nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒04‒08
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Market power and information effects in a multi-unit auction By Andreas Hefti; Peiyao Shen; Regina Betz
  2. Collusive Agreements in Vertically Differentiated Markets By Marco A. Marini
  3. Welfare effects of certification under latent adverse selection By Creane, Anthony; Jeitschko, Thomas D.; Sim, Kyoungbo
  4. Pre-Trade Private Investments By Francesc Dilmé
  5. Strategic Complementarity and Asymmetric Price Setting among Firms By Maiko Koga; Koichi Yoshino; Tomoya Sakata
  6. Market structure and cartel duration: Evidence from detected EU cartel cases By Swoboda, Sandra Maria
  7. Endogenous choice of minority shareholdings: Effects on product market competition By Samuel de Haas
  8. The (Anti-)Competitive Effect of Intellectual Property Rights By Michael Peneder; Mark Thompson; Martin Wörter
  9. Temporary sales in response to aggregate shocks By Benjamin Eden; Maya Eden; Jonah Yuen
  10. Uncertainty and Risk-aversion in a Dynamic Oligopoly with Sticky Prices By Valentini, Edilio; Vitale, Paolo
  11. Bargaining on Supply Chain Networks with Heterogeneous Valuations By Elif Ozcan Tok
  12. The Patent Troll: Benign Middleman or Stick-Up Artist? By David S. Abrams; Ufuk Akcigit; Gokhan Oz; Jeremy G. Pearce
  13. Technology, Market Structure and the Gains from Trade By Impullitti, G.; Licandro, O., Rendahl, P.; Rendahl, P.
  14. Two-Sided Market, R&D and Payments System Evolution By Bin Grace Li; James McAndrews; Zhu Wang
  15. Monopsony Power and Guest Worker Programs By Gibbons, Eric M.; Greenman, Allie; Norlander, Peter; Sørensen, Todd
  16. The Impact of China’s Electricity Deregulation on Coal and Power Industries: Two-stage Game Modeling Approach By Liu, HuiHui; Zhang, ZhongXiang; Chen, ZhanMing; Dou, DeSheng
  17. Incentive Regulation: Evidence From German Electricity Networks By Michael Hellwig; Dominik Schober; Luis Cabral
  18. Mixed Bundling in Retail DVD Sales: Facts and Theories By Luis Cabral; Gabriel Natividad

  1. By: Andreas Hefti; Peiyao Shen; Regina Betz
    Abstract: We study the effects of different information structures (full information, supply uncertainty and demand uncertainty) on equilibrium prices, allocative efficiency and bidding behavior in a (supply-side) uniform-price multi-unit auction, using supply function competition and a novel experimental design. Our setup integrates different types of market power and a varying level of competition. We empirically find that average prices tend to be higher under full information compared to the cases where bidders either have limited information about about the demand level or rivals’ technologies or; the latter even leading to strictly lower average prices as the exertion of market power and bid shading is strongly reduced. We explain this finding with a behavioral equilibrium concept, where bidders behave as if competing against the average market situation. Further, we address the problem of multiplicity of equilibria by exploiting the equilibrium conditions to obtain an empirical selection of the average equilibrium supply function. The respective predictions of the average prices exceed those by standard OLS in all information treatments.
    Keywords: Multi-unit auctions, limited information, market power, supply function competition, supply uncertainty, demand uncertainty, restricted least squares
    JEL: C92 D43 D44 D82 L11 L94 Q41
    Date: 2019–03
  2. By: Marco A. Marini
    Abstract: This paper introduces a number of game-theoretic tools to model collusive agreements among firms in vertically differentiated markets. I firstly review some classical literature on collusion between two firms producing goods of exogenous different qualities. I then extend the analysis to a n-firm vertically differentiated market to study the incentive to form either a whole market alliance or partial alliances made of subsets of consecutive firms in order to collude in prices. Within this framework I explore the price behaviour of groups of colluding firms and their incentive to either pruning or proliferating their products. It is shown that a selective pruning within the cartel always occurs. Moreover, by associating a partition function game to the n-firm vertically differentiated market, it can be shown that a sufficient condition for the cooperative (or coalitional) stability of the whole industry cartel is the equidistance of firms’ products along the quality spectrum. Without this property, and in presence of large quality differences, collusive agreements easily lose their stability. In addition, introducing a standard infinitely repeated-game approach, I show that an increase in the number of firms in the market may have contradictory effects on the incentive of firms to collude: it can make collusion easier for bottom and intermediate firms and harder for the top quality firm. Finally, by means of a three-firm example, I consider the case in which alliances can set endogenously qualities, prices and number of variants on sale. I show that, in every formed coalition, (i) market pruning dominates product proliferation and (ii) partial cartelisation always arises in equilibrium, with the bottom quality firm always belonging to the alliance.
