Friday, June 12, 2015
Roberto Alvarez, University of Chile and Rolando Campusano, Central Bank of Chile ask Does Competition Spur Innovation in Developing Countries?
ABSTRACT: Using the Climate Investment Survey from the World Bank, we analyze the effect of competition on technological innovation in developing countries. We deal with endogeneity of competition by using the interaction between industry turnover and entry regulation as an instrument. The basic idea for this instrument is that entry regulations have a negative and more pronounced effect on competition in those industries with more natural turnover. Our results indicate a negative impact of competition on several measures of innovation outputs and inputs, which are robust across industries and using alternative measures of competition.
Jose-Luis Moraga-Gonzalez, Zsolt Sandor, and Matthijs Wildenbeest have a paper on Consumer Search and Prices in the Automobile Market.
ABSTRACT: In many markets consumers have imperfect information about the utility they derive from the products that are on offer and need to visit stores to find the product that is the most preferred. This paper develops a discrete-choice model of demand with optimal consumer search. Consumers first choose which products to search; then, once they learn the utility they get from the searched products, they choose which product to buy, if any. The set of products searched is endogenous and consumer specific. Therefore imperfect substitutability across products does not only arise from variation in their characteristics but also from variation in the costs of searching them. We apply the model to the automobile industry. Our search cost estimate is highly significant and indicates that consumers conduct a limited amount of search. Estimates of own- and cross-price elasticities are lower and markups are higher than if we assume consumers have full information.
Thursday, June 11, 2015
Can a Platform Make Profit with Consumers' Mobility? A Two-Sided Monopoly Model with Random Endogenous Side-Switching
Pierre Andreoletti, Pierre Gaze, and Maxime Menuet (all University of Orleans) ask Can a Platform Make Profit with Consumers' Mobility? A Two-Sided Monopoly Model with Random Endogenous Side-Switching.
ABSTRACT: We model a specific two-sided monopoly market in which agents can switch from a side to the other. We define two periods of time. In the first period, agents buy the platform services on each side and in the second period of time, they can possibly enhance their satisfaction by going to the other face of the platform. We analyze the link between mobility, consumer’s utility, prices and profit. We show that mobility is a valuable feature which can be compared with an increase of product quality. Finally, the firm is able to capture the mobility in its monopoly’s profit. The relative size of each group then appears as a strategical variable for the firm.
Comparing the Costs of Vertical Separation, Integration, and Intermediate Organisational Structures in European and East Asian Railways
Fumitoshi Mizutani (Graduate School of Business Administration, Kobe University) ; Andrew Smith (Institute for Transport Studies, University of Leeds); Chris Nash (Institute for Transport Studies, University of Leeds) and Shuji Uranishi (Graduate School of Economics, Osaka City University) are Comparing the Costs of Vertical Separation, Integration, and Intermediate Organisational Structures in European and East Asian Railways.
ABSTRACT: There is a major policy debate within Europe and more widely on how to structure railway systems to enhance competition, whilst minimising costs. This is the first study in the academic literature to examine, using econometric methods, the cost impacts of three different approaches to structuring railway systems: vertical separation, vertical integration and the intermediate holding company model. Our analysis is based on a panel of European and East Asian railways (1994-2010). We find that the optimal railway structure depends on the intensity and type of traffic running on the network. Our research suggests that, at least on cost grounds, countries should be free to choose between vertical integration, the holding company model or vertical separation.
Goutam Dutta, Indian Institute of Management, Ahmedabad and Sumitro Santra, Indian Institute of Management, Ahmedabad describe Price Movements of the Competing Airlines in the Indian Market: An Empirical Study (A).
ABSTRACT: In this paper, we analyze the price movements of the Indian domestic airline industry. In the first part, we conduct a detailed econometric analysis of five selected domestic routes. In the second part, we study the weekend effect on the average airfare. Our research suggests that competition steps up airfares as the departure date comes closer and weekend airfares are higher than weekday airfares. The application of Revenue Management and Dynamic Pricing is the common practice in the Indian domestic airlines industry.
Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn) explains Tacit Collusion – The Neglected Experimental Evidence.
