nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒10‒04
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Merger Policy to Promote ‘Global Players’? A Simple Model By Andreas Haufler; Søren Bo Nielsen
  2. Bank mergers, competition and liquidity By Elena Carletti; Philipp Hartmann; Giancarlo Spagnolo
  3. Merger Control in Differentiated Product By Patrick Paul Walsh; Franco Mariuzzo; Ciara Whelan
  4. Can Rivalry Increase Price? By Christian Roessler
  5. Vertical Integration and Technology: Theory and Evidence By Acemoglu, Daron; Aghion, Philippe; Griffith, Rachel; Zilibotti, Fabrizio
  6. Structural Separation and Access in Telecommunications Markets By Paul de Bijl
  7. Financial market integration and loan competition: when is entry deregulation socially beneficial? By Leo Kaas
  8. Perfect Competition in a Bilateral Monopoly (In honor of Martin Shubik) By Pradeep Dubey; Dieter Sondermann
  9. Why Count Advertising Rivals? Competition and Consumer Advertising in Specialized Markets By Amrita Bhattacharyya
  10. Common Labels and Market Mechanisms By Boizot-Szantai, Christine; Lecocq, Sébastien; Marette, Stéphan
  11. Interlinking securities settlement systems - a strategic commitment? By Karlo Kauko
  12. Mergers and acquisitions and bank performance in Europe: the role of strategic similarities By Yener Altunbas; David Marqués Ibáñez
  13. Endogenous preemption on both sides of a market By Wieland Müller; Werner Güth; Jan Potters; Susanne Büchner
  14. Raising rival's costs in the securities settlement industry By Cornelia Holthausen; Jens Tapking
  15. Does product market competition reduce inflation? Evidence from EU countries and sectors By Marcin Przybyla; Moreno Roma
  16. Market Concentration, Macroeconomic Uncertainty and Monetary Policy. By Juan de Dios Tena; Francesco Giovannoni
  17. Benefits and spillovers of greater competition in Europe: A macroeconomic assessment. By Tamim Bayoumi; Douglas Laxton; Paolo Pesenti

  1. By: Andreas Haufler; Søren Bo Nielsen
    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.
    Keywords: merger policy, international trade
    JEL: F13 H77 L41
    Date: 2005
  2. By: Elena Carletti (University of Mannheim, Department of Economics, 68131 Mannheim, Germany.); Philipp Hartmann (European Central Bank, DG Research, Kaiserstrasse 27, 60311 Frankfurt, Germany, and CEPR.); Giancarlo Spagnolo (Stockholm School of Economics, Handelshogskolan, BOX 6501, SE-11383 Stockholm, Consip SpA and CEPR.)
    Abstract: We model the impact of bank mergers on loan competition, banks' reserve holdings and aggregate liquidity. Banks compete in a differentiated loan market, hold reserves against liquidity shocks, and refinance in the interbank market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess changes in liquidity risk and expected liquidity needs for each bank and for the banking system. Large mergers tend to increase expected aggregate liquidity needs, and thus the liquidity provision by the central bank. Comparative statics suggest that a more competitive environment moderates this effect.
    Keywords: Credit market competition; bank reserves; internal money market; banking system liquidity.
    JEL: D43 G21 G28 L13
    Date: 2003–11
  3. By: Patrick Paul Walsh; Franco Mariuzzo; Ciara Whelan (Department of Economics, Trinity College)
    Abstract: Thresholds defined on the level and change in the HHI (Herfindahl- Hirschmann Index) applied to market shares seem to be the main instrument to select notified mergers for investigation in both the EU and US. We question the use of such a selection rule in di?erentiated products industries. We propose the use of a structural approach to apply HHI thresholds based on profit shares rather than market shares. We illustrate our point using product data for Retail Carbonated Soft Drinks (Price, Market Share and Characteristics). We estimate company (product) mark-ups consistent with a structural model of equilibrium, using demand primitives from a Nested Logit model and a Random Coe?cient model. We provide an example where the HHI thresholds based on profit shares identify potentially damaging mergers not captured by applying thresholds to output shares, or conversely, identify mergers of no concern that would be selected on the basis of output shares.
    JEL: K2 L11 L25 L40 L81
    Date: 2005–08
  4. By: Christian Roessler (University of Melbourne)
    Abstract: Spatially differentiated duopolists set higher-than-monopoly prices at some distances. This is proven in a space of arbitrary dimensionality. But the maximal equilibrium price which may occur in a given space converges to the monopoly price as dimensionality increases. If consumers care about sufficiently many features of the product, monopoly nearly leads to an extreme price and is nearly least efficient.
    Keywords: multidimensional product spaces, duopoly pricing, spatial competition
    JEL: C72 D40 D43 L11 L13
    Date: 2005–09–26
  5. By: Acemoglu, Daron; Aghion, Philippe; Griffith, Rachel; Zilibotti, Fabrizio
    Abstract: This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both these effects are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics.
