nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒02‒13
24 papers chosen by
Russell Pittman
US Department of Justice

  1. The Theory of the Firm and Its Critics: A Stocktaking and Assessment By Nicolai J. Foss; Peter G. Klein
  2. Advertising, Brand Loyalty and Pricing By Ioana Chioveanu
  3. A rationale for the coexistence of central and decentral marketing in team sports By Oliver Gürtler
  4. Exclusive Contracts, Loss to Delay and Incentives to Invest By Groh, Christian; Spagnolo, Giancarlo
  5. Does Microsoft Stifle Innovation? Dominant Firms, Imitation and R&D Incentives By Cabral, Luís M B; Polak, Ben
  6. Economic Theories of Bundling and their Policy Implications in Abuse Cases: An Assessment in Light of the Microsoft Case By Caffarra, Cristina; Kühn, Kai-Uwe; Stillman, Robert
  7. Sectoral Regulators and the Competition Authority: Which Relationship is Best? By Barros, Pedro Pita; Hoernig, Steffen
  8. The Impact of Competition on Bank Orientation and Specialization By Degryse, Hans; Ongena, Steven
  9. Telecommunications Policies: Determinants and Impact By Gual, Jordi; Trillas, Francesco
  10. Price Competition in a Differentiated Products Duopoly Under Network Effects By Griva, Krina; Vettas, Nikolaos
  11. Competition, Incomplete Discrimination and Versioning By Diaw, Khaled; Pouyet, Jérôme
  12. Bilateral Market Power and Vertical Integration in the Spanish Electricity Spot Market By Kühn, Kai-Uwe; Machado, Matilde
  13. Price Dispersion and Consumer Reservation Prices By Anderson, Simon P; de Palma, André
  14. Competition and Incentives with Motivated Agents By Besley, Timothy; Ghatak, Maitreesh
  15. Platform Ownership By Nocke, Volker; Peitz, Martin; Stahl, Konrad O.
  16. Platform Competition in Telecommunications By Church, Jeffrey; Gandal, Neil
  17. Anatomy of the Rise and Fall of a Price-Fixing Conspiracy: Auctions at Sotheby's and Christie's By Ashenfelter, Orley C; Graddy, Kathryn
  18. International Cooperation and the Reform of Public Procurement Policies By Evenett, Simon J; Hoekman, Bernard
  19. Creating Competition Out of Thin Air: Market Thickening and Right-to-Choose Auctions By Eliaz, Kfir; Offerman, Theo; Schotter, Andrew
  20. Properties of Scoring Auctions By Asker, John; Cantillon, Estelle
  21. Adoption and diffusion of cost reducing innovations : Cournot competition in duopoly By Raouf, BOUCEKKINE; Omar, LICANDRO; Antonio, MINNITI
  22. Competition, Consumer Welfare and Monopoly Power By Donald J. Brown; G.A. Wood
  23. The Cost of US Pharmaceutical Price Reduction: A Financial Simulation Model of R&D By Thomas A. Abbott; John A. Vernon
  24. How Concentrated are Global Infrastructure Markets? By Antonio Estache; Daniel A. Benitez

  1. By: Nicolai J. Foss; Peter G. Klein
    Abstract: Ever since its emergence in the 1970s the modern economic or Coasian theory of the firm has been discussed and challenged by sociologists, heterodox economists, management scholars, and other critics. This paper reviews and assesses these critiques, focusing on behavioral issues (bounded rationality and motivation), process (including path dependence and the selection argument), entrepreneurship, and the challenge from knowledge-based theories of the firm.
    Keywords: Coasian theory of the firm; Bounded rationality; Motivation; Entrepreneurship
    JEL: B4 D23 L14 L22
    Date: 2005
  2. By: Ioana Chioveanu
  3. By: Oliver Gürtler
    Abstract: In some sports leagues, the sports association sells broadcasting rights centrally in order to create competitive balance. In other ones, the market is decentral. As a result, there is competitive imbalance. In this paper, the preferred kind of marketing of sports associations is analysed. Distinctions are made between three cases. In case one, the sports association is only interested in competitive balance. In the second case, it wishes to create a single high performing team, and in the third, it maximises aggregate performance. It is found that, depending on the preferences of the association, both kinds of marketing can be optimal.
