nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒05‒07
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Vertical Contracts between Manufacturers and Retailers: Inference with Limited Data By Sofia Villas-Boas
  2. Identification of Supply Models of Retailer and Manufacturer Oligopoly Pricing By Sofia Villas-Boas; Rebecca Hellerstein
  3. The Coordinated Effects of Mergers in Differentiated Products Markets By Kühn, Kai-Uwe
  4. R&D and Patenting Activity and the Propensity to Acquire in High Technology Industries By Panayotis Dessyllas; Alan Hughes
  5. Content and Advertising in the Media: Pay-TV versus Free-To-Air By Peitz, Martin; Valletti, Tommaso
  6. Corporate governance convergence: evidence from takeover regulation reforms in Europe By Goergen,Marc; Martynova,Martina; Renneboog,Luc
  7. Public Good Aspects of TARGET: Natural Monopoly, Scale Economies, and Cost Allocation By Wilko Bolt; David B. Humphrey
  8. Reciprocal Dumping with Bertrand Competition By Friberg, Richard; Ganslandt, Mattias
  9. Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets By Ganslandt, Mattias; Maskus, Keith E.
  10. Branch Banking, Bank Competition, and Financial Stability By Mark Carlson; Kris James Mitchener
  11. How Rising Competition Among Microfinance Lenders Affects Incumbent Village Banks By Craig McIntosh; Alain de Janvry; Elisabeth Sadoulet
  12. Contractibility and the Design of Research Agreements By Josh Lerner; Ulrike Malmendier
  13. Brand and Price Advertising in Online Markets By Michael Baye; John Morgan
  14. Persistent Knowledge Specialisation and Intra-Industry Heterogeneity: an Analysis of the Spanish Pharmaceutical Industry By Pablo D'Este Cukierman
  15. The Dynamics of Innovation Networks By Lionel Nesta; Vincent Mangematin
  16. Rockonomics: The Economics of Popular Music By Marie Connolly; Alan B. Krueger
  17. Contracts, Holdup, and Legal Intervention By Steven Shavell
  18. Economists Examine File-Sharing and Music Sales By Stan J. Liebowitz
  19. Economists’ Topsy-Turvy View of Piracy By Stan Liebowitz

  1. By: Sofia Villas-Boas (University of California, Berkeley)
    Abstract: In this paper we compare different models of vertical contracting between manufacturers and retailers in the supermarket industry. Demand estimates are used to compute price-cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed. The focus is on identifying which set of margins seems to be compatible with the margins obtained from direct estimates of cost and to select the best among the non-nested competing models. The models considered are: (1) a simple linear pricing model; (2) a vertically integrated model; and (3) a variety of alternative (strategic) supply scenarios, that allow for collusion, non-linear pricing and strategic behavior with respect to private label products. Using data on yogurt sold at several stores in a large urban area of the United States, we find that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain. This is consistent with non-linear pricing by the manufacturers or with high bargaining power of the retailers.
    Keywords: Vertical contracts, multiple manufacturers and retailers, non-nested tests, yogurt local market.,
    Date: 2004–08–01
  2. By: Sofia Villas-Boas (University of California, Berkeley); Rebecca Hellerstein (Federal Reserve Bank of New York)
    Abstract: This note outlines conditions under which we can identify a vertical supply model of multiple retailers' and manufacturers' oligopoly-pricing behavior. This is an important question particularly when the researcher believes, contrary to the traditional assumption followed in the empirical literature, that retailers may not be neutral pass-through intermediaries. We show that a data-set of an industry's product prices, quantities, and input prices over time is sufficient to identify the vertical model of retailers' and manufacturers' oligopoly-pricing behavior given nonlinear demand, for homogeneous-products industries, and given multi-product firms, for differentiated-products industries.
