nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒04‒22
25 papers chosen by
Russell Pittman
US Department of Justice

  1. Vertical Product Differentiation, Entry-Deterrence Strategies, and Entry Qualities By Yong-Hwan Noh; GianCarlo Moschini
  2. Antitrust in Open Economies By Joseph Francois; Henrik Horn
  3. Quality and Competition: An Empirical Analysis across Industries By John M. Crespi; Stephan Marette
  4. Antitrust in the Not-For-Profit Sector By Tomas J. Philipson; Richard A. Posner
  5. New Networks, Competition and Regulation By Pio Baake; Ulrich Kamecke
  6. Advertising: "The Good, the Bad and the Ugly" By Lynne Pepall; Dan Richards; Liang Tan
  7. Entry, Costs Reduction, and Competition in the Portuguese Telephony Industry By Philippe Gagnepain; Pedro Pereira
  8. Competition and Entry in Banking: Implications for Stability and Capital Regulation By Arnoud W.A. Boot; Matej Marinc
  9. Ownership Structure of Cable Networks and Competition in Local Access By Duarte Brito; Pedro Pereira
  11. Pseudo-Generic Products and Mergers in Pharmaceutical Markets By Granier, L.; Trinquard, S.
  12. Some Investment and Competition Implications of the Ownership Structure of Overlapping Networks By Duarte Brito; Pedro Pereira
  13. Common Labels and Market Mechanisms By Christine Boizot-Szantai; Sebastien Lecocq; Stephan Marette
  14. Spatial market expansion through mergers By Verónica Durán-Carbó; Charles ReVelle; Daniel Serra
  15. Merger stability in a three firm game By Duarte Brito; João Gata
  16. Competition Provisions in Regional Trade Agreements By Oliver Solano; Andreas Sennekamp
  17. A Spatial Equilibrium Analysis of Transmission Charge Reform in Japan's Electric Power Industry By Shu-ichi Akiyama; Nobuhiro Hosoe
  18. Russian Natural Gas Exports to Europe. Effects of Russian gas market reforms and the rising market power of Gazprom By Eirik Lund Sagen and Marina Tsygankova
  19. Testing for adverse selection into private medical insurance By Pau Olivella; Marcos Vera-Hernandez
  20. Modelling firm mergers as a roommate problem By Angelov, Nikolay
  21. Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart By Jerry Hausman; Ephraim Leibtag
  22. Exit Dynamics with Adjustment Costs By Rolf Golombek and Arvid Raknerud
  23. Transparencia, confidencialidad y competencia: un análisis económico de las reformas actuales en el mercado de gas natural argentino. By Santiago Urbiztondo
  24. Understanding co-operative R&D activity: evidence from four European countries By Laura Abramovsky; Elisabeth Kremp; Alberto López; Tobias Schmidt; Helen Simpson
  25. Parallel Research, Multiple Intellectual Property Right Protection Instruments, and the Correlation among R&D Projects By Harun Bulut; GianCarlo Moschini

  1. By: Yong-Hwan Noh; GianCarlo Moschini (Center for Agricultural and Rural Development (CARD))
    Abstract: We analyze the entry of a new product into a vertically differentiated market in which an entrant and an incumbent compete in prices. Here the entry-deterrence strategies of the incumbent firm rely on "limit qualities." With a sequential choice of quality, a quality-dependent marginal production cost, and a fixed entry cost, we relate the entry-quality decision and the entry-deterrence strategies to the level of entry cost and the degree of consumer heterogeneity. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well as an incumbent's aggressive entry-deterrence strategies of increasing its quality level toward potential entry. Welfare evaluation confirms that social welfare is not necessarily improved when entry is encouraged rather than deterred.
    Keywords: entry deterrence; quality choice; vertical product differentiation.
    JEL: C72 D43 L13
    Date: 2005–09
  2. By: Joseph Francois (Erasmus Universiteit Rotterdam); Henrik Horn (IIES, Stockholm)
    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; competition policy; merger policy; trade and imperfect competition; FDI
    JEL: L4 F12 F3
    Date: 2006–01–06
  3. By: John M. Crespi; Stephan Marette (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI))
    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
  4. By: Tomas J. Philipson; Richard A. Posner
    Abstract: Despite the conceptual differences between for-profit and non-profit firms stressed in conventional economic analyses of the non-profit sector, U.S. antitrust law generally does not distinguish between these two organizational forms. This paper argues that the same incentives to restrain trade exist in the non-profit sector as in the for-profit sector. Altruistic firms benefit from exploiting market power, just as non-altruistic ones do, even when they would price below cost without regard to competition. Therefore, promoting competition is socially valuable regardless of the particular objectives of producers, and the fact that antitrust law does not distinguish between the two sectors is efficient.
