nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒01‒01
24 papers chosen by
Russell Pittman
US Department of Justice

  1. An Economic Approach to Article 82 By Jordi, Gual; Martin, Hellwig; Anne, Perrot; MIchele, Polo; Patrick, Rey; Klaus, Schmidt; Rune, Stenbacka
  2. Competition in large markets By Jeffrey R. Campbell
  3. The economic analysis of product diversity. By Heritiana Ranaivoson
  4. A Supply Function Competition Model for the Spanish Wholesale Electricity Market. By Aitor Ciarreta; Maria Paz Espinosa
  5. The Impact of Minimum Quality Standards on Firm Entry, Exit and Product Quality: the Case of the Child Care Market By V. Joseph Hotz; Mo Xiao
  6. Network competition and merchant discount fees By Fumiko Hayashi
  7. Competition and price discrimination in the market for mailing lists By Ron Borzekowski; Raphael Thomadsen; Charles Taragin
  8. Platform Owner Entry and Innovation in Complementary Markets: Evidence from Intel By Annabelle Gawer; Rebecca Henderson
  9. Collaborative Networks in Experimental Triopolies By Anthony Ziegelmeyer; Katinka Pantz
  10. Universal access, cost recovery, and payment services By Sujit Chakravorti; Jeffery W. Gunther; Robert R. Moore
  11. The Effects of Average Revenue Regulation on Electricity Transmission Investment and Pricing By Isamu Matsukawa
  12. Technology Timing and Pricing In the Presence of an Installed Base By QIU-HONG WANG; KAI-LUNG HUI
  13. El Monopolio Cervecero y las Normas de Defensa de la Competencia en Uruguay By Natalia Melgar; Laura Rovegno
  15. Competition and credit and debit card interchange fees: a cross-country analysis By Fumiko Hayashi; Stuart E. Weiner
  16. Technology innovation and market turbulence: a dotcom example By Zhu Wang
  17. Macroeconomic Effects of Deregulation in Goods Market with Heterogeneous Firms By Marco Arnone; Diego Scalise
  18. The Determinants of the Price-Cost Margins of the Manufacturing Firms in Turkey By Ali Culha; Cihan Yalcin
  19. Information and drug prices: evidence from the medicare discount drug card program By Emin M. Dinlersoz; Han Li; Roger Sherman; Ruben Hernandez-Murillo
  20. Markov Perfect Industry Dynamics with Many Firms By Gabriel Weintraub; C. Lanier Benkard; Ben Van Roy
  21. Price discrimination via the choice of distribution channels By Uwe Dulleck; Rudolf Kerschbamer
  22. Oligopoly and outsourcing By Subhayu Bandyopadhyay; Howard J. Wall
  23. The Impact of Generic Reference Pricing Interventions in the Statin Market By Jaume Puig
  24. Cash breeds Success: The Role of Financing Constraints in Patent Races By Enrique Schroth; Dezsö Szalay

  1. By: Jordi, Gual; Martin, Hellwig; Anne, Perrot; MIchele, Polo; Patrick, Rey; Klaus, Schmidt; Rune, Stenbacka
    Abstract: This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.
    JEL: D4
    Date: 2005–12
  2. By: Jeffrey R. Campbell
    Abstract: This paper develops a simple and robust implication of free entry followed by competition without substantial strategic interactions: Increasing the number of consumers leaves the distributions of producers' prices and other choices unchanged. In many models featuring non-trivial strategic considerations, producers' prices fall as their numbers increase. Hence, examining the relationship between market size and producers' actions provides a nonparametric tool for empirically discriminating between these distinct approaches to competition. To illustrate its application, I examine observations of restaurants' seating capacities, exit decisions, and prices from 224 U.S. cities. Given factor prices and demographic variables, increasing a city's size increases restaurants' capacities, decreases their exit rate, and decreases their prices. These results suggest that strategic considerations lie at the heart of restaurant pricing and turnover.
