nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒02‒12
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. Anti-Limit Pricing By Byoung Heon Jun; In-Uck Park
  2. The Impact of Multinational Entry on Domestic Market Structure and R&D By Helmut Luetkepohl
  3. Mergers under Asymmetric Information – Is there a Lemons Problem? By Thomas Borek; Stefan Buehler; Armin Schmutzler
  4. Price regulation and generic competition in the pharmaceutical market By Dalen, Dag Morten; Strøm, Steinar; Haabeth, Tonje
  5. Competition Policy and Exit Rates: Evidence from Switzerland By Stefan Buehler; Christian Kaiser; Franz Jaeger
  6. On The Role of Access Charges Under Network Competition By Stefan Buehler; Armin Schmutzler
  7. Competition for Railway Markets: The Case of Baden-Wuerttemberg By Rafael Lalive; Armin Schmutzler
  8. Switch on the competition; causes, consequences and policy implications of consumer switching costs. By Marc Pomp; Victoria Shestalova; L. Rangel
  9. Switching Costs, Firm Size, and Market Structure By Simon Loertscher; Yves Schneider
  10. Deregulating Network Industries: Dealing with Price-Quality Tradeoffs By Stefan Buehler; Dennis Gaertner; Daniel Halbheer
  11. Intimidating Competitors – Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly By Stefan Buehler; Armin Schmutzler
  12. Competition in markets for life insurance. By Marc Pomp; M. Bijlsma; Machiel van Dijk; Michiel van Leuvensteijn; C. Zonderland
  13. Entry and Regulation - Evidence from Health Care Professions By Schaumans, Catherine; Verboven, Frank
  14. Measuring Market Conduct in the Brazilian Cement Industry: a Dynamic Econometric Investigation By Rodrigo M. Zeidan; Marcelo Resende
  15. Are There Waves in Merger Activity After All? By Dennis Gaertner; Daniel Halbheer
  17. Liberalisation of the Dutch notary profession; reviewing its scope and impact. By Nicole Kuijpers; Joëlle Noailly; Ben Vollaard
  18. Foreign Banks in Eastern Europe: Mode of Entry and Effects on Bank Interest Rates By Sophie Claeys; Christa Hainz
  19. Concession lenght and investment timing flexibility By Chiara D'Alpaos; Cesare Dosi; Michele Moretto
  20. The Impact of Internet on the Market for Daily Newspapers in Italy By Lapo Filistrucchi
  21. Entry in Pharmaceutical submarkets: A Bayesian Panel Probit Approach By Gianni Amisano; Maria Letizia Giorgetti
  22. Product Markets and Paychecks: Deregulation's Effect on the Compensation Structure in Banking By Abigail Wozniak

  1. By: Byoung Heon Jun; In-Uck Park
    Abstract: Extending Milgrom and Roberts (1982) we present an infinite horizon entry model, where the incumbent(s) may use the current price to signal its strength to deter entry. We show that, due to the importance of entrants' types on the post-entry duopoly/oligopoly pro?ts, the incumbent(s) may want to signal its weakness to invite entry of weaker firms. (JEL D42, D43, D82, L11)
  2. By: Helmut Luetkepohl
    Abstract: Structural vector autoregressive (VAR) models are in frequent use for impulse response analysis. If cointegrated variables are involved, the corresponding vector error correction models offer a convenient framework for imposing structural long-run and short-run restrictions. Occasionally it is desirable to impose over-identifying restrictions in this context. Some related problems are pointed out. They result from the fact that the over-identifying restrictions have to be in the admissible parameter space which is not always obvious. Conditions are given that can help in avoiding the problems.
    Keywords: Cointegration, vector autoregressive process, vector error correction model, impulse responses
    JEL: C32
    Date: 2005
  3. By: Thomas Borek (Department of Mathematics, Swiss Federal Institute of Technology Zurich); Stefan Buehler (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model–if any, only low-type firms are traded–is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.
