Selected Publications
Samuel de Haas, Daniel Herold and Jan Thomas Schäfer
Published in: Journal of Industry, Competition and Trade, Vol. 20, No. 1, 139-156. August 2019.
Abstract:
Aldi, the biggest discounter in Germany, started to systematically extend shopping hours of its stores in 2016. We interpret the decision to extend opening hours of a specific Aldi store as entry into a new market. By using a novel data set containing the opening hours of nearly all German grocery retailers, we find the following interesting correlations: The probability that a given Aldi outlet extends its shopping hours past 8 p.m. (i) increases if nearby Aldi outlets already extended shopping hours and (ii) decreases if nearby stores run by Aldi’s close competitors did not expand shopping hours past 8 p.m.. These results seem surprising in conjunction with cannibalization and residual demand, but can be explained by consumer and firm learning or market expansion.
Tim Brühn and Georg Götz
Published in: Managerial and Decision Economics, Vol. 39, No. 5, 577–590. May 2018.
Abstract:
We analyze exclusionary conduct of platforms in 2‐sided markets. Motivated by recent antitrust cases, 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 2‐sided market model, we show that exclusivity agreements are especially profitable for the incumbent and detrimental to social welfare if competition is intense between the 2 shopping centers. We argue that the focus of courts on market definition is misplaced in markets determined by competitive bottlenecks.
Jan Thomas Schäfer and Georg Götz
Published in: Review of Network Economics, Vol. 16, No. 2, 89-123. April 2018.
Abstract:
This paper provides an analysis of the funding structure of the railways in eight European countries. It updates and expands the well-known database on public contributions to rail, which has initially been published by [NERA (2004) Study of the Financing of and Public Budget Contributions to Railways: A Final Report for European Commission, DG TREN. London: NERA National Economic Research Associates.]. The analysis shows that there are large differences concerning the focus of granted funds which can be explained by different policy objectives, differences in the level and degree of network access charges and different cost coverage ratios of public transport services. We identify a tendency towards two main financing models. In our data-set countries either focus their support payments on the operation of the infrastructure, which implies lower network charges and thus a lower amount of necessary Public Service Compensations, or they focus on the support of transport services with a higher degree of cost coverage of network charges and thus a lower amount of operating contributions paid to the infrastructure manager. The structure of funds, different approaches of infrastructure financing and differences in the treatment of historical debt are likely to have an influence on the performance of the investigated railway systems.
Keywords: contributions, Europe, financing, public budget, railways, subsidies
JEL Classifications: R42, R48, L92, H54
Johannes Paha
Published in: Journal of Institutional and Theoretical Economics, Vol. 173 (2017).
Georg Götz and Jan Thomas Schäfer
Published in: Review of Network Economics Vol. 16, No. 2, 63-65 (2017).
Johannes Paha
Published in: Journal of Industrial Economics, Vol. 65, No. 3, 623–653. October 2017.
Abstract:
Collusion has often been alleged in industries where long‐lived capacity investments are important. This article develops a computational duopoly model with capacity investments, demand shocks and either competitive or collusive pricing. It shows that allowing for endogenous capacity investments can sometimes make collusion less valuable than competition and that it can change the normal relationships between the profitability of collusion and both the discount rate and industry‐wide demand shocks.
Georg Götz und Stephan Müller
Published in: Managerial and Decision Economics, Vol. 29, No. 1, 9. June 2017.
Abstract:
We study the rationale for an incumbent to launch a second brand when facing potential entry into a market with quality‐differentiated products and a fringe producer. Depending on market size, the cost of a second brand and a potential entrant's setup cost the incumbent might use a second brand both when deterring and when accommodating entry. For low costs of brand proliferation, the high‐quality firm will prevent entry with limit qualities or multiple brands. The high‐quality incumbent will accommodate entry only if it cannot be prevented. Accommodation is always accompanied by an additional brand safeguarding the premium brand.
Johannes Paha
Published in:
Managerial and Decision Economics. Vol. 38, No. 7, 992–1002. January 2017.
Abstract:
This article analyzes a manager's incentives to establish and sustain an illegal collusive agreement if her firm is subject to profit shocks, if her utility function is concave in profits (e.g., because of risk aversion), and if she incurs opportunity costs (e.g., by violating a social norm). The model supports the empirical observation that if collusion is to be established and sustained in a state with low profits, then this state must be quite persistent. It also indicates that compliance with antitrust laws can be ensured best by combining a zero tolerance policy with a strategy of forgiveness.
Georg Götz, Daniel Herold and Johannes Paha
Published in: Competition Law Compliance Programmes, pp 37-58. October 2016.
Abstract:
This report presents the results of a survey on competition law compliance in Germany, Austria, and Switzerland in which 86 large companies participated. The study shows that 80 % of the firms have implemented measures to identify and mitigate the risks of violating competition laws. The majority of firms and measures concentrate on legal risks (e.g. insufficient awareness of the content and scope of competition laws), whereas risks related to changes in the economic environment (e.g. entry into the market, competition by imports, and more intense competition) are rarely addressed. Risk mitigation heavily relies on competition law training, even though these measures hardly seem sufficient. This is obvious from the fact that 71 % of the firms whose employees had violated competition laws in the past had already trained these employees before the misconduct occurred. We conclude from our study that those measures should be improved that help to detect cartelisation risks at an early stage. Furthermore, sanctions imposed by the firms on the offenders of competition laws require a clearer design and more systematic communication.
Keywords: Demand Shock, Audit Firm, Competition Authority, Executive Board, Compliance Programme
Samuel de Haas and Peter Winker
Published in: Journal of Official Statistics, Vol. 32, No. 3, 643-660. September 2016.
Abstract:
Falsified interviews represent a serious threat to empirical research based on survey data. The identification of such cases is important to ensure data quality. Applying cluster analysis to a set of indicators helps to identify suspicious interviewers when a substantial share of all of their interviews are complete falsifications, as shown by previous research. This analysis is extended to the case when only a share of questions within all interviews provided by an interviewer is fabricated. The assessment is based on synthetic datasets with a priori set properties. These are constructed from a unique experimental dataset containing both real and fabricated data for each respondent. Such a bootstrap approach makes it possible to evaluate the robustness of the method when the share of fabricated answers per interview decreases. The results indicate a substantial loss of discriminatory power in the standard cluster analysis if the share of fabricated answers within an interview becomes small. Using a novel cluster method which allows imposing constraints on cluster sizes, performance can be improved, in particular when only few falsifiers are present. This new approach will help to increase the robustness of survey data by detecting potential falsifiers more reliably.
Keywords: Survey data falsifications; partial falsifications; cluster analysis; constraintcluster analysis; bootstrap
Christian Gissel, Georg Götz and Holger Repp
Published in: Zeitschrift für Rheumatologie, April 2016.
Abstract:
Background: In Germany, Rheumatoid Arthritis (RA) can be treated with TNF-α inhibitors after the failure of conventional disease-modifying antirheumatic drugs like Methotrexate. The clinical use of TNF-α inhibitors grew from 2 % of treated RA patients in 2000 to 20 % in 2008. In 2012, Adalimumab was the most popular TNF-α inhibitor and the best selling drug in the German statutory health insurance system with net expenditure of € 581 mn. We aim to analyze the determinants of cost-effectiveness of Adalimumab and Methotrexate combination therapy for the treatment of RA in Germany.
Methods: We set up an individual patient sampling lifetime model to simulate 10,000 hypothetical patients. Health benefits are recorded in terms of quality-adjusted life years (QALYs). Quality of life is derived from patients’ Health Assessment Questionnaire (HAQ) scores. Initially, patients can achieve one of three responses according to American College of Rheumatology (ACR) criteria or fail the therapy. Each ACR response is associated with an initial improvement in functional status. In each cycle, treatment might be discontinued due to loss of efficacy or adverse events. The patient is then switched to the next available treatment or palliative care. In the Adalimumab simulation arm, we add Adalimumab and Methotrexate combination therapy to the treatment algorithm after failure of both Methotrexate monotherapy and conventional triple therapy. Extensive sensitivity analysis investigates the effects of baseline age and functional status, cost and health effects discounting, methods for estimating quality of life and time horizon.
