nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒04‒29
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Vertical Contracts between Manufacturers and Retailers: Inference with Limited Data By Sofia Villas-Boas
  2. Empirical Analysis of Retail Competition: Spatial Differentiation at Wal-Mart,, and Their Competitors By Lesley Chiou
  3. Reforms, Entry and Productivity: Some Evidence from the Indian Manufacturing Sector By Sumon Kumar Bhaumik; Shubhashis Gangopadhyay; Shagun Krishnan
  4. Entry Deterrence and Entry Accommodation Strategies of a Multiproduct Firm Regulated with Dynamic Price Cap By Paula Sarmento; António Brandão
  5. Access Pricing: A Comparison Between Full Deregulation and Two Alternative Instruments of Access Price Regulation, Cost-Based and Retail-Minus By Paula Sarmento; António Brandão
  6. Profitability Measures and Competition Law By Paul A.Grout; Anna Zalewska
  7. Progressivity and Flexibility in Developing an Effective Competition Regime: Using Experiences of Poland, Ukraine, and South Africa for developing countries By Franz Kronthaler; Johannes Stephan
  8. The Impact of Product Market Competition on Private Benefits of Control By Maria Guadalupe; Francisco Perez-Gonzalez
  9. Economies of Density, Network Size and Spatial Scope in the European Airline Industry By Hugo Salgado; Manuel Romero-Hernández
  10. Public ownership, privatisation and regulation: social welfare counterfactuals for British Telecom By Massimo Florio; Riccardo Puglisi
  11. Patents, Research Exemption, and the Incentive for Sequential Innovation By Moschini, GianCarlo; Yerokhin, Oleg
  12. Firms' Location and R&D Cooperation in an Oligopoly with Spillovers By Isabel Mota; António Brandão
  13. Credit market competition and capital regulation By Franklin Allen; Elena Carletti; Robert Marquez
  14. Regional and sector-specific determinants of industry dynamics and the displacement effect By J. M. Arauzo; M. Manjón; M. Martín; A. Segarra
  15. Complementarity in R&D cooperation strategies By Belderbos René; Carree Martin; Lokshin Boris
  16. The Timing of Movie Releases: Evidence from the Home Video Industry By Lesley Chiou
  18. On Monopoly Power and Ramsey Taxation By Selim, Sheikh Tareq
  19. Market Discipline and Deposit Insurance Reform in Japan By Masami Imai
  20. A Tale of Two Literatures: Transaction Cost and Property Rights in Innovation Outsourcing By Nishaal Gooroochurn; Aoife Hanley

  1. By: Sofia Villas-Boas (University of California, Berkeley)
    Abstract: In this paper we compare different models of vertical contracting between manufacturers and retailers in the supermarket industry. Demand estimates are used to compute price-cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed. The purpose is to identify which set of margins is compatible with the margins obtained from direct estimates of cost and to select among non-nested competing models the one most consistent with the data. The models considered are: (1) a simple linear pricing model; (2) a vertically integrated model; and (3) a variety of alternative (strategic) supply scenarios that allow for collusion, nonlinear pricing and strategic behavior with respect to private label products. Using data on yogurt sold in several stores in a large urban area of the United States, we find that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain. This is consistent with non-linear pricing by the manufacturers or high bargaining power of the retailers.
    Keywords: Vertical contracts, multiple manufacturers and retailers, non-nested tests, yogurt local market.,
    Date: 2005–07–01
  2. By: Lesley Chiou (Department of Economics, Occidental College)
    Abstract: This paper quantifies the degree of competition and spatial differentiation across retail channels by exploiting a unique dataset that describes a consumer's choice of store. I estimate a consumer's choice of retailer in the sales market for DVDs among online, mass merchant, electronics, video specialty, and music stores. Using a discrete choice model, I allow for unobserved heterogeneity in preferences for store types and disutility of travel. A consumer's traveling cost varies by income, and substitution occurs proportionately more among stores of the same type. Conditional on price and distance, the average consumer still prefers Wal-Mart over most other stores.