    Keywords: merger, asymmetric information, oligopoly, single crossing
    JEL: D43 D82 L13 L33
    Date: 2004–07
  4. By: Dalen, Dag Morten (Norwegian School of Management and the Frisch Centre); Strøm, Steinar (Dept. of Economics, University of Oslo); Haabeth, Tonje (University of Oslo and the Frisch Centre)
    Abstract: In March 2003 the Norwegian government implemented yardstick based price regulation schemes on a selection of drugs experiencing generic competition. The retail price cap, termed “index price”, on a drug (chemical substance) was set equal to the average of the three lowest producer prices on that drug, plus a fixed wholesale and retail margin. This is supposed to lower barriers of entry for generic drugs and to trigger price competition. Using monthly data over the period 1998-2004 for the 6 drugs (chemical entities) included in the index price system, we estimate a structural model enabling us to examine the impact of the reform on both demand and market power. Our results suggest that the index price helped to increase the market shares of generic drugs and succeeded in triggering price competition.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; evaluation of yardstick based price regulation
    JEL: C35 D43 I18 L11
    Date: 2005–11–25
  5. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Christian Kaiser (University of St. Gallen); Franz Jaeger (University of St. Gallen)
    Abstract: This paper provides evidence on the relation between the intensity of product market competition and the probability of exit. We adopt a natural experiment approach towards analyzing the impact of a tightening of Swiss antitrust legislation on exit probabilities. Based on a sample of more than 68,000 firms from all major sectors of the Swiss economy, we find that the exit probability of nonexporting firms increased significantly, whereas the exit probability of exporting firms remained largely unaffected. Our results support the notion that there is a positive relationship between the intensity of product market competition and the probability of exit.
    Keywords: competition intensity, exit, natural experiment
    JEL: D43 L23 L40
    Date: 2004–03
  6. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We aim to clarify the role of access charges under two-way network competition, employing a reduced-form approach. Retaining the key features of specific network competition models but imposing less structure, we analyze the impact of changes in access charges on linear and non-linear retail prices. We derive su.cient conditions for usage fees to be increasing (and subscriber charges to be decreasing) in access charges. These conditions are shown to be satisfied only under rather restrictive assumptions on the demand for calls, suggesting that implementing collusion by inflating access charges is likely to be nonfeasible.
    Keywords: network competition, two-way access, collusion, nonlinear retail prices
    JEL: D43 L43
    Date: 2005–01
  7. By: Rafael Lalive (Institute for Empirical Economics, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: This paper studies the e.ects of introducing competition for local passenger railway markets in the German state of Baden-Wuerttemberg. We compare the evolution of the frequency of service on lines that were exposed to competition for the market and lines that were not. Our results suggest that competitive lines enjoyed a stronger growth of the frequency of service than non-competitive lines, even after controlling for various line characteristics that might have an independent influence on the frequency of service. Our results further suggest that the e.ects of competition may depend strongly on the operator and on characteristics of the line.
    Keywords: Competition for the market, liberalization, passenger railways, procurement auctions
    JEL: D43 D44 R48
    Date: 2005–09
  8. By: Marc Pomp; Victoria Shestalova; L. Rangel
    Abstract: The success or failure of reforms aimed at liberalising markets depends to an important degree on consumer behaviour. If consumers do not base their choices on differences in prices and quality, competition between firms may be weak and the benefits of liberalisation to consumers may be small. One possible reason why consumers may respond only weakly to differences in price and quality is high costs of switching to another firm. This report presents a framework for analysing markets with switching costs and applies the framework in two empirical case studies. The first case study analyses the residential energy market, the second focuses on the market for social health insurance. In both markets, there are indications that switching costs are substantial. The report discusses policy options for reducing switching costs and for alleviating the consequences of switching costs.
