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on Industrial Organization |
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Issue of 2008‒02‒09
sixteen papers chosen by |
| By: | Paul Madden; Mario Pezzino |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:0707&r=ind |
| By: | Jan Boone; Jan van Ours; Henry van der Wiel |
| Abstract: | We discuss and apply a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competition. Using firm level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high relevance for competition policy and regulation. So, just when it is needed the most PCM fails whereas PE does not. From this, we conclude that PE is a more reliable measure of competition. |
| Keywords: | competition; profit elasticity; measures of competition; concentration; price cost margin; profits |
| JEL: | D43 L13 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:91&r=ind |
| By: | Martinez de Albeniz, Victor (IESE Business School) |
| Abstract: | We analyze the price competition between two suppliers offering two different lead times and two different prices to a buyer. The buyer chooses its inventory replenishment policy in order to minimize its infinite-horizon average cost. In essence, the fast and expensive supplier is used only in emergencies, while the slow and cheap supplier receives the bulk of the orders. Thus, despite a higher price, the fast supplier is able to capture a part of the buyer's orders. We analyze the price competition between the asymmetric suppliers, where the market share of each supplier is derived from the buyer's inventory problem. We find equilibria that differ significantly from the Bertrand price-only competition. In particular, for some cost parameters, the fast supplier is able to charge a premium for faster delivery, and stay in business even with a higher production cost. We obtain in some cases closed-form formulas for the price difference in equilibrium. Hence, our results show that high cost suppliers may not be driven out of business if they can offer fast delivery. |
| Keywords: | offshoring; dual sourcing; |
| Date: | 2007–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0720&r=ind |
| By: | Antonio Cabrales; Piero Gottardi |
| Abstract: | In this paper we build a formal model to study market environments where information is costly to acquire and is of use also to potential competitors. In such situations a market for information may form, where reports - of unverifiable quality - over the information acquired are sold. A complete characterization of the equilibria of the game is provided. We find that information is acquired when its costs are not too high and in that case it is also sold, though reports are typically noisy. Also, the market for information tends to be a monopoly, and there is typically inefficiency given by underinvestment in information acquisition. Regulatory interventions in the form of firewalls, limiting the access to the sale of information to third parties, uninterested in trading the underlying object, only make the inefficiency worse. On the other hand, efficiency can be attained with a monopolist selling differentiated information, provided entry is blocked. The above findings hold when information has a prevalent horizontal differentiation component. When that is not the case, and the vertical differentiation element is more important, firewalls can in fact be beneficial. |
| Keywords: | Information sale, Cheap talk, Conflicts of interest, Information acquisition, Chinese walls, Market efficiency |
| JEL: | D83 C72 G14 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we080201&r=ind |
| By: | Caro, Felipe (UCLA Anderson School of Management); Martinez de Albeniz, Victor (IESE Business School) |
| Abstract: | We propose a multi-period extension of the competitive newsvendor model of Lippman and McCardle (1997) to investigate the impact of quick response under competition. For this purpose, we consider two retailers that compete in terms of inventory: customers that face a stockout at their first-choice store will look for the product at the other store. Consequently, the total demand that each retailer faces depends on the competitor's inventory level. We allow for asymmetric reordering capabilities, and we are particularly interested in the case when one of the firms has a lower ordering cost but can only produce at the beginning of the selling season, whereas the second firm has higher costs but can replenish stock in a quick response manner taking advantage of any incremental knowledge about demand (if it is available). We visualize this problem as the competition between a traditional make-to-stock retailer that builds up inventory before the season starts versus a retailer with a responsive supply chain that can react to early demand information. We provide conditions for this game to have a unique pure-strategy subgame-perfect equilibrium, which then allows us to perform numerical comparative statics. Our results confirm in a competitive setting the intuitive fact that quick response is more beneficial when demand uncertainty is higher, or exhibits a higher correlation over time. Finally, we find that part of the competitive advantage from quick response arises from the asymmetry in response capabilities. |
| Keywords: | quick response; fast fashion; inventory competition; |
| Date: | 2007–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0722&r=ind |
| By: | Sergio Currarini (Department of Economics, University Of Venice Cà Foscari and School for Advanced Studies in Venice); Francesco Feri (University of Innsbruck) |
