1  

2nd Workshop ‘Industrial Organization: Theory, Empirics and Experiments’

University of Salento

Otranto (Italy), Basiliani Congress Center, 23-24 June 2011

INDEX

• Conference venue

• Committees

• Program overview

• Book of Abstracts

• List of participants

  2  

CONFERENCE VENUE BASILIANI CONGRESS CENTER Valle delle Memorie 73028 Oranto (Italy) Tel. +39 0836 802920

COMMITTEES Program Chairs

Alessandra Chirco (Università del Salento) ��� Marcella Scrimitore (Università del Salento)

Scientific Committee

Giacomo Calzolari (Università di Bologna) Roberto Cellini (Università di Catania) Paolo G. Garella (Università di Milano) Stephen Martin (Purdue University) Hans-Theo Normann (Düsseldorf University) David Pérez-Castrillo (Universitat Autonoma Barcelona) Bradley Ruffle (Ben-Gurion University) Marco Vivarelli (Università Cattolica Milano)

  3  

PROGRAM Thursday, JUNE 23 8:30 Opening registration 9:00 -11:00 Contributed Session I AUCTIONS Chair: Yossi Spiegel (Tel Aviv University) Quazi Shahriar (San Diego State University), Daniel Ackerberg, Keisuke Hirano: Identification of Time and Risk Preferences in Buy Price Auctions Cornelia van Wesenbeeck (Vrije Universiteit Amsterdam), Michiel A. Keyzer: A new mechanism for truthtelling in multi-commodity double auctions Rosella Levaggi (Università di Brescia), Laura Levaggi: Rent extraction through alternative forms of competition in the provision of merit and impure public goods Pim Heijnen (University of Groningen), Adriaan R. Soetevent, Marco A. Haan: Do Auctions and Forced Divestitures increase Competition? Evidence for retail gasoline markets CONTRACTS I Chair: Elisabetta Iossa (U. di Roma Tor Vergata & Brunel U.) Ennio Bilancini (Universtà di Modena e Reggio Emilia), Leonardo Boncinelli: Dynamic adverse selection and the size of the informed side of the market Riccardo Martina (Università Federico II, Napoli), Salvatore Piccolo: Can product market competition elicit stock option contracts? Salvatore Piccolo (Università Federico II, Napoli): Communicating vertical hierarchies: the adverse selection case

  4  

SEARCH AND QUALITY Chair: Corrado Benassi (Università di Bologna) Sandro Shelegia (University of Vienna): Quality choice, observability and dispersion of valuations Simon Weidenholzer (University of Vienna), Maarten Janssen, Paul Pichler: Oligopolistic markets with sequential search and production cost uncertainty Nadav Levy (IDC Herzliya), Arthur Fishman: Search costs and risky investment in quality Dimitri Paolini (Università di Sassari & CORE-Belgium), Berardino Cesi: University choice, peer group and distance Antonio Minniti (Università di Bologna), Emanuele Bacchiega, Arsen Palestini: Quality, Distance and Trade: a Strategic Approach 11:00 - 11:30 Coffee Break 11:30 - 11:40 Welcome address Alessandra Chirco (Università del Salento) 11:40 - 13:00 Plenary Session I Neil Gandal (Tel-Aviv University): Direct and Indirect Knowledge Spillovers: The 'Social Network' of Open Source Projects Chair: Alessandra Chirco (Università del Salento) 13:00 – 14:00 Lunch 14:00 -16:00 Contributed Session II COLLUSION Chair: Jeroen Hinloopen (University of Amsterdam) Liliane Karlinger (U. LUISS Roma & University of Vienna): Implementing collusion by delegating punishment: the role of communication Patrick de Lamirande (Cape Breton University, Canada), Jean-Daniel Guigou, Bruno Lovat: Strategic delegation and collusion: do incentive schemes matter? Petter Berg (Copenhagen Business School), Peter Møllgaard: The effects of asymmetric costs on cartel damages Dennis Gärtner (University of Bonn), Catherine Roux ���: Banning information exchange to fight collusion? Bananas and beyond

  5  

REGULATION Chair: Alberto Cavaliere (Università di Pavia) Yossi Spiegel (Tel-Aviv University), Carlo Cambini: Investment and capital structure of partially private regulated firms Roberta Longo (University of Leeds), Marisa Miraldo, Andrew Street: Price regulation of pluralistic markets subject to provider collusion Fabio Manenti (Università di Padova), Antonio Scialà: Access Regulation, entry and investments in telecommunications Laura Rondi (Politecnico di Torino), Carlo Cambini: Regulatory independence, investment and political interference: evidence from the EU EXPERIMENTS I Chairs: Iván Barreda-Tarrazona (University Jaume I, Castellon) Natalia Shestakova (CERGE-EI Prague): Understanding Consumers’ Choice of Pricing Schemes Giancarlo Spagnolo (U. di Roma Tor Vergata & Stockholm School of Economics), Maria Bigoni, Sven Olof Fridolfsson, Chloé Le Coq: Trust, salience and deterrence: evidence from an antitrust experiment Kenan Kalayci (University of Queensland, Australia): Confusopoly: competition and obfuscation in markets Florian Schuett (Tilburg University), Bastian Henze: Transparency in Markets for Experience Goods: Experimental Evidence 16:00 - 16:30 Coffee Break 16:30 -18:30 Contributed Session III PRODUCT DIFFERENTIATION Chair: Roberto Cellini (Università di Catania) Francesco Di Comite (Université Catholique de Louvain), Jacques-François Thisse, Hylke Vandenbussche: Verti-zontal differentiation in monopolistic competition Matteo Alvisi (Università di Bologna), Emanuela Carbonara: Imperfect substitutes for perfect complements: solving the anticommons problem Claudio Panico (Università Bocconi), Sebastiano Alessio Delre: Competing in Hollywood Stefano Castriota (Università di Perugia), Marco Delmastro: The economics of collective reputation: minimum quality standards, vertical differentiation and optimal group size

  6  

TECHNOLOGY ADOPTION AND PATENTS Chair: Florian Schuett (Tilburg University) Jos Jansen (Max Planck Institute, Bonn): Share to scare: technology sharing in the absence of intellectual property rights Ivan Ledezma (Université Paris-Dauphine): Endogenous asymmetries in technology adoption and international trade Haoyu Zhang (University of Sidney), Yibai Yang: Outsourcing and R&D Investment with Costly Patent Protection Jing-Yuan Chiou (IMT Lucca): In the Shadow of Giants TWO-SIDED MARKETS Chair: Fabio Manenti (Università di Padova) Elena Argentesi (Università di Bologna), Lapo Filistrucchi, Market definition in two-sided markets: the case of newspapers Sebastian Wismer (University of Wuerzburg), Johannes Muthers: Why do platforms charge proportional fees? Commitment and seller participation Lapo Filistrucchi (Università di Firenze & Tilburg University), Stefan Behringer: Price Wars in Two-Sided Markets: The case of the UK Quality Newspapers Federico Boffa (Università di Macerata), Lapo Filistrucchi: Collusion in two-sided markets 20:00 Bus leaving from Basiliani Resort to Santa Cesarea Terme 20:30 Social dinner at Augustus – Santa Cesarea Terme

  7  

Friday, JUNE 24 9:00 -11:00 Contributed Session IV EXPERIMENTS II Chairs: Quazi Shahriar (San Diego State University) Jeroen Hinloopen (University of Amsterdam), Sander Onderstal: Collusion and the choice of auction: an experimental study Jingjing Zhang (University of Zürich), Jacob Goeree: Inefficient Markets Maria Bigoni (Università di Bologna), Jan Potters, Giancarlo Spagnolo: Imperfect monitoring, flexibility and collusion: experimental evidence Natalia Montinari (Max Planck Institute, Jena), Gerald Eisenkopf, Simon Gächter: Incentive spillovers on voluntary cooperation RETAILING Chair: Dennis L. Gärtner (University of Bonn) Frago Kourandi (Telecom ParisTech), Nikolaos Vettas: Dynamic vertical contracting with learning-by-doing Johannes Muthers (ZEW Mannheim), Matthias Hunold: Resale Price Maintenance: Hurting Competitors, Consumers and Yourself Simona Fabrizi (Massey University, New Zealand), Steffen Lippert, Clemens Puppe, Stephanie Rosenkranz: Suggested retail prices with downstream competition GAMES AND CONTESTS Chair: Arsen Palestini (Università di Bologna) Skerdilajda Zanaj (University of Luxembourg), Jean J. Gabszewicz, Didier Laussel, Tanguy van Ypersele: Market games in successive oligopolies Daniela Tellone (Facultés Universitaires Saint-Louis, Bruxelles), Wouter Vergote: Endogenous network formation in Tullock contests Caterina Colombo (Università di Ferrara), Alessandra Chirco, Marcella Scrimitore: Quantity competition, endogenous motives and behavioral heterogeneity Marcella Scrimitore (Università del Salento): Profitability in Cournot and Bertrand mixed markets under endogenous objectives 11:00 - 11:30 Coffee Break

