nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒01‒02
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Virtual Capacity and Tacit Collusion By Christian Schultz
  2. The Effects of Product Bundling in Duopoly By Reisinger, Markus
  3. Vertical Product Differentiation, Market Entry, and Welfare By Reisinger, Markus
  4. Two-Sided Platforms: Pricing and Social Efficiency By Andrei Hagiu
  5. Two-Sided Platforms: Pricing and Social Efficiency - Extensions By Andrei Hagiu
  6. Product market reforms and productivity: a review of the theoretical and empirical literature on the transmission channels By Gaëtan Nicodème; Jacques-Bernard Sauner-Leroy
  7. Franchise Bidding in the Water Industry – Auction Schemes and Investment Incentives By Urs Meister
  8. Enhancing Efficiency of Water Supply – Product Market Competition versus Trade By Reto Foellmi; Urs Meister
  9. A General Analysis of Sequential Merger Games with an Application to Cross-Border Mergers By Alberto Salvo
  10. Monopoly Pricing under Demand Uncertainty: Final Sales versus Introductory Offers By Volker Nocke; Martin Peitz
  11. Platform Ownership By Volker Nocke; Martin Peitz; Konrad Stahl
  12. On Price-Taking Behavior in Asymmetric Information Economies By Richard McLean; James Peck; Andrew Postlewaite
  13. Competitive balance and gate revenue sharing in team sports By Késenne Stefan; Szymanski S.
  14. Price squeezes in a regulatory environment By Bouckaert Jan; Verboven Frank
  15. Voluntary R&D cooperation in experimental duopoly markets By Suetens S.
  16. Piracy and Competition By Paul Belleflamme; Pierre Picard
  17. Selling a Cheaper Mousetrap: Entry and Competition in the Retail Sector By Emek Basker
  18. Incentives for Sabotage in Vertically Related Industries By David Mandy; David E. M. Sappington
  19. Executive Compensation and Product Market Competition By Vicente Cuñat; Maria Guadalupe
  20. Corporate Ownership Structure and Performance in Europe By Jeremy Grant; Thomas Kirchmaier
  21. Snow Removal Auctions in Montreal: Costs, Informational Rents, and Procurement Management By Véronique Flambard; Pierre Lasserre; Pierre Mohnen
  22. STRATEGIC DELEGATION IN OLIGOPOLY: THE MARKET SHARE CASE By Jansen,Thijs; Lier,Arie,van; Witteloostuijn,Arjen,van
  23. Europeanization of National Administrations:an Assessment of the Italian Antitrust Authority By Dario Barbieri

  1. By: Christian Schultz (Institute of Economics, University of Copenhagen)
    Abstract: In several European merger cases competition authorities have demanded that the merging firm auctions of virtual capacity. The buyer of virtual capacity receives an option on an amount of output at a pre-specified price, typically equal to marginal cost. This output is sold in the market in competition with the merging firm. The paper compares sale of physical and virtual capacity by the merging firm and shows that virtual capacity makes tacit collusion easier. The reason is that the auction price on virtual capacity increases, when the merging firm reduces production in order to increase the output price. This reduces its temptation to deviate.
    Keywords: virtual capacity; tacit collusion; anti-trust; mergers; competition policy
    JEL: L40 L41 D44
    Date: 2004–12
  2. By: Reisinger, Markus
    Abstract: This paper studies the incentives for multiproduct duopolists to sell their products as a bundle. It is shown that contrary to the monopoly case bundling may reduce profits and increase consumer rent. This is the case if consumers' reservation values are negatively correlated. The reason is that bundling reduces consumer heterogeneity and makes price competition more aggressive. This effect can dominate the sorting effect that is well known for the monopoly case. Firms are in a prisoner's dilemma situation because they would be better off without bundling. Despite the lower prices a welfare loss occurs because some consumers do not buy their prefered product which results in distributive inefficiency. If firms can influence the correlation by choosing their location in the product range they try to avoid negative correlation and choose minimal differentiation in one good.