Results: In the base case, patients gain 7.07 QALYs with conventional synthetic therapy and 9.92 QALYs if Adalimumab combination therapy is added to the treatment algorithm. The incremental cost-utility ratio (ICUR) is € 24,492 based on German list prices. If mandatory rebates and taxes are deducted for international comparison, the ICUR is only € 17,277. Adalimumab combination therapy lowers indirect costs from € 162,698 to € 134,363. From a societal perspective, the ICUR based on total costs is € 14,550 (€ 7,335 after deducting taxes and rebates). Sensitivity analyses shows that Adalimumab combination therapy becomes a dominant treatment option for younger baseline populations, i.e. Adalimumab is both more effective and less expensive for baseline age 30 due to savings in indirect costs. The biggest increase in ICURs can be seen if the simulation period is limited. If the maximum simulation period is limited to 10 years, ICURs double compared to a lifetime perspective.
Conclusion: Cost-effectiveness of Adalimumab combination therapy in Germany compares favorably to analyses in other countries. Our lifetime simulation model shows that a sufficiently long simulation horizon is necessary to capture the complete range of possible outcomes and the associated longterm benefits of biological treatment. If a lifetime perspective is chosen, the most important determinant of cost-effectiveness is savings in indirect costs. Adalimumab combination therapy is most cost-effective for societies with high indirect costs like Germany.
Keywords: Biologic agents, Biologics, economics and rheumatoid arthritis (RA)
Christian Gissel, Georg Götz, Jörg Mahlich and Holger Repp
Abstract:
Backround: The approval of direct-acting antivirals for Interferon-free treatment revolutionized the therapy of chronic Hepatitis C infection. As of August 2014, two treatment regimens for genotype 1 infection received conditional approval in the European Union: Sofosbuvir and Ribavirin for 24 weeks and Sofosbuvir and Simeprevir with or without Ribavirin for 12 weeks. We aim to analyze the cost-effectiveness of both regimens in Germany.
Methods: We set up a Markov model with a lifetime horizon to simulate immediate treatment success and long-term disease progression for treatment-naive patients. The model analyzes both short-term and long-term costs and benefits from the perspective of the German Statutory Health Insurance. We apply the efficiency frontier method, which was suggested by German Institute for Quality and Efficiency in Health Care for cost-effectiveness analysis in Germany.
Results: The efficiency frontier is defined by dual therapy and first generation direct-acting antiviral Boceprevir, yielding a maximum of € 1,447.69 per additional percentage point of sustained virologic response gained. Even without rebates, Sofosbuvir/Simeprevir is very close with € 1,560.13 per additional percentage point. It is both more effective and less expensive than Sofosbuvir/Ribavirin.
Conclusions: In addition to higher sustained virologic response rates, new direct-acting antivirals save long-term costs by preventing complications such as liver cirrhosis, hepatocellular carcinoma and ultimately liver transplants, thereby offsetting part of higher drug costs. Our findings are in line with the guidance published by German Society for Gastroenterology, Digestive and Metabolic Diseases, which recommends Sofosbuvir/Simeprevir for Interferon ineligible or intolerant patients.
Keywords: Hepatitis C, Interferon-free therapy, Sofosbuvir; Simeprevir; Cost-effectiveness; Germany; Efficiency frontier
Johannes Paha
Abstract:
This article provides a model of two risk-neutral firms that may cooperate to achieve a goal that is potentially illegal. The model assumes enforcement risk and firms that are imperfectly informed about antitrust law enforcement. It is shown that compliance training, which educates the agents about law enforcement, may prevent hardcore cartels. Compliance training programs may also promote forms of cooperation that are beneficial for customers. The article shows that a competition authority can sometimes spur the implementation of compliance programs by imposing lower sanctions on wrongdoers.
JEL Classifications: K21, K42, L41
Georg Götz and Stephan Müller
cege Discussion Paper No.223, November 2014.
Abstract:
In this paper, we study the rational for an incumbent to launch a second brand when facing potential entry in a market with quality differentiated products and a fringe producer. Depending on market size, costs for a second brand and a potential entrant’s setup cost the incumbent might use a second brand both when deterring and when accommodating entry. The analysis generates predictions about the equilibrium degree of product differentiation, the presence of a multiproduct incumbent, and the determinants of successful entry.
In this paper, we study the rational for an incumbent to launch a second brand when facing potential entry in a market with quality differentiated products and a fringe producer. Depending on market size, costs for a second brand and a potential entrant’s setup cost the incumbent might use a second brand both when deterring and when accommodating entry. The analysis generates predictions about the equilibrium degree of product differentiation, the presence of a multiproduct incumbent, and the determinants of successful entry.
Keywords: Multiproduct firms, quality competition, vertical product differentiation, entry accommodation, entry deterrence
JEL Classifications: L13, D43, M31
Samuel de Haas and Peter Winker
Published in: Statistical Journal of the IAOS, Vol. 30, 271-281, August 2014.
Abstract:
Survey data allow constructing indicators, which differ for real and falsified interviews. It could be shown in previous research that applying cluster analysis to a set of indicators helps to identify potential falsifications at the interviewer level. The current work analyzes to what extent a differentiation remains feasible when interviewers falsify only a part of their interviews. An experimental dataset containing both real and falsified data for each respondent allows to construct bootstrap samples with the required properties, i.e., a predefined share of falsified interviews for those interviewers doing (partial) falsifications. The bootstrap approach allows measuring how robust the method works when the share of falsified interviews per interviewer decreases while taking into account also other relevant factors such as the total number of interviews per interviewer, the share of falsifiers, and the number of interviewers. The presented results demonstrate that the method loses power with decreasing share of falsifications, but remains a valuable tool for ensuring high data quality in surveys.
Keywords: Interviewer falsifications, partial falsifications, cluster analysis, bootstrap method
Tim Brühn, Georg Götz and Annette Meinusch
The Value of User-Specific Information for Two-Sided MatchmakersMAGKS Discussion Paper No. 48-2014, August 2014.
Abstract:
This article analyzes the incentives of a monopolistic matchmaker to generate user-specific information. By merging two-sided market modeling with two-sided matching, we derive a micro-foundation of cross-side externalities as a function of the number of potential matches and the accuracy level of user-specific information. Incentives to make fixed investments in identification technologies are determined by two effects that work in opposing directions: Whereas economies of scale work in favor of platforms with large customer bases, expected improvements to match quality are more significant for small-scale platforms.
Christian Gissel and Holger Repp
Published in: Clinical Rheumatology
Abstract:
Tumor necrosis factor α (TNF-α) inhibitors ranked highest in German pharmaceutical expenditure in 2011. Their most important application is the treatment of rheumatoid arthritis (RA). Our objective is to analyze cost per responder of TNF-α inhibitors for RA from the German Statutory Health Insurance funds' perspective. We aim to conduct the analysis based on randomized comparative effectiveness studies of the relevant treatments for the German setting. For inclusion of effectiveness studies, we require results in terms of response rates as defined by European League Against Rheumatism (EULAR) or American College of Rheumatology (ACR) criteria. We identify conventional triple therapy as the relevant comparator. We calculate cost per responder based on German direct medical costs. Direct clinical comparisons could be identified for both etanercept and infliximab compared to triple therapy. For infliximab, cost per responder was 216,392 euros for ACR50 and 432,784 euros for ACR70 responses. For etanercept, cost per ACR70 responder was 321,527 euros. Cost was lower for response defined by EULAR criteria, but data was only available for infliximab. Cost per responder is overestimated by 40 % due to inclusion of taxes and mandatory rebates in German drugs' list prices. Our analysis shows specific requirements for cost-effectiveness analysis in Germany. Cost per responder for TNF-α treatment in the German setting is more than double the cost estimated in a similar analysis for the USA, which measured against placebo. The difference in results shows the critical role of the correct comparator for a specific setting.
