nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒01‒29
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Does a Platform Owning Monopolist Want Competition? By Andras Niedermayer
  2. Mixing Media with Two-Part Tariffs By Hoernig, Steffen; Valletti, Tommaso
  3. Are There Biases in the Market Definition Procedure?. By Markku Stenborg
  4. Optimal Fines in the Era of Whistleblowers By Buccirossi, Paolo; Spagnolo, Giancarlo
  5. The Subsidiarity Bias in Regulation By Jean-Jacques Laffont; Jerome Pouyet
  6. The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists and Oligopolists By Norbäck, Pehr-Johan; Persson, Lars
  7. A Model of Partial Regulation in the Maritime Ferry Industry By Angela S. Bergantino; Etienne Billette de Villemeur; Annalisa Vinella
  8. A Dynamic Game of Technology Diffusion under an Emission Trading Regulation: A Pilot Experiment. By Ivana Capozza
  9. Competition with mandatory labeling of genetically modified products By Toolsema, Linda
  10. On the Evolution of Trading Institutions: The Platform Design Paradox By Alós-Ferrer,Carlos; Kirchsteiger,Georg; Walzl,Markus
  11. Do Consumers Buy Less of a Taxed Good? By Hans Jarle Kind; Marko Köthenbürger; Guttorm Schjelderup
  12. The Role of Advertising in Commercial Banking By Örs, Evren
  13. Market Structure and Competitive Conditions in the Arab GCC Banking System By Al-Muharrami, Saeed; Matthews, Kent; Khabari, Yusuf
  14. Price Setting Behaviour: Micro Evidence on Slovakia By Coricelli, Fabrizio; Horváth, Roman
  15. When Do More Patents Reduce R&D? By Robert M. Hunt
  16. To integrate or not to integrate ? complementarity, similarity, and acquisition value creation By Zaheer, Akbar; Castaner, Xavier; Souder, David
  17. The Effects of Cartelization on Product Design By Haan, Marco A.; Toolsema, Linda A.
  18. Leniency Policies and Illegal Transactions By Buccirossi, Paolo; Spagnolo, Giancarlo
  19. The Finnish Telecom Sector Facing Next Generation Standards - Indigenous Capabilities Versus R&D Alliances By Christopher Palmberg; Olli Martikainen
  20. The Circulation of Ideas: Firms Versus Markets By Hellmann, Thomas F; Perotti, Enrico C
  21. Information Gathering, Transaction Costs and the Property Rights Approach By Schmitz, Patrick W.
  22. Do Foreign Players Change the Nature of the Game Among Local Entrepreneurs? By Mika Maliranta; Satu Nurmi
  23. Diffusion of Digital Mobile Telephony - Are Devoloping Countries Different? By Petri Rouvinen

  1. By: Andras Niedermayer
    Abstract: We consider a software vendor selling both a monopoly platform (e.g. operating system) and an application that runs on this platform. He may face competition by an entrant in the applications market. Consumers are heterogeneous in their preferences for both the platform and the applications. They first buy the platform and then the applications. Their utility over the horizontally differentiated applications is known only after they bought the platform. In equilibrium the platform seller can be better off with a competitor in the applications market for three reasons. First, the platform vendor makes more profits with his platform. Second, the competitor’s entry serves as a credible commitment to lower prices for applications. Third, higher ex ante expectations of product diversity lead to a higher demand for his application. Competition may be profit enhancing even if the first two effects are absent, i.e. the product diversity effect can be sufficient. The model also gives an answer to the much debated question why Microsoft prices MS Office significantly higher than its operating system.
    Keywords: Two-sided markets; platforms; entry; complementary goods; price commitment; product diversity; Microsoft
    JEL: D41 D43 L13 L86
    Date: 2005–12
  2. By: Hoernig, Steffen; Valletti, Tommaso
    Abstract: We consider a media market where consumers mix content offered by different firms and firms charge two-part tariffs. As compared to pure linear pricing (pay-per-view), firms make higher profits, while consumers are worse off and the allocation is not first-best. We also consider flat subscription fees and show that they make mixing unattractive. Both two-part tariffs and pay-per-view Pareto-dominate flat fees.
