nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒10‒08
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Entry and Competition in Local Hospital Markets By Jean M. Abraham; Martin S. Gaynor; William B. Vogt
  2. Estimation and Identification of Merger Effects: An Application to Hospital Mergers By Leemore S. Dafny
  3. Invention under uncertainty and the threat of ex post entry By David A. Miller
  4. A Gap for Me: Entrepreneurs and Entry By Volker Nocke
  5. Barriers To Entry By Dennis W. Carlton
  6. Price Discrimination, Copyright Law, and Technological Innovation: Evidence from the Introduction of DVDs By Julie Holland Mortimer
  7. Horizontally Differentiated Market Makers By Simon Loertscher
  9. Complementarities and Collusion in an FCC Spectrum Auction By Patrick Bajari; Jeremy T. Fox
  10. Spatial Competition between Parking Garages and Downtown Parking Policy By Richard Arnott
  11. Hospital Ownership and Financial Performance: A Quantitative Research Review By Yu-Chu Shen; Karen Eggleston; Joseph Lau; Christopher Schmid
  12. Hotelling's Beach with Linear and Quadratic Transportation Costs: Existence of Pure Strategy Equilibria By Alain Egli
  13. Courts, firms and allocation of credit By Julia Shvets

  1. By: Jean M. Abraham; Martin S. Gaynor; William B. Vogt
    Abstract: There has been considerable consolidation in the hospital industry in recent years. Over 900 deals occurred from 1994-2000, and many local markets, even in large urban areas, have been reduced to monopolies, duopolies, or triopolies. This surge in consolidation has led to concern about competition in local markets for hospital services. We examine the effect of market structure on competition in local hospital markets -- specifically, does the hardness of competition increase with the number of firms? We extend the entry model developed by Bresnahan and Reiss to make use of quantity information, and apply it to data on the U.S. hospital industry. In the hospital markets we examine, entry leads to a quick convergence to competitive conduct. Entry reduces variable profits and increases quantity. Most of the effects of entry come from having a second and a third firm enter the market. The fourth entrant has little estimated effect. The use of quantity information allows us to infer that entry is consumer-surplus-increasing.
    JEL: I1 L1 L8
    Date: 2005–10
  2. By: Leemore S. Dafny
    Abstract: Advances in structural demand estimation have substantially improved economists' ability to forecast the impact of mergers. However, these models rely on extensive assumptions about consumer choice and firm objectives, and ultimately observational methods are needed to test their validity. Observational studies, in turn, suffer from selection problems arising from the fact that merging entities differ from non-merging entities in unobserved ways. To obtain an accurate estimate of the ex-post effect of consummated mergers, I propose a combination of rival analysis and instrumental variables. By focusing on the effect of merger on the behavior of rival firms, and instrumenting for these mergers, unbiased estimates of the effect of merger on market outcomes can be obtained. Using this methodology, I evaluate the impact of all independent hospital mergers between 1989 and 1996 on rivals' prices. I find sharp increases in rival prices following merger, with the greatest effect on the closest rivals. The results for this industry are more consistent with predictions from structural models than with prior observational estimates.
    JEL: I1 D4 L0
    Date: 2005–10
  3. By: David A. Miller (UCSD)
    Abstract: This paper proposes a theoretical framework for studying the invention of new products when demand is uncertain. In this framework, under general conditions, the threat of ex post entry by a competitor can deter invention ex ante. Asymmetric market power in the ex post market exacerbates the problem. The implications of these general results are examined in a series of examples that represent important markets in the computer industry. The first is a model that shows how an operating system monopolist, by its mere presence, can deter the invention of complements, to its own detriment as well as that of society. The implications of policies such as patent protection, price regulation, and mandatory divestiture are considered. Three additional examples consider the ability of a monopolist in one market to commit to bundling an unrelated product, a pair of horizontally differentiated firms that can add a new feature to their products, and a platform leader that can be challenged in its base market by the supplier of a complementary product.
