nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒09‒11
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Tying and entry deterrence in vertically differentiated markets By Eugen Kovac
  2. Competition and Productivity in Japanese Manufacturing Industries By Yosuke Okada
  3. The impact of competition on unilateral incentives to innovate By Nadja Trhal
  4. How Best to Auction Oil Rights By Peter Cramton
  5. Sunk Costs and Real Options in Antitrust By Pindyck, Robert S.
  6. Market Power and Technological Bias: The Case of Electricity Generation By Paul Twomey; Karsten Neuhoff
  7. On the Choice between Strategic Alliance and Merger in the Airline Sector: the Role of Strategic Effects By Barla, Philippe; Constantatos, Christos
  8. Should Merchant Transmission Investment be Subject to a Must-offer Provision? By Gert Brunekreeft; David Newbery
  9. Quality of Service, Efficiency and Scale in Network Industries: An analysis of European electricity distribution By Christian Growitsch; Tooraj Jamasb; Michael Pollitt
  10. Deregulation and R&D in Network Industries: The Case of the Electricity Industry By Tooraj Jamasb; Michael Pollitt
  11. Endogenous preemption on both sides of a market By Gueth,Werner; Mueller,Wieland; Potters,Jan
  12. Why Does the Average Price of Tuna Fall During Lent? By Aviv Nevo; Konstantinos Hatzitaskos
  13. Long-term ve. Short-term Contracts; A European perspective on natural gas By Karsten Neuhoff; Christian von Hirschhausen
  14. Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? By Lucia Foster; John Haltiwanger; Chad Syverson
  15. Determinants of Regional Entry and Exit in Industrial Sectors By Nyström, Kristina
  16. Switching costs and adverse selection in the market for credit cards: new evidence By Paul S. Calem; Michael B. Gordy; Loretta J. Mester
  17. Vertical Cross-Shareholding Theory and Experimental Evidence By Werner Güth; Nikos Nikiforakis; Hans-Theo Normann
  18. Antidumping : a problemin international trade By Zanardi,Maurizio
  19. What Are Firms? Evolution from Birth to Public Companies By Steven N. Kaplan; Berk A. Sensoy; Per Strömberg

  1. By: Eugen Kovac
    Abstract: This paper analyzes tying and bundling as an entry deterrence tool. It shows that a multi-product firm can defend its monopoly position in one market via tying even when it does not have market power in another market. This is shown on a model with two complementary goods, each of which is vertically differentiated and in which consumers’ preferences for the goods are positively correlated. Some possible ways of defending against entry deterrence, and implications for competition policy, are discussed.
    Keywords: Industrial organization, vertical differentiation, anti-trust policy, entry deterrence, foreclosure, tying, bundling.
    JEL: L11 L12 L13 L41
    Date: 2005–08
  2. By: Yosuke Okada
    Abstract: This paper examines the determinants of productivity in Japanese manufacturing industries, looking particularly at the impact of product market competition on productivity. Using a newly available panel data on around ten thousand firms in Japanese manufacturing for the years 1994-2000, I show that competition, as measured by lower level of industrial price-cost margin, enhances productivity growth, controlling for a broad range of industrial and firm-specific characteristics. Moreover, I suggest that market power, as measured by either individual firm’s price-cost margin or market share, has negative impact on productivity level of R&D performing firms.
    JEL: L11 L60 O30
    Date: 2005–08
  3. By: Nadja Trhal
    Abstract: We investigate the impact of the degree of competition in a Cournot market on one firm's unilateral incentives to invest in R&D. Applying comparative static analyses we get different predictions depending on the magnitude of the innovation efficiency parameter alpha. Even inner solutions arose. For alpha->1 the comparative statics predicate that incentives to invest in R&D are strongest in a monopoly whereas for smaller alpha the optimal market structure for unilateral innovation varies depending on the cost level.