    Keywords: central marketing, decentral marketing, collective tournament, complementarity
    JEL: D2 L1 L8 M5
    Date: 2005–02
  4. By: Groh, Christian; Spagnolo, Giancarlo
    Abstract: We model a new effect of exclusivity on non-contractible investments in buyer/seller relationships. By restricting the buyer to purchase from only one seller, exclusivity increases the buyer’s costs of haggling during renegotiation and hence the seller’s relative bargaining power and bargaining share. This in turn fosters the seller’s incentives to invest even for investments that are fully specific to the relationship (‘internal investments’), in contrast to a recent finding by Segal and Whinston (2000b).
    Keywords: bargaining; contracting; exclusive dealing; foreclosure; incomplete contracts; investment
    JEL: C78 D23 L20 L42
    Date: 2004–08
  5. By: Cabral, Luís M B; Polak, Ben
    Abstract: We provide a simple framework to analyse the effect of firm dominance on incentives for R&D. An increase in firm dominance, which we measure by a premium in consumer valuation, increases the dominant firm's incentives and decreases the rival firm's incentives for R&D. These changes influence the probability of innovation through two effects: changes in total R&D effort and changes in how this total is distributed between the two firms. For a given level of total research effort, the shift from the rival firm to the dominant firm is a good thing as it decreases the likelihood of duplicate innovation (we call this the duplication effect). The shift in research effort is not one-to-one, however. The dominant firm's benefit from increased dominance is more inframarginal than marginal when compared to the rival firm's disincentive. As a result, total research effort decreases when firm dominance increases (we call this the total effort effect). We show the total effort effect dominates the duplication effect when intellectual property protection is weak, and the opposite when property rights are strong. That is, firm dominance is good for innovation when (but only when) property rights are strong. We also examine consumer and social surplus.
    Keywords: dominant firm; imitation; innovation; R&D
    JEL: L13 L41 O31
    Date: 2004–08
  6. By: Caffarra, Cristina; Kühn, Kai-Uwe; Stillman, Robert
    Abstract: Theories of bundling have had great importance in European competition policy in recent merger control and abuse of dominance cases. Prominent examples include GE/Honeywell, Tetra Laval/Sidel and the recent Microsoft decision. The European Commission has been heavily criticized in all of those cases. In this Paper we attempt to sketch how a systematic approach to bundling cases can be structured. We first provide an overview of existing bundling theories, concentrating on robust economic mechanisms and their empirical implications. This allows us to develop a number of clear criteria to identify potentially anticompetitive bundling. We show that a careful reading undermines recently proposed arguments for a (modified) per se legality rule for bundling.
    Keywords: bundling; efficiency defenses; foreclosure; policy rules
    JEL: K21 L41
    Date: 2004–11
  7. By: Barros, Pedro Pita; Hoernig, Steffen
    Abstract: Inspired by the creation of the new Competition Authority in Portugal, we consider the interplay between regulatory agencies with overlapping competencies; for example, a competition authority and a sectoral regulator. We analyse how authorities’ incentives are affected if they can decide independently, or must follow each others’ opinions, respectively, and consider how this relationship performs in the presence of institutional biases and lobbying efforts. It is found that the best results tend to be achieved when the authorities act independently of each other: the probability of coming to a decision is higher, and decisions are less vulnerable to lobbying.
    Keywords: competition authority; institutional relationship; lobbying; sectoral regulators; strategic substitutes and complements
    JEL: L51
    Date: 2004–08
  8. By: Degryse, Hans; Ongena, Steven
    Abstract: How do banks react to increased competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking - and bank industry specialization. We empirically investigate the impact of interbank competition on bank branch orientation and specialization. We employ a unique dataset containing detailed information on bank-firm relationships and industry classification. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending and specialize somewhat less in a particular industry. Our results illustrate that competition and relationships are not necessarily inimical.
    Keywords: bank industry specialization; bank orientation; competition; lending relationships
    JEL: G21 L11 L14
    Date: 2004–08
  9. By: Gual, Jordi; Trillas, Francesco
    Abstract: This Paper presents new data, in the form of several indices, on liberalization policies and the independence of regulators for a cross section of countries. These indices are combined with a comprehensive set of performance, institutional and political data to analyse both the determinants and the impact of telecommunications policies. We find that liberalization policies are negatively associated with the degree to which countries have an interventionist tradition, but not with the partisan ideology of reforming governments. We also find that countries with weak protection of investors’ quasi-rents by other means, and countries with a larger incumbent, are more prone to create (at least legally) independent regulatory agencies. There is preliminary evidence with this dataset that, when the endogeneity of policies is taken into account, the creation of independent regulatory agencies and pro-entry policies have a significant positive effect on network penetration and a negative effect on productivity.