Tumor necrosis factor α (TNF-α) inhibitors ranked highest in German pharmaceutical expenditure in 2011. Their most important application is the treatment of rheumatoid arthritis (RA). Our objective is to analyze cost per responder of TNF-α inhibitors for RA from the German Statutory Health Insurance funds' perspective. We aim to conduct the analysis based on randomized comparative effectiveness studies of the relevant treatments for the German setting. For inclusion of effectiveness studies, we require results in terms of response rates as defined by European League Against Rheumatism (EULAR) or American College of Rheumatology (ACR) criteria. We identify conventional triple therapy as the relevant comparator. We calculate cost per responder based on German direct medical costs. Direct clinical comparisons could be identified for both etanercept and infliximab compared to triple therapy. For infliximab, cost per responder was 216,392 euros for ACR50 and 432,784 euros for ACR70 responses. For etanercept, cost per ACR70 responder was 321,527 euros. Cost was lower for response defined by EULAR criteria, but data was only available for infliximab. Cost per responder is overestimated by 40 % due to inclusion of taxes and mandatory rebates in German drugs' list prices. Our analysis shows specific requirements for cost-effectiveness analysis in Germany. Cost per responder for TNF-α treatment in the German setting is more than double the cost estimated in a similar analysis for the USA, which measured against placebo. The difference in results shows the critical role of the correct comparator for a specific setting.
Published in: MAGKS Discussion Paper No. 43-2013, September 2013.
Abstract:
This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can facilitate cartel formation despite lowering collusive profits. This is because lower demand reduces capacity utilization and makes competition more intense especially when capacities are durable and when demand falls much within a short time. The model also shows that firms with a low discount rate strive for a dominant position in the market which results in asymmetric capacity distributions. These obstruct collusive strategies. This is interesting because a low discount rate is usually considered a facilitating factor for collusion.
This article analyzes the strategic decisions of firms whether to establish and adhere to a cartel when they can also shape competition by investing into production capacity while being subject to unexpected demand shocks with persistence. The model shows that a negative demand shock can facilitate cartel formation despite lowering collusive profits. This is because lower demand reduces capacity utilization and makes competition more intense especially when capacities are durable and when demand falls much within a short time. The model also shows that firms with a low discount rate strive for a dominant position in the market which results in asymmetric capacity distributions. These obstruct collusive strategies. This is interesting because a low discount rate is usually considered a facilitating factor for collusion.
Keywords: Asymmetric firms, capacity investments, cartel formation, demand shocks, excess capacity
JEL-Code: D21, D43, L11, L13, L41
Published in: Telecommunications Policy, Volume 37, Issue 11, December 2013, Pages 1095–1109.
Abstract:
This paper reexamines the effect of the regulatory regime on both penetration and coverage of broadband access to the internet. The framework allows for an evaluation of policy initiatives, guidelines and measures to bridge the digital divide and to promote investment. A welfare analysis compares service-based with facilities-based competition and asks whether and how high-speed access to the internet should be subsidized. Using an approach similar to Valletti, Barros, and Hoernig (2002), the paper highlights the importance of population density for whether firms invest to provide internet access. The analysis reveals a trade-off between coverage and penetration.
This paper reexamines the effect of the regulatory regime on both penetration and coverage of broadband access to the internet. The framework allows for an evaluation of policy initiatives, guidelines and measures to bridge the digital divide and to promote investment. A welfare analysis compares service-based with facilities-based competition and asks whether and how high-speed access to the internet should be subsidized. Using an approach similar to Valletti, Barros, and Hoernig (2002), the paper highlights the importance of population density for whether firms invest to provide internet access. The analysis reveals a trade-off between coverage and penetration.
Keywords: Broadband internet; Penetration; Coverage; Subsidies
Published in: MAGKS Discussion Paper No. 28-2013, May 2013.
Abstract:
This paper provides a theoretic model for the analysis of cartel formation in an industry that is subject to profit shocks. The competitive or collusive conduct of a firm is determined by a decision maker who maximizes the present value of utility that accrues to him by earning a share of the firm's profit. The paper assumes that, first, factors like progressive taxation, shareholders' preference for smooth profits, or risk aversion may make the utility function of the decision maker rise concavely in the profits of the firm. Second, collusion causes the decision maker a dis-utility by violating legal and, thus, ethical or social norms. This disutility is independent from the level of profits. Concavity has adverse effects on collusion by making the decision maker value the additional utility from, first, establishing a new cartel, second, deviating from an existing cartel and, third, being punished for this deviation higher when the industry is in a bad state with low profits. Under these conditions, a negative profitability shock must be rather persistent to trigger cartel formation. Persistence prevents a newly formed cartel from falling apart quickly as the intense punishment in this state would also persist for a long time.
This paper provides a theoretic model for the analysis of cartel formation in an industry that is subject to profit shocks. The competitive or collusive conduct of a firm is determined by a decision maker who maximizes the present value of utility that accrues to him by earning a share of the firm's profit. The paper assumes that, first, factors like progressive taxation, shareholders' preference for smooth profits, or risk aversion may make the utility function of the decision maker rise concavely in the profits of the firm. Second, collusion causes the decision maker a dis-utility by violating legal and, thus, ethical or social norms. This disutility is independent from the level of profits. Concavity has adverse effects on collusion by making the decision maker value the additional utility from, first, establishing a new cartel, second, deviating from an existing cartel and, third, being punished for this deviation higher when the industry is in a bad state with low profits. Under these conditions, a negative profitability shock must be rather persistent to trigger cartel formation. Persistence prevents a newly formed cartel from falling apart quickly as the intense punishment in this state would also persist for a long time.
JEL-Code: D43, K21, L13, L41, M20
Johannes Paha, Dirk Rompf and Christiane Warnecke
Published in: Transportation Policy Part A., Vol. 50, 209-227. April 2013.
Abstract:
This study explores determinants of customer choice behaviour in passenger rail competition on two cross-border routes, Cologne–Brussels and Cologne–Amsterdam. It fills a gap in the literature on competition in commercial passenger rail by relying on newly collected stated preference data from about 700 on-train interviews. Our multinomial Logit estimations reveal two important effects that are closely connected to (psychological) switching costs. First, the customers on the route Cologne–Amsterdam, for whom competition is a purely hypothetical situation, value a competitive market structure lower than customers on the already competitive route Cologne–Brussels. Second, travellers show a status quo bias with a preference for the service provider on whose trains they were interviewed. This effect goes beyond the impact exercised by explanatory variables capturing the observable differences of the services and customers, including loyalty-enhancing effects like the possession of customer cards. Our results imply that entry into the commercial passenger rail market may be more difficult than often thought. Thus, the study contributes to explaining the low level of competition in these markets in Europe.
Keywords: Competition, Passenger, Rail, Transport, Discrete choice, Multinomial Logit
Sven Heim and Georg Götz
Do Pay-As-Bid Auctions Favor Collusion? Evidence from Germany's Market for Reserve Power
Do Pay-As-Bid Auctions Favor Collusion? Evidence from Germany's Market for Reserve Power
Published in: MAGKS Discussion Paper No. 24-2013, April 2013.
Abstract:
We analyze a drastic price increase in the German auction market for reserve power, which did not appear to be driven by increased costs. Studying the market structure and individual bidding strategies, we find evidence for collusive behavior in an environment with repeated auctions, pivotal suppliers and inelastic demand. The price increase can be traced back to an abuse of the auction’s pay-as-bid mechanism by the two largest firms. In contrast to theoretical findings, we show that pay-as-bid auctions do not necessarily reduce incentives for strategic capacity withholding and collusive behavior, but can even increase them.
We analyze a drastic price increase in the German auction market for reserve power, which did not appear to be driven by increased costs. Studying the market structure and individual bidding strategies, we find evidence for collusive behavior in an environment with repeated auctions, pivotal suppliers and inelastic demand. The price increase can be traced back to an abuse of the auction’s pay-as-bid mechanism by the two largest firms. In contrast to theoretical findings, we show that pay-as-bid auctions do not necessarily reduce incentives for strategic capacity withholding and collusive behavior, but can even increase them.
JEL-Code: D43, D44, D47, L11, L13
Ahmad Reza Saboori Memar
Profitable Entry into an Unprofitable Market
Profitable Entry into an Unprofitable Market
Published in: MAGKS Discussion Paper No. 6-2013, February 2013.
Abstract:
This paper shows how market entry into an unprofitable market can be profitable for a firm. A firm's expansion into a new market can have a beneficial feedback effect for that firm in its “old market”. By entering into a new market, the firm increases its produced quantity and has higher incentives to invest in process R&D. This is a credible signal to the competitors that the firm will be more aggressive in its R&D investments. This weakens the competitors since they scare off and invest less in process R&D. This feedback effect of expanding in foreign markets increases the profits of the expanding firm in its “old market” and if this profit gain exceeds the losses through market entry, then the market entry is profitable for the firm. I also consider how the results change under Bertrand vs Cournot regime and how results change if price discrimination is possible or not. Beside that I show how higher R&D costs or lower demand in a market can lead to lower profits of one firm, but higher profits of the other firm.
