nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒09‒16
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Production Substitution of Goods Within and Between Firms in a Multiproduct Duopoly By Tetsuya Shinkai; Ryoma Kitamura
  2. Public interest considerations in European merger control regimes By Budzinski, Oliver; Stöhr, Annika
  3. General Competing Mechanisms with Frictions By Seungjin Han
  4. A Structural Estimation Approach to an Asymmetric Auction Model for the Japanese Retail Power Market By Shingo Takagi; Nobuhiro Hosoe
  5. Bank Market Power and Firm Finance: Evidence from Bank and Loan Level Data By Cesar E. Tamayo; Jose E. Gomez-Gonzalez; Oscar M. Valencia
  6. Price Discrimination within and across EMU Markets: Evidence from French Exporters By François Fontaine; Julien Martin; Isabelle Mejean
  7. On the competitive effects of screening in procurement By Adam Pigoñ; Gyula Seres
  8. Solution Algorithms for Optimal Buy-Back Contracts in Multi-period Channel Equilibria with Stochastic Demand and Delayed Information By Azad Gholami, Reza; Sandal, Leif K.; Ubøe, Jan
  9. Nash Equilibria in Optimal Reinsurance Bargaining By Michail Anthropelos; Tim J. Boonen
  10. Markets With Memory: Dynamic Channel Optimization Models With Price-Dependent Stochastic Demand By Azad Gholami, Reza; Sandal, Leif K.; Ubøe, Jan
  11. Multiple Applications, Competing Mechanisms, and Market Power By James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
  12. Durables and Lemons: Private Information and the Market for Cars By Richard Blundell; Ran Gu; Soren Leth-Petersen; Hamish Low; Costas Meghir
  13. Competition issues in the fluid milk industry in the Eastern United States By Bolotova, Yuliya
  14. Why do R&D-intensive firms participate in standards organizations? The role of patents and product-market position By Justus Baron; Cher Li; Shukhrat Nasirov
  15. Exploring In-Game Advertising and Brand Recall By Naglaa Diaa Ramzy; Sireen Abdulhalim; Pansee Mashaly
  16. The Global Value Chain under Imperfect Capital Markets By Jaerim Choi
  17. Optimal Ratings and Market Outcomes By Hugo Hopenhayn; Maryam Saeedi
  18. Switching costs in the Finnish retail deposit market By Takalo, Tuomas

  1. By: Tetsuya Shinkai (School of Economics, Kwansei Gakuin University); Ryoma Kitamura (Faculty of Economics, Otemon Gakuin University)
    Abstract: We consider the product line strategies of duopolistic firms, each of which can supply two vertically-differentiated products under nonnegative output constraints and expectations of their rival's product line reaction. Considering a game of firms with heterogeneous (homogeneous) unit costs for high- (low-) quality products, we derive the equilibria for the game and conduct comparative statics of the equilibria outcomes on the relative superiority of the high-quality product and relative cost efficiency. In two of the equilibria, we find that where the cost-inefficient firm supplies a high-quality good, social welfare can worsen as its unit cost decreases. We also characterize the result using the production substitution of differentiated goods within a firm and the high-quality good between firms. Further, by comparing social welfare in the first-best equilibria with those in the Cournot duopoly equilibria, we find that the social welfare of the market worsens in the multiproduct Cournot duopoly equilibria as the relative superiority of the high-quality good increases.
    Keywords: Multiproduct firm; Duopoly; Production substitution; Vertical product differentiation
    JEL: D21 D43 L13 L15
    Date: 2019–09
  2. By: Budzinski, Oliver; Stöhr, Annika
    Abstract: Nowadays, merger control predominantly relies upon a strict analysis of the effects from merger and acquisitions on effective competition. However, there is scope for so-called public interest considerations in several European merger control regimes and recently a number of European politicians have called for more elbowroom for non-competition-oriented interventions into merger control. For instance, they did so in the context of the prohibition of the Siemens-Alstommerger and the upcoming industrial policy discussion about European Champions. Since the social welfare effects of competitive markets present an important public interest in itself, additional public interest considerations justifying an intervention need to be non-market in the sense that these goals stand in conflict with competition. However, a trade-off between effective competition and public interest, i.e. public interests that are better served through market power then through effective competition, is a rare phenomenon. This paper gives an overview of public interest considerations in the merger policy of European Union member states and analyzes four jurisdictions in more detail. We find that the institutional designs how public interests considerations are included in the merger control regimes lack focus on non-market public interest considerations across the analyzed jurisdictions. Furthermore, there are relevant shortcomings regarding transparency and legal certainty. Moreover, our ex-pots analysis shows that the empirical record of past public interest-motivated interventions is questionable with only few interventions yielding the desired effects. Therefore, we suggest revising the public interest regulations in the respective merger control regulations by narrowing their focus to real non-market public interests and by levying decision power on less politically-influenced bodies.