| Abstract: | We study the problem of information sharing in oligopoly, when sharing decisions are taken before the realization of private signals. Using the general model developed by Raith (1996), we show that if firms are allowed to make bilateral exclusive sharing agreements, then some degree of information sharing is consistent with equilibrium, and is a constant feature of equilibrium when the number of firms is not too small. Our result is to be contrasted with the traditional conclusion that no information is shared in common values situations with strategic substitutes - such as Cournot competition with demand shocks - when firms can only make industry-wide sharing contracts (e.g., a trade association). |
| Keywords: | Networks, Information sharing, oligopoly, networks, Bayesian equilibrium |
| JEL: | D43 D82 D85 L13 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_21&r=ind |
| By: | Leonidas Koutsougeras |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:0717&r=ind |
| By: | Martinez de Albeniz, Victor (IESE Business School); Simchi-Levi, David (MIT) |
| Abstract: | This paper develops a multi-attribute competition model for procurement of short life cycle products. In such an environment, the buyer installs dedicated production capacity at the suppliers before the demand is realized. Final production orders are decided after demand materializes. Of course, the buyer is reluctant to bear all the capacity and inventory risk, and thus signs flexible contracts with several suppliers. We model the suppliers' offers as option contracts, where each supplier charges a reservation price per unit of capacity, and an execution price per unit of delivered supply. These two parameters illustrate the trade-off between total price and flexibility of the contract, and are both important to the buyer. We model the interaction between the suppliers and the buyer as a game in which the suppliers are the leaders and the buyer is the follower. Specifically, suppliers compete to provide supply capacity to the buyer and the buyer optimizes its expected profit by selecting one or more suppliers. We characterize the suppliers' equilibria in pure strategies for a class of customer demand distributions. In particular, we show that this type of interaction gives rise to cluster competition. That is, in equilibrium, suppliers tend to be clustered in small groups of two or three suppliers each, such that within the same group all suppliers use similar technologies and offer the same type of contract. Finally, we show that in equilibrium, the supply chain inefficiencies, i.e., the loss of profit due to competition, are in general at most 25% of the profit of a centralized supply chain, for a wide class of demand distributions. |
| Keywords: | supplier portfolio; supplier competition; |
| Date: | 2007–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0718&r=ind |
| By: | Siebert, Ralph; von Graevenitz, Georg |
| Abstract: | In a patent thicket licensing provides a mechanism to either avoid or resolve hold up. We study the choice between ex ante licensing to avoid hold up and ex post licensing to resolve it. Firms’ choice of licensing contract is studied in the context of a patent portfolio race. We show that high expected blocking leads to ex ante licensing while ex post licensing arises if expected blocking is low but realized blocking is high. Also, ex ante licensing reduces firms’ R&D incentives. A sample selection model of licensing is derived from the theoretical model. In this framework theoretical predictions on effects of blocking are tested with data from the semiconductor industry. We show that licensing helps firms to resolve blocking. However, licensing is not a cure all: it decreases as fragmentation of property rights increases and arises mainly between large firms with similar market shares. Using a treatment effects model we also confirm the prediction that ex ante licensing reduces the level of R&D investment. |
| Keywords: | Hold-Up Problem; Licensing; Innovation; Patent Race; Patent Thicket. |
| JEL: | L13 L49 L63 |
| Date: | 2008–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:msmdpa:2104&r=ind |
| By: | BOURJADE, Sylvain; REY, Patrick; SEABRIGHT, Paul |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:7815&r=ind |
| By: | Steven J. Davis; Cheryl Grim; John Haltiwanger; Mary Streitwieser |
| Abstract: | We develop a large customer-level database to study electricity pricing to U.S. manufacturing plants from 1963 to 2000. We document tremendous dispersion in price per kWh, trace that dispersion to quantity discounts and spatial differentials, estimate the role of cost factors in quantity discounts, and test whether marginal price schedules conform to marginal cost and Ramsey pricing conditions. Our cost analysis and pricing tests rely on a novel empirical approach that exploits utility-level differences in the customer size distribution to estimate how supply costs vary with purchase quantity.<br> <br>The results reveal that annual supply costs per kWh fall by more than half in moving from smaller to bigger purchasers, providing a clear cost-based rationale for quantity discounts. Before the mid 1970s, marginal price and marginal cost schedules are nearly identical, in line with efficient pricing. In later years, marginal supply costs exceed marginal prices for smaller manufacturing customers by 10% or more. In contrast to a clear role for cost factors, our evidence provides no support for a standard Ramsey-pricing interpretation of quantity discounts. Spatial dispersion in retail electricity prices among states, counties and utility service territories is large and rises over time for smaller purchasers. |
| JEL: | L60 L94 Q40 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13778&r=ind |
| By: | Marco Becht; Colin Mayer; Hannes F. Wagner |