    Keywords: Restaurant management ; Markets
    Date: 2005
  3. By: Heritiana Ranaivoson (MATISSE)
    Abstract: Product diversity is a long-debated issue in economics. We remind that mainly two questions have been given answers : (a) To which extent does the market provide diversity ? (b) Why should this diversity be promoted ? The first one stands out as the core of most articles on product diversity, whereas the second one is more evoked than really deepened. However, the economic analysis of product diversity stands out as a paradox. Actually, the definition of diversity itself has been somewhat forgotten. We try to give ways to overcome this absence so that product diversity can eventually be concretely assessed.
    Keywords: Product diversity, theory of consumer choice, monopolistic competition.
    JEL: D11 D43 L13
    Date: 2005–12
  4. By: Aitor Ciarreta (Universidad del País Vasco); Maria Paz Espinosa (Universidad del País Vasco)
    Keywords: supply function competition, electricity market
    JEL: L11 L13 L51
    Date: 2005–10–17
  5. By: V. Joseph Hotz; Mo Xiao
    Abstract: We examine the impact of minimum quality standards on the supply side of the child care market, using a unique panel data set merged from the Census of Services Industries, state regulation data, and administrative accreditation records from the National Association of Education for Young Children. We control for state-specific and time-specific fixed effects in order to mitigate the biases associated with policy endogeneity. We find that the effects of quality standards specifying the labor intensiveness of child care services are strikingly different from those specifying staff qualifications. Higher staff-child ratio requirements deter entry and reduce the number of operating child care establishments. This entry barrier appears to select establishments with better quality into the market and alleviates competition among existing establishments: existing establishments are more likely to receive accreditation and higher profits, and are less likely to exit. By contrast, higher staff-education requirements do not have entry-deterrence effects. They do have the unintended effects of discouraging accreditation, reducing owners' profits, and driving firms out of businesses.
    JEL: L5 L8
    Date: 2005–12
  6. By: Fumiko Hayashi
    Abstract: Pricing in two-sided markets has not been fully understood yet. Especially, investigations of how competition in these markets affects the price structure or levels are still underway. This paper takes the payment card industry as an example of two-sided markets and examines whether two networks’ competition lowers one of the prices in the industry, merchant discount fees, and if it does, how much it lowers equilibrium merchant fees compared with the fee set by a monopoly network. If some cardholders hold only one card and the other cardholders hold two different cards, whether network competition lowers the fees and by how much the fees will be lowered depends on various factors, such as the share of multihoming cardholders in the total cardholder base, the merchants’ transactional benefit, each network’s net transactional benefit to its card users, the difference in the two networks’ cardholder bases, and the share of cardholders in the total customer base. Numerical examples with various parameter values suggest that typically, if the share of multihoming cardholders is 20 percent or less, networks can act as if they are monopolies; and if the share is around 50 percent, the average equilibrium merchant fee is reduced from the monopolistic merchant fee by 25 percent.
    Date: 2005
  7. By: Ron Borzekowski; Raphael Thomadsen; Charles Taragin
    Abstract: This paper examines the relationship between competition and price discrimination in the market for mailing lists. More specifically, we examine whether sellers are more likely to segregate consumers by offering a menu of quality choices (second-degree price discrimination) and/or offering different prices to readily identifiable groups of consumers (third-degree price discrimination) in more competitive markets. We also examine how the fineness with which consumers are divided corresponds to the level of competition in the market. ; The dataset includes information about all consumer response lists derived from mail order buyers (i.e. lists derived from catalogs) available for rental in 1997 and 2002. Using industry classifications, we create measures of competition for each list. We then use these measures to predict whether given lists utilize discriminatory pricing strategies. ; Our results indicate that lists facing more competition are more likely to implement second-degree and third-degree price discrimination, and when implementing second-degree price discrimination, to offer menus with more choices.
