nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒08‒24
24 papers chosen by
Russell Pittman
United States Department of Justice

  1. Soft-Capacity constrained price competition with entry and a minimum firm size: Chamberlin without differentiation By Marie-Laure Cabon-Dhersin; Nicolas Drouhin
  2. Consumer search and the uncertainty effect By Heiko Karle; Heiner Schumacher; Rune Vølund
  3. Product line extensions under the threat of entry: evidence from the UK pharmaceuticals market By Farasat A.S. Bokhari; Weijie Yan
  4. Auctions with Unknown Capacities: Understanding Competition among Renewables By Fabra, Natalia; Llobet, Gerard
  5. Competing Bandits: The Perils of Exploration Under Competition By Guy Aridor; Yishay Mansour; Aleksandrs Slivkins; Zhiwei Steven Wu
  6. Common Ownership among Private Firms and Privatization Policies By Haraguchi, Junichi; Matsumura, Toshihiro
  7. Who Should Set Book Prices? By Silvi Berger; Morten Hviid
  8. Reveal it or conceal it: On the value of second opinions in a low-entry-barriers credence goods market By Parampreet Christopher Bindra; Rudolf Kerschbamer; Daniel Neururer; Matthias Sutter
  9. Consumer Uptake of Internet Banking, Endogenous Market Structure and Regional Integration in Europe By Bruce Lyons; Minyan Zhu
  10. Innovation and growth in the UK pharmaceuticals: the case of product and marketing introductions By Farasat A.S. Bokhari; Franco Mariuzzo; Anna Rita Bennato
  11. Mergers and Innovation: Evidence from the Hard Disk Drive Market By Anna Rita Bennato; Stephen Davies; Franco Mariuzzo; Peter Ormosi
  12. Games with unobservable heterogeneity and multiple equilibria: An application to mobile telecommunications By Mathieu Marcoux
  13. The Market for Lemons with Seller Partition By Gersbach, Hans; Mamageishvili, Akaki; Tejada, Oriol
  14. Testing the Theory of Common Stock Ownership By Lysle Boller; Fiona Scott Morton
  15. Public and reputational sanctions: The case of cartels By Franco Mariuzzo; Peter Ormosi; Zherou Majied
  16. Only Time Will Tell: Credible Dynamic Signaling By Egor Starkov
  17. Competencia Imperfecta con Costos de Sustitución y Efectos de Red By Favio D’Ercole
  18. Mimetic Dominance and the Economics of Exclusion: Private Goods in Public Context By Alex Imas; Kristóf Madarász
  19. Comparative approaches to key issues in the economic regulation of telecommunications markets in South Africa, Tanzania, Zambia, and Zimbabwe By Anthea Paelo; Genna Robb
  20. Competitive dynamics of telecommunications markets in South Africa, Tanzania, Zambia, and Zimbabwe By Genna Robb; Anthea Paelo
  21. Differential Fiscal Policy Induced Innovations in Consumer Markets By Wang, Yikai; Hagedorn, Marcus
  22. Market concentration, supply, quality and prices paid by Local Authorities in the English care home market By Ferran Espuny Pujol; Ruth Hancock; Morten Hviid; Marcello Morciano; Stephen Pudney
  23. Retail alliances in the agricultural and food supply chain By Zohra Bouamra
  24. Fine Cartels By David K Levine

  1. By: Marie-Laure Cabon-Dhersin (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université); Nicolas Drouhin (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique, UNICAEN - Université de Caen Normandie - NU - Normandie Université)
    Abstract: We consider a model of price competition in a homogeneous good, with soft-capacity constraints, in the special case of a Sone-Geary production function that implies a minimum firm size and leads to a U-shaped average cost function. We study free entry and obtain a Chamberlin-like result: zero profit and a positive markup at equilibrium.