    JEL: K2
    Date: 2006–04
  5. By: Pio Baake; Ulrich Kamecke
  6. By: Lynne Pepall; Dan Richards; Liang Tan
    Abstract: We model the choice of firms competing in prices in a differentiated products market to bundle advertising messages with their goods in return for payment from advertisers. From the firms’ perspective, the potential to earn revenue from advertisers, makes advertising a “good”. However, because consumers in the product market dislike such advertising, the bundling dampens demand and in this sense is a “bad”. There is also a third role played by advertising, however. Since a firm that bundles advertisements with its good sells a less attractive good, it has to price more aggressively than one that does not do such bundling. Thus, bundling advertisements with the good can lead to more aggressive product pricing and thereby intensify product market competition. In this sense, advertising can make things “ugly”.
    Date: 2006
  7. By: Philippe Gagnepain (Universidad Carlos III de Madrid); Pedro Pereira (Autoridade da Concorrência)
    Keywords: Mobile Telephony, Entry, Competition, Efficiency, Empirical Analysis
    JEL: L13 L43 L93
    Date: 2005–02
  8. By: Arnoud W.A. Boot (Faculty of Economics & Econometrics, Universiteit van Amsterdam); Matej Marinc (University of Ljubljana)
    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
  9. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this paper, we discuss the role of cable television networks and their ownership structure in promoting competition in the local access market. First, we show that the dual ownership of a local telephone network and a cable network, compared with separate ownership, may increase or decrease incentives to invest in upgrading the cable television network. Second, we argue that separate ownership of the two networks is important to promote competition in local access.
    Keywords: Cable Networks, Local Access, Competition
    JEL: L43 L96
    Date: 2005–04
  10. By: Christian Gollier (Université de Toulouse and Cesifo); Mark Ivaldi (Université de Toulouse and EHESS)
    Date: 2005–03
  11. By: Granier, L.; Trinquard, S.
    Abstract: This paper fills the gap in the theoretical literature concerning mergers between brand-name and generic laboratories in pharmaceutical markets. To prevent generic firms from increasing their market share, some brand-name furms produce generics themselves, called pseudo-generics, enabling them to set up barriers to entry. We develop this topic by considering the pseudo-generics production as a mergers.catalyst. We show, in a duopoly model with substitutable goods, in which a brand-name firm and a generic firm compete à la Cournot, that a brand-name company always has an incentive to purchase its competitor. The key insight of this paper is that the brand-name laboratory can increase its merger gain by producing pseudo-generics beforehand. In some cases, pseudo-generics would not otherwise be produced.
    Keywords: Mergers, Pharmaceutical Market, Pseudo-Generics.
    JEL: I11 L12
    Date: 2006
  12. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this article we discuss the role of cable television networks and their ownership structure, in promoting competition in the local access market. An upgraded cable network can o¤er telecommunication services, and therefore can compete with the public switched telephone network. First, we show that the joint ownership of a local telephone network and a cable network, compared with separate ownership, may increase or decrease incentives to invest in upgrading the cable television network. Second, we argue that separate ownership of the two networks is important to promote competition in local access. Third, we perform the welfare analysis of the investment decision and the ownership structure.
    Keywords: Cable Networks, Local Access, Competition
    JEL: L43 L96
    Date: 2006–02
  13. By: Christine Boizot-Szantai; Sebastien Lecocq; Stephan Marette (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI))
    Abstract: In this article, the impact of common labels is investigated with both theoretical and empirical approaches. Recent statistics regarding the egg market in France suggest that retailer brands largely adopt common labels. A simple theoretical framework enables us to determine the conditions under which producers and/or retailers with different product qualities decide to post a common label on their products. In particular, a situation of multiple equilibria (one where the label is used by the high-quality seller only and one where it is used by the low-quality seller only) is exhibited when the cost of the label is relatively large. The demand is then estimated for different segments of the French egg market, including producer/retailer brands with/without common labels. The estimates are used to derive expenditure and price elasticities and allow us to calculate welfare measures revealing a relatively large willingness-to-pay for labels.
    Keywords: competition, demand estimation, labels, product differentiation.
    Date: 2005–09
  14. By: Verónica Durán-Carbó; Charles ReVelle; Daniel Serra
    Abstract: In this paper we present a model that studies firm mergers in a spatial setting. A new model is formulated that addresses the issue of finding the number of branches that have to be eliminated by a firm after merging with another one, in order to maximize profits. The model is then applied to an example of bank mergers in the city of Barcelona. Finally, a variant of the formulation that introduces competition is presented together with some conclusions.