    Keywords: Invention, innovation, demand uncertainty, ex post entry, bundling, Intel, Microsoft, Netscape
    JEL: L12 L13 O31
    Date: 2005–10–06
  4. By: Volker Nocke (Department of Economics, University of Pennsylvania)
    Abstract: We present a theory of entrepreneurial entry and exit decisions. Knowing their own managerial talent, entrepreneurs decide which market to enter, where markets differ in size. We obtain a striking sorting result: each entrant in a large market is more efficient than any entrepreneur in a smaller market since competition is endogenously more intense in larger markets. This result continues to hold when entrepreneurs can export their output to other markets, thereby incurring a unit transport cost or tariff. The sorting and price competition effects imply that the number of entrants (and hence product variety) may actually be smaller in larger markets. In the stochastic dynamic extension of the model, we show that the churning rate of entrepreneurs is higher in larger markets.
    Keywords: entrepreneurship, entry, exit, firm turnover, industry dynamics
    JEL: L11 L13 M13
    Date: 2003–06–30
  5. By: Dennis W. Carlton
    Abstract: This paper analyzes the concept of barriers to entry. It explains that the concept is a static one and explores the inadequacy of the concept in a world with sunk costs, adjustment costs and uncertainty. The static concept addresses the question of whether profits are excessive. The more interesting and relevant question is how fast entry or exit will erode profits or losses and how do the bounds that entry and exit place on price vary with uncertainty and sunk cost. Intuition based on the static concept of barrier to entry can be misleading in many industries.
    JEL: L1 L4
    Date: 2005–10
  6. By: Julie Holland Mortimer
    Abstract: This paper examines the welfare effects of intellectual property protection, accounting for firms' optimal responses to legal environments and technological innovation. I examine firms' use of indirect price discrimination in response to U.S. copyright law, which effectively prevents direct price discrimination. Using data covering VHS and DVD movie distribution, I explain studios' optimal pricing strategies under U.S. copyright law, and determine optimal pricing strategies under E.U. copyright law, which allows for direct price discrimination. I analyze these optimal pricing strategies for both the existing VHS technology and the new digital DVD technology. I find that studios' use of indirect price discrimination under US copyright law benefits consumers and harms retailers. Optimal pricing under E.U. copyright law also tends to benefit studios and consumers. I also reanalyze these issues assuming continued DVD adoption.
    JEL: L0 O3
    Date: 2005–10
  7. By: Simon Loertscher
    Abstract: I present a model of competition between two market makers who are horizontally differentiated. I first show that absent a search market for buyers and sellers, there is a continuum of symmetric equilibria. These equilibria are payoff equivalent for market makers, but affect buyers' and sellers' welfare in opposite ways. Second, I analyze the model when buyers and sellers can also exchange the good in search markets. The model with search markets shares many features with existing models, yet allows competing intermediaries to net a profit in equilibrium. Interestingly, the model exhibits a complementarity between intermediaries' profits in the presence of search markets. Third, I show that every equilibrium in a game with market makers is also an equilibrium in an appropriately defined game with matchmakers
    Keywords: Market making; intermediation and search; horizontal differentiation; market microstructure
    JEL: C72 D41 D43 L13
    Date: 2005–09
  8. By: B Bhaskara Rao (University of the South Pacific); Gyaneshwar Rao (University of the South Pacific)
    Abstract: We use the LSE-Hendry general to specific approach to analyse if US gasoline price adjustments are asymmetric with respect to changes in crude oil prices. Furthermore, we modify some weaknesses in the earlier works by Boreinstein, Cameron and Gilbert (1997) and Bachmeier and Griffin (2003) and shows that if the price adjustment equations are properly specified and estimated, alternative specifications and temporal aggregation of data do not affect the results. Monthly US data are used to show that alternative specifications give equally good results and there is no asymmetry in the US gasoline price adjustments.
