nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒04‒15
24 papers chosen by
Russell Pittman
United States Department of Justice

  1. Endogenous vertical segmentation in a Cournot oligopoly By BELLEFLAMME Paul,; FORLIN Valeria,
  2. Oligopoly Price Discrimination: The Role of Inventory Controls By James D. Dana Jr.; Kevin R. Williams
  3. Transport Price, Product Differentiation and R&D in an Oligopoly By Kanehara, Daishoku; Kamei, Keita
  4. Public-Private Competition in Regulated Markets By Ziad R. Ghandour
  5. 25 Years of European Merger Control By Pauline Affeldt; Tomaso Duso; Florian Szücs
  6. Managing Channel Profits when Retailers have Profitable Outside Options By Inderst, Roman; Shaffer, Greg
  7. Antitrust Analysis with Upward Pricing Pressure and Cost Efficiencies By Jessica Dutra; Tarun Sabarwal
  8. Hump-shaped cross-price effects and the extensive margin in cross-border shopping By Steen, Frode
  9. Strict Fairness of Equilibria in Mixed and Asymmetric Information Economies By Chiara Donnini; Maria Laura Pesce
  10. Hospital Competition in the National Health Service: Evidence from a Patient Choice Reform By Kurt R. Brekke; Chiara Canta; Luigi Siciliani; Odd Rune Straume
  11. Economic effects of Transmission Expansions: The case of the Regulated Contract Market in Chile By Javier Bustos-Salvagno; Fernando Fuentes H.
  12. The Production of Information in an Online World: Is Copy Right? By Julia Cage; Nicolas Hervé; Marie-Luce Viaud
  13. Market Power and Innovation in the Intangible Economy By Maarten de Ridder
  14. Regulating Cancellation Rights with Consumer Experimentation By Hoffmann, Florian; Inderst, Roman
  15. Dynamic Hospital Competition Under Rationing by Waiting Times By Luís Sá; Luigi Siciliani; Odd Rune Straume
  16. Opening Internet Monopolies to Competition with Data Sharing Mandates By Claudia Biancotti; Paolo Ciocca
  17. Pricing under Fairness Concerns By Erik Eyster; Kristof Madarasz; Pascal Michaillat
  18. Paywalls and the demand for online news By Skjeret, Frode; Steen, Frode; Wyndham, Timothy G.A.
  19. An "Image Theory" of RPM By Inderst, Roman
  20. Deregulation and status quo bias: Evidence from stated and revealed switching behaviors in the electricity market in Japan By Kayo MURAKAMI; Takanori IDA
  21. New Technology and Increasing Returns: The End of the Antitrust Century? By Basu, Kaushik
  22. Spatial Competition of Two-level Hierarchical Transportation Systems under Economies of Scale in Transportation Cost By NISHIDA, Kiheiji
  23. Market Heterogeneity and the Distributional Incidence of Soft-drink Taxes: Evidence from France By Fabrice Etilé; Sebastien Lecocq; Christine Boizot-Szantai
  24. Credence Goods Markets with Fair and Opportunistic Experts By Joachim Heinzel

  1. By: BELLEFLAMME Paul, (CORE, UCLouvain); FORLIN Valeria, (CORE, UCLouvain and European Commission, DG Clima)
    Abstract: An arbitrary number of (ex ante symmetric) firms first choose whether to produce a high-quality or a low-quality product and then the quantity of product to put on the market. We establish the following results: (i) there exists competition within and across quality segments; (ii) firms may be better off producing the low quality if competition within this segment is sufficiently low; (iii) a firm's switch across qualities may benefit all the other firms; (iv) there exists a unique partition of the firms between the two quality segments; (v) if high quality has a larger cost-quality ratio, then the equilibrium exhibits vertical differentiation; (vi) there may be too much differentiation from the consumers' point of view.
    Keywords: quality, differentiation, oligopolistic competition
    JEL: D43 L13 L25
    Date: 2019–03–06
  2. By: James D. Dana Jr. (Northwestern University); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: When ?rms ?rst choose capacity and then compete on prices in a series of advance-purchase markets, we show that strong competitive forces prevent firms from utilizing intertemporal price discrimination. We then enrich the model by allowing ?rms to use inventory controls, or sales limits assigned to individual prices. We show that ?rms will choose to set inventory controls in order to engage in intertemporal price discrimination, but only if demand becomes more inelastic over time. Thus, although typically viewed as a tool to manage demand uncertainty, we show that inventory controls can also facilitate price discrimination in oligopoly.
