nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒01‒16
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. The Impact of Resale on 2-Bidder First-Price Auctions where One Bidder's Value is Commonly Known By Thomas Tröger
  2. A Review of the Monitoring of Market Power The Possible Roles of TSOs in Monitoring for Market Power Issues in Congested Transmission Systems By Paul Twomey; Richard Green; Karsten Neuhoff; David Newbery
  3. Monopoly and Product Diversity: The Role of Retailer Countervailing Power By Zhiqi Chen
  4. Umbrella Branding and the Provision of Quality By Hendrik Hakenes; Martin Peitz
  5. Trends in Competition and Profitability in the Banking Industry: A Basic Framework By Jacob Bikker; Jaap Bos
  6. Heterogeneous preferences and new innovation cycles in mature industries: the camera industry 1955-1974 By Paul Windrum
  7. The potential impact of cross-ownership in transmission: An application to the Belgian electricity market By Guido Pepermans; Bert Willems
  8. Bidding for Incompete Contracts By Patrick Bajari; Stephanie Houghton; Steven Tadelis
  9. Comparing Open and Sealed Bid Auctions: Theory and Evidence from Timber Auctions By Jonathan Levin; Susan Athey; Enrique Seira
  10. Optimal Procurement Auction for a Buyer with Downward Sloping Demand: More Simple Economics By Roberto Burguet
  11. How to Win Twice at an Auction. On the Incidence of Commissions in Auction Markets By Victor Ginsburgh; Patrick Legros; Nicolas Sahuguet
  12. Sequential vs. Single-Round Uniform-Price Auctions By Claudio Mezzetti; Aleksandar Pekec; Ilia Tsetlin
  13. Lobbies and Technology Diffusion By Diego Comin; Bart Hobijn
  14. Regulatory Reform and Economic Performance in US Electricity Generation By Supawat Rungsuriyawiboon; Tim Coelli
  15. Cournot Competition and Endogenous Firm Size By Jason Barr; Francesco Saraceno
  16. What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm By Doris Neuberger
  17. Mergers, Investment Decisions and Internal Organisation By Albert Banal-Estaño; Inés Macho-Stadler; Jo Seldeslachts
  18. Price Competition, Business Hours, and Shopping Time Flexibility By Oz Shy; Rune Stenbacka
  19. Fixed, Focal, Fair? Book Prices Under Optional Resale Price Maintenance By Jonathan Beck

  1. By: Thomas Tröger
    Abstract: We consider 2-bidder first-price auctions where one bidder's value is commonly known. Such auctions induce an ineffcient allocation. We show that a resale opportunity, where the auction winner can make a take-it-or-leave-it offer to the loser, increases (reduces) the ineffciency of the market when the buyer with the commonly known value is weak (strong). Resale always reduces all bidders' payoffs and increases the initial seller's revenue.
    Keywords: asymmetric first-price auctions, resale, effciency
    JEL: D44
    Date: 2004–09
  2. By: Paul Twomey; Richard Green; Karsten Neuhoff; David Newbery
    Abstract: The paper surveys the literature and publicly available information on market power monitoring in electricity wholesale markets. After briefly reviewing definitions, strategies and methods of mitigating market power we examine the various methods of detecting market power that have been employed by academics and market monitors/regulators. These techniques include structural and behavioural indices and analysis as well as various simulation approaches. The applications of these tools range from spot market mitigation and congestion management through to long-term market design assessment and merger decisions. Various market-power monitoring units already track market behaviour and produce indices. Our survey shows that these units collect a large amount of data from various market participants and we identify the crucial role of the transmission system operators with their access to dispatch and system information. Easily accessible and comprehensive data supports effective market power monitoring and facilitates market design evaluation. The discretion required for effective market monitoring is facilitated by institutional independence.
    Keywords: Electricity, liberalisation, market power, regulation
    JEL: D43 L13 L51 L94
    Date: 2005–01
  3. By: Zhiqi Chen (Department of Economics,Carleton University)
    Date: 2004–11–08
  4. By: Hendrik Hakenes; Martin Peitz
    Abstract: Consider a two-product firm that decides on the quality of each product. Product quality is unknown to consumers. If the firm sells both products under the same brand name, consumers adjust their beliefs about quality subject to the performance of both products. We show that if the probability that low quality will be detected is in an intermediate range, the firm produces high quality under umbrella branding whereas it would sell low quality in the absence of umbrella branding. Hence, umbrella branding mitigates the moral hazard problem. We also find that umbrella branding survives in asymmetric markets and that even unprofitable products may be used to stabilize the umbrella brand. However, umbrella branding does not necessarily imply high quality; the firm may choose low-quality products with positive probability.
