nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒04‒01
ten papers chosen by
Russell Pittman
US Department of Justice

  1. Structural Remedies and Abuse of Dominant Position By Tajana,Alessandro
  2. When Different Market Concentration Indices Agree By Hennessy, David A.; Lapan, Harvey E.
  3. When cost improvements harm consumers By Nicolas Gruyer; Philippe Bontems
  4. Symmetries of Imperfect Competition on a Circle By Hennessy, David A.; Lapan, Harvey E.
  5. Mergers and Acquisitions in Europe By Martynova,Marina; Renneboog,Luc
  6. Benchmarking Electricity Liberalisation in Europe’Benchmarking Electricity Liberalisation in Europe By Richard Green; Arturo Lorenzoni; Yannick Perez; Michael Pollitt
  7. Competitive Pressure in Transition: A Role for Trade and Competition Policies? By Rosen Marinov
  8. Airport Substitution by Travelers: Why do we have to drive to fly? By Gary M. Fournier; Monica E. Hartmann; Thomas Zuehlke
  9. Reputational Externality and Self-Regulation By Robert Evans; Timothy W. Guinnane
  10. Optimal Pricing with Recommender Systems By Dirk Bergemann; Deran Ozmen

  1. By: Tajana,Alessandro (TILEC (Tilburg Law and Economics Center))
    Abstract: Regulation 1/2003 empowers the European Commission to adopt remedies of a structural nature in order to bring an infringement of the rules of competition to an end. This paper first describes the legal conditions that have to be fulfilled for a structural remedy to be imposed under Art. 82. These conditions are strict: the effectiveness, necessity, and proportionality of a structural remedy function as a straitjacket and will rarely allow the adoption of structural remedies. The second issue addressed is whether economic analysis and reasoning should be taken into consideration in the decision to adopt a structural remedy. Indeed, a potential conflict may arise between the outcome of a legal test , based on the effectiveness of the remedy, and the economic test , mainly focused on the efficiency of a remedy. In analysing the efficiency of a remedy a three-stage test is suggested. This analysis leads to the suggestion that the Commission, when faced with the option of which remedy to choose, should take into account economic reasoning as much as possible. However, the attempt to reconcile the two tests, the legal and the economic one, inevitably brings to the conclusion that structural remedies have a residual nature and will be adopted only in particular circumstances
    Keywords: EU law;competition;antitrust;abuse of dominant position;monopolisation; structural remedies;behavioural remedies
    JEL: K21 L41
    Date: 2005
  2. By: Hennessy, David A.; Lapan, Harvey E.
    Abstract: Market concentration ratios are popular statistics for characterizing the extent of market dominance in an imperfectly competitive market, but these ratios may not agree when comparing two markets. Neither do they necessarily agree with the Herfindahl-Hirschman or entropy indices. This letter compares two Cournot oligopoly markets in which firms have constant unit costs. It is shown that the majorization pre-ordering on normalized marketing margin vectors is both necessary and sufficient for all aforementioned indices to agree on which is the more concentrated market.
    Keywords: anti-trust; cost dispersion; majorization.
    JEL: C6 D4
    Date: 2006–03–23
  3. By: Nicolas Gruyer (LEEA (air transport economics laboratory), ENAC); Philippe Bontems (Université de Toulouse (INRA, IDEI))
    Abstract: This paper demonstrates that in a vertical structure, improving cost efficiency might sometimes be detrimental to consumers, by increasing market price. This is in stark contrast to the standard result in oligopoly theory which suggests that the surplus generated by any efficiency gain in production is shared between firms and final consumers, depending on the degree of market power. These results are applied in contexts such as international trade, diffusion of knowledge and techniques, and government intervention through income support programs.
    Keywords: oligopsonists, retail, vertical structure, procurement.
    JEL: L11 L12
    Date: 2006–03–24
  4. By: Hennessy, David A.; Lapan, Harvey E.
    Abstract: Taking location as given, we study imperfect competition on a circular city. In Bertrand oligopoly, we identify price harmonics as a function of firm unit costs and locations. The sum of oligopoly profits is larger when costs and/or locations are more dispersed in the ‘dihedral majorization’ sense. This also tends to be the case in which prices are more variable. We study how phase shifts between cost parameters and inter-firm distance parameters change production and oligopoly profits. An exact characterization of production patterns is developed in terms of the eigenvalues for what we call the price harmonics matrix. The same techniques are applied to Cournot oligopoly with spatial externalities on Circular City. Solutions are compared with monopoly and with first-best. Production patterns can differ markedly when cost spillovers are negative.
    Keywords: cyclic and dihedral symmetries, harmonic analysis, price and quantity instruments,
    JEL: C6 E2 M2
    Date: 2006–03–23
