Wednesday, February 12, 2014
Ioannis Samantas, University of Athens explains Bank competition and financial (in)stability in Europe: A sensitivity analysis.
ABSTRACT: This study examines the effect of market structure variables on stability subject to regulation and supervision variables. The Extreme Bound Analysis (EBA) is employed over a sample of banks operating within the enlarged European Union during the period 2002-2010. The results show an inverse U-shaped association between market power and bank soundness and stabilizing tendency in markets of less concentration, where policies lean towards limited restrictions on non-interest bearing activities, official intervention to bank management and book transparency. However, in markets with higher share of foreign owned assets, the pattern is inverted. The significant impact of regulatory variables contributes to the ongoing reform as a stability channel of bank competition.
Geza Sapi (DG Comp) and Irina Suleymanova (DICE) discuss Consumer flexibility, data quality and targeted pricing.
ABSTRACT: We investigate how firms' incentives to acquire customer data for targeted offers depend on its quality. A two-dimensional Hotelling model is proposed where consumers are heterogeneous both with respect to their locations and transportation cost parameters (flexibility). Firms have perfect data on the locations of consumers while data on their flexibility is imperfect. When consumers are relatively homogeneous in their flexibility, in equilibrium both firms acquire customer data regardless of its quality. This increases profits but harms consumers. When consumers are relatively differentiated in flexibility, data acquisition incentives depend on its quality. Only if the data is sufficiently precise, both firms acquire it and their profits decrease, while consumers are better-off. Our model has particular relevance for location-based marketing such as in mobile telephony, where firms have near-perfect information on the p! roximity of customers but may have imperfect knowledge of other consumer characteristics.
Ofer H. Azar (BGU) has written on OPTIMAL STRATEGY OF MULTI-PRODUCT RETAILERS WITH RELATIVE THINKING AND REFERENCE PRICES.
ABSTRACT: Experimental evidence suggests that consumers are affected by reference prices and by relative price differences ("relative thinking"). A linear-city model of two retailers that sell two goods suggests how this consumer behavior affects firm strategy and market outcomes. A simple model analyzes the case in which all consumers want to buy both goods. An extended version adds consumers who want only one good. Relative thinking leads firms to increase the markup on the good with the higher reference price and decrease the markup on the other good, possibly to a negative markup. Stronger relative thinking increases the firms' profits.
Tuesday, February 11, 2014
Bill Baer (DOJ) gave a speech on Public and Private Antitrust Enforcement in the United States.
Jeroen Hinloopen (University of Amsterdam), Wieland Muller (University of Vienna), and Hans-Theo Normann (DICE) provide Output commitment through product bundling: Experimental evidence.
ABSTRACT: We analyze the impact of product bundling in experimental markets. One firm has monopoly power in a first market but competes with another firm à la Cournot in a second market. We compare treatments where the multi-product firm (i) always bundles, (ii) never bundles, and (iii) chooses whether to bundle. We also contrast the simultaneous and the sequential order of moves in the duopoly market. Our data indicate support for the theory of product bundling: with bundling and simultaneous moves, the multi-product firm offers the predicted number of units. When the multi-product firm is the Stackelberg leader, the predicted equilibrium is better attained with bundling, especially when it chooses to bundle, even though in theory bundling should not make a difference here. In sum, bundling works as a commitment device that enables the transfer of market power from one market to another.
Pio Baake (DIW) and Ulrich Schwalbe (University of Hohenheim) explore Price Guarantees, Consumer Search, and Hassle Costs.
ABSTRACT: The paper deals with the competitive effects of price guarantees in a spatial duopoly where consumers can search for lower prices but have to incur hassle costs if they want to claim a price guarantee. It is shown that symmetric equilibria with and without price guarantees exist but price guarantees will have no effect on prices if search costs are low, hassle costs are high and the number of uninformed consumers is small. However, when both firms use price guarantees, there also exist payoff-dominant equilibria where both firms use mixed pricing strategies in the form of "high-low" pricing schemes, provided that the search costs are sufficiently high.
