Friday, January 26, 2018
Lee, Kyungyul ; Kwon and Youngsun offer An empirical study on firms' product entry strategy in the U.S. smartphone market.
ABSTRACT: Prior studies often examine the effect of inertia on enterprise strategy for attracting new consumers or attacking competitors in an industry. Various sources of the firm act as inertia for the incumbents in the strategy; the most representative example is incentives. For incumbents, large incentives reduce competitive inertia and motivate them to change strategy. For example, poor financial performance acts as an incentive. This study asks the question: does prior good performance motivate managers to retain their strategies in a competitive environment? As products in modern society have a very short life span and change rapidly, it is very dangerous for a company to stay in one place without any change in their strategy. Therefore, this paper focuses on the relationship between past performance and strategic choices of firms, and considers managerial incentive as a mediator between the two, even in a rapidly changing society. We analyze three aspects of change in a firm’s product strategies –market preemption, product diversification, and incremental product innovation–to observe the effect of inertia in the U.S. smartphone market. The results showed that past good performance resulted in some company strategies becoming passive. In addition, the past good performance of a company showed negative effects in expanding its market segment. The results were similar in terms of incremental product innovation. This implies that companies did not devote more time to product development once their products were valued well. Consequently, our paper empirically tested that past good performance caused inertia in product diversification and incremental product innovation strategies.
Howell, Bronwyn E. ; Potgieter, Petrus H. ask Triple-play (un)bundled pricing – cui bono?
ABSTRACT: Bundling of broadband access with other services has been a defining characteristic of internet access markets for as long as broadband technologies have been available. Initially, cable television competitors entered telecommunications markets by bundling first voice telephony and subsequently (broadband) internet access with their television products. The fear that bundling broadband access with live sport content could distort competition in broadband markets by first facilitating the assumption of a dominant position in broadband markets and then the squeezing-out of small rivals with low levels of investment but higher costs led to the New Zealand Commerce Commission recently declining to grant clearance for a merger between the dominant pay television provider and the number two (by market share) fixed line broadband provider also the number one mobile operator (Commission 2017; B. E. Howell and Potgieter 2017a; B. E. Howell and Potgieter 2017b). We investigate the situation where a basic content package, a premium content package and broadband are offered by a firm and analyse the firm’s price-setting behaviour when customers react to a given set of prices by maximizing their individual consumer surplus. Numerical simulations with random customer valuations is used to illustrate the multiplicity of outcomes that can be expected from a regulatory intervention. We discuss issues arising from this analysis that should be pertinent to decisions in similar cases.
Thursday, January 25, 2018
Assessing the impact of mobile consolidation on innovation and quality: An evaluation of the Hutchison/Orange merger in Austria
Pedrós, Xavier ; Bahia, Kalvin ; Castells, Pau ; Abate, Serafino are Assessing the impact of mobile consolidation on innovation and quality: An evaluation of the Hutchison/Orange merger in Austria.
ABSTRACT: Assessing the impact of a merger – or predicting the impact of a merger – follows competition law and relies on economic practice. Competition authorities strive for consistency of approach, with assessments generally based on an analysis of the impact on prices, quality and innovation for consumers. Experience has shown, however, that the main measurement relied on by competition authorities is pricing; could the proposed merger increase prices in the short-term? How harmful would this be for the consumer? In the case of mergers in general, and mobile mergers in particular, we argue that whilst price is an important factor, there has been an over reliance on this single aspect of consumers outcomes and less consideration of quality and innovation.
Miao, Zhuang and Long, Ngo Van observe Multiple-Quality Cournot Oligopoly and the Role of Market Size.
ABSTRACT: We model an oligopoly where firms can choose the quality level of their products by incurring set-up costs that generally depend on quality level. If the set-up cost is independent of product quality, firms may choose to supply both types of quality.We focus on the long run equilibrium where free entry and exit ensure that the profit for each type of firm is zero. Using this framework, we study the implications of an increase in the market size. We show that for the existence of an equilibrium where some firms specialize in the low quality product it is necessary that the set-up cost for the lower quality product, adjusted for quality level, is lower than that for the higher quality product. In the case where the unit variable costs are zero, or they are proportional to quality level (so that unit variable costs, adjusted for quality, are the same), we show that an increase in the market size leads to (i) an increase in the fraction of firms that specialize in the high quality products, (ii) the market shares (both in value terms and in terms of volume of output) of high quality producers increases, and (iii) the prices of both types of product decrease. In the case where higher quality requires higher set-up cost (per unit of quality) but lower unit variable cost (per unit of quality), subject to certain bounds on the difference in unit variable costs, we obtain the result that an increase in the market size decreases the number of low quality firms, increases the number of high quality firms, and decreases the prices of both products. In the special case where the set up cost is independent of quality level, we find that all firms will produce both type of quality levels. In this case, an increase in the market size will reduce the value shares of low quality products, but will leave their volume share unchanged; and the market expansion induces a fall in the relative price of the low quality product, and in the prices of both products in terms of the numeraire good. We carry out an empirical test of a version of the model, where set-up costs now refer to set-up costs to establish an export market, and they vary according to the quality of product that the firm exports to that market. We show that the data supported the hypothesis that the average qualities of the product are higher for bigger export markets.