    JEL: L13 D43
    Date: 2004–12
  3. By: Reisinger, Markus
    Abstract: This paper analyses a model of vertical product differentiation with one incumbent and one entrant firm. It is shown that if firms can produce only one quality level welfare in this entry game can be lower than in monopoly. This is the case if qualities are strategic complements because the incumbent may distort its quality downwards. If firms can produce a quality range and practice non-linear pricing welfare in case of entry deterrence is higher than in monopoly because the incumbent enlarges its product line. If entry is accommodated consumer rent increases but the consequences on welfare are ambiguous.
    JEL: L65 L13 D43
    Date: 2004–12
  4. By: Andrei Hagiu
    Abstract: This paper models two-sided market platforms, which connect third-party suppliers (developers) of many different products and services to users who demand a variety of these products. From a positive perspective, our model provides a simple explanation for the stark differences in platform pricing structures observed across a range of industries, including software for computers and an increasing number of electronic devices, videogames, digital media, etc. We show that the optimal platform pricing structure shifts towards making a larger share of profits on developers when users have a stronger preference for variety and also when there is uncertainty with respect to the availability, or a limited supply, of third-party (high-quality) products. From a normative perspective, we show that the increasingly popular public policy presumption that open platforms are inherently more efficient than proprietary ones -in terms of induced product diversity, user adoption and total social welfare- is not justified in our framework. The key welfare tradeoff is between the extent to which a proprietary platform internalizes business-stealing, product diversity and indirect network effects and the two-sided deadweight loss it creates through monopoly pricing.
    Date: 2004–12
  5. By: Andrei Hagiu
    Abstract: This paper contains two extensions of the modelling framework proposed by Hagiu (2004a) for studying two-sided market platforms. First, introducing vertical differentiation among both users and developers, we show that the optimal platform pricing structure continues to shift towards making a larger share of profits on developers relative to users when the latter have a stronger preference for product variety. Also, when developers are vertically differentiated, a two-sided proprietary platform may induce socially excessive product variety, a scenario which never occurs in the horizontal differentiation model. Second, we introduce developer investment in product quality and show that a two-sided proprietary platform may be more socially efficient than an open platform in terms of the product quality it induces, even when when it is less efficient with respect to the level of product variety. In this context we also determine the profit-maximizing proportional variable fee charged by a proprietary platform to developers and show that it is is increasing in the degree of developer risk-aversion and is used by the platform to trade product variety for product quality when developers' marginal cost of quality provision increases.
    Date: 2004–12
  6. By: Gaëtan Nicodème (Solvay Business School & European Commission); Jacques-Bernard Sauner-Leroy (Banque de France)
    Abstract: Product market reforms are structural reforms of microeconomic type that aim at improving the functioning of product markets by increasing competition amongst producers of goods and services. Theoretical models suggest that regulation and reforms which liberalise or improve the functioning of markets can positively affect productivity through three different channels, namely a reallocation of scarce resources (allocative efficiency), an improvement in the utilisation of the production factors by firms (productive efficiency) and an incentive for firms to innovate to move to the modern technology frontier (dynamic efficiency). This paper reviews the theoretical and empirical literature on these three channels.
    Keywords: Productivity Product market reforms competition entry innovation
    JEL: O P
    Date: 2004–12–23
  7. By: Urs Meister
    Abstract: The periodical re-auction of a water monopoly concession causes the danger of underinvestment. If the life-time of specific assets such as water pipes exceeds the contract length and transferring the ownership of assets is difficult, the incumbent franchisee faces a hold-up problem. Using a simple auction model that considers the specifics of the piped water sector this paper shows that investment incentives may vary depending on the applied auction scheme. The model is designed as a two stage game, where the franchisee decides about investment on the first and competes with a potential market entrant on the second stage. Investment tends to be higher in sealed bid auctions than in an English auction, since the incumbent benefits from an information advantage. Additionally investment may vary in a first- and a second-price sealed bid auction depending on several factors such as costs or effectiveness of investment. The analysis is extended by a vertical separation.
    Keywords: Water, Networks, Franchise Bidding, Investment
    JEL: L95 L43 D21 Q25
    Date: 2004–12–20
  8. By: Reto Foellmi (Massachusetts Institute of Technology); Urs Meister (University of Zurich)
    Abstract: This paper analyses and compares potential efficiency gains induced by the introduction of product market competition and cross boarder trade in the piped water market. We argue that due to the specific circumstances in the water sector product market competition, i.e. competition by common carriage is not expected to be very intensive. The connection of networks could alternatively be used for cross boarder trade between neighboured water utilities. We show that competition by common carriage leads to production incentives for the inefficient supplier. This implies that the retail prices tend to be lower than with cross border trade. However, the efficiency effect dominates and resulting welfare is higher in case of trade.