Constantine Manasakis (University of Crete) and Minas Vlassis (University of Crete) discuss Downstream mode of competition with upstream market power.
ABSTRACT: In a two-tier oligopoly, where the downstream firms are locked in pair-wise exclusive relationships with their upstream input suppliers, the equilibrium mode of competition in the downstream market is endogenously determined as a renegotiation-proof contract signed between each downstream firm and its exclusive upstream input supplier. We find that the upstream-downstream exclusive relationships credibly sustain the Cournot (Bertrand) mode of competition in the downstream market, when the goods are substitutes (complements). In contrast to previous studies, this result holds irrespectively of the degree of product differentiation and the distribution of bargaining power between the upstream and the downstream firm, over the pair specific input price.
Bruno Cassiman (yIESE Business School, KU Leuven) and Stijn Vanormelingen (zHU Brussel and KU Leuven) analyze Profiting from innovation: Firm level evidence on markups.
ABSTRACT: While innovation is argued to create value, private incentives of firms to innovate are driven by what part of the value created fi rms can appropriate. In this paper we explore the relation between innovation and the markups a fi rm is able to extract after innovating. We estimate fi rm-specifi c price-cost margins from production data and fi nd that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the fi rm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the fi rms patenting and promotion behavior, the age of the firm and the competition it faces. Moreover, we show that sustained product innovation has a cumulative effect on the fi rms markup.
Monday, February 10, 2014
The Impact of R&D Cooperation on Drug Variety Offered on the Market: Evidence from the Pharmaceutical Industry
Tannista Banerjee (Auburn) and Ralph Siebert (Purdue) describe The Impact of R&D Cooperation on Drug Variety Offered on the Market: Evidence from the Pharmaceutical Industry.
ABSTRACT: This study shows that R&D cooperation can be used as an instrument to coordinate drug development portfolios among participating firms, which has crucial implications on the number of drugs offered on the market. Our study puts special attention to the fact that R&D cooperation, formed at different stages throughout the drug development process, have different impacts on the technology and product markets. Using a comprehensive dataset on the pharmaceutical industry, our results show that R&D cooperation formed at the early stages increase the number of R&D projects and the number of drugs launched on the product market. Late stage R&D cooperation, however, have a positive impact on the drug development process and drug variety only in the short run. In the long run, late stage cooperation provoke that firms re-optimize their drug development portfolios which reduces the number of drugs offered on the market.
Paul O'Sullivan (Department of Economics Finance and Accounting, National
University of Ireland, Maynooth) asks LESS IS MORE? RESEARCH JOINT VENTURES AND ENTRY DETERRENCE.
ABSTRACT: This paper analyses the incentives of incumbent firms to form a first-mover RJV when faced with possible entry. If entry is accommodated, firms’ relative profits under R&D competition and RJV formation depend on R&D spillovers and firms’ R&D efficiency. RJV formation may make entry unprofitable if spillovers are sufficiently low. If entry is deterred, RJV formation may be more profitable. Similarly, whether accommodation or deterrence is more profitable under RJV formation depends on spillovers and the firms’ efficiency. How welfare is affected by RJV formation depends on whether output is exported or domestically consumed. There may be a role for active government policy to affect market outcomes.
Paul O'Sullivan (Department of Economics Finance and Accounting, National University of Ireland, Maynooth) asks RESEARCH JOINT VENTURES: A BARRIER TO ENTRY?
ABSTRACT: This paper examines a one-shot game where two symmetric incumbents are faced with possible entry into an industry, where firms may differ in the efficiency of R&D in reducing marginal production costs. The decision facing the incumbents is whether to compete at the R&D stage or to form a RJV. R&D competition may imply that remaining in the market is not viable for the incumbents and the entrant is a monopolist. Conversely, RJV formation may make entry unprofitable and, possibly, increase welfare. The effect on welfare will depend on whether output is exported in its entirety or consumed domestically.