ABSTRACT: Both in the US and in Europe, antitrust authorities prohibit merger not only if the merged entity, in and of itself, is no longer sufficiently controlled by competition. The authorities also intervene if, post merger, the market structure has changed such that "tacit collusion" or "coordinated effects" become disturbingly more likely. It seems that antitrust neglects the fact that, for more than 50 years, economists have been doing experiments on this very question. Almost any conceivable determinant of higher or lower collusion has been tested. This paper standardises the evidence by way of a meta-study, and relates experimental findings as closely as possible to antitrust doctrine.
Wednesday, June 10, 2015
ABSTRACT: Compliance is a growing field of practice across multiple areas of law. Increasingly companies put compliance risk among the most important corporate governance issues facing them. Moreover, as “JD plus” jobs proliferate, the demand for hiring both at the entry level and for former students currently in practice who are experienced in the compliance field will continue to grow. The growth in compliance jobs comes at a time in shifting demand for legal jobs for law school graduates. Traditional law firm entry level jobs at large law firms, which were the staple of on campus recruiting before 2007, have not returned to pre-2007 levels even with the end of the recession. Technological changes, greater in-house hiring, and better creation of efficiencies have reduced demand for large law firms, which were the traditional training ground for in-depth legal skills and soft skills.
Law schools have responded to the demand shift in entry level hiring with a supply side response - classes in compliance. In some cases, law schools have set up compliance certificates or degrees in areas such as health care and business law. There is now even a casebook devoted to compliance. Yet, with all of these efforts at creating opportunities for careers in compliance, many programs and classes in compliance are nothing other than dressed up versions of classes in white collar crime or regulation or lectures on latest case developments that one might find in a continuing legal education program. These courses do not focus on the substantive areas needs practice with the highest demand for compliance (in-house legal and JD plus jobs) and do not teach the analytical skills necessary to succeed in such jobs. Nor do they focus on the special context within which compliance operates – ideally independent of the “business” but always a part of it. Essentially, law schools have misdiagnosed the demand side - it is not merely the particular type of class (compliance) but also the substance of such classes with the type of quality offering necessary to maximize student short term (entry level hiring) and long term (preparation for ever-shifting analytically complex practice challenges).
This Essay suggests an alternative approach to teaching compliance – one that focuses on the design and implementation of compliance programs. The Essay explores the determinants of why teaching compliance is important, the pitfalls of current approaches and the types of teaching innovations that sophisticated compliance practice requires. First, it explains what compliance is. Then, it explains the basis for the current economic drivers of the increased focus on compliance by firms. Next, it identifies the drivers of illegality before explaining how law school and in-house compliance training might be better structured in both analytical approach and substance. Finally, the Essay concludes with some thoughts about issues in compliance in which courses might place greater emphasis.
Inaki Aguirre, University of the Basque Country UPV/EHU provides thoughts On the economics of the "meeting competition defense" under the Robinson-Patman Act.
ABSTRACT: In this paper we analyze the welfare effects of third-degree price discrimination when competitive pressure varies across markets. In particular, we study the economic aspects of the Robinson-Patman Act associated with the “meeting competition defense.” Using equilibrium models, the main result we find is that this defense might be used successfully in cases of primary line injury precisely when it should not be used, namely when price discrimination reduces social welfare. This result obtains both when discrimination appears in the final good market and when it is used in the intermediate goods market. We also find that these results may drastically change under secondary line injury.
Gamal Atallah (Department of Economics, University of Ottawa) describes Multi-Firm Mergers with Leaders and Followers.
ABSTRACT: This paper analyzes mergers involving several leaders and followers in Stackelberg models, with the merged entity acting as a leader. Adding a follower to a merger increases its profitability or reduces its losses. A merger between one leader and any number of followers is always profitable. When a merger involves two leaders, it requires a sufficiently large proportion of followers to participate in it to be profitable. A merger is less likely to be profitable when the number of participating leaders is intermediate and the number of participating followers is small. All mergers involving leaders and followers are welfare reducing. Overall, Stackelberg leadership partially alleviates the merger paradox.
Now out is the ICN Advocacy Working Group - Competition Culture Project Report.
Elias Carroni (CERPE, University of Namur) discusses Behaviour Based Price Discrimination with Cross-Group Externalities.