This paper shows how market entry into an unprofitable market can be profitable for a firm. A firm's expansion into a new market can have a beneficial feedback effect for that firm in its “old market”. By entering into a new market, the firm increases its produced quantity and has higher incentives to invest in process R&D. This is a credible signal to the competitors that the firm will be more aggressive in its R&D investments. This weakens the competitors since they scare off and invest less in process R&D. This feedback effect of expanding in foreign markets increases the profits of the expanding firm in its “old market” and if this profit gain exceeds the losses through market entry, then the market entry is profitable for the firm. I also consider how the results change under Bertrand vs Cournot regime and how results change if price discrimination is possible or not. Beside that I show how higher R&D costs or lower demand in a market can lead to lower profits of one firm, but higher profits of the other firm.
Keywords: research and development, price discrimination, product differentiation, process innovation, interbrand competition, strategic commitment, separated markets
JEL-Code: L13, D43, O30
Ahmad Reza Saboori Memar and Georg Götz
R&D Incentives in Vertically Related Markets
R&D Incentives in Vertically Related Markets
Published in: MAGKS Discussion Paper No. 7-2013, January 2013.
Abstract:
This paper focuses on incentives to invest in research and development (R&D) in vertically related markets. In a bilateral duopoly setup, we consider how process R&D incentives of the firms in both upstream and downstream market depend on the intensity of simultaneous interbrand and intrabrand competition. Among the results: both interbrand and intrabrand competition have twofold effects on R&D incentives. Existence of a vertically related market with imperfect competition lowers both the incentives to invest in process R&D and the competitive advantage through the R&D investment. We will show how the impact of a firm's R&D investments in either market on consumer surplus as well as on the profits of all firms in both markets depends on exogenous parameters.
This paper focuses on incentives to invest in research and development (R&D) in vertically related markets. In a bilateral duopoly setup, we consider how process R&D incentives of the firms in both upstream and downstream market depend on the intensity of simultaneous interbrand and intrabrand competition. Among the results: both interbrand and intrabrand competition have twofold effects on R&D incentives. Existence of a vertically related market with imperfect competition lowers both the incentives to invest in process R&D and the competitive advantage through the R&D investment. We will show how the impact of a firm's R&D investments in either market on consumer surplus as well as on the profits of all firms in both markets depends on exogenous parameters.
Keywords: research and development, vertical relations, bilateral oligopoly, product differentiation, process innovation, interbrand and intrabrand competition
JEL-Code: L13, D43, O30
Johannes Paha, Dirk Rompf and Christiane Warnecke
Estimating Travellers' Preferences for Competition in Commercial Passenger Rail Transport
Estimating Travellers' Preferences for Competition in Commercial Passenger Rail Transport
Published in: Transportation Policy Part A. (MAGKS Discussion Paper No. 37-2011, September 2011)
Abstract:
This study explores determinants of customer choice behaviour in passenger rail competition on two cross-border routes, Cologne-Brussels and Cologne-Amsterdam. It fills a gap in the literature on competition in commercial passenger rail by relying on newly collected stated preference data from about 700 on-train interviews. Our multinomial Logit regressions reveal two important effects that are closely connected to (psychological) switching costs. First, the customers on the route Cologne-Amsterdam, for whom competition is a purely hypothetical situation, value a competitive market structure lower than customers on the already competitive route Cologne-Brussels. Second, travellers show a status quo bias with a preference for the service provider on whose trains they were interviewed. This effect goes beyond the impact exercised by explanatory variables capturing the observable differences of the services and customers, including loyalty-enhancing effects like the possession of customer cards. Our results imply that entry into the commercial passenger rail market may be more difficult than often thought. Thus, the study contributes to explaining the low level of competition in these markets in Europe.
This study explores determinants of customer choice behaviour in passenger rail competition on two cross-border routes, Cologne-Brussels and Cologne-Amsterdam. It fills a gap in the literature on competition in commercial passenger rail by relying on newly collected stated preference data from about 700 on-train interviews. Our multinomial Logit regressions reveal two important effects that are closely connected to (psychological) switching costs. First, the customers on the route Cologne-Amsterdam, for whom competition is a purely hypothetical situation, value a competitive market structure lower than customers on the already competitive route Cologne-Brussels. Second, travellers show a status quo bias with a preference for the service provider on whose trains they were interviewed. This effect goes beyond the impact exercised by explanatory variables capturing the observable differences of the services and customers, including loyalty-enhancing effects like the possession of customer cards. Our results imply that entry into the commercial passenger rail market may be more difficult than often thought. Thus, the study contributes to explaining the low level of competition in these markets in Europe.
Keywords: Competition, Passenger, Rail, Transport, Discrete Choice, Multinomial Logit
JEL-Code: C25, D12, D40, L92
JEL-Code: C25, D12, D40, L92
Götz, Georg; Briglauer, Wolfgang and Schwarz, Anton
Published in: Review of Network Economics: Vol. 10: Iss. 4, Article 3. December 2011
Abstract:
This paper looks at the effects of different forms of wholesale and retail regulation on retail competition in fixed network telephony markets. We explicitly model two asymmetries between the incumbent operator and a group of homogenous entrants: (i) while the incumbent has zero marginal costs, the entrant has the wholesale access charge as (positive) marginal costs; (ii) while the incumbent sets a two-part tariff at the retail level (fixed fee and calls price), the entrant can only set a linear price for calls. We model the product of the incumbent as horizontally differentiated from the products of the entrants, who are homogenous and do not have any market power. Competition from other infrastructures such as mobile telephony or cable is modelled as an “outside opportunity” for consumers. We find that entrants without market power might be subject to a margin squeeze if the wholesale access price is set at average costs and competitive pressure from other infrastructures increases. We argue that wholesale price regulation at average costs is not optimal in such a situation and discuss other forms of cost-based regulation, retail-minus and deregulation as potential alternatives.
This paper looks at the effects of different forms of wholesale and retail regulation on retail competition in fixed network telephony markets. We explicitly model two asymmetries between the incumbent operator and a group of homogenous entrants: (i) while the incumbent has zero marginal costs, the entrant has the wholesale access charge as (positive) marginal costs; (ii) while the incumbent sets a two-part tariff at the retail level (fixed fee and calls price), the entrant can only set a linear price for calls. We model the product of the incumbent as horizontally differentiated from the products of the entrants, who are homogenous and do not have any market power. Competition from other infrastructures such as mobile telephony or cable is modelled as an “outside opportunity” for consumers. We find that entrants without market power might be subject to a margin squeeze if the wholesale access price is set at average costs and competitive pressure from other infrastructures increases. We argue that wholesale price regulation at average costs is not optimal in such a situation and discuss other forms of cost-based regulation, retail-minus and deregulation as potential alternatives.
Keywords: access regulation, margin squeeze, telecommunications, fixed networks
JEL-Code: L12, L41, L42, L50, L96
JEL-Code: L12, L41, L42, L50, L96
Bender, Christian M.
This draft: December 2011
Abstract:
This paper analyzes the incentives to invest in Next Generation Access Networks (NGA) in a framework with horizontal product differentiation with price competition between an investing and an access seeking firm. Given uncertainty about the success of the NGA, I compare regulatory regimes with symmetric and with asymmetric risk allocation to the firms having the opportunity to cooperate and jointly roll-out the NGA. I find that private incentives to cooperate might coincide with the consumer surplus maximizing outcome. Whether the firms realize this socially desirable outcome depends on the outside option, i.e. the implemented access regime. The optimal regulatory policy is not only subject to the probability that the NGA succeed but depends even more on the degree of product differentiation in the retail market. Therefore, the implementation of different access regimes subject to the degree of product differentiation seems favorable. For heterogeneous retail products, an asymmetric risk allocation not only increases the chances of cooperation but lowers the risk of overinvestment. For homogeneous goods, a symmetric risk allocation is superior as it ensures sufficient investment incentives even if competition is very intensive.
