nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒02‒19
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Antitrust in Open Economies By Francois, Joseph; Horn, Henrik
  2. Price competition and convex costs By Weibull, Jörgen
  3. Coordination Costs: A Drawback for Research Joint Ventures? By Rod Falvey; Joanna Poyago-Theotoky; Khemarat Teerasuwannajak
  4. Beyond Regulation By Stephen Littlechild
  5. Market design By David Newbery
  6. Competition, regulation, and pricing behavior in the Spanish retail gasoline market. By Ignacio Contín-Pilart; Aad F. Correljé; M. Blanca Palacios
  7. Do Entry Conditions Vary over Time? Entry and Competition in the Broadband Market: 1999-2003 By Xiao, Mo; Orazem, Peter
  8. Markets: The Fulton Fish Market By Graddy, Kathryn
  9. Home Market Effect and Regulation Costs --Homogeneous Firm and Heterogeneous Firm Trade Models By Toshihiro Okubo
  10. Climate change policy and its effect on market power in the gas market By David Newbery
  11. Introducing Imperfect Competition in CGE Models: Technical Aspects and Implications By Roberto Roson
  12. Patents, Imitation and Licensing in an Asymmetric Dynamic R&D Race By Fershtman, Chaim; Markovich, Sarit
  14. Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks By Paul L Joskow
  15. Interconnection Negotiations between Telecommunication Networks and Universal Service Objectives By Vasiliki Skreta
  16. Overview of the Chinese Electricity Industry and Its Current Issues By Hongliang Yang
  17. Using EPECs to model bilevel games in restructured electricity markets with locational prices By Xinmin Hu; Daniel Ralph
  18. Informational Intermediation and Competing Auctions By John Kennes; Aaron Schiff

  1. By: Francois, Joseph; Horn, Henrik
    Abstract: We examine antitrust rules in a two-county general equilibrium trade model, contrasting national and multilateral (cooperative) determination of competition policy, exploring the properties of the policy equilibrium. It is not imperfect competition, but variation in competitive stance between sectors that matters for trading partners. Beggar-thy-neighbor competition policies relate to countries' comparative advantages, and hurt the factor intensively used, or specific to, the imperfectly competitive sector. They also create a competitive advantage for export firms. FDI can be pro-competitive in this context, reducing the scope for beggar-thy-neighbor policies and reducing the gains from a multilateral competition agreement.
    Keywords: antitrust policy; competition policy; FDI; merger policy; trade and imperfect competition
    JEL: F12 F3 L4
    Date: 2006–02
  2. By: Weibull, Jörgen (Dept. of Economics, Stockholm School of Economics)
    Abstract: In the original model of pure price competition, due to Joseph Bertrand (1883), firms have linear cost functions. For any number of identical such price-setting firms, this results in the perfectly competitive outcome; the equilibrium price equal the firms’ (constant) marginal cost. This paper provides a generalization of Bertrand’s model from linear to convex cost functions. I analyze pure price competition both in a static setting - where the firms interact once and for all - and in dynamic setting - where they interact repeatedly over an indefinite future. Sufficient conditions are given for the existence of Nash equilibrium in the static setting and for subgame perfect equilibrium in the dynamic setting. These equilibrium sets are characterized, and it is shown that there typically exists a whole interval of Nash equilibrium prices in the static setting and subgame perfect equilibria in the dynamic setting. It is shown that firms may earn sizable profits and that their equilibrium profits may increase if their production costs go up.