  8  

11:30 - 13:00 Plenary Session II Jacob Goeree, California Institute of Technology and University of Zürich Using Theory and Experiments to Design Spectrum Auctions Chair: Bradley Ruffle (Ben Gurion University of the Negev) 13:00 - 14:00 Lunch 14:00 -15:30 Contributed Session V CONTRACTS II Chair: Riccardo Martina (Università Federico II Napoli) Annalisa Luporini (Università di Firenze), Clara Graziano: Optimal delegation when the large shareholder has multiple tasks Elisabetta Iossa (U. di Roma Tor Vergata & Brunel U.), David Martimort: The Theory of Incentives Applied to the Transport Sector Regine Oexl (Università di Padova): Trilateral contract and the hold-up problem EXPERIMENTS III Chairs: Simon Weidenholzer (University of Vienna) Paola Valbonesi (Università di Padova), Maria Bigoni, Giancarlo Spagnolo: Sticks and carrots in procurement: an experimental exploration Iván Barreda-Tarrazona (University Jaume I, Castellon), Nikolaos Georgantzís, Constantine Manasakis, Evangelos Mitrokostas, Emmanuel Petrakis: Endogenous managerial compensation contracts in experimental duopolies Luigi Luini (Università di Siena): Two competitive processes of market selection: Darwin and Lamark in the lab INNOVATION AND ANTITRUST Chair: Giancarlo Spagnolo (U. di Roma Tor Vergata & Stockholm School of Economics) Emanuele Tarantino (Università di Bologna), Bernhard Ganglmair: Patent disclosure in standard setting Giovanni Immordino (Università di Salerno), Michele Polo: Antitrust Policy, Legal Standards and Innovative Activity Bernhard Ganglmair ��� (University of Texas), Luke Froeb, Greg Werden: Patent hold up and antitrust: how a well-intentioned rule could retard innovation.

  9  

15:30 - 16:00 Coffee Break 16:00 -17:30 Contributed Session VI MARKET FORECLOSURE Chair: Carlo Cambini (Politecnico di Torino) Alberto Cavaliere (Università di Pavia), Valentina Giust, Mario Maggi: Efficient mechanism for access to storage with imperfect competition in gas markets Yossi Spiegel (Tel Aviv University): Backward integration, forward integration, and vertical foreclosure Markus Reisinger (University of Munich), Emanuele Tarantino: Vertical integration with complementary inputs THE ECONOMICS OF R&D Chair: Antonio Minniti (Università di Bologna) Maria Luisa Mancusi (Università Bocconi), Andrea Vezzulli: R&D and credit rationing in SMEs Steffen Lippert (Massey University, New Zeland), Francis Bloch, Simona Fabrizi: Learning, Preemption and Cooperation in R&D Races Andrea Conte (European Commission): Knowledge investments and innovation. Insights on the determinants and effects of reforms EMPIRICAL IO Chair: Laura Rondi (Politecnico di Torino) Andrea Günster (ETH Zürich), Martin Carree, Mathijs van Dijk: Do cartels undermine economic efficiency? Giovanni Tabacco (University of East Anglia): What does market structure reveal? Empirical evidence from the US airline industry Maria Letizia Giorgetti (Università di Milano), Gianni Amisano, Maria Luisa Mancusi: Unveiling the effects of sunk costs: barrier to entry vs. commitment.

  10  

BOOK OF ABSTRACTS The following referees have supported the scientific committee in the selection process of the submitted papers and are gratefully acknowledged. Emanuele Bacchiega, Università di Bologna Maria Rosa Battaggion, Università di Bergamo Corrado Benassi, Università di Bologna Isabel Busom, Universitat Autònoma de Barcelona Carlo Cambini, Politecnico di Torino Alessandra Chirco, Università del Salento Giuseppe Colangelo, Università Cattolica di Milano Sergio Currarini, Università di Venezia Daniel Halbeer, University of Zurich Juan Luis Jiménez González, Universidad de las Palmas de Gran Canaria Qihong Liu, University of Oklahoma Andrea Mantovani, Università di Bologna Riccardo Martina, Università di Napoli Camilla Mastromarco, Università del Salento Jeanine Miklos-Thal, University of Rochester Marcella Nicolini, Fondazione Eni Enrico Mattei Marco Pagnozzi, Università di Napoli Lucia Parisio, Università Bicocca Milano Jordi Perdiguero, Universitat de Barcelona Claudio Piga, Loughborough University Joanna Poyago-Theotoky, La Trobe University Andrew Rhodes, Oxford University Marco Savioli, Università di Siena Antonio Scialà, Università Roma Tre Marcella Scrimitore, University of Salento Marta Stryszowska, Tilburg University Antonio Tesoriere, Università di Palermo Cecilia Vergari, Università di Bologna Chris Wilson, Loughborough University Jidong Zhou, University College London AUCTIONS Quazi Shahriar (San Diego State University), Daniel Ackerberg, Keisuke Hirano: Identification of Time and Risk Preferences in Buy Price Auctions Buy price auctions merge a posted price option with a standard bidding mechanisms, and have been used by various online auction sites including eBay and GMAC. A buyer in a buy price auction can accept the buy price to win with certainty and end the auction early. Intuitively, the buy price option may be appealing to bidders who are risk averse or impatient to obtain the good, and a number of authors have examined how such mechanisms can increase the seller's expected revenue over standard auctions. In this paper, we show that data from buy price auction can be used to identify bidders' risk aversion and time preferences. We develop a private value model of bidder behavior in a buy price auction with a temporary buy price. In our setup, bidders arrive stochastically over time, and the auction proceeds as a second- price sealed bid auction after the buy price disappears. Upon arrival, a bidder in our model is allowed to act immediately (i.e. accept the buy price if it is still available, or place a bid) or wait and act later. Allowing for general forms of risk aversion and impatience, we first

  11  

characterize equilibria in cutoff strategies and describe the condition under which all symmetric pure-strategy subgame-perfect Bayesian Nash equilibria are in cutoff strategies. We then show that, given sufficient exogenous variation in reserve and buy prices and in auction lengths, the arrival rate, valuation distribution, utility function, and time-discounting function in our model are all nonparametrically identified. We also develop extensions of the identification results for settings when the variation in auction characteristics is more limited. Cornelia van Wesenbeeck (Vrije Universiteit Amsterdam), Michiel A. Keyzer: A new mechanism for truthtelling in multi-commodity double auctions The need to design auctions that induce truth-telling by participants, allocate goods efficiently over the players, are transparent and understandable by the players has been a driving force behind the auction literature. This need has only become more pressing by the rise of internet auctions, where anonymity of the participants highlights shortcomings in traditional auction mechanisms in preventing strategic behavior such as shill bidding and bid shielding. Our paper presents a new auction mechanism, the Primal Auction, which induces truth telling, is transparent in its assignments of goods during the entire auctioning process, and does not impose large informational requirements on the auctioneer. In the Primal Auction, players bid simultaneously, and in each round, the auctioneer evaluates the bids using the history of bids made. If the new bid satisfies a consistency rule based on Revealed Preference, then the bid is accepted. The new price is calculated as the average over the accepted bids. Players with higher-than-average bids see the allocation of commodities to them increase, while the reverse holds for lower-than-average bidding players. The auction is shown to end after a finite number of rounds with an allocation that is in accordance to players’ preferences. Since the consistency test can also be performed by an automaton, the procedure is especially suited also for Internet applications. Rosella Levaggi (Università di Brescia), Laura Levaggi: Rent extraction through alternative forms of competition in the provision of merit and impure public goods In this paper we compare the properties in terms of rent extraction of Hotelling spatial com- petition and monopoly franchises using Dutch first price auctions, two of the most widely used tools to regulate public service provision. In a framework where the regulator can imperfectly observe costs, spatial competition is more effective in extracting rent if providers are very different in their productivity and if they can observe the costs of their competitors. When they are quite similar and have limited information on the competitors’ characteristics, the use of a monopoly franchise through an auction mechanism should be preferred. Pim Heijnen (University of Groningen), Adriaan R. Soetevent, Marco A. Haan: Do Auctions and Forced Divestitures increase Competition? Evidence for retail gasoline markets Where markets are insufficiently competitive, governments can intervene by auctioning licenses to operate or by forcing divestitures. The Dutch government has done exactly that, organizing auctions to redistribute tenancy rights for highway gasoline stations and forcing the divestiture of outlets of four majors. We evaluate this policy experiment using panel data containing detailed price information. We find that an obligation to divest lowers prices by over 2% while the auctioning of licenses without such an obligation has no discernible effect. We find weak evidence for price effects on nearby competitors.