This paper analyzes the incentives to invest in Next Generation Access Networks (NGA) in a framework with horizontal product differentiation with price competition between an investing and an access seeking firm. Given uncertainty about the success of the NGA, I compare regulatory regimes with symmetric and with asymmetric risk allocation to the firms having the opportunity to cooperate and jointly roll-out the NGA. I find that private incentives to cooperate might coincide with the consumer surplus maximizing outcome. Whether the firms realize this socially desirable outcome depends on the outside option, i.e. the implemented access regime. The optimal regulatory policy is not only subject to the probability that the NGA succeed but depends even more on the degree of product differentiation in the retail market. Therefore, the implementation of different access regimes subject to the degree of product differentiation seems favorable. For heterogeneous retail products, an asymmetric risk allocation not only increases the chances of cooperation but lowers the risk of overinvestment. For homogeneous goods, a symmetric risk allocation is superior as it ensures sufficient investment incentives even if competition is very intensive.
Keywords: Next Generation Access Networks, investment, access regulation, cooperation
JEL-Code: D43, K23, L13, L51, L96
JEL-Code: D43, K23, L13, L51, L96
Paha, Johannes (2011)
Empirical Methods in the Analysis of Collusion in Empirica 2011 38:389–415
Christian Bender, Georg Götz & Benjamin Pakula (2010)
Effective Competition: The Importance and Relevance for Network Industries, in: Intereconomics (forthcoming)
Effective Competition: The Importance and Relevance for Network Industries, in: Intereconomics (forthcoming)
Götz, Georg, Briglauer, Wolfgang and Schwarz, Anton
Do we (still) need to regulate fixed network retails markets?
This draft: November 2008
The final version is published in: Telecommunications Policy, Vol.34 (10), November 2010
(Title: "Can a margin squeeze indicate the need for deregulation? The case of fixed network voice telephony markets")
Abstract:
In the beginning of fixed network liberalisation in Europe in the late 1990s, the main concern of regulators was to lower calls prices. This was done by introducing wholesale regulation and promoting service based competition. Some years later, the concern of some regulators turned from too high calls prices to too low calls prices which might ‘squeeze’ entrants out of the market. We look at a simple model in which this development is explained by increasing competitive pressure from an ‘outside opportunity’, e.g. mobile telephony. We conclude that a margin squeeze is not necessarily used by the incumbent as a device to drive competitors out of the market and increase market power but can also result from increased inter-model competition. If this is the case, we argue that regulators should consider alternatives to cost oriented access prices such as retail minus or complete deregulation.
In the beginning of fixed network liberalisation in Europe in the late 1990s, the main concern of regulators was to lower calls prices. This was done by introducing wholesale regulation and promoting service based competition. Some years later, the concern of some regulators turned from too high calls prices to too low calls prices which might ‘squeeze’ entrants out of the market. We look at a simple model in which this development is explained by increasing competitive pressure from an ‘outside opportunity’, e.g. mobile telephony. We conclude that a margin squeeze is not necessarily used by the incumbent as a device to drive competitors out of the market and increase market power but can also result from increased inter-model competition. If this is the case, we argue that regulators should consider alternatives to cost oriented access prices such as retail minus or complete deregulation.
Keywords: access regulation, vertical integration, foreclosure, price squeeze,
telecommunications, fixed networks
JEL-Code: L12, L41, L42, L50, L96
telecommunications, fixed networks
JEL-Code: L12, L41, L42, L50, L96
Georg Götz & Benjamin Pakula
Quality Investments and Organisational Structures - An Application to the Railway Industry
This draft: October 2010
Abstract:
This paper analyses the incentives to upgrade input quality in vertically related (network) industries. Upstream investments have a biased effect on the downstream companies and lead to vertical product differentiation. Different vertical structures such as vertical integration, ownership and legal unbundling lead to different investments. We find that, without regulation, vertical integration and legal unbundling regimes provide highest investment incentives and lead to highest welfare. However, we also find foreclosure in the downstream market if the potential degree of horizontal product differentiation of the entrant is low. Under ownership unbundling, investment incentives are lower but there is never foreclosure of the entrant since this would worsen double marginalisation. When the network operator is subject to a break-even regulation, the investment incentives are crowded out under legal and ownership unbundling whereas they remain nearly unchanged under vertical integration. Welfare and consumer surplus decrease under legal unbundling, but increase under the two other regimes.
This paper analyses the incentives to upgrade input quality in vertically related (network) industries. Upstream investments have a biased effect on the downstream companies and lead to vertical product differentiation. Different vertical structures such as vertical integration, ownership and legal unbundling lead to different investments. We find that, without regulation, vertical integration and legal unbundling regimes provide highest investment incentives and lead to highest welfare. However, we also find foreclosure in the downstream market if the potential degree of horizontal product differentiation of the entrant is low. Under ownership unbundling, investment incentives are lower but there is never foreclosure of the entrant since this would worsen double marginalisation. When the network operator is subject to a break-even regulation, the investment incentives are crowded out under legal and ownership unbundling whereas they remain nearly unchanged under vertical integration. Welfare and consumer surplus decrease under legal unbundling, but increase under the two other regimes.
Keywords: Vertical Integration, Investment, Foreclosure, Regulation
JEL-Code:D2, D4, L43, L51, L92
JEL-Code:D2, D4, L43, L51, L92
Christian M. Bender and Georg Götz
Coexistence of service- and facility-based competition: The relevance of access prices for "make-or-buy"-decisions
This draft: July 2010
Abstract:
This paper models competition between two firms, which provide broadband Internet access in regional markets with different population densities. The firms, an incumbent and an entrant, differ in two ways. First, consumers bear costs when switching to the entrant. Second, the entrant faces a make-or-buy decision in each region and can choose between service-based and facility-based entry. The usual trade-off between static and dynamic efficiency does not apply in the sense that higher access fees might yield both, lower retail prices and higher total coverage. This holds despite a strategic effect in the entrant's investment decision. While investment lowers marginal costs in regions with facility-based entry, it intensifies competition in all regions. We show that the cost-reducing potential of investments dominates the strategic effect: Higher access fees increase facility-based competition, decrease retail prices and increase total demand.
This paper models competition between two firms, which provide broadband Internet access in regional markets with different population densities. The firms, an incumbent and an entrant, differ in two ways. First, consumers bear costs when switching to the entrant. Second, the entrant faces a make-or-buy decision in each region and can choose between service-based and facility-based entry. The usual trade-off between static and dynamic efficiency does not apply in the sense that higher access fees might yield both, lower retail prices and higher total coverage. This holds despite a strategic effect in the entrant's investment decision. While investment lowers marginal costs in regions with facility-based entry, it intensifies competition in all regions. We show that the cost-reducing potential of investments dominates the strategic effect: Higher access fees increase facility-based competition, decrease retail prices and increase total demand.
Keywords: Broadband access markets, facility- and service-based entry, investments, economies of density, switching costs
JEL-Code: D43, L13, L96s
JEL-Code: D43, L13, L96s
Paha, Johannes
Simulation and Prosecution of a Cartel with Endogenous Cartel Formation
This draft: March 2010
Abstract:
In many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.
In many cases, collusive agreements are formed by asymmetric firms and include only a subset of the firms active in the cartelized industry. This paper endogenizes the process of cartel formation in a numeric simulation model where firms differ in marginal costs and production technologies. The paper models the incentive to collude in a differentiated products Bertrand-oligopoly. Cartels are the outcomes of a dynamic formation game in mixed strategies. I find that the Nash-equilibrium of this complex game can be obtained efficiently by a differential Evolution stochastic optimization algorithm. It turns out that large firms have a higher probability to collude than small firms. Since firms' characteristics evolve over time, the simulation is used to generate data of costs, prices, output-quantities, and profits. This data forms the basis for an evaluation of empirical methods used in the detection of cartels.
Keywords: Collusion, Cartel Detection, Cartel Formation, Differential Evolution, Heuristic Optimization, Industry Simulation
JEL-Code: C51, C69, C72, D43, L12, L13, L40
JEL-Code: C51, C69, C72, D43, L12, L13, L40
Paha, Johannes
Using Accounting Data in Cartel Damage Calculations – Blessing or Menace?
