nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒05‒06
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Simultaneous competitor and customer diffusion: a market growth model based on market space and competition By Debruyne, M.
  2. An Empirical Analysis of Payment Card Usage By Marc Rysman;
  3. Power Inside the Firm and the Market: A General Equilibrium Approach By Dalia Marin; Thierry Verdier
  4. Network Size and Network Capture By Gerard Llobet; Michael Manove
  5. Market power and the need for regulation in the German airport market By Robert Malina
  6. Entry and Accommodation in Airline Markets: Easyjet Caught in the Middle on the London-Grenoble Route By Cristina Barbot
  7. Poder de Mercado en las Profesiones Autorreguladas: El Desempeño Médico en Argentina By Evelyn Vezza
  8. Government Outsourcing: Public Contracting with Private Monopoly By Auriol, Emmanuelle; Picard, Pierre M
  9. Competition, productivity and prices in the euro area services sector By Ad van Riet; Moreno Roma
  10. How to Allocate R&D (and Other) Subsidies: An Experimentally Tested Policy Recommendation By Thomas Giebe; Tim Grebe; Elmar Wolfstetter
  11. Competing for Ownership By Patrick Legros; Andrew F. Newman
  12. Private incentives to vertical disintegration among firms with heterogeneous objectives By G. Rossini
  13. Price setting behaviour in the Netherlands - results of a survey By Marco Hoeberichts; Ad Stokman
  14. New survey evidence on the pricing behaviour of Luxembourg firms By Patrick Lünnemann; Thomas Mathä

  1. By: Debruyne, M.
    Abstract: This paper adds addresses the interaction between competitive dynamics and market evolution. Specifically, it focuses on the development of the market of a new product, in terms of customer adoption as well as competitive entry. The objective of this paper is to develop a model for the growth stage of a new market that addresses the supplier and customer diffusion process and the interaction between them. The contribution of our approach is threefold: (i) the development of a competitor diffusion model, (ii) the combination of a competitor diffusion model with a customer diffusion model, recognizing the interplay between competitive entry and market-level diffusion, and (iii) the recognition that competitive entry effects in the diffusion model are endogenous, resulting from the entry decisions of firms.
    Date: 2006–04–20
  2. By: Marc Rysman (Department of Economics, Boston University);
    Abstract: This paper exploits a unique data set on the payment card industry to study issues associated with network effects and two-sided markets. We show that consumers concentrate their spending on a single payment network (single-homing), although many maintain unused cards that allow the ability to use multiple networks (multi-homing). Further, we establish a regional correlation between consumer usage and merchant acceptance within the four major networks (Visa, Mastercard, American Express and Discover). This correlation is suggestive of the existence of a positive feedback loop between consumer usage and merchant acceptance.
    Keywords: payment cards, two-sided markets, network effects
    JEL: L14 L80
    Date: 2006–01
  3. By: Dalia Marin (Department of Economics, Ludwigstr. 28, 80539 Munich, phone: +49-89-2180-2446, fax: +49-89-2180-6227, e-mail address:; Thierry Verdier (DELTA, Paris)
    Abstract: Recent years have witnessed an enormous amount of reorganization of the corporate sector in the US and in Europe. This paper examines the role of market competition for this trend in corporate reorganization. We find that at intermediate levels of competition the CEO of the corporation decides to have less power inside the firm and to delegate control to lower levels of the firms’ hierarchy. Thus, workers empowerment and the move to flatter firm organizations emerge as an equilibrium when competition is not too tough and not too weak. The model predicts merger waves or waves of outsourcing when countries become more integrated into the world economy as the corporate sector reorganizes in response to an increase in international competition.
    Keywords: monopolistic competition, international trade, corporate reorganisation, flattening firm hierarchies
    JEL: F12 D23 L22 L1
    Date: 2001–12
  4. By: Gerard Llobet (CEMFI); Michael Manove (Boston University, Department of Economics)
    Abstract: Most types of networks, over time, spawn the creation of complementary stocks that enhance network value. Computer operating systems, for example, induce the development of the comple- mentary stock of software applications that increase the value of the operating system. In this paper, we challenge the conventional wisdom that a large network, which induces the creation of large complementary stocks, serves as a barrier to entry that protects the incumbent from competi- tion or network capture. We show that a larger network may either deter or attract entry depending on the relation between the network quality and the cost of an innovator?s network product. The probability of entry also depends on the level of compatibility between the potential entrant?s technology and existing complementary stocks, which in turn is in?uenced by the strength of the intellectual-property-rights environment. Intellectual property rights and the associated threat of entry may a¤ect an incumbent?s choice of network size in counterintuitive ways.