  12  

CONTRACTS I Ennio Bilancini (Universtà di Modena e Reggio Emilia), Leonardo Boncinelli: Dynamic adverse selection and the size of the informed side of the market In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information. We show that in equilibrium all goods can be traded if a simple piece of information is made publicly available: the size of the informed side of the market. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. More precisely we prove that, if the size of the informed side of the market is a public information at each trading stage, then there exists a weak perfect Bayesian equilibrium where all goods are sold in finite time and where the price and quality of traded goods are increasing over time. Moreover, we show that as the time between exchanges becomes arbitrarily small, full trade still obtains in finite time – i.e., all goods are actually traded in equilibrium – while total surplus from exchanges converges to the entire potential. These results suggest two policy interventions in markets suffering from dynamic adverse selection: first, the public disclosure of the size of the informed side of the market in each trading stage and, second, the increase of the frequency of trading stages. ��� Riccardo Martina (Università Federico II, Napoli), Salvatore Piccolo: Can product market competition elicit stock option contracts? We revisit the rationale for sell-out contracts, leaving the manager residual claimant of the firm profis, in a vertical hierarchies setting where managers are privately informed about their costs, and these costs are allowed to be correlated. Building on the insights provided by the literature on competing contracts (Marti- mort, 1996, and Gal-Or, 1999), the objective of the paper is to study how competition and types’ correlation interplay to shape the incentives to issue stock-option contracts for managers. In contrast to previous models (Khalil and Lawaree, 1995, and Maskin and Riley, 1985) that rationalize these incentives in an isolated principal-agent model, we show that competition is indeed a fundamental to understand the logic of these contractual arrangements even in the absence of additional moral hazard problems. Salvatore Piccolo (Università Federico II, Napoli): Communicating vertical hierarchies: the adverse selection case I study the rationale for information sharing in a model where two principals, which exert production externalities one on another, endogenously decide whether to exchange information about their exclusive agents. I show that one novel effect shapes communication decisions when agents are privately informed about production costs. This effect is absent under complete information and it turns out to be of first-order magnitude relative to those emerging in such benchmark. Roughly, what matters is how sharing information impacts contracting relationships within opponent organizations, and therefore its effect on equilibrium outputs. Information exchange induces strategies to be correlated via the distortions channel. Because of those distortions, the equilibrium value of communication depends on the interplay between the nature of upstream externalities and the sign of cost correlation. When upstream externalities and cost correlation have the same sign, there exists a unique symmetric equilibrium with no communication. By contrast, when upstream externalities and cost correlation have opposite signs there exists a unique symmetric equilibrium where both principals share information. I also show that, unlike in previous

  13  

models, under asymmetric information principals might run into a prisoner dilemma when there is no communication at equilibrium. Information sharing is also shown to have an unambiguous negative effect on rents. Moreover, there exists a system of transfers such that the equilibrium outcome obtained when both principals share information is collusion-proof. SEARCH AND QUALITY Sandro Shelegia (University of Vienna): Quality choice, observability and dispersion of valuations We examine the investment of a monopolist in quality as a function of its observability prior to purchase and the dispersion of consumers’ valuations around the average determined by the investment. We find that if there is no dispersion, then even a negligible noise in observability results in zero investment. We argue that the dispersion of valuations is an inherent characteristic of most experience goods. If the dispersion is present, then in order to estimate his idiosyncratic valuation, a consumer does not fully rely on his equilibrium conjecture about the firm’s investment and also takes into account his noisy signal of quality. The firm invests because higher quality leads to better consumer signals and hence higher demand. The equilibrium quality increases both in the observability and the dispersion. Both of these parameters in- crease consumer’s reliance on his signal and thus firm’s ability to credibly invest in quality. Qualitatively the same results are shown to hold under competition. Simon Weidenholzer (University of Vienna), Maarten Janssen, Paul Pichler: Oligopolistic markets with sequential search and production cost uncertainty This paper analyzes a sequential search model where consumers are uninformed about a common production cost faced by firms. We characterize a perfect Bayesian equilibrium satisfying a reservation prices property and provide a sufficient condition for such an equi- librium to exist. We show that: i) firms set on average higher prices compared to a scenario where they know the production costs, ii) expected prices and consumer welfare can be non–monotonic in the number of firms, and iii) the impact of production cost uncertainty vanishes as the number of firms becomes very large. Nadav Levy (IDC Herzliya), Arthur Fishman: Search costs and risky investment in quality One striking development associated with the explosion of e-commerce is the increased transparency of sellers’ quality history. In this paper we analyze how this affects firms’ incentives to invest in quality when the outcome of investment is uncertain. We identify two conflicting effects. On the one hand, reducing the consumer’s cost of search for quality exacerbates the negative effects of past poor performance. This increases incentives to invest, leading to higher quality. On the other hand, the fact that a firm, despite its best efforts, may fail to live up to consumers’ more demanding expectations, makes investment less attractive. This discourages investment, leading to lower quality. We show that reducing the search cost leads to higher quality if the initial level of the search cost is sufficiently high but may lead to lower quality if the initial level of the search cost is sufficiently low.

  14  

Dimitri Paolini (Università di Sassari & CORE-Belgium), Berardino Cesi: University choice, peer group and distance We analyze how authorizing a new university affects welfare when the students’ education depends on the peer group effect. Students are horizontally differentiated according to their ability and the distance from the university. Comparing a monopolistic university with a two-universities model we find that allowing a “new” university is welfare improving when the monopolistic university is only attended by able students with less mobility constraints. This occurs when mobility costs are sufficiently high. When mobility costs are low, a negative externality arises and welfare decreases. The negative externality comes through the peer group effect: high ability students that would have gone to the monopolistic university go to the university with the lower average ability. These students end up in a university with students whose ability was not high enough to go to the monopolist. On the other hand, students remaining in the good university benefit from a lower average ability. Thus, a new university is welfare improving only for those with low ability that in the monopolistic scenario would remain unskilled. When, instead, the mobility cost is high, the monopolist leaves out a significative mass of individuals. In this case, no negative externality arises because no student swaps university therefore a "new" university is welfare improving. However, this welfare improvement makes the opportunities for a higher education less equal (according to Romer, 1998) because an "external circumstance" like mobility cost, rather than own ability, becomes the main determinant of the students’ human capital. Antonio Minniti (Università di Bologna), Emanuele Bacchiega, Arsen Palestini: Quality, Distance and Trade: a Strategic Approach This paper contributes to the vast and growing literature on trade and quality by pro- viding a parsimonious explanation of the observed increase in unit values (and thus quality) of shipped goods with the distance of the country of destination. This mechanism is based on the influence of distance on firms’ strategic behavior when the quality level of goods is a choice variable for firms together with prices, and complements the ones already proposed in the literature. Our approach differs from the extant literature in that it does not rely on technology or preference/income differentials to identify the determinants and drivers of trade flows. Moreover, it allows to clearly disentangle between the price setting and quality choice of firms. We find that distance has an unambiguously positive effect on the average quality of traded goods, as well as a negative one on the likelihood of “trade zeros”. Our results suit the acquired empirical evidence on distance and quality and contribute, therefore, to the research on the determinants of trade performances of firms and countries. Also, our model suggests some useful insights on the relation between distance and free-on-board prices. COLLUSION Liliane Karlinger (U. LUISS Roma & University of Vienna): Implementing collusion by delegating punishment: the role of communication This paper studies collusion in a Bertrand duopoly with imperfect monitoring. Firms cannot directly commit to marginal cost pricing, but they can delegate the implementation of punishment to a third party, called the arbitrator. Communication arises because the arbitrator must learn the firms’ profit realizations in order to know when to start punishment. I show that the optimal collusive equilibrium is Nash implementable by a fairly simple ”cartel mechanism”, though not uniquely so. I also study the effect of public demand information on collusion with and without strategic delegation. I conclude that suppressing inter-firm communication is a key element in any antitrust policy designed to prevent collusion.