    Keywords: Identification, Vertical relationships, Oligopoly models of multiple manufacturers and retailers,
    Date: 2004–10–01
  3. By: Kühn, Kai-Uwe
    Abstract: The Paper addresses the issue of coordinated effects of mergers in the framework of a differentiated products model. Firms’ assets are product varieties that can be sold individually or entirely transferred to another firm in a merger. We show that under symmetric optimal punishment schemes the highest feasible collusive price declines from any asset transfer to the largest firm as long as the size of the smallest firm is unchanged. In contrast, for fully optimal punishment schemes the prices of firms that get larger increase and those of firms that get smaller decrease. In all cases, however, mergers are unprofitable unless the length of product lines is very asymmetric. We discuss the implications of the analysis for merger policy.
    Keywords: collusion; coordinated effects; joint dominance; mergers; product lines
    JEL: D43 K21 L13 L41
    Date: 2004–12
  4. By: Panayotis Dessyllas; Alan Hughes
    Abstract: In this paper we investigate the incidence of high technology acquisitions using a large international sample of acquisitions by public high technology firms. Controlling for firms’ financial characteristics, we examine the impact of the following innovation-related factors on the propensity to acquire: R&D-intensity as a proxy for R&D inputs; the citation-weighted patent-intensity as a proxy for R&D output; the stock of citation-weighted patents as a proxy for the accumulated stock of knowledge generated by past R&D efforts. The following conclusions can be drawn with respect to the characteristics of acquirers of non-public targets - mainly private firms and former subsidiaries. First, we find support for the view that the propensity to acquire new knowledge-related assets through acquisitions is driven by declining returns from the exploitation of a firm’s existing knowledge base. Second, we find evidence in favour of the make-or-buy theory that acquisitions are a substitute for in-house R&D activity. Third, our results are in accordance with the theoretical argument that a large stock of accumulated knowledge enhances a firm’s ability to absorb external knowledge through acquisitions. These results suggest that smaller acquisitions can be seen as part of an innovation strategy by acquiring firms with relatively low levels of internal R&D which seek to offset low R&D productivity by exploring a range of potential innovation trajectories in new and smaller business units. Interestingly, we find that these interpretations cannot be made for acquirers of the larger public companies.
    Keywords: Mergers and acquisitions, acquisition likelihood, R&D, patents
    JEL: G34 O30 L20
  5. By: Peitz, Martin; Valletti, Tommaso
    Abstract: We compare the advertising intensity and content of programming in a market with competing media platforms. With pay-tv media platforms have two sources of revenues, advertising revenues and revenues from viewers. With free-to-air media platforms receive all revenues from advertising. We show that if viewers strongly dislike advertising, the advertising intensity is greater under free-to-air television. We also show that free-to-air television tends to provide more similar content whereas pay-tv stations differentiate their content. In addition, we compare the welfare properties of the two different schemes.
    Keywords: advertising; media; product differentiation; two-sided markets
    JEL: D43 L13 L82
    Date: 2004–12
  6. By: Goergen,Marc; Martynova,Martina; Renneboog,Luc (Tilburg University, Center for Economic Research)
    Abstract: This paper contributes to the research on corporate governance by predicting the effects of European takeover regulation. In particular, we investigate whether the recent reforms of takeover regulation in Europe are leading to a harmonization of the national legislations. With the help of 150 corporate governance lawyers from 30 European countries, we collected the main changes in takeover regulation. We assess whether a process of convergence towards the Anglo-(American) corporate governance system has been started and we find that this is the case. We make predictions as to the consequences of the reforms for the ownership and control. However, we find that, while in some countries the adoption of a unified takeover code may result in dispersed ownership, in others it may further consolidate the blockholder-based system.