    Keywords: competition policy,antitrust,merger control,industrial economics,public interest,governance,competition law,law & economics,institutional economics,German competition policy,UK competition policy,French competition policy,Austrian competition policy
    JEL: K21 K23 D43 L51 F52 F55
    Date: 2019
  3. By: Seungjin Han
    Abstract: This paper studies the class of robust equilibria in a general competing mechanism game for decentralized markets with frictions in which non-deviating sellers punish a deviator with dominant strategy incentive compatible (DIC) direct mechanisms. Given one-dimensional, independent, and private types, the lower bound of a seller's payoff in such equilibria is his minmax value over all DIC direct mechanisms if a seller can deviate to a contract that determines a menu of any complex mechanisms conditional on buyers' messages and he chooses a mechanism he wants from it. In applications, the number of sellers is endogenized given a number of buyers and fixed entry costs. As the number of buyer increases, a unique equilibrium emerges and the equilibrium ratio of buyers to sellers converges to the point where a seller's net profit is zero with the monopoly terms of trade.
    Keywords: competing mechanisms, dominant strategy incentive compatibility, frictions, implicit collusion
    JEL: C72 D82
    Date: 2019–09
  4. By: Shingo Takagi (Hokkaido University, Hokkaido, Japan); Nobuhiro Hosoe (National Graduate Institute for Policy Studies, Tokyo, Japan)
    Abstract: In this paper, we develop a structural auction model and quantify the effects of policy measures aiming to enhance competition in the Japanese retail power market. We employ a theoretical model that incorporates asymmetries between the incumbent and entrants in terms of both the cost and information structures, where the costs of the former are assumed common knowledge, and empirically estimate the structural parameters characterizing their cost distributions using public power procurement data. We then conduct counterfactual simulations to quantify two competition-promoting policy measures: a bid preference program for entrants, and an increase in the number of potential bidders. We take a parametric approach to estimate the structural model successfully in contrast to a nonparametric approach that previous studies took. Our simulation results show that these procompetitive measures would barely increase participation by potential entrants but would elicit more aggressive incumbent bidding behavior. Further, a modest bid-preferential rate would improve welfare and reduce the probability of realizing inefficient allocations associated with a costly winning bidder.
    Date: 2019–09
  5. By: Cesar E. Tamayo; Jose E. Gomez-Gonzalez; Oscar M. Valencia
    Keywords: Bank competition, market power, Boone, Lerner, Colombia, cost of firm finance, loan-level data.
    JEL: G21 D22 O16
    Date: 2019–09–03
  6. By: François Fontaine; Julien Martin; Isabelle Mejean
    Abstract: We study the cross-sectional dispersion of prices paid by EMU importers for French products. We document a significant level of price dispersion both within product categories across exporters, and within exporters across buyers. This latter source of price discrepancies, sellers' price discrimination across buyers, is indicative of deviations from the law-of-one price. Price discrimination (i) is substantial within the EU, within the euro area, and within EMU countries; (ii) has not decreased over the last two decades; (iii) is more prevalent among the largest firms and for more differentiated products; (iv) is lower among retailers and wholesalers; (v) is also observed within almost perfectly homogenous product categories, which suggests that a non-negligible share of price discrimination is triggered by heterogeneous markups rather than quality or composition effects. We then estimate a rich statistical decomposition of the variance of prices to shed light on exporters' pricing strategies.
    JEL: F1 F14 F4
    Date: 2019–09
  7. By: Adam Pigoñ; Gyula Seres
    Abstract: Procuring authorities frequently use screening in order to mitigate risky bids. This study estimates the effect of bid screening and litigation on entry and bidding using a unique data set on highway construction procurement auctions in Poland. The market exhibits a screening method that ex post selects eligible offers. We demonstrate with an empirical model that this method disproportionately affects small firms and creates a barrier to entry. Our results suggest that screening increases bids by two channels. First, it directly inates bids as well as decreasing entry. Second, in a competitive market, lower entry also inates bids and prices.