    Keywords: Switching costs; consumer behaviour; competition; energy markets; health insurance
    JEL: L13 D12
    Date: 2005–09
  9. By: Simon Loertscher (Economic Department, University of Berne); Yves Schneider (Socioeconomic Institute, University of Zurich)
    Abstract: In many markets, homogenous goods and services are sold both by large global frms and small local frms. Surprisingly, the large frms charge, often substantially, higher prices. Examples include hotels, airlines, and coffee shops. This paper provides a parsimonious model that can account for these pricing patterns. In this model, consumers face costs when switching from one supplier to another and consumers change locations with a given positive probability. Consequently, large frms or "chain stores" insure consumers against this switching cost. The model predicts that chain stores and local stores coexist in equilibrium and that chain stores charge higher prices and yet attract more consumers than local stores. As consumer mobility increases, the profits of both local stores and chain stores increase, but the chain stores' profts increase at a faster rate.
    Keywords: Firm size, switching costs, consumer mobility, market structure
    JEL: D43 L15
    Date: 2005–08
  10. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Dennis Gaertner (Socioeconomic Institute, University of Zurich); Daniel Halbheer (Socioeconomic Institute, University of Zurich)
    Abstract: This paper examines the e®ects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we ¯rst show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications.
    Keywords: infrastructure quality, deregulation, investment incentives, access charges, regulation
    JEL: D43 L43
    Date: 2004–01
  11. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We examine the interplay of endogenous vertical integration and costreducing downstream investment in successive oligopoly. We start from a linear Cournot model to motivate our more general reducedform framework. For this general framework, we establish the following main results: First, vertical integration increases own investment and decreases competitor investment (intimidation effect). Second, asymmetric equilibria typically involve integrated firms that invest more into effciency than their separated counterparts. Our findings suggest that asymmetric vertical integration is a potential explanation for the initial difference between leader and laggard in investment games.
    Keywords: vertically related oligopolies, investment, vertical integration, cost reduction
    JEL: L13 L20 L22
    Date: 2004–07
  12. By: Marc Pomp; M. Bijlsma; Machiel van Dijk; Michiel van Leuvensteijn; C. Zonderland
    Abstract: This report presents an empirical analysis of competition in the market for life insurance. In this market, financial advisors play a large role. Therefore, the report devotes considerable attention to the functioning of the market for financial advice. The main findings are as follows. Empirical indicators of competition find only weak competition in the market for life insurance. There are substantial economies of scale, large X-inefficiencies, and limited competition as measured by the Boone-indicator compared to other services sectors. Also, the higher profitability of Dutch life insurers compared to their foreign peers suggests weak competition, although it should be pointed out that this indicator mainly reflects the situation in the past. Better functioning of financial advisors offers a key towards improving competition. Consumers who purchased annuities through advisors are found to achieve lower pay-outs than consumers who purchased directly from life insurers. This finding underlines the importance of more transparency of life insurance products and of independent advice.
    Keywords: competition; life insurance; financial advice
    JEL: L13 D14
    Date: 2005–09
  13. By: Schaumans, Catherine; Verboven, Frank
    Abstract: The health care professions in Europe have been subject to substantial entry and conduct regulation. Most notably, pharmacies have frequently received high regulated markups over wholesale costs, and have been protected from additional competition through geographic entry restrictions. We develop an entry model to study the direct impact of the regulations on the pharmacies, and the indirect impact on the physicians who provide related services. We study the case of Belgium, which is representative for many other countries with geographic entry restrictions. We find that the entry decisions of pharmacies and physicians are strategic complements. Furthermore, the entry restrictions have directly reduced the number of pharmacies by more than 50%, and indirectly reduced the number of physicians by about 7%. A policy analysis shows that a removal of the entry restrictions, combined with a large reduction in the regulated markups (by between 10-18%, down from the current 28%) would lead to a large shift in rent to consumers, without reducing the geographic coverage of pharmacies throughout the country. These findings show that the public interest motivation for the current regime has no empirical support. Our findings are also relevant in light of the renewed attention by competition authorities to liberalize professional regulation.
