nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒03‒11
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Capacity Choice under Uncertainty: The Impact of Market Structure By Veronika Grimm; Gregor Zoettl
  2. Vertical differentiation, network externalities and compatibility decisions : an alternative approach. By Hend Ghazzai; Rim Lahmandi-Ayed
  3. "Repeated Games, Entry in The New Palgrave Dictionary of Economics, 2nd Edition" By Michihiro Kandori
  4. Should Employment Authorities Worry About Mergers and Acquisitions? By David N. Margolis
  5. Electricity Restructuring and Regulation in the Provinces: Ontario and Beyond By Donald N. Dewees
  6. Efficiency in Deregulated Electricity Markets: Offer Cost Minimization vs. Payment Cost Minimization Auction By Rimvydas Baltaduonis
  7. Insurance and Incentives for Medical Innovation By Alan M. Garber; Charles I. Jones; Paul M. Romer
  9. The effect of business regulations on nascent and actual entrepreneurship By Andre van Stel; David Storey; Roy Thurik
  10. Should You Allow Your Agent to Become Your Competitor? .On Non-Compete Agreements in Employment Contracts By Matthias Kräkel; Dirk Sliwka
  11. Supermarket Pricing Strategies By Ellickson, Paul; Misra, Sanjog
  12. "Effects of a bank consolidation promotion policy: Evaluating Bank Law in 1927 Japan" By Tetsuji Okazaki; Michiru Sawada

  1. By: Veronika Grimm; Gregor Zoettl
    Abstract: We analyze a market game where firms choose capacities under uncertainty about future market conditions and make output choices after uncertainty has unraveled. We show existence and uniqueness of equilibrium under imperfect competition and provide an intuitive characterization of equilibrium investment. We show that investment in oligopoly, in the first and second best solution can be unambiguously ranked, in particular investment incentives are highest in the First Best solution and lowest under imperfect competition. We finally demonstrate that intervention of a social planer only at the production stage leads to strategic uncertainty at the investment stage and moreover decreases total investment below the level obtained under imperfect competition.
    Keywords: Investment incentives, demand uncertainty, cost uncertainty, Cournot competition, First Best, Second Best, capacity obligations, spot market regulation
    JEL: D43 L13 D41 D42 D81
    Date: 2006–02–28
  2. By: Hend Ghazzai (CES-CERMSEM et LEGI-Ecole Polytechnique de Tunisie); Rim Lahmandi-Ayed (LEGI-Ecole Polytecnique de Tunisie)
    Abstract: We characterize the equilibrium of a game in vertically differentiated market which exhibits network externalities. There are two firms, an incumbent and a potential entrant. Compatibility means in our model that the inherent qualities of the goods are close enough. By choosing its quality, the entrant chooses in the same time to be compatible or not. The maximal quality difference that allows compatibility i.e the compatibility interval is chosen by the incumbent which involves costs increasing with the width of that interval. We show that in order to have two active firms at price equilibrium, the sufficient condition on the market size of a standard vertical differentiation model remains valid under compatibility. However, an additional condition on the firms' qualities is needed under incompatibility. For a small quality segment, the incumbent can block entry choosing an empty compatibility interval. At the subgame perfect equilibrium, incompatibility prevails if the quality segment is large and the compatibility costs are high. Compatibility prevails for sufficiently large quality segments and low costs of compatibility. Finally there is no entry if the quality segment is small and the compatibility costs are high.
    Keywords: Vertical differentiation, compatibility, network externalities.
    JEL: L13 L15 D43
    Date: 2006–02
  3. By: Michihiro Kandori (Faculty of Economics, University of Tokyo)
    Abstract: This entry shows why self-interested agents manage to cooperate in a long-term relationship. When agents interact only once, they often have an incentive to deviate from cooperation. In a repeated interaction, however, any mutually beneficial outcome can be sustained in an equilibrium. This fact, known as the folk theorem, is explained under various information structures. This entry also compares repeated games with other means to achieve efficiency and briefly discuss the scope for potential applications.