    Keywords: discrete choice, retail, spatial differentiation
    JEL: C25 L81
    Date: 2005–05
  3. By: Sumon Kumar Bhaumik (Brunel University and IZA Bonn); Shubhashis Gangopadhyay (India Development Foundation); Shagun Krishnan (India Development Foundation)
    Abstract: It is now stylized that, while the impact of ownership on firm productivity is unclear, product market competition can be expected to have a positive impact on productivity, thereby making entry (or contestability of markets) desirable. Traditional research in the context of entry has explored the strategic reactions of incumbent firms when threatened by the possibility of entry. However, following De Soto (1989), there has been increasing emphasis on regulatory and institutional factors governing entry rates, especially in the context of developing countries. Using 3-digit industry level data from India, for the 1984-97 period, we examine the phenomenon of entry in the Indian context. Our empirical results suggest that during the 1980s industry level factors largely explained variations in entry rates, but that, following the economic federalism brought about by the post-1991 reforms, variations entry rates during the 1990s were explained largely by state level institutional and legacy factors. We also find evidence to suggest that, in India, entry rates were positively associated with growth in total factor productivity.
    Keywords: entry, productivity, institutions, regulations, India, reforms
    JEL: L11 L52 L64 L67 O14 O17
    Date: 2006–04
  4. By: Paula Sarmento (CETE, Faculdade de Economia, Universidade do Porto); António Brandão (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: In this paper we study the way a multiproduct firm, regulated through a dynamic price cap, can develop a price strategy that uses the regulatory policy to deter entry. We consider a firm that initially operates as a monopolist in two markets but faces potential entry in one of the markets. We conclude that the regulated firm can have the incentive to block the entry. This strategy leads to the reduction of the price in both markets. However, the final effect of the entry deterrence strategy on total consumer surplus is not always positive.
    Keywords: price cap regulation, entry
    JEL: L11 L51
    Date: 2005–05
  5. By: Paula Sarmento (CETE, Faculdade de Economia, Universidade do Porto); António Brandão (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: In this paper we compare two instruments of access price regulation, cost-based and retail-minus, with the full deregulation hypothesis. We consider an upstream monopolist firm that sells a vital input to an independent firm and to a subsidiary firm in the downstream market. We conclude that the retail-minus regulation avoids foreclosure and leads to better results than cost-based regulation in terms of investment level and consumer surplus. Moreover, retail-minus regulation allows a higher consumer surplus than deregulation of access price as long as the regulator carefully defines the retail-minus instrument. We also compare retail-minus regulation with the Efficient Component Pricing Rule and we conclude that the two mechanisms can lead to different results.
    Keywords: access regulation, vertical integration, retail-minus, Efficient Component Pricing Rule
    JEL: L12 L51 L96
    Date: 2006–03
  6. By: Paul A.Grout; Anna Zalewska
    Abstract: The paper outlines various measures of profitability and considers what role they can play in competition law. We argue that profitability measures can provide a good answer to the wrong question and a much less good answer to the question we really want to answer. Using appropriate definitions of asset value it is possible to identify whether a firm earns more than the absolute minimum needed to cover cost and compensate for risk, i.e., whether profitability measures such as the internal rate of return and the accounting rate of return are above the cost of capital. However, both the empirical evidence we present and theory indicates that this does not really help in most cases. Knowing that a firm is earning say, half a percent more than the cost of capital is not really much help in almost all competition law cases. But we show that once the rate of return deviates from the cost of capital it becomes hard to measure. Using simple examples we show that shifts in cash flows that preserve the net present value of a project can have dramatic effects on profitability measures. Hence, it is hard to assess the quantity of the “excessive” return. Furthermore, this problem is likely to be far more prevalent today than in the past given the growth in outsourcing (since outsourcing has exactly this type of effect on cash flows). Despite such problems, we argue that the measurement of profit has a role to play in competition law but that the analysis is far more of an art form and far less of a simple statistical procedure.