    Keywords: Mergers, facility location, spatial competition
    JEL: C61 J80
    Date: 2006–03
  15. By: Duarte Brito (Universidade Nova de Lisboa); João Gata (Autoridade da Concorrência and Universidade de Aveiro and UECE/ISEG-UTL)
    Abstract: We compare different notions of stability in three firm merger games. We discuss some of their shortcomings and introduce an alternative notion of stability which overcomes them. The paper concludes with an illustrative example.
    Keywords: endogenous mergers, stability, core.
    JEL: L13 L41
    Date: 2006–01
  16. By: Oliver Solano; Andreas Sennekamp
    Abstract: Regional Trade Agreements (RTAs) have grown dramatically in number and importance since the early 1990s and they increasingly include chapters and provisions encompassing competition issues. This study provides a taxonomy of the types of competition-related provisions contained in selected RTAs. It distinguishes different types of provisions addressing cooperation and coordination among competition agencies, as well as provisions directly addressing anticompetitive behaviour. It further contains information on dispute settlement, provisions concerning special and differential treatment and competition-specific clauses regarding non-discrimination, transparency, due-process, trade remedies and the exlusion of antidumping. The study also assesses the role and scope of competition provisions and distinguishes two families of agreements: those containing substantive provisions addressing anticompetitive behaviour and those focusing more on co-ordination and co-operation.
    Keywords: competition, trade, monopoly, regionalism, RTA, regional trade agreements, anti-competitive
    Date: 2006–03–21
  17. By: Shu-ichi Akiyama; Nobuhiro Hosoe
    Abstract: A key intention of the regulatory reform of transmission charge schemes on Japan's electric power market was to promote inter-regional competition between power suppliers by lowering long-distance transmission charges with a postage-stamp charge scheme. This can lead to extensive use of inter-regional links and cause congestion. Congestion segments the market into several regional markets, making the reform less successful. We developed a nine-region spatial equilibrium model to simulate the reform at the peak-load hour. We found the reform would lead to significant increases of inter-regional transmission and congestion at the link between the 50-Hz area and the 60-Hz area.
    Date: 2006–04
  18. By: Eirik Lund Sagen and Marina Tsygankova (Statistics Norway)
    Abstract: Gazprom, the dominant gas company in Russia, is widely believed to be the key supplier of gas to Europe in the foreseeable future. However, there are numerous uncertainties and challenges within the Russian and European gas industry that may alter the allocation of Gazprom´s gas sales between domestic and export markets. In this paper we use both theoretical and numerical models to study potential effects on Russian gas exports from changes in Russian domestic gas prices and the production capacities in 2015. We also investigate whether the liberalization of the European gas markets may provide incentives for Gazprom to induce monopoly power in its export markets. Our main findings suggest that both increased domestic gas prices and sufficient production capacities are vital to maintain Gazprom´s market share in Europe over the next decade. At low domestic prices, Gazprom may even have difficulties to carry out its long-term export commitments. However, if export possibilities are ample due to both lower domestic demand at higher prices and high overall production capacities, a large share of spot trades in Europe may encourage Gazprom to exercise market power in its export markets.
    Keywords: Russia; Natural gas; production capacity; export; Western Europe; price; numerical model
    JEL: F17 D42 Q31 Q38
    Date: 2006–02
  19. By: Pau Olivella; Marcos Vera-Hernandez (Institute for Fiscal Studies)
    Abstract: We develop a test for adverse selection and use it to examine private health insurance markets. In contrast to earlier papers that consider a purely private system or a system in which private insurance supplements a public system, we focus our attention on a system where privately funded health care is substitutive of the publicly funded one. Using a model of competition among insurers, we generate predictions about the correlation between risk and the probability of taking private insurance under both symmetric information and adverse selection. These predictions constitute the basis for our adverse selection test. The theoretical model is also useful to conclude that the setting that we focus on is especially attractive to test for adverse selection. Using the British Household Panel Survey, we find evidence that adverse selection is present in this market.
