nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒04‒16
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Hard Core Cartels and Avoidance of Investigation in the Presence of an Antitrust Authority By Gianmaria Martini
  2. Deconstructing Chicago on Exclusive Dealing By Joseph Farrell
  3. Spot Market Power and Future Market Trading By Stephen Shore; Alexander Muermann; ... ...
  4. Incitamentsreglering av monopol med styckvis linjär approximation av efterfrågan By Lantz, Björn
  5. Financing of Media Firms: Does Competition Matter? By Kind, Hans Jarle; Nilssen, Tore; Sørgard, Lars
  6. Bank Mergers, Competition and Liquidity By Carletti, Elena; Hartmann, Philipp; Spagnolo, Giancarlo
  7. Edith Penrose and the Penrosians - or, why there is still so much to learn from The Theory of the Growth of the Firm. By Nicolai J. Foss
  8. The determining factors of entry of new firms into industrial sectors: a survey By Christian Garavaglia
  9. Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement By Giovanni B. Ramello; Donatella Porrini
  10. Partial Communication and Collusion with Demand Uncertainty By Heiko Gerlach
  11. Price Competition and Product Differentiation when Goods have Network Effects By Klaus CONRAD
  12. Collusion in the Dutch waste collection market By E. Dijkgraaf; R. H. J. M. Gradus
  13. Endogenous Timing in a Mixed Oligopoly with Foreign Competitors By Yuanzhu Lu
  14. Integrating Competition Policy and Innovation Policy: The Case of R&D Cooperation By Georg von Graevenitz
  15. Impact of Market Entry and Exit on EU Productivity and Growth Performance By Michele Cincera; Olivia Galgau
  16. Patents Hinder Collusion By Klaus Kultti; Tuomas Takalo; Juuso Toikka
  17. Entrada y competencia en los servicios de telecomunicaciones By Israel J. Muñoz; Elena Huergo
  18. El diagnóstico de poder de mercado en Economía Industrial: Una revisión de la literatura empírica española del siglo XX By Elena Huergo
  19. Endogenous Antitrust: Cross-Country Evidence on the Impact of Competition-Enhancing Policies on Productivity By Joan-Ramon Borrell; Mara Tolosa
  20. Deregulation, Restructuring and Changing R&D Paradigms in the US Electric Utility Industry By Paroma Sanyal; Linda R. Cohen
  21. U.S. Domestic Airline Pricing, 1995-2004 By Severin Borenstein
  22. Favouritism and cartel disruption in first-price auctions By Ricardo Gonçalves
  23. Delivered versus Mill Nonlinear Pricing in Free Entry Markets By Sílvia Jorge; Cesaltina Pires

  1. By: Gianmaria Martini (University of Bergamo)
    Abstract: Hard Core Cartels aim to design, being aware of the presence of an antitrust authority, market practices granting avoidance of antitrust investigations. We show, in a dynamic game, that they can reach this goal and get extra--normal profits. However, the bulk of this opportunity does not lay, here, in limiting price changes across periods (as in Harrington [2004b]), but rather in sending a signal to the authority which has a twofold effect: (1) it does make evident that cartel's members are currently not engaged in an ``excessive'' degree of collusion, (2) it credibly shows that this moderate collusive activity has a persistence effect, i.e. it will be maintained also in future periods. We also show that antitrust remedies (e.g. behavioral constraints or injunction reliefs) are more powerful, in limiting the collusive activity, than fines. Last, we show that social welfare is higher if Hard Core Cartels have limited information about the type of authority (i.e. tough or accommodating) they are facing.
    JEL: D43 L13 L41
    Date: 2005–02–23
  2. By: Joseph Farrell (Department of Economics, University of California at Berkeley)
    Abstract: While exclusive dealing can be efficient, the Chicago School has also argued that it cannot be anticompetitive, or that it seldom is. That argument takes two forms; both are weak. First, a pricetheory argument (“the Chicago Three-Party Argument”) depends crucially on a special model of oligopoly and predicts that we will never see what we see. I show how simply replacing the embedded oligopoly model suggests new efficiency and anticompetitive motives for exclusive dealing; these motives differ markedly from those usually discussed. Second, “the Chicago Vertical Question” is a challenge to theories of anticompetitive vertical practices, including exclusive dealing. While that Question is salutary and helpful, its apparent force dissipates if we pay careful attention to externalities, as others have noted, and to the issue of alternatives versus benchmarks, as I describe below. Overall, economic logic does not support any general presumption that exclusive dealing is efficient.