    Date: 2005
  8. By: Annabelle Gawer; Rebecca Henderson
    Abstract: This paper draws on a detailed history of Intel's strategy with respect to the complementary markets for microprocessors to explore the usefulness of the current theoretical literature for explaining behavior. We find that as the literature predicts, Intel invests heavily in these markets, both through direct entry and through subsidy. We also find, again consistent with the literature, that the firm's entry decisions are shaped by the belief that it does not have either the capabilities or the resources to enter all possible markets, and thus that it believes it is critical to encourage widespread entry. As several authors have pointed out, this imperative places the firm in a difficult strategic position, since it needs to attempt to commit to potential entrants that it will not engage in an ex-post "squeeze", despite the fact that ex post it has very strong incentives to do so. We find that the fact that the complementary markets in which Intel competes are complex, dynamic and multilayered considerably sharpens this dilemma. We explore the ways in which Intel attempts to solve it, highlighting in particular the organizational structure and processes through which they attempt to commit to making money in the markets which they choose to enter while also committing not to making too much. Our results have implications for both our understanding of the dynamics of competition in complements and of the role of organizational structures and processes in shaping competition.
    JEL: L0
    Date: 2005–12
  9. By: Anthony Ziegelmeyer; Katinka Pantz
    Abstract: This paper experimentally investigates the interdependence between market competition and endogenously emerging inter-firm collaboration. We restrict attention to arrangements resulting from bilateral collaboration agreements that typically characterize real world applications in which the activity concerned is a core activity of the partnering firms and risk sharing, contract enforcement and protection of proprietory knowledge are central issues. We rely on a baseline model by Goyal and Joshi (2003) which formalizes the strategic formation of collaborative networks between firms that are competing on the same product market. This model predicts strategically stable patterns of inter-firm collaboration which are empirically observed but have been ruled out in the previous theoretical literature. In a two-stage game, firms decide to form bilateral collaboration links, whose formation is costly but reduces marginal production costs, before they compete in quantity on the market. We report the results of a series of experiments. The first experiment is designed as a straightforward theory-test simulating a one-shot interaction. We manipulate the cost of link formation in different treatments. Our data almost perfectly match the predictions for both stages whenever the link formation costs are extreme and the predicted networks symmetric (empty or complete networks). In the case of intermediate link formation costs where the predicted networks are asymmetric, subjects rarely form asymmetric networks. When they do, observed and predicted quantities are less in accordance than for symmetric networks. Collusion cannot account for the observed behavior. In our second experiment we reject the conjecture that these findings are driven out by experience in a setting in which we increase the implemented number of repetitions of the two-stage game. Finally, in our third experiment we reduce the complexity of the setting by transforming the original two-stage game into a one-stage game where the formation of inter-firm networks directly determines firms’ payoffs. These are derived from assumed equilibrium market outputs on the here absent competition stage. In this case, observed networks coincide with the predicted ones indicating that experimental subjects’ limited capacity to foresee the outcomes of the market stage may be driving the earlier discrepancies.
    Keywords: Endogenous formation of networks; Cournot competition; Collusion; Experiments
    JEL: D85 C92 D43
    Date: 2005–11
  10. By: Sujit Chakravorti; Jeffery W. Gunther; Robert R. Moore
    Abstract: We suggest a subtle, yet far- reaching, tension in the objectives specified by the Monetary Control Act of 1980 (MCA) for the Federal Reserve’s role in providing retail payment services, such as check processing. Specifically, we argue that the requirement of an overall cost-revenue match, coupled with the goal of ensuring equitable access on a universal basis, partially shifted the burden of cost recovery from high-cost to low-cost service points during the MCA’s early years, thereby allowing private-sector competitors to enter the low-cost segment of the market and undercut the relatively uniform prices charged by the Fed. To illustrate this conflict, we develop a voter model for what begins as a monopoly setting in which a regulatory regime that establishes a uniform price irrespective of cost differences, and restricts total profits to zero, initially dominates through majority rule both deregulation and regulation that sets price equal to cost on a bank-by-bank basis. Uniform pricing is dropped in this model once cream skimming has subsumed half the market. These results help illumine the Federal Reserve’s experience in retail payments under the MCA, particularly the movement over time to a less uniform fee structure for check processing.
