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

  1. My Precious. The Role of Appropriability Strategies in Shaping Innovative Performance By Keld Laursen; Ammon Salter
  2. The More Cooperation, the More Competition? A Cournot Analysis of the Benefits of Electric Market Coupling By Benjamin F. Hobbs; Fieke A. M. Rijkers
  3. Models of competition between one for-profit and one nonprofit firm By Petra Brhlikova
  4. Coase’s conjecture in finite horizon By Michal Ostatnicky
  5. Strategic Behavior and Collusion: An Application to the Spanish Electricity Market. By Aitor Ciarreta; Carlos Gutierrez-Hita
  6. Acquisiton Strategies: Empirical Evidence of Outsider-Toeholds By Lindqvist, Tobias
  7. How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines By Austan Goolsbee; Chad Syverson
  8. Did the HMO Revolution Cause Hospital Consolidation? By Robert Town; Douglas Wholey; Roger Feldman; Lawton R. Burns
  9. A Capacity Market that Makes Sense By Peter Cramton; Steven Stoft
  10. Review of the Proposed Reserve Markets in New England By Peter Cramton; Hung-po Chao; Robert Wilson
  11. Patent pools and the dynamic incentives to R&D By Dequiedt, V.; Versaevel, B.
  12. Interbank Competition with Costly Screening By Xavier Freixas; Sjaak Hurkens; Alan D. Morrison; Nir Vulkan
  13. "An Analysis of Airport Pricing and Regulation in the Presence of Competition Between Full Service Airlines and Low Cost Carriers" By Tae Hoon Oum; Xiaowen Fu; Mark Lijesen
  14. Competing Matchmaking By Damiano, Ettore; Li, Hao
  15. Telecommunications Reform within Russia’s Accession to the World Trade Organization By Jesper Jensen; Thomas F. Rutherford; David G. Tarr
  16. Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity By Elena Krasnokutskaya

  1. By: Keld Laursen; Ammon Salter
    Abstract: The strategies firms use to protect their intellectual property and knowledge can strongly influence their ability to capture the benefits of their innovative efforts. In attempting to appropriate their innovations, firms can chose from a range of mechanisms, including patents, trade secrets and lead times. Yet, little is known about how the use of different appropriability mechanisms may shape innovative performance. Using a large-scale database of UK manufacturing firms, we examine how legal (such as patents) and first mover (such as secrecy) appropriability strategies shape performance. We find that both strategies are curvilinearly (taking an inverted U-shape) related to innovative performance, indicting that some firms may suffer from a myopia of protectiveness, relying too heavily on appropriation to the detriment of other activities.
    Keywords: Appropriability; Intellectual property rights; Innovation; Innovative Performance
    JEL: C24 O32 O34
    Date: 2005
  2. By: Benjamin F. Hobbs; Fieke A. M. Rijkers
    Abstract: Market coupling in Belgian and Dutch markets would permit more efficient use of intercountry transmission, 1) by counting only net flows against transmission limits, 2) by improving access to the Belgian market, and 3) by eliminating the mismatch in timing between interface auctions and the energy spot market. A Cournot market model that accounts for the region’s transmission pricing rules and limitations is used to simulate market outcomes with and without market coupling. This accounts for 1) and 2). Market coupling improves social surplus in the order of 108 €/year, unless it encourages the largest producer in the region to switch from a price-taking strategy in Belgium to a Cournot strategy due to a perceived diminishment of the threat of regulatory intervention. Benefit to Dutch consumers depends on the behavior of this company. The results illustrate how large-scale oligopoly models can be useful for assessing market integration.
    Keywords: Electric power, Electric transmission, Liberalization, Oligopoly, Complementarity models, Computational models, Netherlands, Belgium, France, Germany, Market Coupling
    Date: 2005–01
  3. By: Petra Brhlikova
    Abstract: To study the coexistence of two different ownership forms within anindustry, I develop a simple model of competition between one for-profit and one nonprofit firm. The two firms have different objectives and face different constraints due to their choice of ownership status. Assuming heterogenous consumers I derive quality-price bundles provided by the two firms and their market shares under various conditions.
    Keywords: Nonprofit firm, For-profit firm, Monopoly, duopoly, mixed industry.
