nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒06‒27
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Cartel Stability under an Optimal Sharing Rule By Hans-Peter Weikard
  2. Partner Selection in R&D Cooperation By Gamal Atallah
  3. R&D Networks with Heterogenous Firms By Lorenzo Zirulia
  4. Political renegotiation of regulatory contracts By Cecile Aubert; Jean- Jacques Laffont
  5. The Management of Digital Rights in Pay TV By Campbell Cowie; Sandeep Kapur
  6. Switching Costs, Consumers' Heterogeneity and Price Discrimination in the Mobile Communications Industry By Nicoletta Corrocher; Lorenzo Zirulia
  7. Institution-Driven Competition: The Regulation of Cross-Border Broadcasting in the EU By Alison Harcourt
  8. Media Pluralism: European Regulatory Policies and the Case of Central Europe By Beata Klimkiewicz
  9. Speculation in Standard Auctions with Resale By Rod Garrat; Thomas Tröger
  10. Product Market Competition and Human Resource Practices: An Analysis of the Retail Food Sector By Elizabeth Davis; Matthew Freedman; Julia Lane; Brian McCall; Nicole Nestoriak; Timothy Park
  11. Reform of the Japanese Banking System By Masahiro Kawai
  12. Are Durable Goods Consumers Forward Looking? Evidence from College Textbooks By Judith Chevalier; Austan Goolsbee
  13. Determinants of Vertical Integration: Finance, Contracts, and Regulation By Daron Acemoglu; Simon Johnson; Todd Mitton
  14. Pricing and matching under duopoly with imperfect buyer mobility By Massimo A. De Francesco
  15. The pricing of gasoline grades and the third law of demand By R. Morris Coats; Gary M. Pecquet; Leon Taylor

  1. By: Hans-Peter Weikard (Wageningen University)
    Abstract: Previous work on the formation and stability of cartels has focused on the case of identical players. This assumption is very restrictive in many economic environments. This paper analyses stability of cartels in games with heterogeneous players and spillovers to non-members. I introduce a sharing rule for coalition payoffs, called "optimal sharing" which stabilises all cartels that are possibly stable under any rule. Under optimal sharing the grand coalition is the unique stable cartel if spillovers are negative. I introduce a new property, called "non-essentiality" and determine the set of stable cartels under optimal sharing if spillovers are positive and if the non-essentiality property applies. Finally I analyse cartel stability under optimal sharing in simple public goods game with heterogeneous players. My results show – in contrast to earlier findings for identical players – that large coalitions may well be stable.
    Keywords: Cartel stability, Coalition formation games with spillovers, Partition function approach, Optimal sharing rule
    JEL: C72 D72 H41
    Date: 2005–05
  2. By: Gamal Atallah
    Abstract: In this paper we extend the R&D cooperation model to asymmetric firms, focusing on the incentives for cooperating with firms characterized by different levels of efficiency. Three firms differentiated by their cost levels invest in cost-reducing R&D before competing in output. Firms may cooperate in R&D, which implies both R&D coordination and perfect information sharing. It is found that firms’ preferences over whom to cooperate with depend on spillovers and on cost differences between firms. With low (high) spillovers, a firm prefers to cooperate with the most (least) efficient among the remaining firms. As the cost differential between firms increases, efficient (inefficient) firms prefer to cooperate with the most (least) efficient firm more often. For very high spillovers, a firm prefers to be excluded from R&D cooperation. The equilibrium configuration is that the most efficient firms cooperate for low spillovers, while all firms cooperate for intermediate spillovers. For high spillovers, the equilibrium is for all firms to cooperate when the cost differential is sufficiently low, but depends on the bargaining mechanism when the cost differential is high. The model constitutes a generalization of the standard R&D model with symmetric firms. <P>Ce papier analyse les incitations à la coopération technologique entre des