  15  

Patrick de Lamirande (Cape Breton University, Canada), Jean-Daniel Guigou, Bruno Lovat: Strategic delegation and collusion: do incentive schemes matter? This paper introduces delegation decisions and contracts based on relative performance evaluation (RPE) in the analysis of cartel stability. We follow the approach developed by Lambertini and Trombetta (2002), where manager’s compensation combines profits and sales (CPS) instead. Some of our results are similar while others are distinct from those of Lambertini and Trombetta. In particular, we show that collusion under RPE is always harder to sustain than under CPS. Petter Berg (Copenhagen Business School), Peter Møllgaard: The effects of asymmetric costs on cartel damages Collusion models are used to estimate cartel overcharges and the resultant welfare losses. Most applications assume symmetric costs and homogeneous products, assumptions that rarely are satisfied in reality. Relaxing these assumptions, we find that model misspecifications result in overestimation of the damage caused by cartels - and possibly in an unfair distribution of the compensation. The estimation error increases with the degree of cost asymmetry and product differentiation. Dennis Gärtner (University of Bonn), Catherine Roux ���: Banning information exchange to fight collusion? Bananas and beyond We examine the relation between oligopolists’ exchange of prospective information and collusion, and the extent to which a ban of such exchange may be desirable for consumers. We use a repeated framework to argue that, while the sharing of such information may be sustained in equilibrium along with collusive activity, firms need not communicate this kind of information for collusion. Hence, an antitrust policy which bans the sharing of prospective information may not restore competition and, as such, leave consumers worse off. Moreover, we show that, from a firms’ point of view, information sharing may actually have a destabilizing effect on collusive activity. REGULATION Yossi Spiegel (Tel Aviv University), Carlo Cambini: Investment and capital structure of partially private regulated firms We develop a model that examines the capital structure and investment decisions of regulated firms and explicitly takes into account two key institutional features of the public utilities sector in the EU: partial ownership of the state in the regulated firm and regulation by agencies with various degrees of independence. Our model gives rise to a number of testable hypotheses about the effects of ownership structure, regulatory independence, and the regulatory climate on capital structure, regulated prices, and investments. Roberta Longo (University of Leeds), Marisa Miraldo, Andrew Street: Price regulation of pluralistic markets subject to provider collusion We analyze incentives for cooperative behaviour when heterogeneous providers are faced with regulated prices under two forms of yardstick competition, namely discriminatory and uniform schemes. Providers are heterogeneous in the degree to which their interests

  16  

correspond to those of the regulator, with close correspondence labelled altruism. Deviation of interests may arise as a result of de-nationalisation or when private providers enter predominantly public markets. We assess how provider strategies and incentives to collude relate to provider characteristics and across different yardstick competition schemes. We find that the incentive for collusion as well as providers’ choice of cost depends on the yardstick scheme and on provider heterogeneity. Our results seem to indicate that collusion is more likely to be sustained in a uniform rather than in a discriminatory scenario. In general, non-cooperative costs are higher under the uniform scheme, reflecting its weaker incentives to cost reduction. Under the discriminatory scheme each provider’s choice of cost is decreasing in the degree of the other provider’s altruism, so a self-interested provider will operate at a lower cost than an altruistic provider. Under the uniform scheme providers always choose to operate at the same cost. The prospect of defection serves to moderate the chosen level of operating cost. Fabio Manenti (Università di Padova), Antonio Scialà: Access Regulation, entry and investments in telecommunications This paper presents a model of competition between an incumbent and an entrant firm in telecommunications. The entrant has the option to enter the market with or without having preliminary invested in its own infrastructure; in case of facility based entry, the entrant has also the option to invest in the provision of enhanced services. In case of resale based entry the entrant needs access to the incumbent network. Unlike the rival, the incumbent has always the option to upgrade the existing network to provide advanced services. We study the impact of access regulation on the type of entry and on firms’ investments. Without regulation, we find that the incumbent sets the access charge to prevent resale-based entry and this overstimulates rival’s investment that may turn out to be socially inefficient. Access regulation may discourage welfare enhancing investments, thus also inducing a socially inefficient outcome. We extend the model to account for negotiated interconnection in case of facilities based entry. Laura Rondi (Politecnico di Torino), Carlo Cambini: Regulatory independence, investment and political interference: evidence from the EU This paper examines the implications of “modern” regulatory governance - i.e. the creation of Independent Regulatory Authorities (IRAs) - for the capital investment decisions of a large sample of EU publicly traded regulated firms from 1994 to 2004. These firms provide massively consumed services, and this is why governments are particularly sensitive to regulatory decisions and outcomes. We therefore analyze and empirically investigate i) whether the inception of IRAs may reduce the time-inconsistency problems undermining company investment, and ii) whether governments’ political orientation and residual state ownership interfere with investment decisions. We control for the potential endogeneity of the key institutional variables by drawing our identification strategy from the political economy literature. Our results show that regulatory independence has a positive impact on regulated firms’ investment while private vs. state ownership is not significant. The executive’s political orientation also matters, as company investment increases under more conservative and market-oriented governments, but the impact seems to reverse when the IRA is in place. Our evidence suggests that the interaction of politics with the functions of the IRA can undermine investment decisions whenever a formally independent regulator coexists with a strongly ideologically driven executive, as this is likely to introduce instability and uncertainty in the regulatory framework.

  17  

EXPERIMENTS I Natalia Shestakova (CERGE-EI Prague): Understanding Consumers’ Choice of Pricing Schemes This paper uses experimental data to understand how consumers choose pricing schemes when their demand is perfectly inelastic but uncertain. I consider three-part pricing schemes (i.e. fixed fee, included units, extra-unit price). The analysis suggests a strong bias towards the pricing scheme with the number of included units equal to the expected demand. The leading explanation is what I call the "expected demand" heuristic. It assumes that subjects use their expected demand to compute how much they would have to pay under a particular pricing scheme. This procedure gives the same result as computing the expected expenditure when the expenditure function is linear. However, when the number of included units is equal to the expected demand, the expenditure function is non-linear. In this case, subjects underestimate the expected level of expenditure, which leads to the observed bias. Another relevant explanation is what I call the "match" heuristic. It assumes that subjects do not compute at all how much they would pay under any pricing scheme. Instead, they always choose the pricing scheme whose label "matches" their demand. In the experiment reported here, schemes are labeled with their number of included units. Hence, this decision rule predicts that subjects would always choose the pricing scheme with the number of included units equal to the expected demand. Surprisingly, this extreme decision rule is the best predictor for 17% of subjects. Giancarlo Spagnolo (U. di Roma Tor Vergata & Stockholm School of Economics), Maria Bigoni, Sven Olof Fridolfsson, Chloé Le Coq: Trust, salience and deterrence: evidence from an antitrust experiment We present results from a laboratory experiment identifying the main channels through which different law enforcement strategies deter organized economic crime. The absolute level of a fine has a strong deterrence effect, even when the exogenous probability of apprehension is zero. This effect appears to be driven by distrust or fear of betrayal, as it increases significantly when the incentives to betray partners are strengthened by policies offering amnesty to “turncoat whistleblowers”. We also document a strong deterrence effect of the sum of fines paid in the past, which suggests a significant role for salience or availability heuristic in law enforcement. Kenan Kalayci (University of Queensland, Australia): Confusopoly: competition and obfuscation in markets This paper examines the effects of competition in experimental posted-offer markets where sellers can confuse buyers. I report two studies. In one, the sellers offering heterogeneous goods can obfuscate buyers by means of spurious product differentiation. In the other study, sellers offer identical goods and make their prices unnecessarily complex by having multi-part tariffs. I vary the level of competition by having treatments with two- and three sellers. The results from both studies show that average complexity created by a seller is not affected by the number of sellers, which contrasts with what has been suggested by earlier literature (Gabaix and Laibson, 2004; Carlin, 2009). In addition, market prices are lower and buyer surplus is higher when there are three rather than two sellers in a market.

  18  

Florian Schuett (Tilburg University), Bastian Henze: Transparency in Markets for Experience Goods: Experimental Evidence We propose an experimental design to investigate the role of transparency in the market for an experience good. The market is served by a duopoly of firms which choose both the quality and the price of their product. Consumers differ in their taste for quality and choose from which firm to buy. We compare four different treatments in which we vary the degree to which consumers are informed about quality. Specifically, we have a full-information treatment in which all consumers are informed, a no-information treatment in which none of them are informed, a subset treatment in which half of them is informed, and a signal treatment in which all consumers receive an imperfect signal about quality. We find that, contrary to theoretical predictions, firms do not differentiate quality under full information. Rather, both tend to offer services of similar, and high, quality, entailing more intense price competition than predicted by theory. Under no information, we observe a “lemons” outcome where quality is low. At the same time, firms manage to maintain prices substantially above marginal cost. In the subset and signal treatments, quality is significantly above the no-information level. Taken together, the evidence from the experiment suggests that transparency is a more effective tool to raise welfare and consumer surplus than theory would lead one to expect. Our results have implications for consumer protection policies aimed at increasing transparency, such as recent EU legislation mandating that ISPs disclose information on how they manage their network. PRODUCT DIFFERENTIATION Francesco Di Comite (Université Catholique de Louvain), Jacques-François Thisse, Hylke Vandenbussche: Verti-zontal differentiation in monopolistic competition This paper presents a monopolistic competition model where the observed heterogeneity in sales, profits and markups across firms can be explained by differences in quality, tastes and costs. The standard quadratic utility function is generalized to allow for demand parameters capturing variety-specific vertical differentiation and market- variety-specific horizontal differentiation. In each market, prices are shown to depend on costs, quality and the toughness of local competition through the effective mass of competitors and the degree of substitutability across varieties. The interaction between supply- and demand-side heterogeneity allows us to accommodate recent empirical evidence based on micro-level trade data and obtain results that models of cost or quality heterogeneity alone are unable to capture. In addition, we uncover the possibility to break the univocal relation between markups and sales, for given levels of quality, which plagues trade models based on monopolistic competition. Finally, taking into account the idiosyncratic horizontal dimension of differentiation, weighted aggregate indices of price, cost and quality are proposed to better characterize market outcomes in a context of multi-dimensional heterogeneity in the hope of providing guidance in dealing with micro-level trade data. Matteo Alvisi (Università di Bologna), Emanuela Carbonara: Imperfect substitutes for perfect complements: solving the anticommons problem An integrated monopoly, where all complements forming a composite good are offered by a single !firm, is typically welfare superior to a complementary monopoly. This is !the tragedy of the anticommons!. We consider the possibility of competition in the market for each complement. We present a model with two perfect complements and introduce n imperfect substitutes for one and then for both complements. We prove that, when one complementary good is still produced by a monopolist, competition in the other sector may be preferred if and