    Keywords: hold-up; incomplete contracts; internal organisation of the firm; investment; R&D; residual rights of control; technology; UK manufacturing; vertical integration
    JEL: L22 L23 L24
    Date: 2005–09
  6. By: Paul de Bijl
    Abstract: This paper presents a basic framework to assess whether structural (vertical) separation is desirable. It is discussed within the setting of fixed telecommunications markets. From an economist’s perspective, the key question that underlies the case for structural separation is: is there a persistent bottleneck? The obvious candidate is the ‘local loop’, or local access network. If yes then it makes sense to compare the costs and benefits of structural separation. The framework provides a set of options that the regulator can use strategically, by using the threat of a break-up to influence an incumbent’s competitive stance in the wholesale market.
    JEL: L12 L40 L51 L96
    Date: 2005
  7. By: Leo Kaas (Department of Economics, University of Vienna, Hohenstaufengasse 9, 1010 Vienna, Austria.)
    Abstract: The paper analyzes how the removal of barriers to entry in banking affect loan competition, bank stability and economic welfare. We consider a model of spatial loan competition where a market that is served by less efficient banks is opened to entry by banks that are more efficient in screening borrowers. It is shown that there is typically too little entry and that market shares of entrant banks are too small relative to their socially optimal level. This is because efficient banks internalize only the private but not the public benefits of their better credit assessments. Only when bank failure is very likely or very costly, socially harmful entry can occur.
    Keywords: Entry deregulation; Bank competition.
    JEL: D43 D82 G21
    Date: 2004–11
  8. By: Pradeep Dubey (Center for Game Theory, Dept. of Economics, SUNY at Stony Brook and Cowles Foundation, Yale University); Dieter Sondermann (Department of Economics, University of Bonn, Bonn)
    Abstract: We show that if limit orders are required to vary smoothly, then strategic (Nash) equilibria of the double auction mechanism yield competitive (Walras) allocations. It is not necessary to have competitors on any side of any market: smooth trading is a substitute for price wars. In particular, Nash equilibria are Walrasian even in a bilateral monopoly.
    Keywords: Limit orders, double auction, Nash equilibria, Walras equilibria, perfect competition, bilateral monopoly, mechanism design
    JEL: C72 D41 D42 D44 D61
    Date: 2005–09
  9. By: Amrita Bhattacharyya (Boston College)
    Abstract: This paper analyzes what incentives firms have to advertise to consumers when consumption decisions are made by market experts. The study explains why only some, but not all firms choose to advertise to consumers in specialized markets with experts. The theoretical analysis finds that the observed across-class and within-class variation in consumer advertising by U.S. pharmaceuticals is due to differences in disease-familiarity and heterogeneity in patients' types. Finally, a simple game-theoretic model shows that when only some, but not all competitors in a market advertise to consumers, the crucial determinant of advertising is the number of advertising competitors. With increased competition from advertising rivals, each firm's consumer advertising decreases. Using annual, brand-level direct-to-consumer-advertising expenditure data for brand-name prescription drugs belonging to 5 therapeutic classes over the period 1996-1999, empirical study offers support for the negative relationship between consumer advertising expenditure and number of advertising rivals.
    Keywords: Advertising, Competition, Pharmaceutical, Expert, Nash equilibrium
    JEL: L0 M3 I0
    Date: 2005–09–29
  10. By: Boizot-Szantai, Christine; Lecocq, Sébastien; Marette, Stéphan
    Abstract: In this article, the impact of common labels is investigated with both theoretical and empirical approaches. Recent statistics regarding the egg market in France suggest that retailer brands largely adopt common labels. A simple theoretical framework enables us to determine the conditions under which producers and/or retailers with different product qualities decide to post a common label on their products. In particular, a situation of multiple equilibria (one where the label is used by the high-quality seller only and one where it is used by the low-quality seller only) is exhibited when the cost of the label is relatively large. The demand is then estimated for different segments of the French egg market, including producer/retailer brands with/without common labels. The estimates are used to derive expenditure and price elasticities and allow us to calculate welfare measures revealing a relatively large willingness-to-pay for labels.
    Keywords: competition, demand estimation, labels, product differentiation.
    Date: 2005–09–28
  11. By: Karlo Kauko (Monetary Policy and Research Department, Bank of Finland)
    Abstract: Central securities depositories (CSDs) have opened mutual links, but most of them are seldom used. Why are idle links established? By allowing a foreign CSD to offer services through the link the domestic CSD invites competition. The domestic CSD can determine the cost efficiency of the rival by charging suitable fees, and prevent it from becoming more competitive than the domestic CSD. By inviting the competitor the domestic CSD can commit itself not to charge monopoly fees for secondary market services. This enables the domestic CSD to charge high fees in the primary market without violating investors’ participation constraints.
