nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒04‒08
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. The relationship between regulation and competition policy for network utilities By David Newbery
  2. Cross-Border Merger Waves By Fumagalli, Eileen; Vasconcelos, Helder
  3. Quality and Competition: An Empirical Analysis across Industries By Crespi, John M.; Marette, Stéphan
  4. On-Net and Off-Net Pricing on Asymmetric Telecommunications Networks By Hoernig, Steffen
  5. On the Evolution of Market Institutions: The Platform Design Paradox By Alos-Ferrer, Carlos; Kirchsteiger, Georg; Walzl, Markus
  6. Competition and Entry in Banking: Implications for Stability and Capital Regulation By Boot, Arnoud W A; Marinc, Matej
  7. Vertical integration and the licensing of innovation with a fixed fee or a royalty By Lemarié, S.
  8. Piracy Prevention and the Pricing of Information Goods By Cremer, Helmuth; Pestieau, Pierre
  9. Gas thin markets:insights from bargaining and networks models By Matteo Maria GALIZZI
  10. Do Prices grow more in Euroland? Evidence from the Airline Industry By Claudio A. Piga; Enrico Bachis
  11. Caracterización de las barreras a la entrada: un estudio para la industria caleña 1994-2002 By Christian Manuel Posso Suárez
  12. Beaten by bribery: Why not blow the whistle? By Tina Søreide
  13. Asset Ownership and Foreign-Market Entry By Horst Raff; Michael Ryan; Frank Stähler
  14. International Trade with Competitiveness Effects in R&D By Garcia Pires, Armando José
  15. Cross-Border Acquisitions and Corporate Taxes: Efficiency and Tax Revenues By Norbäck, Pehr-Johan; Persson, Lars; Vlachos, Jonas
  16. Long-Term Contracts and Asset Specificity Revisited -An Empirical Analysis of Producer-Importer Relations in the Natural Gas Industry By Anne Neumann; Christian von Hirschhausen
  17. Bundling under the Threat of Parallel Trade By CRAMPES, Claude; HOLLANDER, Abraham; MACDISSI, Charbel M.
  18. R&D and Strategic Industrial Location in International Oligopolies By Garcia Pires, Armando José
  19. Should You Allow Your Agent to Become Your Competitor? On Non-Compete Agreements in Employment Contracts By Matthias Kräkel; Dirk Sliwka
  20. Takeovers By Burkart, Mike; Panunzi, Fausto
  21. Credit Market Competition and Capital Regulation By Franklin Allen; Elena Carletti; Robert Marquez

  1. By: David Newbery
    Abstract: Should regulation of potentially competitive elements of network utilities be left with sector regulators or solely subject to normal competition laws? Britain evolved licenses for network activities overseen by regulators while the EU places more emphasis on making sector regulation consistent with competition law. The paper discusses the appropriateness of the competition law approach for telecoms and electricity. Post-modern utilities like telecoms, in which facilities-based competition is possible, lend themselves to the approach laid out in the Communications Directives, and its application to mobile call termination is discussed. Electricity, where collective dominance is more likely, does not fit comfortably into this approach. Instead, licence conditions retain advantages where it may be necessary to modify market rules in a timely and well-informed manner, as exemplified by the English Electricity Pool.
    Keywords: Regulation, competition policy, telecommunications, electricity, market power
    JEL: G18 L94 L96
    Date: 2006–02
  2. By: Fumagalli, Eileen; Vasconcelos, Helder
    Abstract: This paper proposes a sequential merger formation game with cost synergies to study how trade policy can influence firms' choice between domestic and cross-border mergers in an international Cournot oligopoly. We find that the equilibrium market structure depends heavily on: (i) the level of trade costs; and (ii) whether or not active antitrust authorities are incorporated within the sequential merger game. In addition, it is shown that whenever mergers occur in equilibrium, they occur in waves and the merger wave comprises at least one cross-border merger. We also analyze how the equilibrium market structures are affected by the presence of lobbying efforts.
