nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒02‒26
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. "Inferring Conduct under the Threat of Entry: The Case of the Brazilian Cement Industry." By Alberto Salvo
  2. Anti-Limit Pricing By Byoung Heon Jun; In-Uck Park
  3. Endogenous Integration and Welfare in Complementary Goods Markets By Ricardo Flores-Fillol; Rafael Moner-Colonques
  4. Strategic Buyers, Horizontal Mergers and Synergies: An Experimental Investigation* By Douglas D. Davis; Bart J. Wilson
  5. The Effects of Entry on Incumbent Innovation and Productivity By Philippe Aghion; Richard Blundell; Rachel Griffith; Peter Howitt; Susanne Prantl
  7. On Information and Competition in Private Value Auctions By Juan José Ganuza; José S. Penalva
  8. DIFFERENTIAL MERGER EFFECTS: The Case of the Personal Computer Industry By Christos Genakos
  9. State Casket Sales and Restrictions: A Pointless Undertaking? By Judith Chevalier; Fiona Scott Morton
  10. University competition: Symmetric or asymmetric quality choices? By Vanhaecht E.; Pauwels W.
  11. Identifying technology spillovers and product market rivalry By Nick Bloom; Mark Schankerman; John Van Reenen
  12. Evolutionary stability and Nash equilibrium in finite populations, with an application to price competition By Ana B. Ania
  13. The effects of gallery and artist reputation on prices in the primary market for art By Susanne Schönfeld; Andreas Reinstaller
  14. Regulating Advertisements: The Case of Smoking Cessation Products By Rosemary J. Avery; Donald S. Kenkel; Dean R. Lillard; Alan D. Mathios
  15. Bertrand colludes more than Cournot By Suetens S.; Potters J.
  16. Market Power, Brand Characteristics and Demand for Retail Grocery Products By Paul H. Jensen; Elizabeth Webster
  17. Mergers and acquisitions in Europe By Martynova,Martina; Renneboog,Luc
  18. Globalization and SMEs: A Comment on Three Asian Experiences By Sumner La Croix
  19. Competitive implications of cross-border banking By Claessens, Stijn
  20. Efficient Capacity Pricing of the Internet Services By Chang-Ho Yoon; Young-Woong Song; Byoung Heon Jun
  21. Competition and Resource Effectiveness in Education By David Mayston

  1. By: Alberto Salvo
    Abstract: This paper demonstrates that when an industry faces potential entry and this threat of entry constrains pre-entry prices, cost and conduct are not identified from the comparative statics of equilibrium. In such a setting, the identifying assumption behind the well-established technique of relying on exogenous demand perturbations to empirically distinguish between alternative hypotheses of conduct is shown to fail. The Brazilian cement industry, where the threat of imports restrains market outcomes, provides an empirical illustration. In particular, price-cost margins estimated using this established technique are considerably biased downward, underestimating the degree of market power. A test of conduct is proposed, adapted to this constrained setting, which suggests that outcomes in the industry are collusive and characterised by market division.
    Keywords: Conduct, Multimarket competition, Market division, Limit pricing, Cement
    JEL: L13 L41 L70 F14
    Date: 2004–10
  2. 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)
  3. By: Ricardo Flores-Fillol; Rafael Moner-Colonques
    Abstract: This paper analyzes the strategic decision to integrate by firms that produce complementary products. Integration entails bundling pricing. We find out that integration is privately profitable for a high enough degree of product differentiation, that profits of the non-integrated firms decrease, and that consumer surplus need not necessarily increase when firms integrate despite the fact that prices diminish. Thus, integration of a system is welfare-improving for a high enough degree of product differentiation combined with a minimum demand advantage relative to the competing system. Overall, and from a number of extensions undertaken, we conclude that bundling need not be anti-competitive and that integration should be permitted only under some circumstances.
    Keywords: complementary products; integration; bundling
    JEL: L13 L41 D43
    Date: 2006–02–01
  4. By: Douglas D. Davis (Department of Economics, VCU School of Business); Bart J. Wilson (Interdisciplinary Center for Economic Science, George Mason University)
    Abstract: This paper reports an experiment designed to evaluate interrelationships between strategic buyers, market power and merger-induced synergies. The experiment consists of 40 posted-offer quadropolies. Treatments include the use of simulated or human buyers, seller consolidations and merger-induced fixed cost and unit cost synergies. In the simulated-buyer markets we observe behavior generally consistent with comparative static predictions: prices rise post-merger, and unit (but not fixed) cost synergies may exert some price-moderating effect. The addition of powerful buyers changes results markedly. Although prices are lower in the human buyer markets, outcomes are more variable and predicted comparative static effects are no longer observed.