    JEL: G3 G34 G38 K2 K22 K40 G32
    Date: 2005
  7. By: Wilko Bolt; David B. Humphrey
    Abstract: This paper discusses various theoretic concepts which play a role in assessing the public benefits ofTarget, the large value RTGS payment network operated by the Eurosystem. These concepts touch upon natural monopoly, network externalities, competition and contestability, as well as economies of scale and scope. Based on empirical results for the Federal Reserve's payment system (Fedwire), it is argued that if Target decided to standardize its operating platforms and consolidate its processing sites into one or a few centers, it too could realize strong scale economy benefits and lower unit costs. The main thrust of the paper concerns natural monopoly and the possibility of lowering unit payment processing cost via economies of scale. The existence of a natural monopoly provides a rationale for a temporary partial or full subsidy in order for Target to achieve the `most efficient scale' or apply the most efficient technology to lower unit costs. Such a subsidy could be implemented through temporary 'penetration' pricing (i.e., pricing at less than full current cost). When the lower costs are realized, the subsidy would be removed and full cost pricing implemented. Once users face the full costs of their payment decisions, they are better able to match benefits with actual costs and implement a more efficient allocation of payment resources than occurs today on Target.
    Keywords: public good; natural monopoly; most efficient scale; partial subsidy
    JEL: G20 H41 L10
    Date: 2005–04
  8. By: Friberg, Richard (Department of Economics); Ganslandt, Mattias (The Research Institute of Industrial Economics)
    Abstract: This paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that welfare is a U-shaped function in the transport cost as long as trade occurs in equilibrium. With a Cournot duopoly trade can reduce welfare compared to autarchy for any degree of product differentiation. Under Bertrand competition we show that trade may reduce welfare compared to autarchy, if firms produce sufficiently close substitutes and the autarchy equilibrium is sufficiently competitive. Otherwise it can not.
    Keywords: Reciprocal Dumping; Intra-Industry Trade; Oligopoly; Product Differentiation; Transport Costs
    JEL: F12 F15 L13
    Date: 2005–03–16
  9. By: Ganslandt, Mattias (The Research Institute of Industrial Economics); Maskus, Keith E. (Department of Economics)
    Abstract: We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets that are integrated at the distributor level by parallel imports (PI). The manufacturing firm needs to set these two prices to balance three competing interests: restricting competition in the PI-recipient market, avoiding resource wastes due to actual trade, and reducing the double-markup problem in the PI-source nation. These trade-offs imply the counterintuitive result that both wholesale and retail prices could diverge as a result of declining trading costs, even as the volume of PI increases. Thus, in some circumstances it may be misleading to think of PI as an unambiguous force for price integration.
    Keywords: Vertical Restraints; Parallel Imports; Market Integration
    JEL: F12 F15
    Date: 2005–04–15
  10. By: Mark Carlson; Kris James Mitchener
    Abstract: It is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios; however, previous empirical research on the Great Depression offers mixed support for this view. Analyses using state-level data find that states allowing branch banking had lower failure rates, while those examining individual banks find that branch banks were more likely to fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings. Using data on national banks from the 1920s and 1930s, we show that branch banking increases competition and forces weak banks to exit the banking system. This consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves. Our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s.
    JEL: G21 N22 E44
    Date: 2005–05
  11. By: Craig McIntosh (University of California, San Diego); Alain de Janvry (University of California, Berkeley); Elisabeth Sadoulet (University of California, Berkeley)
    Abstract: This paper uses data from Uganda's largest incumbent microfinance institution to analyze the impact of entry by competing lenders on client behavior. We first examine the geographic placement decisions of competitors, and find that placement decisions are strongly affected by district-level characteristics. We observe that increased competition induces a decline in repayment performance and in savings deposited with the incumbent Village Bank, suggesting multiple loan-taking by clients. Urban clients take multiple loans primarily from lenders with more individual methodologies, while rural clients borrow from several group lenders. Individuals who operate larger businesses are the ones most likely to leave the incumbent Village Bank when a Solidarity Group lender enters the marketplace.
