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on Industrial Competition |
| By: | Bergemann, Dirk; Heumann, Tibor; Morris, Stephen |
| Abstract: | We analyze demand function competition with a finite number of agents and private information. We show that the nature of the private information determines the market power of the agents and thus price and volume of equilibrium trade. We provide a characterization of the set of all joint distributions over demands and payoff states that can arise in equilibrium under any information structure. In demand function competition, the agents condition their demand on the endogenous information contained in the price. We compare the set of feasible outcomes under demand function to the feasible outcomes under Cournot competition. We find that the first and second moments of the equilibrium distribution respond very differently to the private information of the agents under these two market structures. The first moment of the equilibrium demand, the average demand, is more sensitive to the nature of the private information in demand function competition, reflecting the strategic impact of private information. By contrast, the second moments are less sensitive to the private information, reflecting the common conditioning on the price among the agents. |
| Keywords: | Bayes correlated equilibrium; demand function competition; incomplete information; linear best responses; market power; moment restrictions; price impact; quadratic payoffs; supply function competition; volatility |
| JEL: | C72 C73 D43 D83 G12 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10791&r=all |
| By: | Sonja Brangewitz (University of Paderborn); Jochen Manegold (University of Paderborn) |
| Abstract: | On an intermediate goods market we allow for vertical and horizontal product differentiation and analyze the influence of simultaneous competition for resources and customers on the market outcome. Asymmetries between intermediaries cannot arise just from distinct product qualities, but also from different production technologies. The intermediaries face either price or quantity competition on the output market and a monopolistic input supplier on the input market. We find that there exist quality and productivity differences such that for quantity competition only one intermediary is willing to procure inputs from the input supplier, while for price competition both intermediaries are willing to purchase inputs. Considering product innovation for symmetric productivities we derive equilibrium conditions on the investment costs and compare price and quantity competition. It turns out that on the one hand there exist product qualities and degrees of horizontal product differentiation for complements such that asymmetric investment equilibria fail to exist. On the other hand we find that there also exist product qualities and degrees of horizontal product differentiation for substitutes such that existence can be guaranteed if the investment costs are chosen accordingly. |
| Keywords: | Input Market, Product Quality, Quantity Competition, Price Competition, Product Innovation |
| JEL: | L13 D43 C72 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:ciepap:90&r=all |
| By: | Tuchman, Anna E. (Stanford University); Nair, Harikesh S. (Stanford University); Gardete, Pedro M. (Stanford University) |
| Abstract: | The standard paradigm in the empirical literature is to treat consumers as passive recipients of advertising, with the level of ad exposure determined by firms' targeting technology and the intensity of advertising supplied in the market. This paradigm ignores the fact that consumers may actively choose their consumption of advertising. Endogenous consumption of advertising is common. Consumers can easily choose to change channels to avoid TV ads, click away from paid online video ads, or discard direct mail without reading advertised details. Becker and Murphy (1993) recognized this aspect of demand for advertising and argued that advertising should be treated as a good in consumers' utility functions, thereby effectively creating a role for consumer choice over advertising consumption. They argued that in many cases demand for advertising and demand for products may be linked by complementarities in joint consumption. We leverage access to an unusually rich dataset that links the TV ad consumption behavior of a panel of consumers with their product choice behavior over a long time horizon to measure the co-determination of demand for products and ads. The data suggests an active role for consumer choice of ads, and for complementarities in joint demand. To interpret the patterns in the data, we fit a structural model for both products and advertising consumption that allows for such complementarities. We explain how complementarities are identified. Interpreting the data through the lens of the model enables a precise characterization of the treatment effect of advertising under such endogenous non-compliance, and assessments of the value of targeting advertising. To illustrate the value of the model, we compare advertising, prices and consumer welfare to a series of counterfactual scenarios motivated by the "addressable" future of TV ad-markets in which targeting advertising and prices on the basis of ad-viewing and product purchase behavior is possible. We find that both profits and net consumer welfare may increase, suggesting that it may be possible that both firms and consumers become better off in the new addressable TV environments. We believe our analysis holds implications for interpreting ad-effects in empirical work generally, and for the assessment of ad-effectiveness in many market settings. |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3288&r=all |
| By: | Steven T. Berry; Philip Haile |
| Abstract: | Empirical models of demand for–and, often, supply of–differentiated products are widely used in practice, typically employing parametric functional forms and distributions of consumer heterogeneity. We review some recent work studying identification in a broad class of such models. This work shows that parametric functional forms and distributional assumptions are not essential for identification. Rather, identification relies primarily on the standard requirement that instruments be available for the endogenous variables–here, typically, prices and quantities. We discuss the kinds of instruments needed for identification and how the reliance on instruments can be reduced by nonparametric functional form restrictions or better data. We also discuss results on discrimination between alternative models of oligopoly competition. |