    Keywords: Water, Networks, Product-Market Competition, Trade, Bargaining
    JEL: L95 L43 D21 Q25
    Date: 2004–12–21
  9. By: Alberto Salvo
    Abstract: This paper seeks to uncover why the pattern of equilibria in sequential merger games of a certain type is similar across a fairly wide class of models much studied in the literature. By developing general conditions characterising each element of the set of possible equilibria, I show that the solution to models that satisfy a certain sufficient condition will be restricted to the same subset of equilibria. This result is of empirical relevance in that the pattern of equilibria obtained for this wide class of models is associated with mergers not happening in isolation but rather bunching together. I extend the results to the analysis of cross-border mergers, studying two standard models that satisfy the sufficient condition --Sutton's (1991) vertically-differentiated oligopoly and Perry and Porter's (1985) fixed-supply-of-capital model.
    Keywords: Mergers, sequential mergers, cross-border investment, technology transfer.
    Date: 2004–04
  10. By: Volker Nocke (Department of Economics, University of Pennsylvania); Martin Peitz (Department of Economics, University of Mannheim)
    Abstract: We study rationing as a tool of the monopolist’s selling policy when demand is uncertain. Three selling policies are potentially optimal in our environment: uniform pricing, final sales, and introductory offers. Final sales consist in charging a high price initially, but then lowering the price while committing to a total capacity. Consumers with a high valuation may decide to buy at the high price since the endogenous probability of rationing is higher at the lower price. Introductory offers consist in selling a limited quantity at a low price initially, and then raising price. Those consumers with high valuations who were rationed initially at the lower price may find it optimal to buy the good at the higher price. We show that the optimal selling policy involves either uniform pricing or final sales. Introductory offers may dominate uniform pricing, but can never be optimal if the monopolist can also use final sales.
    Keywords: Rationing, priority pricing, sales, demand uncertainty, introductory offer, price dispersion, advance purchase discount
    JEL: L12 M31
    Date: 2004–06–23
  11. By: Volker Nocke (Department of Economics, University of Pennsylvania); Martin Peitz (Department of Economics, University of Mannheim); Konrad Stahl (Department of Economics, University of Mannheim)
    Abstract: We develop a general theoretical framework of trade on a platform on which buyers and sellers interact. The platform may be owned by a single large, or many small independent or vertically integrated intermediaries. We provide a positive and normative analysis of the impact of platform ownership structure on platform size. The strength of network effects is important in the ranking of ownership structures by induced platform size and welfare. While vertical integration may be welfare-enhancing if network effects are weak, monopoly platform ownership is socially preferred if they are strong. These are also the ownership structures likely to emerge.
    Keywords: Two-Sided Markets, Network Effects, Intermediation, Product Diversity
    JEL: L10 D40
    Date: 2004–07–21
  12. By: Richard McLean (Department of Economics, Rutgers University); James Peck (Department of Economics, Ohio State University); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: It is understood that rational expectations equilibria may not be incentive compatible: agents with private information may be able to affect prices through the information conveyed by their market behavior. We present a simple general equilibrium model to illustrate the connection between the notion of informational size presented in McLean and Postlewaite (2002) and the incentive properties of market equilibria. Specifically, we show that fully revealing market equilibria are not incentive compatible for an economy with few privately informed producers because of the producers’ informational size, but that replicating the economy decreases agents’ informational size. For sufficiently large economies, there exists an incentive compatible fully revealing market equilibrium.
    Keywords: Rational Expectations Equilibria, Informational Smallness
    JEL: D52 D82
    Date: 2004–06–04
  13. By: Késenne Stefan; Szymanski S.
    Abstract: This paper shows that under reasonable conditions that increasing gate revenue sharing among teams in a sports league will produce a more uneven contest, i.e. reduce competitive balance. This result has significant implications for antitrust authorities and legislators, who have tended to assume that revenue sharing arrangements will necessarily promote competitive balance.