    Keywords: Capacity-pricing games, Intertemporal price discrimination, Oligopoly models, Inventory controls
    JEL: D21 D43 L13
    Date: 2018–06
  3. By: Kanehara, Daishoku; Kamei, Keita
    Abstract: This study incorporates transport price and endogenous product differentiation in an international oligopoly. Assuming endogenous determination of transport price based on the profit maximization of the transporter and using a three-stage game, we analyze the effect of the degree and difficulty of product differentiation on transport price. We show that both negatively affect the endogenous transport price. The intuition of this result comes from that the positive effect of a decrease in endogenous transport price on the demand for the differentiated products is greater than the negative effect on the price.
    Keywords: Endogenous Product Differentiation; International Trade; Oligopoly; Product R&D; Transport Price.
    JEL: F12 L13 L16 O1
    Date: 2019–04–07
  4. By: Ziad R. Ghandour (Department of Economics / NIPE, University of Minho)
    Abstract: We analyse the effect of competition on quality provision in mixed markets, such as healthcare and education, where public and private providers coexist. We draw two key assumptions about the public provider in such markets, namely in that it faces a regulated price and is (partly) motivated. We also explore the effects of changes in the state subsidy and co-payment fees. Our main contribution is that, under certain circumstances, more competition leads to lower average quality in equilibrium. Similarly, the effects of higher co-payment fees or larger state subsidies on average quality are also a priori ambiguous. These conclusions hold regardless of whether providers seek profit maximisation or the public provider has altruistic preferences. Furthermore, we characterise the incentives for the private provider to unilaterally relocate towards the public provider.
    Keywords: Mixed Duopoly, Competition, Quality Provision, Motivated Provider, State Subsidy, Co-payment Fees
    JEL: D4 L1 L2 L3
    Date: 2019
  5. By: Pauline Affeldt; Tomaso Duso; Florian Szücs
    Abstract: We study the evolution of the EC’s merger decision procedure over the first 25 years of European competition policy. Using a novel dataset constructed at the level of the relevant markets and containing all merger cases over the 1990-2014 period, we evaluate how consistently arguments related to structural market parameters were applied over time. Using non-parametric machine learning techniques, we find that the importance of market shares and concentration measures has declined while the importance of barriers to entry and the risk of foreclosure has increased in the EC’s merger assessment following the 2004 merger policy reform.
    Keywords: Merger policy, DG competition, causal forests
    JEL: K21 L40
    Date: 2019
  6. By: Inderst, Roman; Shaffer, Greg
    Abstract: The channel-coordination literature typically focuses on how a supplier canovercome channel inefficiencies stemming from misaligned pricing incentives. In contrast, we show that when an incumbent supplier faces competition from other suppliers to supply the downstream firms, it may want to create inefficiencies. Our analysis offers useful prescriptions for how incumbent suppliers should react to competitive threats by smaller competitors, how manufacturers should react to powerful retailers who can produce their own private-label brands, and how upstream firms should optimally treat downstream firms who may have different marginal costs of distribution. Our analysis also explains why wholesale prices and thus final-goods prices would be expected to decrease when there is an increase in upstream or downstream competition.
    Keywords: channel coordination; Distribution channels; Game theory
    Date: 2019–04
  7. By: Jessica Dutra (Department of Economics, The University of Kansas); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. We include model-based, merger-specific cost efficiencies in a tractable manner and extend the standard UPP formulation to account for these efficiencies. The efficacy of the new UPP formulations is analyzed using Monte Carlo simulation of 40,000 mergers (8 scenarios, 5,000 mergers in each scenario). We find that the new UPP formulations yield substantial gains in prediction of post-merger prices, and there are substantial gains in merger screening accuracy as well. Moreover, the new UPP formulations outperform the standard UPP formulation at higher thresholds for all the standard cases in the paper. The results support the inclusion of model-based cost efficiencies in the standard UPP formulation for more accurate antitrust decision-making.
    Keywords: upward pricing pressure, merger efficiency, monte carlo, UPP, mergers, antitrust, unilateral effects, cost efficiencies
    JEL: K21 L11 L41 L13
    Date: 2019–04
  8. By: Steen, Frode
    Abstract: This paper examines the effect of cross-border shopping on grocery demand in Norway using monthly store*category sales data from Norway's largest grocery chain 2011-2016. The sensitivity of demand to foreign price is hump-shaped and greatest 30-60 minutes' driving distance from the closest foreign store. Combining continuous demand, fixed costs of cross-border shopping and linear transport costs `a la Hotelling we show how this hump-shape can arise through a combination of intensive and extensive margins of cross-border shopping. Our conclusions are further supported by novel survey evidence and cross-border traffic data.