    Keywords: umbrella branding, reputation transfer, signaling, experience goods
    JEL: D82 L14 L15 M37
    Date: 2004
  5. By: Jacob Bikker; Jaap Bos
    Abstract: This paper brings to the forefront the assumptions that we make when focussingon a particular type of explanation for bank profitability. We evaluate a broad field of research by introducing a general framework for a profit maximizing bank and demonstrate how different types of models can be fitted into this framework. Next, we present an overview of the current major trends in European banking and relate them to each model's assumptions, thereby shedding light on the relevance, timeliness and shelf life of the different models. This way, we arrive at a set of recommendations for a future research agenda. We advocate a more prominent role for output prices, and suggest a modification of the intermediation approach. We also suggest ways to more clearly distinguish between market power and effciency, and explain why we need time-dependent models. Finally, we propose the application of existing models to different size classes and sub-markets. Throughout we emphasize the benefits from applying several, complementary models to overcome the identification problems that we observe in individual models.
    JEL: G21 L11 L22 L23
    Date: 2004–11
  6. By: Paul Windrum
    Abstract: The paper examines the innovation dynamics of the mature camera market between 1955 and 1974. This highlights the importance of heterogeneous preferences in determining industry structure. By recognising and accommodating consumer heterogeneity, new firms engaged in radical product and process innovation and overcame the first-mover advantages of dominant firms. The case raises important issues for our understanding of industry life cycles. First, a number of innovation cycles are possible over the life cycle. Second, new rounds of entry, exist and market shake-out can occur, with new, innovative entrants displacing old firms. If the new firms are in developing countries then a shift in global production occurs. Third, a basic tenet of Porterian competitive advantage is overturned because success is based on innovation not wage-cost advantages. Fourth, market structure can change, the industry dividing into a number of market niches that contain distinct user groups. Fifth, incremental modular innovations may be adopted by some user groups but not by others. Consequently, incremental product innovations may be adopted in low-priced goods but not in high-priced goods.
    Keywords: industry life cycle, innovation, heterogeneous preferences, cameras, photography
    JEL: L10 L60
    Date: 2004–12
  7. By: Guido Pepermans (K.U.Leuven-Center for Economic Studies); Bert Willems (K.U.Leuven-Center for Economic Studies)
    Abstract: This paper looks at the potential effect of partial ownership on the generation and the transmission sector of electricity markets. Ideally, in liberalized electricity markets, transmission is separated form generation. The transmission sector is a natural monopoly operated by a regulated transmission firm, while the generation sector is open for competition. This paper assumes that the transmission firm is not very well regulated and behaves strategically, that there is oligoplistic competition in generation, and that one of the generators, the incumbent, owns part of the transmission firm. We then study the effect of this partial ownership in a numerical model which is calibrated on the Belgian market. The model captures two kinds of partial ownership interactions: passive ownership, where the generation firm simply cashes its share of the transmission firm’s profit without having a direct impact on its decision process, and active ownership, where the generator has a direct influence on the transmission firm’s decision process. It is shown that ownership of the network operator by the incumbent generator reduces double marginalization (= welfare improving) but also reduces entry in the generation market (= welfare decreasing).
    Keywords: vertical integration, unbundling, cross-ownership, electricity
    JEL: L13 L22 L43 L94
    Date: 2005–01
  8. By: Patrick Bajari (Duke University and NBER); Stephanie Houghton (Duke University); Steven Tadelis (Stanford University)
    Abstract: When procurement contracts are incomplete, they are frequently changed after the contract is awarded to the lowest bidder. This results in a final cost that differs from the initial price, and may involve significant transaction costs due to renegotiation. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway repair contracts. We estimate the magnitude of transaction costs and their impact using both reduced form and fully structural models. Our results suggest that transactions costs are a significant and important determinant of observed bids, and that bidders strategically respond to contractual incompleteness. Our findings point at disadvantages of the traditional bidding process that are a consequence of transaction costs from contract adaptations.