    Keywords: price competition,soft-capacity constraint,tacit collusion,returns to scale,free-entry
    Date: 2020–07–31
  2. By: Heiko Karle; Heiner Schumacher; Rune Vølund
    Abstract: We consider a model of Bertrand competition where consumers are uncertain about the qualities and prices of firms’ products. Consumers can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, a purchase plan, which involves buying products of varying quality and price with positive probability, creates scale-dependent disutility from gain-loss sensations. Even if their degree of loss aversion is modest, they may refrain from inspecting all products and choose an individual default that is first-order stochastically dominated. Firms’ strategic behavior can exacerbate the scope for this “uncertainty effect”, and sellers of inferior products may earn positive profits despite Bertrand competition. We find suggestive evidence for the predicted association between consumer behavior and loss aversion in new survey data.
    Keywords: Consumer Search, Competition, Loss Aversion
    Date: 2020–07–29
  3. By: Farasat A.S. Bokhari (School of Economics and Centre for Competition Policy, University of East Anglia); Weijie Yan (Economic and Social Research Institute, Ireland and Department of Economics, Trinity College Dublin, Ireland)
    Abstract: Do firms increase product lines to deter entry and, if so, when is such a strategy successful? We use data from the UK pharmaceuticals to examine how incumbents respond to change in the threat of entry. In line with the entry deterrence motive, originators' product launch rate is higher when the risk of entry is moderate, but becomes lower when entry is very likely, and the e ect is most pronounced in medium size markets. We further find that in medium size markets, originators can deny entry via proliferation if they fill the product space evenly across patients so that each variant has a significant market share of the originators drugs. This does not work in large markets, but here entry is deterred when originators engage in product hopping, i.e., shift most of the patients to newer variants of the drug that may still be protected by intellectual property.
    Keywords: Product proliferation, product hopping, entry deterrence, pharmaceuticals, hazard models
    JEL: L40 L12 I11 L79
    Date: 2020–01–01
  4. By: Fabra, Natalia; Llobet, Gerard
    Abstract: The energy transition will imply a change in the competitive paradigm of electricity markets. Competition-wise, one distinguishing feature of renewables versus fossil-fuels is that their marginal costs are known but their available capacities are uncertain. Accordingly, in order to understand competition among renewables, we analyze a uniform-price auction in which bidders are privately informed about their random capacities. Renewable plants partially mitigate market power as compared to conventional technologies, but producers are still able to charge positive markups. In particular, firms exercise market power by either withholding output when realized capacities are large, or by raising their bids above marginal costs when realized capacities are small. Since markups are decreasing in realized capacities, a positive capacity shock implies that firms offer to supply more at reduced prices, giving rise to lower but also more volatile market prices. An increase in capacity investment depresses market prices, which converge towards marginal cost when total installed capacity is sufficiently large, or when the market structure is sufficiently fragmented.
    Keywords: Electricity markets; Forecasts; Multi-unit auctions; renewables
    Date: 2019–10
  5. By: Guy Aridor; Yishay Mansour; Aleksandrs Slivkins; Zhiwei Steven Wu
    Abstract: Most online platforms strive to learn from interactions with consumers, and many engage in exploration: making potentially suboptimal choices for the sake of acquiring new information. We initiate a study of the interplay between exploration and competition: how such platforms balance the exploration for learning and the competition for consumers. Here consumers play three distinct roles: they are customers that generate revenue, they are sources of data for learning, and they are self-interested agents which choose among the competing platforms. We consider a stylized duopoly model in which two firms face the same multi-armed bandit instance. Users arrive one by one and choose between the two firms, so that each firm makes progress on its bandit instance only if it is chosen. We study whether and to what extent competition incentivizes the adoption of better bandit algorithms, and whether it leads to welfare increases for consumers. We find that stark competition induces firms to commit to a "greedy" bandit algorithm that leads to low consumer welfare. However, we find that weakening competition by providing firms with some "free" consumers incentivizes better exploration strategies and increases consumer welfare. We investigate two channels for weakening the competition: relaxing the rationality of consumers and giving one firm a first-mover advantage. We provide a mix of theoretical results and numerical simulations. Our findings are closely related to the "competition vs. innovation" relationship, a well-studied theme in economics. They also elucidate the first-mover advantage in the digital economy by exploring the role that data can play as a barrier to entry in online markets.