    Keywords: innovation incentives; market structure; Cournot competition
    JEL: D4 L1 O31
    Date: 2005–08–29
  4. By: Peter Cramton (Economics Department, University of Maryland)
    Abstract: I study the design of oil rights auctions. A good auction design promotes both an efficient assignment of rights and competitive revenues for the seller. The structure of bidder preferences and the degree of competition are key factors in determining the best design. With weak competition and additive values, a simultaneous first-price sealed-bid auction may suffice. With more complex value structures, a dynamic auction with package bids, such as the clock-proxy auction, likely is needed to promote the efficiency and revenue objectives. Bidding on production shares, rather than bonuses, typically increases government take by reducing oil company risk.
    Keywords: Auctions, Oil Auctions, Market Design, Clock Auctions
    JEL: D44
    Date: 2005
  5. By: Pindyck, Robert S.
    Abstract: Sunk costs play a central role in antitrust economics, but are often misunderstood and mismeasured. I will try to clarify some of the conceptual and empirical issues related to sunk costs, and explain their implications for antitrust analysis. I will be particularly concerned with the role of uncertainty. When market conditions evolve unpredictably (as they almost always do), firms incur an opportunity cost when they invest in new capital, because they give up the option to wait for the arrival of new information about the likely returns from the investment. This option value is a sunk cost, and is just as relevant for antitrust analysis as the direct cost of a machine or a factory.
    Keywords: Sunk costs, real options, investment decisions, antitrust, entry barriers, market power, mergers,
    Date: 2005–07–29
  6. By: Paul Twomey; Karsten Neuhoff
    Abstract: It is difficult to elminated all market power in electricity markets and it is therefore frequently suggested that some market power should be tolerated: extra revenues contribute to fixed cost recovery, facilitate investment and increase security of supply. This suggestion implicitly assumes all generation technologies benefit equally from market power. We assess a mixture of conventional and intermittent generation, eg coal plants and wind power. If all output is sold in the spot market, then intermittent generation benefits less from market power than conventional generation. Forward contracts or option contracts reduce the level of market power but bias against intermittent generators persists.
    Keywords: market power, technology choice, electricity markets, intermittent output, forward and option contracting
    JEL: D42 D43 L12 L13 Q42
    Date: 2005–08
  7. By: Barla, Philippe; Constantatos, Christos
    Abstract: We consider a market with three competitors, two of which decide to cooperate. Firms first choose capacity under demand uncertainty then compete in quantities after the uncertainty has been resolved. We specify strategic alliance (SA) as an agreement where two airlines jointly choose capacity and divide it among themselves. Contrary to the full merger case, after demand is revealed the alliance members market their capacity shares independently. Our main result is that the profit of the cooperating firms is greater under SA than under full merger.
    Keywords: Strategic alliance, capacity, airline industry
    JEL: L13 L24 L93
    Date: 2005
  8. By: Gert Brunekreeft; David Newbery
    Abstract: Merchant electricity transmission investment is a practically relevant example of an unregulated investment with monopoly properties. However, while leaving the investment decision to the market, the regulator may decide to prohibit capacity withholding with a must-offer provision. This paper examines the welfare effects of a must-offer provision prior to the capacity choice, given three reasons for capacity withholding: uncertainty, demand growth and pre-emptive investment. A must-offer provision will decrease welfare in the first two cases, and can enhance welfare only in the last case. In the presence of importer market power, a regulatory test might be needed.
    Keywords: investment, must-offer, capacity withholding, regulation, electricity
    JEL: L51 L94 L4
    Date: 2005–08
  9. By: Christian Growitsch; Tooraj Jamasb; Michael Pollitt
    Abstract: Quality of service is of major economic significance in natural monopoly infrastructure industries but is generally not reflected in efficiency analysis. In this paper we present an efficiency analysis of electricity distribution networks using a sample of about 500 electricity distribution utilities from seven European countries. We apply the stochastic frontier analysis (SFA) method on multi-output translog input distance function models to estimate cost and scale efficiency with and without incorporating quality of service. We show that introducing the quality dimension into the analysis affects estimated efficiency significantly. In contrast to previous research, smaller utilities seem to indicate lower technical efficiency when incorporating quality. We also show that incorporating quality of service does not alter scale economy measures. Quality of service should be an integrated part of efficiency analysis and incentive regulation regimes, as well as in the economic review of market concentration in regulated natural monopolies.