  19  

only if the substitutes of the complementary good differ in their quality, so that as their number increases, average quality and/or quality variance increases. Then, favoring competition in some sectors, leaving monopolies in others may be detrimental for consumers and producers alike when competition does not generate an adequate level of product differentiation. Results change when competition is introduced in each sector. In this case, if goods are close substitutes, we find that competition may be welfare superior for a sufficiently high number of competing firms in each sector, even with no quality differentiation. Claudio Panico (Università Bocconi), Sebastiano Alessio Delre: Competing in Hollywood Big studios spend hefty sums producing and advertising their movies. But how do they make their strategic budget choices? To what extent do they differentiate their movies? How do their choices affect viewership over the movie’s life cycle? To address these research questions, this study proposes a location model in which two studios compete to attract a population of moviegoers with heterogeneous preferences. The investigation accounts for predatory marketing in the pre-launch period and word-of- mouth effects on the post-launch period, as well as for cases in which moviegoers exhibit no satiation and variety seeking. We find that more differentiation increases movie budgets, with advertising expenditures increasing faster than the production budgets. While with no satiation the studios do not differentiate their movies, with variety seeking the studios choose an intermediate differentiation. Stefano Castriota (Università di Perugia), Marco Delmastro: The economics of collective reputation: minimum quality standards, vertical differentiation and optimal group size The literature on collective reputation is still in its infancy. Despite a number of valuable theoretical works studying the process of collective reputation building, due to data limitations there are no studies testing the determinants of group reputation. This work represents a first empirical step in this direction. Control variables range from the context in which firms operate to the quality standards set by the coalition, from the variables measuring the vertical and horizontal differentiation to the characteristics of the group. Our research provides empirical support in favor of the usefulness of compulsory and voluntary quality standards. Furthermore, it shows that the relationship between group size and collective reputation is non-linear: free entry may be not optimal since above a certain number of producers the group reputation declines due to free-riding problems. TECHNOLOGY ADOPTION AND PATENTS Jos Jansen (Max Planck Institute, Bonn): Share to scare: technology sharing in the absence of intellectual property rights I study the incentives of Cournot duopolists to share their technologies with their competitor in markets where intellectual property rights are absent and imitation is costless. The trade-off be- tween a signaling effect and an expropriation effect determines the technology-sharing incentives. In equilibrium at most one firm shares some of its technologies. For similar technology distributions, there exists an equilibrium in which nobody shares. If the technology distributions are skewed towards efficient technologies, then there may exist equilibria in which one firm shares all technologies, only the best technologies, or only intermediate technologies. No other equilibria can exist.

  20  

Ivan Ledezma (Université Paris-Dauphine): Endogenous asymmetries in technology adoption and international trade This note explores the interaction between economic integration and asymmetric choices of technology adoption. It seeks to bring micro foundations of firm heterogeneity into an open-economy model. By so doing, the analysis shows the complementarity between an imperfect competition framework of strategic substitutability and a system of preferences specially well suited for general equilibrium analysis. Preliminary results, still in partial equilibrium, conform standard claims on price reduction and the ability of economies of scale to facilitate technology adoption. More interesting, the number of active firms is reduced by the increase in market size and subtile interactions arises from demand aggregation. Haoyu Zhang (University of Sidney), Yibai Yang: Outsourcing and R&D Investment with Costly Patent Protection We analyze decisions of firms on outsourcing of intermediate goods and R&D investment. If firms choose in-house production, a high profit discount is incurred due to the inefficiency of producing the intermediate goods, whereas if firms search for and outsource to specialists, the production costs decrease, but an imitation risk arises by specialists, who may become competitors in the final-good market. Accordingly, patents are used to mitigate this possibility, which are costly. We show that in outsourcing, all firms outsource to the same specialist to minimize the possibility of successful imitation in equilibrium. Moreover, firms still invest in R&D activities and outsource their intermediate goods with some patent protection even though the selected specialist put effort into imitation. Jing-Yuan Chiou (IMT Lucca): In the Shadow of Giants Intellectual giants provide broad shoulders for subsequent inventors. When they tumble, however, it also casts shadow on the prospect of future research. This paper incorporates this shadow effect into a two-stage innovation process and shows that patenting the first-stage result (the basic invention) may enhance the second stage performance. Only under weak shadow effect can it be optimal to enable the doctrine of patentable subject matter (the DPSM) and reject patent protection to the basic in- vention. In this case, the DPSM serves to preserve the pioneering inventor’s incentive TWO-SIDED MARKETS Elena Argentesi (Università di Bologna), Lapo Filistrucchi, Market definition in two-sided markets: the case of newspapers The paper first discusses the design and implementation of a SSNIP test in a two-sided market such as the media one. Then it applies the proposed SSNIP test for two-sided markets to the newspaper market, using a unique dataset on daily newspapers in Italy. The paper therefore not only provides guidance on the implementation of a SSNIP test in a two-sided market, but it also brings an example of structural demand estimation for the purpose of market definition.

  21  

Sebastian Wismer (University of Wuerzburg), Johannes Muthers: Why do platforms charge proportional fees? Commitment and seller participation If an intermediary offers sellers a platform to reach consumers, he may face the following commitment problem: Sellers suspect the intermediary to enter their respective product market as a merchant after they have sunk fixed costs of entry. Therefore, less sellers join the platform as they fear that their investments cannot be recouped. Hence, committing to not becoming active in sellers’ markets can be profitable for the intermediary. We discuss different platform tariff systems to analyze this commitment problem. We find that proportional fees (which are observed in many relevant real-world examples) mitigate the commitment problem, contrary to two-part tariffs (which most of the literature on two-sided markets focusses on). Therefore, we offer a novel explanation for the use of proportional platform fees. Lapo Filistrucchi (Università di Firenze & Tilburg University), Stefan Behringer: Price Wars in Two-Sided Markets: The case of the UK Quality Newspapers This paper investigates the price war in the UK quality newspaper industry in the 1990s. We show that the empirical evidence is in accordance with a substantial change in the optimal finance mix of newspapers as advertising becomes the dominant source of newspaper revenue. The finding holds under weak theoretical assumptions. The evidence brought forward at the time is not sufficient to establish a case of predatory pricing as it has neglected the critical two-sidedness of the firms and necessitates further study. Federico Boffa (Università di Macerata), Lapo Filistrucchi: Collusion in two-sided markets This paper studies what determines the profit maximizing output of a cartel in two-sided markets. Two differentiated firms catering to two markets linked by external effects engage in a supergame. We find conditions under which above monopoly prices (respectively, below monopoly quantities) may prevail on the market as a means to enhance the sustainability of the cartel". EXPERIMENTS II Jeroen Hinloopen (University of Amsterdam), Sander Onderstal: Collusion and the choice of auction: an experimental study We experimentally examine the collusive properties of two commonly used auctions: the English auction (EN) and the first-price sealed-bid auction (FPSB). In theory, both tacit and overt collusion are always incentive compatible in EN while both can be incentive compatible in FPSB if the auction is repeated and bidders are patient enough. We find that the auctions do not differ in subjects’ propensity to collude overtly and in the likelihood that subjects defect from a collusive agreement. Moreover, the average winning bid does not differ between the auctions unless subjects can collude overtly. Under overt collusion, stable cartels buy at a lower price in EN than in FPSB resulting in a lower average winning bid in EN. Jingjing Zhang (University of Zürich), Jacob Goeree: Inefficient Markets Numerous experiments have demonstrated that with private values, the continuous double auction converges quickly and reliably to competitive equilibrium, resulting in full allocative