    Keywords: combinable products; flat fees; pay-per-view; two-part tariffs
    JEL: L13 L82
    Date: 2006–01
  3. By: Markku Stenborg
    Date: 2004–03–15
  4. By: Buccirossi, Paolo; Spagnolo, Giancarlo
    Abstract: We review current methods for calculating fines against cartels in the US and EU, and simulate their deterrence effects under different assumptions on the legal and economic environment. It is likely that European fines have not had significant deterrence effects before leniency programs were introduced. Previous simulations of the effects of fines ignore the different type of deterrence that leniency programs bring about, and, therefore, grossly overstate the minimum fine likely to have deterrence effects. With schemes that reward whistleblowers, the minimum fine with deterrence effects falls to extremely low levels (below 10% of the optimal "Beckerian" fine). Strategic judgement-proofness can and should be prevented by suitable regulation or extended liability. Criminal sanctions, in the form of imprisonment, certainly bring benefits (and costs) in terms of cartel deterrence, but the firms’ limited ability to pay does not appear any longer such a strong argument for their introduction.
    Keywords: amnesty; antitrust; cartels; collusion; corporate crime; debt; deterrence; extended liability; fines; immunity; imprisonment; judgement proofness; law enforcement; leniency; optimal fines; optimal liability; optimal sanctions; organized crime; political economy; rewards; sunk cost bias; whistleblowers
    JEL: D43 D78 G18 G33 K21 K42 L41
    Date: 2006–01
  5. By: Jean-Jacques Laffont (IDEI and GREMAQ (UMR 5603 CNRS), Universite des Sciences Sociales, Place Anatole-France,); Jerome Pouyet (CERAS-ENPC (URA 2036 CNRS), 28 rue des Saint Peres, 75007 Paris, France.)
    Abstract: We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two oppos- ite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, be- cause the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm's rent and contracts tend to be too low-powered. When the activities of the firm are suf- ficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulat- ory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.
    Keywords: incentives, decentralization, regulation
    JEL: D72 H41 H70 L20
  6. By: Norbäck, Pehr-Johan; Persson, Lars
    Abstract: Exit of venture-backed firms often takes place through sales to large incumbent firms. We show that in such an environment, venture-backed firms have a stronger incentive to develop basic innovations into commercialized innovations than incumbent firms, due to strategic product market effects. This will increase the price for basic innovations, thereby triggering more such innovations by entrepreneurs. Consequently, a venture capital market implies that more innovations are created, and that these become better developed. Moreover, we show that to exist in equilibrium, venture capitalist must be substantially more efficient, otherwise incumbents will preempt venture capitalists entering the market by acquiring basic innovations
    Keywords: acquisitions; entrepreneurship; innovation; venture capital
    JEL: G24 L1 L2 M13 O3
    Date: 2006–01
  7. By: Angela S. Bergantino (University of Bari, Department of Economics, Via C. Rosalba, 53, 70124 Bari (Italy)); Etienne Billette de Villemeur (University of Toulouse, IDEI and GREMAQ, Manufacture des Tabacs, Aile Jean-Jacques Laffont); Annalisa Vinella (University of Toulouse, GREMAQ, Manufacture des Tabacs, Aile Jean-Jacques Laffont)
    Abstract: In this paper, we study how maritime ferry industries should be regulated. This is a fundamental issue in so far as maritime transport between islands and mainland is a service of general interest. We argue that the policy design crucially depends on the goals the collectivity pursues (pure e¢ ciency, fairness) as well as on the relevant industry structure (monopoly, oligopoly). We show that the regulator needs to prevent ine¢ cient crowding out, whenever room exists for access of new providers to former monopolies. By properly allocating tra¢ c across shippers, the regulated firm's budget constraint can then be relaxed. We subsequently shed light on the implications of adopting the territorial continuity principle to boost social fairness. We establish that the incumbent's public service obligations dump the entrant's incentives to provide connections in the low season; conversely, soft competition encourages the entrant to operate in the high season, when it pockets a net rent. As to customers, our model predicts that the islanders, whose consumption is partly subsidized by the non-residents, patronize the incumbent and that liberalization directly benefits the non-residents who switch to the entrant.
    Keywords: Maritime transport; Price and frequency; Partial regulation; Territorial
    JEL: L51 L92 R48
  8. By: Ivana Capozza (Dipartimento di Scienze Economiche, Università degli Studi di Bari, Via Camillo Rosalba 53, BARI)
    Abstract: In this paper we investigate how the interaction between the product and the emission permit markets may affect firms' propensity to adopt cleaner technologies. The adoption of a cleaner technology has the direct effect of reducing the compliance cost of the firm, but it also involves a strategic decision, if the industry is not perfectly competitive. We look at this problem from both a theoretical and an experimental point of view. We develop a model of duopoly, in which two firms engage in quantity competition in the output market and behave as price takers in the permit market. Firms have the possibility of investing in a cleaner production technology, which is available on the market at some cost. We set up a dynamic game over an infinite horizon in order to investigate firms' investment decisions: in each period, each firm decides whether to invest in the new technology or not. The stationary equilibria to this game crucially depend on both the cost of switching to the cleanest technology and the emission cap. Technology diffusion is one of the possible equilibria of the game. In order to test the predictions of the theory, we design and implement an "innovation experiment" that replicates the "innovation game". The results of our pilot experiment suggest that firms' behaviour will eventually lead to innovation diffusion.