    Date: 2006–01
  4. By: David N. Margolis (University of Paris 1, CNRS, CREST-INSEE and IZA Bonn)
    Abstract: This paper considers the role mergers and acquisitions have on employment. First, it considers the importance of different aspects of compensation policy and human resource management practices for distinguishing acquired and acquiring firms. Second, it examines which individuals from which firms remain with the newly created entity after the takeover. Using a unique employer-employee linked data set for France, we find that very few observable workforce or compensation characteristics distinguish acquired from acquiring firms ex-ante. Nevertheless, the human resources department seems to be quite active in the post-takeover period, with employees of the acquired firm being less likely to remain with the new entity in the short term after takeover than those of the acquiring firm and with the differences between the two types of firms disappearing after 3 years. The workers with characteristics that tend to be associated with the fastest subsequent job finding in the displaced worker literature are also those who tend to be overrepresented among the individuals who separate from their employer post-takeover. Finally, as both acquired and acquiring firms differ from firms not involved in takeover activity in a similar manner, employment authorities may be able to anticipate the regions in which takeovers are more likely to occur by looking at the financial accounts of firms with particular characteristics that have local establishments.
    Keywords: employment, takeovers, linked employer-employee data
    JEL: G34 J21 J23 J31 J63 L29 M51
    Date: 2006–03
  5. By: Donald N. Dewees
    Abstract: Competitive electricity markets are artificial markets with extensive rules for all participants arising from the complex interconnections of the electricity network. Governments or regulatory agencies oversee the market design process and the operation and maintenance of the market, so market design is necessarily a political process. The conceptual design of the market must recognise the political forces that will operate on the market design process so that the political process will not thwart the intended outcome of the market as it has in some jurisdictions including Ontario. The limited ability of consumers to understand changes in the electricity sector in the short run poses a real constraint on what can be achieved politically. Letting the market set the price means that governments cannot ensure any particular future price level and both theory and experience tell us that prices may increase after restructuring (California, Ontario, Alberta). This makes it difficult to sell restructuring to consumers who will be interested in the price they pay and not much interested in abstractions like efficiency. Another challenge for electricity restructuring is that the starting points differ from one jurisdiction to another and the starting points matter. The problems are different if you begin with a crown monopoly than if you have investor-owned utilities; if expected prices are higher than recent prices rather than lower; if governments have been deeply involved in the electricity sector rather than distant from it; if the public has experience with stable electricity prices rather than fluctuating prices. Finally, the situation in neighbouring jurisdictions matters as well. Restructuring in a low-price jurisdiction surrounded by high prices will increase the prospect of price increases at home, while a high-price island is more likely to see its prices decline. If workable competition will be difficult to achieve at home, strong interties to neighbouring jurisdictions can improve competitive performance if the market is appropriately designed. Air pollution, like electricity, moves across borders, so one must assess and evaluate the pollution implications of competition and make any appropriate adjustments to the market design.
    Keywords: electricity restructuring, electric utilities, market design
    JEL: L94
  6. By: Rimvydas Baltaduonis (University of Connecticut)
    Abstract: This study of the wholesale electricity market compares the efficiency performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed mechanism. The analysis highlights the importance of considering strategic behavior when comparing different institutional systems. We find that in concentrated markets, neither auction mechanism can guarantee an efficient allocation. The advantage of the current mechanism increases with increased price competition if market demand is perfectly inelastic. However, if market demand has some responsiveness to price, the superiority of the current auction with respect to efficiency is not that obvious. We present a case where the proposed auction outperforms the current mechanism on efficiency even if all offers re ect true production costs. We also find that a market designer might face a choice problem with a tradeoff between lower electricity cost and production efficiency. Some implications for social welfare are discussed as well.
    Keywords: strategic behavior, multi-unit auction, efficiency, electricity
    JEL: C72 D44 D61 L94
    Date: 2006–03
  7. By: Alan M. Garber; Charles I. Jones; Paul M. Romer
    Abstract: This paper studies the interactions between health insurance and the incentives for innovation. Although we focus on pharmaceutical innovation, our discussion applies to other industries producing novel technologies for sale in markets with subsidized demand. Standard results in the growth and productivity literatures suggest that firms in many industries may possess inadequate incentives to innovate. Standard results in the health literature suggest that health insurance leads to the overutilization of health care. Our study of innovation in the pharmaceutical industry emphasizes the interaction of these incentives. Because of the large subsidies to demand from health insurance, limits on the lifetime of patents and possibly limits on monopoly pricing may be necessary to ensure that pharmaceutical companies do not possess excess incentives for innovation.