    Keywords: competition in grocery markets; Cross-border shopping; product differentiation
    JEL: F15 H73 L66 R20
    Date: 2019–04
  9. By: Chiara Donnini (Università di Napoli Parthenope); Maria Laura Pesce (Università di Napoli Federico II)
    Abstract: We investigate the fairness property of equal-division competitive market equilibria (CME) in asymmetric information economies with a space of agents that may contain non-negligible (large) traders. We first propose an extension to our framework of the notion of strict fairness due to Zhou (1992). We prove that once agents are asymmetrically informed, any equal-division CME allocation is strictly fair, but a strictly fair allocation might not be supported by an equilibrium price. Then, we investigate the role of large traders and we provide two sufficient conditions under which, in the case of complete information economies, a redistribution of resources is strictly fair if and only if it results from a competitive mechanism.
    Keywords: Asymmetric information, mixed markets, strict fairness, competitive equilibrium.
    JEL: D43 D60 D82
    Date: 2019–04–08
  10. By: Kurt R. Brekke (Norwegian School of Economics (NHH)); Chiara Canta (Toulouse Business School); Luigi Siciliani (University of York, Department of Economics and Related Studies); Odd Rune Straume (University of Minho, Department of Economics/NIPE)
    Abstract: We study the impact of exposing hospitals in a National Health Service (NHS) to non-price competition by exploiting a patient choice reform in Norway in 2001. The reform facilitates a dfference-in-difference research design due to geographical variation in the scope for competition. Using rich administrative data covering the universe of NHS hospital admissions from 1998 to 2005, we find that hospitals in more competitive areas have a sharper reduction in AMI mortality, readmissions, and length of stay than hospitals in less competitive areas. These results indicate that competition improves patient health outcomes and hospital cost efficiency, even in the Norwegian NHS with large distances, low fixed treatment prices, and mainly public hospitals.
    Keywords: Patient Choice; Hospital Competition; Quality; Cost-efficiency
    JEL: I11 I18 L13
    Date: 2018
  11. By: Javier Bustos-Salvagno (ILADES – Universidad Alberto Hurtado); Fernando Fuentes H. (ILADES – Universidad Alberto Hurtado)
    Abstract: One of the main issues in deciding an expansion in power transmission capacity is the effect on generators’ competition. This paper aims to perform an econometric estimation of the main determinants of long-term regulated contract prices from 2006 to 2014 and use the results to estimate the effect on market power reduction of an interconnection of the two main power systems in Chile.
    Keywords: Power Transmission, Market Power, Contracts, Prices, Auctions, Chile
  12. By: Julia Cage (Département d'économie); Nicolas Hervé (Institut national de l'audiovisuel); Marie-Luce Viaud (Institut national de l'audiovisuel)
    Abstract: This paper documents the extent of copying and estimates the returns to originality in online news production. We build a unique dataset combining all the online content produced by French news media during the year 2013 with new micro audience data. We develop a topic detection algorithm that identifies each news event, trace the timeline of each story, and study news propagation. We unravel new evidence on online news production. First, we document high reactivity of online media: one quarter of the news stories are reproduced online in under 4 minutes. Second, we show that this comes with extensive copying: only 33% of the online content is original. Third, we investigate the cost of copying for original news producers. Using article-level variations and media-level daily audience combined with article-level social media statistics, we find that readers partly switch to the original producers, thereby mitigating the newsgathering incentive problem raised by copying.
    Keywords: Internet; Information spreading; Copyright; Social media; Reputation
    JEL: L11 L15 L82 L86
    Date: 2019–04
  13. By: Maarten de Ridder (Centre for Macroeconomics (CFM); University of Cambridge)
    Abstract: Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles cause a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs and endogenously raise fixed costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits.
    Keywords: Business dynamism, Growth, Intangibles, Productivity, Market power
    Date: 2019–03
  14. By: Hoffmann, Florian; Inderst, Roman
    Abstract: Embedding consumer experimentation with a product or service into a market environment, we find that unregulated contracts induce too few returns or cancellations, as they do not internalize a pecuniary externality on other firms in the market. Forcing firms to let consumers learn longer by imposing a commonly observed statutory minimum cancellation or refund period is socially efficient only when firms appropriate much of the market surplus, while it backfires otherwise. Interestingly, cancellation rights are a poor predictor of competition, as in the unregulated outcome firms grant particularly generous rights when competition is neither too low nor too high.
