Investigating the Alternating Periods Monopoly Arthur L
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Florida State University Libraries Electronic Theses, Treatises and Dissertations The Graduate School 2004 Investigating the Alternating Periods Monopoly Arthur L. Zillante Follow this and additional works at the FSU Digital Library. For more information, please contact [email protected] THEFLORIDASTATEUNIVERSITY COLLEGE OF SOCIAL SCIENCES INVESTIGATING THE ALTERNATING PERIODS MONOPOLY By: ARTHUR L ZILLANTE A dissertation submitted to the Department of Economics in partial fulfillment of the requirements for the degree of Doctor of Philosophy Degree Awarded: Fall Semester, 2004 The members of the Committee approve the dissertation of Arthur L. Zillante defended on August 17, 2004. ____________________________ R. Mark Isaac Professor Directing Dissertation ____________________________ Joe Cronin Outside Committee Member ____________________________ Tom Zuehlke Committee Member ____________________________ Tim Salmon Committee Member The Office of Graduate Studies has verified and approved the above named committee members. ii Acknowledgements Special thanks to the John and Hallie Quinn Research Fellowship for research support during mylastthreeyearsattheFloridaStateUniversity. The Irv and Peggy Sobel Award and the Charles Rockwood award also provided financial assistance. I would also like to thank Bob Lemke of Krause Publications for answering my questions about minute details of the baseball card industry and Jeremy Hobbes of Collector’s Attic for providing information on some of the missing baseball card product release dates. iii Table of Contents List of Tables v List of Figures vi Abstract vii 1. INTRODUCTION 1 2. THEORETICAL MODELS 3 3. INDUSTRY OVERVIEW 13 4. EMPIRICAL RESULTS 35 5. EXPERIMENTAL TEST 44 6. CONCLUSION 68 Appendix A. Instructions for the Experiment 70 Appendix B. Sample Experiment Screen 75 Appendix C. Human Subjects Approval 79 Appendix D. Subject Informed Consent Form 81 References 83 Biographical Sketch 87 iv List of Tables 1 IndustrySummaryStatistics,AllBrands.................... 29 2 IndustrySummaryStatistics—LowPriceBrandsOnly............ 30 3 Topps’FinancialInformation.......................... 32 4 DurationAnalysisResults............................ 40 5 Numberoftimesaparticularmarketstructurewasachieved ......... 51 6 Individualresultsforsession4N......................... 55 7 Individualresultsforsession4I......................... 56 8 Individualresultsforsession3N......................... 57 9 Individualresultsforsession3I......................... 57 10 Payoffs to following an APM strategy given a specificnumberofsimpleNash players....................................... 59 11 Signals sent indicating recognition of the APM for session 4N ......... 62 12 Signals sent indicating recognition of the APM for session 4I ......... 63 13 Signals sent indicating recognition of the APM for session 3N ......... 63 14 Signals sent indicating recognition of the APM for session 3I ......... 64 15 Simple Signals Table for session 4N . .................... 65 16 Simple Signals Table for session 4I ........................ 66 17 Simple Signals Table for session 3N . .................... 66 18 Simple Signals Table for session 3I ........................ 67 v List of Figures 1 ManufacturerBrandsbyYear,1988-2000.................... 25 2 ManufacturerReleasesbyYear,1988-2000................... 25 3 IndustryAggregates,ReleasesandBrands,1989-2000............. 28 4 Time series of baseball card releases by manufacturer from 10/11/2001 — 5/1/2002...................................... 28 5 Time series of baseball card releases by manufacturer from 5/1/2002 — 11/27/2002 29 6 The hazard rate for all releases using the best response (BR) and halfs defin- itions........................................ 39 7 The estimated hazard rate for low-price brands using the best response (BR) and halfs definitions................................ 41 8 Hazardratesforthebenchmarkdatasets.................... 43 9 Timeseriesoftotalnumberofentrantsfortwo4-subjectgroups....... 53 10 Timeseriesoftotalnumberofentrantsfortwo3-subjectgroups....... 54 11 A sample message sending screen for the experiment .............. 76 12 Asamplechoicescreenfortheexperiment................... 77 13 A sample payoff displayscreenfortheexperiment............... 78 14 HumanSubjectsApprovalform......................... 