    Keywords: Research Methods/ Statistical Methods
    Date: 2017–06–23
  3. By: Creane, Anthony; Jeitschko, Thomas D.; Sim, Kyoungbo
    Abstract: Asymmetric information is a classic example of market failure that undermines the efficiency associated with perfectly competitive market outcomes: the "lemons" market. Credible certification, that substantiates unobservable characteristics of products that consumers value, is often considered a potential solution to such market failure. This paper examines welfare effects of certification in markets in which there is asymmetric information, but without an adverse selection problem. We analyze the market equilibrium when the certification technology becomes available and contrast this with the equilibrium without certification. We find that despite an improvement in allocative efficiency, overall welfare may decrease due to the possibility of certification when such certification is either costly or inaccurate. In fact, most of these results are not derived from the direct welfare cost of certification, but rather from certification's effect on the market(s).
    Keywords: credible certification,welfare-reducing certification,asymmetric information,adverse selection
    JEL: D8 D4 L1
    Date: 2019
  4. By: Francesc Dilmé
    Abstract: This paper investigates the welfare effects of private investments prior to trade. A seller of a durable good can privately invest on changing its quality. After the investment, she receives a take-it-or-leave-it offer from a buyer. Both the seller and the buyer value more goods of higher quality. We obtain that, in equilibrium, the seller mixes the investment choice, adding adverse selection to the exchange. The nonobservability of the investment lowers the buyer’s payoff without giving the seller additional rents. Notably, adding buyer competition exacerbates the adverse selection and completely eliminates the trade surplus. Partial observability increases the equilibrium investment, makes the seller better off, and lowers the payoff of the buyer.
    Keywords: Private Investment, Hold Up Problem, Price Dispersion
    JEL: D82 D83 D42 L15
    Date: 2019–03
  5. By: Maiko Koga (Bank of Japan); Koichi Yoshino (Bank of Japan); Tomoya Sakata (Bank of Japan)
    Abstract: Exploiting a large panel of firm survey data from Japan (Tankan survey), we provide micro evidence of strategic complementarity in firms' price setting. We find that a firm's price adjustment is affected by its competitors' pricing behavior and that this adjustment is larger when the firm is lowering its price, which accords with the theoretical predictions of quasi-kinked demand. Our results also indicate that firms with greater pricing power tend to be less sensitive to their competitors' behavior. Finally, we observe that heightened demand uncertainty mitigates the effect of shifts in demand conditions on the likelihood of price adjustment-evidence of wait and see pricing.
    Keywords: Demand uncertainty; Firm survey data; Price setting; Strategic complementarity
    JEL: D22 D84 E31 E32
    Date: 2019–03–29
  6. By: Swoboda, Sandra Maria
    Abstract: Cartel duration is influenced by market structure but it also varies depending on the cause of cartel death. This paper distinguishes between determinants which increase the probability of death by leniency application and those that increase the probability of death through intervention by competition authorities. Proportional hazard models with competing risks are applied to detected EU cartel cases for the period 2001 to 2017. The analysis indicates that the existence of industry specific problems or high cumulative market share do not give cartel members an incentive to apply for leniency, whereas companies which benefit from advantages or the existence of buyer power on the demand side are more likely to denounce the cartel. Regardless of the cause of their death, cartels lasted longer if they operated across different markets. Likewise, the probability of cartel detection by competition authorities decreases if cartel agreements affect heterogeneous products. In contrast, detection probability increases if companies are organised around an industry association with regular meetings or in case the cartel has a leader.
    Date: 2018
  7. By: Samuel de Haas (Justus-Liebig-University Giessen)
    Abstract: Non-controlling minority shareholdings in rivals (NCMS) lower the sustainability of collusion under a wide variety of circumstances. Nevertheless, NCMS are sometimes deemed to facilitate collusion, in particular if the level of NCMS is exogenous. The present paper endogenizes firms' choice of NCMS and answers the question: Would colluding firms find it rational to acquire NCMS in rivals? The study of the acquisition reveals that firms have an incentive to acquire NCMS which are accompanied by a shift from collusive to competitive behaviour.