  22  

efficiency. Furthermore, with common values, previous experiments have shown that the continuous double auction is informationally efficient, i.e. trade prices accurately summarize traders’ dispersed private information. This paper considers an environment where traders’ values and information consist of both private and common-value elements. Under the rational expectations hypothesis, the introduction of common values has no adverse consequences for allocative and informational efficiency. In contrast, a Bayes-Nash model in which traders’ optimal behavior reflects only a combination of their private and common-value information predicts that neither allocative nor informational efficiency is possible. In a series of experiments, we test these competing hypotheses and find that observed behavior is much better predicted by the Bayes-Nash model. The double auction is highly inefficient – only 50% of the gains from trade materialize – and prices differ significantly and substantially from their rational expectation levels. We also investigate whether free-form communication enhances the performance of the continuous double auction. We find that cheap-talk communication has a positive effect in bilateral settings, but it has no effect or even a negative effect in larger, more competitive markets. The chat data can be classified according to a small number of communication protocols, which either reflect endogenously emerging institutions (negotiations, auctions, or posted prices), disclosure of private information, or inconsequential messages unrelated to trading (babbling). Truthful disclosure is stable in bilateral settings but breaks down in large groups with adverse effects for efficiency. Our findings contrast with those of previous double auction experiments along a number of dimensions: (i) with private and common values, the informational and allocative efficiency of the double auction is low, (ii) more competition is beneficial only with private values, has no effect with private and common values, and lowers efficiency when communication is possible, and (iii) communication is beneficial only in bilateral settings but has no, or even a negative, effect in larger groups. Maria Bigoni (Università di Bologna), Jan Potters, Giancarlo Spagnolo: Imperfect monitoring, flexibility and collusion: experimental evidence Flexibility - the ability to react fast to others’ choices - facilitates collusion by reducing the gains a deviating party can secure before opponents react. Under imperfect monitoring, flexibility may also hinder collusion by inducing players to react too early, after observing too few noisy signals. Frequent mistakes may then erode the value of collusion and lead agreements to unravel. The interaction between these forces predicts a non-monotonic relationship between flexibility and collusion. We implement in the laboratory an indefinitely repeated 2x2 Cournot game where players only observe noisy price information. Across treatments we vary the number of periods firms have to wait to change output. The experimental results lend credence to the theoretical predictions. Collusion is supported more easily at the intermediate level of flexibility. Natalia Montinari (Max Planck Institute, Jena), Gerald Eisenkopf, Simon Gächter: Incentive spillovers on voluntary cooperation We investigate the impact of different incentives on simultaneous public good contributions in economically unrelated games. The results show that tournaments, but not simple piece rate schemes, reduce contributions by about 40%. However, the effect is brittle. The incentivized elicitation of beliefs eliminates the effect. It also vanishes immediately if the games are played sequentially rather than simultaneously. We conclude that designers of competitive incentive schemes must pay close attention to the framing of the scheme in order to avoid negative spillovers.

  23  

RETAILING Frago Kourandi (Telecom ParisTech), Nikolaos Vettas: Dynamic vertical contracting with learning-by-doing We analyze a dynamic vertical contracting framework with learning-by-doing production technologies. The downstream retailer is a large player that sets the contract terms and the upstream product differentiated manufacturers gain proficiency through the repetition of their production. We study the dynamic interactions in the vertical chain and find that exclusive dealing may arise in equilibrium when the products are close substitutes and be welfare enhancing. Johannes Muthers (ZEW Mannheim), Matthias Hunold: Resale Price Maintenance: Hurting Competitors, Consumers and Yourself Improving retailers’ incentives for service is a prominent efficiency defense of resale price maintenance (RPM). We investigate the incentives of symmetric manufacturers to use RPM when selling products through common retailers that advice consumers searching for the best match. We show that the possibility to use RPM can create a dilemma for manufacturers. If retailing competition is strong and retailers’ ability to bias demand substantial, a manufacturer wants to introduce minimum RPM to incentivize retailers to favor sales of her product. However, other manufacturers follow into RPM. In the symmetric equilibrium, advice is unbiased, but retail margins and consumer prices are higher than without RPM. In turn, manufacturers’ profits and social welfare are lower. This challenges the service argument as an efficiency defense for RPM. Simona Fabrizi (Massey University, New Zealand), Steffen Lippert, Clemens Puppe, Stephanie Rosenkranz: Suggested retail prices with downstream competition We analyze a manufacturer's choice whether to recommend retail prices to downstream retailers or to use resale price maintenance, when consumers have reference-dependent preferences: Consumers suffer (benefit) from loss aversion (gain proneness) whenever experiencing retail prices set above (below) their recommended level. In equilibrium, the upstream manufacturer prefers suggested retail prices to resale price maintenance as long as consumers are sufficiently gain-prone and downstream retailers are perceived as sufficiently differentiated. Two types of conflict arise among private and social preferences: either (i) upstream manufacturers choose not to recommend retail prices when it would have been consumers’ surplus enhancing to do so, or (ii) upstream manufacturers choose to recommend retail prices when it would have been consumers’ surplus enhancing not to do so. GAMES AND CONTESTS Skerdilajda Zanaj (University of Luxembourg), Jean J. Gabszewicz, Didier Laussel, Tanguy van Ypersele: Market games in successive oligopolies This paper introduces a new approach of successive oligopolies. We rely on market games ‡ la Shapley-Shubik to examine how successive oligopolies operate between downstream and upstream markets when the input price is determined by the action of all firms, downstream and upstream ones. This approach, differs from the classical one since it allows to consider downstream firms who exercise market power both in the downstream and in the upstream market. We perform a comparison of the market outcome with each regime and a welfare

  24  

analysis. Daniela Tellone (Facultés Universitaires Saint-Louis, Bruxelles), Wouter Vergote: Endogenous network formation in Tullock contests In many contests competing agents (politicians, firms, soccer teams, etc.) form cooperative alliances. However, when agents share valuable re- sources or information they increase not only their own value for the prize but also their rivals’ valuations. Hence it is not obvious that competitors decide to cooperate. We study the endogenous formation of networks of cooperation in the Tullock contest. We find that the network formation process can act as a barrier to the entry to the contest insofar as there can exist pairwise stable group dominant networks that hamper the participation of some competitors. Moreover, we show that the total welfare can be maximized under pairwise stable dominant group networks rather than the complete one. Furthermore, it may happen that the player who is driven out is the one with the highest ex-ante valuation. Caterina Colombo (Università di Ferrara), Alessandra Chirco, Marcella Scrimitore: Quantity competition, endogenous motives and behavioral heterogeneity The paper shows that strategic quantity competition can be characterized by behavioral heterogeneity, once competing firms are allowed in a pre-market stage to optimally choose the behavioral rule they will follow in their strategic choice of quantities. In particular, partitions of the population of identical firms in profit maximizers and relative profit maximizers turn out to be deviation-proof equilibria, both in simultaneous and sequential game structures. Our findings that in a strategic framework heterogeneous behavioral rules are consistent with individual incentives provides a game-theoretic micro-foundation of heterogeneity. Marcella Scrimitore (Università del Salento): Profitability in Cournot and Bertrand mixed markets under endogenous objectives We examine a differentiated oligopoly in which a public firm and a number of private firms compete under both quantity and price competition. In this framework, the public firm is strategically allowed by the government to weight its own profits versus social welfare in its objective function, being potentially partially privatized. We show that the higher profitability of Bertrand competition stated by Ghosh and Mitra (2010) in a mixed market is contingent on the assumption that the public firm maximizes pure social welfare. Under endogenous objectives, all firms gain higher profits under Cournot, as standard in a market with all private firms. Higher profits under Bertrand are gained only by the private firm in a duopoly: in this situation the opposite profit ordering of the two firms leads to equivalent aggregate profits in the Bertrand and Cournot models. CONTRACTS II Annalisa Luporini (Università di Firenze), Clara Graziano: Optimal delegation when the large shareholder has multiple tasks The paper analyzes the optimal delegation and ownership structure in a setting where the initial owner hires a manager to run the firm and to gather information on investment projects. The owner has two tasks: monitoring the manager and supervising project choice. Profits

