Friday, August 26, 2016
Nikolaos Danias (Department of Economics, University of Strathclyde) and J Kim Swales (Department of Economics, University of Strathclyde) review The welfare impacts of discriminatory price tariffs.
ABSTRACT: This paper looks at the use of asymmetric tariffs as a regulatory instrument. We use a monopolistic market setup with two markets and we introduce price controls in one of the two. The purpose of the regulator is to maximise consumer welfare through this price discriminatory practice. We consider cases where the welfare of the consumers in the two markets is weighted equally and cases where it is not. In some cases we allow for the two markets to be linked through a monopsonistic input market. The paper focuses on the welfare implications of this regulatory approach, with the firm operating under a profit restriction. Results suggest that having only one price-controlled market is in certain cases a good option from a welfare perspective.
Ralf Dewenter, Ulrich Heimeshoff, and Hendrik Luth estimate The impact of the market transparency unit for fuels on gasoline prices in Germany.
ABSTRACT: Increasing horizontal as well as vertical transparency in oligopolistic markets can be advantageous for consumers, due to reduced search costs. However, market transparency can also affect incentives to deviate from collusive agreements and the punishment by rival firms in the market. Using a panel of 27 European countries, we analyze the impact of increased market transparency via the introduction of a market transparency unit for fuels in Germany. Applying a difference-in-differences approach, we find evidence that both gasoline and diesel prices have increased. While consumers may be better off using a retail price app for fuels, gas stations are also able to compare prices at almost no cost.
Gregory S. Crawford, Robin S. Lee, Michael Whinston, and Ali Yurukoglu investigate The Welfare Effects of Vertical Integration in Multichannel Television Markets.
ABSTRACT: We investigate the welfare effects of vertical integration of regional sports networks (RSNs) with programming distributors in U.S. multichannel television markets. Vertical integration can enhance efficiency by reducing double marginalization and increasing carriage of channels, but can also harm welfare due to foreclosure and raising rivals' costs incentives. We estimate a structural model of viewership, subscription, distributor pricing, and affiliate fee bargaining using a rich dataset on the U.S. cable and satellite television industry (2000-2010). We use these estimates to analyze the impact of simulated vertical mergers and de-mergers of RSNs on competition and welfare, and examine the efficacy of regulatory policies introduced by the U.S. Federal Communications Commission to address competition concerns in this industry.
Patrice Bougette (Université Nice Sophia Antipolis (UNS)); Marc Deschamps (Universite de Lorraine (UL)) and Frederic Marty (OFCE) describe When economics met antitrust: The second Chicago School and the economization of antitrust law.
ABSTRACT: In this article, the authors interrogate legal and economic history to analyze the process by which the Chicago School of Antitrust emerged in the 1950s and became dominant in the United States. They show that the extent to which economic objectives and theoretical views shaped the inception of antitrust law. After establishing the minor influence of economics in the promulgation of U.S. competition law, they highlight U.S. economists’ caution toward antitrust until the Second New Deal and analyze the process by which the Chicago School developed a general and coherent framework for competition policy. They rely mainly on the seminal and programmatic work of Director and Levi (1956) and trace how this theoretical paradigm became collective—that is, the “economization” process in U.S. antitrust. Finally, the authors discuss the implications and possible pitfalls of such a conversion to economics-led antitrust enforcement.
Thursday, August 25, 2016
Brishti Guha notes Moral Hazard, Bertrand Competition, and Natural Monopoly.
ABSTRACT: In the traditional model of Bertrand price competition among symmetric firms, there is no restriction on the number of firms that are active in equilibrium. A symmetric equilibrium exists with the different firms sharing the market. I show that this does not hold if we preserve the symmetry between firms but introduce moral hazard with a customer-sensitive probability of exposure; competition necessarily results in a natural monopoly with only one active firm. Sequential price announcements and early adoption are some equilibrium selection mechanisms that help to pin down the identity of the natural monopolist. If we modify the standard Bertrand assumptions to introduce decreasing returns to scale, a natural oligopoly will emerge instead of a natural monopoly. The insights of the basic model are robust to many extensions.
Roman Inderst and Martin Obradovits study Excessive Competition for Headline Prices.