    Date: 2003–03
  14. By: Bouckaert Jan; Verboven Frank
    Abstract: Regulators have recently shown an increased sensitivity to the issue of price squeezes, especially telecom regulators in European countries. This paper analyzes the relevance and the scope of price squeeze tests as proposed by practitioners and economists, taking the existing regulatory environment as fixed. Based on the degree of existing regulation (full, partial or no) we distinguish between three types of price squeezes: regulatory squeezes, predatory squeezes, and squeezes as foreclosure. We argue that the scope of price squeeze tests is limited to predatory price squeeze tests, to be used in combination with other pieces of evidence as collected in standard predation cases. We propose a predatory squeeze test that respects previously made regulatory choices, in contrast with earlier proposed tests by European practitioners and economists. We extend the framework to ask at which aggregation level predatory price squeeze tests ought to be applied, a much-debated issue in telecommunications.
    Date: 2003–04
  15. By: Suetens S.
    Abstract: In the paper I examine in an experiment whether for two different levels of technological spillovers, cooperative R&D behavior voluntarily arises when firms have communication possibilities. It is assumed that in the output market, firms compete `a la Cournot. Experimental results indicate that when technological spillovers are complete and subjects communicate, R&D decisions converge to the cooperative level, while in other cases R&D decisions converge towards the Nash equilibrium.
    Date: 2003–12
  16. By: Paul Belleflamme; Pierre Picard
    Abstract: The effects of (private, small-scale) piracy on the pricing behavior of producers of information goods are studied within a unified model of vertical differentiation. Although information goods are assumed to be perfectly horizontally differentiated, demands are interdependent because the copying technology exhibits increasing returns to scale. We characterize the Bertrand-Nash equilibria in a duopoly. Comparing equilibrium prices to the prices set by a multiproduct monopolist, we show that competition drives prices up and reduces total surplus.
    Keywords: information goods, piracy, copyright, pricing
    JEL: K11 L13 L82 L86 O34
    Date: 2004
  17. By: Emek Basker (Department of Economics, University of Missouri-Columbia)
    Abstract: In models of imperfect competition, entry of a lower-cost competitor tends to reduce output prices of all market participants; this effect is likely to be larger in small (less-competitive) markets and for product categories with high cross-price elasticities of demand. In this paper, I test these predictions by considering the effect of Wal-Mart entry on average city-level prices of various consumer goods. I combine two unique data sets, one containing opening dates of all US Wal-Mart stores and the other containing average quarterly retail prices of several narrowlydefined commonly-purchased goods over the period 1982-2002. I focus on 13 specific items likely to be sold at Wal-Mart stores and analyze their price dynamics in 160 US cities before and after Wal-Mart entry. An instrumental-variables specification corrects for measurement error in Wal-Mart entry dates. I find an economically large and statistically significant decline in the prices of drugstore items such as toothpaste, shampoo, and facial tissue. As expected, this effect is much stronger in small cities than in large ones. No effect on prices of convenience-store items (alcoholic beverages, Coke, and cigarettes) or clothing items can be detected. These results are consistent with the intuition that Wal-Mart provides a closer substitute to most drugstores than to convenience stores and clothing stores.
    Keywords: Wal-Mart, Competition, Prices, Market Size
    JEL: L13 L81 E31
    Date: 2004–10–20
  18. By: David Mandy (Department of Economics, University of Missouri-Columbia); David E. M. Sappington
    Abstract: We show that the incentives a vertically integrated supplier may have to disadvantage or "sabotage" the activities of downstream rivals vary with both the type of sabotage and the nature of downstream competition. Cost-increasing sabotage is typically profitable under both Cournot and Bertrand competition. In contrast, demand-reducing sabotage is often profitable under Cournot competition, but unprofitable under Bertrand competition. Incentives for sabotage can vary non-monotonically with the degree of product differentiation.
    JEL: C1
    Date: 2004–12–16
  19. By: Vicente Cuñat; Maria Guadalupe
    Abstract: The aim of this paper is to study the effects of product market competition on the explicit compensationpackages that firms offer to their executives. In order to measure the net effect of competition we use twodifferent identification strategies. The first exploits cross sectoral variation in concentration ratios and thepanel nature of the dataset. The second uses as a quasi-natural experiment the deregulations that occurredin the banking and financial sectors in the nineties and estimates differences in differences coefficients. Ourresults show that a higher level of product market competition increases the performance pay sensitivity ofexecutive compensation schemes, and they hold through a number of performance measures such as stockoptions or bonus. The results are robust to a number of specification checks.
