nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒07‒11
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Strictness of leniency programs and cartels of asymmetric firms By Motchenkova,Evgenia; Laan,Rob van der
  2. Productivity Differential and Competition: Can an Old Dog be Taught New Tricks? By Poltavets Ivan
  3. An Agent-Based Computational Laboratory for Testing the Economic Reliability of Wholesale Power Market Designs By Koesrindartoto, Deddy; Sun, Junjie; Tesfatsion, Leigh S.
  4. The Economics of Interchange Fees and Their Regulation: An Overview By Evans, David; Schmalensee, Richard
  5. Optimal privatization using qualifying auctions By Boone,Jan; Goeree,Jacob K.
  6. Competitor-oriented Objectives: The Myth of Market Share By Kesten C. Green; J. Scott Armstrong
  7. Upstream market power and product line differentiation in retailing By Avenel, E.; Caprice, S.
  8. Multilateral vertical contracting with an alternative supplier : discrimination and nondiscrimination By Caprice, S.
  9. Bank Performance: Market Power or Efficient Structure? By Yonjil Jeon; Stephen M. Miller
  10. Innovation strategies in the presence of technology markets: evidence from Spanish innovative firms By Arbussà, Anna; Coenders, Germà
  11. Ownership Structure of Cable Networks and Competition in Local Access By Duarte Brito; Pedro Pereira
  12. Non Cooperatives Stackelberg Networks By Juan M.C. Larrosa
  13. Efficiency standards versus negotiated agreements in the electrical appliance sector By Philippe Menanteau
  14. Has Competition in the Japanese Banking Sector Improved? By Hirofumi Uchida; Yoshiro Tsutsui

  1. By: Motchenkova,Evgenia; Laan,Rob van der (Tilburg University, Center for Economic Research)
    Abstract: This paper studies the effects of leniency programs on the behavior of firms participating in illegal cartel agreements. The main contribution of the paper is that we consider asymmetric firms. In general, firms differ in size and operate in several different markets. In our model, they form a cartel in one market only. This asymmetry results in additional costs in case of disclosure of the cartel, which are caused by an asymmetric reduction of the sales in other markets due to a negative reputation effect. This modeling framework can also be applied to the case of international cartels, where firms are subject to different punishment procedures according to the laws of their countries, or in situations where following an application for leniency firms are subject to costs other than the fine itself and where these costs depend on individual characteristics of the firm. Moreover, following the rules of existing Leniency Programs, we analyze the effects of the strictness of the Leniency Programs, which reflects the likelihood of getting complete exemption from the fine even in case many firms self-report simultaneously. Our main results are that, first, leniency programs work better for small (less diversified) companies, in the sense that a lower rate of law enforcement is needed in order to induce self-reporting by less diversified firms. At the same time, big (more diversified) firms are less likely to start a cartel in the first place given the possibility of self-reporting in the future. Second, the more cartelized the economy, the less strict the rules of leniency programs should be.
    JEL: K21 L41
    Date: 2005
  2. By: Poltavets Ivan
    Abstract: Belief that competition is beneficial in general and for productive efficiency in particular is likely to root in competition's well established and rigorously proved positive relation to the optimal allocation of economic resources. This paper looking at the production side of the economy attempts to provide another argument in favor of competition as a productivity enhancing mechanism or to raise the issue of the importance of competition in a transition context. The author suggests an alternative view of the subject, which is merely 'traditional' in the literature devoted to transition economies, by indirect testing of the competition effect on the individual firms' productivity. The project strives to test the relationship between the level of competition and variance of technical efficiency of individual enterprises.
    Keywords: Ukraine, competition, market structure, productivity, efficiency.
    JEL: L11 L16 D24 C51
    Date: 2005–07–06
  3. By: Koesrindartoto, Deddy; Sun, Junjie; Tesfatsion, Leigh S.
    Abstract: In April 2003 the U.S. Federal Energy Regulatory Commission (FERC) proposed the Wholesale Power Market Platform (WPMP) for common adoption by U.S. wholesale power markets. The WPMP is a complicated market design that has been adopted in some regions of the U.S. but resisted in others on the grounds that its reliability has not yet been sufficiently tested. This article reports on the development of an agent-based computational framework for exploring the economic reliability of the WPMP. The key issue under study is the extent to which the WPMP is capable of sustaining efficient, orderly, and fair market outcomes over time despite attempts by market participants to gain advantage through strategic pricing, capacity withholding, and/or induced transmission congestion.