    JEL: L31 L1 D42 D43
    Date: 2004–10
  4. By: Michal Ostatnicky
    Abstract: In this paper Coase's Conjecture is analyzed in a finite-horizon formulation. In addition to utility discounting models decreasing-willingness-to-pay models are analyzed. We find that in contrast to Coase's Conjecture a monopolist may extract full monopoly profit in the finite-horizon problem under certain conditions; in fact, the monopolist does not have any reason to attract traders and waits until they come and trade. However, including utility discounting or decreasing-willingness-to-pay on the purchasers' side the monopolist's profit may dramatically decrease. The monopolist tries to clear trades as soon as possible, which makes him sacrifice a part of his one-shot monopoly profit to attract traders to buy.
    Keywords: Coase's conjecture, Monopoly, Discounting, Decreasing willingness to pay.
    JEL: C72 D42 G14 L11 L12
    Date: 2004–11
  5. By: Aitor Ciarreta (Universidad del País Vasco (Spain)); Carlos Gutierrez-Hita (Universitat Jaume I Castellón)
    Keywords: collusion, repeated games, electricity market
    JEL: L11 L13 L51
    Date: 2005–01–27
  6. By: Lindqvist, Tobias (The Research Institute of Industrial Economics)
    Abstract: Theoretically, cross ownership may mitigate mergers, i.e. market concentrations. Holding a share in a competing firm before the acquisition of another firm, outsider-toehold, is more profitable in some market constellations, due to the positive externality on the outsider (competing) firm when a merger occurs. The purposes of this paper are to empirically observe when US firms buy outsider-toeholds and through event-studies estimate the gains of buyers, outsider firms and competitors when firms holding outsider-toeholds merge.
    Keywords: Acquisition; Antitrust; Insiders’ Dilemma; Mergers; Toeholds
    JEL: G34 L12 L13 L41
    Date: 2005–01–24
  7. By: Austan Goolsbee; Chad Syverson
    Abstract: This paper examines how incumbents respond to the threat of entry of competitors, as distinguished from their response to competitors%u2019 actual entry. It uses a case study from the passenger airline industry %u2013 specifically, the evolution of Southwest Airlines%u2019 route network %u2013 to identify particular routes where the probability of future entry rises abruptly. When Southwest begins operating in airports on both sides of a route but not the route itself, this dramatically raises the chance they will start flying that route in the near future. We examine the pricing of the incumbents on threatened routes in the period surrounding such events. We find that incumbents cut fares significantly when threatened by Southwest%u2019s entry into their routes. This is true even after controlling in several ways for airport-specific operating costs. The response of incumbents seems to be limited only to the threatened route itself, and not to routes out of nearby competitor airports where Southwest does not operate (e.g., fares drop on routes from Chicago Midway but not Chicago O%u2019Hare). The largest responses appear to be restricted to routes that were concentrated beforehand. Incumbents do experience short-run increases in their passenger loads concurrent with these fare cuts. This is consistent with theories implying incumbents will try to generate some longer-term loyalty among current customers before the entry of a new competitor. We examine evidence relating this demand-building motive to frequent flyer programs and find suggestive evidence in favor of this notion. There is only weak evidence that incumbents increase capacity on the routes.
    JEL: L1 L9
    Date: 2005–01
  8. By: Robert Town; Douglas Wholey; Roger Feldman; Lawton R. Burns
    Abstract: During the 1990s US healthcare markets underwent a significant transformation. Managed care rose to become the dominant form of insurance in the private sector. Also, a wave of hospital consolidation occurred. In 1990, the mean population-weighted hospital Herfindahl-Hirschman Index (HHI) in a Health Services Area (HSA) was .19. By 2000, the HHI had risen to .26. This paper explores whether the rise in managed care caused the increase in hospital concentration. We use an instrumental variables approach with 10-year differences to identify the relationship between managed care penetration and hospital consolidation. Our results strongly imply that the rise of managed care did not cause the hospital consolidation wave. This finding is robust to a number of different specifications.