    Keywords: endogenous mergers; merger waves; tariff-jumping FDI
    JEL: F10 F13 L13 L41
    Date: 2006–03
  3. By: Crespi, John M.; Marette, Stéphan
    Abstract: This paper empirically explores the link between quality and concentration in a cross-section of manufactured goods. Using concentration data and product quality indicators, an ordered probit estimation explores the impact of concentration on quality that is defined as an index of quality characteristics. The results demonstrate that market concentration and quality are positively correlated across different industries. When industry concentration increases, the likelihood of the product being higher quality increases and the likelihood of observing a lower quality decreases.
    Keywords: concentration, market structure, ordered probit, product differentiation, product quality.
    Date: 2006–03–28
  4. By: Hoernig, Steffen
    Abstract: The differential between on-net and off-net prices, for example on mobile telephony networks, is an issue that is hotly debated between telecoms operators and regulators. Small operators contend that their competitors' high off-net prices are anticompetitive. We show that if the utility of receiving calls is taken into account, the equilibrium pricing structures will indeed depend on firms' market shares. Larger firms will charge higher off-net prices even without anticompetitive intent, both under linear and two-part tariffs. Predative behavior would be accompanied by even larger on-net / off-net differentials even if access charges are set at cost.
    Keywords: asymmetry; call externality; on/off-net pricing; telecommunications network competition
    JEL: L51
    Date: 2006–03
  5. By: Alos-Ferrer, Carlos; Kirchsteiger, Georg; Walzl, Markus
    Abstract: This paper analyses a situation where market designers create new trading platforms and traders learn to select among them. We ask whether 'Walrasian' platforms, leading to market-clearing trading outcomes, will dominate the market in the long run. If several market designers are competing, we find that traders will learn to select non-market clearing platforms with prices systematically above the market-clearing level, provided at least one such platform is introduced by a market designer. This in turn leads all market designers to introduce such non-market clearing platforms. Hence platform competition induces non-competitive market outcomes.
    Keywords: asymmetric rationality; evolution of trading platforms; learning; market institutions
    JEL: C72 D4 D83 L1
    Date: 2006–03
  6. By: Boot, Arnoud W A; Marinc, Matej
    Abstract: We assess the influence of competition and capital regulation on the stability of the banking system. We particularly ask two questions: i) how does capital regulation affect (endogenous) entry; and ii) how do (exogenous) changes in the competitive environment affect bank monitoring choices and the effectiveness of capital regulation? Our approach deviates from the extant literature in that it recognizes the fixed costs associated with banks’ monitoring technologies. These costs make market share and scale important for the banks’ cost structures. Our most striking result is that increasing (costly) capital requirements can lead to more entry into banking, essentially by reducing the competitive strength of lower quality banks. We also show that competition improves the monitoring incentives of better quality banks and deteriorates the incentives of lower quality banks; and that precisely for those lower quality banks competition typically compromises the effectiveness of capital requirements. We generalize the analysis along a few dimensions, including an analysis of the effects of asymmetric competition, e.g. one country that opens up its banking system for competitors but not vice versa.
    Keywords: banking; capital regulation; competition
    JEL: G21 L13 L50
    Date: 2006–02
  7. By: Lemarié, S.
    Abstract: In this paper, we analyse a situation where a patent holder is considered as an upstream firm that can license its innovation to some downstream companies that compete on a final market with differentiated products. Licensing contract may be based either on a royalty or a fixed fee. The patent holder can either be independant or vertically integrated with one of the downstream companies. We show that a licence based on a royalty works better with vertical integration, and that consequently, the patent holder have some interest to vertically integrate if it enables him to apply a royalty based license. The effect of vertical integration on the social surplus can be either positive or negative.