    Date: 2019–04
  15. By: Luís Sá (University of Minho, Department of Economics/NIPE); Luigi Siciliani (University of York, Department of Economics and Related Studies); Odd Rune Straume (University of Minho, Department of Economics/NIPE)
    Abstract: We develop a dynamic model of hospital competition where (i) waiting times increase if demand exceeds supply; (ii) patients differ in their evaluation of health benefits and choose a hospital based on waiting times; and (iii) there are penalties for providers with long waits. We show that, if penalties are linear in waiting times, a more competitive dynamic environment does not affect waiting times. If penalties are instead non-linear, we find that waiting times are longer under the more competitive environment. The latter result is derived by calibrating the model with waiting times and elasticities observed in the English NHS for a common treatment (cataract surgery), which also shows that the difference between waiting times under the two solution concepts is quantitatively small. Policies that facilitate patient choice, an alternative measure of competition, also lead to higher steady-state waiting times, and tougher penalties exacerbate the negative effect of choice policies.
    Keywords: Hospital competition; waiting times; differential games.
    JEL: C73 H42 I11 I18 L42
    Date: 2018
  16. By: Claudia Biancotti (Peterson Institute for International Economics); Paolo Ciocca (Consob)
    Abstract: Over the past few years, it has become apparent that a small number of technology companies have assembled detailed datasets on the characteristics, preferences, and behavior of billions of individuals. This concentration of data is at the root of a worrying power imbalance between dominant internet firms and the rest of society, reflecting negatively on collective security, consumer rights, and competition. Introducing data sharing mandates, or requirements for market leaders to share user data with other firms and academia, would have a positive effect on competition. As data are a key input for artificial intelligence (AI), more widely available information would help spread the benefits of AI through the economy. On the other hand, data sharing could worsen existing risks to consumer privacy and collective security. Policymakers intending to implement a data sharing mandate should carefully evaluate this tradeoff.
    Date: 2019–04
  17. By: Erik Eyster; Kristof Madarasz; Pascal Michaillat
    Abstract: This paper proposes a theory of pricing consistent with two well-documented patterns: customers care about fairness, and firms take these concerns into account when they set prices. The theory assumes that customers find a price unfair when it carries a high markup over cost, and that customers dislike unfair prices. Since markups are not observable, customers must extract them from prices. The theory assumes that customers infer less than rationally: when a price rises after an increase in marginal cost, customers partially misattribute the higher price to a higher markup---which they find unfair. Firms anticipate this response and trim their price increases, which reduces the passthrough of marginal costs into prices below one: prices are somewhat rigid. Embedded in a New Keynesian model---as a replacement of Calvo pricing---our theory produces monetary nonneutrality. When monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate the perceived unfairness of prices by reducing their markups, which in general equilibrium leads to higher output.
    Date: 2019–04
  18. By: Skjeret, Frode (SNF); Steen, Frode (Dept. of Economics, Norwegian School of Economics and Business Administration); Wyndham, Timothy G.A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The digitisation of society has posed a challenge to news outlets. Seeking advertising revenues and facing competition for the attention of their readers, many news outlets entered the digital era with unrestricted access to their online content. More recently, news outlets have sought to restrict the amount of content available for free. We quantify the impact of introducing a paywall on the demand for news in Norway. The short-run average impact of a paywall is negative and between 3 and 4%, in the long run the effect increases to between 9 and 11%. We find heterogeneity in the response to paywalls. The largest news outlet within its market experiences larger effects than the other news outlets. After introducing a paywall, the largest news outlets face a long-run reduction in demand between 13 and 15%, as compared to the others who experience a decrease of between 8 and 11%. The timing of introducing a paywall does not seem to affect the demand response very much.
    Keywords: Online news; paywalls; business models; two-sided markets
    JEL: D40 L20 L82
    Date: 2019–05–22
  19. By: Inderst, Roman
    Abstract: We show how a brand manufacturerís control over retail prices can lead to e¢ cien-cies when consumers rely on prices as a signal of quality. For this we first show how higher prices can be associated with both higher quality perception as well as higher actual quality. We next identify a conflict of interest between retailers and manufactures. Retailers do not internalize the ensuing reputation spill-over that higher prices have on demand at all outlets. And they have less incentives to support brand image through higher prices as this erodes their own position in negotiations while increasing that of the manufacturer. Our efficiency defence for RPM thus applies even when retailers need not be incentivized to undertake non-contractible activities, as in our model the key opportunism problem, with respect to quality provision, lies between the manufacturer and consumers.