    Keywords: microfinance, competition, credit markets,
    Date: 2003–06–01
  12. By: Josh Lerner; Ulrike Malmendier
    Abstract: We analyze how variations in contractibility affect the design of contracts in the context of biotechnology research agreements. A major concern of firms financing biotechnology research is that the R&D firms might use the funding to subsidize other projects or substitute one project for another. We develop a model based on the property-rights theory of the firm that allows for researchers in the R&D firms to pursue multiple projects. When research activities are non-verifiable, we show that it is optimal for the financing company to obtain the option right to terminate the research agreement while maintaining broad property rights to the terminated project. The option right induces the biotechnology firm researchers not to deviate from the proposed research activities. The contract prevents opportunistic exercise of the termination right by conditioning payments on the termination of the agreement. We test the model empirically using a new data set on 584 biotechnology research agreements. We find that the assignment of termination and broad intellectual property rights to the financing firm occurs in contractually difficult environments in which there is no specifiable lead product candidate. We also analyze how the contractual design varies with the R&D firm's financial constraints and research capacities and with the type of financing firm. The additional empirical results allow us to distinguish the property-rights explanation from alternative stories, based on uncertainty and asymmetric information about the project quality or research abilities.
    JEL: D23 L14 L24 O31
    Date: 2005–05
  13. By: Michael Baye (Indiana University); John Morgan (Haas School of Business & Department of Economics)
    Abstract: We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract 'shoppers'). Our analysis allows for 'cross-channel' effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. While each firm finds it optimal to advertise its brand in an attempt to 'grow' its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.
    Keywords: Price dispersion
    JEL: D4 D8 M3 L13
    Date: 2005–04–29
  14. By: Pablo D'Este Cukierman (SPRU, University of Sussex)
    Abstract: This paper aims to contribute to the analysis of within industry inter-firm variety. Building upon the knowledge-based theory of the firm (Nelson and Winter, 1982; Penrose, 1959; Fransman, 1994), this paper develops two themes. First, the analysis of intra-industry heterogeneity: why do firms that operate in the same industry differ, and why are such differences persistent? Second, the paper investigates the extent to which higher performance is associated with the capacity of firms to expand their knowledge base (rather than with their initial conditions). The main contribution of the paper is empirical, based on a data source consisting of information on documents published in scientific international journals by Spanish pharmaceutical firms. The empirical results support the argument that the firm's knowledge base is a main driver of persistent heterogeneity within industries on the one hand, because of the systematic variety in terms of how firms articulate and organise their research activities and their background knowledge, and on the other hand, because of the positive correlation between the firms' knowledge diversification and performance.
    Keywords: Firm heterogeneity, Knowledge diversification, Bibliometric analysis, Spanish pharmaceutical industry
    JEL: O33 L65
    Date: 2005–04–26
  15. By: Lionel Nesta (SPRU, University of Sussex); Vincent Mangematin (INRA, University Pierre Mendes-France)
    Abstract: We analyse the changing contribution of networks to the innovative performance of 30 pharmaceutical companies from 1989 to 1997. Count data models show that collaborations with universities and biotechnology companies are important determinants of the firms' innovative performance, but their respective contributions diverge when industry matures. Larger firms enjoy a significant size advantage and in-house research activities are highly significant. Returns to scale in research are decreasing over time while the size advantage is increasing. The changing contribution of networks to knowledge production suggests that these are phase-specific, which has substantial managerial and policy implications.
    Keywords: pharmaceutical industry, biotechnology, innovative processes, networks
    JEL: O31 D85
    Date: 2005–04–26
  16. By: Marie Connolly; Alan B. Krueger
    Abstract: This paper considers economic issues and trends in the rock and roll industry, broadly defined. The analysis focuses on concert revenues, the main source of performers ' income. Issues considered include: price measurement; concert price acceleration in the 1990s; the increased concentration of revenue among performers; reasons for the secondary ticket market; methods for ranking performers; copyright protection; and technological change.
