|
on Industrial Competition |
| By: | Marco A. Marini (University of Rome La Sapienza) |
| Abstract: | This paper introduces a number of game-theoretic tools to model collusive agreements among firms in vertically differentiated markets. I firstly review some classical literature on collusion between two firms producing goods of exogenous different qualities. I then extend the analysis to a n-firm vertically differentiated market to study the incentive to form either a whole market alliance or partial alliances made of subsets of consecutive firms in order to collude in prices. Within this framework I explore the price behaviour of groups of colluding firms and their incentive to either pruning or proliferating their products. It is shown that a selective pruning within the cartel always occurs. Moreover, by associating a partition function game to the n-firm vertically differentiated market, it can be shown that a sufficient condition for the cooperative (or coalitional) stability of the whole industry cartel is the equidistance of firms’ products along the quality spectrum. Without this property, and in presence of large quality differences, collusive agreements easily lose their stability. In addition, introducing a standard infinitely repeated-game approach, I show that an increase in the number of firms in the market may have contradictory effects on the incentive of firms to collude: it can make collusion easier for bottom and intermediate firms and harder for the top quality firm. Finally, by means of a three-firm example, I consider the case in which alliances can set endogenously qualities, prices and number of variants on sale. I show that, in every formed coalition, (i) market pruning dominates product proliferation and (ii) partial cartelisation always arises in equilibrium, with the bottom quality firm always belonging to the alliance. |
| Keywords: | Vertically Differentiated Market, Price Collusion, Product Pruning, Product Proliferation, Endogenous Qualities, Endogenous Alliance Formation, Coalition Structures, Grand Coalition, Coalition Stability, Core, Simultaneous and Sequential Game of Coalition Formation |
| JEL: | D42 D43 L1 L12 L13 L41 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2017.29&r=com |
| By: | Stuart Baumann; Margaryta Klymak |
| Abstract: | This paper examines a consumer search market exhibiting vertically differentiated firms, heterogeneous consumers and endogenous consumer market entry. In an asymmetric information setting high and low quality firms make equal sales and profit in this market. Conversely when there is full information, search frictions induce an unravelling mechanism that leads to a unique re ned equilibrium where all consumers approach low quality firms and high quality firms make no sales or profit. This presents a rationale for why low quality firms may disclose their quality and high quality firms may not even when disclosure is costless. |
| Keywords: | Consumer Search, Quality Disclosure |
| JEL: | D82 D83 L15 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:280&r=com |
| By: | Hunold, Matthias; Muthers, Johannes |
| Abstract: | We characterize mixed-strategy equilibria in a setting with capacity constrained suppliers which can charge location based prices to different customers. The equilibrium prices weakly increase in the transport distance between supplier and customer, whereas the margins decrease. Despite prices above costs and excess capacities, the competing suppliers exclusively serve their home markets in equilibrium. Competition yields volatile market shares and an inefficient allocation of more distant customers to firms. Even ex-post subcontracting may restore efficiency only partly. The suppliers sometimes do not cross-supply each other as this can intensify competition by relaxing the receiver's capacity constraint. We use our findings to discuss recent competition policy cases and provide hints for a more refined coordinated-effects analysis. |
| Keywords: | Bertrand-Edgeworth,capacity constraints,inefficient competition,spatial price discrimination,subcontracting,transport costs |
| JEL: | L11 L41 L61 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:254&r=com |
| By: | Baumann, Stuart |
| Abstract: | In markets where firms sell similar goods to their competitors, firms may be able to free-ride off the costly price signalling of competitor firms by engaging in price comparative advertising. As the goods are similar, consumers can reason that if one good is high quality (revealed through price signalling) then so is the other. This paper models this phenomenon and finds that in equilibrium there will be firms price signalling as well as freeriding firms that signal through price comparative advertising. Welfare is strictly higher in markets where advertising firms are active relative to pure price signalling markets. In some cases advertising markets can be even more efficient than full information markets as advertisers surrender market power to avoid costly price signalling. |
| Keywords: | Comparative advertising, Price Signalling |
| JEL: | D82 D83 M37 |
| Date: | 2017–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79872&r=com |
| By: | Planer-Friedrich, Lisa; Sahm, Marco |
| Abstract: | We examine the strategic use of Corporate Social Responsibility (CSR) in imperfectly competitive markets. The level of CSR determines the weight a firm puts on consumer surplus in its objective function before it decides upon supply. First, we consider symmetric Cournot competition and show that the endogenous level of CSR is positive for any given number of firms. However, positive CSR levels imply smaller equilibrium profits. Second, we find that an incumbent monopolist can use CSR as an entry deterrent. Both results indicate that CSR may increase market concentration. Third, we consider heterogeneous firms and show that asymmetric costs imply asymmetric CSR levels. |