    Keywords: Bertrand competition;
    JEL: D43
    Date: 2006–02–14
  3. By: Rod Falvey (School of Economics,University of Nottingham); Joanna Poyago-Theotoky (Department of Economics, Loughborough University); Khemarat Teerasuwannajak (Ministry of Foreign Affairs, Thailand)
    Abstract: We analyze a simple oligopoly model where firms can engage in cost-reducing R&D. We compare two R&D regimes, that is, R&D competition and R&D cooperation where firms can enter in a Research Joint Venture (RJV). We introduce coordination costs for the RJV and examine how these affect the equilibrium outcomes. Further, we examine the question of the equilibrium versus the optimal size of the RJV. For a given size of the RJV, its members decrease their own R&D as the anticipated coordination costs increase. This results in lower output and profits. On the contrary, the non-RJV firms increase their R&D investment in response to the fall in the RJV firms' R&D. We show that the performance of the RJV in terms of R&D investment, profit and welfare in relation to R&D competition is sensitive to the level of coordination costs. Furthermore, we show that, although the RJV as a whole may no longer conduct a unit of R&D at a lower cost compared to the independent firm under the non-cooperative R&D regime, its members can still make savings on their own R&D expense through information sharing. Finally, we find that not only the equilibrium size becomes smaller as coordination costs increase, but the discrepancy between the equilibrium and optimal sizes is widening. One important message from our analysis is that by ignoring the coordination costs of operating the RJV, the anticipated benefits or success of the cooperative project could have been grossly exaggerated.
    Keywords: research joint venture, coordination costs, equilibrium size, optimal size
    JEL: O30 L13 D43
    Date: 2006–02
  4. By: Stephen Littlechild
    Abstract: The ‘standard model’ of electricity reform has been refined in many countries but not extended to others. Government is supplanting the role of regulation. Revised calculations suggest that the benefits of UK electricity privatisation were higher than previously estimated and more widely shared with consumers. Other calculations suggest that generation market power in the US is less than previously estimated by Lerner index calculations. Unduly tight price controls explain why there has been less customer switching in some residential electricity markets. There has been significant development of fixed price contracts in Nordic markets, posing questions for regulation in the absence of retail competition. There are alternatives to regulation of network monopolies. In Australia regulated interconnectors have been less economic than merchant interconnectors. In Argentina arrangements for users to determine transmission expansions have worked well. In Florida negotiated settlements have secured a better deal for customers than regulation.
    Keywords: : regulation, competition, electricity, transmission
    JEL: L94 L51
    Date: 2006–02
  5. By: David Newbery
    Abstract: Europe is liberalising electricity in accordance with the European Commission’s Electricity Directives. Different countries have responded differently, notably in the extent of restructuring, treatment of mergers, market power, and vertical unbundling. While Britain and Norway have achieved effective competition, others like Germany, Spain and France are still struggling to deal with dominant and sometimes vertically integrated companies. The Netherlands offers an interesting intermediate case, where good economic analysis has sometimes been thwarted by legalistic interpretations. Investment under the new Emissions Trading system could further transform the electricity industry but may be hampered by slow progress in liberalising European gas markets.
    Keywords: Competition, liberalisation, restructuring, electricity, market power
    JEL: G34 K23 L51 L94
    Date: 2006–02
  6. By: Ignacio Contín-Pilart (Universidad Pública de Navarra); Aad F. Correljé (Delft Technical University, and Clingendael International Energy Programme); M. Blanca Palacios (Universidad del País Vasco)
    Abstract: The restructuring of the Spanish oil industry produced a highly concentrated oligopoly in the retail gasoline market. In June 1990 the Spanish government introduced a system of ceiling price regulation in order to ensure that \"liberalization\" was accompanied by adequate consumer protection. This paper examines the pricing behavior of the retail gasoline market using multivariate error correction models over the period January 1993 (abolishment of the state monopoly)-December 2004. The results suggest that gasoline retail prices respond symmetrically to increases and decreases in the spot price of gasoline. However, one the ceiling price regulation was abolished, the \"collaboration\" between the government and the major operators, Repsol-YPF and Cepsa-Elf in order to control the inflation rate results in a slower rate of increase (decrease) of gasoline retail prices when gasoline spot prices went up (went down) than elsewhere in the European Union. Finally, retail margins were by the end of our timing period of analysis, as in the first years after the abolishment of the state monopoly, well above the European ones.