firmes différenciées par leur niveau d’efficacité. Trois firmes dotées de coûts de production différents investissent dans la R&D visant à réduire leurs coûts de production, avant de se concurrencer en quantités. Les firmes peuvent coopérer en R&D, ce qui implique la coordination des investissements en R&D et le partage d’information. Il est démontré que les préférences quant au choix du partenaire dépendent des externalités de recherche et du différentiel de coûts. Lorsque les externalités de recherche sont faibles (élevées), une firme préfère coopérer avec le partenaire le plus (moins) efficace qui est disponible. À mesure que le différentiel de coûts augmente, les firmes efficaces (inefficaces) préfèrent coopérer avec les partenaires les plus (moins) efficaces plus souvent. Pour des niveaux d’externalités très élevés, une firme préfère être exclue de la coopération en R&D. La configuration d’équilibre est que les firmes les plus efficaces coopèrent lorsque les externalités sont faibles, alors que toutes les firmes coopèrent pour des niveaux intermédiaires des externalités. Lorsque les externalités sont élevées, l’équilibre est que toutes les firmes coopèrent lorsque le différentiel de coûts est suffisamment faible, mais dépend de la structure de négociation lorsque ce différentiel est élevé. Le modèle constitue une généralisation du modèle de concurrence en R&D avec des firmes symétriques.
    Keywords: asymmetric firms, R&D cooperation, R&D spillovers, research joint ventures, coopération en R&D, consortiums de recherche, firmes asymétriques, externalités de recherche
    JEL: L13 O33
    Date: 2005–06–01
  3. By: Lorenzo Zirulia (CESPRI, Università Bocconi, Milano)
    Abstract: This paper models the formation of R&D networks in an industry where firms are technologically heterogenous, extending previous work by Goyal and Moraga (2001). While remaining competitors in the market side, firms share their R&D efforts on a pairwise base, to an extent that depends on their technological capabilities. First, we consider a four firms’ industry. In the class of symmetric networks, the complete network is the only pairwise stable network, although not necessarily profit or social welfare maximizing. Then, we extend the analysis to asymmetric structures in a three firms’ industry. Only the complete and the partially connected networks are possibly stable, but which network is stable depends on the level of heterogeneity and technological opportunities. The complete and partially connected networks are also the possible welfare and aggregate profit maximizing networks, but social and private incentives do not generally coincide. Finally, we consider the notion of strongly stable networks, where all the possible deviations by coalitions of agents are allowed. It turns out that in the four firms’ case, the complete network is very rarely strongly stable, while in the three firms’ case the partially connected network where two firms in different technological group are linked is, for a large subset of the parameter space, the only strongly stable network.
    Keywords: Strategic alliances; Networks; Research and development; Technological complementarities
    JEL: D21 D43
    Date: 2005–05
  4. By: Cecile Aubert (Universite Paris Dauphine, Eurisco); Jean- Jacques Laffont (IDEI, Toulouse)
    Abstract: Governmental contracts may be renegotiated after political changes. Current governments can anticipate this and strategically distort contracts to influence renegotiation outcomes. In this sequential common agency game, the initial contract impacts elements of the renegotiation process: outside options (a `leverage' effect), and the beliefs of the new government through partial information revelation (a `strategic' effect). We characterize the optimal initial contract, as a function of political stability, time preference, and profits appropriation by the initial government. It always entails either full separation or strategic, partial, information revelation. Last, institutional rules imposing immediate payments to the firm help limit output distortions.
    Keywords: Renegotiation, Political uncertainty, Regulation.