    Keywords: entry; professional services; regulation
    JEL: I11 K21 L10 L43
    Date: 2006–01
  14. By: Rodrigo M. Zeidan; Marcelo Resende
    Abstract: Indirect assessments of market conduct have become widespread in the New Empirical Industrial Organization-NEIO literature. Recently, Steen and Salvanes (1999) provided a flexible dynamic econometric formulation of the approach advanced by Bresnahan (1982) and Lau (1982). The present paper considers a similar approach as applied to regional cement markets in Brazil under more favorable data availability and it also attempts to address part of the critiques that usually emerge with respect to the NEIO literature. In particular, issues pertaining to structural stability and yet the control for the number of competing firms are addressed. The evidence clearly indicates non-negligible and distinct market power in the different regions and yet distinct conduct patterns in the short and long-run.
    JEL: L11 L13
    Date: 2005
  15. By: Dennis Gaertner (Socioeconomic Institute, University of Zurich); Daniel Halbheer (Socioeconomic Institute, University of Zurich)
    Abstract: This paper investigates the merger wave hypothesis for the US and the UK employing a Markov regime switching model. Using quarterly data covering the last thirty years, for the US, we identify the beginning of a merger wave in the mid 1990s but not the much-discussed 1980s merger wave. We argue that the latter finding can be ascribed to the refined methods of inference offered by the Gibbs sampling approach. As opposed to the US, mergers in the UK exhibit multiple waves, with activity surging in the early 1970s and the late 1980s.
    Keywords: mergerwaves, Markov Regime Switching Regression Model, Gibbs Sampling
    JEL: G34 C32 C11 C15
    Date: 2004–09
  16. By: Hernán Vallejo G
    Abstract: This paper analyses two approaches to measuring market power –the commonly used Lerner index and a range of exploitation measures-. It is argued that the Lerner index is designed to quantify market power from the supply side, and the exploitation measures are designed to quantify market power from the demand side, and that those two approaches do not always behave in a symmetric way, since they do not always have the same bounds. To sort out these potentially undesirable properties, this paper proposes a new general index to measure market power, which is symmetrical in the sense that it is bounded between cero and one, regardless of whether the market power comes from the supply or the demand side. The index proposed allows for the presence of more than one firm and for the existence of conjectural variations.
    Date: 2005–10–30
  17. By: Nicole Kuijpers; Joëlle Noailly; Ben Vollaard
    Abstract: This study provides an overview of the policy of liberalisation that transformed the Dutch notary profession into one of the least regulated in Europe. We discuss the changes brought with the new Notary Act of 1999, the political debates and lobbying preceding the introduction of the Act, and its impact on the profession. We go into the likely effects on key indicators, including entry, notary fees and the (perceived) quality of service. We place the Dutch experiences in an international context by comparing the Dutch notary profession to the organisation and regulation of the profession in other countries, including the US, Quebec, Germany and Belgium.
    Keywords: notary profession; liberalisation
    JEL: K23
    Date: 2005–09
  18. By: Sophie Claeys (Department of Financial Economics and CERISE, Ghent University, W. Wilsonplein 5D, B-9000 Ghent, Tel.: +32-9-264 34 91, Fax.: +32-9-264 89 95.; Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Tel.: +49-89-2180 3232, Fax.: +49-89-2180 2767.
    Abstract: Credit markets in many Eastern European countries are now dominated by foreign-owned banks. We analyze the development for foreign ownership and its impact on lending rate in ten Eastern European countries between 1995 and 2003. Currently, the majority of loans from foreign banks is granted by acquired banks. The presence of foreign acquired banks as measured by their relative number among the banks in our dataset increased somewhat slower than that of foreign de novo banks. However, since market entry through acquisition allows acquiring a credit portfolio and a customer base, acquired banks were able to expand their market share much faster than the foreign de novo banks. Our results also show that the interest rate decreased after foreign bank entry. Moreover, while the reduction in interest rates of domestic banks is more pronounced in the case of foreign entry through a de novo investment, foreign de novo banks charge higher interest rates than foreign acquired banks.