    Date: 2020–07
  6. By: Haraguchi, Junichi; Matsumura, Toshihiro
    Abstract: This study investigates the relationship between the optimal privatization policy and the degree of common ownership among private firms by formulating a mixed oligopoly model in which one public firm competes against private firms under common ownership. We find that depending on the private firms' cost structure, one of the following three patterns emerges: (a) the optimal degree of privatization is increasing in the degree of common ownership, (b) the optimal degree of privatization is decreasing in the degree of common ownership, (c) an inverted U-shaped relationship exists between the two. If the marginal cost of private firms is constant, then (b) always emerges, regardless of whether the marginal cost of the public firm is increasing or constant. However, if the marginal cost of private firms is increasing, then all three patterns can emerge. Our results suggest that the property of the optimal privatization policy depends crucially on the cost structure of private firms.
    Keywords: overlapping ownership, optimal degree of privatization, mixed oligopolies, relative profit maximization, payoff interdependence
    JEL: H44 K21 L13 L32
    Date: 2020–07–31
  7. By: Silvi Berger (Centre for Competition Policy, University of East Anglia); Morten Hviid (Centre for Competition Policy, University of East Anglia)
    Abstract: The key question for this paper is by whom and with what restrictions the price of books should be set. In the past, public cultural policy has in some jurisdictions favoured limiting competition at the retail level by mandating a fixed book price system, where prices are the same everywhere. Digitalisation has enabled some competition authorities to challenge this practice. This has left us with a situation where very different rules apply to the book market in different jurisdictions and where the initial question of who sets prices faced with what restrictions is given a very different answer across EU member states. This paper uses recent antitrust cases to highlight the tension over who should have the price setting power in the market for books.
    Keywords: Retail Price MFN, Across Platform Parity Agreements, price guarantees, agency models
    JEL: D22 D4 L82
    Date: 2019–10–01
  8. By: Parampreet Christopher Bindra (Department of Economics, University of Innsbruck); Rudolf Kerschbamer (Department of Economics, University of Innsbruck); Daniel Neururer (Department of Economics, University of Innsbruck); Matthias Sutter (Max Planck Institute for Research into Collective Goods, Bonn)
    Abstract: Credence goods markets with their asymmetric information between buyers and sellers are prone to large inefficiencies. In theory, poorly informed consumers can protect themselves from maltreatment through sellers by asking for second opinions from other sellers. Yet, empirical evidence whether this is a successful strategy is scarce. Here we present a natural field experiment in the market for computer repairs. We find that revealing a second opinion from another expert to the seller does neither increase the rate of successful repairs nor decrease the average repair price. We assess under which conditions gathering a second opinion can be valuable.
    Keywords: Credence goods, expert services, second opinions, natural field experiment
    JEL: C93 D82
    Date: 2020–06
  9. By: Bruce Lyons (Centre for Competition Policy and School of Economics, University of East Anglia); Minyan Zhu (Department of Economics, University of Reading)
    Abstract: This paper examines how market structure influences the early introduction and consumer uptake of a digital service that is a convenient alternative to traditional service delivery. Digital provision also has “extended geographic reach†and “lower sunk costs†as compared with bricks-and-mortar service provision. We further examine how these affect market structure. Internet banking provides an important example that also allows us to separate regional integration and national concentration dimensions of market structure. We develop an econometric model of the effects of market structure on the introduction and consumer uptake of internet banking. We estimate using panel data for all EU Member States and find that both concentration and regionalisation bring these forward. Next, we examine how consumer uptake of the digital product then begins to impact on banking market structure. We find a substantial de-concentrating effect in large non-regionalised markets and indirect evidence of integration in previously regionalised markets. This is consistent with internet banking having enhanced competition in both integrated markets and, despite little change in national concentration, also in previously regionalised markets.