    JEL: D82 L51 D73
    Date: 2005–06–15
  5. By: Campbell Cowie; Sandeep Kapur (School of Economics, Mathematics & Statistics, Birkbeck College)
    Abstract: Successful roll-out of Digital Rights Management (DRM) solutions has the potential to transform the economics of pay television. This paper explains how a technology that is being developed as a potential solution to the challenge posed by the widespread theft of intellectual property (piracy) may ultimately support the development of new business models. These new business models could trigger a radical change in the sources of market power in the supply chain, increasing the bargaining power of content companies relative to vertically integrated platform operators. The paper examines some of the regulatory challenges that the new business models and the new technology raise
    Keywords: Digital rights management, pay television, competition
    JEL: L1 L5 L82
    Date: 2005–06
  6. By: Nicoletta Corrocher (CESPRI, Università Bocconi, Milano); Lorenzo Zirulia (CESPRI, Università Bocconi, Milano)
    Abstract: In this paper we develop a formal model that captures some basic features of competition in the mobile communications service industry. In a model of oligopolistic competition with price discrimination and switching costs, we study the role of firms’ installed base of consumers in providing the incentives to offer contracts for a new class of consumers with a lower willingness to pay. The model predicts that there exists an inverse relationship between the share of the leader in the market of consumers with high willingness to pay and its share in the market of consumers with low willingness to pay. This implies that market shares converge. If firms collude in the introduction of new contracts, convergence is milder. This result is consistent with the empirical evidence related to the mobile communications industry in different European countries, where we observe a convergence in market shares driven by the superior ability of followers to acquire new customers, who typically have lower willingness to pay as compared with early adopters.
    Keywords: Switching costs; Price discrimination; Mobile communications
    JEL: L13 L96
    Date: 2005–05
  7. By: Alison Harcourt
    Keywords: regulatory competition; media
    Date: 2004–12–15
  8. By: Beata Klimkiewicz
    Keywords: media; Poland; Czech Republic; Slovakia; regulatory politics
    Date: 2005–05–15
  9. By: Rod Garrat; Thomas Tröger
    Abstract: In standard auctions with symmetric, independent private value bidders resale creates a role for a speculator - a bidder who is commonly known to have no use value for the good on sale. For second-price and English auctions the efficient value-bidding equilibrium coexists with a continuum of inefficient equilibria in which the speculator wins the auction and makes positive profits. First-price and Dutch auctions have an essentially unique equilibrium, and whether or not the speculator wins the auction and distorts the final allocation depends on the number of bidders, the value distribution, and the discount factor. Speculators do not make profits in first-price or Dutch auctions.
    Keywords: standard auctions, speculation, resale, efficiency
    JEL: D44
    Date: 2005–05
  10. By: Elizabeth Davis; Matthew Freedman; Julia Lane; Brian McCall; Nicole Nestoriak; Timothy Park
    Abstract: The rise of super-centers and the entry of Wal-Mart into food retailing have dramatically altered the competitive environment in the industry. This paper explores the impact of such changes on the labor market practices of traditional food retailers. We use longitudinal data on workers and firms to construct new measures of compensation and employment, and examine how these measures evolve within and across firms in response to changes in product market structure. An additional feature of the analysis is to combine rich case study knowledge about the retail food industry with the new matched employer-employee data from the Census Bureau.
  11. By: Masahiro Kawai
    Abstract: Japan has experienced a decade-long economic stagnation with a distressed banking sector in the 1990s. The absence of a credit culture to rigorously assess and price credit risks of borrowers, aggravated by weak prudential and supervisory frameworks, in the 1980s, the collapse of the asset price bubble in the early 1990s, and the lack of decisive, comprehensive strategy to address the banking sector problem at an early stage were largely responsible for the emergence of banking sector problems. All of these allowed a systemic banking crisis to emerge in 1997-98 and a large output loss during 1998-2002. The crisis ultimately prompted the government to take a more aggressive policy to tackle the problem. Sufficient progress has been made since then on banking sector stabilization, restructuring, and consolidation. The regulatory and supervisory framework has been strengthened in a way consistent with an increasingly market-oriented, globalized environment. As a result, the worst is over in the Japanese banking system, setting the stage for sustained economic recovery. Though bank capital may still be inadequate, safety nets are in place, the credit allocation has been made more rational. Remaining risks are limited to regional and smaller institutions that are vulnerable to weak, local economic conditions and hikes of the long-term interest rate.