ABSTRACT: When firms' shrouding of charges, as in Gabaix and Laibson (2006), meets with consumers' salient thinking, as in Bordalo et al. (2013), this can have severe welfare implications. The ensuing excessive competition for headline prices tends to inefficiently bias consumers' choice towards low-quality products, which is compounded when firms react and reduce quality beyond what would be cost efficient. As more intense shopping leads to a greater pass through of shrouded charges into lower headline prices, which aggravates the problem, competition policy is no substitute for consumer protection policy. While in our model all consumers are potential victims of salient thinking and shrouded charges, salient thinking becomes effective only for those who are attentive to different offers. Attentive consumers are likely to show ex-post regret and they can be ex-ante worse off, even though their choice set is larger. The combination of shrouding and salient thinking! can sufficiently disadvantage high-quality firms so as to make them willing to educate consumers and unshroud all charges. While there is no unshrouding on equilibrium, high-quality firms' threat of unshrouding may sufficiently discipline firms to make efficient product choices.
Michele Polo, Boconni provides an overview of Entry Games and Free Entry Equilibria.
ABSTRACT: This Chapter reviews the theoretical literature on entry games and free entry equilibria. We show that a wide range of symmetric oligopoly models share common comparative statics properties. Individual profits and quantities decrease in the number of firms, and tend to competitive or monopolistic competitive equilibria when the number of firms increases indefinitely. The maximum number of firms sustainable in a symmetric long run equilibrium depends on technology (economies of scale), preferences (market size) and strategies (toughness of price competition). On the normative side, in homogeneous product markets the business stealing effect drives the result of excessive entry, whereas adding product differentiation and the utility from variety may revert the result. We then consider asymmetric free entry equilibria that exploit the aggregative nature of many oligopoly models. Finally, we discuss endogenous sunk costs and persistent concentration and frictionless entry and contestable markets.
Yun Jeong Choi (Yonsei University); Jong-Hee Hahn (Yonsei University); and Hojung Kim (Korea Information Society Development Institute) have an interesting paper on Vertical Integration and Market Foreclosure: Empirical Evidence in the Korean Movie Industry.
ABSTRACT: This paper examines how the firms¡¯ foreclosure incentive is affected by the degree of vertical integration, measured by the number of vertically integrated firms, in vertically-related markets. Using seven-year daily screening data in the Korean movie industry, we empirically investigate how the exhibition behavior of vertically integrated and separated theaters respectively responds to the change in the degree of vertical integration. The vertical separation of a formerly integrated firm in 2007 serves as a structural break in the market structure. Our results show that the foreclosure incentive of vertically integrated firms generally decreases as the degree of vertical integration decreases (i.e., the market is composed of more separated independent firms). However, we find the integrated firms strengthened foreclosure to the newly separated firm after the breakup event. This seems to indicate the strategic behavior of existing integrated theaters t! o weaken the market position of their formerly integrated rival. We also observe the newly separated firms behave more like other independent firms with no sign of foreclosing behavior.
Wednesday, August 24, 2016
M. E. Bontempi; L. Lambertini; and E. Medeossi examine Market Power and Duration of R&D Investment in a Panel of Italian Firms.
ABSTRACT: Studies about innovation find evidence of a positive relationship between technological advancement and firm performance, in particular when the innovative effort is continuous. This paper aims to further the analysis on the duration of R&D investment at the firm level. The contribution of this study is threefold: first, we extend Máñez et al. , Triguero et al.  analysis for Spain to the Italian case: we use a panel of manufacturing and service companies, thus enlarging the view of R&D duration within the European countries. Secondly, from a methodological point of view, we employ both discrete- and continuous-time duration models, in order to test the Proportional Hazards (PH) assumption, i.e. the assumption that the hazard rate is equivalent over time across groups. Last, but not least, we assess whether a firm’s likelihood of continuing investment in R&D depends on the market power of companies. We test alternative measures ! for market power: the classical price-cost margin and a new proxy for the firm demand elasticity, obtained from a specific survey question. Results are in line with the hypothesis that R&D presents considerable temporal spill overs and strong persistence, even once unobserved heterogeneity is controlled for. Also, we argue that the appropriate proxy for market power is the firm demand elasticity, and we find support for the Schumpeterian hypothesis.
Sven Heim, Kai Hüschelrath, Philipp Schmidt-Dengler, and Maurizio Strazzeri estimate The impact of state aid on the survival and financial viability of aided firms.
ABSTRACT: We estimate the causal impact of restructuring aid granted by the European Commission between 2003 and 2012 on the survival and financial viability of aided firms. Using a comprehensive dataset we find that restructuring aid increases a firm's average survival time by 8 to 15 years and decreases the hazard rate by 58 to 68 percent, depending on the definition of firm survival. Further analysis finds strong support that, in the longer run, aid receiving firms have a significantly higher probability to improve their financial viability than the counterfactual group.
Sharat Ganapati (Dept. of Economics, Yale University) ; Joseph S. Shapiro (Cowles Foundation, Yale University) ; and Reed Walker (University of California, Berkeley, IZA, & NBER) examine Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing.