    Keywords: Exclusive dealing, vertical restraints, monopoly, antitrust
    JEL: L
    Date: 2005–04–14
  3. By: Stephen Shore; Alexander Muermann; ... ...
    Abstract: When a spot market monopolist participates in the futures market, he has an incentive to adjust spot prices to make his futures market position more pro.table. Rational futures market makers take this into account when they set prices. Spot market power thus creates a moral hazard problem which parallels the adverse selection problem in models with inside information. This moral hazard not only reduces the optimal amount of hedging for those with and without market power, but also makes complete hedging impossible. When market makers cannot distinguish orders placed by those with and without market power, market power provides a venue for strategic trading and market manipulation. The monopolist will strategically randomize his futures market position and then use his market power to make this position pro.table. Furthermore, traders without market power can manipulate futures prices by hiding their orders behind the monopolist.s strategic trades.
    Date: 2005–04
  4. By: Lantz, Björn (Department of Business Administration, School of Economics and Commercial Law, Göteborg University)
    Abstract: One anonymous mechanism for monopoly regulation is the Chord-approximation Adjustment Process, CAP, suggested by Vogelsang (1988) where the change in consumer surplus is approximated as an average between a Laspeyres and a Paasche index. The main drawback of this method is an incentive for strategic pricing behaviour so that the price will not converge to marginal cost whenever demand is not linear. This paper shows how the change in consumer surplus under a non-linear demand curve can be approximated piecewise linearly based on solely verifiable information which removes the incentive for strategic behaviour. <p>
    Keywords: Monopoly regulation; incentive regulation
    Date: 2005–03–29
  5. By: Kind, Hans Jarle (Norwegian School of Economics and Business Administration); Nilssen, Tore (Dept. of Economics, University of Oslo); Sørgard, Lars (Norwegian Competition Authority)
    Abstract: This paper analyses how competition between media firms influences the way they are financed. In a setting where monopoly media firms choose to be completely financed by consumer payments, competition may lead the media firms to be financed by advertising as well. The closer substitutes the media firms’ products are, the less they rely on consumer payment and the more they rely on advertising revenues. If media firms can invest in programming, they invest more the less differentiated the media products are perceived to be.
    Keywords: Media; Advertising; Two-sided markets
    JEL: L22 L82 L86 M37
    Date: 2005–04–06
  6. By: Carletti, Elena (Center for Financial Studies); Hartmann, Philipp (European Central Bank); Spagnolo, Giancarlo (Stockholm School of Economics)
    Abstract: We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger creates an internal money market that affects reserve holdings and induces financial cost advantages, but also withdraws liquidity from the interbank market. Loan market competition modifies the heterogeneity in the size of banks, thus affecting aggregate liquidity. Mergers among large banks tend to increase aggregate liquidity needs and thus the liquidity provision in monetary operations by the central bank.
    Keywords: Credit market competition; bank reserves; internal money market; banking system liquidity
    JEL: D43 G21 G28 L13
    Date: 2005–03–01
  7. By: Nicolai J. Foss
    Keywords: firm growth; capabilities; firm strategy
    JEL: L21 L22 M2
  8. By: Christian Garavaglia (Cattaneo University (LIUC))
    Abstract: Entry is a common feature of all industries and it represents a key aspect to be studied in order to understand the dynamics that characterise the evolution of industrial sectors. It is the purpose of this paper to analyse the process of entry of firms into markets and the nature of the factors that could play a role in determining it and in shaping the evolution of market structures. Different fields of economic literature examine the dynamic process of entry of new firms. In this paper, we focus our attention on the differences that characterise these approaches: the traditional approach, the technological regime theory, the role of “competence-enhancing” and “competence-destroying” technological change, the industry life cycle theory, the role of information and uncertainty, the organisational ecology approach and the psychological view. We claim that the relationship of the entry processes with the evolution of market structures, then, can be deeply understood only if we take into account the distinctions and the complementarities offered by these views.