Bergantino, Angela Stefania ; Capozza, Claudia ; Capurso, Mauro identify Pricing strategies: who leads and who follows in the air and rail passenger markets in Italy.
ABSTRACT: In this paper, we aim at empirically uncovering the existence of price leadership in the passenger transport market, whose oligopolistic structure facilitates the strategic interaction among companies, with price being one of the principal elements of competition. The strategic interaction is particularly favoured by the fact that prices are easily observable online by all competitors. The analysis focuses on selected Italian city-pair markets that differ from one another with respect to the degree of inter and intra-modal competition and to the characteristics of the transport services provided. We exploit this heterogeneity to study transport operators’ strategic interactions in different competitive environments. We find evidence of the existence of price leadership, even though results differ across city-pair markets. In particular, it emerges that the incumbent operator, in either the air or the rail sector, always holds the role of leader.
Maarten Pieter Schinkel was awarded the Van der Schroeff Award 2017. The award is presented annually to the best lecturer at UvA Economics and Business. See the press release here. Not every professor is cool enough for their own video, but Maarten Pieter is. His class was so large (over 1,000 students) that it needed to be moved to a well known theater in Amsterdam. Economics as theater! Who knew?
Klumpp, Tilman (University of Alberta, Department of Economics) ; and Su, Xuejuan (University of Alberta, Department of Economics) explore Public Private Competition.
ABSTRACT: We examine competition between a private and a public provider in markets for "merit goods" such as education, healthcare, housing, recreation, or culture. The private firm provides a high-price/high-quality variety of the good and serves richer individuals, while the public firm provides a low-price/low-quality variety and serves poorer individuals. We derive the private competitor's best response to changes in the public firm's price and quality level. This enables us to examine the distributional effects of government policies aimed at making publicly provided goods more affordable or increase their quality, and of changes to the government budget constraint that make publicly provided goods more expensive or decrease their quality. Our results have implications for the financing of the public supply of such goods, and for whether additional resources, if available, should be spent on reducing the price or enhancing the quality of publicly provided goods.
Wednesday, January 24, 2018
Muthers, Johannes and Hunold, Matthias offer thoughts on Capacity constrained price competition with transportation costs.
ABSTRACT: We characterize mixed-strategy equilibria in case of capacity constrained price competition, transportation costs and customer-specific pricing. Equilibrium prices weakly increase in the distance between supplier and customer. Despite prices above costs and excess capacities, the firms exclusively their serve home markets. Competition yields volatile market shares and an inefficient allocation of more distant customers to suppliers. Even ex-post subcontracts may restore efficiency only partly.
Kokovin, Sergey ; Parenti, Mathieu ; Thisse, Jacques-François ; Ushchev, Philip provide thoughts On the Dilution of Market Power.
ABSTRACT: We show that a market involving a handful of large-scale firms and a myriad of small-scale businesses may give rise to different types of market structure, ranging from monopoly or oligopoly to monopolistic competition through new types of market structure. In particular, we find conditions under which the free entry and exit of small firms incentivizes the big firms to sell their varieties at the monopolistically competitive prices, as if they were to behave like in monopolistic competition. We call this result dilution of market power. The structure of preferences is the main driver for a specific market structure to emerge as an equilibrium outcome.
Bisceglia, Michele ; Cellini, Roberto ; Grilli, Luca discuss Quality competition in healthcare services with regional regulators: A differential game approach.
ABSTRACT: This article proposes a differential-game model, in order to analyze markets in which regional regulation is operative and competition is based on quality. The case we have in mind is healthcare public service, where consumers (patients) choose the provider mainly basing on the providers' location and the quality of services, while prices play a more limited role. In most European countries, within the same State, regional (or local) providers compete on quality to attract demand. Market regulation is set at national and/or regional level. Our model highlights the features of equilibrium in such a framework, and specifically investigates how the differences in product quality evolve among regions, and how inter-regional demand flows behave. Differently from some available similar models (that do not take into account the regional dimension of the decision process), we find that quality differentials among regions may persist in equilibrium.