    Keywords: Competition, regulation, pricing behavior, gasoline market
    JEL: L11 L43 L51 L71
    Date: 2006–02–08
  7. By: Xiao, Mo; Orazem, Peter
    Abstract: We extend Bresnahan and Reiss’s (1991) model of local oligopoly to allow firm entry and exit over time. In our framework, entrants have to incur sunk costs in order to enter a market. After becoming incumbents, they disregard these entry costs in deciding whether to continue operating or to exit. We apply this framework to study market structure and competitive conduct in local markets for high-speed Internet service from 1999 to 2003. Replication of Bresnahan and Reiss’s framework generates unreasonable variation in firms’ competitive conduct over time. This variation disappears when entry costs are allowed. We find that once the market has one to three firms, the next entrant has little effect on competitive conduct. We also find that entry costs vary with the order of entry, especially for early entrants. Our findings highlight the importance of sunk costs in determining entry conditions and inferences about firm conduct.
    Keywords: Broadband, High-Speed Internet, Entry, Exit, Competition, Pricing, oligopoly
    JEL: L8
    Date: 2006–02–16
  8. By: Graddy, Kathryn
    Abstract: Centralized markets with large numbers of buyers and sellers are generally thought of as being competitive and well-functioning. However, an important role of centralized markets is matching heterogeneous products, such as fish, to buyers of these products. The high level of differentiation in the Fulton fish market and the institutional structure at the Fulton market has led to patterns of behaviour that suggest imperfect competition and market segmentation. At times in the past, the repeated nature of price setting and extensive knowledge of the sellers may have created the basis for tacit collusion and allowed the dealers to gather economic rents by exploiting the different elasticities and buying patterns. Additional economic rents at the market were created by subsidized rents and lax regulation created fertile ground for organized crime to operate.
    Keywords: fish; imperfect competition; markets; pricing
    JEL: D40 L10
    Date: 2006–02
  9. By: Toshihiro Okubo (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm marginal costs heterogeneity. Our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The Home Market Magnification Effect (HMME) in terms of trade openness is hump-shaped, whereas the pro-HMME in terms of regulation costs coordination by technical barriers to trade (TBT) agreements can be found. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfect spatial sorting, in which a large country attracts only high productivity firms and vice versa.
    Keywords: regulation costs, market potential, perfect spatial sorting, home market effect, home market magnification effect, firm heterogeneity, technical barriers to trade
  10. By: David Newbery
    Abstract: The European Emissions Trading Scheme (ETS) limits CO2 emissions from covered sectors, especially electricity until December 2007, after which a new set of Allowances will be issued. The paper demonstrates that the impact of controlling the quantity rather than the price of carbon is to reduce the elasticity of demand for gas, amplifying the market power of gas suppliers, and also amplifying the impact of gas price increases on the price of electricity. A rough estimate using just British data suggests that this could increase gas market power by 50%.
    Keywords: Climate change, emissions trading, market power, gas, quotas vs taxes
    JEL: Q54 Q58 L94
    Date: 2006–02
  11. By: Roberto Roson (Università Ca’ Foscari di Venezia)
    Abstract: This paper considers the technical aspects and the consequences, in terms of simulation results and policy assessment, of introducing imperfect competition in a CGE model. The modifications to the standard CGE framework needed to model imperfect competition in some industries are briefly discussed. Next, the paper discusses whether, how much and why, those changes may affect the qualitative output of a typical simulation experiment. It is argued that technical choices made in designing the model structure may have a significant impact on the model behavior. This is especially evident when the output of the model, under an imperfect competition closure, is compared with that obtained under a standard closure, assuming perfect competition. As an illustration, a scenario of agricultural trade liberalization under alternative market structures is analyzed.