    Date: 2004–03
  9. By: Giovanni B. Ramello (Cattaneo University (LIUC)); Donatella Porrini (Cattaneo University (LIUC))
    Abstract: The antitrust intervention in banking has always been heavily influenced by considerations of stability. Regulation has historically given precedence to the stability objective, relegating thus competition to second place. In fact, in the case of banking, price competition tends to encourage overly speculative behaviours, which essentially entail acceptance of excessive risk, with a resultant volatility that could potentially harm depositors, and ultimately compromise the stability of the economic system as a whole. The consequence of this approach is that banking market becomes extremely rigid on the supply side and structurally not equipped for a competitive orientation, and banks come to occupy a privileged position vis-à-vis governments that--to a greater or lesser extent, depending on the countries and the situations--enables them to sidestep the antitrust authorities. In such a scenario, the trade-off between stability and competition cannot be totally resolved through traditional antitrust actions, which are sometimes at odds with the stability objective and hampered by the constraints of the previously defined regulatory framework. It is precisely these considerations, found in a significant portion of the literature, that provide the starting base for the hypothesis of this work and namely the proposal of a novel demand side perspective, i.e. one which focuses on the central role of consumers in the competitive process. If intervention on the supply side is hampered a priori by the regulatory framework, it is nevertheless possible to implement pro-competition actions on the demand side, for example by enhancing the ability of consumers to change from one provider to the other without impacting on the market structure. In operational terms, the proposed approach is to leverage consumer mobility in order to stimulate the currently weakened competition between firms. This would make it possible to pursue the traditional antitrust objectives of efficiency and welfare maximisation, without necessarily impacting on stability.
    Date: 2004–09
  10. By: Heiko Gerlach (University OF AUCKLAND)
    Abstract: This paper analyzes the role of communication in an infinitely repeated Bertrand game in which firms receive an imperfect private signal of a common value i.i.d. demand shock. Communication allows firms to coordinate on the most collusive price and it eliminates the possibility of undetectable price cuts. It is shown that firms can use stochastic intertemporal market sharing as a perfect substitute for communication in low demand states. Therefore, partial communication in high demand states is sufficient to achieve the first-best, full communication outcome. And partial communication in low demand state does not improve on the equilibrium without communication. Communication is most valuable to firms if signal frequency is intermediate, demand is characterized by upward shocks and the number of firms is neither too small nor too large.
    Keywords: Communication, Collusion, Repeated Games, Competition Policy
    JEL: L41 L13 D
    Date: 2005–01–31
  11. By: Klaus CONRAD (University of Mannheim Department of Economics)
    Abstract: The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be either one with the firm offering the conventional engine as the only producer, one with the firm offering the new technology as the only producer, or one in which both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important. In order to find out whether private decision on the type of engine coincides with a socially optimal product differentiation, we determine the position of the two types of engine by a welfare maximizing authority.
    Keywords: Price competition; Quality competition; Environmental awareness; Network effects; Automobiles.
    JEL: L Q H L
    Date: 2005–02–07
  12. By: E. Dijkgraaf (Erasmus University Rotterdam, ECRi, SEOR); R. H. J. M. Gradus (Erasmus University Rotterdam, Vrije Universiteit Amsterdam)
    Abstract: In this paper we analyse whether collusion exists in the Dutch waste collection market, which shows a high degree of concentration. Although scale effects might be in accordance with this market outcome, the question is whether this concentration is in fact a result of fair competition. Using data for (nearly) all Dutch municipalities we estimate whether collusion exists and what the impact is on tariffs for waste collection. The results indicate that high concentration increases prices and therefore (partly) offsets the advantage of contracting out. The presence of competing public firms might be essential to ensure more and fair competition.
    Keywords: Waste collection, collusion, public-private firms, contracting out
    JEL: D43 L33 R51
    Date: 2005–02–08
  13. By: Yuanzhu Lu (National University of Singapore)
    Abstract: Endogenous order of moves is analyzed in a mixed oligopoly with one public firm, n1 domestic private firms and n2 foreign private firms, where the firms first choose the timing for choosing their quantities. We consider the observable delay game of Hamilton and Slutsky (1990) in the context of a quantity setting mixed oligopoly where firms first choose the timing of choosing their quantities before quantity choice and find subgame perfect Nash equilibria (SPNE). The main result is that the public firm chooses to be a follower of all the domestic private firms and not to be a leader of all the foreign private firms, and that the number of SPNE depends on the number of domestic private firms and of foreign private firms.