    Keywords: Procurement, Construction
    JEL: D23 D82 H57 L14 L22 L74
    Date: 2004–12
  9. By: Jonathan Levin (Stanford University); Susan Athey (Stanford University and NBER); Enrique Seira (Stanford University)
    Abstract: We study entry and bidding patterns in sealed bid and open auctions with heterogeneous bidders. Using data from U.S. Forest Service timber auctions, we document a set of systematic effects of auction format: sealed bid auctions attract more small bidders, shift the allocation towards these bidders, and can also generate higher revenue. We propose a model, which extends the theory of private value auctions with heterogeneous bidders to capture participation decisions, that can account for these qualitative effects of auction format. We then calibrate the model using parameters estimated from the data and show that the model can explain the quantitative effects as well. Finally, we use the model to provide an assessment of bidder competitiveness, which has important consequences for auction choice.
    Keywords: Auctions, Timber
    JEL: Q23 D44
    Date: 2004–12
  10. By: Roberto Burguet (Institut d’Anàlisi Econòmica, CSIC)
    Abstract: A buyer with downward slopping demand faces a number of unit supply sellers. The paper characterizes optimal auctions in this setting. For the symmetric case, a uniform auction (with price equal to lowest rejected offer) is optimal when complemented with reserve prices for different quantities acquired. For asymmetric sellers, the optimal distortions are familiar. The problem is similar to the third degree discriminating monopsonist problem, just as in the unit (flat) demand case (Bulow-Roberts, 1989), and when the number of sellers (and the demand) grows their outcomes approach at the speed of the law of large numbers.
    Keywords: Auctions, Monopsony
    JEL: D44 D42
    Date: 2004–12
  11. By: Victor Ginsburgh (How to Win Twice at an Auction. On the Incidence of Commissions in Auction Markets); Patrick Legros (ECARES, Université Libre de Bruxelles and CEPR); Nicolas Sahuguet (ECARES, Université Libre de Bruxelles)
    Abstract: We analyze the welfare consequences of an increase in the commissions charged by the organizer of an auction. Commissions are similar to taxes imposed on buyers and sellers and the economic problem that results looks similar to the question of tax incidence in consumer economics. We argue, however, that auction markets deserve a separate treatment. Indeed we show that an increase in commissions makes sellers worse off, but some (or all) buyers may gain. The results are therefore strikingly different from the standard result that all consumers lose after a tax or a commission increase. We apply our results to comment on the class action against Christie’s and Sotheby’s and argue that the method used to distribute compensations was misguided.
    Keywords: Auction, Intermediation, Commissions, Welfare
    JEL: D44 D80
    Date: 2004–12
  12. By: Claudio Mezzetti (University of North Carolina); Aleksandar Pekec (The Fuqua School of Business, Duke University); Ilia Tsetlin (INSEAD)
    Abstract: We study sequential and single-round uniform-price auctions with affiliated values. We derive symmetric equilibrium for the auction in which k1 objects are sold in the first round and k2 in the second round, with and without revelation of the first-round winning bids. We demonstrate that auctioning objects in sequence generates a lowballing effect that reduces first-round revenue. Thus, revenue is greater in a single-round, uniform auction for k = k1 + k2 objects than in a sequential uniform auction with no bid announcement. When the first-round winning bids are announced, we also identify two informational effects: a positive effect on second-round price and an ambiguous effect on first-round price. The expected first-round price can be greater or smaller than with no bid announcement, and greater or smaller than the expected price in a single-round uniform auction. As a result, total expected revenue in a sequential uniform auction with winning-bids announcement can be greater or smaller than in a single-round uniform auction.
    Keywords: Multi-unit auctions, Sequential auctions, Uniform-price auction, Affiliated values, Information revelation
    JEL: D44 D42
    Date: 2004–12
  13. By: Diego Comin; Bart Hobijn
    Abstract: Do lobbies affect technology diffusion and growth? A number of authors have identified the importance of vested interests as a deterrent to technology diffusion and the relevance that this may have for growth. however, the evidence that exists about this mechanism is just anecdotal. In this paper we build a model of lobbying and technology diffusion where the speed of diffusion of new technologies depends on some dimensions of the political regime and on the whether there is an old technology that may be substituted by the new technology. This differential effect of institutions on the diffusion of technologies with a predecessor constitutes the central element of our identification strategy. To implement this test we use technology diffusion data from Comin and Hobijn [2004]. We find that the relevant institutional variables have a differential effect on the diffusion of technologies with a predecessor technology as predicted by the theory. We show that this result is unlikely to be driven by omitted variables, or reverse causality.