| Keywords: | Corporate Social Responsibility,Market Concentration,Cournot Competition,Entry Deterrence,Strategic Delegation,Evolutionary Stability |
| JEL: | D42 D43 L12 L13 L21 L22 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:124&r=com |
| By: | Lee, Sang-Ho; Park, Chul-Hi |
| Abstract: | This article investigates the strategic environmental corporate social responsibility (ECSR) of polluting firms in the presence of eco-firms. When the firms decide ECSR sequentially within the framework of the managerial incentive design and then face simultaneous price competition, we show that firms will adopt ECSR and purchase abatement goods to mitigate competition if the products are more substitutable, but the late adopter chooses lower ECSR and thus earns higher profit. It can partially explain the current expansive adoption of ECSR as an industry-wide wave. |
| Keywords: | environmental corporate social responsibility; eco-firms; abatement goods; late adopter advantage |
| JEL: | L13 L21 M14 |
| Date: | 2017–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79881&r=com |
| By: | Lin, Ming Hsin; Matsumura, Toshihiro |
| Abstract: | We discuss optimal privatization policies in mixed oligopolies in which a public firm is the Stackelberg follower (private leadership). We find that under constant marginal cost, the optimal degree of privatization is zero. When the marginal cost is increasing, however, the optimal degree is never zero, and full privatization can be optimal. These results suggest that the optimal privatization policy depends on the cost conditions. We also find that the optimal degree of privatization is substantially lower under private leadership than in the simultaneous-move model when there is no cost difference between public and private firms. |
| Keywords: | private leadership; mixed oligopoly; mixed ownership in public firms |
| JEL: | H42 L13 |
| Date: | 2017–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79913&r=com |
| By: | Daniel McFadden |
| Abstract: | A common problem in applied economics is to determine the impact on consumers of changes in prices and attributes of marketed products as a consequence of policy changes. Examples are prospective regulation of product safety and reliability, or retrospective compensation for harm from defective products or misrepresentation of product features. This paper reexamines the foundations of welfare analysis for these applications. We consider discrete product choice, and develop practical formulas that apply when discrete product demands are characterized by mixed multinomial logit models and policy changes affect hedonic attributes of products in addition to price. We show that for applications that are retrospective, or are prospective but compensating transfers are hypothetical rather than fulfilled, a Market Compensating Equivalent measure that updates Marshallian consumer surplus is more appropriate than Hicksian compensating or equivalent variations. We identify the welfare questions that can be answered in the presence of partial observability on the preferences of individual consumers. We examine the welfare calculus when the experienced-utility of consumers differs from the decision-utility that determines market demands, as the result of resolution of contingencies regarding attributes of products and interactions with consumer needs, or as the result of inconsistencies in tastes and incomplete optimizing behavior. We conclude with an illustrative application that calculates the welfare impacts of unauthorized sharing of consumer information by video streaming services. |
| JEL: | D11 D12 D60 D61 K13 L51 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23535&r=com |
| By: | Levin, Mark (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Matrosova, Kseniya (Russian Presidential Academy of National Economy and Public Administration (RANEPA)) |
| Abstract: | This paper is an analysis of the innovation incentives. The aim of this study is to create the model describing innovation processes, and to research the mechanisms stimulating innovation in the economic systems. The first section is devoted to the review of the models and approaches for analyzing the effects of the market competition on the innovation activity of firms. The second section describes several models of behavior of companies in the domestic and international market. The final section presents the original model of the effectiveness of the schemes of innovation incentives at different levels of diffusion of innovation and technological development. |
| Keywords: | innovation, innovation incentives, diffusion of innovation, simulation analysis, competition, èííîâàöèè, ñòèìóëèðîâàíèå, äèôôóçèÿ èííîâàöèé, èìèòàöèîííîå ìîäåëèðîâàíèå, êîíêóðåíöèÿ |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:wpaper:061713&r=com |
| By: | Allen, Beth (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:217&r=com |
| By: | Marschak, Thomas (Center for Mathematical Economics, Bielefeld University); Selten, Reinhard (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:40&r=com |
| By: | Requate, Till (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:212&r=com |
| By: | David Imhof (Secretariat of the Swiss Competition Commission, Université Bourgogne Franche-Comté, CRESE); YAVUZ KARAGÖK (Secretariat of the Swiss Competition Commission); SAMUEL RUTZ (Avenir Suisse) |