    JEL: D45 L22 L42 O31 O32
    Date: 2005
  8. By: Cremer, Helmuth; Pestieau, Pierre
    Abstract: This paper develops a simple model of piracy to analyze its effects on prices and welfare and to study the optimal enforcement policy. A monopolist produces an information good (involving a 'large' development cost and a 'small' reproduction cost) that is sold to two groups of consumers differing in their valuation of the good. We distinguish two settings: one in which the monopoly is regulated and one in which it maximizes profits and is not regulated, except that the public authority may be responsible for the control of piracy. We show that copying or piracy might be welfare enhancing because it is a way to 'provide' the good to some individuals (those with a low willingness to pay) without undermining the firm’s ability to finance the development cost via the pricing scheme applied to high valuation consumers. The level of piracy control differs according to the regulatory environment. Three levels of piracy control emerge. The highest is the one chosen by the private monopoly. The next level is the one chosen by the regulated monopoly. The lowest, that can be zero, is the level of control chosen by the public authority when the good is sold (and priced) by a private monopoly.
    Keywords: copying; information good; intellectual property; piracy
    JEL: D82 L11 L86
    Date: 2006–03
  9. By: Matteo Maria GALIZZI
    Abstract: Several results from bargaining and networks microeconomic litera ture are presented and their main insights and applications to bi lateral market power and price formation in gas thin markets are discussed. Bargaining models encompass the bilateral Rubinstein negotiations, bargaining between a single seller and two buyer, b oth symmetric and heterogeneous and negotiations in bilateral oli gopolies. Models of price formation both in fixed and in endogeno usly formed buyers-sellers networks are also discussed.
    Keywords: Gas Industry, Bargaining, Networks, Thin markets
  10. By: Claudio A. Piga (Dept of Economics, Loughborough University); Enrico Bachis (Business School, Nottingham University)
    Abstract: Using more than 10 million on-line fares, we study the determinants of yearly fares’ changes in June 2002-June 2005. We verify whether airlines took advantage, after the Euro introduction, of potential inflationary pressures by increasing their fares more in routes to Eurozone nations. The evidence suggests that this was the case only for the period end 2003-end 2004. To control for other factors that may affect fares’ setting decisions, we provide insights into the effects of the takeovers of Go Fly and Buzz by EasyJet and Ryan Air, respectively. Although we generally find that fares offered immediately after the takeover by the acquiring firms were lower than the ones charged by the target firms twelve months earlier, in one case the effects of the takeover on consumers’ welfare are ambiguous.
    Keywords: Price discrimination; takeovers, Euro, changeover, low cost carriers, liberalisation.
    JEL: L11 L13 L93
    Date: 2006–03
  11. By: Christian Manuel Posso Suárez
    Abstract: RESUMEN En este trabajo se realiza un análisis de las principales barreras a la entrada en mercados industriales, y un contraste empírico para el sector manufacturero del área metropolitana de Cali durante el período 1994 - 2002. El análisis se realiza con base en las diferentes perspectivas teóricas que plantean la Organización Industrial y la Microeconomía. También se realiza un análisis descriptivo de la dinámica empresarial que existe en el sector manufacturero del área metropolitana de Cali y se intenta contrastar el efecto de las barreras a la entrada a través de una estimación con la técnica de datos de panel; con este fin, se estima un modelo de corte transversal en donde se tiene en cuenta el efecto de las barreras a la entrada en 17 sectores industriales; posteriormente se hace lo mismo con un modelo de efectos fijos. Se encontró que las principales barreras a la entrada en la industria caleña son la estructura de costos medios, la concentración del mercado y la intensidad tecnológica. Los sectores más concentrados son el de fabricación de papel y productos de papel, fabricación de productos minerales no metálicos, fabricación de productos de caucho y plástico, y la industria de bebidas. ABSTRACT In this work an analysis is made of the main entry barriers in industrial markets, and an empirical contrast for the manufacturing sector of the metropolitan area of Santiago de Cali from 1994 to 2002. The analysis was based on different theoretical perspectives proposed by industrial organization and micro-economy. A descriptive analysis was also carried out of the entrepreneurial dynamics which exist in the manufacturing sector of the city of Santiago de Cali, with the intention of contrasting the effect of the entry barriers by means of an estimate using the panel data technique. For this purpose, a cross-section model is estimated in which the effect of the entry barriers in 17 industrial sectors is taken into account. This is done subsequently with a fixed effects model. It was found that the main entry barriers in industry in Cali are the medium cost structures, the concentration of the market, and the technological intensity. The most concentrated market sectors are paper manufacturing and paper products, he manufacture of non-mineral metal products, rubber and plastic and the beverage industry.
