nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒11‒05
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Competition and contracts in the Nordic Residential Electricity Markets By Stephen Littlechild
  2. Product Market Competition and Economic Performance in Australia By Simen Bjornerud; Vassiliki Koutsogeorgopoulou; Michael Wise; Helmut Ziegelschmidt
  3. Does the Profit Motive Make Jack Nimble? Ownership Form and the Evolution of the U.S. Hospital Industry By Sujoy Chakravarty; Martin Gaynor; Steven Klepper; William B. Vogt
  4. "There and Back Again: Airline Routes, Fares and Passenger Flows in Network Equilibria." By Joseph I. Daniel; Munish Pahwa
  5. Inspection Intensity and Market Structure By Marette, Stéphan
  6. Competition Law in India: Need to Go Slow and Steady By Agarwal Anurag K
  7. Be Nice, unless it Pays to Fight By Jan Boone
  8. U.S. v. Microsoft: Did Consumers Win? By David S. Evans; Albert L. Nichols; Richard Schmalensee
  9. Long-term Framework for Electricity Distribution Access Charges By Tooraj Jamasb; Karsten Neuhoff; David Newbery; Michael Pollitt
  10. The Effects of Cardiac Specialty Hospitals on the Cost and Quality of Medical Care By Jason R. Barro; Robert S. Huckman; Daniel P. Kessler
  11. Ownership Concentration, Market Monitoring and Performance: Evidence from the UK, the Czech Republic and Poland By Vahe Lskavyan; Mariana Spatareanu
  12. Monopoly Power and Optimal Taxation of Capital Income By Sheikh Tareq Selim
  13. Barriers to network-specific innovation By Antoine Martin; Michael J. Orlando

  1. By: Stephen Littlechild
    Abstract: The main Nordic residential electricity markets (Norway, Sweden and Finland) effectively opened to retail competition around 1998. They have not been subject to regulatory controls on prices or other contract terms. Between 11 and 29 per cent of residential customers have switched suppliers and between a fifth and a half of all residential customers have chosen alternative contractual terms of supply. These alternatives include fixed price contracts ranging from 3 months to five years duration, as well as spot-price related terms, instead of the standard variable tariffs. The use of these alternatives is increasing over time, and there is considerable product innovation. This paper surveys these developments and illustrates with case studies of significant suppliers in each Nordic market. The market is thus ascertaining and bringing about the outcomes that customers prefer. Without retail competition, it is not clear how regulation will replicate this aspect of the market process.
    Keywords: retail competition, electricity, regulation, Nordic countries
    JEL: L94 L L51
    Date: 2005–11
  2. By: Simen Bjornerud; Vassiliki Koutsogeorgopoulou; Michael Wise; Helmut Ziegelschmidt
    Abstract: The OECD Growth Study and other empirical work have shown that the strength of competition in product markets plays an important role in the economic growth process as well as contributing to a more efficient allocation of resources in a static sense. More intense competition is likely to encourage stronger efforts of managers to improve efficiency and induce higher innovative activity, leading to higher multi-factor productivity. This paper begins with a short review of Australia’s growth performance since the early 1990s and its possible link to strengthened competitive pressures and their interaction with other economic reforms. Attention is then turned to indicators of product market competition to gauge the strength of competitive pressures. This is followed by an assessment of the general competition policy framework and its role in promoting competition. The next section presents the framework of the National Competition Policy and reviews the completeness of the reform programme and the areas requiring further action. The paper then examines a number of sectors where regulatory policies can be expected to have particularly large impacts. The implications of trade liberalisation on Australia’s economic performance and the scope for further improvements are also discussed in some detail. The paper concludes with a set of policy recommendations. This Working Paper relates to the 2005 OECD Economic Survey of Australia ( <P>Concurrence sur les marchés de produits et performance économique en Australie L’Étude sur la croissance de l’OCDE et d’autres travaux empiriques ont montré que la vigueur de la concurrence sur les marchés des produits joue un rôle important dans le processus de croissance économique et contribue aussi à une allocation plus efficiente des ressources du point de vue statique. Un renforcement de la concurrence encouragera