    Keywords: profitability measures, excess return, competition
    JEL: K21 L43 G38
    Date: 2006–01
  7. By: Franz Kronthaler; Johannes Stephan
    Abstract: Die Studie diskutiert die Bedeutung von ‘special and differential treatment’ im Rahmen von Freihandelsabkommen für die Entwicklung eines Wettbewerbsregimes. Zunächst werden die Entstehung und die Hauptbestandteile dieses Konzeptes kurz diskutiert. Anschließend werden drei Länder – Polen, Ukraine und Südafrika – bezüglich dieses Konzeptes bewertet. Polen mußte im Rahmen der Beitrittsverhandlungen zur Europäischen Union das Wettbewerbsregime dem der Europäischen Union anpassen. Die Ukraine wählte freiwillig das Europäische Modell, trotz der engen Anbindung an Rußland. Mit Südafrika wird ein Entwicklungsland behandelt, dessen Gesellschaftssystem durch jahrzehntelange Rassentrennungspolitik beeinflußt wurde und heute noch durch eine hohe Konzentration der Wirtschaftsaktitivtät gekennzeichnet ist. Alle drei Länder haben jüngst ein Wettbewerbsgesetz eingeführt beziehungsweise reformiert, um den Herausforderungen zunehmender wirtschaftlicher Integration, nachholender Entwicklung und gesellschaftlicher Probleme zu begegnen. Die Erfahrungen dieser Länder können anderen Entwicklungsländern helfen, die angehalten sind, im Rahmen eines Freihandelsabkommens ein Wettbewerbsregime zu etablieren.
    Date: 2006–04
  8. By: Maria Guadalupe; Francisco Perez-Gonzalez
    Abstract: This paper investigates the impact of product market competition (PMC) on private benefits of control (PBC). We estimate PBC using the voting premium between shares with differential voting rights. We use two measures of the intensity of product market competition: an external competition measure based on industry-level import penetration, and an internal measure derived from domestic product market regulations. Using data for publicly-traded firms in 19 countries for which information on dual class shares is available we find that PMC is strongly negatively correlated with PBC. The evidence indicates that the effect is particularly strong for firms in industries that are likely to be concentrated and in countries with poor legal environments. We further examine the channels through which PMC enhances governance. We find evidence indicating that improvements in the availability of industry information and the higher default probability associated with tougher competition are two important forces in reducing the estimated price gap between dual class shares. Using exchange rates and terms of trade as instruments for import penetration, we find that the link between competition in product markets and private benefits of control is not spurious. Overall, our results suggest that product market competition can help in curbing private benefits of control.
    Keywords: private benefits of control, competition, corporate governance, import penetration
    JEL: G30 G15 D40
    Date: 2006–03
  9. By: Hugo Salgado; Manuel Romero-Hernández
    Abstract: In this article we use four different indices to measure cost performance of the European Airline Industry. By using the number of routes as an indicator of Network Size, we are able to estimate indicators of Economies of Density, Network Size and Spatial Scope. By estimating total and variable cost functions we are also able to calculate an index of the excess capacity of the firms. For this purpose, we use data from the years 1984 to 1998, a period during which several deregulation measures were imposed on the European airline industry. Our results suggest that in the year 1998, almost all the firms had Economics of Density in their existing networks, while several of the firms also had Economies of Network Size and Economies of Spatial Scope. These results support our hypothesis that fusion, alliance, and merger strategies followed by the principal European airlines after 1998 are not just explained by marketing strategies, but also by the cost structure of the industry.
