nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒07‒25
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Monopoly Prices versus Ramsey-Boiteux Prices: Are they "similar", and: Does it matter? By Felix Höffler
  2. Cost and Benefits from Infrastructure Competition. Estimating Welfare Effects from Broadband Access Competition By Felix Höffler
  3. Merger Policy to Promote Global Players? A Simple Model By Haufler, Andreas; Nielsen, Soren Bo
  4. The Dominance of Diversified Versus Specialized Firms Across Industries By MANUEL BECERRA; JUAN SANTALO
  5. Forced information disclosure and the fallacy of transparency in markets By Cason, Timothy N.; Plott, Charles R.
  6. Nonlinear Incentive Provision in Walrasian Markets: A Cournot Convergence Approach By Martin Hellwig
  7. Are Sports Teams Multi-Product Firms? By Kenneth G. Stewart; J. C. H. Jones
  8. Even Giants Need A Club: Domestic Institutions, Market Size, And Regulatory Influence By DAVID BACH
  9. La mise en œuvre de la réglementation : une lecture économico-juridique du secteur électrique et des marchés publics By Thierry Kirat; Frédéric Marty
  10. Piracy as Strategy? A Reexamination of Product Piracy By JULIO DE CASTRO
  11. Relative Market Share, Leadership and Competition in Concentrated Banking Markets. By Arie Melnik; Oz Shy; Rune Stenbacka
  12. Banks without Parachutes – Competitive Effects of Government Bail-out Policies By Hendrik Hakenes; Isabel Schnabel
  13. Does Inefficiency Justify Privatization? The Case of Intermediate Industry Monopolies By Gerhard Glomm; Fabio Mendez
  14. The Institutional-Evolutionary Antitrust Model By Chrysostomos Mantzavinos
  15. Market Definition As a Social Construction (Marktabgrenzung als soziale Konstruktion) By Christoph Engel

  1. By: Felix Höffler (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: Ramsey-Boiteux prices and monopoly prices are frequently regarded as being similar. This might suggest that, in particular in network industries with large fixed costs, sometimes monopoly pricing is close to the Ramsey-Boiteux second best and welfare superior to imperfectly regulated prices. This paper tries to specify what is meant by "being similar", and it analyzes the welfare implications that can be drawn from comparing both sets of prices. Interdependence of demand and the impact of competition are discussed. We reinforce the view that monopoly prices are usually not "similar", and even if they are, this implies no positive welfare judgments on monopoly pricing.
    Keywords: Ramsey Pricing, Regulation, Access Pricing, Termination
    JEL: L33 L50 L94
    Date: 2005–04
  2. By: Felix Höffler (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: Competition between parallel infrastructures incorporates opposing welfare effects. The gain from reduced deadweight loss might be outweighed by the inefficient duplication of an existing infrastructure. Using data from broadband internet access for Western Europe 2000-2004, this paper investigates which effect prevails empirically. Infrastructure competition between DSL and cable TV had a significant and positive impact on the broadband penetration. Comparing the additional social surplus attributable to cable competition with the cable investments, we conclude that infrastructure competition has not been welfare enhancing. A theoretical model is provided, formalizing why the effect of competition on penetration might be limited.
    Keywords: Infrastructure Competition, Service Competition, Broadband, Internet, Cable TV, DSL
    JEL: L51 L86 L96 L12 K23
    Date: 2005–02
  3. By: Haufler, Andreas; Nielsen, Soren Bo
    Abstract: We use a simple framework where firms in two countries serve their respective domestic markets and a world market to analyze under which conditions cost-reducing mergers will be beneficial for the merging firms, the home country, and the world as a whole. For a national merger, the policies enacted by a national merger authority tend to be overly restrictive from a global efficiency perspective. In contrast, all international mergers that benefit the merging firms will be cleared by either a national or a regional regulator, and this laissez-faire approach is also globally efficient. Finally, we derive the properties of the endogenous merger equilibrium.
    JEL: H77 F13 L41
    Date: 2005–07
  4. By: MANUEL BECERRA (Instituto de Empresa); JUAN SANTALO (Instituto de Empresa)
    Abstract: Some industries are populated primarily by diversified firms, while other industries are dominated by specialized firms, which are present only in such a given industry. In this study, we analyze what factors determine the dominance of diversified versus specialized firms, and its effect on firm performance. In line with transaction cost economics, we show that market concentration and the degree of variability in the diversification pattern of firms in the industry are negatively associated with the importance of the activity accounted by specialized firms across the 720 industries in our study.