This draft: June 2009
Abstract:
Standard methods for calculating cartel-damages rely on data of prices charged and quantity sold. Such data may not easily be available. In this paper, it is shown that a lower bound for cartel-damages can also be computed from accounting data. In previous literature it is shown that economic profits can hardly be inferred from accounting data. Therefore, it is shown under which econometrically testable assumptions on accounting costs a meaningful lower bound for cartel damages can consistently be estimated from accounting data. An estimation of cartel-damages is performed for four vitamins producers that participated in the vitamins cartel. The results indicate that both the aggregation-level and the publication-frequency of accounting data pose a challenge to the estimation of cartel damages. A further challenge is to appropriately reflect the strength respectively effectiveness of the collusive agreement in the specification of any such estimation.
Standard methods for calculating cartel-damages rely on data of prices charged and quantity sold. Such data may not easily be available. In this paper, it is shown that a lower bound for cartel-damages can also be computed from accounting data. In previous literature it is shown that economic profits can hardly be inferred from accounting data. Therefore, it is shown under which econometrically testable assumptions on accounting costs a meaningful lower bound for cartel damages can consistently be estimated from accounting data. An estimation of cartel-damages is performed for four vitamins producers that participated in the vitamins cartel. The results indicate that both the aggregation-level and the publication-frequency of accounting data pose a challenge to the estimation of cartel damages. A further challenge is to appropriately reflect the strength respectively effectiveness of the collusive agreement in the specification of any such estimation.
JEL-Code: C22, L12, L13, L41
Götz, Georg
Competition, Regulation, and Broadband Access to the Internet
This draft: February 2009
Abstract:
Standard methods for calculating cartel-damages rely on data of prices charged and quantity sold. Such data may not easily be available. In this paper, it is shown that a lower bound for cartel-damages can also be computed from accounting data. In previous literature it is shown that economic profits can hardly be inferred from accounting data. Therefore, it is shown under which econometrically testable assumptions on accounting costs a meaningful lower bound for cartel damages can consistently be estimated from accounting data. An estimation of cartel-damages is performed for four vitamins producers that participated in the vitamins cartel. The results indicate that both the aggregation-level and the publication-frequency of accounting data pose a challenge to the estimation of cartel damages. A further challenge is to appropriately reflect the strength respectively effectiveness of the collusive agreement in the specification of any such estimation.
Standard methods for calculating cartel-damages rely on data of prices charged and quantity sold. Such data may not easily be available. In this paper, it is shown that a lower bound for cartel-damages can also be computed from accounting data. In previous literature it is shown that economic profits can hardly be inferred from accounting data. Therefore, it is shown under which econometrically testable assumptions on accounting costs a meaningful lower bound for cartel damages can consistently be estimated from accounting data. An estimation of cartel-damages is performed for four vitamins producers that participated in the vitamins cartel. The results indicate that both the aggregation-level and the publication-frequency of accounting data pose a challenge to the estimation of cartel damages. A further challenge is to appropriately reflect the strength respectively effectiveness of the collusive agreement in the specification of any such estimation.
Keywords: Broadband, coverage, penetration, investment, population density
JEL-Code: L 51, L 96, L12
JEL-Code: L 51, L 96, L12
Lyra, Marianna, Paha, Johannes, Paterlini, Sandra, and Winker, Peter
Optimization Heuristics for Determining Internal Rating Grading Scales
Computational Statistics & Data Analysis, forthcoming
Abstract:
Basel II imposes regulatory capital on banks related to the default risk of their credit portfolio. Banks using an internal rating approach compute the regulatory capital from pooled probabilities of default. These pooled probabilities can be calculated by clustering credit borrowers into di®erent buckets and computing the mean PD for each bucket. The clustering problem can become very complex when Basel II regulations and real-world constraints are taken into account. Search heuristics have already proven remarkable performance in tackling this problem. A Threshold Accepting algorithm is proposed, which exploits the inherent discrete nature of the clustering problem. This algorithm is found to outperform alternative methodologies already proposed in the literature, such as standard k-means and Di®erential Evolution. Besides considering several clustering objectives for a given number of buckets, we extend the analysis further by introducing new methods to determine the optimal number of buckets in which to cluster banks' clients.
Basel II imposes regulatory capital on banks related to the default risk of their credit portfolio. Banks using an internal rating approach compute the regulatory capital from pooled probabilities of default. These pooled probabilities can be calculated by clustering credit borrowers into di®erent buckets and computing the mean PD for each bucket. The clustering problem can become very complex when Basel II regulations and real-world constraints are taken into account. Search heuristics have already proven remarkable performance in tackling this problem. A Threshold Accepting algorithm is proposed, which exploits the inherent discrete nature of the clustering problem. This algorithm is found to outperform alternative methodologies already proposed in the literature, such as standard k-means and Di®erential Evolution. Besides considering several clustering objectives for a given number of buckets, we extend the analysis further by introducing new methods to determine the optimal number of buckets in which to cluster banks' clients.
Keywords: credit risk, probability of default, clustering, Threshold Accepting, Differential Evolution.
JEL-Code: L 51, L 96, L12
JEL-Code: L 51, L 96, L12
Götz, Georg, Briglauer, Wolfgang and Schwarz, Anton
Margin Squeeze in Fixed-Network Telephony Markets - competitive or anticompetitive?
This draft: November 2008
Abstract:
This paper looks at the effects of different forms of wholesale and retail regulation on retail competition in fixed network telephony markets. We explicitly model two asymmetries between the incumbent operator and the entrant: (i) While the incumbent has zero marginal costs, the entrant has the wholesale access charge as (positive) marginal costs; (ii) While the incumbent is setting a two-part tariff at the retail level (fixed fee and calls price), the entrant can only set a linear price for calls. Competition from other infrastructures such as mobile telephony or cable is modelled as an ‘outside opportunity’ for consumers. We find that a horizontally differentiated entrant with market power may be subject to a margin squeeze due to double marginalization but will never be completely foreclosed. Entrants without market power might be subject to a margin squeeze if the wholesale access price is set at average costs and competitive pressure from other infrastructures increases. We argue that a wholesale price regulation at average costs is not optimal in such a situation and discuss retail minus and deregulation as potential alternatives.
This paper looks at the effects of different forms of wholesale and retail regulation on retail competition in fixed network telephony markets. We explicitly model two asymmetries between the incumbent operator and the entrant: (i) While the incumbent has zero marginal costs, the entrant has the wholesale access charge as (positive) marginal costs; (ii) While the incumbent is setting a two-part tariff at the retail level (fixed fee and calls price), the entrant can only set a linear price for calls. Competition from other infrastructures such as mobile telephony or cable is modelled as an ‘outside opportunity’ for consumers. We find that a horizontally differentiated entrant with market power may be subject to a margin squeeze due to double marginalization but will never be completely foreclosed. Entrants without market power might be subject to a margin squeeze if the wholesale access price is set at average costs and competitive pressure from other infrastructures increases. We argue that a wholesale price regulation at average costs is not optimal in such a situation and discuss retail minus and deregulation as potential alternatives.
Keywords: access regulation, foreclosure, margin squeeze, telecommunications, fixed networks
JEL-Code: L12, L41, L42, L50, L96
JEL-Code: L12, L41, L42, L50, L96
Götz, Georg and Hammerschidt, Anna
R&D cooperation with unit-elastic demand
This Draft: January 2008
The final version is published in: Bulletin of Economic Research, 61(2), 179-188
Abstract:
This paper shows that R&D cooperation leads to the monopoly outcome in terms of price and quantity if demand is unit-elastic. If the demand function exhibits an upper bound for the willingness to pay, R&D cooperation is inferior to a scenario in which firms cooperate both in their R&D and their output decision.
This paper shows that R&D cooperation leads to the monopoly outcome in terms of price and quantity if demand is unit-elastic. If the demand function exhibits an upper bound for the willingness to pay, R&D cooperation is inferior to a scenario in which firms cooperate both in their R&D and their output decision.