  25  

depend on both tasks and optimality would require different ownership structures. A large fraction of shares is required to provide the owner with the proper incentive to monitor but a small fraction is necessary to induce her to delegate project choice to the manager. We show that delegation and monetary incentives coexist and complement each other in the optimal contract. The initial owner by allocating control rights over project choice and by using optimal compensation scheme is able to retain full ownership of the firm and, at the same time, to provide strong incentives to the manager. Full ownership comes at the price of distorting monitoring and the resulting firing policy. This distortion is alleviated by the presence of a sizeable severance pay in the compensation package. Elisabetta Iossa (U. di Roma Tor Vergata & Brunel U.), David Martimort: The Theory of Incentives Applied to the Transport Sector Building upon Iossa and Martimort (2008), we study the main incentive issues and the form of optimal contracts for Public Private Partnerships (PPPs) in transports. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses unobservable efforts in infrastructure and service quality. We begin by analyzing the effect on incentives and risk transfer of bundling building and operation into a single contract. We consider the factors that affect the optimal allocation of demand risk and their implications for the choice of contract length. We discuss the dynamics of PPP contracts and how the risk of regulatory opportunism affects contract design and incentives. Regine Oexl (Università di Padova): Trilateral contract and the hold-up problem We present a novel solution for the hold up problem, when more than two parties are involved. The case we consider is a company selling identical products to two buyers that have a common interest in inducing the seller to make a quality enhancing investment. We show that a trilateral contract may provide the correct incentives to restore efficiency. The contract induces a coalition proof Nash equilibrium and holds under complete as well as incomplete information. The extension to more than two buyers is straightforward. EXPERIMENTS III Paola Valbonesi (Università di Padova), Maria Bigoni, Giancarlo Spagnolo: Sticks and carrots in procurement: an experimental exploration We study differently framed incentives in dynamic laboratory buyer-seller relationships with multi-tasking and endogenous matching. The experimental design mitigates the role of social preferences to simulate a business-to-business environment. Absent explicit incentives, effort is low in both tasks. Their introduction boosts efficiency increasing significantly effort in the contractible task, mildly crowding it out in the non-contractible one, and increasing buyer surplus. Bonuses and penalties are equivalent for efficiency and crowding-out, but different in distributional effects: sellers’ surplus increases with bonuses as buyers’ offers become more generous. Buyers tend to prefer penalties, which may explain why they are widespread in procurement.

  26  

Iván Barreda-Tarrazona (University Jaume I, Castellon), Nikolaos Georgantzís, Constantine Manasakis, Evangelos Mitrokostas, Emmanuel Petrakis: Endogenous managerial compensation contracts in experimental duopolies In a Cournot duopoly, we experimentally investigate whether firms’ owners compensate their managers with contracts combining own profits and revenues or own profits and relative performance. We also explore the effects of the selected contracts on the output levels set by managers. In line with the theory, Relative Performance contracts are chosen more frequently than Profit Revenue contracts. Nevertheless, Profit-Revenue-compensating owners weight own profits more than Relative Performance-compensating owners. This is in line with the theory, but only for asymmetric contract configurations. Finally, managers set quantities in an excessively pro-competitive way. Luigi Luini (Università di Siena): Two competitive processes of market selection: Darwin and Lamark in the lab Two different theories of competition are compared in the laboratory to ascertain the difference in producing the exit of one firm from a duopoly market. Under the common experimental condition of inertial demand: 1) in the Darwinian competition the earlier (vs later) exit depends on the intensity of price competition, 2) in the Lamarckian competition the exit process is associated with a over(under)investment in (un)successful innovation. INNOVATION AND ANTITRUST ���Emanuele Tarantino (Università di Bologna), Bernhard Ganglmair: Patent disclosure in standard setting In this paper we analyze the timing of patent disclosure by a patent holder during the process of industry standard setting. In a non-cooperative model of communication with asymmetric information we endogenize patent holdup to study the effect of patent strength, the productivity of industry standard setting, and a standard setting organization’s IPR disclosure rules. We find that late disclosure is more likely in more productive standard setting organizations and in less competitive industries. The enforcement of antitrust laws against deceptive conduct in standard setting organizations results in earlier disclosure. Giovanni Immordino (Università di Salerno), Michele Polo: Antitrust Policy, Legal Standards and Innovative Activity This paper analyzes optimal legal standards and enforcement policies in antitrust. We consider both traditional industries where firms have a given set of feasible practices to choose from and an innovative one where they can enlarge the set of practices by investing in research. For traditional industries and unlimited fines a discriminating rule dominates and implements the first best. For innovative industries and unlimited fines the need to sustain investment in research leads to select a per-se legality rule when the probability of social harm is low, reverting to a discriminating rule when the probability is higher. In this case, only type-I errors are reduced to limit over-deterrence and sustain investment in research. Conversely, with limited liability, for traditional industries a discriminating rule is dominant if social harm is unlikely, and type-II errors are reduced to improve marginal deterrence, while a higher probability of social harm leads to adopt per-se illegality. Finally, limited liability and an innovative industry leads - for increasing likelihood of social harm – first to per-se legality, then to a discriminating rule joined with a more symmetric reduction in both errors and finally to per-se illegality.

  27  

Bernhard Ganglmair ��� (University of Texas), Luke Froeb, Gregory Werden: Patent hold up and antitrust: how a well-intentioned rule could retard innovation. Licensing technology essential to a standard can present a hold-up problem. After designing new products incorporating a standard, a manufacturer could be confronted by an innovator asserting patent rights to essential technology. A damages remedy provided by antitrust or some other body of law solves this hold-up problem, inducing the socially optimal level of investment by the manufacturer, but it can reduce the innovator’s licensing revenue and thereby retard innovation. The availability of an ex post damages remedy similarly alters the licensing terms in ex ante bargaining, with the result that fewer socially beneficial R&D projects are undertaken. MARKET FORECLOSURE Alberto Cavaliere (Università di Pavia), Valentina Giust, Mario Maggi: Efficient mechanism for access to storage with imperfect competition in gas markets Scarce storage capacity and distortions in access to gas storage are considered a cause of market foreclosure in liberalized gas markets. We consider rules currently adopted in Europe for storage rationing and pro- pose efficient rationing mechanism based on the value of storage, when other flexibility inputs are available. Firstly we analyze productive efficiency issues neglecting vertical restraints and strategic behaviour in the final market for gas. Then we assume that the downstream market for gas is characterized by imperfect competition, due to the existence of a dominant firm and a competitive fringe of small suppliers. We consider both productive efficiency and allocative efficiency issues in a two stage model with alternative rationing mechanism for storage capacity, comparing regulated storage tariffs - coupled with a centralized rationing mechanism- with storage auctions. Finally we propose a welfare analysis where the allocation of storage chosen by a benevolent dictator is compared with the allocation resulting from previous mechanisms. We can then discuss the opportunity of auctioning gas storage on welfare grounds, according to the availability of storage substitutes and the share of storage capacity assigned to the competitive fringe. Yossi Spiegel (Tel Aviv University): Backward integration, forward integration, and vertical foreclosure I show that partial vertical integration may either alleviates or exacerbate the concern for vertical foreclosure and I examine the circumstances under which it enhances or harms welfare relative to full vertical integration. Markus Reisinger (University of Munich), Emanuele Tarantino: Vertical integration with complementary inputs We analyze the profitability and welfare consequences of vertical integration when down- stream firms deal with suppliers of complementary intermediate goods that exert market power. We show that the results in this setting are markedly different from those of the received literature that deals only with substitute intermediate goods. In particular, vertical integration is not necessarily profitable since the integrated firm faces the problem that the complementary input producer expropriates the higher profits earned by the integrated chain on the downstream market. Interestingly, this effect is particularly strong is the integrated firm is very efficient. We also show that if vertical integration is profitable, foreclosure of downstream rivals is no longer the optimal strategy of the integrated firm. Instead, the

  28  

integrated firm may set prices even below marginal costs thereby rendering vertical integration pro-competitive, which has profound consequences on antitrust policy. THE ECONOMICS OF R&D Maria Luisa Mancusi (Università Bocconi), Andrea Vezzulli: R&D and credit rationing in SMEs This paper studies the effect of credit rationing on the decision to invest in Research and Development (R&D) and on the level of R&D investment using survey data and complete financial accounting data on a large number of Italian manufacturing Small and Medium Enterprises (SMEs). We use a direct indicator of credit rationing and employ an econometric approach allowing for the existence of credit rationing to be endogenously determined. We find that, ceteris paribus, credit rationing has a significantly negative effect on the probability to set up R&D activities and on the level of R&D spending, conditioned on the R&D decision. We also find that ignoring the endogeneity of the credit rationing indicator and the sample selection originating from firms not interested in doing R&D induces a strong upward bias in the estimated effect. We then show that the overall reduction in R&D spending is largely to be associated with the reduction in the likelihood to do R&D, rather than with a reduced level of investment. Finally, but importantly, firms that are both young and small appear to have additional difficulties in obtaining debt financing and display a higher probability of being subject to credit rationing, even after controlling for both size and age. Steffen Lippert (Massey University, New Zeland), Francis Bloch, Simona Fabrizi: Learning, Preemption and Cooperation in R&D Races This paper analyzes a research race with learning. The research process is divided into an experimental phase, where the teams receive signals about the cost of the project, and a research phase where they draw the innovation after investment. We characterize the equilibrium of the investment timing game with private and common values, private and public signals. There are two sources of inefficiencies: duplication and excess momentum due to preemption. We analyze cooperation schemes and show that a large part of the surplus should accrue to the unsuccessful team. Cooperation allows to reach efficient outcomes in the common values case, but not necessarily in the private values case. Andrea Conte (European Commission): Knowledge investments and innovation. Insights on the determinants and effects of reforms This paper will try to identify different reform strategies pursued by EU Member States in support of the "knowledge economy", namely policies enhancing a country’s performance in the area of R&D, innovation and education. In particular, this paper will provide an empirical assessment of the factors which affect the propensity of a country to engage into structural reforms by looking at the MICREF database. Among these factors, this chapter will look at the role played by R&D and education-related variables, governance indicators and macroeconomic conditions. The objective is to understand the extent and timing of the reform measures adopted by Member States. In doing so, the aim of this chapter is to contribute to design a more effective policy framework in the context of the renewed Europe 2020 strategy.