| Abstract: | We study how deregulation of corporate law affects the decision of entrepreneurs of where to incorporate. Recent rulings by the European Court of Justice (ECJ) have enabled entrepreneurs to select their country of incorporation independently of their real seat. We analyze foreign incorporations in the U.K., where incorporations of limited liability companies can be arranged at low cost. Using data for over 2 million companies from around the world incorporating in the U.K., we find a large increase in cross-country incorporations from E.U. Member States following the ECJ rulings. In line with regulatory cost theories, incorporations are primarily driven by minimum capital requirements and setup costs in home countries. We record widespread use of special incorporation agents to facilitate legal mobility across countries. |
| Keywords: | Incorporation, costs of regulation, regulatory competition |
| JEL: | G38 K22 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe04&r=ind |
| By: | Ilaria Mosca; Marc Pomp; Victoria Shestalova |
| Abstract: | A change of legislation in 2004 of the Dutch Exceptional Medical Expenses Act (EMEA) allowed for more competition among suppliers of home care. The new law made it possible for the 32 regional healthcare purchasing agencies to contract suppliers selectively and to negotiate over prices and quality. Since, at least in some regions, one or two providers dominate the market, there are concerns about the effect of providers’ market power on the pricing of home care services. This paper tries to assess whether these concerns are justified. Using complete data on contracted prices and quantities for 2004-2006, we find that, indeed, providers with a larger market share are able to contract at a higher price. We also find significant differences in contracted prices for some healthcare purchasing agencies, which points towards differences in their regional situations and/or policies. It is conceivable that both differences in market share and differences in price are driven by unobserved differences in quality. However, our analysis based on quality data reported in a consumer survey does not support this explanation. |
| Keywords: | market structure; bargaining; healthcare |
| JEL: | D4 I18 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:95&r=ind |
| By: | Thomas J. Holmes |
| Abstract: | The roll-out of Wal-Mart store openings followed a pattern that radiated from the center out with Wal-Mart maintaining high store density and a contiguous store network all along the way. This paper estimates the benefits of such a strategy to Wal-Mart, focusing on the savings in distribution costs afforded by a dense network of stores. The paper takes a revealed preference approach, inferring the magnitude of density economies by the extent of sales cannibalization from closely-packed stores that Wal-Mart is willing to sustain to achieve density economies. The model is dynamic with rich geographic detail on the locations of stores and distribution centers. Given the enormous number of possible combinations of store-opening sequences, it is difficult to directly solve Wal-Mart's problem, making conventional approaches infeasible. The moment inequality approach is used instead and it works well. The estimates show the benefits to Wal-Mart of high store density are substantial and likely extend significantly beyond savings in trucking costs. |
| JEL: | L11 L81 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13783&r=ind |
| By: | Jakub Kastl (Stanford University); David Martimort (Toulouse School of Economics); Salvatore Piccolo (Toulouse School of Economics, University of Naples and CSEF) |
| Abstract: | We use data from the Italian manufacturing industry to document the positive relationship between delegation of decisions within organizations and innovation incentives. In order to obtain the causal effect, we build a contract theory model with asymmetric information and moral hazard which predicts that awarding autonomy to the manager spurs innovation incentives relative to arrangements based on vertical control. We use the model to guide our search for suitable instruments. Using several alternative instrumental variables and different specifications we find a strong positive effect of delegation on R&D spending. |
| Keywords: | Asymmetric Information, Delegation, Hold-up, R&D and Vertical Control |
| Date: | 2008–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:192&r=ind |
| By: | Roberto Roson (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | Traditionally, media like TV and radio, but also the Internet, have been characterized by free access (by consumers having the necessary hardware), with services supported through advertising revenues. Profitability in these markets depends on the capability of attracting audience. Strategic choices, however, also depend on the relationship with the dual market for advertising services. In this paper, a model is introduced, which has two distinguishing features. First, the multidimensional nature of competition in media markets is acknowledged, through explicit modeling of vertical and horizontal differentiation. Second, the price of advertising depends on the expected audience composition, not simply on its magnitude. It also depends on the broadcasters' capability of effectively price-discriminate among advertising customers. It is found that market equilibria depend on a number of critical factors: the amount and type of price discrimination in advertising, the correlation between formats and audience composition, the relative profitability of the different market segments, and diseconomies of scale in program quality. |
| Keywords: | Advertising, Media Industries, Broadcasting, Price Discrimination, Television, Radio, Differentiation.. |
| JEL: | L82 M37 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2007_07&r=ind |