  10. By: Massimo Florio (University of Milan); Riccardo Puglisi (Department of Political Science, Massachusetts Institute of Technology)
    Abstract: Is privatization per se socially beneficial? Or do those benefits depend on the subsequent changes in the regulatory regime? In this paper, building on Vogelsang, Jones and Tandon (1994), we answer these questions by analyzing three different counterfactuals about British Telecom privatization and regulation. In the factual scenario, the British government decided to privatize British Telecom, and at the same time to establish an independent agency (OFTEL), which was to impose a price cap mechanism on BT services, in those market segments in which competition was unfeasible or limited. Our research strategy is to follow a simple ceteris paribus approach, and to change in each counterfactual only one aspect of the institutional setup. The analysis suggests that the change in ownership from public to private had negative welfare effects, under reasonable assumptions about the productive efficiency gains arising from it. Moreover, the paper studies the relationship between productive and allocative efficiency, by making hypotheses about the price changes induced by the new regulatory regime
    Keywords: privatization, regulation, British Telecom, welfare analysis,
    Date: 2006–01–25
  11. By: Moschini, GianCarlo; Yerokhin, Oleg
    Abstract: We develop a dynamic duopoly model of R&D competition to improve the quality of a final good. The innovation process is sequential and cumulative, and takes place alongside production in an infinite-horizon setting. In this context we study the R&D incentive impacts resulting from a “research exemption” or “experimental use” provision. We specify and solve the innovation and production model under two distinct IPR regimes, essentially a patent system with and without a research exemption. The model applies closely to the question of the optimal mode of intellectual property right (IPR) protection for plants, where traditional plant breeder’s rights allow for a well-defined research exemption, whereas standard utility patents do not. We characterize the properties of the relevant Markov perfect equilibria and investigate the profit and welfare effects of the research exemption. We find that firms, ex ante, always prefer full patent protection. The welfare ranking of the two IPR regimes, on the other hand, depends on the relative magnitudes of the costs of initial innovation and improvements. In particular, a research exemption is most likely to provide inadequate R&D incentives when there is a large cost to establish the initial research program.
    Keywords: Cumulative innovation; Experimental use exemption; Intellectual property rights; Markov perfect equilibrium; Patents; Stochastic games.
    JEL: O3 C72 L0
    Date: 2006–04–26
  12. By: Isabel Mota (CETE, Faculdade de Economia, Universidade do Porto); António Brandão (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: This paper aims at explaining if firms's decision about location revises when firms cooperate or compete in R&D. For that purpose, it is proposed a three-stage game amongst three firms where each firm decides about location, R&D and output. Firms' decision about location determines a R&D spillover, which is inversely related to the distance between firms. R&D output is assumed to be cost-reducing and exhibit diminishing returns. Cooperation is only allowed in the R&D stage. Our results allow us to conclude that there is a positive relationship between R&D output equilibrium and the distance between firms when firms acts independently. When firms cooperate in R&D, the R&D output for a cooperating firm increases with the degree of information sharing between them, as well as with a reduction of the distance between cooperating firms. Firms' decision about location is also affected by R&D activities: if R&D activities run independently, the clustering of firms only occurs for a convex spillover function; if R&D activities run cooperatively, clustering is always observed if there is an increased information sharing between firms.
    Keywords: Location, R&D cooperation, R&D spillovers
    JEL: R30 O31 L13
    Date: 2004–10
  13. By: Franklin Allen; Elena Carletti; Robert Marquez
    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 off. 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 the capital requirement may not be binding, as recent evidence seems to indicate.
    Date: 2006
  14. By: J. M. Arauzo; M. Manjón; M. Martín; A. Segarra
    Abstract: In this paper we analyze the regional and sector-specific determinants of industry dynamics. Concretely, we empirically tested three hypotheses (originally proposed by Shapiro and Khemani 1987) for the relationship between the entry and exit of firms in Spanish regions and sectors. The simplest one claims that entries and exits are independent. The symmetry and simultaneity hypotheses, on the other hand, take the opposite view. The symmetry hypothesis claims that barriers to entry are also barriers to exit, while the simultaneity hypothesis claims that there is a close relationship between entry and exit. Our estimates from a panel data system of equations seem to confirm the simultaneity hypothesis for Spain during the period 1980 to 1994.
  15. By: Belderbos René; Carree Martin; Lokshin Boris (METEOR)
    Abstract: This paper assesses the performance effects of simultaneous engagement in R&D cooperation with different partners (competitors, clients, suppliers, and universities and research institutes). We test whether these different types of R&D cooperation are complements in improving productivity. The results suggest that the joint adoption of cooperation strategies could be either beneficial or detrimental to firm performance, depending on firm size and specific strategy combinations. Customer cooperation helps to increase market acceptance and diffusion of product innovations and enhances the impact ofcompetitor and university cooperation. On the other hand, smaller firms also face diseconomies in pursuing multiple R&D cooperation strategies, which may stem from higher costs and complexity of simultaneously managing multiple partnerships with different innovation objectives.
