Tuesday, May 24, 2016
Vikas Kathuria, Tilburg University describes Pharmaceutical Mergers and Their Effect on Access and Efficiency: A Case of Emerging Markets.
ABSTRACT: The pharmaceutical M&As in emerging markets may jeopardies cheap access to generics. This may be a motivation for policy makers to use competition law as a tool to deter cross-border M&As. Additionally, M&As in pharmaceutical sector may also give rise to certain efficiencies. However, it is not clear as to how efficiencies will be treated in the peculiar socio-economic context of emerging markets. This paper develops a theoretical framework, which argues that the application of competition law is guided by sector-specific socio-economic realities and institutional realities of the jurisdiction. Thereafter, it employs this framework to analyze both the issues.
Niklas Horstmann, Karlsruhe Institute of Technology, Jan Kraemer, University of Passau, and Daniel Schnurr, Karlsruhe Institute of Technology experiment on Oligopoly Competition in Continuous Time.
ABSTRACT: We conduct oligopoly competition experiments with differentiated goods in discrete and continuous time. Continuous time experiments allow for real-time, asynchronous strategic interaction and are therefore argued to be a more realistic mode of interaction, particularly in the context of (electronic) markets. We consider duopolies and triopolies both under Bertrand as well as Cournot competition and consistently find that, ceteris paribus, tacit collusion is higher under discrete time than under continuous time, which contrasts the theoretical prediction. Thus, our results bear important methodological implications for research on oligopoly competition.
Monday, May 23, 2016
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.
Siekmann, Manuel ; Haucap, Justus ; Heimeshoff, Ulrich describe Fuel Prices and Station Heterogeneity on Retail Gasoline Markets.
ABSTRACT: Price levels and movements on gasoline and diesel markets are heavily debated among consumers, policy-makers, and competition authorities alike. In this paper, we empirically investigate how and why price levels differ across gasoline stations in Germany, using eight months of data from a novel panel data set including price quotes from virtually all German stations. Our analysis specifically explores the role of station heterogeneity in explaining price differences across gasoline stations. Key determinants of price levels across fuel types are found to be ex-refinery prices as key input costs, a station's location on roads or highway service areas, and brand recognition. A lower number of station-specific services implies lower fuel price levels, so does a more heterogeneous local competitive environment.
Normann, Hans-Theo ; Mollers, Claudia ; Snyder, Christopher M. offer Communication in Vertically Related Markets: Experimental Evidence.
ABSTRACT: When an upstream monopolist supplies several competing downstream firms, it may fail to monopolize the market because of opportunistic behavior towards the downstream firms. We analyze this well-known commitment problem in an experiment where we extend previous research by allowing for communication. In one treatment, the upstream firm can bilaterally talk to either of two downstream firms. In a second treatment, all three firms talk together. We find that the treatment with bilateral communication leads to fewer rejections of offers and higher joint profits than a baseline treatment without communication, but output is still above the monopoly benchmark. Only the treatment where all three firms can communicate leads to complete monopolization. Such communication effectively works as a vertical restraint and should be regarding as potentially anticompetitive.
Wenzel, Tobias ; Normann, Hans-Theo examine Shrouding add-on information: an experimental study.
ABSTRACT: We explore how competition affects firms obfuscation strategies in laboratory experiments. Firms sell a base good and an add-on product. The price of the add-on may be shrouded and, if so, myopic consumers pay too much. Shrouding is an equilibrium but an unshrouding equilibrium coexists. In our experiments, competition matters in that only duopolistic markets are frequently shrouded whereas fourfirm markets are not. With repeated interaction, shrouding rates do not increase. However, the opportunities to shroud facilitate tacit collusion on the base good price for the duopolies: the unshrouding equilibrium serves as a credible punishment if deviations occur.
