nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒02‒05
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  2. The Determinants of Merger Waves By Klaus Gugler; Dennis C. Mueller; B. Burçin Yurtoglu
  3. Merger Theory and Evidence: The Baby-Food Case Reconsidered By Richard Dagen; Daniel Richards
  7. Prices, capacities and service quality in a congestible Bertrand duopoly By Bruno De Borger; Kurt Van Dender
  8. Eliciting Demand Information through Cheap Talk: An Argument in Favor of Price Regulations By Lars Frisell; Johann Lagerloef
  9. The Boundaries of the Platform: Vertical Integration and Economic Incentives in Mobile Computing By Boudreau, Kevin
  10. Structure de la concurrence sur la chaîne du gaz naturel : le marché européen By Girault Vincent
  11. Strategies of an incubent constrained to supply entrants : the case of european gas release programs By CLASTRES Cédric; DAVID Laurent
  12. Incentives and Coordination in Vertically Related Energy Markets By Augusto Rupérez Micola; Albert Banal Estañol; Derek W. Bunn
  13. L’approvisionnement gazier sur un marche oligopolistique : une analyse par la théorie économique By Girault Vincent
  14. Ryanair’s Impact on Airline Market Share from the London Area Airports - a Time Series Analysis By David Pitfield
  15. Product Market Deregulation and the U.S. Employment Miracle By Monique Ebell; Christian Haefke
  16. Retail deposit fees and multimarket banking By Timothy H. Hannan
  17. Equilibrium Bid-Ask Spread of European Derivatives in Dry Markets By Matos, Joao Amaro de; Lacerda, Ana
  18. Strategic Monopolization: Kamien and Zang Revisited By Granier, L.
  19. Asymmetric Price Adjustment in the Dutch Mortgage Market By Leo de Haan; Elmer Sterken
  20. Collaborative agreements and R&D intensity. By Olivier Mortehan; Bruno Van Pottelsberghe
  21. Network competition - the co-existence of hub-and-spoke and point-to-point By Marco Alderighi; Alessandro Cento; Peter Nijkamp; Piet Rietveld

  1. By: Ioana Chioveanu (Universidad de Alicante)
    Abstract: I construct a model in which an oligopoly first invests in persuasive advertising in order to induce brand loyalty to consumers who would otherwise buy the cheapest alternative on the market, and then competes in prices. Despite ex-ante symmetry, at equilibrium, there is one firm which chooses a lower advertising level, while the remaining ones choose the same higher advertising. For the endogenous profile of advertising expenditure, there are a family of pricing equilibria with at least two firms randomizing on prices. The setting offers a way of modelling homogenous product markets where persuasive advertising creates subjective product differentiation and changes the nature of subsequent price competition. The pricing stage of the model can be regarded as a variant of the Model of Sales by Varian (1980) and the two stage game as a way to endogenize consumers heterogeneity raising a robustness question to Varian¿s symmetric setting.
    Keywords: oligopoly, advertising, price dispersion, brand loyalty
    JEL: D21 D43 L11 L13 M37
    Date: 2005–11
  2. By: Klaus Gugler; Dennis C. Mueller; B. Burçin Yurtoglu
    Abstract: One of the most conspicuous features of mergers is that they come in waves, and that these waves are correlated with increases in share prices and price/earnings ratios. We test four hypotheses that have been advanced to explain merger waves: the industry shocks, q-, overvaluation and managerial discretion hypotheses. The first two are neoclassical in that they assume that managers maximize profits, mergers create wealth, and the capital market is efficient. The last two, behavioral hypotheses relax these assumptions in different ways. We test the four hypotheses by estimating models of the amounts of assets acquired by firms, models that identify the characteristics of targets, and estimates of the returns to acquirers’ shareholders. Although some support is found for each of the four hypotheses, most of the evidence favors the two behavioral hypotheses. <br> <br> <i>ZUSAMMENFASSUNG - (Die Determinanten von Fusionswellen) <br> Es ist eines der auffallendsten Merkmale von Unternehmenszusammen-schlüssen, dass sie in Wellen stattfinden und dass diese Wellen mit dem Anstieg der Aktienkurse und des Preis/ Ertragsverhältnisses zusammen hängen. Wir untersuchen vier Hypothesen, die als Erklärung von Unternehmenszusammenschlüssen genannt werden: die der Industrieschocks, die q-Hypothese, die Hypothese der Überbewertung und die Hypothesen des Ermessensspielraums von Managern. Die ersten zwei sind neoklassischer Natur insofern als sie davon ausgehen, dass Manager Gewinne maximieren, Unternehmenszusammenschlüsse Reichtum schaffen und der Kapitalmarkt effizient ist. Die zwei letzteren sind Verhaltenshypothesen, die die neo-klassischen Annahmen (auf unterschiedliche Weise) lockern. Wir untersuchen die vier Hypothesen, indem wir Modellschätzungen der von Unternehmen akquirierten Aktien vornehmen. Dabei werden in den Modellen die Charakteristika der bei Zusammenschlüssen aufgekauften Unternehmen identifiziert und die Rendite für die Aktionäre des aufkaufenden Unternehmens geschätzt. Auch wenn alle vier Hypothesen in gewisser Hinsicht Bestätigung finden, untermauern die meisten Belege die zwei Verhaltenshypothesen.</i>