    Keywords: Mixed Oligopoly; Endogenous Timing; Foreign Competitors
    JEL: C72 D43 H42 L13
    Date: 2005–03–01
  14. By: Georg von Graevenitz (INNO-tec, Munich School of Management)
    Abstract: This paper considers the integration of competition policy and innovation policy in the context of R&D cooperation. An explicit comparison of the welfare losses under ex-ante and ex-post R&D cooperation reveals differing incentives to undertake R&D in both regimes. The strength of these incentives is related to the degree of product market competition. We show that there is a clear relationship between the degree of competition in the product market and the relative performance of firms under ex-ante and ex-post cooperation. We derive implications for the design of competition policy rules.
    Keywords: Competition Policy, Innovation Policy, R&D Cooperation, Licensing, Research Joint Venture, Oligopolistic R&D
    JEL: O31
    Date: 2005–03–15
  15. By: Michele Cincera (Université Libre de Bruxelles-DULBEA-CERT & CEPR); Olivia Galgau (Université Libre de Bruxelles-DULBEA)
    Abstract: The European Union and its Member States have been engaged in product market reforms over a long period with notable reforms including the Single Market Program and the Lisbon Agenda launched in March 2000. Product market reforms are seen as exerting both a direct and an indirect impact on productivity, however, the net effects of the direct effect were found to be small. This study concentrates on the impact of product market reforms on firm entry and exit that can itself be decomposed into two effects: internal restructuring which refers to productivity growth of individual firms present in the industry and external restructuring whereby the process of market selection leads to a reallocation of resources among individual firms. The change in firm entry and exit will in turn affect macroeconomic performance.
    Keywords: Market entry and exit, product market reforms, macroeconomic performance
    JEL: L16 L50 O47 O52
    Date: 2005–03–28
  16. By: Klaus Kultti (University of Helsinki); Tuomas Takalo (University of Toulouse & Bank of Finland); Juuso Toikka (Helsinki School of Economics)
    Abstract: We argue that a patent system makes collusion among innovators more difficult. Our simple argument is based on two properties of the patent system. First, a patent not only protects against infringement but also against retaliation by former collusion members. Second, a deviator has an equal chance with former collusion members to get a patent on new innovations. We show that if a patent system reduces spillovers, it renders collusion impossible. Moreover, it is possible to design a patent system that simultaneously increases knowledge spillovers and eliminates collusion
    Keywords: Patens, Collusion, Secrecy, Innovation
    JEL: L
    Date: 2005–03–31
  17. By: Israel J. Muñoz (Universidad Complutense de Madrid); Elena Huergo (Universidad Complutense de Madrid)
    Abstract: Este trabajo analiza la entrada y la competencia en servicios de telecomunicaciones, en los que las empresas se diferencian por sus costes hundidos y por la valoración que reciben de los consumidores. En este marco de análisis desaparece el problema de coordinación presente en la literatura sobre entrada con costes hundidos, debido a que ahora la competencia en precios se ve modificada por el parámetro de valoración. Cuando se introduce heterogeneidad en los consumidores, la entrada queda definida por la combinación de costes y valoración, mientras los consumidores dirigen su demanda hacia la empresa que mejor se adapta a su tipo.
    Keywords: Entry, telecommunications, sunk costs, discrete choice of consumers
    JEL: L1 L11 L96
    Date: 2005–04–04
  18. By: Elena Huergo (Universidad Complutense de Madrid)
    Abstract: El propósito de este trabajo es revisar las principales aplicaciones sobre el diagnóstico de poder de mercado que hacen referencia concreta a la industria española de manufacturas. En el marco del paradigma clásico las aplicaciones han consistido básicamente en estimaciones de ecuaciones de rentabilidad. La evidencia obtenida a partir de estas estimaciones tiende a señalar un efecto positivo de la concentración sobre los resultados empresariales, si bien su magnitud y significatividad varía en función del resto de variables explicativas. En la línea de la Nueva Organización Industrial Empírica, el conjunto de estudios empíricos sobre poder de mercado en la industria española es muy reducido, consecuencia en parte del retraso en el cambio de orientación del trabajo aplicado en España. Dentro de este pequeño grupo se observa una gran heterogeneidad que está en consonancia con la observada en la literatura empírica internacional, respecto a la que las aplicaciones españolas han reducido notablemente la distancia que manifestaban en décadas anteriores.