    JEL: I11 L12
    Date: 2005–01
  9. By: Peter Cramton (Economics Department, University of Maryland); Steven Stoft
    Abstract: We argue that a capacity market is needed in most restructured electricity markets, and present a design that avoids the many problems found in the early capacity markets. The proposed locational capacity market pays suppliers based on their demonstrated ability to supply energy or reserves in shortage hours—hours in which there is a shortage of operating reserves. Thus, only supply that contributes to reliability is rewarded. The capacity price responds to market conditions. When capacity is scarce the capacity price is high; when capacity is plentiful the capacity price is low or zero. Market power in the capacity market is addressed by setting the capacity price based on actual capacity, rather than bid capacity, so generators cannot increase the capacity price by withholding supply. Ex post peak energy rents (the short-run energy profits of a benchmark peaking unit) are subtracted from the capacity price. Thus, a supplier does not have an incentive to create real-time shortages—the high shortage price resulting from a shortage is subtracted from the capacity price, so there is no net gain from the high price. By defining a capacity product closely tied to reliability and directly addressing market power both in the capacity market and in the spot energy market, the proposed design results in a market participants can trust to encourage efficient behavior both in the short run and long run.
    Keywords: Auctions, Electricity Auctions, Capacity Auctions, Market Design
    JEL: D44
    Date: 2005
  10. By: Peter Cramton (Economics Department, University of Maryland); Hung-po Chao; Robert Wilson
    Abstract: ISO New England proposes reserve markets designed to improve the existing forward reserve market and improve pricing during real-time reserve shortages. We support all of the main elements of the proposal. For example, we agree that little is gained by allowing reserve availability bids in the day-ahead market. Doing so greatly increases the complexity of the market without the prospect of more efficient pricing. Rather, offline reserves are most efficiently priced and awarded well in advance, as is done by the improved forward reserve market.
    Keywords: Auctions; Multiple Object Auctions; Electricity Auctions
    JEL: D44 L12 L94
    Date: 2005–01–18
  11. By: Dequiedt, V.; Versaevel, B.
    Abstract: Patent pools are cooperative agreements between several patent owners to bundle the sale fo their respective licences. In this paper the authors analyse their consequences on the speed of the sale of their respective licences. In this papier, they analyze their consequences on the speed of the innovation process. They adopt an ex ante prespective and study the impact of possible pool formation on the incentives to innovate. Because participation in the creation of a pool acts as a bonus reward on R&D activity, they show that a firm's investment pattern is upward sloping over time before pool formation, and decreases afterwards. The smaller the set of initial contributors, the higher this effect. A pool formation mechanism based on a proposal by the industry and acceptant / refusal by the competition authority may induce overinvestment in early innovations and lead to a delayed clearance date, that is suboptimal from an ex ante viewpoint. ...French Abstract : Les paniers de brevets sont des accords coopératifs entre plusieurs détenteurs de brevets afin de grouper la vente des licences associés aux brevets respectifs. Dans cet article, les auteurs analysent leurs conséquences sur la rapidité du processus d'innovation. Ils adoptent une perspective ex ante et étudient l'impact d'une possible formation de panier sur les incitations à innover. Parce que la participation à un panier agit comme un revenu supplémentaire issu de l'activité de R&D, ils montrent que la décision d'investissement de l'entreprise est croissante avec le temps avant la formation du panier et décroît ensuite. Plus l'ensemble des contributeurs initiaux au panier est petit, plus cet effet est fort. Un mécanisme de formation de panier reposant sur une proposition de l'industrie et une décision d'acceptation / refus par les autorités de concurrence risque d'induire un surinvestissement dans les premières innovations et conduire à une date trop tardive d'acceptation du panier, sous-optimale d'une point de vue ex ante.
    JEL: L51 O32
    Date: 2004
  12. By: Xavier Freixas; Sjaak Hurkens; Alan D. Morrison; Nir Vulkan
    Abstract: We analyse credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broecker’s (1990) analysis, where he demonstrates that no pure strategy equilibrium exists when banks have zero screening costs. In our set up we show that interest rate on loans are largely independent of marginal costs, a feature consistent with the extant empirical evidence. In equilibrium, banks make positive profits in our model in spite of the threat of entry by inactive banks. Moreover, an increase in the number of active banks increases credit risk and so does not improve credit market efficiency: this point has important regulatory implications. Finally, we extend our analysis to the case where banks have differing screening abilities.