| JEL: | C3 C35 C36 C52 D12 D22 D43 L13 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21500&r=all |
| By: | Yongmin Chen (Department of Economics, University of Colorado, Boulder); Marius Schwartz (Department of Economics, Georgetown University) |
| Abstract: | An important question in merger analysis is how much of a firm's lost output after a unilateral price increase will shift to the merger partner. To estimate this diversion ratio, antitrust agencies sometimes use data on consumer switching ("churn"), potentially caused by various reasons. This paper uses a tractable model of oligopoly competition to investigate the relation between churn and diversion, depending on what caused the churn. If the cause is an exogenous decrease in a firm's product quality and all prices remain constant, or an increase in its marginal cost that induces a price increase only by that firm, then churn ratios will equal the corresponding diversion ratios; for the same quality or cost shocks, if churn is observed after all prices adjust to the new equilibrium, churn ratios will generally differ from diversion ratios, but nevertheless will still track the ranking of diversion ratios across the firm's competitors. If the exogenous shock is an increase in a rival's product quality, or a decrease in its cost that leads to a price decrease, the churn ratio to that rival will always overstate the diversion ratio. We also consider churn caused by shifts in consumer preferences, broadly interpreted to include changed circumstances or learning about product attributes. Plausibly, churn ratios can then suggest a wrong ranking of how intensely the firm competes with various rivals. |
| Keywords: | churn ratio, diversion ratio, merger, unilateral price effects, antitrust |
| JEL: | L4 D43 |
| Date: | 2015–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~15-15-07&r=all |
| By: | Gugler, Klaus Peter; Weichselbaumer, Michael; Zulehner, Christine |
| Abstract: | In this paper, we analyze mergers in bidding markets. We utilize data from procurement auctions in the Austrian construction sector and estimate models of first-price sealed-bid auctions. Based on estimated cost and markups, we run merger simulations and disentangle the market power effects from potential cost efficiencies. We analyze static and dynamic models of first price auctions, and compare the outcomes of the merger simulations with the actual effects of observed mergers. Our results show that market power and efficiency effects are present post merger, leading to increased markups, but leaving the winning bid essentially unaffected by the merger. We find a good correspondence of predicted and actual effects for full mergers, but not for majority acquisitions. |
| Keywords: | construction procurement; evaluation of mergers; first-price auctions; independent private values; merger simulation |
| JEL: | D44 L10 L13 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10799&r=all |
| By: | Bronwyn H. Hall; Christian Helmers; Georg von Graevenitz |
| Abstract: | We analyze the effect of patent thickets on entry into technology areas by firms in the UK. We present a model that describes incentives to enter technology areas characterized by varying technological opportunity, complexity of technology, and the potential for hold-up in patent thickets. We show empirically that our measure of patent thickets is associated with a reduction of first time patenting in a given technology area controlling for the level of technological complexity and opportunity. Technological areas characterized by more technological complexity and opportunity, in contrast, see more entry. Our evidence indicates that patent thickets raise entry costs, which leads to less entry into technologies regardless of a firm’s size. |
| JEL: | K11 L20 O31 O34 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21455&r=all |
| By: | Scherer, F. M. (Harvard University) |
| Abstract: | This paper advances the analysis of incentives for technological innovation by examining the conditions under which first mover advantages--e.g., a head start, the necessity for imitators to incur their own research and development costs, production cost advantages derived inter alia through learning by doing, and the reputational "image" advantages of first movers--provide an adequate substitute for patent protection. The paper begins by modifying the pioneering analysis of William Nordhaus to deal with product innovations. Computer simulations then investigate whether profitability under diverse first mover advantages is sufficient to motivate investment in research and development. Cases emerge under which incentives are insufficient without patent protection, most notably, when target markets are small, imitation lags are short, and imitators' erosion of the innovator's market share is rapid. But in the majority of cases investigated, innovation is profitable even without patent protection. Tentative implications for patent policy are proposed. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp14-053&r=all |
| By: | Gilad Sorek |
| Abstract: | This paper provides first analysis of horizontal product differentiation in health care markets with option demand. I show that differentiation choices in option demand market differ from those obtained in spot markets analyzes. This is because option demand induces competition over inclusion under insurance coverage, whereas in spot markets providers are competing over the marginal consumers. In addition providers that are perceived as substitutes in the spot market - after exact medical needs reveal, may be perceived as complements in option market - before actual medical needs emerged. I show that in the model option demand market competition in simultaneous moves yields efficient horizontal differentiation and excessive investment in quality. Moreover I show that sequential moves result in asymmetric equilibrium with first mover-gains to the leading provider, too little horizontal differentiation and yet higher expected utility for consumers (compared with simultaneous moves). |
| Keywords: | Health Insurance; Option Demand; Product Differentiation |