Keywords:R&D cooperation, spillovers, cartelization
JEL-Code: L13, O31
JEL-Code: L13, O31
Götz, Georg and Astebro, Thomas (University of Toronto)
Diffusion of new technology – The case of multiple generations
This draft: December 2006
Abstract:
We model adoption decisions by competitive firms when successive generations of a new technology become available over time. Profit-maximizing firms choose which generation to adopt and at which adoption date. The model accounts for leapfrogging and simultaneous adoption of different generations. Leapfrogging occurs if a potential user does not adopt the state of the art technology but adopts the next generation. In the simultaneous adoption case some adopt the new generation while others still adopt an old generation. The two mentioned patterns are shown to be equilibrium outcomes that depend on exogenous parameters. Both overlap and leapfrogging may arise from the same parameters. As a consequence, firms of different sizes may adopt a generation at the same time. The model predicts that leapfroggers, who are the smallest firms in the industry, may well adopt the new generation before medium and large firms and that large firms are likely to adopt both generations. Empirical analysis on the adoption of two generations of machine tools (NC and CNC) by U.S. metalworking plants show that there is indeed substantial leapfrogging: 26% of all plants in the sample had adopted CNC but not NC by 1993. There was also overlap in adoption: 68% of the adopters of CNC adopted during 1981-1993; 53% of the adopters of NC adopted that technology during the same period. We find that the non-adopters of both technologies (NC and CNC) are the smallest, the adopters of NC but not CNC are on average larger, the leapfroggers are still larger and the largest plants, on average, adopt both technologies. Leapfroggers adopt CNC approximately one year earlier than adopters of both technologies. Empirical results are broadly consistent with model predictions.Keywords: Diffusion, Leapfrogging and CNC-machine tools.
We model adoption decisions by competitive firms when successive generations of a new technology become available over time. Profit-maximizing firms choose which generation to adopt and at which adoption date. The model accounts for leapfrogging and simultaneous adoption of different generations. Leapfrogging occurs if a potential user does not adopt the state of the art technology but adopts the next generation. In the simultaneous adoption case some adopt the new generation while others still adopt an old generation. The two mentioned patterns are shown to be equilibrium outcomes that depend on exogenous parameters. Both overlap and leapfrogging may arise from the same parameters. As a consequence, firms of different sizes may adopt a generation at the same time. The model predicts that leapfroggers, who are the smallest firms in the industry, may well adopt the new generation before medium and large firms and that large firms are likely to adopt both generations. Empirical analysis on the adoption of two generations of machine tools (NC and CNC) by U.S. metalworking plants show that there is indeed substantial leapfrogging: 26% of all plants in the sample had adopted CNC but not NC by 1993. There was also overlap in adoption: 68% of the adopters of CNC adopted during 1981-1993; 53% of the adopters of NC adopted that technology during the same period. We find that the non-adopters of both technologies (NC and CNC) are the smallest, the adopters of NC but not CNC are on average larger, the leapfroggers are still larger and the largest plants, on average, adopt both technologies. Leapfroggers adopt CNC approximately one year earlier than adopters of both technologies. Empirical results are broadly consistent with model predictions.Keywords: Diffusion, Leapfrogging and CNC-machine tools.
Keywords: Diffusion, Leapfrogging and CNC-machine tools
JEL-Code: L13, O31 and O33
JEL-Code: L13, O31 and O33
Götz, Georg
Location, Technology, and Competitive Strategy
This (preliminary) draft: February 2005
(This paper is a completely revised version of my paper Spatial Competition, Sequential Entry, and Technology Choice)
Abstract:
Strategic (capital) investments and the strategic choice of product characteristics are among the most important devices to manipulate market positions in a favorable way. This article examines optimum firm behavior as a function of cost parameters, market size, and barriers to entry. Synthesizing the economics and the business literature, it discusses under what conditions excessive entry deterrence, second-mover advantage as well as delegation of entry deterrence emerge in the same framework. The paper shows that both the number of firms and the equilibrium prices may be non-monotonic in market size. Larger markets may exhibit higher prices.
Strategic (capital) investments and the strategic choice of product characteristics are among the most important devices to manipulate market positions in a favorable way. This article examines optimum firm behavior as a function of cost parameters, market size, and barriers to entry. Synthesizing the economics and the business literature, it discusses under what conditions excessive entry deterrence, second-mover advantage as well as delegation of entry deterrence emerge in the same framework. The paper shows that both the number of firms and the equilibrium prices may be non-monotonic in market size. Larger markets may exhibit higher prices.
Keywords: Hotelling model, entry deterrence, over-investment, under-investment, capital investment, strategic location choice
JEL-Code: L11, L13
JEL-Code: L11, L13
Accompanying files: The results of the simulation presented in the paper are available as a compressed (zip) Mathematica 3.0 notebook (size >900k) and as a PDF file (size 1 MB). If you do not have a license of Mathematica, you may view the (easier accessible) Mathematica file by installing the free MathReader at Wolfram Research, Inc.
Götz, Georg and Gugler, Klaus (University of Vienna)
Mergers and product variety under spatial competition: Evidence from retail gasoline
This draft: August 2003
Abstract:
We show that for a spatially differentiated economy reduced product variety is the likely outcome of mergers except in cases where exit costs in relation to (outlet specific) fixed costs are high. Our empirical analysis of the Austrian retail gasoline market confirms that increases in concentration reduce product variety. Ignoring this product variety effect is likely to lead to an underestimate of market power in structural merger analysis.
We show that for a spatially differentiated economy reduced product variety is the likely outcome of mergers except in cases where exit costs in relation to (outlet specific) fixed costs are high. Our empirical analysis of the Austrian retail gasoline market confirms that increases in concentration reduce product variety. Ignoring this product variety effect is likely to lead to an underestimate of market power in structural merger analysis.
Keywords: spatial product differentiation, retail gasoline, mergers, concentration
JEL-Code: L11, L13, L90
JEL-Code: L11, L13, L90
Götz, Georg
Endogenous Sequential Entry in a Spatial Model Revisited
This draft: June 2004.
A slightly changed version is published in the International Journal of Industrial Organization Volume 23, Issues 3-4 , April 2005, Pages 249-261.
A slightly changed version is published in the International Journal of Industrial Organization Volume 23, Issues 3-4 , April 2005, Pages 249-261.
Abstract:
This article reexamines sequential entry of firms in a Hotelling model of spatial product differentiation and corrects some results of Neven (1987). Contrary to Neven, I show that the pattern of locations is generally asymmetric in the case of a duopoly. Profits are non-monotonic in market size, even in the range where the number of firms does not change. The firm that bears the "burden" of entry deterrence gains from lower barriers to entry as long as entry deterrence is possible. Equilibrium profits of all firms may be larger in situations in which more firms are active.
This article reexamines sequential entry of firms in a Hotelling model of spatial product differentiation and corrects some results of Neven (1987). Contrary to Neven, I show that the pattern of locations is generally asymmetric in the case of a duopoly. Profits are non-monotonic in market size, even in the range where the number of firms does not change. The firm that bears the "burden" of entry deterrence gains from lower barriers to entry as long as entry deterrence is possible. Equilibrium profits of all firms may be larger in situations in which more firms are active.
Keywords: Hotelling model, entry deterrence, strategic location choice
JEL-Code: L11, L13
Götz, Georg, Elberfeld, Walter (University of Cologne) and Stähler, Frank (University of Kiel)
JEL-Code: L11, L13
Accompanying files: The results of the simulation presented in the paper are available as a Mathematica notebook and as a PDF file. If you do not have a license of Mathematica, you may view the (easier accessible) Mathematica file by installing the free MathReader at Wolfram Research, Inc.
Vertical foreign direct investment, welfare, and employment
This draft: August 2004.
Published in Berkley Electronic Press: Topics in Economic Analysis & Policy 2005, Volume 5, Issue 1, Article 3.
Abstract:
This paper shows that vertical foreign direct investment will reduce prices but the aggregate welfare effect is unambiguously positive only under free market entry. Using a standard model of imperfect competition, we develop this result by considering two different cases. In the first case, the total number of firms is fixed, and we show that national and multinational firms may coexist. In the second case, we allow for market entry, and we focus on situations in which either only national or only multinational firms are active. Furthermore, we discuss impact effects on labor demand. We show that a decline in foreign wages increases domestic employment.
This paper shows that vertical foreign direct investment will reduce prices but the aggregate welfare effect is unambiguously positive only under free market entry. Using a standard model of imperfect competition, we develop this result by considering two different cases. In the first case, the total number of firms is fixed, and we show that national and multinational firms may coexist. In the second case, we allow for market entry, and we focus on situations in which either only national or only multinational firms are active. Furthermore, we discuss impact effects on labor demand. We show that a decline in foreign wages increases domestic employment.