    JEL: B4 C0 C6 C7 L1 L5 Q4
    Date: 2005–07–06
  4. By: Evans, David; Schmalensee, Richard
    Abstract: This essay surveys the economic literature on interchange fees and the debate over whether interchange should be regulated and, if so, how. We consider, first, the operation of unitary payment systems, like American Express, in the context of the recent economic literature on two-sided markets, in which businesses cater to two interdependent groups of customers. The main focus is on the determination of price structure. We then discuss the basic economics of multi-party payment systems and the role of interchange in the operation of such systems under some standard, though unrealistic, simplifying assumptions. The key point of this discussion is that the interchange fee is not an ordinary price; its most direct effect is on price structure, not price level. We then examine the implications for privately determined interchange fees of some of the relevant market imperfections that have been discussed in the economic literature. While some studies suggest that privately determined interchange fees are inefficiently high, others point to fees being inefficiently low. Moreover, there is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system that considers only costs. This distinguishes the market imperfections at issue here for multi-party systems from the more familiar area of public utility regulation, where setting price equal to marginal cost is theoretically ideal. Next, we consider the issues facing policy makers. Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today's economics - at a theoretical or empirical level - for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so. This, again, is quite unlike public utility regulation or many areas of antitrust including, in particular, ordinary cartels. By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof - for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior - it would be difficult for them to demonstrate that they set socially optimal fees. We take a pragmatic approach by suggesting two fact-based inquiries that we believe policymakers should undertake before intervening to affect interchange. First, policymakers should establish that there is a significant market failure that needs to be addressed. Second, policymakers should establish that it is possible to correct a serious market imperfection, assuming one exists, by whatever intervention they are considering (such as cost-based regulation of interchange fee levels) and thereby to increase social welfare significantly after taking into account other distortions that the intervention may create. We illustrate both of these points by examining the recent Australian experience.
    Date: 2005–07–08
  5. By: Boone,Jan; Goeree,Jacob K. (Tilburg University, Center for Economic Research)
    Abstract: This paper explores the use of auctions for privatizing public assets. In our model, a single "insider" bidder (e.g. incumbent management of a government-owned firm) possesses information about the asset's risky value. In addition, bidders are privately informed about their costs of exploiting the asset. Due to the insider's presence, uninformed bidders face a strong winner's curse in standard auctions with devastating consequences for revenues. We show that the optimal mechanism discriminates against the informationally advantaged bidder to ensure truthful information revelation. The optimal mechanism can be implemented via a simple two-stage "qualifying auction." In the first stage of the qualifying auction, non-binding bids are submitted to determine who enters the second stage, which consists of a standard second-price auction augmented with a reserve price.
    JEL: D44 D82 L33
    Date: 2005
  6. By: Kesten C. Green; J. Scott Armstrong
    Abstract: Competitor-oriented objectives, such as market-share targets, are promoted by academics and are common in business. A 1996 review of the evidence indicated that this violation of economic theory led to reduced profitability. We summarize the evidence as of 1996 then describe evidence from 12 new studies. All of the evidence supports the conclusion that competitor-oriented objectives are harmful. However, this evidence has had only a modest impact on academic research and it seems to be largely ignored by managers. Until this situation changes, we expect that many firms will continue to use competitor-oriented objectives to the detriment of their profitability.
    Keywords: Competition, Market Share, Objectives, Profitability.
    JEL: L21 M21 M31
    Date: 2005–07
  7. By: Avenel, E.; Caprice, S.
    Abstract: We analyze a model of vertical differentiation in which retailers compete in product lines and may purchase a high qulity good from a monopolist. The low quality good is produced by a competitive fringe. Depending on quality and cost differentials, the product lines chosen by retailers in equilibrium are either identical, completely different or partially overlapping. In the absence of upstream market power, the unique equilibrium is for retailers to offer identical product lines. We provide a detailed analysis of the link between upstream market power and product line differentiation. ...French Abstract : Le papier s'intéresse à la formation des prix et des marges en fonction des gammes de produits offertes par les distributeurs. Les auteurs considèrent un modèle de différenciation verticale avec un bien de qualité haute produit par un fournisseur en monopole et un bien de qualité basse fourni par une frange concurrentielle. Les gammes de produits offertes par les distributeurs sont endogènes. En fonction des structures de coûts et du différentiel de qualité, les gammes de produits choisies par les distributeurs peuvent être identiques, différentes ou partiellement différentes. En l'absence de pouvoir de marché en amont, les gammes offertes sont toujours identiques. Les auteurs fournissent une analyse détaillée du lien entre gammes de produits offertes et pouvoir de marché amont.
    JEL: D43 L13 L42 L81
    Date: 2005
  8. By: Caprice, S.
    Abstract: This paper examines third-degree price discrimination by an intermediate supplier selling to downstream firms that have access to an alternative less efficient supplier. We allow nonlinear pricing. It is shown that banning price discrimination may raise welfare in some cases by increasing total output. The fall in the final price is a result of the dominant supplier trying to offset the reduction in profits caused by the threat of bypass by the downstream firms. ...French Abstract : Ce papier examine la discrimination en prix sur un marché intermédiaire oû un vendeur en concurrence avec un fournisseur alternatif s'adresse à plusieurs distributeurs. L'analyse est conduite en tarifs non-linéaires. Il est montré qu'interdire la discrimination peut augmenter le surplus social par un accroissement de la quantité vendue. La baisse du prix final est le résultat des contrats proposés par le fournisseur dominant qui tente de compenser un partage moins favorable du surplus de l'industrie par une concurrence accrue.