    Date: 2006–01
  5. By: Philippe Aghion; Richard Blundell; Rachel Griffith; Peter Howitt; Susanne Prantl
    Abstract: How does firm entry affect innovation incentives and productivity growth in incumbent firms? Micro-data suggests that there is heterogeneity across industries--incumbents in technologically advanced industries react positively to foreign firm entry, but not in laggard industries. To explain this pattern, we introduce entry into a Schumpeterian growth model with multiple sectors which differ by their distance to the technological frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technological frontier--successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation--increased entry threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro-level productivity growth and patent panel data for the UK, and controlling for the endogeneity of entry by exploiting the large number of policy reforms undertaken during the Thatcher era.
    JEL: E2
    Date: 2006–02
  6. By: Makoto Watanabe
    Abstract: This paper presents a search-theoretic model where middlemen can emerge endogenously to intermediate between ex ante homogeneous buyers and sellers in the presence of coordination frictions. Middlemen set price to compete in the market, and hold an inventory to provide a high matching service. I show that middlemen's inventories can mitigate trade imbalances and interact with price competition, generating an interesting tradeoff for the equilibrium price determination. The competitive limit emerges when middlemen guarantee excess demand will never occur. Conditions are characterized under which middlemen carry out the short-side principle for the market price to be Walrasian.
    Date: 2006–01
  7. By: Juan José Ganuza; José S. Penalva
    Abstract: This paper studies the relationship between the auctioneer’s provision of information and the level of competition in private value auctions. We use a general notion of informativeness which allows us to compare the efficient with the (privately) optimal amount of information provided by the auctioneer. We show that in the private value setting more information increases the efficiency of the allocation while it also increases informational rents so that it is not optimal for the auctioneer to provide the efficient level of information. We also show that as the number of participants in the auction increases both the efficient and the optimal level of information increase and both converge when the number of bidders goes to infinity.
    Keywords: Auctions, Competition, Private Values, Optimal and Efficient Provision of Information
    JEL: D44 D82 D83
    Date: 2006–01
  8. By: Christos Genakos
    Abstract: This paper examines how information on the purchasing patterns of differentcustomer segments can be used to more accurately evaluate the economicimpact of mergers. Using a detailed dataset for the leading manufacturers in theUS during the late nineties, I evaluate the welfare effects of the biggest ($25billion) merger in the history of the PC industry between Hewlett-Packard andCompaq. I follow a two-step empirical strategy. In the first step, I estimate ademand system employing a random coefficients discrete choice model. In thesecond step, I simulate the postmerger oligopolistic equilibrium and compute thewelfare effects. I extend previous research by analysing the merger effects notonly for the whole market but also for three customer segments (home, smallbusiness and large business). Results from the demand estimation and mergeranalysis reveal that: (i) the random coefficients model provides a more realisticmarket picture than simpler models, (ii) despite being the world's second andthird largest PC manufacturers, the merged HP-Compaq entity would not raisepostmerger prices significantly, (iii) there is considerable heterogeneity inpreferences across segments that persists over time, and (iv) the merger effectsdiffer considerably across segments.
    Keywords: Computer industry, discrete choice models, merger analysis, productdifferentiation, random coefficients.
    JEL: D12 G34 L41 L63
    Date: 2004–12
  9. By: Judith Chevalier; Fiona Scott Morton
    Abstract: We utilize a new micro dataset of prices of funeral goods and services at individual funeral homes, plus data from the Census to examine the effects of state regulations that restrict entry into funeral goods market. In particular, some states have regulations that allow only licensed funeral homes to sell caskets, while others allow unlicensed retailers, such as Costco, to compete with funeral homes in the sale of caskets. However, as caskets and funeral services are complements, generally purchased in one-to-one proportions, it is not a priori clear that casket sale restrictions can expand the rent extraction capabilities of licensed funeral homes. Our results suggest that when courts lift funeral goods sales restrictions the prices of funeral goods fall but the prices of funeral services rise by nearly as much. Overall, our results support the "one monopoly rent" hypothesis; we do not find that overall funeral home revenues decline when funeral goods sales are lifted.
    JEL: L0
    Date: 2006–02
  10. By: Vanhaecht E.; Pauwels W.
    Abstract: In this paper we model competition between two publicly financed and identical universities deciding on quality and on admission standards. The education offered by the two universities is differentiated horizontally and vertically. If horizontal differentiation dominates, the Nash equilibrium is symmetric, and the two universities offer the same quality levels. If vertical differentiation dominates, the Nash equilibrium is asymmetric, and the high quality university attracts the better students. Symmetric and asymmetric equilibria may also coexist. We highlight the importance of three driving forces behind these results: a single crossing condition, the peer group effect, and the students' mobility costs. We also compare the monopoly and the duopoly case. The model we use is an extension of Del Rey's [8] model.