Juan Vélez (Banco de la República de Colombia) analyzes Merger Effects with Product Complementarity: Evidence from Colombia’s Telecommunications.
ABSTRACT: Mergers of firms producing complementary products have ambiguous effects on consumer welfare. Consumers benefit if the firm, motivated by the internalized profits created by the complementarity, lowers prices. Consumers are hurt if the firm uses bundles to exert price discrimination, making standalone products more expensive. To assess which effect dominates, I use an administrative dataset, which records prices, market shares, and plan attributes of the universe of Colombia’s telecom carriers. I estimate a random coefficients discrete choice model of demand for bundled and standalone telecom products, in which the degree of substitutability or complementarity among products is an essential parameter of interest. I find that major telecom products display a mix of substitutability and complementarity, but in general hardwired and mobile services are complements. Counterfactual experiments using the estimated model indicate positive net effects of mergers with complements: despite a small increase in the price of standalone goods, consumer surplus increased by around 11 million dollars per quarter after the Claro merger. On the other hand I find evidence that mergers between ISPs and mobile carriers reduce the likelihood of poorer households adopting faster broadband. Classification JEL: L22, L13, G34, L96.
Tuesday, January 23, 2018
Suppliet, Moritz examines Umbrella Branding in Pharmaceutical Markets.
ABSTRACT: Umbrella branding is a marketing practice whereby multi-product firms leverage their reputation across different product categories. This paper investigates how advertising in the market of over-the-counter (OTC) drugs affects the decision to buy prescription drugs from a promoted brand name. I exploit specific charac- teristics of market regulation in Germany to identify the effect of advertising and find positive effects of umbrella branding on sales of prescription drugs. Umbrella branding results in market expansion, particularly for generic firms which invest in OTC drug advertising. If the effect leads to more consumers of generic substitutes or to more patients in undertreated therapeutic areas, market expansion can have a positive effect on welfare.
Susumo Sato identifies Freemium as Optimal Menu Pricing.
ABSTRACT: In online contents markets, content providers collect revenues from both consumers and advertisers by segmenting consumers who are willing to avoid advertisements and who are not. To analyze such situations, I construct a model of menu pricing by advertising platforms in two-sided markets. I find that, under certain condition, although a monopolistic platform can choose any menu of price-advertisement pairs, the optimal menu consists of only two services: ad-supported basic service and ad-free premium service. In addition, if the willingness to pay of advertisers is sufficiently high, the basic service is offered for free. This menu pricing is well known as freemium. Furthermore, this binary structure remains to hold an equilibrium menu pricing even under duopoly.
Nikolay Chernyshev (University of St Andrews) understands The Relationship between R&D and Competition: Reconciling Theory and Evidence.
ABSTRACT: The hypothesis of a hump-shaped relationship between innovation and competition due to Aghion, Bloom, Blundell, Griffith, and Howitt (2005), has been tested for different data sets without garnering conclusive support. In this paper we argue that this lack of agreement is because of a difference in approaches to measuring innovation (either in terms of R&D outcomes or by R&D effort). We develop a unified tractable general-equilibrium framework, in which, while R&D outcomes are a hump-shaped function of competition, R&D effort can be observed to be either increasing, decreasing, or hump-shaped. This enables our paper, first, to reconcile the conclusions by Aghion et al. (2005) with more recent results and, second, to inform further attempts to identify the hump-shaped relationship in data.
Justus Haucap asks Merger effects on innovation: A rationale for stricter merger control?
ABSTRACT: The question how mergers affect innovation has gained prominence in a number of recent merger cases. Accounting for the likely effects of mergers on innovation is difficult for a number of reasons though. First of all, the relationship between market concentration and innovation is far from clear and not unambiguous. While it is an empirical regularity and, hence, a useful presumption that an increase in market concentration also leads to an increase in price, the case for a similarly general presumption with respect to mergers and innovation is relatively weak. Secondly, while mergers may result in innovation efficiencies, these may be difficult to demonstrate, given that the European Commission requires the efficiencies to accrue in a timely fashion, i.e., within two to four years after the merger. This contrasts with the timespan applied to the theories of harm which the Commission itself employs. This structural asymmetry tends to bias the framework against innovation efficiencies. Thirdly, remedies are notoriously difficult to design, and this is even more valid for innovation markets. In addition, competitors may choose to strategically not disclose part of their research ideas and pipelines in order to sabotage a competing merger if that merger would be procompetitive. Hence, the market test for remedies, which is already difficult in other merger cases, given market participants' strategic interests, will be even more difficult for innovation markets where competing firms can easily hide their intentions, research ides and pipelines.