    Keywords: institutions; liberalization; telecommunications
    JEL: F21 L32 L96
    Date: 2004–08
  10. By: Griva, Krina; Vettas, Nikolaos
    Abstract: We examine price competition under product-specific network effects, in a duopoly where the products are differentiated horizontally and vertically. When consumers' expectations are not affected by prices, firms may share the market equally, or one firm (possibly the low-quality one) may capture the entire market. When product qualities are different, we may also have interior asymmetric equilibria. With expectations affected by prices, firms' competition becomes more intense and the high quality firm captures a larger market share.
    Keywords: network effects; price competition; product differentiation; product variety; quality
    JEL: D43 L13
    Date: 2004–08
  11. By: Diaw, Khaled; Pouyet, Jérôme
    Abstract: Two producers offer differentiated goods to a representative consumer. The buyer has distinct marginal valuations for the quality of the products. Each producer knows perfectly the consumer’s taste for its own product, but remains uninformed about its taste for the rival’s product. When each product cannot be purchased in isolation of the other one, a phenomenon of endogenous preferences arises since a firm’s offer to the consumer depends on the information unknown by the rival firm. Multiple equilibria emerge and the consumer’s rent increases with their valuation for one product and decreases with the valuation for the other product. This provides some foundations for the phenomenon of versioning, which has been observed in some digital goods markets. By contrast, when each product can be purchased in isolation of the other one, at the unique equilibrium consumers with larger valuations for a product earn higher rents. The analysis is undertaken under two alternative pricing policies: in the partially-discriminatory case, producers make use of the known information only; in the fully-discriminatory case, each producer offers second-degree price discriminates the consumer according to the unknown information. We show that, sometimes, firms prefer partial to full discrimination to soften competition.
    Keywords: price competition; price discrimination; versioning
    JEL: D82 L13
    Date: 2004–09
  12. By: Kühn, Kai-Uwe; Machado, Matilde
    Abstract: The Spanish electricity spot market is highly concentrated both on the seller and the buyer side. Furthermore, unlike electricity spot markets in other deregulated electricity systems, large buyers and sellers are typically vertically integrated. This allows both large net sellers and large net buyers to strategically influence the spot market price. We develop a supply function model of this market to analyse the impact of market power on prices and productive efficiency and use it empiricially to detect such bilateral market power. Our estimates suggest that market power has had little impact on spot market prices but that substantial productive inefficiencies may have arisen from the exercise of bilateral market power.
    Keywords: bilateral market power; electricity markets; market power test; supply function equilibirum; vertical integration
    JEL: L13 L41 L94
    Date: 2004–09
  13. By: Anderson, Simon P; de Palma, André
    Abstract: We describe firm pricing when consumers follow simple reservation price rules. In stark contrast to other models in the literature, this approach yields price dispersion in pure strategies even when firms have the same marginal costs. At the equilibrium, lower price firms earn higher profits. The range of price dispersion increases with the number of firms: the highest price is the monopoly one, while the lowest price tends to marginal cost. The average transaction price remains substantially above marginal cost even with many firms. The equilibrium pricing pattern is the same when prices are chosen sequentially.
    Keywords: passive search; price dispersion; reservation price rule
    JEL: C72 D43 D83
    Date: 2004–09
  14. By: Besley, Timothy; Ghatak, Maitreesh
    Abstract: A unifying theme in the literature on organizations such as public bureaucracies and private non-profits is the importance of missions, as opposed to profit, as an organizational goal. Such mission-oriented organizations are frequently staffed by motivated agents who subscribe to the mission. This Paper studies incentives in such contexts and emphasizes the role of matching principals’ and agents’ mission preferences in increasing organizational efficiency and reducing the need for high-powered incentives. The framework developed in this Paper is applied to non-profits, school competition, and incentives in the public sector.