| Abstract: | This paper proposes a method to detect bid-rigging by applying mutually reinforcing screens to a road construction procurement data set from Switzerland in which no prior information about collusion was available. The screening method is particularly suited to deal with the problem of partial collusion, i.e. collusion which does not involve all firms and/or all contracts in a specific data set, implying that many of the classical markers discussed in the corresponding literature will fail to identify bid-rigging. In addition to presenting new screens for collusion, it is shown how benchmarks and the combination of different screens may be used to identify subsets of suspicious contracts and firms. The discussed screening method succeeds in isolating a group of “suspicious” firms exhibiting the characteristics of a local bid-rigging cartel with cover bids and a – more or less pronounced – bid rotation scheme. Based on these findings the Swiss Competition Commission (COMCO) opened an investigation and sanctioned the identified “suspicious” firms for bid-rigging in 2016. |
| Keywords: | bid-rigging, screening method, variance screen, cover bidding screen, bid rotation test, partial collusion |
| JEL: | C00 C40 D22 D40 K40 L40 L41 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:crb:wpaper:2017-09&r=com |
| By: | G. de Jong (VU Amsterdam, The Netherlands); C.L. Behrens (VU Amsterdam, The Netherlands); H. van Herk (VU Amsterdam, The Netherlands); E.T. Verhoef (VU Amsterdam, The Netherlands) |
| Abstract: | We posit and empirically test the hypothesis that airlines are able to charge a fare premium in markets that originate in their domestic country relative to similar markets that originate in foreign countries. To this end, we focus on intercontinental one-stop air travel trips for which the main, intercontinental, flight legs are identical, while the feeder legs depart from a mixture of domestic- and foreign origins. We collect a unique database of published fares for such trips and estimate reduced form fare regressions with main flight leg fixed effects. We find that trips from and to domestic airports (compared with foreign airports) are characterized by about 9.5 per cent higher fares, even after adding controls for airport dominance, trip operating costs, the competitive environment and origin catchment area characteristics. These findings demonstrate that airlines have substantial domestic market power, enabling them to raise fares at their domestic airports irrespective of aforementioned market conditions. The magnitude of this domestic country effect is large relative to the traditional airport dominance effect, suggesting that the distinction between domestic- and foreign origins is a crucial determinant of the degree of market power that airlines can exert in the international airline industry. |
| Keywords: | market power, airline competition, price discrimination, international aviation |
| JEL: | L11 L13 L93 R40 |
| Date: | 2017–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20170009&r=com |
| By: | Escobari, Diego |
| Abstract: | This paper uses the random-coefficients logit methodology that controls for potential endogeneity of prices and allows for general substitution patterns to estimate various demand systems. The estimation takes advantage of an original ticket-level revealed preference data set on travels from the New York City area to Toronto that contains prices and characteristics of not only flight choices but also of all non-booked alternative flights. Consistent with having higher valuations, our results show that travelers buying closer to departure have a higher utility of flying. Moreover, consumers' heterogeneity decreases as the flight date nears. At the carrier level, we identify which carriers have more price-sensitive consumers and which carriers face greater competition. In addition, the results suggest that our multi-airport metropolitan area can be considered as a single market and that JFK and Newark are relatively closer substitutes. Overall, consumers are more willing to switch to alternative carriers than between airports or departure times. |
| Keywords: | Airline choice; Airport choice; Departure time choice; Substitution patterns; Airline demand; Elasticities |
| JEL: | C33 C36 D12 D40 L93 R41 |
| Date: | 2017–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79857&r=com |
| By: | Christos Genakos; Tommaso Valletti; Frank Verboven |
| Abstract: | We study the dual relationship between market structure and prices and between market structure and investment in mobile telecommunications. Using a uniquely constructed panel of mobile operators' prices and accounting information across 33 OECD countries between 2002 and 2014, we document that more concentrated markets lead to higher end user prices. Furthermore, they also lead to higher investment per mobile operator, though the impact on total investment is not conclusive. Our findings are not only relevant for the current consolidation wave in the telecommunications industry. More generally, they stress that competition and regulatory authorities should take seriously the potential trade-off between market power effects and efficiency gains stemming from agreements between firms. |
| Keywords: | mobile telecommunications, market structure, prices, investments, mergers |
| JEL: | K20 L10 L40 L96 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1486&r=com |
| By: | Jill R. Horwitz; Charleen Hsuan; Austin Nichols |