vraisemblablement les gestionnaires à faire des efforts plus soutenus pour améliorer l’efficience et induire une activité plus novatrice, conduisant à une augmentation de la productivité multifactorielle. Ce document de travail commence avec un bref examen de la performance de l’Australie sur le plan de la croissance depuis le début des années 90 et de ses liens éventuels avec le renforcement des pressions concurrentielles et leur interaction avec d'autres réformes économiques. On s’intéressera aussi aux indicateurs de la concurrence sur les marchés des produits de façon à évaluer la vigueur des pressions concurrentielles. Cet examen est suivi d’une évaluation du cadre général de la politique de la concurrence et de son rôle dans la promotion de la concurrence. La section suivante expose le cadre de la politique nationale de la concurrence et analyse l’exhaustivité du programme de réformes et les domaines exigeant une action plus approfondie. Plusieurs secteurs où les politiques réglementaires devraient avoir une incidence particulièrement importante sont ensuite passés en revue. Les conséquences de la libéralisation commerciale sur la performance économique de l’Australie et les possibilités d’autres améliorations sont aussi examinées en détail. Le document se conclut par un ensemble de recommandations d’action. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de l’Australie, 2005 (
    Keywords: telecommunications, télécommunications, health, santé, productivité, politique de la concurrence, air transport, transport aérien, trade policy, politique commerciale, retail distribution, electricity, gas, électricité, gaz, eau, national competition policy, NCP, Trade Practices Act, ACCC, Dawson Review, multifactor productivity, access regime, water, rail, road, television broadcasting, legal services, multifactorielle, NCP, Trade Practices Act, ACCC, Commission Dawson, révision de la législation, régime d’accès, transport feroviaire, transport routier, télédiffusion, distribution de détail, professions juridiques
    JEL: H4 K20 K21 L50 L94 L96 Q1 Q4
    Date: 2005–10–13
  3. By: Sujoy Chakravarty; Martin Gaynor; Steven Klepper; William B. Vogt
    Abstract: We examine the evolving structure of the U.S. hospital industry since 1970, focusing on how ownership form influences entry and exit behavior. We develop theoretical predictions based on the model of Lakdawalla and Philipson, in which for-profit and not-for-profit hospitals differ regarding their objectives and costs of capital. The model predicts for-profits would be quicker to enter and exit than not-for-profits in response to changing market conditions. We test this hypothesis using data for all U.S. hospitals from 1984 through 2000. Examining annual and regional entry and exit rates, for-profit hospitals consistently have higher entry and exit rates than not-for-profits. Econometric modeling of entry and exit rates yields similar patterns. Estimates of an ordered probit model of entry indicate that entry is more responsive to demand changes for for-profit than not-for-profit hospitals. Estimates of a discrete hazard model for exit similarly indicate that negative demand shifts increase the probability of exit more for for-profits than not-for-profits. Finally, membership in a hospital chain significantly decreases the probability of exit for for-profits, but not not-for-profits.
    JEL: I11 L11 L2 L3
    Date: 2005–10
  4. By: Joseph I. Daniel (Department of Economics, University of Delaware); Munish Pahwa (MBNA, Newark, DE)
    Abstract: We calculate mutual-best-response route networks for profit maximizing airlines serving large US air-traffic-hub cities. A simulated annealing algorithm determines which of over ten thousand potential routes receive direct or hub-and-spoke service. DOT’s Origin and Destination Survey is used to calibrate airline revenue and cost functions. Simulated route structures, airfares, passenger flows, and market concentration levels closely approximate actual US networks comprising over seventy percent of domestic air travel. The results support several controversial positions regarding airline competition. Average airfares by route are consistent with price-taking behavior. Existing industry concentration levels can be justified by cost-reducing economies of scale and scope. Control of multiple airports by individual airlines currently has minimal effects on airfares or passenger flows. Socially optimal route structures would concentrate traffic at fewer and larger airports—but reduce costs only modestly. Airport pricing and capacity can significantly affect network traffic patterns. Investigation of strategic pricing is left for future research.