    Date: 2005
  11. By: Isamu Matsukawa (Musashi University)
    Abstract: This paper investigates the long-run effects of average revenue regulation on an electricity transmission monopolist who applies a two- part tariff comprising a variable congestion price and a non-negative fixed access fee. A binding constraint on the monopolistfs expected average revenue lowers the access fee, promotes transmission investment, and improves consumer surplus. In a case of any linear or log-linear electricity demand function with a positive probability that no congestion occurs, average revenue regulation is allocatively more efficient than a Coasian two-part tariff if a positive access fee under average revenue regulation is lower than that under a Coasian two-part tariff.
    Keywords: congestion pricing; electric power transmission; two-part tariff; average revenue regulation; Coasian two-part tariff
    JEL: L
    Date: 2005–12–19
  12. By: QIU-HONG WANG (National University of Singapore); KAI-LUNG HUI (National University of Singapore)
    Abstract: This study relaxes the conventional assumption in the literature of new product introduction that all consumers possess nothing at the beginning of the game. We generalize consumers’ utility function to a market in the presence of an installed base and characterize its specific properties pertaining to various market contexts with different consumer heterogeneity and technology improvement. In such a general setting, we investigate various feasible combinations of timing, pricing and product line strategies that the seller can employ in a two-period game for selling the new product to consumers with different purchase history and heterogeneous preference on product quality. Our subgame-perfect- equilibrium results suggest that other than the upgrade policy, the seller can maximize her profits via intertemporal price discrimination, or delayed introduction, or pooling pricing, depending on the characteristics of market structure and technology improvement. Without the concern about cost, social welfare directly depends on whether the seller can sustain her monopoly power facing the mutual cannibalization between the old and new products and the mutual arbitrage between the heterogeneous consumers.
    Keywords: New product introduction, intertemporal price discrimination, delayed product introduction, installed base, upgrade policy
    JEL: L
    Date: 2005–12–19
  13. By: Natalia Melgar (Facultad de Ciencias Económicas, Universidad de la República); Laura Rovegno (Facultad de Ciencias Económicas, Universidad de la República)
    Abstract: The Competition Legislation in Uruguay is of recent date (2001), and since its approval the authority in charge of its application, the General Bureau of Commerce (Dirección General de Comercio) has carried out its first investigations. One of the most debated cases was the one of the bear market, where an agreement between Quinsa and AmBev (January 2003) meant the concentration of the 98% of the market. The investigation carried out by de DGC led to conclusion of no intervening in this case. In this paper we estimate a VAR model with representation as ECM, for the relevant variables of the market (estimating this way the price, income and cross elasticities). Based on this model we: 1) analyze the impact of this agreement between Quinsa and AmBev; and 2) discus the DGC’s decision.
    Date: 2004–05
  14. By: Matteo Bugamelli (Banca d’Italia); Roberto Tedeschi (Banca d’Italia)
    Abstract: This paper estimates a pricing-to-market equation for Italy over the period 1990-99 with the aim of assessing the degree of exchange rate pass-through (ERPT). As compared to previous works, we minimize aggregation and selection biases using export data on all products (about 700 from 4 digits of SITC) and all destination markets (about 70). On average, ERPT is asymmetric: Italian exporters did not reduce their profit margins, and thus did not defend their market shares, when the Italian lira got appreciated (complete ERPT); on the contrary, they did raise margins – in the order of 30 per cent of the exchange rate variation – after a depreciation. Disaggregating in terms of destination markets and products, ERPT is incomplete when exports are directed to industrial countries and originate in oligopolistic industries, more precisely high-tech and economies of scale sectors. Despite large overlappings, the same results hold for industries where firms are bigger and more productive than average. Sales of traditional competitive products to non-industrial countries display an almost complete ERPT.