    Date: 2005–08
  11. By: Nick Bloom; Mark Schankerman; John Van Reenen
    Abstract: Support for many R&D and technology policies relies on empirical evidence that R&D "spills over" between firms. But there are two countervailing R&D spillovers: positive effects from technology spillovers and negative effects from business stealing by product market rivals. We develop a general framework showing that technology and product market spillovers have testable implications for a range of performance indicators, and exploits these using distinct measures of a firm's position in technology space and product market space. We show using panel data on U.S. firms between 1981 and 2001 that both technology and product market spillovers operate, but that net social returns are several times larger than private returns. The spillover effects are also revealed when we analyze three hightech sectors in detail - pharmaceuticals, computer hardware andtelecommunication equipment. Using the model we evaluate three R&Dsubsidy policies and show that the typical focus of support for small and medium firms may be misplaced.
    Keywords: Spillovers, R&D, market value, patents.
    JEL: F23
    Date: 2005–01
  12. By: Ana B. Ania
    Abstract: Schaffer (1988) proposed a concept of evolutionary stability for finite-population models that has interesting implications in economic models of evolutionary learning, since it is related to perfectly competitive equilibrium. The present paper explores the relation of this concept to Nash equilibrium in particular classes of games, including constant-sum games, games with weak payoff externalities, and games where imitative decision rules are individually improving. An illustration of the latter is provided in the context of Bertrand oligopoly with homogeneous product which allows for a characterization of the set of evolutionarily stable prices.
    JEL: B52 C72 D43 D83 L13
    Date: 2005–11
  13. By: Susanne Schönfeld (Department of Economics, Vienna University of Economics & B.A.); Andreas Reinstaller (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: This paper advances a decision theoretical foundation for pricing scripts by means of a simple model of product differentiation implementing the undercut-proof equilibrium concept. We argue that while sociological factors play undoubtedly an important role, economic analysis can complement the insights from economic sociology on pricing in the primary art market. Our model analyzes the effects of the gallery's and the artist's reputation on the price the gallery charges. The results suggest that prices positively correlate with an artist's reputation and negatively correlate with a gallery's reputation. The model may therefore explain the results of recent empirical studies that have led to similar results.
    JEL: Z11 L11
    Date: 2005–05
  14. By: Rosemary J. Avery; Donald S. Kenkel; Dean R. Lillard; Alan D. Mathios
    Abstract: In this paper we investigate how direct-to-consumer (DTC) advertising of pharmaceutical products in affected by regulations of the Food and Drug Administration and by market conditions. We focus on a relatively under-studied segment of the pharmaceutical market -- the market for smoking cessation products. Because of their proven effectiveness, these products could be the key to meeting public health goals to reduce smoking. However, in many ways, smoking cessation products have been more heavily regulated than cigarettes. Our empirical analysis uses data on advertising expenditures and data from an archive of print advertisements. The archive includes all smoking cessation product advertisements that appeared in over 13,000 issues of 28 magazines between January 1985 and May 2002. Our study period begins shortly atfer the first nicotine replacement product was introduced, and covers the evolution of the market as new products are introduced while some of the older products move from prescription to over-the-counter (OTC) status. OTC status eases the disclosure requirements imposed on advertisements of prescription pharmaceuticals, substantially reducing the costs of a print advertisement. Our results suggest that OTC status is associated with an increase in advertising expenditures and the number and pages of magazine advertisements. A current proposal to reduce disclosure requirements on all DTC advertisements of prescription drugs could have similar effects. Our results also suggest that advertising increase with the introduction of new products and with market competition.
    JEL: I1 L5
    Date: 2006–02
  15. By: Suetens S.; Potters J.
    Abstract: On the basis of evidence of past oligopoly experiments, we argue that there is often significantly more tacit collusion in Bertrand price-choice than in Cournot quantity-choice markets.
    Date: 2005–12
  16. By: Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper examines the effects of market power and product differentiation on demand for grocery products in Australia over the period 2002 to 2005. We construct a model of the relationship between demand, market power and brand characteristics and then estimate the model using monthly data on price, quantity and volume sold for a bundle of 92 brands in 12 product categories from major supermarket stores across Australia. We also use data on the characteristics of each brand such as whether the product is environment-friendly, is a “private label”, or is made from recyclable materials. Our results suggest that firms are able to affect their demand curves through both product differentiation strategies and through market power.