    Keywords: Asset price bubble, Japan's "lost decade", systemic banking sector crisis, bank restructuring and consolidation, market-based regulatory and supervisory framework
    JEL: E44 E51 G21 G28
    Date: 2005–06
  12. By: Judith Chevalier; Austan Goolsbee
    Abstract: Popular wisdom holds that publishers revise college textbooks mainly to kill off the secondary market for used books. While this behavior might be profitable if consumers are myopic, uninformed or have high short-run discount rates (that exceed the publishers'), neoclassical authors have noted that it will typically not be profitable if publishers can precommit not to cut prices and if consumers are forward-looking and have similar discount rates as the publishers; the consumer's willingness to pay for new books falls if they know that they cannot resell their used books. Using a large new dataset on all textbooks sold in psychology, biology and economics in the 10 semesters from 1997 to 2001, we estimate a demand system for books to test whether textbook consumers are forward-looking. The data strongly support the view that students are forward-looking with low short-run discount rates and that they have rational expectations of publishers' revision behavior. When the students buy their textbooks, they correctly take into account the probability that they will not be able to resell their books at the end of the semester due to a new edition release. Conditional on faculty assignment behavior, simulation results suggest that students are sufficiently forward-looking that publishers could not raise revenues by accelerating current revision cycles.
    JEL: L2 L6 D9
    Date: 2005–06
  13. By: Daron Acemoglu; Simon Johnson; Todd Mitton
    Abstract: We study the determinants of vertical integration in a new dataset of over 750,000 firms from 93 countries. Existing evidence suggests the presence of large cross-country differences in the organization of firms, which may be related to differences in financial development, contracting costs or regulation. We find cross-country correlations between vertical integration on the one hand and financial development, contracting costs, and entry barriers on the other that are consistent with these "priors". Nevertheless, we also show that these correlations are almost entirely driven by industrial composition; countries with more limited financial development, higher contracting costs or greater entry barriers are concentrated in industries with a high propensity for vertical integration. Once we control for differences in industrial composition, none of these factors are correlated with average vertical integration. However, we also find a relatively robust differential effect of financial development across industries; countries with less-developed financial markets are significantly more integrated in industries that are more human capital or technology intensive.
    JEL: G30 G34 L22 L23
    Date: 2005–06
  14. By: Massimo A. De Francesco
    Abstract: Recent contributions have explored how lack of buyer mobility affects pricing. For example, Burdett, Shi, and Wright (2001) envisage a two-stage game where, once prices are set by the firms, the buyers play a static game by choosing independently which firm to visit. We incorporate imperfect mobility in a duopolistic pricing game where the buyers are involved into a multi-stage game. The firms are shown to have an incentive to give service priority to loyal customers. Under this rationing rule, equilibrium prices converge to their value under perfect buyer mobility as the number of stages of the buyer game increases
    Keywords: Bertrand competition, matching, imperfect mobility, sequential equilibrium, buyerloyalty
    JEL: D43 L13
    Date: 2004–11
  15. By: R. Morris Coats (Nicholls State University); Gary M. Pecquet (Shenandoah University); Leon Taylor (Tulane University)
    Abstract: Alchian and Allen’s “third law of demand” states that as a fixed cost increases by the same amount for low- and high-quality goods, the ratio of the prices of high- to low-quality goods will fall and the quantity demanded of high quality goods relative to low quality goods will increase. We examine the more general hypothesis by estimating the ratio of the quantities of sales of premium to regular grade gasoline using the ratio of premium to regular prices, controlling for supply and demand factors. We find moderate evidence for the more general hypothesis.
    Keywords: Third Law of Demand, Price Ratios, Gasoline Grades
    JEL: D1 D2 D3 D4
    Date: 2005–06–18

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