    Keywords: exchange rate pass-through, pricing-to-market, market structure
    JEL: F14 F3 L1
    Date: 2005–11
  15. By: Fumiko Hayashi; Stuart E. Weiner
    Abstract: This paper seeks to provide a bridge between the theoretical and empirical literatures on interchange fees. Specifically, the paper confronts theory with practice by asking, to what extent do existing models of interchange fees match up with actual interchange fee practices in various countries? For each of four countries—Australia, the Netherlands, the UK, and the United States—models that “best” fit the competitive and institutional features of that country’s payment card market are identified, and the implications of those model are compared to actual practices. Along what competitive dimensions is there alignment? Along what competitive dimensions is there not alignment? What country-specific factors appear to be important in explaining deviations from theoretical predictions? The results suggest that a theory applicable in one country may not be applicable in another, and that similar interchange fee arrangements and regulations may well have different implications in different countries.
    Date: 2005
  16. By: Zhu Wang
    Abstract: This paper explains market turbulence, such as the recent dotcom boom/bust cycle, as equilibrium industry dynamics triggered by technology innovation. When a major technology innovation arrives, a wave of new firms enter the market implementing the innovation for profits. However, if the innovation complements existing technology, some new entrants will later be forced out as more and more incumbent firms succeed in adopting the innovation. It is shown that the diffusion of Internet technology among traditional brick-and-mortar firms is indeed the driving force behind the rise and fall of dotcoms as well as the sustained growth of e-commerce. Empirical evidence from retail and banking industries supports the theoretical findings.
    Date: 2005
  17. By: Marco Arnone (Catholic University of Milan); Diego Scalise (Catholic University of Milan)
    Abstract: This paper builds on the Blanchard and Giavazzi (2003) model of deregulation. We concentrate on product market to construct a framework explaining in a more nuanced way the redistributive effects of deregulation between sectors and within the same sector, and possible oppositions to this policy by firms and workers. In a general equilibrium framework, we introduce two sectors(regulated and unregulated), heterogeneity in firms' productivity, and a…fixed cost of entry. In such a context effects of deregulation policies can be ambiguous depending on some parametric restrictions, and sometime counterproductive. As a result, deregulation policies are not always welfare improving: a deregulation action will succeed in increasing competition and reducing mark up when the economy is already partially deregulated (sufficiently high level of competition), but may achieve the opposite outcome when it is highly regulated. Additionally, we study the choice of the best policy instrument and the optimal sequencing in the use of instruments.
    JEL: E61 L43
    Date: 2005–12–25
  18. By: Ali Culha; Cihan Yalcin
  19. By: Emin M. Dinlersoz; Han Li; Roger Sherman; Ruben Hernandez-Murillo
    Abstract: In early 2004, the U.S. Government initiated the Medicare Discount Drug Card Program, under which a large amount of pharmacy-level price data pertaining to over 800 drugs has been released weekly on the Medicare website continuously between May 29, 2004 and October 2005. This extensive information release was intended to facilitate access to prices that are offered by drug card sponsors to Medicare eligible, with the hope of promoting competition among sponsors. This paper utilizes a large sample of pharmacy level drug price data collected from the Medicare website for several weeks to answer the following questions: i) Did the program generate significant dispersion in prices across drug cards, across pharmacies, or across geography?, ii) Did the dispersion and the average of prices change over time?, iii) Are the observed patterns consistent with theories of consumer search and improved access to information?, iv) Did the program had the intended effects of promoting competition between drug card sponsors?, v) How are the observed effects related to the design and the institutional environment of the program?, and vi) What are the broader implications of the findings for the role of public information policy in the functioning of markets?
    Keywords: Drugs ; Medical care, Cost of
    Date: 2005
  20. By: Gabriel Weintraub; C. Lanier Benkard; Ben Van Roy
    Abstract: We propose an approximation method for analyzing Ericson and Pakes (1995)-style dynamic models of imperfect competition. We develop a simple algorithm for computing an ``oblivious equilibrium,'' in which each firm is assumed to make decisions based only on its own state and knowledge of the long run average industry state, but where firms ignore current information about competitors' states. We prove that, as the market becomes large, if the equilibrium distribution of firm states obeys a certain ``light-tail'' condition, then oblivious equilibria closely approximate Markov perfect equilibria. We develop bounds that can be computed to assess the accuracy of the approximation for any given applied problem. Through computational experiments, we find that the method often generates useful approximations for industries with hundreds of firms and in some cases even tens of firms.