    Keywords: tradable permits, technology adoption, oligopoly, laboratory experiments
    JEL: C91 L13 Q28
  9. By: Toolsema, Linda (Groningen University)
    Abstract: In April 2004, the European Union adopted a new legislative framework for genetically modified (GM) organisms. This framework regulates the placing on the market of GM products, and demands these products to be labeled as such. We present a duopoly model with vertical differentiation and mandatory labeling, where one firm produces the conventional product. We assume the GM product to have lower marginal cost, and lower value to consumers. We analyze the effects of introducing the GM good on output, prices, and welfare. We also study contamination and costly testing of convential goods.
    Date: 2005
  10. By: Alós-Ferrer,Carlos; Kirchsteiger,Georg; Walzl,Markus (METEOR)
    Abstract: This paper analyzes a learning model where sophisticated market designers create new trading platforms and boundedly rational traders select among them. We ask wether "Walrasian'''' platforms, leading to efficient (market - clearing) trading outcomes, will dominate the market in the long run. If several market designers are competing, we find that traders will learn to select non-market clearing platforms with prices systematically above the market-clearing level, provided at least one such platform is introduced by a market designer. This in turn leads all market designers to introduce such inefficient (non-market clearing) platforms. Hence platform competition induces non-competitive market outcomes.
    Keywords: economic systems ;
    Date: 2006
  11. By: Hans Jarle Kind; Marko Köthenbürger; Guttorm Schjelderup
    Abstract: This paper shows that consumers may buy more of a taxed good if it is sold by a two-sided platform firm. Two-sided platform industries serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry (newspapers/magazines and advertisers), banking (cardholder and merchant), and the software industry (users and application developers). The paper compares ad-valorem and specific taxes and shows that they may have opposite effects on quantities sold, and that the ad-valorem tax - the most commonly used tax throughout the OECD - has effects on prices and quantities not previously recognized.
    Keywords: two-sided markets, ad-valorem taxes, specific taxes
    JEL: D40 D43 H21 H22 L13
    Date: 2005
  12. By: Örs, Evren
    Abstract: I use a new Call Reports data item to revisit the role of advertising in US commercial banking. I examine how banks' advertising varies with the deposit market structure and whether bank profitability is influenced by advertising. My analysis addresses the endogeneity of market structure and advertising variables using instrumental variables. I find that banks advertise more with increasing market concentration, whereas banks with larger market shares and size advertise less. I also find that advertising has a positive and economically significant impact on bank profitability. These results suggest that advertising is an important aspect of bank competition.
    Keywords: depository institutions; market structure; non-price competition
    JEL: D40 G21 M37
    Date: 2006–01
  13. By: Al-Muharrami, Saeed; Matthews, Kent (Cardiff Business School); Khabari, Yusuf
    Abstract: This paper investigates the market structure of Arab GCC banking industry during the years of 1993 to 2002 using the most frequently applied measures of concentration k-bank concentration ratio (CRk) and Herfindahl-Hirschman Index (HHI) and evaluates the monopoly power of banks over the ten years period using the "H statistic" by Panzar and Rosse. The results show that Kuwait, Saudi Arabia and UAE have moderately concentrated markets and are moving to less concentrated positions. The measures of concentration also show that Qatar, Bahrain and Oman are highly concentrated markets. The Panzar-Rosse H-statistics suggest that banks in Kuwait, Saudi Arabia and the UAE operate under perfect competition; banks in Bahrain and Qatar operate under conditions of monopolistic competition; and we are unable to reject monopolistic competition for the banking market in Oman.
    Keywords: GCC countries; Concentration; Market structure; Competition; Panzar-Rosse model; k-bank concentration ratio (CR<i>k</i>) and Herfindahl-Hirschman Index (HHI)
    JEL: G21 L1 D40
    Date: 2006–01
  14. By: Coricelli, Fabrizio; Horváth, Roman
    Abstract: The paper provides an empirical analysis of price setting behaviour in Slovakia, using large micro-level dataset covering about 57% of Slovak CPI for the period 1997-2001. The novelty of the paper is the analysis of a country characterized by nearly double-digit inflation and undergoing massive changes in market structure during the process of transition and accession to the EU. Several empirical findings stand out. Similarly to results on advanced market economies, we find that price changes are infrequent and sizeable. Moreover, the relationship between frequency and size of price changes is highly non-linear. Product-specific inflation is typically highly persistent. We find that market structure is an important determinant of pricing behaviour. The dispersion of prices is higher while persistence is lower in the non-tradable sectors, suggesting that higher competition in goods markets is not conducive to lower persistence. An important implication is that increasing market competition brought about by entry in the EU will not necessarily lead to lower persistence. By contrast, the increasing share of services in consumption will reduce persistence. Our results, together with the finding that the frequency of price changes depends negatively on the price dispersion and positively on the individual inflation, seems consistent with predictions of Calvo’s staggered price model.