    Keywords: Mergers waves, managerial discretion, overvaluation
    JEL: G34 L2
    Date: 2006–01
  3. By: Richard Dagen; Daniel Richards
    Abstract: The Federal Trade Commission’s successful challenge to the proposed merger of Heinz and Beech-Nut baby food operations in 2001 remains a controversial case that raises concern over the role of cost efficiencies in merger analysis. Although the FTC argued that the merger would result in an increased likelihood of coordinated effects, we develop an alternative explanation for why the merger was likely to harm consumers even in the absence of such cooperation. We show that a conventional model of vertical product differentiation is able to replicate the premerger market data. Vertical product differentiation assumes that consumers agree on the relative quality of different products, which seems to describe the baby food market. When the model is then used to determine potential post-merger outcomes, we find that only using the most favorable assumptions for Heinz, would the claimed cost-efficiencies have been passed on to consumers. Under any more conservative and realistic scenarios, consumer prices rise substantially. The analysis supports the decision to oppose the merger. It also raises some doubt about the merit of cost efficiencies as a merger defense when an industry is characterized by vertical product differentiation.
    Date: 2006
  4. By: Jacint Balaguer (Universitat Jaume I); Ezequiel Uriel Jiménez (Instituto Valenciano de Investigaciones Económicas); Vicente Orts (Universitat Jaume I)
    Abstract: In this paper, we suggest a method to test price-fixing agreements. Prices fixed to multiple shipments are decomposed into a set of destination market effects and time effects in order to allow us to perform an analysis of residuals. We examine the pricing behavior of vitamin C in the European destination markets of German exports. We explore two different periods: January 1991 to August 1995 and September 1995 to September 2001. Empirical results on the first period, which are consistent with our knowledge obtained from firms¿ confessions about illegal agreements, contrast notably with those obtained on the more recent period. En este trabajo proponemos un método para contrastar la presencia de prácticas no competitivas en precios. Cada uno de los precios fijados para diferentes mercados es descompuesto en un efecto fijo por destino y un efecto temporal con objeto de analizar los residuos. Los precios de la vitamina C en los mercados de destino de las exportaciones alemanas son examinados en dos periodos: de enero de 1991 a agosto de 1995 y de septiembre de 1995 a septiembre de 2001. Los resultados para el primer periodo, los cuales son consistentes con nuestro conocimiento obtenido de las confesiones de las empresas participantes en los acuerdos ilegales, contrastan notablemente con los obtenidos para un período más reciente.
    Keywords: Colusión; Mercados internacionales; Vitamina C Collusion; International markets; Vitamin C
    JEL: D43 L12 L41 L65
    Date: 2005–03
  5. By: Rafael Moner Colonques (Universitat de València); Ricardo Flores Fillol (Universidad Autónoma de Barcelona)
    Abstract: The present paper develops a simple model of a network structure to analyze the profitability and the strategic effects of airline alliances in which two complementary alliances, following different paths, may be formed to serve a certain city-pair market. We examine whether airlines that employ the same hub have an incentive to create an alliance, analyze the effects on carriers outside the alliance and study how fares are affected. We conclude that complementary alliances are profitable for a sufficient degree of product differentiation, which implies that competition intensity is low; that an alliance hurts the outsiders; and that fares will decrease. These findings remain valid to the introduction of more competition in the form of a direct non-stop flight. Our results provide a very simple testable implication that relies on demand parameters that measure the degree of product differentiation, and our findings are consistent with some of the observed facts in the industry.