80 vi Abstract An oft-neglected pattern of behavior in the industrial organization literature occurs when firms time the release of their products so that they are not released on the same date. Because of the potentially collusive nature of this practice, there may be legitimate antitrust concerns. This paper presents a model of this behavior which will be called the alternating periods monopoly (APM). Industry characteristics that increase the likelihood of the APM are developed and conditions are derived in a stochastic demand environment to show when firms would prefer to use the APM to other sustainable methods of collusion. A detailed description of the post World War II baseball card industry is presented using the standard industrial organization structure-conduct-performance paradigm as a guide. The characteristics of the baseball card industry closely parallel those characteristics dis- cussed in the theoretical model. This parallel between the theory and the industry suggests that data from the baseball card industry may be used to determine if the manufacturers are using an APM. Current methods of detecting potentially collusive behavior are discussed in the fourth chapter. The data from the baseball card industry do not meet the assumptions needed to effectively use the current methods, rendering them useless in this particular industry. I propose a new empirical test based on duration analysis to determine if firms are using the APM. Using the time between product release data from the baseball card industry, I estimate hazard rates that show positive duration dependence. I also estimate hazard rates for data sets constructed using the same parameters (number of releases and number of days over which those releases occur) as the baseball card industry, but forcing the firms toreleaseinwaysthatwouldnotbeconsideredtomatchtheAPM.Thehazardratesfor the constructed data show negative duration dependence, which provides evidence that the data from the baseball card industry is consistent with an APM hypothesis. The fifth chapter of the dissertation uses an economic experiment to determine if the APM can arise without free-form communication between subjects. The existence of practices that facilitate collusion has generated a large discussion in the antitrust arena. This experiment allows subjects to communicate their future intentions of entering a market in a particular time period by means of a binary signal, where 1 signals enter and 0 signals exit. The overwhelming evidence provided by the experiment is that subjects cannot use the binary signals to coordinate on an APM, even though it is clear that some subjects are both signaling a willingness to participate in an APM and making entry decisions consistent with an APM. These experiments show that the practice of sending non-binding communication is not enough to foster collusion among all subjects, although the treatments with fewer subjects and higher costs show some evidence that an APM may arise under these conditions. vii CHAPTER 1 INTRODUCTION Collusion by firms has long been recognized as an impediment to an efficiently functioning market system. As such, a wealth of literature exists on the topic. Current research on collusive behavior can be classified into five broad categories based upon research technique: case study, empirical/econometric, theoretical, experimental, and computational. Although I have separated the techniques into separate categories, most studies utilize a combination of techniques. This dissertation discusses a particular form of collusion, the alternating periods monopoly (APM), and utilizes all of the techniques mentioned above except for computational methods. The APM occurs when only one firm is active in the market per period, and then firms alternate turns being the active firm in the market. Although such a rotation scheme is not necessarily evidence of explicit collusion, it could be used by firms as a collusive scheme. The primary reason firms may choose to use the APM is that it removes intra-period competition among firms. Perhaps the most famous use of a collusive strategy similar to the APM is the “phases of the moon” bid rotation scheme employed in the electrical switchgear industry in the middle of the 20th century. According to Scherer (1970), this scheme involved: ...dividing the United States into four quadrants, assigning four sellers to each quadrant, and letting the sellers in a quadrant rotate their bids. A ‘phases of the moon’ system was used to allocate low-bidding privileges in the high voltage switchgear field, with a new seller assuming low-bidder priority every two weeks. (Scherer, 1970, pgs. 159-161) To my knowledge little work has been done on the APM outside of the auction litera- ture, as typical economic analysis of timing problems in production center around one of the following: capturing first-mover advantage in the industry, the trade-off between delay- ing release to produce a higher quality product or releasing early to earn less-discounted profits, and the obsolescence problem. Any attention given to the APM outside of the auc- tion literature is typically fleeting1. An exception is Herings, Peeters, and Schinkel (2001) (HPS). Using an algorithm developed