    Date: 2005–02
  5. By: Cason, Timothy N.; Plott, Charles R.
    Abstract: A theory advanced in regulatory hearings holds that market performance will be improved if one side of the market is forced to publicly reveal preferences. For example, wholesale electricity producers claim that retail electricity consumers would pay lower prices if wholesale public utility demand is disclosed to producers. Experimental markets studied here featured decentralized, privately negotiated contracts, typical of the wholesale electricity markets. Two conclusions emerge: (i) such markets generally converge to the competitive equilibrium and (ii) forced disclosure works to the disadvantage of the disclosing side. Information disclosure would result in higher wholesale and thus higher retail electricity prices
    Date: 2004–06
  6. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: The paper studies insurance with moral hazard in a system of contingent-claims markets. Insurance buyers are modelled as Cournot monopolists or oligopolists. The other agents condition their expectations on market prices, as in models of rational-expectations equilibrium with asymmetric information. Thereby they correctly anticipate accident probabilities corresponding to effort incentives induced by insurance buyers’ net trades. When there are many agents to share the insurance buyer’s risk, Cournot equilibrium outcomes are close to being second-best. In contrast, if insurance buyers are price takers, equilibria fail to exist or are bounded away from being second-best.
    Keywords: Insurance, Moral Hazard, Incentive Contracting, Walrasian Markets, Rational-Expectations, Cournot Equilibrium
    JEL: D50 D62 D80
  7. By: Kenneth G. Stewart (Department of Economics, University of Victoria); J. C. H. Jones (Department of Economics, University of Victoria)
    Abstract: The appropriate conception of team outputs is investigated by estimating a two-output factor demand system for baseball teams, relative to which single-output models are rejected. There is, however, some empirical support for output separability, suggesting that team outputs may sometimes be adequately treated as a production aggregate.
    Keywords: Sports economics, multi-output production
    JEL: D24 L83
    Date: 2005–07–21
  8. By: DAVID BACH (Instituto de Empresa)
    Abstract: This paper show that work on international market regulation has paid insufficient attention to the critical role played by domestic political and regulatory institutions. Existing literature emphasizes the role of market power, determined by market size, in analyzing international regulatory influence. While we do not contest the importance of market power, we introduce the notion of domestic regulatory capacity to capture the domestic institutional side of international market regulation that previous work has sidestepped. Domestic regulatory capacity is the missing link between latent market power vested in market size and international influence activated through regulatory institutions.
    Date: 2005–03
  9. By: Thierry Kirat (IRISECREP - Institut de recherche interdisciplinaire en socio-économie - Centres de Recherches et d'Etudes Politiques - - CNRS : UMR7170 - Université Paris Dauphine - Paris IX); Frédéric Marty (IDEFI - Institut de droit et d'économie de la firme et de l'industrie - - CNRS : FRE2814 - Université de Nice Sophia-Antipolis)
    Abstract: Nous nous proposons d'appliquer une grille de lecture institutionnelle, sensible aux dimensions économiques du droit, aux dispositifs juridiques relatifs au secteur électrique et aux marchés publics, en particulier de la défense. Ces domaines ont en commun d'être fortement réglementés, de mettre en jeu la présence de l'Etat dans l'activité économique et, à ce titre, d'être liés à la conduite de l'action publique. Deux dimensions seront privilégiées : d'une part, celle de l'architecture institutionnelle des systèmes de réglementation et des conditions dans lesquelles ils opèrent ; d'autre part, celle de la mise en œuvre des règles, dont nous verrons qu'elle constitue un processus plus complexe qu'une simple application de règles prescrivant des comportements. <br />Une première section sera consacrée aux logiques d'action des institutions de réglementation. La seconde abordera la question de la mise en œuvre des règles, et insistera sur l'importance des recours aux tribunaux et des interdépendances entre règles. La conclusion reviendra sur les questions méthodologiques que l'utilisation de matériaux juridiques en économie permet de poser.
    Keywords: réglementation - droit - économie - secteur électrique - marchés publics
    Date: 2005–07–20
  10. By: JULIO DE CASTRO (Instituto de Empresa)
    Abstract: (WP 08/04 Clave pdf) To explore the impact that piracy has on demand for legal versions of a product and firm performance, we use the literatures of information economics and strategic management to expand the analysis of piracy to markets other than software. Our paper helps clarify the nature of customer demand for legal versions of products, and gain a deeper understanding of the way that piracy can enhance the performance of those firms that own the intellectual property. We contend that although piracy represents unauthorized imitation of a firm’s intellectual property, there are some circumstances when piracy can improve the value of the intellectual property.