Monday, January 22, 2018
Asongu, Simplice ; Biekpe, Nicholas examine ICT, Information Asymmetry and Market Power in the African Banking Industry.
ABSTRACT: This study assesses how market power in the African banking industry is affected by the complementarity between information sharing offices and information and communication technology (ICT). The empirical evidence is based on a panel of 162 banks consisting of 42 countries for the period 2001-2011. Three estimation techniques are employed, namely: (i) instrumental variable Fixed effects to control for the unobserved heterogeneity; (ii) Tobit regressions to control for the limited range in the dependent variable; and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of market power. Whereas results from Fixed effects and Tobit regressions are not significant, with QR: (i) the interaction between internet penetration and public credit registries reduces market power in the 75th quartile and (ii) the interaction between mobile phone penetration and private credit bureaus increases market power in the top quintiles. Fortunately, the positive net effects are associated with negative marginal effects from the interaction between private credit bureaus and mobile phone penetration. This implies that mobile phones could complement private credit bureaus to decrease market power when certain thresholds of mobile phone penetration are attained. These thresholds are computed and discussed.
Aaron Rosenbaum ; Garth Baughman ; Mark D. Manuszak ; Kylie Stewart ; Fumiko Hayashi ; Joanna Stavins describe Faster Payments : Market Structure and Policy Considerations.
ABSTRACT: The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant-operator environment, a multi-operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. The paper also considers tools to promote positive outcomes in each market structure.
What past U.S. agency actions say about complexity in merger remedies, with an application to generic drug divestitures
Emch, Eric ; Jeitschko, Thomas D. ; and Zhou, Arthur ask What past U.S. agency actions say about complexity in merger remedies, with an application to generic drug divestitures.
ABSTRACT: We consider merger remedies of the U.S. Department of Justice's Antitrust Division and the U.S. Federal Trade Commission between 2008 and 2017. Traditionally one distinguishes between structural and behavioral remedies' and structural remedies are generally considered to be more effective and easier to implement. Our analysis suggests that over time this distinction has become somewhat blurred and a better gradation of remedies may be tied to the complexity of the proposed remedy. Divestitures in the market for generic drugs, in particular, are particularly complex, even though the remedies are of a structural, and so their efficacy is hard to ascertain.
Laurence C. Baker; M. Kate Bundorf; and Daniel P. Kessler asks Does Multispecialty Practice Enhance Physician Market Power?
ABSTRACT: In markets for health services, vertical integration – common ownership of producers of complementary services – may have both pro- and anti-competitive effects. Despite this, no empirical research has examined the consequences of multispecialty physician practice – a common and increasing form of vertical integration – for physician prices. We use data on 40 million commercially insured individuals from the Health Care Cost Institute to construct indices of the price of a standard office visit to general-practice and specialist physicians for the years 2008-2012. We match this to measures of the characteristics of physician practices and physician markets based on Medicare Part B claims, aggregating physicians into practices based on their receipt of payments under a common Taxpayer Identification Number. Holding fixed the degree of competition in their own specialty, we find that generalist physicians charge higher prices when they are integrated with specialist physicians, and that the effect of integration is larger in uncompetitive specialist markets. We find the same thing in the reciprocal setting – specialist prices are higher when they are integrated with generalists, and the effect is stronger in uncompetitive generalist markets. Our results suggest that multispecialty practice has anticompetitive effects.
Grzybowski, Lukasz ; Nicolle, Ambre ; Zulehner, Christine analyze the Impact of competition and regulation on prices of mobile services: Evidence from France.
ABSTRACT: In this paper, we assess the impact of competition and regulation on prices of mobile services in France. We estimate hedonic price regressions using data on tariff plans offered by the main mobile telecommunications operator in France between May 2011 and December 2014. In this time period, the obtained quality-adjusted price index decreased by about 51% as compared to a decline in average prices without quality adjustment of 8.9%. In a second step, we relate the quality-adjusted prices to a set of competition and regulation variables and find that the launch of 4G networks by mobile operators was the main driver of price reductions for classic tariffs with commitment. Low cost tariffs without commitment which were introduced to pre-empt the entry of low cost competitor declined at the time of entry. Moreover, we find that regulation, which is approximated by the level of mobile termination charges and international roaming price caps for voice and data, has jointly a significant impact on quality-adjusted prices. In percentage terms, competition is responsible for about 68% of total price decline. We conclude that the reduction in quality-adjusted prices in the last years was largely caused by competition between established operators and by entry of fourth low cost operator.