    Date: 2006–02
  17. By: Martynova,Martina; Renneboog,Luc (Tilburg University, Center for Economic Research)
    Abstract: This paper provides a comprehensive overview of the European takeover market. We characterize the main features of the domestic and cross-border corporate takeovers involving European companies in the period 1993-2001. We provide detailed and comparable information on the size and dynamics of takeover activity in 28 Continental European countries, the UK and Ireland. The data is supplemented with the characteristics of takeover transactions, including the type of takeovers (negotiated acquisition or tender offer), bid attitude (friendly or hostile), payment method (all-cash, all-equity, or mixed deals), legal status of the target firm (public or private), takeover strategy (focus or diversification), amongst other factors. In addition, we investigate the shortterm wealth effects of 2,419 European mergers and acquisitions. We find announcement effects of 9% for target firms compared to a statistically significant announcement effect of only 0.5% for the bidders. Including the price run-up, the share price reaction amounts to 21% for the targets and 0.9% for the bidders. We show that the estimated shareholder wealth effect strongly depends on the different attributes of the takeovers. The type of takeover bid has a large impact on the short-term wealth effects for the target firm shareholders with hostile takeovers triggering substantially larger price reactions than friendly transactions. When a UK target is involved, the abnormal returns are higher than those of bids involving a Continental European target. There is strong evidence that the means of payment has a large impact on the share prices of both bidder and target.
    Keywords: takeovers;mergers and acquisitions;diversification;takeover waves;means of payment
    JEL: G34
    Date: 2006
  18. By: Sumner La Croix (Department of Economics, University of Hawaii at Manoa)
    Abstract: This paper briefly discusses three case studies (Choi and Tcha 2005; Lin 2005; Motohashi 2005) of responses by small and medium-size manufacturing enterprises (SMEs) in Korea, Taiwan, and Japan to the rising tide of imports from China in their product markets. They find vastly different responses in each country, with some firms relocating plants to mainland China; others exiting affected product markets; and some maintaining home country production by moving up the product ladder and using new production technologies. This paper conjectures that outmoded production technologies may underpin the exit of Japanese SMEs from these product markets; considers the impact that potential impact of Chinese imports on Korea’s attachment to a market economy; and finds that Taiwan’s SME investments in mainland China have substantial political as well as economic roots. The long-run response by Northeast Asian SMEs to Chinese competition will, in all three countries, be closely tied to SME development (via in-house or cooperative R&D) or acquisition of rights to new products and technologies. I conclude that a better understanding of the public and private institutions structuring SME contracting vis-a-vis R&D projects and technology acquisition is vital to each country’s development of effective policy responses to the meteoric rise of China.
    Keywords: Globalization, SMEs, creative destruction, exports, imports, entry, exit
    Date: 2006
  19. By: Claessens, Stijn
    Abstract: This paper reviews the recent literature on cross-border banking, with a focus on policy implications. Cross-border banking has increased sharply in recent decades, particularly in the form of entry, and has affected the development of financial systems, access to financial services, and stability. Reviewing the empirical literature, the author finds much, although not uniform, evidence that cross-border banking supports the development of an efficient and stable financial system that offers a wide access to quality financial services at low cost. But as better financial systems have more cross-border banking, the relationship between cross-border banking and competitiveness has to be carefully judged. While developing countries have some special conditions, provided a minimum degree of oversight is in place, they experience effects similar to industrial countries. There are some questions, though, on the effects of cross-border banking on lending based on softer information and on stability. Relevant experiences from capital markets show that the degree of cross-border financial activities can affect local market sustainability and there can be path dependency when opening up to cross-border competition. Reviewing the fast changing landscape of financial services provision, the author argues that cross-border banking highlights the increased importance of competition policy in financial services provision. This competition policy cannot be traditional, institutional based, but will need to resemble that used in other network industries. Fu rthermore, with globalization accelerating, competition policy will need to be global, supported by greater cross-border institutional collaboration and using the General Agreement on Trade in Services (GATS) process and the disciplines of the World Trade Organization. GATS can be of special value to developing countries as it provides a binding, pro-competition framework that has proven more difficult to establish otherwise.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Financial Intermediation,Knowledge Economy,Education for the Knowledge Economy
    Date: 2006–02–01
  20. By: Chang-Ho Yoon; Young-Woong Song; Byoung Heon Jun
    Abstract: The paper examines the possibilities to improve efficiency in Internet pricing by introducing pre-purchase contract. One can regard pre-purchase market as a device for providing guaranteed services and as an alternative to smart market that can implement expected capacity pricing in an efficient manner. We find that the pre-purchase market tends to discriminate against the consumers who are less certain about their demands. We provide a condition under which the discriminatory effect is overwhelmed by the market force, which discourages the consumers with lower value by high premium. We also suggest a solution to the discriminatory effect.
  21. By: David Mayston
    Abstract: This paper examines the impact of competition in the markets for teachers and for housing on the long-standing issue of the influence of school resourcing on educational attainment. The existence of such competition is found to imply not only downward bias in many earlier empirical estimates of the role of resources in the educational production function, but also powerful general equilibrium effects, especially for the impact of relative levels of school resources upon the distribution of relative levels of educational attainment across individual schools, that highlight the importance of how resources are distributed across individual schools. The paper derives optimal resource allocation rules for distributing government educational budgets across individual schools and examines the properties of the associated funding formulae.
    Date: 2006–02

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