Friday, May 20, 2016
Bertrand-Edgeworth markets with increasing marginal costs and voluntary trading: Experimental evidence
Jacobs, Martin ; Requate, Till study Bertrand-Edgeworth markets with increasing marginal costs and voluntary trading: Experimental evidence.
ABSTRACT: Price competition with increasing marginal costs, though relevant for many markets, appears as an under-researched field in the experimental oligopoly literature. We provide results from an experiment that varies the number of firms as well as the demand rationing and matching schemes in Bertrand-Edgeworth markets with increasing marginal costs and voluntary trading. We find that prices and profits are substantially higher in duopoly than in triopoly and with proportional compared to efficient demand rationing. The matching rule has little effect on prices and profits. Nash equilibrium predictions do not capture observed behavior. Neither the mixed-strategy Nash equilibria of the underlying one-shot game nor, for the fixed matching condition, the symmetric stationary outcome pure-strategy Nash equilibria of the infinitely repeated game are supported by the data. In contrast to results from related experiments, behavior is largely more competitive than pre! dicted by Nash equilibrium theory. Individual pricing decisions can predominantly be explained by either myopic best responses (Edgeworth cycles) or simple imitative behavior, where the complexity of the decision situation plays a crucial role in which behavioral pattern applies.
Teichmann, Isabel and von Schlippenbach, Vanessa identify Collusive effects of a monopolist's use of an intermediary to deliver to retailers.
ABSTRACT: A manufacturer contracting secretly with several downstream competitors faces an opportunism problem, preventing it from exerting its market power. In an infinitely repeated game, the opportunism problem can be relaxed. We show that the upstream firm's market power can be restored even further if the upstream firm chooses a mixed distribution system in which it makes use of an intermediary to distribute the good to a subset of the retailers and delivers directly only to the remaining downstream firms.
Daniel Herold offers A Principal-Agent Model of Competition Law Compliance.
ABSTRACT: This paper analyzes firm owners' incentives to implement Competition Law Compliance Programs as imperfect monitoring devices in a principal-agent setup and the interaction effects with bonus contracts. The manager chooses working effort and has the option to cartelize. The model reveals a non-monotonic relationship between profit targets and incentives to collude. Contrary to intuition, it might be the case that low instead of high profit targets facilitate collusion. This result is driven by the threat of detection and punishment. A Compliance Program deters the agent from misbehavior and enhances effort as long as the agent did not engage in collusive activity. Additionally, the owner can use the Program as an insurance against fines.
Thursday, May 19, 2016
Maican, Florin (University of Gothenburg) ; Orth, Matilda (Research Institute of Industrial Economics (IFN)) examine Entry Regulations, Welfare and Determinants of Market Structure.
ABSTRACT: We use a dynamic oligopoly model of entry and exit with store-type differentiation to evaluate how entry regulations affect profitability, market structure and welfare. Based on unique data for all retail food stores in Sweden, we estimate demand, recover variable profits, and estimate entry costs and fixed costs by store type. Counterfactual policy experiments show that welfare increases when competition is enhanced by lower entry costs. Protecting small stores by imposing licensing fees on large stores is not welfare enhancing. This study sheds light on the long-run implications of entry regulations for the welfare of differentiated product industries with endogenous entry and exit.
Schmidt-Dengler, Philipp ; Hünermund, Paul ; Takahashi, Yuya discuss Entry and Shakeout in Dynamic Oligopoly.
ABSTRACT: In many industries, the number of firms evolves non-monotonically over time. A phase of rapid entry is followed by an industry shakeout: a large number of firms exit within a short period. We present a simple timing game of entry and exit with an exogenous technological process governing firm effi- ciency. We calibrate our model to data from the post World War II penicillin industry. The equilibrium dynamics of the calibrated model closely match the patterns observed in many industries. In particular, our model gener- ates richer and more realistic dynamics than competitive models previously analyzed. The entry phase is characterized by preemption motives while the shakeout phase mimics a war of attrition. We show that dynamic strategic incentives accelerate early entry and trigger the shakeout by comparing a Markov Perfect Equilibrium to an Open-loop Equilibrium.