    Keywords: complementary airline alliances, substitute trips, product differentiation
    Date: 2005–04
  6. By: Amparo Nagore (Universitat de València); Joaquín Maudos Villarroya (Instituto Valenciano de Investigaciones Económicas)
    Abstract: This paper presents evidence on the impact of bank-specific, regulatory, institutional, macro and financial development variables on competition in banking, using information at both national and bank level. With this aim, Lerner indices of market power are estimated using a sample of 10,479 annual observations over the period 1995-99 across 58 countries. Results show that although bank-specific characteristics explain a substantial proportion of market power, market structure variables and, above all, the level of financial development also help to explain the differences observed in the levels of banking competition. Regulatory impediments to competition are not significant when controlling for financial development. Este artículo presenta evidencia del impacto que las variables específicas de cada banco, las regulatorias, institucionales, macroeconómicas y de desarrollo financiero ejercen sobre la competencia bancaria, utilizando información tanto a escala nacional como a nivel de empresa. Con este objetivo, se estiman índices de Lerner de poder de mercado utilizando 10.479 observaciones durante el periodo de 1995-99 para una muestra de 58 países. Los resultados muestran que, aunque las características específicas de cada banco explican una parte sustancial del poder de mercado (especialmente el tamaño y la eficiencia), las variables de estructura del mercado, y, sobretodo, el nivel de desarrollo financiero también ayudan a explicar las diferencias observadas en los niveles de competencia bancaria. Las barreras regulatorias a la competencia no son significativas cuando se controla por desarrollo financiero.
    Keywords: banking, market power Banca, poder de mercado
    JEL: G21 D43 L13
    Date: 2005–04
  7. By: Bruno De Borger; Kurt Van Dender
    Abstract: We study the duopolistic interaction between congestible facilities that supply perfect substitutes. Firms are assumed to make sequential decisions on capacities and prices. Since the outcomes directly affect consumers’ time cost of accessing or using a facility, the capacity sharing rule is endogenous. We study this two-stage game for different firm objectives and compare the duopoly outcomes with those under monopoly and at the social optimum. For the symmetrical duopoly outcome, our findings include the following. First, for profit maximizing firms both capacity provision and service quality are distorted under duopoly: they are below the socially optimal levels. This contrasts with the monopoly outcome, where pricing and capacity provision are such that the monopolist does provide the socially optimal level of service quality. Second, duopoly prices are lower than monopoly prices, but higher than in the social optimum. Hence, while price competition between duopolists yields benefits for consumer, capacity competition is harmful. Third, price-capacity competition implies that higher capacity costs may lead to higher profits for both facilities. Finally, if firms care about output as well as profits, this mainly affects pricing behavior; strategic interactions in capacities are much less affected. Finally, we explore the conditions under which symmetrical and asymmetrical duopoly equilibria arise and when they are stable.
    Date: 2005–08
  8. By: Lars Frisell (Sveriges Riksbank); Johann Lagerloef (Department of Economics, Royal Holloway, University of London)
    Abstract: A firm must decide whether to launch a new product. A launch implies considerable fixed costs, so the firm would like to assess downstream demand before it decides. We study under which conditions a potential buyer would be willing to reveal his willingness to pay under different pricing regimes. We show that the firm’s welfare — as well as consumers’ — may be higher with a commitment to linear pricing than when pricing is unrestricted. That is, if informational asymmetries are significant, price regulations such as the Robinson-Patman Act may be endorsed by all parties.
    Keywords: Price regulations, price discrimination, incomplete information, cheap talk, Robinson-Patman Act
    JEL: D82 L11 L42
    Date: 2005–08
  9. By: Boudreau, Kevin
    Abstract: Research on the organization of systems industries generally takes the boundaries of platforms to be exogenously-determined artifacts, given by the nature of technology. This paper studies whether platform boundaries are responsive to economic incentives by studying variation in platform boundaries in competing systems in mobile computing. Using detailed descriptive evidence and systematically collected databases of integration patterns, I find that platform boundaries in this industry could be understood as established in response to three primary goals: 1) to consolidate control around assets that conferred the power to regulate production in the system as a whole; 2) to integrate economic activities that risked coordination problems; 3) to open platform boundaries in response to interactions with market competition.