    Keywords: competition; incentives; non-profits
    JEL: D23 H10 L31
    Date: 2004–09
  15. By: Nocke, Volker; Peitz, Martin; Stahl, Konrad O.
    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. There also may be free entry into the market for platform slots, or platform owners my form a club that restricts entry. 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 equilibrium platform size and welfare. We develop an intuitive taxonomy of these towards developing our results. We show that 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: intermediation; network effects; product diversity; two-sided markets
    JEL: D40 L10
    Date: 2004–10
  16. By: Church, Jeffrey; Gandal, Neil
    Abstract: In this Paper we consider the economics of platform competition in telecommunications. Platform competition occurs when different, sometimes incompatible, technologies compete to provide telecommunications services to end-users. Battles between competing technologies have been an important feature of telecommunications in the last twenty or so years. Examples of platform competition in telecommunications include wireless vs. wireline networks, competing wireless options, such as satellite vs. cellular, and, within cellular, different digital standards.
    Keywords: platform competition; telecommunications
    JEL: L13
    Date: 2004–10
  17. By: Ashenfelter, Orley C; Graddy, Kathryn
    Abstract: The Sotheby’s/Christie’s price-fixing scandal that ended in the public trial of Alfred Taubman provides a unique window on a number of key economic and antitrust policy issues related to the use of the auction system. The trial provided detailed evidence as to how the price fixing worked, and the economic conditions under which it was started and began to fall apart. The outcome of the case also provides evidence on the novel auction process used to choose the lead counsel for the civil settlement. Finally, though buyers received the bulk of the damages, a straightforward application of the economic theory of auctions shows that it is unlikely that successful buyers as a group were injured.
    Keywords: auctions; cartels; commissions; price-fixing
    JEL: D44 K21 L41
    Date: 2004–10
  18. By: Evenett, Simon J; Hoekman, Bernard
    Abstract: The stalemate reached on launching negotiations on most of the Singapore Issues at Cancún provides an opportunity to revisit the knowledge base upon which proposals for international collective action may be drawn. This Paper examines the available evidence on public procurement practices in developing countries that could be relevant to multilateral rule making. Although there is considerable agreement on ends (efficient, non-corrupt, and transparent public purchasing systems), little information is available on means: effective and replicable strategies that developing countries have adopted to improve their public procurement systems. A concerted effort to substantially add to the knowledge base on public procurement reforms in developing countries, through targeted research and international exchange of information on applied procurement policies and outcomes, is critical to identify areas where binding multilateral disciplines may be beneficial. The literature surveyed in this Paper suggests that reforms of public procurement systems are often guided by international instruments and templates, but are not informed by quantitative assessments of the cross-country experience as regards the different options, mechanisms and technologies that can be adopted. A research agenda to help fill these lacunae is presented – implementation of which might inform a WTO-based effort to identify options for international cooperation.
    Keywords: Doha round; economic development; government procurement; WTO
    JEL: F13 H57
    Date: 2004–10
  19. By: Eliaz, Kfir; Offerman, Theo; Schotter, Andrew
    Abstract: We study a procedure for selling multiple heterogenous goods, which is commonly used in practice but rarely studied in the literature. The novel feature of this procedure is that instead of selling the goods themselves, the seller offers buyers the right to choose among the available goods. Thus, buyers who are after completely different goods are forced to compete for the same good, the ‘right to choose’. Competition can be further enhanced by restricting the number of rights that are sold. This is shown both theoretically and experimentally. Our main experimental finding is that by auctioning ‘rights-to-choose’ rather than the goods themselves, the seller induces an aggressive bidding behaviour that generates more revenue than the theoretical optimal mechanism.
    Keywords: Behavioural Mechanism-Design; Experimental auctions; Right-to-Choose Auctions
    JEL: C91 D44
    Date: 2004–10
  20. By: Asker, John; Cantillon, Estelle
    Abstract: This Paper studies scoring auctions, a procedure commonly used to buy differentiated products: suppliers submit offers on all dimensions of the good (price, level of non monetary attributes), and these are evaluated using a scoring rule. We provide a systematic analysis of equilibrium behaviour in scoring auctions when suppliers’ private information is multidimensional (characterization of equilibrium behaviour and expected utility equivalence) and show that scoring auctions dominate several other commonly used procedures for buying differentiated products.