    Keywords: Procurement, Auctions, Market Design, Litigation
    JEL: H57 D44 L5
    Date: 2019–08
  8. By: Azad Gholami, Reza (Dept. of Business and Management Science, Norwegian School of Economics); Sandal, Leif K. (Dept. of Business and Management Science, Norwegian School of Economics); Ubøe, Jan (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We analyze the problem of time-dependent channel coordination in the face of uncertain demand. The channel, composed of a manufacturer and a retailer, is to address a time-varying and uncertain price-dependent demand. The decision variables of the manufacturer are wholesale and (possibly zero) buy-back prices, and those of the retailer are order quantity and retail price. Moreover, at each period, the retailer is allowed to postpone her retail price until demand uncertainty is resolved. In order to place emphasis on the price-decadent nature of demand, we embed a class of memory effects in demand structure, such that current demand at each period demand is affected by pricing history as well as current price. The ensuing equilibria problems, thus, become highly nested in time. We then propose our memory-based solution algorithm which coordinates the channel with optimal buy-back contracts at each period. We show that, contrary to the conventional belief, too generous buy-back prices may not only be suboptimal to the manufacturer, but also decrease the expected profit for the retailer and thus for the whole channel.
    Keywords: Stochastic optimization; bilevel programming; game theory; channel coordination; buy-back contracts; price postponement; pricing theory; contract theory
    JEL: C61 C73 D81
    Date: 2019–09–09
  9. By: Michail Anthropelos; Tim J. Boonen
    Abstract: We introduce a strategic behavior in reinsurance bilateral transactions, where agents choose the risk preferences they will appear to have in the transaction. Within a wide class of risk measures, we identify agents' strategic choices to a range of risk aversion coefficients. It is shown that at the strictly beneficial Nash equilibria, agents appear homogeneous with respect to their risk preferences. While the game does not cause any loss of total welfare gain, its allocation between agents is heavily affected by the agents' strategic behavior. This allocation is reflected in the reinsurance premium, while the insurance indemnity remains the same in all strictly beneficial Nash equilibria. Furthermore, the effect of agents' bargaining power vanishes through the game procedure and the agent who gets more welfare gain is the one who has an advantage in choosing the common risk aversion at the equilibrium.
    Date: 2019–09
  10. By: Azad Gholami, Reza (Dept. of Business and Management Science, Norwegian School of Economics); Sandal, Leif K. (Dept. of Business and Management Science, Norwegian School of Economics); Ubøe, Jan (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: Almost every vendor faces uncertain and time-varying demand. Inventory level and price optimization while catering to stochastic demand are conventionally formulated as variants of newsvendor problem. Despite its ubiquity in potential applications, the time-dependent (multi-period) newsvendor problem in its general form has received limited attention in the literature due to its complexity and the highly nested structure of its ensuing optimization problems. The complexity level rises even more when there are more than one decision maker in a supply channel, trying to reach an equilibrium. The purpose of this paper is to construct an explicit and e cient solution procedure for multi-period price-setting newsvendor problems in a Stackelberg framework. In particular, we show that our recursive solution algorithm can be applied to standard contracts such as buy back contracts, revenue sharing contracts, and their generalizations.
    Keywords: Stochastic demand; time-dependent demand; price-dependent demand; memory functions; market engineering; demand manipulation; prescriptive analytics; pricing theory
    JEL: C61 C73 D81
    Date: 2019–09–09
  11. By: James Albrecht; Xiaoming Cai; Pieter A. Gautier; Susan Vroman
    Abstract: We consider a labor market with search frictions in which workers make multiple applications and firms can post and commit to general mechanisms that may be conditioned both on the number of applications received and on the number of offers received by its candidate. When the contract space includes application fees, there exists a continuum of equilibria of which only one is socially efficient. In the inefficient equilibria, firms have market power that arises from the fact that the value of a worker’s application portfolio depends on what other firms offer, which allows individual firms to free ride and offer workers less than their marginal contribution. Finally, by allowing for general mechanisms, we are able to examine the sources of inefficiency in the multiple applications literature.
    Keywords: multiple applications, directed search, competing mechanisms, efficiency, market power
    JEL: C78 D44 D83
    Date: 2019
  12. By: Richard Blundell (University College London); Ran Gu (University of Essex); Soren Leth-Petersen (University of Copenhagen); Hamish Low (University of Oxford); Costas Meghir (Cowles Foundation, Yale University, NBER, IZA, CEPR, and Institute for Fiscal Studies)
    Abstract: We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.