    Keywords: management and organization theory ;
    Date: 2006
  16. By: Lesley Chiou (Department of Economics, Occidental College)
    Abstract: In the movie industry, an intriguing question is why studios cluster their big theatrical hits during the Memorial Day or July 4th weekends in the early summer as opposed to the fall. This paper examines the home video industry to provide more evidence on whether booms in theatrical revenues are supply- or demand-driven. First, I find no evidence of segmentation within the home video market by genre or newness of videos. Secondly, my estimates of the seasonality within the home video market suggest that Memorial Day and July 4th may be more favorable for a theatrical release than Labor Day.
    Keywords: home video, seasonality, discrete choice
    JEL: C13 L82
    Date: 2005–11
  17. By: Aurora Garcia-Gallego; Nikolaos Georgantzis; Praveen Kujal
    Abstract: We test how a monopoly, a duopoly and a public monopoly manage and allocate water resources. Stock depletion for the public monopoly is fastest. However, it reaches the optimal stock level towards the end of the experimental sessions. The private monopoly and duopoly maintain inefficiently high levels of stock throughout the sessions. The average quality to price ratio offered by the public monopoly is substantially higher than that offered by the private monopoly or duopoly. A clear result from the experiments is that a public monopoly offers the highest (average) quality to price ratio and has the fastest rate of stock depletion compared to a private monopoly or duopoly.
    Date: 2006–04
  18. By: Selim, Sheikh Tareq (Cardiff Business School)
    Abstract: This paper examines the equivalence of the two key results that dominate the discussion on Ramsey tax policy with imperfect competition. With imperfectly competitive intermediate goods market, the long run Ramsey policy is consistent with capital tax or subsidy, and this result is generally dominant if the government is permitted or not permitted to use any other subsidy, or if the government has access to consumption tax. This is an important extension of the two effect result due primarily to Guo & Lansing (1999). Access to consumption tax but no access to labor subsidy enables the government to reduce labor tax in monopoly sector to zero, but the two effect result for capital taxation remains unaltered. Qualifying Judd’s (1997) principle of optimal capital subsidy requires full confiscation of profits, or subsidizing capital income at a rate that may be larger than the first best subsidy rate. The strong motivation to tax capital assists in explaining the repeal of the Investment Tax Credit scheme in the US.
    Keywords: Optimal taxation; Monopoly power; Ramsey policy
    JEL: D42 E62 H21 H30
    Date: 2006–04
  19. By: Masami Imai (Economics and East Asian Studies, Wesleyan University)
    Abstract: On April 1, 2002, the Japanese government lifted a blanket guarantee of all deposits and began limiting the coverage of time deposits. This paper uses this deposit insurance reform as a natural experiment to investigate the relationship between deposit insurance coverage and market discipline. I find that the reform raised the sensitivity of interest rates on deposits, and that of deposit quantity to default risk. In addition, the interest rate differentials between partially insured large time deposits and fully insured ordinary deposits increased for risky banks. These results suggest that the deposit insurance reform enhanced market discipline in Japan. I also find that too-big-to-fail (TBTF) policy became a more important determinant of interest rates and deposit allocation after the reform, thereby partially offsetting the positive effects of the deposit insurance reform on overall market discipline.
    Keywords: Deposit Insurance, Market Discipline, Japanese Banks
    JEL: G2 G28 O53
    Date: 2006–01
  20. By: Nishaal Gooroochurn (Nottingham University Business School); Aoife Hanley (Nottingham University Business School)
    Abstract: This paper investigates the relative importance of property rights (PR) and transactions cost (TC) factors in driving the decision of firms to outsource innovation. The TC literature explains a small part of outsourcing decisions (cost saving motives) while the PR literature deals with revenue maximisation. Using data for over 8,000 firms from the UK Community Innovation Survey, we find that PR variables dominate over TC variables. Our results suggest that the decision to outsource innovation is mostly driven by the ability of firms to control information leakages, less so by cost motives.
    Keywords: transaction cost, property rights, innovation
    JEL: L2 O3
    Date: 2006–04–18

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