    Date: 2004–03
  11. By: Arie Melnik; Oz Shy; Rune Stenbacka
    Abstract: For many years IO economists devoted attention to the size distributions’ of firms in a given industry. Most studies showed that the size distribution of firms in oligopolistic markets is highly skewed. There are many small firms and a few large firms. There is also a consensus that relative market shares are important and that large firms are, in general, more profitable and durable than small firms. Relative size is also important as a determinant of the structure of the industry. The concept is also central in strategic analysis of business firms and in the formulation of government (regulatory) policy. In this paper we propose to use an empirical measure of market leadership. The measure relies on the assumption that the degree of competition critically depends on how dominant the leading firm is in a given industry. The measure also takes into account the number of “significant” competitors in the market and how close they are to the leading firm in terms of size. The measure is simple to use and easy to interpret. It also yields a critical value that facilitates comparisons between different markets.
    Date: 2005–06
  12. By: Hendrik Hakenes (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously leads to higher risk-taking at those banks that do not enjoy a bail-out guarantee. The reason is that the prospect of a bail-out induces the protected bank to expand, thereby intensifying competition in the deposit market and depressing other banks’ margins. In contrast, the effects on the protected bank’s risk-taking and on welfare depend on the transparency of the banking sector.
    Keywords: Government bail-out, banking competition, transparency, “too big to fail”, financial stability
    JEL: G21 G28 L11
    Date: 2004–11
  13. By: Gerhard Glomm (Indiana University); Fabio Mendez (University of Arkansas)
    Abstract: We use an infinitely lived agent model in which an intermediate good is provided either by a public or a private monopolist to study the effects of privatization on steady state levels of income. We allow for public sector inefficiencies(x-inefficiency) which shift down the intermediate goods technology as well as bureaucratic inefficiencies which decrease the amount of tax revenue which will actually be allocated to public investment. We solve the model numerically for reasonable parameter values. The results of the model indicate that the benefits of this type of privatizations depend crucially on the size of the relative inefficiency of public firms and the amount of public investment. Furthermore, the gains from privatization are found to be strongly related to the balance sheet of the public firm that is privatized. Privatization of public firms which run deficits (surpluses) typically generate increases (decreases) in steady state consumption.
    Keywords: Privatization, Deregulation, Public Inefficiency, Public Monopolies
    JEL: E
    Date: 2005–07–22
  14. By: Chrysostomos Mantzavinos (Faculty of Economics and Business, Witten/Herdecke University)
    Abstract: The purpose of this article is to provide an alternative antitrust model to the mainstream model that is used in competition policy. I call it the Institutional-Evolutionary Antitrust Model. In order to construct an antitrust model one needs both empirical knowledge and considerations of how to adequately deal with norms. The analysis of competition as an evolutionary process that unfolds within legal rules provides the empirical foundation for the model. The development of the normative dimension involves the elaboration of a comparative approach. Building on those foundations the main features of the Institutional-Evolutionary Model are sketched out and it is shown that its use leads to systematically different outcomes and conclusions than the dominant antitrust ideals.
    Keywords: Antitrust, Competition, Competition Policy, Evolutionary Process, Institutions
  15. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn, Germany)
    Abstract: Anti-trust cases more often than not hinge upon market definition. The anti-trust authorities use standardised tests for the purpose, like the "small but significant and nontransitory increase in price" test prevalent in US law. These tests are often read as neoclassical economics, watered down to legal scale. They then are interpreted by economic concepts like cross price elasticities. These interpretations rest on methodological individualism. Social phenomena, like competition, are explained from the perspective of actors maximising their individual utility. If one wants to understand how an individual firm is controlled by competition, this is a most helpful approach. But for defining the effective area of competition, or the relevant market, methodological holism is more powerful. Its basic conceptual unit is not the individual, but communication. Markets are seen as implicitly or explicitly organised entities, giving an industry an identity, and helping the consumers orient themselves in a complex environment. Specifically, a market turns out to be a hybrid between co-operation (for constituting the area of competition) and conflict (within the area thus defined). This alternative approach is important for anti-trust practice. The decisive fact is not whether two products "objectively ought to be" substitutes. What market participants see as substitutes is the only thing that matters. Consequently, for market definition, anti-trust authorities may not (only) rely on their own wisdom. They must find ways to reconstruct the communication among market participants.
    Keywords: Market Definition, Constructivism
    JEL: B50 L40 L41
    Date: 2003–11

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