Keywords: Vertical foreign direct investment, multinational enterprises, imperfect competition, welfare, labor demand.
JEL-Code: F12, F15
This draft: July 2004.
A slightly changed and shortened version is pubished in the Journal of Institutional and Theoretical Economics 2005, Vol. 161, p. 503-521 under the title "Market Size, Technology Choice, and the Existence of Free-Entry Cournot Equilibrium". The file contains proofs (in particular of Proposition 1) and further discussions, which are not part of the published version.
A slightly changed and shortened version is pubished in the Journal of Institutional and Theoretical Economics 2005, Vol. 161, p. 503-521 under the title "Market Size, Technology Choice, and the Existence of Free-Entry Cournot Equilibrium". The file contains proofs (in particular of Proposition 1) and further discussions, which are not part of the published version.
Abstract:
This article adds technology choice to a free-entry Cournot model with linear demand and constant marginal costs. Firms can choose from a discrete set of technologies. This simple framework yields non-existence of equilibrium, existence of multiple equilibria and equilbria in which ex-ante identical firms choose different technologies, as possible outcomes. I provide a full characterization of the parameter sets for which these outcomes arise. The (non-)existence problem disappears if vertical market size is large. Non-existence is largely a 'small number' phenomenon. Asymmetric equilibria emerge either because of indivisibilities or due to similarity of different technologies in terms of the average costs realized.
This article adds technology choice to a free-entry Cournot model with linear demand and constant marginal costs. Firms can choose from a discrete set of technologies. This simple framework yields non-existence of equilibrium, existence of multiple equilibria and equilbria in which ex-ante identical firms choose different technologies, as possible outcomes. I provide a full characterization of the parameter sets for which these outcomes arise. The (non-)existence problem disappears if vertical market size is large. Non-existence is largely a 'small number' phenomenon. Asymmetric equilibria emerge either because of indivisibilities or due to similarity of different technologies in terms of the average costs realized.
Keywords: Cournot equilibrium; existence; market size, heterogeneity; integer constraint
JEL-Code:D43; L13
Götz, Georg
Spatial Competition, Sequential Entry, and Technology Choice
This draft: April 2002.
Abstract:
This article introduces technology choice into a Hotelling model of spatial competition. This yields two entry deterrence devices, as well as complex strategic choices for the firms and a rich picture of industry structure. Depending on cost parameters and market size, firms may choose to over-invest or to under-invest. Industry structure is typically asymmetric either in terms of the locations chosen or the technologies used or in both. I find excessive entry deterrence, second mover advantage as well as delegation of entry deterrence. Both the number of firms and the equilibrium prices may be non-monotonic in market size. Larger markets may exhibit higher prices.
This article introduces technology choice into a Hotelling model of spatial competition. This yields two entry deterrence devices, as well as complex strategic choices for the firms and a rich picture of industry structure. Depending on cost parameters and market size, firms may choose to over-invest or to under-invest. Industry structure is typically asymmetric either in terms of the locations chosen or the technologies used or in both. I find excessive entry deterrence, second mover advantage as well as delegation of entry deterrence. Both the number of firms and the equilibrium prices may be non-monotonic in market size. Larger markets may exhibit higher prices.
Keywords: Hotelling model, entry deterrence, overinvestment, underinvestment
JEL-Code: L11, L13
Accompanying files: The results of the simulation presented in the paper are available as a compressed (zip) Mathematica 3.0 notebook (size >900k) and as a PDF file (size 1 MB). If you do not have a license of Mathematica, you may view the (easier accessible) Mathematica file by installing the free MathReader at Wolfram Research, Inc.
Götz, Georg and Elberfeld, Walter ( University of Cologne)
Market size, technology choice, and market structure
This draft: June 2001.
German Economic Review, Vol. 3, 2002.
Abstract:
We introduce technology choice into a model of monopolistic competition and analyze the structural effects of changes in market size. A larger market leads to the adoption of a large scale technology. If a technology switch occurs, the number of firms decreases, and a rationalizing effect arises: individual and aggregate output increases; prices fall. This need not benefit consumers since a technology switch is associated with a decrease in product variety.
We introduce technology choice into a model of monopolistic competition and analyze the structural effects of changes in market size. A larger market leads to the adoption of a large scale technology. If a technology switch occurs, the number of firms decreases, and a rationalizing effect arises: individual and aggregate output increases; prices fall. This need not benefit consumers since a technology switch is associated with a decrease in product variety.
Keywords: technology choice, monopolistic competition, shakeout, variable elasticity of substitution
JEL-Code: L10
Götz, Georg
Sunk costs, windows of profit opportunities and the dynamics of entry
This draft: January 2002.
Published in: International Journal of Industrial Organization, 2002, Vol. 20, pp. 1409 -1436.
Abstract:
This paper adds two elements to a standard model of monopolistic competition: First, the number of potential entrants is limited in each period and increases only over time. Second, the potential entrants differ with respect to the consumers’ valuation of the variant they could offer. It is shown that the resulting simple model exhibits a rich dynamic structure covering cases like the product life cycle, a path dependent equilibrium and the traditional textbook case of entry. The welfare analysis confirms the view that you can’t have too much entry. Even entry of 'inefficient' firms improves welfare.
This paper adds two elements to a standard model of monopolistic competition: First, the number of potential entrants is limited in each period and increases only over time. Second, the potential entrants differ with respect to the consumers’ valuation of the variant they could offer. It is shown that the resulting simple model exhibits a rich dynamic structure covering cases like the product life cycle, a path dependent equilibrium and the traditional textbook case of entry. The welfare analysis confirms the view that you can’t have too much entry. Even entry of 'inefficient' firms improves welfare.
Keywords: Industry evolution, product life cycle, path dependence
JEL-Code: L10
Götz, Georg
Monopolistic competition and the diffusion of new technology
This draft: October 1998
A slightly revised version has been published in The RAND Journal of Economics, Vol. 30, 1999, pp. 679-693.
Abstract:
This paper analyses the adoption and diffusion of new technology in a market for a differentiated product with monopolistic competition. It is shown that in a noncooperative equilibrium ex-ante identical firms adopt a new technology at different dates. This equilibrium can be described by a simple distribution function. For non-identical firms, the conditions are stated under which a positive relationship between firm size and speed of adoption exists. It is demonstrated that increased competition often promotes diffusion. Diffusion is shown to occur more slowly in the noncooperative solution than in a constrained social optimum.
This paper analyses the adoption and diffusion of new technology in a market for a differentiated product with monopolistic competition. It is shown that in a noncooperative equilibrium ex-ante identical firms adopt a new technology at different dates. This equilibrium can be described by a simple distribution function. For non-identical firms, the conditions are stated under which a positive relationship between firm size and speed of adoption exists. It is demonstrated that increased competition often promotes diffusion. Diffusion is shown to occur more slowly in the noncooperative solution than in a constrained social optimum.
Keywords: Adoption, diffusion, monopolistic competition
JEL-Code: O31
Götz, Georg
Strategic timing of adoption of new technologies under uncertainty: A note.
This draft: March 1998
Published in: International Journal of Industrial Organization, Vol 18, 2000, pp. 369-379.
Abstract:
In this note the circumstances under which ex ante identical firms will choose different adoption dates are clarified. In particular, conditions under which ‘diffusion’ will arise in both open-loop and closed-loop games are identified. Furthermore, it is shown that the rents of nonidentical firms are not equalised, even if pre-emptive adoption is possible. Finally, an example is given in which the reduction of the uncertainty associated with the implementation of the new technology leads to a postponement of the adoption by the late adopter.
In this note the circumstances under which ex ante identical firms will choose different adoption dates are clarified. In particular, conditions under which ‘diffusion’ will arise in both open-loop and closed-loop games are identified. Furthermore, it is shown that the rents of nonidentical firms are not equalised, even if pre-emptive adoption is possible. Finally, an example is given in which the reduction of the uncertainty associated with the implementation of the new technology leads to a postponement of the adoption by the late adopter.
Keywords: Adoption, diffusion, pre-emption, rent equalisation.
JEL-Code: O31, O32