    JEL: K21 L13 L42
    Date: 2005
  9. By: Yonjil Jeon (Central Michigan University); Stephen M. Miller (University of Nevada, Las Vegas, and University of Connecticut)
    Abstract: Regulatory change not seen since the Great Depression swept the U.S. banking industry beginning in the early 1980s, culminating with the Interstate Banking and Branching Efficiency Act of 1994. Significant consolidations have occurred in the banking industry. This paper considers the market-power versus the efficient-structure theories of the positive correlation between banking concentration and performance on a state-by-state basis. Temporal causality tests imply that bank concentration leads bank profitability, supporting the market-power, rather than the efficient-structure, theory of that positive correlation. Our finding suggests that bank regulators, by focusing on local banking markets, missed the initial stages of an important structural change at the state level.
    Keywords: commercial banks, concentration, profitability
    JEL: E5 G2
    Date: 2005–06
  10. By: Arbussà, Anna; Coenders, Germà
    Abstract: The development of markets for technology has eased the acquisition of technology and reshaped the innovation strategies of firms that we classify as producers of innovations or as imitators. Innovative activities of firms include research, acquisition of technology and downstream activities. Within an industry, firms producing innovations tend to conduct more research and downstream activities than those imitating innovations. Acquisition of technology is equally important for both. To implement innovation strategies, firms producing innovations require both the capability to scan the external environment for technology and the capability to integrate new technology. Firms producing innovations require both, while firms imitating innovations require scan capabilities only.
    Keywords: Innovation; R&D; technology acquisition; appropriability; absorptive capacity
    JEL: L22 O32
    Date: 2005–07
  11. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this paper, we discuss the role of cable television networks and their ownership structure in promoting competition in the local access market. First, we show that the dual ownership of a local telephone network and a cable network, compared with separate ownership, may increase or decrease incentives to invest in upgrading the cable television network. Second, we argue that separate ownership of the two networks is important to promote competition in local access.
    Keywords: Cable Networks, Local Access, Competition
    JEL: L43 L96
    Date: 2005–07–08
  12. By: Juan M.C. Larrosa (CONICET-Universidad Nacional del Sur)
    Abstract: Noncooperative network-formation games in oligopolies analyze optimal connection structures that emerge when linking represent the appropriation of cost-reducing one-way externalities. These models reflect situations where one firm access to another firm’s (public or private) information and this last cannot refuse it. What would happen if decisions are sequential? A model of exogenous Stackelberg leadership is developed and first-mover advantages are observed and commented.
    Keywords: non cooperative games, network formation strategies, Stackelberg equilibrium.
    JEL: C70 D43 L13
    Date: 2005–07–08
  13. By: Philippe Menanteau (LEPII - Laboratoire d'économie de la production et de l'intégration internationale - - CNRS : FRE2664 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Associées à l'étiquetage énergétique, les normes d'efficacité minimum ont prouvé leur effet de stimulation de l'efficacité énergétique. Mais les normes sont souvent difficiles à mettre en place à cause de la résistance du secteur industriel. Ce papier compare les normes d'efficacité et l'étiquetage énergétique avec une démarche volontaire des industriels du secteur électro-ménager.
    Keywords: étiquetage;appareil électroménager;efficacité énergétique;accord volontaire;norme
    Date: 2005–07–07
  14. By: Hirofumi Uchida (Indiana University and Wakayama University); Yoshiro Tsutsui (Graduate School of Economics, Osaka University)
    Abstract: This paper investigates whether competition in the Japanese banking sector has improved in the last quarter of the 20th century. By estimating the first order condition of profit maximization, together with the cost function and the inverse demand function, we found that competition had improved, especially in the 1970s and in the first half of the 1980s. The results fail to reject a Cournot oligopoly for city banks for most of the period, while they do reject it for regional banks for the overall period. This suggests that competition among city banks was stronger than that among regional banks.
    Keywords: Japanese banks, degree of competition, loan market.
    JEL: G21 L13
    Date: 2002–06
  15. By: Fernando Beltrán; Cesar García
    Abstract: Un intermediario forma paquetes de productos (bundles) ejerciendo un tipo de discriminación sobre los consumidores. El tipo de discriminación que consideramos está basada en la calidad de los productos que forman el paquete. Para el efecto proponemos dos modelos de selección adversa: un modelo considera que la decisión de agregación depende de las acciones del comprador mientras que el otro supone que es el intermediario (o el vendedor) el que agrega productos. Los paquetes formados comprenden dos productos de alta y baja calidad y los consumidores son de dos tipos, uno con una disponibilidad alta de pago y otro con disponibilidad baja. Los resultados son ilustrativos de los efectos de la agregación de productos de diferentes calidades sobre el bienestar de un consumidor.
    Keywords: agregación de productos
    JEL: D82
    Date: 2003–11–15

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