    Keywords: Computable general equilibrium models, Imperfect competition, Oligopolistic models, Economies of scale, Empirical industrial organization, Agriculture, Trade liberalization, Trade policy
    JEL: D58 F12 L16
    Date: 2006–01
  12. By: Fershtman, Chaim; Markovich, Sarit
    Abstract: R&D is an inherently dynamic process which involves different intermediate steps that need to be developed before the completion of the final invention. Firms are not necessarily symmetric in their R&D abilities; some may have advantages in early stages of the R&D process while others may have advantages in other stages of the process. The paper uses a simple two-firm asymmetric ability multistage R&D race model to analyse the effect of different types of patent policy regimes and licensing arrangement on the speed of innovation, firm value and consumers' surplus. The paper demonstrates the circumstances under which a weak patent protection regime, which facilitates free imitation of any intermediate technology, may yield a higher overall surplus than a regime that awards patent for the final innovation. This result holds even in cases where the length of the patent is optimally calculated.
    Keywords: licensing; patent protection; R&D race
    JEL: D43 L1 O3
    Date: 2006–02
  13. By: William R. Zame (University of California)
    Date: 2005–07–01
  14. By: Paul L Joskow
    Abstract: Modern theoretical principles to govern the design of incentive regulation mechanisms are reviewed and discussed. General issues associated with applying these principles in practice are identified. Examples of the actual application of incentive r egulation mechanisms to the regulation of prices and service quality for “unbundled” transmission and distribution networks are presented and discussed. Evidence regarding the performance of incentive regulation in practice for electric distribution and transmission networks is reviewed. Issues for future research are identified.
    Keywords: regulation, incentives, networks, electricity, transmission, distribution
    JEL: L94 L51
    Date: 2006–02
  15. By: Vasiliki Skreta
    Date: 2005–01–28
  16. By: Hongliang Yang
    Abstract: In China, many ongoing problems in the electricity sector can be traced back to the old ‘centrally planned’ economy. Since the start of liberalization in the 1980s, the clash between a liberalized economy (excluding a few so-called strategic industries) and a centrally controlled electricity industry has gradually become more and more apparent. The Chinese electricity industry is in need of constructive restructuring. In the absence of a universal agreement on optimal industry design, the Chinese government should have a firm and clear understanding of the implications of electricity restructuring for long-term social welfare. Otherwise the electricity industry might, again, be locked into an inferior industry design which would be very costly to change.
    Keywords: Chinese electricity industry, reform, electricity policy
    JEL: L22 L52 Q48
    Date: 2006–02
  17. By: Xinmin Hu; Daniel Ralph
    Abstract: CWPE0619 (EPRG0602) Xinmin Hu and Daniel Ralph (Feb 2006) Using EPECs to model bilevel games in restructured electricity markets with locational prices We study a bilevel noncooperative game-theoretic model of electricity markets with locational marginal prices. Each player faces a bilevel optimization problem that we remodel as a mathematical program with equilibrium constraints, MPEC. This gives an EPEC, equilibrium problem with equilibrium constraints. We establish sufficient conditions for existence of pure strategy Nash equilibria for this class of bilevel games and give some applications. We show by examples the effect of network transmission limits, i.e. congestion, on existence of equilibria. Then we study, for more general EPECs, the weaker pure strategy concepts of local Nash and Nash stationary equilibria. We model the latter via complementarity problems, CPs. Finally, we present numerical examples of methods that attempt to find local Nash or Nash stationary equilibria of randomly generated electricity market games. The CP solver PATH is found to be rather effective in this context.
    Keywords: electricity market, bilevel game, MPEC, EPEC, Nash stationary point, equilibrium constraints, complementarity problem
    JEL: C61 C62 C72 Q40
    Date: 2006–02
  18. By: John Kennes (Department of Economics, University of Copenhagen); Aaron Schiff (Department of Economics, University of Auckland)
    Abstract: We examine the effects of provision of information about seller qualities by a third-party in a directed search model with heterogeneous sellers, asymmetric information, and where prices are determined ex post. The third party separates sellers into quality-differentiated groups and provides this information to some or all buyers. We show that this always raises total welfare, even if it causes the informed buyers not to trade with low quality sellers. However, buyers and some sellers may be made worse off in equilibrium. We also examine the provision of information by a profit maximizing monopoly, and show that it may have an incentive to overinvest in the creation of information relative to the social optimum.
    Date: 2006–02

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