    Keywords: Platforms, systems competition, vertical integration, theory of the firm, information technology,
    Date: 2006–01–13
  10. By: Girault Vincent
    Abstract: Notre analyse a pour but de déterminer à quel type de concurrence sera confronté un entrant sur le marché gazier européen. L’augmentation de la dépendance des importateurs européens, la sécurité des approvisionnements et la diversification des offres d’énergies entraînent une concurrence oligopolistique sur le marché européen. L’étude des caractéristiques du marché européen nous indiquera que les distributeurs européens font face à un oligopole de producteurs. Nous verrons aussi que le marché européen est très concentré et que les études théoriques et empiriques tendent à montrer que les acteurs européens vont se concurrencer en quantités.
    Keywords: natural gas ; european competition; oligopoly
    Date: 2005
  11. By: CLASTRES Cédric; DAVID Laurent
    Date: 2005
  12. By: Augusto Rupérez Micola; Albert Banal Estañol; Derek W. Bunn
    Abstract: We present an agent-based model of a multi-tier energy market including gas shippers, electricity generators and retailers. We show how reward interdependence between strategic business units within a vertically integrated firm can increase its profits in oligopolistic energy markets. The effects are shown to be distinct from those of the raising rivals’ costs model. In our case, higher prices relate to the nature of energy markets, which facilitate the emergence of financial netback effects. <br> <br> <i>ZUSAMMENFASSUNG - (Anreize und Koordination in vertikal integrierten Energiemärkten) <br> Es wird ein Agenten-basiertes Modell eines Energiemarktes mit mehreren Ebenen der Wertschöpfungskette vorgestellt, das Gaslieferanten, Stromerzeuger und Händler berücksichtigt. Es kann gezeigt werden, wie ein vertikal integriertes Unternehmen, das auf oligopolistischen Energiemärkten agiert, die Honorierungsbeziehungen zwischen strategischen Geschäftsbereichen nutzen kann, um seine Gewinne zu steigern. Üblicherweise versuchen Firmen, die die gesamte Wertschöpfungskette integriert haben, ihren Vorteil dadurch zu nutzen, dass sie die Kosten der Wettbewerber durch Preisdiskriminierung erhöhen und den Markt gegen sie abschotten. Das ist in Energiemärkten nicht möglich. Im vorgestellten Modell wird ein Mechanismus gewählt, der den Charakteristika von Energiemärkten angepasst ist, um über Anreize denselben Endeffekt zu erzielen. Dieser beruht aber nicht auf der Marktabschottung, sondern auf einem finanziellen Valorisierungseffekt, bei dem Unternehmensbereiche am Beginn der Wertschöpfungskette die Preisspannen für die Unternehmensteile am oberen Ende vorgeben.</i>
    Keywords: Agent-based modeling, energy markets, reward interdependence
    JEL: C63 L22 L97
    Date: 2006–01
  13. By: Girault Vincent
    Abstract: L’objectif de notre analyse est de déterminer quels sont les facteurs qui influencent le portefeuille d’approvisionnement d’un entrant sur le marché gazier européen. L’augmentation de la dépendance des importateurs européens, la sécurité des approvisionnements et la diversification des offres d’énergies entraînent une concurrence oligopolistique sur le marché européen. Les acteurs, gaziers ou électriciens du marché européen, adaptent leurs comportements pour faire face à la concurrence et aux réactions des producteurs gaziers. La construction d’un portefeuille d’approvisionnement est déterminante pour permettre aux firmes européennes de se concurrencer.
    Keywords: natural gas ; supply chain; oligopoly
    Date: 2005
  14. By: David Pitfield
    Abstract: Ryanair tends to operate to destinations from its UK bases that are not the main airports in the country being served and in this it differs from many other European low cost carriers. For example, it flies from London Stansted (STN) to Venice Treviso (TSF), whereas the competition flies from other London area airports to Venice Marco Polo (VCE). So although direct competition is not provided in the way that rival services operate between identical pairs of airports, indirect competition is provided. This raises the question, when Ryanair commence services, what is the impact on the market share of the incumbent airlines at these other airports? This can be shown by examining UK Civil Aviation Authority (CAA) data on scheduled passengers carried, along with OAG data on flight frequency, airline and aircraft type on a number of selected routes. The impact on market share can be shown and the conclusion suggested that total traffic is stimulated on these sectors so that incumbent's traffic might fall, be constant or even increase, whilst their share, and probably their yield, falls, as Ryanair exploits latent demand. These findings echo previous work, for example, Barrett (2000). These conclusions are really generated hypotheses and these can be tested more completely by a time series analysis on monthly passenger data from 1991- 2003.