ABSTRACT: This article studies the effects of Behaviour-Based Price Discrimination (BBPD) in a horizontally and vertically differentiated duopoly. In a two-period model, firms are allowed to condition their pricing policies on the past purchase behaviour of consumers. The paper shows two different types of equilibria depending on the strength of vertical differentiation. If the difference in quality is small enough, both firms steal each other’s consumers and suffer a situation in which prices and profits are lower and the consumer surplus increases. When quality differentials are instead substantial, asymmetric behaviours arise: the high-quality firm sells its product to few consumers at a high price in the first period and then becomes aggressive in the second one. As a consequence, customers only move from the low-quality to the high-quality firm. If consumers are myopic, the ODS scenario is detrimental for them and beneficial for firms in relation to uniform pricing. If instead consumers are forward-looking, they and the low-quality firm are better off and the high-quality firm is worse off when BBPD is viable.
Luca Lambertini (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis, Italy) and Raimondello Orsini (Department of Economics, University of Bologna, Italy) provide Quality Improvement and Process Innovation in Monopoly: A Dynamic Analysis.
ABSTRACT: We investigate the R&D portfolio of a monopolist investing in cost-reducing and quality enhancing R&D. Incentives along the two directions are inversely related to the size of market demand, and independent of each other. The stability analysis shows the existence of a unique stable steady state equilibrium, which is a saddle point. Finally, we show that the monopolist undersupplies product quality as compared to the social optimum, while its investment in the abatement of marginal cost is socially efficient.
Tuesday, June 9, 2015
Who Is That Old Guy Dancing With Carly Rae Jepsen?
This is the question that my oldest daughter (age 10) posed today as we watched the music video for Carly Rae Jepsen's new song I Really Like You.
As you can see from the video, it is none other than movie star Tom Hanks. She is too young to remember many of his greatest movies (none of which co-starred Meg Ryan). The two previous movies in which I remember Tom Hanks dancing were Big and Bachelor Party.
I'll never forget Tom Hanks dancing on the FAO Schwartz piano in Big.
I also remember Tom Hanks dancing in Bachelor Party (1984) but I could not find that clip or any clip of the movie. For those of you who don't remember the movie, the co-stars were Tawny Kitaen and Adrian Zmed with music by the Police, R.E.M., Wang Chung, Oingo Boingo (Danny Elfman's band) and... Adrian Zmed! At the time, Zmed was a popular actor on that now classic 80s show TJ Hooker. I cannot explain the appeal of that show to my girls but they think that the theme song and intro are silly. I had nostalgia for the show until I watched the intro with them. Just like William Shatner, TJ Hooker has not aged well.
Daniel C. K. Chow, Ohio State University College of Law explains How China's Enforcement of Its Anti-Monopoly Law Poses Risks to Multinational Companies.
ABSTRACT: China’s recent enforcement of its Anti-Monopoly Law (AML) has caused alarm and concern among Multinational Companies (MNCs). Many MNCs believe that the primary purpose of China’s AML is not to create open, fair, and market-based competition but is to serve the Industrial Policy goals of China’s ruling Communist Party. These goals result in the enforcement of the AML in favor of Chinese companies, especially China’s massive State-owned Enterprises, at the expense of MNCs doing business in China. In addition, China’s AML enforcement authorities seem to be using the AML to force MNCs to transfer their valuable technologies (intellectual property rights) at below market rates to Chinese firms and to force price reductions of their products sold in China. AML enforcement authorities also appear to be using the AML to protect famous Chinese brands from being acquired by foreign firms. China’s use of the AML appears to be consistent with China’s overall goal of strengthening its position as a global economic power.
Gregory S Crawford, Nicola Pavanini, Fabiano Schivardi explore Asymmetric Information and Imperfect Competition in Lending Markets.
ABSTRACT: We measure the consequences of asymmetric information and imperfect competition in the Italian market for small business lines of credit. We provide evidence that a bank’s optimal price response to an increase in adverse selection varies depending on the degree of competition in its local market. More adverse selection causes prices to increase in competitive markets, but can have the opposite effect in more concentrated ones, where banks trade off higher markups and the desire to attract safer borrowers. This implies both that imperfect competition can moderate the welfare losses from an increase in adverse selection, and that an increase in adverse selection can moderate the welfare losses from market power. Exploiting detailed data on a representative sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent defaults, we estimate models of demand for credit, loan pricing, loan u! se, and firm default to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. We find evidence of adverse selection in the data, and increase it with a policy experiment to evaluate its importance. As predicted, in the counterfactual equilibrium prices rise in more competitive markets and decline in more concentrated ones, where we also observe an increase in access to credit and a reduction in default rates. Thus market power may serve as a shield against the negative effects of an increase in adverse selection.