    JEL: C63 C73 L11
    Date: 2005–12
  21. By: Uwe Dulleck (Department of Economics, Johannes Kepler University Linz, Austria); Rudolf Kerschbamer (Department of Economics, University of Innsbruck, Austria)
    Abstract: This article studies the use of different distribution channels as an instrument of price discrimination in credence goods markets. In credence goods markets, where consumers do not know which quality of the good or service they need, price discrimination proceeds along the dimension of quality of advice offered. High quality advice and appropriate treatment is provided to the most profitable market segment only. Less profitable consumers are induced to demand a treatment without a serious diagnosis. If consumers differ in the probabilities of needing different treatments some consumers are potentially overtreated. By contrast, under heterogeneity in the valuations of a successful intervention some consumers are potentially undertreated. Our results help to explain the casual observation that in the early phase of the IT industry only low quality equipment was distributed via warehouse sellers while today it is quite common to see high quality equipment at discounters.
    Keywords: Price Discrimination; Distribution Channels; Credence Goods; Experts; Discounters
    JEL: L15 D82 D40
    Date: 2005–07
  22. By: Subhayu Bandyopadhyay; Howard J. Wall
    Abstract: With outsourcing comes a perceived tension between the competitive pressures faced by domestic firms and the effect that outsourcing has on domestic workers. To address this tension, we present a general-equilibrium model with an oligopolistic export sector and a competitive import-competing sector. When there is a minimum wage, an outsourcing tax might be desirable and the usual profit-shifting objectives of an export subsidy are mitigated, perhaps completely, because it might lead to higher unemployment. Also, increased international competition has no affect on the level of outsourcing, but the direction of its effect on unemployment and national income depends on the relative factor intensities of the two sectors. Under wage flexibility, an outsourcing tax cannot be justified and the profit-shifting motive is the same as in a model without outsourcing. Further, if export subsidies are not possible due to WTO regulations, it is optimal to subsidize rather than to tax outsourcing. Finally, the effect of increased foreign competition on welfare depends on the relative factor intensities of the two sectors.
    Keywords: Contracting out ; Labor market
    Date: 2005
  23. By: Jaume Puig
    Abstract: The objective of this study was to evaluate the intended and unintended impact on pharmaceutical use and sales of three public financing reforms applied to the prescription of statins: a Spanish generic reference pricing (RP) system for lovastatin and simvastatin, and two competing policies introduced by the Andalusian Public Health Service (APHS) for all statins, first a maximum consumer price (MCP) and then a so called quality prescribing incentive for general practitioners (MCP plus PI). This study is designed as an observational, retrospective, interrupted time series analysis with comparison series (APHS and the rest of Spain) of 46 monthly drug use and sales ratios from January 2001 to October 2004 for each active ingredient in the group of statins. RP has been effective at reducing the volume of sales growth of the off-patent statins, yet its overall impact on sales of all statins has been relatively modest. The quantity and volume of sales impact heavily depends on regulatory RP details such as when the system is introduced, how often it is updated, and how the reference price is calculated.
    Keywords: Pharmaceutical sales, generic medicines, pharmaceutical reference pricing, statins
    JEL: I18 H5
    Date: 2005–12
  24. By: Enrique Schroth; Dezsö Szalay
    Abstract: This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT and fit probabilistic regressions of the predicted equilibrium winning probabilities on measures of the incumbent's and potential entrants' financial wealth. The empirical findings support our theoretical predictions.
    Keywords: patent race; incumbent; entrant; financial constraints; empirical estimation
    JEL: G24 G32 L13
    Date: 2005–05

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