    Keywords: auction; multi-attribute; multidimensional private information; procurement
    JEL: D44 L14 L24
    Date: 2004–11
  21. By: Raouf, BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE) and Institut de Recherches Economiques et Sociales(IRES)); Omar, LICANDRO (EUI, European University Institute (Firenze-Italy)); Antonio, MINNITI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE), Belgium)
    Abstract: This note analyses the adoption and diffusion of innovations in a horizontally differentiated Cournot duopoly in which firms have to choose the dates for adopting a cost-reducing new technology like in Reinganum (1981a). We prove that product differentiation crucially matters in the diffusion pattern of the innovation and in the comparison between the adoption timing in the decentralized economy Vs the social optimum .
    Keywords: Adoption; diffusion; differentiated duopoly
    JEL: O31
    Date: 2004–10–05
  22. By: Donald J. Brown (Cowles Foundation, Yale University); G.A. Wood
    Abstract: An applied general equilibrium analysis of monopoly power is proposed as an alternative to the partial equilibrium analyses of monopoly pricing current in antitrust economics. This analysis introduces a new notion of market equilibrium where firms with monopoly power are cost-minimizing price-takers in competitive factor markets and make supracompetitive profits in equilibrium, i.e., the monopoly price exceeds the marginal cost of production. We assume that the primary goals of antitrust policy are the promotion of competition and the enhancement of consumer welfare. To that end, we use Debreu's coefficient of resource utilization to determine the counterfactual competitive price levels in monopolized markets and then impute the economic costs of monopolization.
    Keywords: Monopoly power, Antitrust economics, Applied general equilibrium analysis
    JEL: D42 D58 D61 L12 L41
    Date: 2004–05
  23. By: Thomas A. Abbott; John A. Vernon
    Abstract: Previous empirical studies that have examined the links between pharmaceutical price controls, profits, cash flows, and investment in research and development (R&D) have been largely based on retrospective statistical analyses of firm- and/or industry-level data. These studies, which have contributed numerous insights and findings to the literature, relied upon ad hoc reduced-form model specifications. In the current paper we take a very different approach: a prospective micro-simulation approach. Using Monte Carlo techniques we model how future price controls in the U.S. will impact early-stage product development decisions in the pharmaceutical industry. This is done within the context of a net present value (NPV) framework that appropriately reflects the uncertainty associated with R&D project technical success, development costs, and future revenues. Using partial-information estimators calibrated with the most contemporary clinical and economic data available, we demonstrate how pharmaceutical price controls will significantly diminish the incentives to undertake early-stage R&D investment. For example, we estimate that cutting prices by 40 to 50 percent in the U.S. will lead to between 30 to 60 percent fewer R&D projects being undertaken (in early-stage development). Given the recent legislative efforts to control prescription drug prices in the U.S., and the likelihood that price controls will prevail as a result, it is important to better understand the firm response to such a regulatory change.
    JEL: I1 L1 L2 L5
    Date: 2005–02
  24. By: Antonio Estache; Daniel A. Benitez
    Abstract: In infrastructure, the possibility of a positive relationship between operators’ profitability and the degree of concentration is a major political issue in view of the wide diversity of feelings about the potential role of the private sector. This is particularly important because of (1) the large residual degree of monopolies, (2) the protection they are granted through exclusivity clauses built in service delivery contracts, and (3) the widespread sense that the same operators tend to be present in most of the privatized operations. The main purpose of this paper is to provide a first set of quantitative assessments of the degree of concentration in infrastructure at the global and the regional levels. Concentration issues were identified in only about 20 percent of the cases studied, and a presumption of concentration was found in another 30 percent of the cases. Benitez and Estache find no correlation between the degree of concentration and the degree of reform adopted by a region or a sector. In more general terms, they find no scope for simple encompassing regional or sectoral statements because issues are region- and sector-specific. The authors conclude by arguing that there are a few cases and regions in which it would make sense for a supranational competition or regulation agency to ensure that the interests of the users are protected more effectively against the risks of collusion and other types of anti-competitive behaviors local regulators would not be equipped to address. This paper—a product of the Office of the Vice President, Infrastructure Network—is part of a larger effort in the network to document the state of the sector.
    Keywords: Governance; Infrastructure; International Economics; Private Sector Development; Public Sector Management; Globalization
    Date: 2005–02–08

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