    Keywords: Hub-and-spoke airline networks, simulated annealing, commercial aviation, airline competition, airline mergers, airfares, airport congestion, and airport capacity.
    Date: 2005
  5. By: Marette, Stéphan
    Abstract: An investigation of financing an inspection policy while allowing the enforcement of a market regulation is described. A simple model shows that the intensity of controls depends on the market structure. Under a given number of firms, the per-firm probability of controls is lower than one, since firms’ incentive to comply with regulation holds under positive profits. In this case, a lump-sum tax is used for limiting distortions coming from financing with a fixed fee. Under free entry, the per-firm probability of controls is equal to one, and only a fixed fee that prevents excess entry is used to finance inspection.
    Keywords: inspection policies, market regulation, regulatory funding.
    Date: 2005–10–26
  6. By: Agarwal Anurag K
    Abstract: The globalized and liberalized Indian economy is witnessing cut-throat competition. To provide institutional support to healthy and fair competition, there is a requirement of better regulatory and adjudicatory mechanism. To this effect, India has enacted the new competition law which shall replace the earlier law. This is a shift from curbing monopolies to encouraging competition. The design of the new law carves out a very important role for the Competition Commission of India (CCI). The task has been divided in three phases. This article sets out to explain the intricate relationship of competition law and judiciary in India by examining the experience CCI had so far. The article then goes on to examine the role of lawyers. The article then considers the time frame for the implementation of the three phases and provides realistic suggestions to have a successful setting of competition regime in India.
    Keywords: Competition Advocacy, Competition Commission, India, Judiciary, Lawyers, MRTP Act
    Date: 2005–10–27
  7. By: Jan Boone
    Abstract: This paper considers industries where a firm or group of firms acts as price leader. It shows that entry in such industries can lead to higher prices through a crowding effect. Further, efficiency gains can lead to higher prices by making it too costly to fight. Mergers that bring the merged firms' efficiency close to that of the price leader(s) lead to higher prices if the merged firm does not belong to the group of price leaders. This is a formalization of joint dominance or coordinated effects. Finally, the model is extended to endogenize the identity of the price leader. This is done by allowing firms to make price announcements.
    Keywords: price leadership, mergers, joint dominance, coordinated effects, endogenous price leadership
    JEL: D43 L11 L41
    Date: 2005–03
  8. By: David S. Evans; Albert L. Nichols; Richard Schmalensee
    Abstract: U.S. v. Microsoft and the related state suit filed in 1998 appear finally to have concluded. In a unanimous en banc decision issued in late June 2004, the D.C. Circuit Court of Appeals rejected challenges to the remedies approved by the District Court in November 2002. The wave of follow-on private antitrust suits filed against Microsoft also appears to be subsiding. In this paper we review the remedies imposed in the United States, in terms of both their relationship to the violations found and their impact on consumer welfare. We conclude that the remedies addressed the violations ultimately found by the Court of Appeals (which were a subset of those found by the original district court and an even smaller subset of the violations alleged, both in court and in public discourse) and went beyond them in important ways. Thus, for those who believe that the courts were right in finding that some of Microsoft's actions harmed competition, the constraints placed on its behavior and the active, ongoing oversight by the Court and the plaintiffs provide useful protection against a recurrence of such harm. For those who believe that Microsoft should not have been found liable because of insufficient evidence of harm to consumers, the remedies may be unnecessary, but they avoided the serious potential damage to consumer welfare that was likely to accompany the main alternative proposals. The remedies actually imposed appear to have struck a reasonable balance between protecting consumers against the types of actions found illegal and harming consumers by unnecessarily restricting Microsoft's ability to compete.
