitive market competition, every business actor who wants to win the competition must pay attention and apply the right marketing strategies and changes in consumption patterns that occur in the marketing environment. Companies must pay attention, understand and respond quickly to changes in the needs and desires of these consumers to be able to become winners in such intense competition. This research uses a type of survey research with a quantitative approach, which is analyzed using multiple linear regression methods, the population used in this research is the people of Pangkalpinang City who use Honda PCX motorcycles. The sample is determined based on the accidental sampling method, with a total sample of 100 respondents. The results of this research that simultaneously (F-test) promotion, product attributes, and brand awareness have a significant effect on purchasing decisions of Honda PCX motorcycles in Pangkalpinang City. This is evidenced by the value of Fcount> Ftable which is 78.725> 2.70.
    Keywords: Product Attributes, Promotion, Brand Awareness and Purchasing Decisions
    JEL: M31
    Date: 2018–12
  16. By: Martinez, Stephen W.; Levin, David
    Abstract: ERS researchers use IRI retail store data from 2008 to 2012 to describe the extent of product entry and exit in 17 food and beverage categories. As consumers demand healthier food and beverage products, research is needed to highlight changes in nutrient composition associated with product innovation strategies. The nutrient content implications of product turnover are examined by comparing nutritional quality of products entering the market, products exiting the market, and “established” products (i.e., neither entered nor exited). Differences in nutritional content of entering and exiting products have significant implications over time for changes in the nutritional profiles of product categories with relatively high turnover rates.
    Keywords: Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety
    Date: 2017–11
  17. By: Demet Yilmazkuday (Department of Economics, Florida International University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: Consumers face significantly different gasoline prices across gas stations. Using gasoline price data obtained from 98,753 gas stations within the U.S., it is shown that such differences can be explained by a model utilizing the gasoline demand of consumers depending on their income and commuting istance/time, where the pricing strategies of both gas stations and refiners are taken into account. The corresponding welfare analysis shows that there are significant redistributive effects of gasoline price changes among consumers, where the welfare costs of an increase in gasoline prices are found to be higher for lower income consumers.
    Keywords: Gasoline Prices, Gas-Station Level Analysis, United States
    JEL: L11 L81 Q41
    Date: 2018–10
  18. By: Francesca Barigozzi (University of Bologna, Italy); Izabela Jelovac (Univ Lyon, CNRS, GATE L-SE UMR 5824, F-69131 Ecully, France)
    Abstract: Pharmaceutical innovations result from the successful achievement of basic research, produced by an upstream lab, and applied research, produced by a downstream lab. We focus on the negotiation process to finance basic research by setting public and private grants and to agree on the final price of a new drug. We show that exclusive funding of basic research is desirable. To increase consumers’ surplus and reduce negotiated prices for new drugs, basic and applied research should be integrated if the lab producing applied research has a relatively large bargaining power. When instead the health authority has the larger bargaining power, integration with the producer of basic research increases negotiated prices for new drugs and should be avoided, unless the gain in bargaining power after the integration is extremely high.
    Keywords: Pharmaceutical innovation, drug prices, negotiation, basic research, applied research
    JEL: D8
    Date: 2019

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