Andre DE PALMA - Centre for Economic Studies, KU Leuven, Fay DUNKERLEY - Centre for Economic Studies, KU Leuven, and Stefan PROOST - Centre for Economic Studies, KU Leuven ponder The generalized network problem.
ABSTRACT: Many transport and other service problems come down to simple network choices: what mode and/ or route to take, if some of the routes and modes are congested and their use can be priced or not priced by different operators. The operators can have different objective functions: public or private monopoly, private duopoly, etc.. This standard problem has been studied in many variants, mostly using the assumption of perfect substitutability between alternatives, so that in the deterministic Wardrop equilibrium, all routes that are used have the same generalized cost. This paper examines in more detail the role of the perfect substitutability assumption. Users of a network consume transport services, which are differentiated in two ways. There are objective differences in quality (length of route, congestion level) perceived by all users and there are individual idiosyncratic preferences for transport services. The resulting! stochastic equilibrium is analysed on a simple parallel network for four types of ownership regimes: private ownership, coordinated public ownership, mixed public-private and public Stackelberg leadership. We find that, firstly, when total demand is fixed and there is congestion, then by controlling one route a government can achieve the First Best allocation, although the second route is privately operated or unpriced. This result holds whatever the level of substitutability and whatever the levels of congestion. Secondly, whenever imperfect substitutability is present, private supply of one of the two routes becomes relatively less efficient because the private supplier has an additional source of market power to exploit. If the better of the two routes is privately supplied it is always insufficiently used. However, if only one route can be privately operated, then this should always be the intrinsically better route.
Friday, February 7, 2014
Sergio Currarini (University of Leicester, Universita' di Venezia and Euro-Mediterranean Center on Climate Change) and Marco A. Marini (Universita' degli Studi di Roma "La Sapienza") study Coalitional Approaches to Collusive Agreements in Oligopoly Games.
ABSTRACT: We study the welfare effects of parallel trade (PT) considering investment in quality. We thus revisit the case for allowing PT in research-intensive industries. We find that quality may be higher with than without PT, depending on how consumers' preferences for quality differ across countries. Conditional on quality, consumer surplus may rise in the source country, or fall in the destination country of PT. We find that PT reduces ex post welfare, and improving quality is a necessary (and sometimes sufficient) condition for PT to increase welfare ex ante.
Close encounter with the hard discounter: A multiple-store shopping perspective on the impact of local hard-discounter entry
Mark Vroegrijk (Lessius University College), Els, Gijsbrechts (Tilburg University) and Katia Campo (Lessius University College) discuss Close encounter with the hard discounter: A multiple-store shopping perspective on the impact of local hard-discounter entry.
ABSTRACT: “Hard-discounters” have become a considerable force within grocery retailing. With rock-bottom prices and minimal assortments, they strongly differ from “large-discounters” like Wal-Mart, and constitute complements rather than substitutes for more traditional supermarkets. Hence, we propose that their impact-of-entry on local incumbents is very different as well. Using a store choice and spending model that explicitly accounts for inter-store synergies and “multiple-store shopping” behavior, we study consumer responses to 194 hard-discounter openings. While we find that hard-discounters, like large-discounters, especially appeal to private label-prone shoppers and lead to sizable incumbent losses, the results confirm that the nature of these losses is strikingly different. First, hard-discounters do not make incumbent chains lose their best customers but, rather, shoppers who already visited other chains alongside the incumbent. Second, we find that chains located in close proximity of new hard-discounters do not suffer more from their entry. Third, losses are lower for upscale chains and incumbents that strongly complement the hard-discounter. Implications for proper response to hard-discounter entry are discussed.
Neil Campbell, Jun Chao Meng, James Musgrove, and Francois Tougas (McMillan) offer Group Buying—A Canadian Case Study.