    JEL: K21 L1 L4 L6
    Date: 2005–10
  9. By: Tooraj Jamasb; Karsten Neuhoff; David Newbery; Michael Pollitt
    Abstract: In order to achieve overall economic efficiency, incentive regulation of electricity distribution utilities must address two important and inter-related issues. First, the utilities’ allowed revenues need to be set at correct levels. Second, the access charging mechanism by which the utilities recover the allowed revenues must give the correct economic signals to generation and load connected to the network. This paper is concerned with the latter aspect of regulation. The paper discusses the main economic principles that should form the basis on which a distribution access charging model is developed. The charging model should have a number of attributes: be calibrated to each existing network; contain an asset register; be able to determine assets needed to meet new demand; find least-cost system expansion; compute network losses and handle ancillary services; estimate incremental operating and maintenance costs; be available to users; and be simple enough for external users to understand.
    Keywords: Electricity, network regulation, access charges, distributed generation
    JEL: L43 L51 L94
    Date: 2005–11
  10. By: Jason R. Barro; Robert S. Huckman; Daniel P. Kessler
    Abstract: The recent rise of specialty hospitals -- typically for-profit firms that are at least partially owned by physicians -- has led to substantial debate about their effects on the cost and quality of care. Advocates of specialty hospitals claim they improve quality and lower cost; critics contend they concentrate on providing profitable procedures and attracting relatively healthy patients, leaving (predominantly nonprofit) general hospitals with a less-remunerative, sicker patient population. We find support for both sides of this debate. Markets experiencing entry by a cardiac specialty hospital have lower spending for cardiac care without significantly worse clinical outcomes. In markets with a specialty hospital, however, specialty hospitals tend to attract healthier patients and provide higher levels of intensive procedures than general hospitals.
    JEL: I1
    Date: 2005–10
  11. By: Vahe Lskavyan; Mariana Spatareanu
    Abstract: Using data for publicly traded companies from the UK and two transition countries, the Czech Republic and Poland, we analyze the relationship between ownership concentration and performance while also accounting for the effect of hostile takeover threats on this relationship. Some argue that ownership concentration will improve performance by making the owners more willing or able to monitor managers. Others argue that in the presence of efficient markets, market monitoring (via the threat of hostile takeovers) will discipline the managers. Our results show that concentration is insignificant in explaining performance both in the transition countries, where market monitoring is supposedly weak, and in the UK, where market monitoring is supposedly strong.
    Keywords: Ownership Concentration, Markets for Corporate Control
    JEL: G32 G34
    Date: 2005–09
  12. By: Sheikh Tareq Selim (Cardiff University)
    Abstract: The recent general trend of cutting top marginal income tax rates in industrialized economies and the policy concern of enhancing competition in the US and the EU product markets subtly motivate the question if low income tax rates are optimal in an economy with imperfectly competitive markets. This paper examines long run optimal income tax policy in a model with private market monopoly distortion. It finds that the welfare-maximizing income tax policy is distortion-neutralizing, and the optimal policy may involve capital income tax or subsidy depending on the relative strength of two opposing effects --- the monopoly distortion effect, and the welfare effect of investment. If monopoly power is low (high), the welfare effect of investment (the monopoly distortion effect) dominates which supports a capital income tax (subsidy).
    Keywords: Monopoly Power, Optimal Taxation, Ramsey Policy
    JEL: D42 H21 H30
    Date: 2005–11–01
  13. By: Antoine Martin; Michael J. Orlando
    Abstract: We examine incentives for network-specific investment and the implications for network governance. We model an environment in which participants that make payments over a network can invest in a technology that reduces the marginal cost of using the network. A network effect results in multiple equilibria; either all agents invest and network usage is high or no agents invest and network usage is low. When commitment is feasible, the high-use equilibrium can be implemented; however, when commitment is infeasible, fixed costs associated with use of the network-specific technology result in a holdup problem that implements the low-investment equilibrium. Thus, governance structures necessary to achieve commitment will be preferred to those necessary merely to achieve coordination. For example, mutual ownership by network users may emerge where users face risk of ex post renegotiation. Such a governance structure will also be sufficient to avoid the network effect.
    Keywords: Investments ; Equilibrium (Economics) ; Payment systems
    Date: 2005

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