    JEL: N10 O30 O57
    Date: 2005–01
  14. By: Supawat Rungsuriyawiboon; Tim Coelli (CEPA - School of Economics, The University of Queensland)
    Abstract: In this paper we investigate the effect of the introduction of incentive regulation upon the total factor productivity (TFP) growth of electricity generation companies in the United States, using sample data on 61 firms observed over a 13-year period from 1986 to 1998. Empirical estimates of TFP growth are obtained using three techniques: Tornqvist index numbers, a stochastic cost frontier and a stochastic input distance function. The results obtained using the stochastic cost frontier are discarded because they are found to differ from those obtained using the other techniques, apparently as a consequence of violations of the required cost minimizing behavioral assumptions, which are not uncommon in regulated industries. Tests of hypotheses regarding the effect of regulatory reform upon TFP (using the distance function results) indicate that the introduction of incentive regulation has not had the desired positive effect upon the economic performance of the firms involved. In fact, in the case of these data, we find that performance is negatively related with the introduction of the new regulatory regimes, a result that is the opposite of the theoretical predictions.
    Date: 2004–09
  15. By: Jason Barr; Francesco Saraceno
    Abstract: We study the dynamics of firm size in a repeated Cournot game with unkown demand function. We model the firm as a type of artificial neural network. Each period it must learn to map environmental signals to both demand parameters and its rival's output choice. But this learning game is in the background, and we focus on the endogenous adjustment of network size. We investigate the long-run behavior of firm/network size as a function of profits, rival's size, and the type of adjustment rules used.
    Keywords: Firm size, adjustment dynamics, artificial neural networks, Cournot games
    JEL: C63 D21 D83 L13
  16. By: Doris Neuberger (University of Rostock)
    Abstract: The financial systems in continental Europe are moving from bank intermediation to intermediation by non-bank institutional investors. The present paper examines to what extent this implies a substitution of relationship finance by arm’s length finance or just of one form of relationship finance by another. Within the contractual theory of the firm, we seek common features of relationship banking and relationship investing. Extending the governance structure approach, we show that both are hybrid governance forms, whose comparative advantages depend on two kinds of asset specificity. They are complements rather than substitutes to finance and control firms with different redeployability and information opaqueness of assets.
    Keywords: relationship banking, relationship investing, banks, institutional investors, corporate governance, contractual theories of the firm
    JEL: G20 G30 L14 L22
    Date: 2005–01–13
  17. By: Albert Banal-Estaño; Inés Macho-Stadler; Jo Seldeslachts
    Abstract: We analyse the effects of investment decisions and firms’ internal organisation on the efficiency and stability of horizontal mergers. In our framework synergies are endogenous and there might be internal conflict within merged firms. We show that often stable mergers do not lead to more efficiency and may even lead to efficiency losses. These mergers lead to lower welfare, suggesting that a regulator should be careful in assuming that possible efficiency gains of a merger will be effectively realised. Moreover, the paper offers a possible explanation for merger failures. <br> <br> <i>ZUSAMMENFASSUNG - (Fusionen, Investitionsentscheidungen und unternehmensinterne Organisation) <br> Wir analysieren die Auswirkungen von Investitionsentscheidungen und internen Organisationsstrukturen auf die Effizienz und Stabilität von horizontalen Firmenzusammenschlüssen. In unserer Untersuchung sind Synergien endogen und es können interne Konflikte in dem fusionierten Unternehmen auftreten. Es zeigt sich, dass "stabile" Fusionen häufig nicht zu mehr Effizienz, sondern sogar zu Effizienzverlusten führen können. Da solche Firmenzusammenschlüsse zu einer geringeren Wohlfahrt führen, sollte der Regulierer nicht ungeprüft annehmen, dass potentielle Wohlfahrtsgewinne auch immer tatsächlich erreicht werden. Außerdem bietet das Papier eine mögliche Erklärung für das Scheitern von Fusionen.</i>
    Keywords: Horizontal Mergers, Investment, Efficiency gains, Internal Conflict.