    Date: 2005
  13. By: Tae Hoon Oum (Sauder School of Business, University of British Columbia); Xiaowen Fu (University of British Columbia); Mark Lijesen (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: Despite the airport privatization and deregulation trend in recent years, whether or not the privatized or commercialized airports should be left unregulated is still an open question. Related to this issue, one question that has received a very little attention to date is if and how pricing behavior of unregulated airports affect downstream airline competition, especially the competition between airlines offering differentiated services such as the case of full service airlines (FSA) vis-a-vis low cost carriers (LCC). If the upstream monopoly (airport) hinders downstream (airline) competition, the welfare effects of the upstream unregulated monopoly may be much larger than initially suspected. This aspect of airport pricing has not been formally incorporated in the debate on airport price regulation. In this paper, we study a duopoly model to capture the differential competitive effects of changing airport user charges on FSAs and LCCs. By making reasonable assumptions on differential price elasticities, unit costs and competitive behavior as manifested by firmspecific conduct parameters, we perform numerical simulations to measure differential effects on an FSA and an LCC of increasing airside user charge by an unregulated upstream monopolist airport. Our analytical and numerical results suggest existence of the asymmetric effects of an airport's monopoly pricing on LCC and FSA. That is, LCCs suffer more from an identical cost increase than FSAs and are, therefore, more vulnerable to monopolistic pricing practices of an unregulated airport. This implies that unregulated airport pricing would reduce the extent of competition in downstream airline markets, and thus, cause a further detrimental effect on welfare over and above the first-order dead weight loss of airport's monopolistic pricing. Considering that LCCs have brought considerable reduction of average fares and the associated welfare gains, it is important for the governments to take into account of these asymmetric effects of increasing airport user charges on FSAs and LCCs when they consider the form and extent of regulation or deregulation. Although our model and simulation work deal specifically with the effect of airport pricing on downstream airline markets, our framework of analysis may be applicable to analysis of any policy affecting costs of FSAs and LCCs including security levies as well as potentially adaptable to other upstream-downstream industry cases.
    Date: 2005–01
  14. By: Damiano, Ettore; Li, Hao
    Abstract: We study how competing matchmakers use prices to sort participants into search markets, where they form random pairwise matches, and how equilibrium outcomes compare with monopoly in terms of prices, search market structure and sorting efficiency. The role of prices to facilitate sorting is compromised by the need to survive price competition. We show that the competitive outcome can be less efficient in sorting than the monopoly outcome in terms of total match value. In particular, price competition results in a high quality market that is insufficiently exclusive.
    Date: 2005–01–25
  15. By: Jesper Jensen; Thomas F. Rutherford; David G. Tarr (World Bank)
    Abstract: In World Trade Organization (WTO) accession negotiations, telecommunications is always a sector that receives close scrutiny by the WTO Working Party, and the extent of market access and nondiscriminatory treatment of multinational telecommunications companies in Russia has been a significant issue in Russia’s accession negotiations. Jensen, Rutherford, and Tarr use a computable general equilibrium model of the Russian economy to assess the role of telecommunications in the discussions regarding Russian accession to the WTO. The results show that reduction of barriers to foreign direct investment in telecommunications will bring substantial gains to the Russian economy, including an increase in the productivity of Russian labor and capital. Despite the fact that multinationals use Russian labor less intensively than Russian firms, demand for Russian labor employed in telecommunications should increase, following reductions in barriers to foreign direct investment that are included in the context of WTO accession. This is because the overall demand for telecommunication services should increase due to the growth effects of the liberalization of barriers against foreign direct investment generally and the reduction in tariffs. Russian capital owners in telecommunications will likely be sought as joint venture partners and can restructure and obtain gains as partners with foreign firms. Wholly owned Russian firms are likely to experience losses. This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the group to assess the consequences of liberalization of barriers against foreign direct investment in services.
    Keywords: International Economics
    Date: 2005–01–26
  16. By: Elena Krasnokutskaya (Department of Economics, University of Pennsylvania)
    Abstract: This paper proposes a semi-parametric method to uncover the distribution of bidders’ private information in the market for highway procurement when unobserved auction heterogeneity is present. I derive sufficient conditions under which the model is identified and show that the estimation procedure produces uniformly consistent estimators of the distributions in question. The estimation procedure is applied to data from Michigan highway procurement auctions. I estimate that 75% of the variation in bidders’ costs may be attributed to the factors known to all bidders and only 25% may be generated by private information. My results suggest that failing to account for unobserved auction heterogeneity may lead to overestimating uncertainty that bidders face when submitting their bids. As a result both inefficiency of the auction mechanism and mark-ups over the bidders’ costs may be overestimated.
    Keywords: First-Price Auctions, unobserved auction heterogeneity, highway procurement
    JEL: L0 L1 L2 L8 M3
    Date: 2004–05–24

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