Jay Bhattacharya (Stanford University); Vilsa Curto (Stanford University); Liran Einav (Stanford University); and Jonathan Levin (Stanford University) ask Can Health Insurance Competition Work? Evidence from Medicare Advantage.
ABSTRACT: We estimate the economic surplus created by Medicare Advantage under its reformed competitive bidding rules. We use data on the universe of Medicare beneficiaries, and develop a model of plan bidding that accounts for both market power and risk selection. We find that private plans have costs around 12% below fee-for-service costs, and generate around $50 in surplus on average per enrollee-month, after accounting for the disutility due to enrollees having more limited choice of providers. Taxpayers provide a large additional subsidy, and insurers capture most of the private gains. We use the model to evaluate possible program changes.
Guy Meunier (INRA-UR1303 ALISS) ; Jean-Pierre Ponssard (CNRS) ; Francisco Ruiz-Aliseda (Ecole Polytechnique) examine Antitrust versus industrial policies, entry and welfare.
ABSTRACT: In industries with large sunk costs, the investment strategy of firms depends on the regulatory context. We consider ex-ante industrial policies in which the sunk cost may be either taxed or subsidized, and antitrust policies which could either be pro-competitive (leading to divestiture in case of high ex-post profitability) or lenient (allowing mergers in case of low ex-post profitability). Through a simple entry game we completely characterize the impact of these policies and examine their associated dynamic trade-offs between the timing of the investment, the ex-post benefits for the consumers, and the possible duplication of fixed costs. We find that merger policies are dominated by ex-ante industrial policies, whereas the latter are dominated by divestiture policies only under very special circumstances.
Monday, June 8, 2015
Baosen Zhang, Stanford University, Ramesh Johari, Stanford University, and Ram Rajagopal, Stanford University describe Cournot Games with Uncertainty: Coalitions, Competition, and Efficiency.
ABSTRACT: We investigate the impact of group formations on the efficiency of Cournot games where producers face uncertainties. In particular, we study a market model where producers must determine their output before an uncertainty production capacity is realized. In contrast to standard Cournot models, we show that the game is not efficient when there are many small producers. Instead, producers tend to act conservatively to hedge against their risks. We show that in the presence of uncertainty, the game becomes efficient when producers are allowed to take advantage of diversity to form groups of certain sizes. We characterize the trade-off between market power and uncertainty reduction as a function of group size. Namely, we show that when there are N producers present, competition between groups of size square root of N results in equilibria that are socially optimal.
Intra-Industry Trade with Bertrand and Cournot Oligopoly: The Role of Endogenous Horizontal Product Differentiation
James A. Brander and Barbara J. Spencer analyze Intra-Industry Trade with Bertrand and Cournot Oligopoly: The Role of Endogenous Horizontal Product Differentiation.
ABSTRACT: This paper investigates the effect of endogenous horizontal product differentiation on trade patterns and the gains from trade under Bertrand and Cournot oligopoly. Firms differentiate their products to mitigate competition, but only if the investment required is not too high. Investment in product differentiation takes place in a much wider range of cases and results in a greater difference between products under Bertrand than Cournot competition. In our model, trade in homogeneous products never takes place under Bertrand competition: Bertrand firms export only if they differentiate their products. Cournot firms may trade in either homogeneous or differentiated products. If there is trade, consumers tend to be better off with Bertrand than Cournot competition due to greater product differentiation and more aggressive pricing, but higher levels of investment can raise Bertrand profit above Cournot profit and also above the monopoly profit at autarky when investment costs are sufficiently low.
Matthew Grennan, Wharton and Robert Town, Wharton analyze Regulating Innovation with Uncertain Quality: Information, Risk, and Access in Medical Devices.
ABSTRACT: This paper examines optimal regulatory testing requirements when new product quality is uncertain but market participants may learn over time. We develop a model capturing the regulator's tradeoff between consumer risk exposure and access to innovation. Using new data and exogenous variation between EU and US medical device regulatory rules, we document patterns consistent with our model and estimate its parameters. We find: without information from regulatory testing, risk shuts down the market; US policy is close to the one that maximizes a measure of welfare derived from our theoretical model and our empirical estimates; EU surplus could increase 20 percent with more pre-market testing; and “post-market surveillance” could increase surplus 24 percent.