  29  

EMPIRICAL IO Andrea Günster (ETH Zürich), Martin Carree, Mathijs van Dijk: Do cartels undermine economic efficiency? Cartel existence might evoke three types of inefficiencies according to economic theory: allocative, dynamic and x-inefficiency. We estimate the profitability of international cartels thereby testing for the allocative inefficiency hypothesis. Second, we assess dynamic inefficiency measured by considering investments into R&D. Third, we asses x-inefficiency by considering (labor) productivity. Our research analyzes firm-specific financial data for a sample of 143 firms involved in 50 European cartel infringements that took place between 1983 and 2004 involving internationally operating firms. Our findings support increased profitability showing a significant rise in return on assets during cartel years. Ringleaders are more profitable on average than other cartel members. R&D expenditures over sales and assets measuring dynamic efficiency decrease during the cartel period. Productive efficiency – measured as sales over employees – declines during the cartel phase indicating a ‘quiet life’ effect. Giovanni Tabacco (University of East Anglia): What does market structure reveal? Empirical evidence from the US airline industry Most of the industrial organization literature on airlines has neglected competitive forces which have generated industrial market structure. In addition, the majority of competition models of this literature assume homogeneous products or at most symmetric product differentiation. This paper, in contrast to previous work, shows the underlying competitive process in the airline industry inferred by investigation of market structure, as well as how product differentiation drives concentration. The empirical analysis is grounded on Sutton (1991) and Nocke (2000) endogenous sunk costs model, finding that i) there is a weak negative relation between market size and concentration; ii) there is evidence of a lower bound to concentration substantially above zero (non fragmentation); c) we have monopolies even in very large route markets, hence we have a sharp upper bound to concentration invariant to market size. Therefore, the empirical evidence suggests that the structure of airline city pair markets is mainly driven by competition in quality through endogenous sunk costs – namely, route structure and advertising – as well as product proliferation. Maria Letizia Giorgetti (Università di Milano), Gianni Amisano, Maria Luisa Mancusi: Unveiling the effects of sunk costs: barrier to entry vs. commitment. The sunk costs are generally considered a barrier to entry. In some cases if the sunk investment required to entry are huge, the entry becomes more risky and the sunk costs could be a right commitment that induce incumbents to be less aggressive. If sunk costs are an " encouragement" to entry, the Cabral-Ross effect takes place. We study the impact of sunk cost on entry in the ATC3 level pharmaceutical submarkets in USA in the period 1988-1998. We relate the variation in the effect of sunk costs on entry to some observable theoretical important variable that make predation by incumbents less or more likely. Among these regressors we control for entrant size compared to incumbent size and the level of competition by an entrant with incumbents. The Cabral-Ross effect is greater when, once we observe a positive impact of sunk costs on entry, the entrant is into direct competition with the incumbents. In these cases then incumbents reaction should be more likely but if the commitment role of sunk costs prevails on the entry barrier role, this implies a greater Cabral-Ross effect.

  30  

LIST OF PARTICIPANTS Alvisi Matteo m.alvisi@unibo.it Angelè Giuseppe giuseppe.angele@unisalento.it Argentesi Elena elena.argentesi@unibo.it Barreda Tarrazona Iván Ivan.Barreda@eco.uji.es Benassi Corrado corrado.benassi@unibo.it Berg Petter pbe.eco@cbs.dk Bigoni Maria maria.bigoni@unibo.it Bilancini Ennio ennio.bilancini@unimore.it Boffa Federico federico.boffa@unimc.it Bucci Valeria valeria.bucci@unisalento.it Cambini Carlo carlo.cambini@polito.it Castriota Stefano stefano.castriota@unipg.it Cavaliere Alberto alberto.cavaliere@unipv.it Cellini Roberto cellini@unict.it Chiou Jing-Yuan jychioua@gmail.com Chirco Alessandra alessandra.chirco@unisalento.it Colombo Caterina caterina.colombo@unife.it Conte Andrea Andrea.CONTE@ec.europa.eu Corvaglia Francesca francesca.corvaglia@unisalento.it Daniele Grassi daniele.grassi@unisalento.it de Lamirande Patrick Patrick_deLamirande@cbu.ca De Santis Simona simona.desantis@unisalento.it Di Cintio Marco marco.dicintio@unisalento.it Di Comite Francesco francesco.dicomite@uclouvain.be; Emanuele Grassi emanuele.grassi@unisalento.it Fabrizi Simona S.Fabrizi@massey.ac.nz Filistrucchi Lapo L.Filistrucchi@uvt.nl Gaertner Dennis dennis.gaertner@uni-bonn.de Gandal Neil gandal@post.tau.ac.il Ganglmair Bernhard ganglmair@utdallas.edu Giorgetti Maria Letizia Letizia.Giorgetti@unimi.it Goeree Jacob jacob.goeree@gmail.com Guenster Andrea andrea.guenster@ip.gess.ethz.ch Guigou Jean Daniel jean-daniel.guigou@uni.lu Heijnen Pim p.heijnen@rug.nl; Hinloopen Jeroen J.Hinloopen@uva.nl Immordino Giovanni giimmo@tin.it Iossa Elisabetta elisabetta.iossa@uniroma2.it Jansen Jos jansen@coll.mpg.de Kalayci Kenan k.kalayci@uq.edu.au Karlinger Liliane lilianegk@gmail.com; Kourandi Frago kourandi@aueb.gr; Ledezma Ivan ivan.ledezma@dauphine.fr Levaggi Rosella levaggi@eco.unibs.it; Levy Nadav nadavlevy3@gmail.com Lezzi Emanuela e.lezzi@uea.ac.uk Lippert Steffen steffen.lippert@gmail.com Longo Roberta R.Longo@leeds.ac.uk

  31  

Luini Luigi luini@unisi.it Luporini Annalisa annalisa.luporini@unifi.it Mancusi Maria Luisa marialuisa.mancusi@unibocconi.it Manenti Fabio fabio.manenti@unipd.it Martina Riccardo riccardo.martina@unina.it Minniti Antonio antonio.minniti@unibo.it Minzyuk Larysa larissa.minzuk@unisalento.it Montinari Natalia montinari@econ.mpg.de Muthers Johannes johannes.muthers@uni-wuerzburg.de Oexl Regine regine.oexl@unipd.it Palestini Arsen arsen.palestini@uniroma1.it Panico Claudio claudio.panico@unibocconi.it Paolini Dimitri dpaolini@uniss.it Pezzolla Emilia emilia.pezzolla@unisalento.it Piccolo Salvatore salvatore.piccolo@unina.it Rondi Laura laura.rondi@polito.it Ruffle Bradley bradley@bgu.ac.il Schuett Florian f.schuett@uvt.nl Scrimitore Marcella marcella.scrimitore@unisalento.it Shahriar Quazi qshahria@mail.sdsu.edu Shelegia Sandro sandro.shelegia@univie.ac.at Shestakova Natalia natalia.shestakova@gmail.com Spagnolo Giancarlo giancaspagnolo@yahoo.com Spiegel Yossi spiegel@post.tau.ac.il Tabacco Giovanni G.Tabacco@uea.ac.uk Tarantino Emanuele emanuele.tarantino@unibo.it Tellone Daniela tellone@fusl.ac.be Valbonesi Paola paola.valbonesi@unipd.it Weidenholzer Simon simon.weidenholzer@univie.ac.at Wesenbeeck Cornelia cwesenbeeck@sow.vu.nl Wismer Sebastian Sebastian.Wismer@uni-wuerzburg.de Zanaj Skerdilajda skerdilajda.zanaj@uni.lu Zhang Haoyu haoyu.zhang@sydney.edu.au Zhang Jingjing jingjing.zhang@uzh.ch