| JEL: | I11 I13 L1 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2015-11&r=all |
| By: | Laurence C. Baker; M. Kate Bundorf; Daniel P. Kessler |
| Abstract: | We test whether the generosity of employer-sponsored health insurance facilitates the exercise of market power by hospitals. We construct indices of health plan generosity and the price and volume of hospital services using data from Truven MarketScan for 601 counties from 2001-2007. We use variation in the industry and union status of covered workers within a county over time to identify the causal effects of generosity. Although OLS estimates fail to reject the hypothesis that generosity facilitates the exercise of hospital market power, IV estimates show a statistically significant and economically important positive effect of plan generosity on hospital prices in uncompetitive markets, but not in competitive markets. Our results suggest that most of the aggregate effect of hospital market structure on prices found in previous work may be coming from areas with generous plans. |
| JEL: | I11 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21513&r=all |
| By: | Scherer, F. M. (Harvard University) |
| Abstract: | This paper, written as a chapter for the forthcoming 13th edition of the case study volume, The Structure of American Industry, examines the structure, conduct, and economic performance of the U.S. banking industry, focusing mainly on commercial and investment banking. It finds a strongly rising trend in the concentration of banking activity among the top ten banks despite weak evidence of scale economies. An intense merger history is a main reason. During the first decade of the 21st century, the conduct of U.S. banking firms left much to be desired. It precipitated the "great recession" of 2008, intensified consumption reductions, sustained diverse inter-bank collusive activity. The sharp increase in the financial industries' share of total U.S. corporation profits between the 1980s and the 2000s is analyzed, as is the extraordinary growth of financial employee compensation to roughly three times levels for college graduates employed in other sectors. Changes in banking regulation and governmental merger controls are examined. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp14-042&r=all |
| By: | Ronald Fischer |
| Abstract: | One of the difficult questions facing regulators in the financial sector is how much banking competition to allow. In most industries, increased competition increases social welfare. But banking regulators see the banking industry as different. They believe that excessive competition may put the banking system at risk, a belief that underlies the recent restrictions on mortgage lending introduced by the New Zealand Reserve Bank. Ronald Fischer explores the connections between banking competition and economic stability. |
| Date: | 2013–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwcrt:380003&r=all |
| By: | Crawford, Gregory S.; Shcherbakov, Oleksandr; Shum, Matthew |
| Abstract: | We measure the welfare consequences of endogenous quality choice in imperfectly competitive markets. We introduce the concept of a "quality markup" and measure the relative welfare consequences of market power over price and quality. For U.S. paid-television markets during 1997-2006, we find that not only are cable monopolists' prices 33% to 74% higher than marginal costs, but qualities are also 23% to 55% higher than socially optimal and the welfare costs of each are similar in magnitude. Such evidence for "quality inflation" by monopolists is at odds with classic results in the literature. |
| Keywords: | cable television; endogenous quality; imperfect competition; industrial organization; monopoly; pay television; quality markup; welfare |
| JEL: | C51 L13 L15 L82 L96 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10793&r=all |
| By: | DOI Naoshi; OHASHI Hiroshi |
| Abstract: | This paper investigates the economic impacts of the merger between Japan Airlines (JAL) and Japan Air System (JAS) in October 2002 and its remedial measures. This paper performs simulation analyses using an estimated structural model in which airlines set both fares and flight frequencies on each route in the domestic market. By comparing supply models, the hypothesis that the merger caused a collusion among airlines is rejected. The marginal-cost estimates for the merging airlines significantly declined primarily through the expansion of its domestic network. The simulation estimates suggest that, although the merger increased the total social surplus for all domestic routes by 6.8%, it increased fares and decreased consumer surplus on the JAL-JAS duopoly routes. This paper also evaluates remedial measures associated with the merger. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:15100&r=all |
| By: | McCullough, Gerard J. |
| Keywords: | Demand and Price Analysis, Industrial Organization, Research and Development/Tech Change/Emerging Technologies, |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:ags:umaesp:207766&r=all |
| By: | Marco Savioli (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy); Lorenzo Zirulia (Department of Economics, University of Bologna, Italy; CRIOS, Bocconi University, Italy; The Rimini Centre for Economic Analysis, Italy) |
| Abstract: | In many industries, firms give the opportunity to add (at a price) optional goods and services to a baseline product. The aim of our paper is to provide a theoretical model of add-on pricing in competitive environments with two new distinctive features. First, we discuss the choice of offering the add-on, assuming that this entails a fixed cost. Second, we allow firms to have a varying degree of market power on the add-on, associated with the ability to capture the value that consumers obtain from such additional good/service. Our model shows that the conventional wisdom, for which offering the add-on should unambiguously lower the price of the baseline product, is not always supported. In asymmetric equilibria, in which only one firm offers the add-on, baseline prices are higher if the firm’s market power on the add-on is limited. The predictions of the model are confirmed via a hedonic price function on a dataset of cruises offered worldwide, an idea setting to test our predictions because cruises are a highly controlled environment. |
| Date: | 2015–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:15-26&r=all |