    Keywords: Asymmetric price adjustments, Market power, General to specific approach, Error correction models and Gasoline and crude oil prices
    JEL: P Q Z
    Date: 2005–10–02
  9. By: Patrick Bajari; Jeremy T. Fox
    Abstract: We empirically study bidding in the C Block of the US mobile phone spectrum auctions. Spectrum auctions are conducted using a simultaneous ascending auction design that allows bidders to assemble packages of licenses with geographic complementarities. While this auction design allows the market to find complementarities, the auction might also result in an inefficient equilibrium. In addition, these auctions have equilibria where implicit collusion is sustained through threats of bidding wars. We estimate a structural model in order to test for the presence of complementarities and implicit collusion. The estimation strategy is valid under a wide variety of alternative assumptions about equilibrium in these auctions and is robust to potentially important forms of unobserved heterogeneity. We make suggestions about the design of future spectrum auctions.
    JEL: L0 L5 C1
    Date: 2005–10
  10. By: Richard Arnott (Boston College)
    Abstract: This paper looks at parking policy in dense urban districts ("downtown"), where spatial competition between parking garages is a key feature. The paper has four parts. The first looks at the "parking garage operator's problem". The second derives the equilibrium in the parking garage market when there is no on-street parking, compares the equilibrium to the social optimum, and examines parking policy in this context. The third considers how the presence of on-street parking alters the analysis, and the fourth extends the analysis to include mass transit.
    Keywords: parking, off-street parking, on-street parking, parking garages, mass transit, parking policy, second best, spatial competition
    JEL: R40 L91
    Date: 2005–09–30
  11. By: Yu-Chu Shen; Karen Eggleston; Joseph Lau; Christopher Schmid
    Abstract: We apply meta-analytic methods to conduct a quantitative review of the empirical literature since 1990 comparing financial performance of US for-profit, not-for-profit, and government-owned general acute hospitals. We find that the diverse results in the hospital ownership literature can be explained largely by differences in authors' underlying theoretical frameworks, assumptions about the functional form of the dependent variables, and model specifications. Weaker methods and functional forms tend to predict larger differences in financial performance between not-for-profits and for-profits. The combined estimates across studies suggest little difference in cost among all three types of hospital ownership, and that for-profit hospitals generate more revenue and greater profits than not-for-profit hospitals, although the difference is only of modest economic significance. There is little difference in revenue or profits between government and not-for-profit hospitals.
    JEL: I11 L30
    Date: 2005–10
  12. By: Alain Egli
    Abstract: In Hotelling type models consumers have the same transportation cost function. We deviate from this assumption and introduce two consumer types. Some consumers have linear transportation costs, while the others have quadratic transportation costs. If at most half the consumers have linear transportation costs, a subgame perfect equilibrium in pure strategies exists for all symmetric locations. Furthermore, no general principle of differentiation holds. With two consumer types, the equilibrium pattern ranges from maximum to intermediate differentiation. The degree of product differentiation depends on the fraction of consumer types
    Keywords: Hotelling; Horizontal Product Differentiation; Equilibrium
    JEL: L13 R32
    Date: 2005–05
  13. By: Julia Shvets (University of Cambridge, Corpus Christi College)
    Abstract: The paper investigates whether and how performance of regional commercial courts has affected external credit of Russian enterprises between 1995 and 2002. The results show that more reliable courts lead to higher bank lending to firms. This occurs predominantly through expansion of the number of businesses which have access to bank financing. There is limited evidence that trade credit also responds to changes in quality of courts. However, credit from suppliers is considerably less sensitive to court performance than bank credit. Court reliability is precisely defined and measured objectively using appeal rates of lower court decisions. The paper analytically derives the relationship between reliability of courts, appeal rates and lending to firms, identifying a specific channel through which law enforcement affects external financing. Empirical analysis is based on a new panel dataset which measures credit at the level of a firm and permits a number of robustness tests.
    Keywords: law enforcement, finance
    JEL: O12 G38 G32 K42 K41 H40
    Date: 2005–09–29

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