    Keywords: inflation; inflation persistence; price dispersion; price stickiness; staggered price models
    JEL: D40 E31
    Date: 2006–01
  15. By: Robert M. Hunt
    Date: 2006–01–24
  16. By: Zaheer, Akbar; Castaner, Xavier; Souder, David
    Abstract: In this paper, the authors explain that relatedness is often associated with acquisition value creation without distinguishing between three underlying sources of synergy: business similarity, product complementarity and geographic complementarity. The authors argue that realizing value in acquisitions requires maching the type of relatedness with the appropriate degree of integration; specifically high integration for business similarity, medium integration for product complementarity and low integration for geographic complementarity. Empirical validation, broadly supporting their hypotheses comes from 88 M&As
    Keywords: mergers and acquisitions; value creation; integration
    JEL: G34
    Date: 2006–01–24
  17. By: Haan, Marco A.; Toolsema, Linda A. (Groningen University)
    Abstract: We consider the following model. First, two firms choose locations on a Hotelling line. Second, they play a repeated price-setting game, in which they may be able to collude. Transportation costs are quadratic. We show that if firms collude in the location stage, they choose locations that coincide with the social optimum, provided that the discount factor is high enough. If the discount factor is lower, the firms locate further apart. Furthermore, we show that if firms choose locations non-cooperatively, they both locate in the middle of the line, again provided that the discount factor is high enough. If the discount factor is lower, the firms locate further apart. Thus, with the possibility of a price cartel and a discount rate that is sufficiently high, Hotelling?s principle of minimum differentiation is restored.
    Date: 2005
  18. By: Buccirossi, Paolo; Spagnolo, Giancarlo
    Abstract: We study the consequences of leniency - reduced legal sanctions for wrongdoers who spontaneously self-report to law enforcers - on sequential, bilateral, illegal transactions such as corruption, manager-auditor collusion, or drug deals. It is known that leniency helps to deter illegal relationships sustained by repeated interaction. Here we find that - when not properly designed - leniency may simultaneously provide an effective governance mechanism for occasional sequential illegal transactions that would not be feasible in its absence.
    Keywords: amnesty; collusion; corruption; financial fraud; governance; hold up; hostages; illegal trade; immunity; law enforcement; leniency; organized crime; self-reporting; whistleblowers
    JEL: D73 G38 K21 K42 M42
    Date: 2006–01
  19. By: Christopher Palmberg; Olli Martikainen
    Keywords: standards, Finnish telecom, diversification, R&D alliances
    Date: 2004–11–18
  20. By: Hellmann, Thomas F; Perotti, Enrico C
    Abstract: We describe new ideas as incomplete concepts for which the innovator needs feedback from agents with complementary skills. Once shared, ideas may be stolen. We compare how different contractual environments support invention and implementation. Markets, as open exchange systems, are good for circulation and thus elaboration, but may fail to reward idea generation. Firms, as controlled idea exchange systems, can reward idea generation but can do so only by restricting their circulation. This identifies a basic trade-off between protecting the rights of invention and the best implementation of ideas. An environment that allows ideas to cross firm boundaries enhances the rate of innovation and creates a symbiotic relationship between markets and firms.
    Keywords: firms; ideas; innovation
    JEL: D83 L22 M13 O31
    Date: 2006–01
  21. By: Schmitz, Patrick W.
    Abstract: The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party may invest and acquire private information about the default payoff that it can realize on its own. Inefficient rent-seeking can overturn prominent implications of the property rights theory. In particular, ownership by party B may be optimal, even though only the indispensable party A makes an investment decision.
    Keywords: incomplete contracts; ownership rights; theory of the firm
    JEL: D23 L14 L22
    Date: 2006–01
  22. By: Mika Maliranta; Satu Nurmi
    Keywords: foreign ownership, entrepreneurship, local labour markets, competition, survival, company effeciency, selection effect, absortive capacity
    Date: 2004–10–28
  23. By: Petri Rouvinen
    JEL: L96 O30 O10
    Date: 2004–03–15

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