    Date: 2005–10–31
  12. By: Tina Søreide
    Abstract: A recent business survey in Norway reveals that firms rarely react to corruption, even when they have lost important contracts as a result. This disinclination to take action is explored in the light of market structures, business efficiency, judicial institutions and political corruption. The paper develops a theory about how these four variables deter firms from reacting against corruption, and, in particular, how the potential for collusion reinforces the incentives to remain silent. Considered separately, each of the factors are unable to explain the low frequency of anti-corruption reactions between firms. Considered in combination, however, the various impediments suggest a more complete explanation: When conditions in market structure suggest that the best response would be to take action, political conditions may favour inaction. When a potential whistle-blower expects support from local politicians or legal institutions, the given offender may be impervious to sanctions; its role in the market will not be altered by the given case. The sum of precondition for action suggests that firms rarely react against corruption. JEL L10, K42
    Keywords: Corruption Whistleblowing Industrial organization Collusion JEL L10, K42
    Date: 2006
  13. By: Horst Raff; Michael Ryan; Frank Stähler
    Abstract: This paper examines the link between a firm’s ownership of productive assets and its choice of foreign-market entry strategy. We find that, controlling for industry- and country-specific characteristics, the most productive firms (i.e., those owning the most assets) will enter through greenfield investment, less productive ones will choose M&A, and the least productive ones will export. In addition, the most productive firms are shown to prefer whole ownership to a joint venture. These predictions are confirmed in an econometric analysis of Japanese firm-level data.
    Keywords: foreign direct investment, merger and acquisition, joint venture, greenfield investment, firm heterogeneity, productivity
    JEL: F12 F15
    Date: 2006
  14. By: Garcia Pires, Armando José
    Abstract: In an oligopoly trade model where firms engage in R&D, international differences in market size allow for the emergence of endogenous asymmetries between firms. Concretely, firms located in countries with more demand become more competitive because they have strong incentives to perform R&D ('home market' and 'competitiveness effects' in R&D). As a consequence, these firms have better access to export markets and the countries where they are hosted often also tend to run trade surplus in the oligopolist sector. This shows that cross-border differences at the level of R&D intensity can be a basis for international specialization.
    Keywords: asymmetric firms; competitiveness effects; international trade; oligopoly; R&D investment; spatial demand markets
    JEL: F12 L13 O31
    Date: 2006–03
  15. By: Norbäck, Pehr-Johan (The Research Institute of Industrial Economics); Persson, Lars (The Research Institute of Industrial Economics); Vlachos, Jonas (Stockholm Institute of Transistion Economics)
    Abstract: We find that reduced foreign corporate taxes may lead to inefficient foreign acquisitions if complementarities between foreign and domestic assets are low, and to efficient foreign acquisitions if such complementarities are high. Moreover, with large complementarities, foreign acquisitions can increase domestic tax revenues. The reason is that in the bidding competition between the foreign firms, all benefits from the acquisition, including tax advantages and evaded taxes, are competed away and captured by the domestic seller which, in turn, pays capital gains tax on the proceeds. Technical issues in the tax code, such as the treatment of goodwill deductibility, is also shown to crucially affect the pattern of foreign acquisitions.
    Keywords: Tax Competition; Ownership; Tax Revenues; FDI; M&As
    JEL: F23
    Date: 2006–03–09
  16. By: Anne Neumann; Christian von Hirschhausen
    Abstract: In this paper, we analyze structural changes in long-term contracts in the international trade of natural gas. Using a unique data set of 262 long-term contracts between natural gas producers and importers, we estimate the impact of different institutional, structural and technical variables on the duration of contracts. We find that contract duration decreases as the market structure of the industry develops to more competitive regimes. Our main finding is that contracts that are linked to an asset specific investment are on average four years longer than those who are not.