ABSTRACT: This paper studies how increases in energy input costs for production are split between consumers and producers via changes in product prices (i.e., pass-through). We show that in markets characterized by imperfect competition, marginal cost pass-through, a demand elasticity, and a price-cost markup are sucient to characterize the relative change in welfare between producers and consumers due to a change in input costs. We find that increases in energy prices lead to higher plant-level marginal costs and output prices but lower markups. This suggests that marginal cost pass-through is incomplete, with estimates centered around 0.7. Our confidence intervals reject both zero pass-through and complete pass-through. We find heterogeneous incidence of changes in input prices across industries, with consumers bearing a smaller share of the burden than standards methods suggest.
Eric Helland and Seth A. Seabury ask Are Settlements in Patent Litigation Collusive? Evidence from Paragraph IV Challenges.
ABSTRACT: The use of “pay-for-delay” settlements in patent litigation – in which a branded manufacturer and generic entrant settle a Paragraph IV patent challenge and agree to forestall entry – has come under considerable scrutiny in recent years. Critics argue that these settlements are collusive and lower consumer welfare by maintaining monopoly prices after patents should have expired, while proponents argue they reinforce incentives for innovation. We estimate the impact of settlements to Paragraph IV challenges on generic entry and evaluate the implications for drug prices and quantity. To address the potential endogeneity of Paragraph IV challenges and settlements we estimate the model using instrumental variables. Our instruments include standard measures of patent strength and a measure of settlement legality based on a split between several Circuit Courts of Appeal. We find that Paragraph IV challenges increase generic entry, lower drug prices and ! increase quantity, while settlements effectively reverse the effect. These effects persist over time, inflating price and depressing quantity for up to 5 years after the challenge. We also find that eliminating settlements would result in a relatively small reduction in research and development (R&D) expenditures.
Tuesday, August 23, 2016
Alberto Cavaliere (Department of Economics and Management, University of Pavia) and Giovanni Crea (Department of Economics and Management, University of Pavia) undertake Vertical Differentiation With Consumers Misperceptions And Information Disparities.
ABSTRACT: We consider vertical differentiation with quality uncertainty and information disparities, in a duopoly where firms supply a product with credence attributes. Consumers choice is affected by misperceptions, but equilibrium prices and qualities depend also on the behavior and the share of informed consumers. With optimistic misperceptions uninformed consumers are cheated in equilibrium as we observe less price competition and minimum differentiation. Alternatively some product differentiation is provided when informed consumers buy high quality goods and the incentive to increase quality is positively affected by optimistic misperceptions. With more informed consumers we find more price competition but less incentive to product differentiation. In most cases the share of informed consumers asymmetrically affects equilibrium prices, to the detriment of the high quality firm. Pessimistic misperceptions prevent more product differentiation and adverse selecti! on arises, but it can be eliminated if the share of informed consumers is high enough. However with pessimistic consumers, information disparities can also lead to inelastic demands and market segmentation, such that externalities
Monday, August 22, 2016
Jeroen Hinloopen (Utrecht University, the Netherlands) and Adriaan R. Soetevent (University of Groningen, the Netherlands) examine (Non-)Insurance Markets, Loss Size Manipulation and Competition - Experimental Evidence.
ABSTRACT: The common view that buyer power of insurers may effectively counteract provider market power critically rests on the idea that consumers and insurers have a joint interest in extracting price concessions. However, in markets where the buyer is an insurer, the interests of insurers and consumers to reduce prices may be importantly misaligned. The positive dependence between loss size and the insurer's expected profits limits the insurer's incentives to reign in loss sizes; in markets with small initial loss sizes, insurers may try to raise these in order to create demand for insurance. After having defined insurance and non-insurance markets based on the initial loss size, we develop theory to show that insurers with buyer power have incentives to create insurance markets. Insurer competition will push their profits to zero but markets do not return to the initial non-insurance state. This constitutes a welfare loss. We design experimental insurance marke! ts to test our theory and find support. Monopolistic insurer-subjects in non-insurance markets increase loss sizes to establish insurance markets. Insurer competition eliminates profits but not the loss size to uninsured consumers. This provides an additional reason to be careful in granting insurers buyer power.
Rodolphe Dos Santos Ferreira ; Teresa Lloyd-Braga ; and Leonor Modesto ask Could competition always raise the risk of bank failure?