    Keywords: securities settlement systems, central securities depositories, network industries, access pricing
    JEL: G29 L13
    Date: 2005–01
  12. By: Yener Altunbas (Centre for Banking and Financial Studies, SBARD, University of Wales Bangor, Gwynedd, Bangor, LL57, 2DG, United Kingdom.); David Marqués Ibáñez (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
    Abstract: An unprecedented process of financial consolidation has taken place in the European Union over the past decade. Building on earlier US evidence, we examine the impact of strategic similarities between bidders and targets on post-merger financial performance. We find that, on average, bank mergers in the European Union resulted in improved return on capital. By making the assumption that balance-sheet resource allocation is indicative of the strategic focus of banks, we also find significantly different results for domestic and cross-border mergers. For domestic deals, it could be quite costly to integrate dissimilar institutions in terms of their loan, earnings, cost, deposits and size strategies. For cross-border mergers and acquisitions (M&As), differences of merging partners in their loan and credit risk strategies are conducive to a higher performance whereas diversity in their capital, cost structure as well as technology and innovation investments strategies are counterproductive from a performance standpoint.
    Keywords: Banks; M&As; strategic similarities.
    JEL: G21 G34
    Date: 2004–10
  13. By: Wieland Müller; Werner Güth; Jan Potters; Susanne Büchner
    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).
    Date: 2005–08
  14. By: Cornelia Holthausen (European Central Bank, DG Research); Jens Tapking (European Central Bank, DG Payment Systems and Market Infrastructure)
    Abstract: The competition between a central securities depository (CSD) and a custodian bank is analysed in a Stackelberg model. The CSD sets its prices first, the custodian bank follows. There are many investor banks each of which has to decide whether to use the service of the CSD or of the custodian bank. This decision depends on the prices and the investor bank's preferences for the inhomogeneous services of the two service providers. Since the custodian bank uses services provided by the CSD as input, the CSD can raise its rival's costs. However, due to network externalities, the CSD's equilibrium market share is not necessarily higher than socially optimal. This result has important policy implications that are related to a discussion currently taking place in the securities settlement industry.
    Keywords: Securities settlement, network competition, raising rival's cost.
    JEL: G10 G20 L14
    Date: 2004–07
  15. By: Marcin Przybyla (EU Countries Division, Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Moreno Roma (Corresponding author: European Central Bank, Directorate General Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In this paper we explore the link between the intensity of product market competition and inflation rates across EU countries and sectors. We consider long-term averages of inflation rates in order to remove the cyclical behavior of inflation over time and as alternative proxies of competition we use the level of mark-up, profit margin, the profit rate and a survey based “intensity of competition” variable. Results for both aggregate and sectoral panels show that the extent of product market competition, as proxied by the level of mark-up in particular, is an important driver of inflation. Notwithstanding some caveats associated with the measurement of the proxies of competition used, our findings suggest that higher product market competition reduces average inflation rates for a prolonged period of time. Moreover, results both at the aggregate and sectoral level are generally confirmed by a wide set of robustness tests.
    Keywords: Inflation; Competition; Estimation and Panel Data Analysis.
    JEL: C21 C23 E31
    Date: 2005–03
  16. By: Juan de Dios Tena; Francesco Giovannoni
    Abstract: This paper studies the effect of market structure and macroeconomic uncertainty on the transmission of monetary policy. We motivate our analysis with a simple model which predicts that: 1) investment and production in more concentrated sectors are more affected by demand changes and 2) high uncertainty makes investment and production more sensitive to demand changes. The empirical analysis estimates the effect of monetary shocks on sectoral output for different sectors in the US using different structural vector autoregressive VAR approaches. The results are largely consistent with the proposed theory.
    Keywords: Market concentration, macroeconomic uncertainty, monetary policy transmission, vector autoregressive models.
    JEL: E22 E32 E52 D43
    Date: 2005–08
  17. By: Tamim Bayoumi (International Monetary Fund, NY, USA.); Douglas Laxton (International Monetary Fund, NY, USA.); Paolo Pesenti (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Using a general-equilibrium simulation model featuring nominal rigidities and monopolistic competition in product and labor markets, this paper estimates the macroeconomic benefits and international spillovers of an increase in competition. After calibrating the model to the euro area vs. the rest of the industrial world, the paper draws three conclusions. First, greater competition produces large effects on macroeconomic performance, as measured by standard indicators. In particular, we show that differences in competition can account for over half of the current gap in GDP per capita between the euro area and the US. Second, it may improve macroeconomic management by increasing the responsiveness of wages and prices to market conditions. Third, greater competition can generate positive spillovers to the rest of the world through its impact on the terms of trade.
    Keywords: Competition; Markups; Monetary Policy; Taylor Rule.
    JEL: C51 E31 E52
    Date: 2004–04

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