    Keywords: Collusion, Coordinated Effects, Minority Shareholdings, Merger Control, Unilateral Effects
    JEL: G34 K21 L41
    Date: 2019
  8. By: Michael Peneder (WIFO); Mark Thompson; Martin Wörter
    Abstract: We test whether intellectual property rights foster or hinder innovation by estimating IV structural equations for a large sample of Swiss firms. We find that better appropriability conditions at the industry level raise the number of competitors. However, conditional on the given industry structure, individual firms face fewer competitors, if they actually use intellectual property rights. The further impact of fewer competitors is to raise R&D, when initial competition is strong, but to reduce it, when initial competition is weak ("inverted U").
    Keywords: patents, innovation, competition, simultaneous system
    Date: 2019–03–27
  9. By: Benjamin Eden (Vanderbilt University); Maya Eden (Brandeis University); Jonah Yuen (Vanderbilt University)
    Abstract: This paper studies the role of temporary sales in the reaction to aggregate shocks. Using scanner data from supermarkets, we establish the following stylized facts: (a) The fraction of stores that offer sale prices fluctuate over weeks; (b) Goods with more fluctuations in regular prices have also more sales; (c) Temporary sales contribute substantially to the weekly variation of the average cross-sectional price of the typical good; (d) High prices appear to be more rigid than low prices. These findings can be rationalized by a model in which prices are completely flexible and temporary sales are reactions to unwanted inventories which accrue in response to aggregate demand shocks.
    Keywords: Temporary Sales, Unwanted Inventories, Sequential Trade
    JEL: E0 D4
    Date: 2019–03–25
  10. By: Valentini, Edilio; Vitale, Paolo
    Abstract: In this paper we present a dynamic discrete-time model that allows to investigate the impact of risk-aversion in an oligopoly characterized by a homogeneous non-storable good, sticky prices and uncertainty. Our model nests the classical dynamic oligopoly model with sticky prices by Fershtman and Kamien (Fershtman and Kamien, 1987), which can be viewed as the continuous-time limit of our model with no uncertainty and no risk-aversion. Focusing on the continuous-time limit of the infinite horizon formulation we show that the optimal production strategy and the consequent equilibrium price are, respectively, directly and inversely related to the degrees of uncertainty and risk-aversion. However, the effect of uncertainty and risk-aversion crucially depends on price stickiness since, when prices can adjust instantaneously, the steady state equilibrium in our model with uncertainty and risk aversion collapses to Fershtman and Kamien’s analogue.
    Keywords: Research Methods/ Statistical Methods
    Date: 2019–03–19
  11. By: Elif Ozcan Tok
    Abstract: In this study, a bargaining between buyers and sellers on a stationary two-sided supply chain network is modelled. Any further restrictions on the network structure is not imposed. Both buyers and sellers are allowed to make offers in the bargaining game. Furthermore, valuations of buyers for the good are heterogeneous. The results reveal that the equilibrium payoffs in the bargaining game that we study depend on the valuations of the buyers and the network positions of all players. As such, these two factors turn out to be the main sources of bargaining power.
    Keywords: Bargaining, Heterogeneity, Networks, Supply chain
    JEL: C78 L14
    Date: 2019
  12. By: David S. Abrams; Ufuk Akcigit; Gokhan Oz; Jeremy G. Pearce
    Abstract: How do non-practicing entities ("Patent Trolls") impact innovation and technological progress? Although this question has important implications for industrial policy, little direct evidence about it exists. This paper provides new theoretical and empirical evidence to fill that gap. In the process, we inform a debate that has historically portrayed non-practicing entities (NPEs) as either "benign middlemen", who help to reallocate IP to where it is most productive, or "stick-up artists", who exploit the patent system to extract rents and thereby hurt innovation. We employ unprecedented access to NPE-derived patent and financial data, as well as a novel model that guides our data analysis. We find that NPEs acquire patents from small firms and those that are more litigation-prone, as well as ones that are not core to the seller's business. When NPEs license patents, those that generate higher fees are closer to the licensee's business and more likely to be litigated. We also find that downstream innovation drops in fields where patents have been acquired by NPEs. Finally, our numerical analysis shows that the existence of NPEs encourages upstream innovation and discourages downstream innovation. The overall impact of NPEs depends on the share of patent infringements that come from non-innovating producers. Our results provide some support for both views of NPEs and suggests that a more nuanced perspective on NPEs and additional empirical work are needed to make informed policy decisions.