    Keywords: asset specificity, econometric analysis, long-term contracts, natural gas
    Date: 2006–02
  17. By: CRAMPES, Claude; HOLLANDER, Abraham; MACDISSI, Charbel M.
    Abstract: This paper examines the use of bundling by a firm that sells in two national markets and faces entry by parallel traders. The firm can bundle its main product, - a tradable good- with a non-traded service. It chooses between the strategies of pure bundling, mixed bundling and no bundling. The paper shows that in the low-price country the threat of grey trade elicits a move from mixed bundling, or no bundling, towards pure bundling. It encourages a move from pure bundling towards mixes bundling or no bundling in the high-price country. The set of parameter values for which the profit maximizing strategy is not to supply the low price country is smaller than in the absence of bundling. The welfare effects of deterrence of grey trade are not those found in conventional models of price arbitrage. Some consumers in the low-price country may gain from the threat of entry by parallel traders although they pay a higher price. This is due to the fact that the firm responds to the threat of arbitrageurs by increasing the amount of services it puts in the bundle targeted at consumers in that country. Similarly, the threat of parallel trade may affect some consumers in the hight-price country adversely.
    Keywords: rallel trade, bundling, arbitrage
    JEL: F12 L12 L41
    Date: 2006
  18. By: Garcia Pires, Armando José
    Abstract: In a spatial economy where oligopolist firms compete in R&D, it is found that geography affects the innovative behaviour of firms. Notably, international differences in market size conduce to endogenous asymmetries between firms given that firms located in the country with more demand have stronger incentives to invest in R&D. This 'R&D linkage' between demand and competitiveness promotes firms to strategically delocalize to the larger country. As a result, a spatial equilibrium arises with only total or partial agglomeration, but never with symmetric dispersion.
    Keywords: agglomeration effects; asymmetric firms; industrial location; oligopoly; R&D investment
    JEL: F12 L13 O31 R3
    Date: 2006–03
  19. By: Matthias Kräkel (University of Bonn and IZA Bonn); Dirk Sliwka (University of Cologne and IZA Bonn)
    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 not imposing such an agreement can be beneficial for the principal as the possibility to leave the firm generates implicit incentives for the agent. The principal prefers to impose such a clause if and only if the value created is sufficiently small relative to the agent’s outside option. If the principal can use an option contract for retaining the agent, she will never prefer a strict non-compete agreement.
    Keywords: fine, incentives, incomplete contracts, non-compete agreements, option contract
    JEL: D21 J3 K1 M5
    Date: 2006–03
  20. By: Burkart, Mike; Panunzi, Fausto
    Abstract: This paper reviews the existing literature on takeovers. Takeovers are a means to redeploy corporate assets more efficiently and to discipline incumbent management. However, an active market for corporate control also brings about potential inefficiencies. Takeovers may be undertaken for reasons other than value creation and the threat of a control change can induce inefficient actions on the part of target firm management and employees. The functioning of the market for corporate control is further impaired by incentive and coordination problems inherent in the takeover process. When the target firm is owned by many small shareholders, the free-rider problem prevents bidders firms from earning a profit on the tendered shares. We analyse implications of this problem as well as ways to overcome it. As widely held firms are atypical in many countries, we also discuss the impact that target ownership structure has on the incidence and efficiency of control transfers.
    Keywords: efficiency of control transfers; free-rider problem; takeovers
    JEL: G34
    Date: 2006–03
  21. By: Franklin Allen (The Wharton School, University of Pennsylvania); Elena Carletti (Center for Financial Studies); Robert Marquez (Robert h. Smith School of Business, University of Maryland)
    Abstract: Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks have to compete for projects. In such a setting, borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending, thus creating an asset market-based incentive for banks to hold capital. Borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans, which accrue only if the loans are in fact paid o.. Since borrowers do not fully internalize the cost of raising capital to the banks, the level of capital demanded by market participants may be above the one chosen by a regulator, even when capital is a relatively costly source of funds. This implies that capital requirements may not be binding, as recent evidence seems to indicate.
    Keywords: Banking, Costly Capital, Asset Side Market Discipline
    JEL: G21 G38
    Date: 2005–01–23

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