    Date: 2019–04
  20. By: Kayo MURAKAMI; Takanori IDA
    Abstract: This study investigates consumers’ status quo bias against new alternatives after deregulation in the residential electricity market in Japan. We conducted two choice experiments using online surveys before and after deregulation, and analyzed the relationship between consumers’ stated preferences and their revealed switching behaviors. The results indicate that the average Japanese consumer experiences status quo bias in electricity plan choice; consumers preferred to remain with their default provider despite the obvious 5% bill savings that could be gained from switching to a new provider. Moreover, respondents who did not switch in the real market became twice as attached to their default plan after their actual decision. In addition, respondents who switched soon after deregulation had a higher stated preference for renewable energy sources. This implies that new electricity plans that enhance clean energy have more potential to moderate consumer status quo bias in electricity plan choice. By simulating the potential share of new providers in the liberalized market, we found that a 50% renewable-energy plan has a larger potential market share than a plan that offers a 7% bill reduction under price competition.
    Date: 2019–04
  21. By: Basu, Kaushik (World Bank)
    Abstract: The advance of digital technology is changing the nature of markets, enhancing the capacity of corporations to extract more consumers' surplus and lower the wages paid to workers. The rise of new technology has also diminished the efficacy of traditional laws to regulate firms and corporations. This is best illustrated by antitrust laws. With the new technology, there is greater returns to scale in production, and further, it is possible to have different components of the same final good be produced by different firms in faraway places. Unlike in earlier times the n firms in one industry, say the automobile industry, would all be producing cars, now the n firms in that industry produce n different parts of the product, thereby getting enormous returns to scale. Such markets are described as vertically serrated markets and their equilibria are characterized. Traditional antitrust law does not apply to these markets because the high returns to scale are natural and not artificially induced. This compels us to look for novel ways to regulate such markets. This paper discusses, in particular, laws that compel firms to have widely dispersed share holdings.
    Keywords: antitrust law, share distribution, technological advance, labor demand
    JEL: K21 L13 O33
    Date: 2019–04
  22. By: NISHIDA, Kiheiji
    Abstract: In this short paper, we consider how the hierarchical structure in transportation, in which goods are transported from demand points to nearby terminal stations in the first level of hierarchy and from station to station in the second, emerges in competition between transportation companies having economies of scale in volume and distance. We conmpare the competitive and planning locations of terminal stations of the hierarchical system using a Hotelling-style spatial competition model (1929). We find that a competitive location can be generated in an area where the planning location can never be generated. We also find no difference between the two when point-to-point transportation is replaced by transportation in bulk.
    Keywords: Hierarchy system, Economy of scale in volume, Economy of scale in travelling distance, Competitive location, Planning location.
    JEL: R41
    Date: 2018
  23. By: Fabrice Etilé (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Sebastien Lecocq (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique); Christine Boizot-Szantai (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique)
    Abstract: Market heterogeneity may affect the distributional incidence of soft-drink taxes if households sort by income across markets with different characteristics. We use the Kantar Worldpanel homescan data to analyse the distributional incidence of the 2012 French soda tax on Exact Price Indices (EPIs) that measure consumer welfare from the price, availability and consumption of Sugar-Sweetened Beverages (SSBs) at a local market level. After correcting prices for consumer heterogeneity in preferences, we find that the soda tax had a significant but small national average impact corres- ponding to a pass-through of approximately 40%. Producers and retailers set significantly higher pass-throughs in low-income, less-competitive and smaller markets and for cheaper but less popular brands. Market heterogeneity ultimately has substantial distributional effects, as it accounts for approximately 35% of the difference in welfare variation between low- and high-income consumers.
    Keywords: Soft-drink tax,Nutrition,Tax incidence,Inequality,Market Structure,Consumer Price Index
    Date: 2019–03
  24. By: Joachim Heinzel (Paderborn University)
    Abstract: We analyze a credence goods market adapted to a health care market with regulated prices, where physicians are heterogeneous regarding their fairness concerns. The opportunistic physicians only consider monetary incentives while the fair physicians, in addition to a monetary payoff, gain an non-monetary utility from being honest towards patients. We investigate how this heterogeneity affects the physicians’ equilibrium level of overcharging and the patients’ search for second opinions (which determines overall welfare). The impact of the heterogeneity on the fraud level is ambiguous and depends on several factors such as the size of the fairness utility, the share of fair physicians, the search level and the initial fraud level. Introducing heterogeneity does not affect the fraud or the search level when the share of fair physicians is small. However, when social welfare is not at its maximum, social welfare always increases if we introduce a sufficiently large share of fair physicians.
    Keywords: credence goods, heterogeneous experts, fairness, overcharging
    JEL: D82 I11 L15
    Date: 2019–02

This nep-com issue is ©2019 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.