    Keywords: Internet Banking, Digital Markets, Endogenous Market Structure, Market Integration, Consumer Diffusion
    JEL: L11 O33 F15 G21 L81
    Date: 2019–04–25
  10. By: Farasat A.S. Bokhari (Centre for Competition Policy and School of Economics, University of East Anglia); Franco Mariuzzo (Centre for Competition Policy and School of Economics, University of East Anglia); Anna Rita Bennato (Centre for Competition Policy, University of East Anglia and Loughborough University)
    Abstract: New drug introductions are a key to growth for pharmaceutical firms. However not all innovations are the same and they may have differential effects that vary by firm size. We use quarterly sales data on UK pharmaceuticals in a dynamic panel model to estimate the impact of product (new drugs) and marketing (additional pack varieties) innovations within a therapeutic class on a firm's business unit growth. We find that product innovations lead to substantial growth in both the short and long run, whereas a new pack variety only produces short-term effects. The strategies are substitutes but the marginal effects are larger for product innovations relative to additional packs, and the effects are larger for smaller business units. Nonetheless, pack introductions offer a viable short-term growth strategy, especially for small and medium sized businesses.
    Keywords: Growth; Innovation; Size; Pharmaceuticals; Business unit
    JEL: L25 L65 O31 O32
    Date: 2019–10–01
  11. By: Anna Rita Bennato (Loughborough University); Stephen Davies (Centre for Competition Policy and School of Economics, University of East Anglia); Franco Mariuzzo (Centre for Competition Policy and School of Economics, University of East Anglia); Peter Ormosi (Centre for Competition Policy and Norwich Business School, University of East Anglia)
    Abstract: This case study is a relatively rare ex-post evaluation of how the level of innovation changed after the 5-to-3 consolidation of the world-wide hard disk drive (HDD) industry. We take a holistic view of innovation, employing four different measures: R&D expenditure and patent activity as indicators of innovative inputs, and the number of new products marketed, and their unit user costs as indicators of innovative output. This allows us to distinguish the magnitude of the merging parties' innovative efforts from the productivity of those efforts. Of the remaining HDD manufacturers, for Seagate we found an increase in all our innovation measures following the mergers, but for Western Digital the evidence is mixed. Methodologically, the paper draws light on some of the challenges of conducting similar case-specific retrospective studies on the impact of mergers on innovation.
    Keywords: ex-post evaluation, innovation, mergers, patents, R&D
    JEL: L10 L40 O30
    Date: 2019–03–14
  12. By: Mathieu Marcoux (Université de Montréal)
    Abstract: To shed light on the limited success of competition enhancing policies in mobile telecommunications, I estimate a game of transceivers’ locations between national incumbents and a new entrant in Canada. I recover player-specific unobserved heterogeneity from bids for spectrum licenses to address the unavailability of regressors required to identify incumbents’ responses to the new entrant’s decisions. I find that incumbents benefitting from important economies of density is a plausible explanation for policies’ drawbacks. I then evaluate the equilibrium effect of subsidizing the new entrant’s transceivers and find that this alternative proposition increases its investments while only slightly modifying incumbents’.
    Keywords: Multiple equilibria, Unobserved heterogeneity, Empirical games, Telecommunications
    JEL: C57 L11
    Date: 2019–02
  13. By: Gersbach, Hans; Mamageishvili, Akaki; Tejada, Oriol
    Abstract: We introduce a four-stage, multi-prize buying mechanism, which can be used by a (big) buyer to separate low-quality sellers, called "lemon" owners, from high-quality sellers. When the pool of sellers can be partitioned into groups with known mixes of high- and low-quality sellers, the buyer obtains the commodities from the high-quality sellers at a price that matches the willingness to sell. By contrast, "lemon" owners are trapped into selling their items at a low, or even negligible, price. These properties hold even if the buyer cannot commit to a single execution of the mechanism. We outline some applications of our results and suggest that our mechanism might be useful for market makers.
    Keywords: Lemons market - Partition - Signaling - Commitment - Decoy ballots
    JEL: C72 D4 D82 D86
    Date: 2019–10
  14. By: Lysle Boller; Fiona Scott Morton
    Abstract: We test if an increase in common ownership changes future expected profits with an event study method. We collect instances of a stock entering the S&P 500 index and identify its product market competitors. We measure the change in institutional and common ownership (with product market rivals) and find that entering stocks experience a significant increase in both. We measure the stock returns of the entrant's product market rivals upon the entry news. We find that increases in common ownership (driven by the whole vector of ownership similarity) cause increases in stock returns, consistent with a hypothesis that common ownership raises profits.