    Keywords: SME, Banking, Foreign Entry, Mode of Entry, Interest Rate
    JEL: D4 G21
    Date: 2006–02
  19. By: Chiara D'Alpaos; Cesare Dosi; Michele Moretto
    Abstract: When assigning a concession contract, the regulator faces the issue of setting the concession length. Another key issue is whether or not the concessionare should be allowed to set the timing of new invest- ments. In this paper we investigate the impact of concession length and investment timing ?exibility on the ?concession value?. It is generally argued that long-term contracts are privately valuable as they enable a concessionaire to increase her overall discounted returns. Moreover, the real option theory suggests that investment ?exibility has an in- trinsic value, as it allows concessionaires to avoid costly errors. By combining these two conventional wisdoms, one may argue that long- term contracts, which allow for investment timing ?exibility, should always result in higher concession values. Our result suggests that this is not always the case. Firstly, investment ?exibility does not always increase the concession value. Secondly, long-term contracts do not necessarily increase the concession value.
  20. By: Lapo Filistrucchi
    Abstract: Recent years have seen a surge in websites that provide news for free and, up to the end of 2001, daily newspapers in Italy have shown a growing trend towards making available online for free; the exact articles published on paper. To assess whether on-line news and traditional daily newspapers are substitute, complement or independent goods, I model the choice between different daily newspapers as a discrete choice among differentiated products. Considering the availability of a website as a newspaper characteristic and controlling for other observable and unobservable characteristics of newspapers and of the outside good, I estimate a logit model of demand on market level data from 1976 to 2001 for the main national daily newspapers in Italy. Results suggest that opening a website had a negative impact both on the sales of the newspaper who opened it and on those of its rivals. I calculate the implied short-run and approximated long-run losses in both sales and profits and provide some evidence of the additional negative effect stemming from the general availability of Internet and on-line news. Results also contribute to explaining why, starting from the end of 2001, many publishers introduced a fee to read on-line the paper edition of the newspaper.
    Keywords: daily newspapers, Internet, websites, substitution, discrete choice models, product differentiation, dynamics, market level data
    JEL: C2 D12 L12 O3
    Date: 2005
  21. By: Gianni Amisano; Maria Letizia Giorgetti
    Abstract: In this paper we analyze entry dynamics in new submarkets of pharma- ceutical companies in the period 1987-1998 in seven countries considered as a single country and on each country separately. In particular we study entry decisions at time t in a new submarket, conditioned on the entrance or non-entrance in a new submarket at time t-1. Our analysis is based on a Bayesian approach which allows us to properly account for hetero- geneity among ?rms. We try to manage the inclusion among regressors of non strictly exogenous variables, which can be correlated with unobserved heterogeneity. Reassuming, the relevant variables are the achieved diver- si?cation indipendently of the size and other strategic variables connected with the attractiveness of each submarket. The unobservable heterogeneity is not explained by the lagged dependent variable but rather by the initial diversi?cation.
  22. By: Abigail Wozniak (University of Notre Dame and IZA Bonn)
    Abstract: This paper asks how deregulation intended to promote competition in the commercial banking industry affected the compensation structure for banking employees. Using establishment-based data from the Employment Cost Index Survey of the U.S. Bureau of Labor Statistics, I obtain measures of the level and distribution of wage and benefits compensation within industries. I then compare changes in compensation in the banking industry to changes in unaffected industries across states and over time to identify the effects of deregulation. Banking deregulation had no effect on compensation levels or inequality in the industry as a whole, but this masks conflicting changes within the compensation structure. Manager wages fell while non-manager wages held steady, leading to a large decline in between-occupation compensation inequality. In contrast, between-establishment inequality increased dramatically. Deregulation also led to increases in inequality among managers despite their falling wages and to significant shifts in the types of non-wage benefits banking employees received.
    Keywords: total compensation, compensation inequality, product market competition, commercial banking
    JEL: J31 L11
    Date: 2006–01

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