    JEL: I1 O30
    Date: 2006–03
  8. By: Ramón Faulí-Oller (Universidad de Alicante); Lluís Bru (Universitat de les Illes Balears); Joel Sandonís (Universidad de Alicante)
    Abstract: We analyze third degree price discrimination by an upstream monopolistto a continuum of heterogeneous downstream firms. The novelty of ourapproach is to recognize that customizing prices may be costly, whichintroduces an interesting trade-off. As a consequence, partial pricediscrimination arises in equilibrium. In particular, we show that inefficientdownstream firms receive personalized prices whereas efficient firms arecharged a uniform price. The extreme cases of complete price discriminationand uniform price arise in our setting as particular cases, depending on the costof customizing prices.
    Keywords: Price discrimination, input markets
    JEL: D4 L11 L12
    Date: 2006–02
  9. By: Andre van Stel; David Storey; Roy Thurik
    Abstract: This paper investigates the effect of business regulations on various measures of entrepreneurship. Using data for a sample of countries participating in the Global Entrepreneurship Monitor between 2002 and 2005, we estimate a two-equation model explaining the nascent and the actual entrepreneurship rate, while taking into account the interrelationship between the two variables. Various determinants of entrepreneurship reflecting the demand and supply side of entrepreneurship as well as business regulation measures are incorporated in the model. Data on various categories of business regulations are taken from the World Bank Doing Business data base. Our estimation results suggest that, while entry regulations only have a small and indirect impact on the actual entrepreneurship rate, the impact of labour market regulations is more important. We also find that the determinants of opportunity and necessity entrepreneur-ship are fundamentally different.
    Keywords: nascent entrepreneurship, young businesses, business regulations, Global Entrepreneurship Monitor, World Bank Doing Business
    JEL: K20 L51 M13 O57
    Date: 2006–02
  10. By: Matthias Kräkel (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, tel: +49 228 733914, fax: +49 228 739210.; Dirk Sliwka (University of Cologne, Herbert-Lewin-Str. 2, D-50931 Köln, Germany, tel: +49 221 470-5888, fax: +49 221 470-5078.
    Abstract: We discuss a principal-agent model in which the principal has the opportunity to include a non-compete agreement in the employment contract. We show that if the agent faces limited liability and there is an incentive problem the principal prefers not to impose such a clause if and only if the principal's profits from entering the market are sufficiently large relative to the agent's outside option. If the principal can impose a fine on the agent for leaving the firm, she will never prefer a non-compete agreement.
    Keywords: fine, incentives, incomplete contracts, non-compete agreements
    JEL: D21 J3 K1 M5
    Date: 2006–03
  11. By: Ellickson, Paul; Misra, Sanjog
    Abstract: Most supermarket firms choose to position themselves by offering either "Every Day Low Prices" (EDLP) across several items or offering temporary price reductions (promotions) on a limited range of items. While this choice has been addressed from a theoretical perspective in both the marketing and economic literature, relatively little is known about how these decisions are made in practice, especially within a competitive environment. This paper exploits a unique store level dataset consisting of every supermarket operating in the United States in 1998. For each of these stores, we observe the pricing strategy the firm has chosen to follow, as reported by the firm itself. Using a system of simultaneous discrete choice models, we estimate each store's choice of pricing strategy, conditional on its expectation over the choices of its rivals. We find evidence that firms cluster by strategy, choosing actions that agree with those of its rivals. We also find a significant impact of various demographic and firm characteristics, providing some qualified support for several specific predictions from marketing theory.
    Keywords: EDLP, promotional pricing, positioning strategies, supermarkets, discrete games
    JEL: M31 L11 L81
    Date: 2006
  12. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo); Michiru Sawada (Faculty of Economics, Nagoyagakuin University)
    Abstract: This paper investigates the impact of bank consolidations promoted by government policy, using data from pre-war Japan when the Ministry of Finance promoted bank consolidations by dint of the Bank Law of 1927. It is found that policy-promoted consolidation had a positive effect on deposit growth, especially in the period when the financial system was unstable. On the other hand, it had a negative effect on profitability, particularly when there was no dominant bank among the participants or when more than two banks participated in the consolidation. Policy-promoted consolidation in such cases was likely to be accompanied by large organizational cost.
    Date: 2006–02

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