    Keywords: Market Structure, Market power, empirical evidence
    JEL: L
    Date: 2005–04–04
  19. By: Joan-Ramon Borrell (University of Barcelona); Mara Tolosa (University of Barcelona)
    Abstract: This paper presents empirical evidence regarding the effect of simultaneous antitrust and trade policy on productivity. We find that treating antitrust across countries as an exogenous policy overestimates the impact of competition on productivity by as much as 18%.
    Keywords: Antitrust,Productivity,Political economy
    JEL: D7 L4 O4
    Date: 2005–04–08
  20. By: Paroma Sanyal (Brandeis University); Linda R. Cohen (University of Califirnia, Irvine)
    Abstract: This paper studies the impact of electricity deregulation and restructuring on research and development (R&D) expenditures of investor owned utilities. The differing pace of deregulation in the fifty states provides heterogeneity in institutional structure and competitive forces, and showcases the response of R&D funding to changing institutional environments. Based on a panel of all major investor-owned utilities from 1989-1997, this paper analyzes various political constraints, institutional change, and firm-specific financial and structural factors that have contributed to the decline of R&D expenditure in the U.S. electric utility industry. R&D is modeled as a two-stage process where firms first decide whether to invest in research depending on their critical mass and state characteristics, and then conditional on a positive decision, decide on the level of expenditure. A variation of the Heckman model is estimated in a panel data setting, allowing for separate effects of selection and intensity. The primary findings are: First, greater deregulation and competition has a positive effect on R&D whereas a higher probability of deregulation adversely affects research spending. The start date for retail competition and level and policies for stranded cost recovery do affect spending. Second, the response of R&D to financial and other firm attributes varies with the state of deregulation and provides insights into firm behavior in a regulated context. Third, the institutional and competitive factors interact in a way that suggest that full deregulation, coupled with effective retail competition may mitigate the problem of declining electricity R&D by the utilities.
    Keywords: Electricity Deregulation, Competition, R&D
    JEL: O30 O31 L50 L94
    Date: 2005–04–13
  21. By: Severin Borenstein (Haas School of Business, University of California, Berkeley)
    Abstract: Between 1995 and 2004, I find that airline prices fell more than 20% adjusted for inflation. I also show that premia at hub airports declined and that there is now substantially less disparity between the cheaper and more expensive airports than there was a decade ago. Still, I find that prices remain quite high at a few dominated airports.
    Keywords: Airline Competition, Airline Hubs, Price Indices
    JEL: L13 L93 E31
    Date: 2005–04–14
  22. By: Ricardo Gonçalves (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro)
    Abstract: The seller in an auction will generally not be happy to know that a cartel of bidders will take part in that auction. Cartels generate their profits by inducing a final price which is lower (higher in the case of procurement contracts' auctions) than in a competitive auction. This paper proposes a solution to the problem. By allowing the seller to cheat on the auction rules, and to allocate the good to a given bidder with a predetermined probability (favouritism), we show that when no cartel is active, the auction leads to a lower price than that obtained in a purely competitive auction. However, if a cartel is operative, favouritism generates incentives for the favoured bidder to defect the cartel. This single defection is sufficient to disrupt the cartel. In equilibrium, the seller may choose this probability of cheating so as to obtain the highest possible final auction price, which we show to be a second-best outcome. In other words, this proposed solution to the cartel's existence does not lead to a final auction price as high as that obtained in a competitive auction.
    Keywords: First-price auctions, collusion, cartels
    JEL: D44
    Date: 2004–04
  23. By: Sílvia Jorge (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro); Cesaltina Pires (Departamento de Gestão de Empresas, Universidade de Évora)
    Abstract: This paper discusses a model where consumers simultaneously differ according to one unobservable (preference for quality) and one observable characteristic (location). In these circumstances nonlinear prices arise in equilibrium. The main question addressed in this work is whether firms should be allowed to practise different nonlinear prices at each location (delivered nonlinear pricing) or should be forced to set an unique nonlinear contract (mill nonlinear pricing). Assuming that firms can costless relocate, we show that the free entry long-run number of firms may be either smaller, equal, or higher under delivered nonlinear pricing. In addition, we show that delivered nonlinear pricing yields in the long-run higher welfare and, consequently, our results support the view that discriminatory nonlinear pricing should not be prohibited.
    Keywords: Delivered nonlinear pricing, Mill nonlinear pricing, Asymmetric information, Pricing regulation
    JEL: D43 L13 D82
    Date: 2004–09

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