| Abstract: | Little is known about how the adoption and diffusion of medical innovation is related to and influenced by market characteristics such as competition. The particular complications involved in investigating these relationships in the health care sector may explain the dearth of research. We examine diagnostic angiography, percutaneous coronary interventions (PCI), and coronary artery bypass grafting (CABG), three invasive cardiac services. We document the relationship between the adoption by hospitals of these three invasive cardiac services and the characteristics of hospitals, their markets, and the interactions among them, from 1996-2014. The results show that the probability of hospitals adopting a new cardiac service depends on competition in two distinct ways: 1) hospitals are substantially more likely to adopt an invasive cardiac service if competitor hospitals also adopt new services; 2) hospitals are less likely to adopt a new service if a larger fraction of the nearby population already has geographic access to the service at a nearby hospital. The first effect is stronger, leading to the net effect of hospitals duplicating access rather than expanding access to care. In addition, for-profit hospitals are considerably more likely to adopt these cardiac services than either nonprofit or government-owned hospitals. Nonprofit hospitals in high for-profit markets are also more likely to adopt them relative to other nonprofits. These results suggest that factors other than medical need, such as a medical arms race, partially explain technological adoption. |
| JEL: | I1 I11 I18 L1 L13 L2 L3 L8 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23530&r=com |
| By: | Petr Jakubik; Dimitris Zafeiris (EIOPA) |
| Abstract: | Under the current low yield environment insurers are changing their business models and looking for new investment and business opportunities. This is also reflected in an increasing interest in mergers and acquisitions to achieve sufficient returns. However, there is no clear answer in the literature whether this strategy brings the expected positive results. This study empirically tests the effects of mergers and acquisitions (M&A) on share prices of European insurers via an event study. Our results do not confirm the positive impact of such strategies on acquirers’ share prices delivering abnormal returns for shareholders. |
| Keywords: | Insurance, Mergers and Acquisitions, financial stability |
| JEL: | G22 G28 E27 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:eio:thafsr:7&r=com |
| By: | Barra, Cristian; Zotti, Roberto |
| Abstract: | This paper explores the relationship between bank market concentration and financial stability of financial institutions relying on highly territorially disaggregated data taken at municipality level in Italy between 2001 and 2012. Firstly, we test the existence of a U-shaped relationship between market concentration and financial stability. Secondly, we estimate the impact of the level of concentration of the banking system and other explanatory variables, such as size, level of capitalization and credit insolvency of financial institutions, on a proxy of risk taking behavior such as the banking ‘‘stability inefficiency’’ derived simultaneously from the estimation of a stability stochastic frontier. The paper concludes that the inefficiency of financial stability is U-shaped relationship with respect to the measure of market concentration. Boosting market power increases bank failure in very concentrated markets while leads to higher financial stability in already competitive markets. Bank size is an essential factor in explaining this relationship as the effect of size on the inefficiency of stability is an inverse U-shaped as a function of the market share indicator; results also suggest that high, low and average concentration levels do not change the positive effects that the level of capitalization has on the stability inefficiency. |
| Keywords: | Management; local banks; market structure; financial stability |
| JEL: | C14 D21 G21 G28 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79900&r=com |
| By: | Shijaku, Gerti |
| Abstract: | This paper analyses the inter-temporal competition – stability nexus after the global financial crises. For this reason, the empirical estimation approach follows a five – step procedure. First, we utilise quarterly macroeconomic and balance sheet and income statement data for 16 banks operating in the Albanian banking sector over the period 2008 – 2015. Second, we calculate a new composite index as a measure of bank stability conditions, which includes a wide set of information rather than focusing only on one aspect of risk. Then, we construct a proxy for bank competition such as the Boone indicator. Empirical estimations are based on the General Method of Moments approach. A set of robustness checks include also the use of other alternative proxy of competition such as the Lerner index and the efficient-adjusted Lerner index, profit elasticity and the Herfindahl index. Empirical results strongly support the “competition – stability” view after the global financial crises - that higher degree of competition boosts further bank stability conditions. Results further indicate that greater concentration has also a negative impact on bank stability. Results imply also that bank stability is positively linked with macroeconomic conditions and capital ratio and inverse with operational efficiency. Finally, we do not find a non-linear relationship between competition and stability. |
| Keywords: | Bank stability, Competition, Boone indicator, Panel Data, GMM. |
| JEL: | C26 E32 E43 G21 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79891&r=com |