Xavier Freixas ; Kebin Ma examine Banking Competition and Stability: The Role of Leverage.
ABSTRACT: This paper re-examines the classical issue of the possible trade-offs between banking competition and financial stability by highlighting different types of risk and the role of leverage. We show that competition can affect portfolio risk, insolvency risk, liquidity risk, and systemic risk differently. The effect depends crucially on a bank’s type of funding (retail deposits vs. wholesale debts) and whether leverage is exogenous or endogenous. In particular, we argue that while competition might increase financial stability in a classical originate-to-hold banking industry, the opposite can be true for an originate-to-distribute banking industry with a large fraction of market short-term funding.
Roberto Burguet and Jozsef Sakovics are Bidding for input in oligopoly.
ABSTRACT: We present a model where firms producing substitutes bid for inputs (especially labor) in a decentralized market. We show that downstream market power increases the intensity of competition for input through a new channel: local competitive foreclosure. In our model each unit of input (worker) is sold in a separate local market and Â…rms try not just to get it, but also to keep it from their rivals. This externality leads to Â…firms targeting the same units of input and the price of these is bid up. This effect mitigates the output reducing effect of downstream market power and in the limit (linear Cournot with constant returns) can even restore efficiency. As a result of coordination, there exist further equilibria, with prices above cost even with price taking suppliers –in the labor application this leads to involuntary unemployment. When, instead of targeting, firms post prices, coordination no longer plays a role and we have a unique(!) equilibrium that clears the market, still internalizing the externality. Finally, we show that targeting can also result in endogenous market segmentation and price/wage differentials.
Wednesday, May 18, 2016
David P. Byrne (University of Melbourne) ; Nicolas de Roos (University of Sydney) examine Consumer Search in Retail Gasoline Markets.
ABSTRACT: This paper develops novel direct tests for search behavior in retail gasoline markets. We exploit a unique market-level dataset that allows us to directly measure search intensity with daily web traffic data from a gasoline price reporting website and perfectly measure daily changes in price levels and dispersion. Our simple yet powerful tests provide strong evidence of both cross-sectional and intertemporal price search behavior.
Does Bank Branch Competition Alleviate Household Credit Constraints?Evidence from Korean Household Data
Saeyeon Oh (Department of Economics, Sogang University, Seoul) ; Jungsoo Park ask Does Bank Branch Competition Alleviate Household Credit Constraints?Evidence from Korean Household Data.
ABSTRACT: This paper provides empirical evidence on how bank branch competition affects household credit constraints based on Korean household and nation-wide bank branch data. The main findings are as follow. First, regression results show that banks alleviate household credit constraint when bank branch competition is strong. Second, relaxation of credit constraint occurs at the internal margin, while external margin is not affected. Finally, main beneficiaries from increase in banking competition are older households with head age 35 or above. These results are consistent with the fact that most Korean banks are multi-branch nation-wide banks transacting based on hard information. Banks are compelled to provide more household credit in order to compensate for the lower profitability in competitive market.
Concentration, Product Variety and Entry-for-Merger: Evidence from New Product Introductions in the U.S. Food Industry
Bhattacharya, Haumanti ; Innes, Robert explore Concentration, Product Variety and Entry-for-Merger: Evidence from New Product Introductions in the U.S. Food Industry.
ABSTRACT: Competing theories in industrial organization predict that more concentrated industries will lead to a smaller and more efficient variety of products, or alternately, a larger and less efficient array of products. This paper presents an empirical study of these competing implications that estimates the impact of market concentration on new product introductions in a panel of nine food processing industries over 1983 to 2004. Controlling for industry-level unobservables (using fixed effects) and endogeneity of industry market structure, we find that industry concentration promotes the introduction of new products. Preliminary evidence also suggests that new product introductions spur subsequent food industry mergers. Both conclusions are consistent with the “entry for merger” theory of product variety wherein small firms introduce new products in anticipation of profitable future mergers with concentrated firms.