    JEL: G14 G34 L4 L41
    Date: 2020–07
  15. By: Franco Mariuzzo (Centre for Competition Policy and School of Economics, University of East Anglia); Peter Ormosi (Centre for Competition Policy and Norwich Business School, University of East Anglia); Zherou Majied (Rayyan Al-Iraq Group, Baghdad, Iraq)
    Abstract: In this article, we revive an old debate in the law and economics literature: the relative role of public and reputational sanctions in deterring misconduct. We propose an empirical framework, which accounts for public sanctions and a more direct measure of reputational sanctions, harnessing recent developments in opinion mining. We use the intensity and the sentiment of media exposure of misconduct as a measure of reputational effect and thus approximation of the reputational sanction. As a demonstration, we combine an event study approach, sentiment analysis, and econometric techniques on a sample of 339 listed cartel member firms, prosecuted by the European Commission between 1992 and 2015. Our results offer evidence that in the context of cartels, public and reputational sanctions act as substitutes.
    Keywords: Cartels, event study, public sanctions, reputational sanctions, sentiment analysis
    JEL: L4 K4
    Date: 2019–12–01
  16. By: Egor Starkov (Department of Economics, University of Copenhagen, Denmark)
    Abstract: This paper explores a model of dynamic signaling without commitment. It is known that separating equilibria do not exist if the sender cannot commit to future costly actions, since no single action can have enough weight to be an effective signal. This paper, however, shows that informative and payoff-relevant signaling can occur even without commitment and without resorting to unreasonable off-path beliefs. Such signaling can only happen through attrition, when the weakest type mixes between revealing own type and pooling with the stronger types. The possibility of full information revelation in the limit hence depends crucially on the assumptions about the state space. We illustrate the results by exploring a model of dynamic price signaling and show that prices may be informative of product quality even if the seller cannot commit to future prices, with both high and low prices being able to signal high quality.
    Keywords: dynamic signaling, repeated signaling, reputation, attrition
    JEL: C73 D82 D83 L15
    Date: 2020–08
  17. By: Favio D’Ercole
    Abstract: El trabajo explora a nivel teórico la competencia por precios durante dos períodos entre dos firmas ubicadas en los extremos de una ciudad lineal. Los consumidores enfrentan costos de sustitución por cambiar de marca y perciben efectos por la red de quienes com- pran el mismo producto. Las empresas pueden adoptar una de tres estrategias. Las estrategias se denominan «conservadora», «expansiva» y «agresiva». El equilibrio «conservadora – conservadora» racionaliza la observación «naive» realiza- da por algunos autores que las empresas no prestan atención a sus competidoras, concen- trándose únicamente en sus clientes. En realidad, este equilibrio emerge como resultado de una competencia «atenta» a la estrategia de la competidora. Si la competidora cam- bia su estrategia por «expansiva», la firma reaccionará bajando los precios para disuadirla.
    Keywords: Competencia Imperfecta; Costos de Sustitución; Efectos de Red; Duopolio
    JEL: D21 D43 D85 L11 L13
    Date: 2019–11
  18. By: Alex Imas; Kristóf Madarász
    Abstract: We propose a simple mechanism of mimetic dominance whereby a person’s valuation for consuming an object or possessing an attribute is increasing in others’ unmet desire for it. Such mimetic preferences help explain a host of market anomalies and generate novel predictions in a variety of domains. In bilateral exchange, people exhibit a social endowment effect, and there is an increased demand for goods that become relatively more scarce. A classic monopolist earns excess profit by randomly excluding some people from being able to purchase the product. We test the predictions of the model empirically across several exchange environments. When auctioning a private good, we find that randomly excluding people from the opportunity to bid substantially increases average bids amongst those who retain this option. Furthermore, exclusion leads to greater expected revenue than increasing competition through inclusion. This effect is absent when bidders know that those who are excluded have lower desires for the good. We demonstrate that mimetic preferences matter even for basic exchange: a person’s demand for a good increases substantially when others are explicitly excluded from the opportunity to buy the same kind of good. Mimetic preferences have implications for both price and non-price based methods of exclusion: the model predicts Veblen effects, rationalizes attitudes against redistribution and trade, and provides a novel motive for social stratification and discrimination.