    Keywords: Contract theory, Testing, Health Insurance
    JEL: D82 I19 G22
    Date: 2006–01
  20. By: Angelov, Nikolay (Department of Economics)
    Abstract: We propose a way to model firm mergers using a matching game known as the roommate problem, whereby firms are assumed to make preference rankings of potential merger partners. The position of a firm in another firm's ranking is assumed to be governed by an index, which in turn consists of a deterministic part and of a stochastic one, similar to the latent indices used in standard discrete-choice models. Given all firms' preferences, game-theoretic mechanisms lead to a matching whereby each firm is either self-matched or assigned a merger partner. We derive expressions for the probability of a merger between a specific firm pair, and also a log-likelihood function for estimation using firm-specific data. Using a simulation in a setting with groups of three firms involved in roommate games within each group, the model's finite-sample properties are examined.
    Keywords: firm mergers; roommate game; matching markets; discrete response
    JEL: C15 C25 C78 G32
    Date: 2006–01–20
  21. By: Jerry Hausman (Institute for Fiscal Studies and Massachussets Institute of Technology); Ephraim Leibtag
    Abstract: Consumers often benefit from increased competition in differentiated product settings. In previous research Hausman (1997a, 1997b, 1999, 2002) has estimated the increased consumer welfare from the introduction of new brand, e.g. Apple Cinnamon Cheerios, and new products, e.g. mobile telephones. In this paper we consider consumer benefits from increased competition in a differentiated product setting: the spread of nontraditional retail outlets. Non-traditional outlets, including supercenters, warehouse club stores, and mass merchandisers have grown in popularity and nearly doubled their share of consumer food-at-home expenditures from 1998 to 20033. Within this non-traditional retail group, supercenters have experienced the largest increase over this time period, but warehouse club stores and dollar stores have also experienced significant increases in their share of the consumer food dollar as U.S. consumers attempt to find the best combination of prices and services at their retailer of choice.
    Date: 2006–03
  22. By: Rolf Golombek and Arvid Raknerud (Statistics Norway)
    Abstract: We use the Stock and Wise approximation of stochastic dynamic programming in order to identify the extent to which profitability can explain exit behavior. In our econometric model, heterogeneous firms engage in Bertrand (price) competition. Firms produce heterogeneous products, using labor, materials and capital as inputs. The stock of capital is changed through investments and disinvestments, where the firm incurs adjustment costs due to partial irreversibilities. The model is estimated for six manufacturing industries using Norwegian micro data for the period 1993-2002. We find that increased profitability lowers the exit probability, and this effect is statistically significant in all industries, while, ceteris paribus, high adjustment costs significantly decrease the probability of exit in five of the industries. Exiting firms are characterized by persistently, although only moderately higher, annual exit probabilities than the average firm. There is no tendency for exiting firms to have a high probability of exit just prior to exit.
    Keywords: Firm exit; adjustment costs; Bertrand game; manufacturing firms; mixed logit; state space model.
    JEL: C33 C51 C61 C72 D21
    Date: 2005–12
  23. By: Santiago Urbiztondo (FIEL)
    Date: 2005–08
  24. By: Laura Abramovsky (Institute for Fiscal Studies); Elisabeth Kremp; Alberto López; Tobias Schmidt; Helen Simpson (Institute for Fiscal Studies)
    Abstract: This paper investigates co-operative research activity by firms using data from the 3rd Community Innovation Survey for four countries, France, Germany, Spain and the UK. We build on the Cassiman and Veugelers (CV) (2002) study of Belgian manufacturing firms, by incorporating information on the service sector, and considering the role of public support in affecting firms’ decisions to co-operate. Our results support those in CV, in that we find a positive relationship between the likelihood of undertaking co-operative R&D and both incoming knowledge spillovers and the extent to which firms find strategic methods important in appropriating the returns to innovative activity. We find that public support is positively related to the probability of undertaking co-operative agreements particularly with regard to the likelihood of co-operation with the research base. We find some evidence, in particular for Spain, that firms carry out co-operative R&D to overcome excessive perceived risks and financial constraints.
    Keywords: R&D co-operation, spillovers, joint ventures, CIS
    JEL: O31 O32 L24
    Date: 2005–10
  25. By: Harun Bulut; GianCarlo Moschini (Center for Agricultural and Rural Development (CARD))
    Abstract: The choice of a research path in attacking scientific and technological problems is a significant component of firms' R&D strategy. One of the findings of the patent races literature is that, in a competitive market setting, firms' noncooperative choices of research projects display an excessive degree of correlation, as compared to the socially optimal level. The paper revisits this question in a context in which firms have access to trade secrets, in addition to patents, to assert intellectual property rights (IPR) over their discoveries. We find that the availability of multiple IPR protection instruments can move the paths chosen by firms engaged in an R&D race toward the social optimum.
    Keywords: intellectual property rights, parallel R&D, patent races.
    JEL: O3 L0
    Date: 2005–09

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