    JEL: L22 D43
    Date: 2004–12
  18. By: Oz Shy; Rune Stenbacka
    Abstract: We analyze differentiated retail industries where shops engage in two-stage competition with respect to opening hours and prices. We explore the effects of consumers' shopping time flexibility by comparing bi-directional consumers with forward- or backward-oriented consumers, who can either postpone or advance their shopping, but not both. We demonstrate that retailers with longer opening hours charge higher prices and that opening hour differentiation softens price competition. We calculate both symmetric and asymmetric subgame perfect equilibria in closing hours and demonstrate how the equilibrium configurations depend on the cost increases associated with extended business hours, as well as the relative densities of day and night shoppers. <br> <br> <i>ZUSAMMENFASSUNG - (Preiswettbewerb, Öffnungszeiten und Flexibilität der Einkaufszeit) <br> Wir analysieren unterschiedliche Einzelhandelsindustrien, in denen Läden in einem zweistufigen Wettbewerb bezüglich Öffnungszeiten und Preisen stehen. Wir erforschen die Effekte von Kundenflexibilität, indem wir völlig flexible Kunden mit vor- bzw. rückwärtsorientierten Kunden vergleichen können, welche ihren Einkauf nur vorziehen oder verschieben können, aber nicht beides. Wir zeigen, dass Einzelhändler mit längeren Öffnungszeiten höhere Preise verlangen und dass die Differenzierung der Öffnungszeiten den Preiswettbewerb abschwächt. Wir berechnen sowohl symmetrische als auch unsymmetrische teilspielperfekte Gleichgewichte für die Öffnungszeiten und zeigen, wie die Ausgestaltung der Gleichgewichte von den zusätzlichen Kosten der ausgedehnten Öffnungszeiten und der relativen Dichte von Tag- und Nachteinkäufern abhängt.</i>
    Keywords: Business Hours, Delayed or Advanced Shopping, Differentiated Business Hours, Price Competition, Shopping Time Flexibility.
    JEL: L1 L81 M2
    Date: 2004–12
  19. By: Jonathan Beck
    Abstract: In media markets, products are highly differentiated but prices are often bunched at apparent focal points. I use a comprehensive cross-section data set on the German book market to assess whether such focal points are a result of upstream coordination and whether the option to impose resale price maintenance (RPM) played a facilitating role. Therewith, I provide empirical evidence to a long-lasting policy debate. Results suggest that focal prices are used to coordinate competition rather than collusion. Focal prices are mostly lower than expected from hedonic projections. In cases where the decisions on focal pricing and RPM are positively correlated, controlling for endogeneity and a number of other factors, RPM does not seem to facilitate above average focal pricing in particular. <br> <br> <i>ZUSAMMENFASSUNG - (Fixiert, fokal, fair? Buchpreise bei optionaler Preisbindung) <br> Produkte in Medienmärkten sind hochgradig differenziert, Preise sammeln sich jedoch häufig an augenscheinlich fokalen Punkten. Ich verwende einen umfassenden Satz von Querschnittsdaten aus dem deutschen Buchmarkt, um zu untersuchen, ob derartige Fokalpunkte das Ergebnis von Koordination auf der Verlagsseite sind und ob optionale Preisbindung eine begünstigende Rolle dabei spielte. Damit bereichere ich eine langlebige Politikdebatte mit empirischer Evidenz. Die Ergebnisse legen nahe, dass Fokalpreise eher der Koordination von Wettbewerb als Kollusion dienen. Fokalpreise sind meistens niedriger als von hedonischen Projektionen erwartet. In den Fällen, in welchen die Entscheidungen über fokale Preissetzung und Preisbindung positiv korreliert sind, unter Kontrolle des Einflusses von Endogenität und einer Reihe von anderen Faktoren, scheint optionale Preisbindung die Setzung von überdurchschnittlichen Fokalpreisen nicht insbesondere zu begünstigen.</i>
    Keywords: resale price maintenance; focal prices; vertical restraints; collusion; simultaneous probit; book industry.
    JEL: D4 L11 L13 L42 L82
    Date: 2004–12

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