    JEL: O31 O34
    Date: 2019–03
  13. By: Impullitti, G.; Licandro, O., Rendahl, P.; Rendahl, P.
    Abstract: We study the gains from trade in a new model with oligopolistic competition, firm heterogeneity, and innovation. Lowering trade costs reduces markups on domestic sales but increases markups on export sales, as firms do not pass the entire reduction in trade costs onto foreign consumers. Trade liberalisation can also reduce the number of firms competing in each market, thereby increasing markups on both domestic and export sales. For the majority of exporters, however, the procompetitive effect prevails and their avera ge markups decline. The incomplete pass-though and the reduction in the number of competitors instead dominate for top-exporters – the top 0:1% of firms which end up increasing their markup. In a quantitative exercise we find that the aggregate effect of trade-induced markup changes is pro-competitive and accounts for the majority of the welfare gains from trade. Trade-induced changes in competition affect survival on domestic and export markets and firms’ decision to innovate. All exporters, and especially the top exporters, increase their market size after liberalisation which, in turn, encourages them to innovate more. Hence, top exporters contribute negatively to welfare gains by increasing their markups but positively by increasing innovation and productivity. Firms’ innovation response accounts for a small but non-negligible share of the welfare gains while the contribution of selection is U-shaped, being negative for small liberalisations and positive otherwise. A more globalised economy is therefore populated by larger, fewer and more innovative firms, each feature representing an important source of the gains from trade.
    Keywords: Gains from Trade, Heterogeneous Firms, Oligopoly, Innovation, Endogenous Markups, Endogenous Market Structure.
    JEL: F12 F13 O31 O41
    Date: 2018–11–26
  14. By: Bin Grace Li; James McAndrews; Zhu Wang
    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 twosided 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.
    Date: 2019–03–18
  15. By: Gibbons, Eric M.; Greenman, Allie; Norlander, Peter; Sørensen, Todd
    Abstract: Guest workers on visas in the United States may be unable to quit bad employers due to barriers to mobility and a lack of labor market competition. Using H-1B, H-2A, and H-2B program data, we calculate the concentration of employers in geographically defined labor markets within occupations. We find that many guest workers face moderately or highly concentrated labor markets, based on federal merger scrutiny guidelines, and that concentration generally decreases wages. For example, moving from a market with an HHI of zero to a market comprised of two employers lowers H-1B worker wages approximately 10 percent, and a pure monopsony (one employer) reduces wages by 13 percent. A simulation shows that wages under pure monopsony could be 47 percent lower, suggesting that employers do not use the extent of their monopsony power. Enforcing wage regulations and decreasing barriers to mobility may better address issues of exploitation than antitrust scrutiny.
    Date: 2019
  16. By: Liu, HuiHui; Zhang, ZhongXiang; Chen, ZhanMing; Dou, DeSheng
    Abstract: The regulated price mechanism in China’s power industry has attracted much criticism because of its incapability to optimize the allocation of resources. To build an “open, orderly, competitive and complete” power market system, the Chinese government launched an unprecedented marketization reform in 2015 to deregulate the electricity price. This paper examines the impact of the electricity price deregulation in the industry level. We first construct two-stage dynamic game models by taking the coal and coal-fired power industries as the players. Using the models, we compare analytically the equilibriums with and without electricity regulation, and examine the changes in electricity price, electricity generation, coal price and coal traded quantity. The theoretical analyses show that there are three intervals of the regulated electricity sales prices which influence the impact of electricity price deregulation. Next, we collect empirical data to estimate the parameters in the game models, and simulate the influence of electricity deregulation on the two industries in terms of market outcome and industrial profitability. Our results suggest that the actual regulated electricity price falls within the medium interval of the theoretical results, which means the price deregulation will result in higher electricity sales price but lower coal price, less coal traded amount and less electricity generation amount. The robustness analysis shows that our results hold with respect to the electricity generation efficiency and price elasticity of electricity demand.
    Keywords: Resource /Energy Economics and Policy
    Date: 2018–06–07
  17. By: Michael Hellwig; Dominik Schober; Luis Cabral
    Date: 2018
  18. By: Luis Cabral; Gabriel Natividad
    Date: 2018

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