Exclusionary Practices in Two-Sided Markets: The Effect of Radius Clauses on Competition Between Shopping Centers
Tim Bruhn (University of Giessen) and Georg Gotz (University of Giessen) are rethink Exclusionary Practices in Two-Sided Markets: The Effect of Radius Clauses on Competition Between Shopping Centers.
ABSTRACT: This paper analyzes exclusionary conduct of platforms in two-sided markets. Motivated by recent antitrust cases against shopping centers introducing radius restrictions on their tenants, we provide a discussion of the likely positive and normative effects of exclusivity clauses, which prevent tenants from opening outlets in other shopping centers covered by the clause. In a standard two-sided market model with two competing shopping centers, we analyze incentives to introduce exclusivity clauses and the likely effects on social welfare. We show that exclusivity agreements are especially profitable for shopping centers and detrimental to social welfare if competition is intense between the two shopping centers. We argue that the focus of courts on market definition is misplaced in markets determined by competitive bottlenecks.
Tuesday, May 17, 2016
Mathieu Parenti (National Research University Higher School of Economics) ; Philip Ushchev (National Research University Higher School of Economics) ; Jacques-Francois Thisse (National Research University Higher School of Economics) move Toward a Theory of Monopolistic Competition.
ABSTRACT: We propose a general model of monopolistic competition which encompasses existing models while being exible enough to take into account new demand and competition features. Even though preferences need not be additive and/or homothetic, the market outcome is still driven by the sole variable elasticity of substitution. We impose elementary conditions on this function to guarantee empirically relevant properties of a free-entry equilibrium. Comparative statics with respect to market size and productivity shock are characterized through necessary and sucient conditions. Furthermore, we show that the attention to the constant elasticity of substitution (CES) based on its normative implications was misguided: constant mark-ups, additivity and homotheticity are neither necessary nor sucient for the market to deliver the optimum outcome. Our approach can cope with heterogeneous rms once it is recognized that the elasticity of substitution is rm-specic. Finally,! we show how our set-up can be extended to cope with multiple sectors.
Price-setting Behavior and Competition in Developing Countries: An Analysis of Retail Outlets in Lesotho
Mamello Nchake, Lawrence Edwards and Asha Sundaramstudy Price-setting Behavior and Competition in Developing Countries: An Analysis of Retail Outlets in Lesotho.
ABSTRACT: We study the relationship between price-setting behavior and the degree of competition in a setting where markets and information flows are relatively imperfect. Using a unique dataset that combines survey data on retail outlets in Lesotho, and detailed historical information on their product prices, we find a non-monotonic relationship between the frequency of price changes and perceived competition, measured by the number of reported competitors. This non-monotonic relationship is consistent with a model of increasing costs of coordinating price changes under tacit collusion with few competitors, and a breakdown of collusion at higher levels of competition.
Manaek SM PASARIBU (Commission For The Supervision of Business Competition (KPPU)) suggests Challenges of Indonesian Competition Law and Some Suggestions for Improvement.
ABSTRACT: This paper discusses the problems in the implementation of Law No. 5 of 1999, the Indonesian Competition Law, explains the substance of the law, and provides recommendations for amending the Indonesian competition law. Existing loopholes in the enforcement of competition law in Indonesia, both in substantive and procedural terms, have created difficulties in practice. One way to solve this problem would be to amend the competition law. Our suggestions for the amendment of the Indonesian Competition Law relate to institutional status, dawn raid authority, indirect evidence, leniency programme, procedural law, private litigations, legal aspects of cross border enforcement, and merger notification. We expect that amending said law will result in a balance between procedural and substantive law and that implementing the competition law will finally create legal certainty regarding competition law enforcement in Indonesia.