    JEL: Z1 L82 O34
    Date: 2005–04
  17. By: Steven Shavell
    Abstract: This article develops the point that the problems associated with contractual holdup may justify legal intervention in theory, and the article relates this conclusion to legal intervention in practice. Contractual holdup is considered for both fresh contracts and for modifications of contracts. The law can in principle alleviate the incentive and risk-bearing problems due to holdup in two ways. One approach is for the law simply to void agreements made in certain circumstances, since that will remove the prospect of profit from holdup. This policy may be desirable when the events that permit holdup are engineered, for these events would not have been instigated if they would not have resulted in enforceable contracts. When situations of need are not engineered (bad weather puts a ship in jeopardy), flat voiding of contracts is undesirable, since contracts for aid in situations of need (to tow a ship) are often socially beneficial. In these circumstances, the policy of controlling the contract price is preferable, as that policy can reduce the problems of holdup but still allow contracts to be made. Both types of legal intervention in contracts and their modifications -- voiding without regard to price and control of price -- are used by courts to counter problems of pronounced holdup. Also, various price control regulations appear to serve the same objective, at least in part, for instance maximum price ordinances for car towing services, emergency price regulations, and the historically important rule of laesio enormis of the Middle Ages.
    JEL: D8 K12
    Date: 2005–05
  18. By: Stan J. Liebowitz (University of Texas at Dallas)
    Abstract: The decline in sales of music CDs and the recording industry’s attempts to reverse the decline have been much in the news over the last few years. Since this decline began at the same time that file-sharing became popular, and since file-sharing would be expected to lead to a decline in sales, file-sharing is the leading candidate among possible causes of this decline. At the center of the file-sharing debate is the empirical issue of whether or not file-sharing decreases sales. In this paper I examine the different empirical methodologies that have been chosen by economists studying this issue. The studies use different methodologies but nevertheless find, almost unanimously, that file- sharing has led to a serious decline in record sales, except for one highly publicized study that reaches very different, and in my opinion, highly implausible conclusions.
    Keywords: mp3, filesharing, music, downloading, napster
    JEL: L
    Date: 2005–05–03
  19. By: Stan Liebowitz (University of Texas at Dallas)
    Abstract: Although it was once considered inevitable that unauthorized copying would harm copyright owners, it is now understood that this is not necessarily the case. The concept of indirect appropriability played an important role in shaping this newer understanding. In recent years, however, many economists seem to have taken the message from this new understanding too far, seeing gains to the copyright owners from unauthorized copying in every nook and cranny of the economy, when in reality the instances of such gains are likely to be rather limited. The current literature on this subject, which consists mainly of theoretical models, seems to be badly out of kilter. In this paper I attempt to explain some of the problems and try to provide the outlines of what I believe to be a more balanced and nuanced view of copying. It emphasizes the importance of examining various institutional and behavioral details of individual markets, which are often overlooked by researchers.
    Keywords: copyright, indirect appropriability, copying, mp3, downloads
    JEL: K
    Date: 2005–05–03
  20. By: Stan J. Liebowitz (University of Texas at Dallas); Stephen E. Margolis (North Carolina State University)
    Abstract: In 2002, seventeen economists including five Nobel Laureates presented an amicus curiae brief discussing the economics of copyright extension in support of the petitioners in Eldred v. Ashcroft. The economists’ amicus brief was unusual in several respects, not least in that it brought together a group of economists almost as notable for its diversity of opinion (spanning the ideological spectrum from Kenneth Arrow to Milton Friedman) as for its academic distinction. When such a distinguished and broad panel of economists readers would have every reason to believe that the arguments set forth in this document are sound down to the smallest details. Yet this is not the case. Scholars in the fields of law and economics will continue to address the economics of copyright duration in the foreseeable future, so it is important that they understand the imperfections in the economists’ brief. This Article provides a counterweight to the amicus brief, identifying some points the economists ignored, clarifying some discussions they did not quite get right, and providing data that runs counter to some assumptions they made.
    Keywords: Eldred, coypright, sonny bono, lessig
    JEL: K
    Date: 2005–05–03

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