ABSTRACT: The debate between the 'competition-fragility' and 'competition-stability' views has been centered upon the risk of banks' loan portfolios. In this paper, we shift the focus of the debate from the riskiness of loan portfolios to the riskiness of operational costs net of the income of non-traditional banking activities, banks' default resulting from negative aggregate profits. We consider a simple model in which, due to purely idiosyncratic risks, portfolio diversification would eliminate the risk of banks' default if those net operational costs were negligible or were known with certainty. We show that more competition always raises the risk of bank default, non-monotonicity being excluded as an equilibrium outcome under free oligopolistic competition between profit maximizing banks. However, the same result obtains in fact under systemic risk, even under non-stochastic net operation costs, a situation which we explore in a slightly different model. We sh! ow further that, under liquidity shortness, a higher intensity of competition in the loan market can result in an increase of deposit rates, rather than a decrease of loan rates.
Hattori, Masahiko and Tanaka, Yasuhito weigh License or entry with vertical differentiation in duopoly.
ABSTRACT: We consider choice of options for a foreign innovating firm to license its technology for producing the high quality good to a domestic firm, or to enter the market of the domestic country with or without license. Under the assumption of uniform distribution about taste parameters of consumers; when cost functions are linear, if the low quality good’s quality is sufficiently high, license without entry strategy is optimum; if the low quality good’s quality is low, both of entry without license strategy and license without entry strategy are optimum; when cost functions are quadratic, if the high quality good’s quality is high, license without entry strategy is optimum; if the high quality good’s quality is low, entry with license strategy is optimum.
Paulo R. Scalco and Marcelo J. Braga have a paper on the Identification of Market Power in Bilateral Oligopoly: The Brazilian Wholesale Market of UHT Milk.
ABSTRACT: The aim of this study was to test the hypothesis of market power in the wholesale market for UHT milk. The structure of this market is an oligopoly characterized as bilateral and uses the model proposed by Schroeter et al. (2000), which allows testing the hypothesis of market power without assuming the restrictive hypothesis of price-taking behavior on one side of the market. The system of nonlinear simultaneous equations that determines quantity, wholesale and retail prices of UHT milk was estimated by nonlinear generalized method of moments. Estimation of conduct parameter was 0.638, rejecting the hypothesis of a perfectly competitive market. Evidences suggest that retailers exert oligopsony power on the dairy industry; however, the distortions caused by such market power could not be quantified.
Friday, August 19, 2016
Zaifu Yang ; Rong Zhang ; and Zongyi Zhang provide An Exploration of a Strategic Competition Model for the European Union Natural Gas Market.
ABSTRACT: Following Jansen et al. (2012), we examine an unconventional Cournot model of the European Union natural gas market with three major suppliers Russian Gazprom, Norwegian Statoil, and Algerian Sonatrach. To re ect Russia's other strategic consideration besides profit, we incorporate a relative market share into Gazprom's objective function. We prove that when Gazprom pursues the control of market share along with profit, it will be good news for consumers but bad news for its pure profit maximising rivals. We further show that by seeking a proper market share, Gazprom can achieve the same profit of a Stackelberg leader in a simultaneous move model as in the standard sequential move leader-follower model. Compared with Jansen et al.'s, our approach makes the analysis considerably simpler and more transparent.
Nathan Miller (Georgetown University, McDonough School of Business) ; Marc Remer (Swarthmore College, Department of Economics) ; Conor Ryan (University of Minnesota, Department of Economics) ; and Gloria Sheu (Economic Analysis Group, U.S. Department of Justice) have a paper on Upward Pricing Pressure as a Predictor of Merger Price Effects.
ABSTRACT: We use Monte Carlo experiments to evaluate whether “upward pricing pressure” (UPP) accurately predicts the price effects of mergers, motivated by the observation that UPP is a restricted form of the first order approximation derived in Jaffe and Weyl (2013). Results indicate that UPP is quite accurate with standard log-concave demand systems, but understates price effects if demand exhibits greater convexity. Prediction error does not systematically exceed that of misspecifed simulation models, nor is it much greater than that of correctly-specifed models simulated with imprecise demand elasticities. The results also support that both UPP and the HHI change provide accurate screens for anticompetitive mergers.
Francesco Nava and Pasquale Schiraldi examine Sales and collusion in a market with storage.
ABSTRACT: Sales are a widespread and well-known phenomenon documented in several product markets. This paper presents a novel rationale for sales that does not rely on consumer heterogeneity, or on any form of randomness to explain such periodic price fluctuations. The analysis is carried out in the context of a simple repeated price competition model, and establishes that firms must periodically reduce prices in order to sustain collusion when goods are storable and the market is large. The largest equilibrium profits are characterized at any market size. A trade-off between the size of the industry and its profits arises. Sales foster collusion, by magnifying the inter-temporal links in consumers' decisions.