ABSTRACT: Historically, group buying has been treated more leniently under Canadian competition law than coordination between competing sellers. This is, in part, because such arrangements are often viewed as procompetitive. However, a recent (and rare) group buying case had challenged this generally accepted view before the case was overturned on appeal. In 321665 Alberta Ltd. v. ExxonMobil Canada Ltd. and Husky Oil Operations Ltd. (Husky Oil ),1 the Alberta Court of Queen’s Bench ruled that two joint purchasers unduly lessened competition and contravened the conspiracy offense; the Alberta Court of Appeal disagreed. Although the final outcome was correct, both decisions rely on some non-germane factors and fail to provide a coherent framework for assessing the competitive effects of purchaser collaborations. In our view, the case should have been analyzed using a coherent economic framework, such as the Competition Bureau’s enforcement guidelines, which, with perhaps one exception, properly take into account the procompetitive effects that often arise from group buying.
Jonathan M. Jacobson, Wilson Sonsini argues Monopsony 2013: Still Not Truly Symmetric.
ABSTRACT:We have been assured for years that “monopoly and monopsony are symmetrical distortions of competition,” and that statement is precisely true. But the conclusion some commentators have told us to draw, that symmetric legal and economic treatment is necessarily required, is sometimes quite wrong. Despite the superficial appeal of symmetric outcomes, economic analysis frequently yields a different result. And, indeed, the case law over many decades has been consistent in authorizing conduct by buyers that symmetric treatment would prevent. To that end, the courts routinely uphold practices like purchasing cooperatives whose counterparts are invariably condemned as unlawful per se on the selling side. And to this day, no reported case has found a firm guilty of unilateral monopsonization, notwithstanding the numerous occasions in which single- firm conduct has been held to constitute unlawful monopolization under Section 2 of the Sherman Act.4 The purposes of this article are, first, to explain the important real-world economic differences between monopoly and monopsony and, second, to analyze why the outcomes in the relevant case law are generally consistent with sound economic analysis.
Thursday, February 6, 2014
Daryl Lim (John Marshall Law) has a new book on Patent Misuse and Antitrust Law.
BOOK ABSTRACT: This unique book provides a comprehensive account of the patent misuse doctrine and its relationship with antitrust law. Created to remedy and discourage misconduct by patent owners a century ago, its proper role today is debated more than ever before. Innovation and competition take place in increasingly complex environments that demand a clear understanding of where illegality ends and legitimate corporate strategy begins.
The book is an essential resource for the curious, the expert and all those engaged in deciding what patent misuse means and should mean today. In addition to in-depth doctrinal and policy perspectives, it looks at patent misuse through the eyes of today’s leading practitioners, judges, government officials and academics. It also presents a qualitative analysis of modern misuse case law spanning 1953 to 2012. The result is a compelling account that lays out an important doctrinal, policy and empirical framework for future cases and scholarship.
Patent law students and scholars will find the author’s comprehensive study of popular and actual perceptions of the misuse doctrine a valuable resource, while practitioners, government officials and judges will appreciate the predictive value of the author’s findings.
Lisa Bruttel (Department of Economics, University of Konstanz, Germany) asks Is there an Exclusionary Effect of Retroactive Price Reduction Schemes?
ABSTRACT: This paper presents an experiment on the loyalty enhancing effect potentially created by retroactive price reduction schemes. Such price reductions are applied to all units bought in a certain time frame if the total quantity passes a given threshold. Close to the threshold, the marginal price the buyer pays for the missing units up to the threshold is very low. A dominant firm can use this effect to exclude potential rivals from competition, which is why some jurisdictions consider retroactive discounts as unlawful. This study shows that there in fact is a loyalty enhancing effect of retroactive discounts and how it relates to risk preferences and loss aversion.
Naoto Jinji (Kyoto University) offers Comparative Statics for Oligopoly: A Generalized Result.
ABSTRACT: We perform comparative statics for a general model of asymmetric oligopoly and derive a concise formula for the response of one firm to a marginal change in its rival’s strategic variable, taking into account the responses of all other firms. We obtain the conditions under which the sign of this response coincides with that of the mixed second-order partial derivative of the firm’s payoff function. We then propose a distinction between gross and net strategic relationships (i.e., strategic substitute and complement).