    Keywords: efficiency, quality of service, scale economies, input distance function, stochastic frontier analysis.
    JEL: L15 L51 L94
    Date: 2005–09
  10. By: Tooraj Jamasb; Michael Pollitt
    Abstract: Electricity reform has coincided with a significant decline in energy R&D activities. Technical progress is crucial for tackling many energy and environmental issues as well as for long-term efficiency improvement. This paper reviews the industrial organisation literature on innovation to explore the causes of this decline, and shows that it was predicted by the pre-reform literature. More recent evidence endorses this conclusion. At the same time, R&D productivity and innovative output appear to have improved in both electric utilities and equipment suppliers, in line with general improvements in the operating efficiency of the sector. Despite this, a lasting decline in basic R&D and innovation input into basic research may negatively affect development of radical technological innovation in the long run. There is a need for reorientation of energy technology policies and spending toward more basic research, engaging more firms in R&D, encouraging collaborative research, and exploring public private partnerships.
    Keywords: innovation, R&D expenditure, electricity reform, regulation, ownership
    JEL: L94 O38
    Date: 2005–08
  11. By: Gueth,Werner; Mueller,Wieland; Potters,Jan (Tilburg University, Center for Economic Research)
    Abstract: We study a market in which both buyers and sellers can decide to preempt and set their quantities before market clearing. Will this lead to preemption on both sides of the market, only one side of the market, or to no preemption at all? We find that preemption tends to be asymmetric in the sense that it is restricted to only one side of the market (buyers or sellers).
    Keywords: preemption;endogenous timing
    JEL: C72 D43 L11
    Date: 2005
  12. By: Aviv Nevo; Konstantinos Hatzitaskos
    Abstract: For many products the average price paid by consumers falls during periods of high demand. We use information from a large supermarket chain to decompose the decrease in the average price into a substitution effect, due to an increase in the share of cheaper products, and a price reduction effect. We find that for almost all the products we study the substitution effect explains a large part of the decrease. We estimate demand for these products and show the price declines are consistent with a change in demand elasticity and the relative demand for different brands. Our findings are less consistent with "loss-leader" models of retail competition.
    Date: 2005–08
  13. By: Karsten Neuhoff; Christian von Hirschhausen
    Abstract: This paper analyses the economics of long-term gas contracts under changing institutional conditions, mainly gas sector liberalisation. The paper is motivated by the increasingly tense debate in continental Europe, UK and the US on the security of long-term gas supply. We discuss the main issues regarding long-term contracts, i.e. the changing role of the flexibility clause, the effect of abandoning the destination clause, and the strategic behaviour of producers between long-term sales and spot-sales. The literature suggests consumers and producers benefit from risk hedging through long-term contracts. Furthermore long-term contracts may reduce exercise of market power. This was argued to benefit consumers at the ‘expense’ of producers’ profits. Our analysis shows if the long-run demand elasticity is significantly lower than the short-run elasticity, both strategic producers and consumers benefit from lower prices and larger market volume. Some policy implications of the findings are also discussed.
    Keywords: contracts, gas, market power, demand elasticity, liberalisation, Europe
    JEL: L22 D L95
    Date: 2005–09
  14. By: Lucia Foster; John Haltiwanger; Chad Syverson
    Abstract: There is considerable evidence that producer-level churning contributes substantially to aggregate (industry) productivity growth, as more productive businesses displace less productive ones. However, this research has been limited by the fact that producer-level prices are typically unobserved; thus within-industry price differences are embodied in productivity measures. If prices reflect idiosyncratic demand or market power shifts, high "productivity" businesses may not be particularly efficient, and the literature's findings might be better interpreted as evidence of entering businesses displacing less profitable, but not necessarily less productive, exiting businesses. In this paper, we investigate the nature of selection and productivity growth using data from industries where we observe producer-level quantities and prices separately. We show there are important differences between revenue and physical productivity. A key dissimilarity is that physical productivity is inversely correlated with plant-level prices while revenue productivity is positively correlated with prices. This implies that previous work linking (revenue-based) productivity to survival has confounded the separate and opposing effects of technical efficiency and demand on survival, understating the true impacts of both. We further show that young producers charge lower prices than incumbents, and as such the literature understates the productivity advantage of new producers and the contribution of entry to aggregate productivity growth.