    Keywords: Executive compensation, product market competition, performance related pay
    JEL: M52 L1 J31
    Date: 2004–02
  20. By: Jeremy Grant; Thomas Kirchmaier
    Abstract: In this paper, we show that ownership structures vary considerably across Europe, and that the dominant form ofownership is not necessarily the most efficient one. These findings are in contradiction to similar research basedon US samples. The results also demonstrate that firms without a dominant shareholder tend to outperform theircountry peer groups. We base our analysis on a new and unique dataset of uniform ownership data of the largest100 firms in the five major European economies. We quantify the differences in ownership by comparing threedistinct ownership structures of firms and relating them to performance. For the first time we employ aHodrick-Prescott Filter, a methodology widely used in macroeconomics to isolate the trend growth componentsfrom cyclical fluctuations, to estimate the share price trend of each firm. We take this trend as a good indirectindicator of the quality of governance.
    Keywords: Corporate governance, ownership structures, performance, Europe
    JEL: G32 G34 G38
    Date: 2004–04
  21. By: Véronique Flambard; Pierre Lasserre; Pierre Mohnen
    Abstract: Using nonparametric estimation techniques adapted from Guerre et al. [2000], we infer cost distributions and informational rents, from 666 snow removal contracts offered for tender by the City of Montreal. Our results are compatible with standard received theory of competitive auctions: there is a positive correlation between costs and bids; rents increase with the variance of costs and decrease with the number of bidders. Bids and costs have decreased over the sample period, while informational rents remained stable. The City deserves credit for these results. It has succeeded in exploiting economies of scale while maintaining competition; and it was instrumental in promoting above Canadian average technological progress by its design of snow-removal territories. <P>Par des méthodes non paramétriques adaptées de Guerre et al. [2000], nous évaluons la distribution des coûts et les rentes informationnelles correspondant à 666 contrats de déneigement mis aux enchères par la Ville de Montréal. Les résultats sont conformes à la théorie des enchères concurrentielles : corrélation positive entre soumissions et coûts; rentes croissantes avec la variance des coûts et décroissantes avec le nombre d’enchérisseurs. Tant les soumissions que les coûts diminuent au cours de la période, tandis que les rentes sont stables. Ces résultats sont à mettre au crédit de la Ville : elle a su exploiter les économies d’échelle sans réduire la concurrence, et susciter un progrès technologique plus élevé que la moyenne nationale grâce au découpage des territoires.
    Keywords: procurement auction, nonparametric estimation, informational rents, task design, municipal contracts, enchères d’approvisionnement, estimation non paramétrique, rentes d’information, conception des tâches, contrats municipaux
    JEL: D44 H40
    Date: 2004–12–01
  22. By: Jansen,Thijs; Lier,Arie,van; Witteloostuijn,Arjen,van (METEOR)
    Abstract: In this paper, we consider a two-stage (sequential) game as introduced by Vickers (1985),Fershtman (1985), Fershtman and Judd (1987) and Sklivas (1987). This game models the situation where the owners of competing firms manipulate their managers'' incentive contracts for strategic reasons. Instead of the sales volume as part of these contracts, we introduce market share, besides profit, as a natural part of managers'' incentives. Then we compare the results with those obtained for combinations of profits and sales volume, as well as for the classical Cournot model. Concerning an {\eightit n}-firm oligopoly, and compared to the sales-delegation case, it appears that owners put more emphasis on managerial profit-maximizing behavior, indicated by smaller weights attributed to market share in managerial incentive contracts. Social welfare corresponding to the market share-delegation case almost equals welfare associated with the sales-delegation case. However, its components differ.The case of market share-delegation leads to a higher profitability of incumbent rivals and to a lower consumer surplus, in comparison to the sales-delegation case. One may state that the owner''s strategic use of market share as a managerial incentive leads to a (partial) shift of benefits from consumers to producers.
    Keywords: mathematical economics;
    Date: 2004
  23. By: Dario Barbieri
    Keywords: Europeanization; networks
    Date: 2004–12–22

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