    Keywords: Lemons penalty, Car market, Estimated life-cycle equilibrium model
    JEL: D82 E2
    Date: 2019–09
  13. By: Bolotova, Yuliya
    Keywords: Industrial Organization
    Date: 2019–06–25
  14. By: Justus Baron; Cher Li; Shukhrat Nasirov
    Abstract: This paper examines the determinants of participation of R&D-intensive firms in standards development. Using data on R&D spending, patent, and trademark activities of the world's largest corporate R&D investors and their membership of standards organizations, we find a highly robust positive association between a firm's R&D spending and its participation in standards development. However, the causal effect of R&D spending on membership of standards organizations is conditional upon the firm's patent and/or product-market position, and varies across different types of standards organizations. More specifically, a strong patent position amplifies the effect of R&D spending on participation in standards-developing organizations, while a strong product-market position strengthens the impact of R&D spending on participation in the organizations that promote established standards. Finally, we also show that policy changes that increase the value of patents, such as variations in the preferential tax treatment of patent-related revenue, induce R&D-intensive firms to intensify their participation in standards organizations.
    Keywords: standards organizations, R&D expenditure, patents, trademarks
    Date: 2019
  15. By: Naglaa Diaa Ramzy (Helwan University); Sireen Abdulhalim (Future University in Egypt); Pansee Mashaly (Future University in Egypt)
    Abstract: Digital gaming is increasingly recognized as one of the most important entertainment sectors worldwide, turning it into a promising medium for advertisers. Games are extremely engaging, interactive and challenging, as a result, it attracted advertisers who are seeking the attention of the customers through a nontraditional medium to convey their advertising messages. Along with this growth in digital games, there are several important contextual factors to consider in the selection and placement of the advertising messages in digital games. The objective of this research was to explore the effect of in-game advertising on brand recall processing. The quantitative approach was employed and a survey was distributed on 201 respondents applied on FIFA game players in Egypt. The results showed that in-game advertising has an effect on brand recall. Additionally, the position of the advertisement and time of appearance appear to be the most significant factor in affecting brand recall.
    Keywords: In-Game Advertising - Brand Recall - Advergames- Product placement
    JEL: M30 M39 M37
    Date: 2019–07
  16. By: Jaerim Choi (University of Hawaii at Manoa)
    Abstract: An abstract: This paper develops a model to study how suppliers’ financial constraints interact with suppliers’ position in a global value chain. I embed financial frictions into the property-rights model of the global value chain, as in Antr’and Chor (2013), to derive the optimal allocation of ownership rights along the global value chain. The model predicts that multinational firms are more likely to integrate downstream intermediate input suppliers in countries with weak financial institutions when the production process is sequential complements. Using U.S. intrafirm trade data for the years 2000–2010, together with a triple-interaction term between “downstreamness†of an industry, demand elasticity of an industry, and financial development of a country, I provide empirical evidence that supports the key prediction of the model.
    Keywords: Global value chain, Imperfect capital markets
    JEL: D23 F12 F23 L23 O16
    Date: 2019–08
  17. By: Hugo Hopenhayn; Maryam Saeedi
    Abstract: This paper considers the design of an optimal rating system, in a market with adverse selection. We address two critical questions about rating design: First, given a number of categories, what are the criteria for setting the boundaries between them? Second, what are the gains from increasing the number of categories? A rating system helps reallocate sales from lower- to higher-quality producers, thus mitigating the problem of adverse selection. We focus on two main sources of market heterogeneity that determine the extent and effect of this reallocation: the distribution of firm qualities and the responsiveness of sellers' supply to prices. We provide a simple characterization for the optimal rating system as the solution to a standard k-means clustering problem, and discuss its connection to supply elasticity and the skewness of firm qualities. Our results show that a simple two-tier rating can achieve a large share of full information surplus. Additionally, we characterize the conflicting interests of consumers and producers in the design of a rating system.
    JEL: D21 D60 D82 L11
    Date: 2019–09
  18. By: Takalo, Tuomas
    Abstract: I calibrate switching cost for the Finnish retail deposit market by using the approach developed by Oz Shy (2002). It turns out that switching costs faced by deposit customers of the main banks are high, ranging from 200 euros to nearly 1,400 euros. Over the past 20 years, switching costs have increased by roughly 50% in real terms, but in relation to average account balance, switching costs have not essentially changed. I conjecture that differences in the switching costs among the Finnish banks might be explained by differences in their loyalty programs.
    JEL: G21 L13 L49
    Date: 2019–09–05

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