    Date: 2005–08
  15. By: Monique Ebell (Humboldt University of Berlin and University of Pennsylvania); Christian Haefke (CSIC, Universitat Pompeu Fabra, CREA and IZA Bonn)
    Abstract: We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matching model with monopolistic competition in the goods market and individual wage bargaining. Product market competition affects unemployment by two channels: the output expansion effect and a countervailing effect due to a hiring externality. Competition is then linked to barriers to entry. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980’s and 1990’s could be attributed to product market deregulation. Our quantitative analysis suggests that under individual bargaining, a decrease of less than two tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount.
    Keywords: product market competition, barriers to entry, wage bargaining
    JEL: E24 J63 L16 O00
    Date: 2006–01
  16. By: Timothy H. Hannan
    Abstract: This paper reports a systematic examination of the determinants of deposit-related retail banking fees using a set of survey data that is unusual for its size, specificity, and sampling properties. The analysis focuses explicitly on six different fees associated with checking accounts and automated teller machine (ATM) usage. A preliminary analysis documents that, on average, multimarket banks charge substantially higher fees than do typically smaller, single-market banks. A more detailed econometric analysis yields results consistent with predictions of recent models. In particular, it finds that the greater the presence of multimarket banks in the local market, the higher are the retail deposit fees of single-market banks (except in highly concentrated markets) and the weaker is the positive relationship between those fees and market concentration.
    Date: 2005
  17. By: Matos, Joao Amaro de; Lacerda, Ana
    Abstract: In the framework of incomplete markets, due to the non-existence of trade at some points in time, and using a partial equilibrium analysis, we show how the bid-ask spread of an European derivative is generated. We also ¯nd conditons for the existence of the spread. These conditions concern the market structure of the maret-makers, which can be a oligolopoly with price competition or a monopoly, as well as the riskaversion of the demand and supply of the market.
    Date: 2006
  18. By: Granier, L.
    Abstract: Kamien and Zang (1990 and 1993) give monopolization conditions for static and dynamic acquisition games. Introducing cost heterogeneity in these games, we find enlarged monopolization conditions. Indeed, we show that every industry can be monopolized if cost heterogeneity is large enough.
    JEL: L12 L41
    Date: 2005
  19. By: Leo de Haan; Elmer Sterken
    Abstract: We analyze the mortgage interest rate setting behavior of the four largest banks in the Dutch mortgage market using advertised interest rates at a daily frequency from October 1997 to July 2003. We find that the pass-through of funding cost changes into mortgage interest rates on 5 and 10 year loans differs among these banks. Further, there is evidence of asymmetric price adjustment, in the sense that funding cost increases are more quickly passed on than decreases.
    JEL: G21 L13
    Date: 2005–12
  20. By: Olivier Mortehan (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels); Bruno Van Pottelsberghe (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: This paper provides evidence showing that collaborative agreements in the IT industry contribute to decrease the R&D intensity of the largest firms. This is particularly true for acquisitions (as opposed to alliances, consortia and joint ventures) and for the mixed agreements (i.e. with a sales, marketing and technological content).
    Keywords: collaborative agreement, R&D intensity, IT industry
    JEL: O31 L63 M21
    Date: 2005–01
  21. By: Marco Alderighi; Alessandro Cento; Peter Nijkamp; Piet Rietveld
    Abstract: Airlines network choices are analysed to describe the co-existence of alternative business models: the full service model based on the hub-and-spoke (HS) system and the low cost model based on point-to-point (PP) system. The analysis is carried on both theoretically and empirically. In the theoretical part, we show that the rise of the low costs business model can be the consequence of a simple two-player game. When two carriers compete in designing their network configurations (HS or PP), asymmetric equilibria emerge, i.e. one carrier will choose HS and the other PP. Full service carriers are stuck to a HS configuration to serve intercontinental destinations, whilst non-flag carriers implement a point-to-point network. In the second part, the recent network evolution in Europe is empirically evaluated by means of different spatial measures of concentration, such as Gini index, Freeman centrality index and Bonacich centrality. In addition, we also provide an airline-specific measure of centrality based on scheduled time comparison of direct to one-stop services. Spatial measures of centrality capture a reduction of centrality in non-flag carriers and small changes in the network centrality of flag carriers. Indeed, the time-based measure of centrality suggests an increase of centrality of flag carriers.
    Date: 2005–08

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