    Keywords: mimetic preferences, objects of desire, exclusion, trade, competition, inequality
    Date: 2020
  19. By: Anthea Paelo; Genna Robb
    Abstract: This paper reviews comparative approaches to key issues in economic regulation in four countries of the Southern African Development Community, and how this has been reflected in outcomes in terms of competition, prices, access, and innovation in telecommunications services. In this paper, regulatory models in South Africa, Tanzania, Zambia, and Zimbabwe are evaluated with a focus on regulation of spectrum assignment, infrastructure sharing, call termination rates, and number portability.
    Keywords: Competition, economic regulation, Regulation, Southern African Development Community, Telecommunication
    Date: 2020
  20. By: Genna Robb; Anthea Paelo
    Abstract: Low levels of broadband penetration combined with poor quality of services present a challenge to growth and development in the Southern African Development Community (SADC). This paper performs a comparative analysis of the competitive dynamics of telecommunications markets in four SADC countries and relates this to outcomes for consumers. From a mobile perspective, a common theme is that while entrants have attracted subscribers, they have struggled to grow revenues and compete effectively due to tariff-mediated network effects and the high cost of building a network.
    Keywords: Competition, fixed and mobile infrastructure, interoperability, Southern African Development Community, Telecommunication
    Date: 2020
  21. By: Wang, Yikai; Hagedorn, Marcus
    Abstract: Many consumer goods - sugar, cigarettes, alcohol, fossil fuels - are considered sin goods as they cause externalities like CO2 emissions or internalities such as addiction. The standard response is then to appeal to the Pigouvian principle and tax these goods to correct these ex- and internalities. This paper builds on this fundamental Pigouvian insight but argues that the effectiveness of the traditional approach is limited. The main reason is that in many cases, close substitutes are missing, which provide similar benefits to the consumer but are less harmful. As a result behavior does not change and the fiscal intervention is regressive. We then make two points. First, if those substitutes exist, then a differential fiscal policy which directs consumer behavior from the sin good to the less harmful substitute complements the pure Pigouvian approach. We survey the nascent empirical literature on this topic and nd that this differential approach is promising. Second, if those substitutes do not exist, then a commitment to implement a differential fiscal policy (fiscal forward guidance) in the future (not now) will induce innovations today and finally deliver a substitute in the future.
    Date: 2020–08–08
  22. By: Ferran Espuny Pujol (Clinical Operational Research Unit, University College London); Ruth Hancock (Health Economics Group, University of East Anglia); Morten Hviid (Centre for Competition Policy, University of East Anglia); Marcello Morciano (University College London, University of Manchester); Stephen Pudney (School of Health and Related Research, University of Sheffield)
    Abstract: We investigate the impact of exogenous local conditions which favour high market concentration on supply, price and quality in local markets for care homes for older people in England. We extend the existing literature in: (i) considering supply capacity as a market outcome alongside price and quality; (ii) taking account of the chain structure of care home supply and differences between the nursing home and residential care home sectors; (iii) introducing a new econometric approach based on reduced form relationships that treats market concentration as a jointly-determined outcome of a complex contested market. We find that areas susceptible to a high degree of market concentration tend to have greatly restricted supply of care home places and (to a lesser extent) a higher average public cost, than areas susceptible to low degree of market concentration. There is no significant evidence that conditions favouring high market concentration affect average care home quality.
    Keywords: Care homes; market concentration; price; supply; quality.
    JEL: H75 I11 L22
    Date: 2019–10–23
  23. By: Zohra Bouamra (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Date: 2020
  24. By: David K Levine
    Date: 2020–08–04

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