    JEL: E2 L1 L6 O4
    Date: 2005–08
  15. By: Nyström, Kristina (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: Recent empirical research by, for example, Audretsch and Fritsch (1999) and Armington and Acs, (2002) shows that regional determinants of new firm formation differs between industries. It has also been suggested that a large part of the regional variation of new firm formation can be explained by differences in industrial structure. This paper reinvestigates the regional determinants of entry and exit considering these findings. The empirical analysis is performed using data on Swedish firm entry and exit rates for 1997-2001. It is shown that on average about 0.5 to 2.7 percent of the regional variation in entry and exit rates remains to be explained, after controlling for differences in industrial structure, but that there is substantial regional variation. A majority of the firms in the 47 industries investigated are sensitive to unobserved regional characteristics, such as regional policy when deciding to enter or exit a particular region. Agglomeration and the size structure in the particular industry and region are factors that are found to influence entry and exit rates in almost all industries.
    Keywords: Entry; exit; industry structure; regions
    JEL: L10 R12
    Date: 2005–08–12
  16. By: Paul S. Calem; Michael B. Gordy; Loretta J. Mester
    Abstract: To explain persistence of credit card interest rates at relatively high levels, Calem and Mester (AER, 1995) argued that informational barriers create switching costs for high-balance customers. As evidence, using data from the 1989 Survey of Consumer Finances, they showed that these households were more likely to be rejected when applying for new credit. In this paper, they revisit the question using the 1998 and 2001 SCF. Further, they use new information on card interest rates to test for pricing effects consistent with information-based switching costs. The authors find that informational barriers to competition persist, although their role may have declined
    Keywords: Credit cards
    Date: 2005
  17. By: Werner Güth; Nikos Nikiforakis; Hans-Theo Normann
    Abstract: This paper analyses vertical cross-shareholding, that is, the mutual holding of a minority of shares between vertically related firms. We investigate the conditions under which cross-shareholding improves efficiency. First, we explore the issue in a game-theoretic model and find that cross-shareholding is sufficient to obtain the first-best solution. We then proceed by testing these predictions experimentally. Our findings are that the theory predicts the sellers' decisions accurately and to some extent the price of the buyers. Cross-shareholding appears to occur more frequently than predicted and it enhances efficiency even where not predicted.
    Date: 2005–05
  18. By: Zanardi,Maurizio (Tilburg University, Center for Economic Research)
    Abstract: When in 1923 Jacob Viner wrote the book "Dumping: A Problem in International Trade", he probably did not imagine that the system put in place to eliminate the effects of dumping (i.e. antidumping) would surge to be a problem. However, as we celebrate the 100th anniversary of the first antidumping law, the situation is quite different from what Viner could observe at the beginning of last century. And if his economic analysis on the nature and causes of dumping is still valid, since the early 1990s the debate has centered on the widespread use and consequences of antidumping, which is just a modern protectionist tool used by many countries. This paper documents the evolution of antidumping from its early days by looking at the number of countries adopting antidumping laws and various statistics pertaining to the total caseload. One striking result is the important role of new users of antidumping, with negative consequences not only for traditional users.
    Keywords: WTO;antidumping; trade liberalization;GATT
    JEL: F13 F14
    Date: 2005
  19. By: Steven N. Kaplan; Berk A. Sensoy; Per Strömberg
    Abstract: We study how firm characteristics evolve from early business plan to initial public offering to public company for 49 venture capital financed companies. The average time elapsed is almost 6 years. We describe the financial performance, business idea, point(s) of differentiation, non-human capital assets, growth strategy, customers, competitors, alliances, top management, ownership structure, and the board of directors. Our analysis focuses on the nature and stability of those firm attributes. Firm business lines remain remarkably stable from business plan through public company. Within those business lines, non-human capital aspects of the businesses appear more stable than human capital aspects. In the cross-section, firms with more alienable assets have substantially more human capital turnover.
    JEL: L2 G3
    Date: 2005–08

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