  5. By: Martynova,Marina; Renneboog,Luc (TILEC (Tilburg Law and Economics Center))
    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
  6. By: Richard Green; Arturo Lorenzoni; Yannick Perez; Michael Pollitt
    Abstract: In this paper, we discuss the choice and use of benchmarks in each of five areas relevant to an assessment of the progress of EU electricity sector liberalisation. These areas are market design, market power, EU enlargement, regulation, and sustainability. Our aim is to discuss the most important benchmarks for each area, and to do so in the context of that area. Where a benchmark can be used as a signal that things are going well (or badly) we will discuss the values associated with a good (or bad) signal. This paper forms part of the final report of the EU funded Sustainable Energy Specific Support Assessment project (SESSA, see
    Keywords: electricity reform, market design, market power, regulation,EU enlargement, environmental sustainability
    JEL: L11 L50 L94
    Date: 2006–03
  7. By: Rosen Marinov (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper investigates the effects of trade reforms and antitrust enforcement on the pricing behavior of firms, shedding light on the respective contributions of these policy instruments to the shaping of competitive markets. To this end, we use a rich panel data set of more than 25,000 manufacturing firms from Bulgaria, the Czech Republic, Estonia, Hungary, Poland, the Slovak Republic and Slovenia, spanning a five-year period. We find a positive and statistically significant relationship between domestic firms' mark-ups and industry protection, as reflected in MFN and trade-weighted import tariffs. The toughness of competition policy enforcement, captured by the number of final instance decisions delivered by national antitrust authorities and an index developed by the EBRD, has a negative impact of greater magnitude than tariff protection. We also test for the significance of enacting major legislative amendments with regard to competition policy in the studied countries, as well as for differential effects in export-oriented and import-competing industries.
    Keywords: Competition policy; Mark-up; Import penetration; Transitional economies
    Date: 2006–03–29
  8. By: Gary M. Fournier (Florida State University); Monica E. Hartmann (University of St. Thomas); Thomas Zuehlke (Florida State Unversity)
    Abstract: This paper explores aspects of the determination of airline faresin selected medium-sized U.S. markets subject to competition fromalternative airport hubs within driving distance. Passengers inthese markets often face substantial discounts at distantairports, in exchange for the time costs of driving there. Spatiallinkages in airport competition are not well studied. A panel of16 quarters is constructed in order to investigate models ofspatial error correlation and spatial autoregression in overallfare levels in adjacent airports. We find that fare differentialsbetween local and nearby alternative airports can lead to lowerload factors and other indicators of poor performance in smallerlocal airports. Fare differentials at nearby hub airports oftenprovide substantial incentives to travelers and are an importantdeterminant of poor performance at medium-sized airports.
    Keywords: airline economics, airport substitution, spatial competition
    JEL: L93
    Date: 2005–09
  9. By: Robert Evans; Timothy W. Guinnane
    Abstract: Professional associations and other producer groups often complain that their reputation is damaged by other groups providing a similar but lower-quality service and that the latter should be regulated. We examine the conditions under which a common regulatory regime can induce Pareto-improvements by creating a common reputation for quality among heterogeneous producers, when the regulator cannot commit to a given quality. A common reputation can be created only if the groups are not too different and if marginal cost is declining. High cost groups and small groups benefit most from forming a common regime.
    Keywords: Keywords: Quality Regulation, Licensing, Collective Reputation, Reputational Externality
    JEL: L43 L44
    Date: 2006–03
  10. By: Dirk Bergemann (Cowles Foundation, Yale University); Deran Ozmen (Boston Consulting Group)
    Abstract: We study optimal pricing in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons which generate informational externalities. The quality of the recommendation add-on is endogenously determined by sales. We investigate the impact of these factors on the optimal pricing by a seller with a recommender system against a competitive fringe without such a system. If the recommender system is sufficiently effective in reducing uncertainty, then the seller prices otherwise symmetric products differently to have some products experienced more aggressively. Moreover, the seller segments the market so that customers with more inflexible tastes pay higher prices to get better recommendations.
    Keywords: Recommender system, Collaborative filtering, Add-ons, Pricing, Information externality
    JEL: D42 D83 D85
    Date: 2006–03

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