    JEL: L41 O34
    Date: 2002–12
  5. By: Robert Malina (Institute of Transport Economics, University of Muenster)
    Abstract: With the increasing profit orientation of German airport operators the question as to weather they possess market power is gaining more importance. Whereas there have been some studies about the degree of market power of individual airports in countries as Australia and Great Britain, the German airport market has not yet been studied in detail. This paper is a part of a research project that tries to assess market power in this market. It indicates which of the 35 examined German airports possess market power and therefore need special regulatory attendence. We calculate a substitution coefficient for inter-airport competition that quantifies the quality of the best substitute for a certain airport. It is defined as the proportion of inhabitants within the relevant regional market of an airport that consider another airport, which has been identified as meeting the demands of the airlines, to be a good substitute from their perspective as well. The analysis is complemented by an assessment of intermodal substitution and countervailing power of airlines. The study gives strong indication that 23 out of the 35 German airports do not possess relevant market power. In contrast to this, four airports (HAM, FRA, MUC, STR) and Berlin Airport System (THF, TXL, SXF) have strong, five (BRE, DRS, LEJ, NUE, HAJ) have modest market power. The results provide a basis for the construction of an efficient regulatory framework for the German airport market.
    Keywords: airport competition, counterveiling power, market power, substitution
    JEL: L93 R48 D42
    Date: 2005–10
  6. By: Cristina Barbot (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: Low cost carriers (LCCs) have recently proved that they can develop aggressive behaviour towards the threat of new entrants. This paper analyses the theoretical conditions under which a low cost carrier can deter or accommodate entry by means of product proliferation, using the example of Easyjet on the London-Grenoble route. Theoretical conclusions show that they can only deter entry if they launch a service with a quality that is superior to the entrant’s and to their own previous one. Otherwise, they accommodate entry by improving their old product, when they face the entry of a full service carrier (FSC), or by launching a new service, if they are caught in the middle of a FSC and another LCC. Empirical findings about competition in the same route in monopoly, duopoly and oligopoly with three firms show that price competition depends on the existence and nature of rivals, and on the level of demand.
    Keywords: low cost carriers, entry, accommodation
    JEL: L93 L13
    Date: 2006–01
  7. By: Evelyn Vezza
    Abstract: La naturaleza potencialmente anticompetitiva de las prácticas impartidas desde las organizaciones de profesionales ha sido racionalizada por la literatura económica y ha ocupado un lugar no menor en la agenda de los organismos de defensa de la competencia. Sin embargo, la economía empírica carece de estudios sobre el ejercicio profesional autorregulado. Este trabajo relaciona los mercados de servicios profesionales con los modelos de diferenciación vertical y emplea un modelo Logit Mixto para evaluar la conducta del desempeño médico en Argentina. La evidencia hallada sugiere la existencia de algún acuerdo de precios.
    Keywords: profesiones autorreguladas, diferenciación vertical del producto, Logit Mixto, self-regulated professions, vertical product differentiation, Mixed Logit.
    JEL: D43 L1
    Date: 2004–12
  8. By: Auriol, Emmanuelle; Picard, Pierre M
    Abstract: The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds à la Laffont and Tirole (1993). An alternative to regulation is proposed in which firms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private firms. This ex-post contracting set-up allows more flexibility than traditional regulation where governments commit to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.
    Keywords: adverse selection; natural monopoly; privatization; regulation; soft-budget constraint
    JEL: D82 L33 L43 L51
    Date: 2006–04
  9. By: Ad van Riet (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Moreno Roma (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper analyses the degree of competition in the euro area services sector and its effects on labour productivity and relative prices in that sector over the period 1980-2003. The importance of the euro area services sector has significantly increased over time; it now accounts for around 70% of the euro area’s total nominal value added and employment. Labour productivity growth across the euro area services industries appears to be characterised by a high degree of diversity and the level of services inflation is on average higher than aggregate inflation. Investigating several proxies of market competition for the non-financial business services, the paper finds that limited competition in services tends to hamper labour productivity growth in the services sector. Moreover, results tend to suggest that measures aimed at increasing services market competition may have a dampening impact on relative price changes in some services sectors and thus temporarily on aggregate inflation.
    Date: 2006–04
  10. By: Thomas Giebe (Institut für Wirtschaftstheorie I, Humboldt.Universität zu Berlin Spandauer Str. 1, 10099 Berlin, Germany Email:; Tim Grebe (Institut für Wirtschaftstheorie I, Humboldt.Universität zu Berlin Spandauer Str. 1, 10099 Berlin, Germany Email: grebe; Elmar Wolfstetter (Institut für Wirtschaftstheorie I, Humboldt.Universität zu Berlin Spandauer Str. 1, 10099 Berlin, Germany Email:
    Abstract: This paper evaluates how R&D subsidies to the business sector are typically awarded. We identify two sources of ine_ciency: the selection based on a ranking of individual projects, rather than complete allocations, and the failure to induce competition among applicants in order to extract and use information about the necessary funding. In order to correct these ine_- ciencies we propose mechanisms that include some form of an auction in which applicants bid for subsidies. Our proposals are tested in a simulation and in controlled lab experiments. The results suggest that adopting our proposals may considerably improve the allocation.
    Keywords: Research, Subsidies, Experimental Economics
    JEL: D44 D45 H25 O32 O38
    Date: 2005–10
  11. By: Patrick Legros (ECARES, Universite Libre de Bruxelles); Andrew F. Newman (Institute for Economic Development, Boston University)
    Abstract: We study how the internal organization of firms — specifically, the allocation of ownership of assets and the distribution of profit among the firm’s managers — is determined in a competitive market. We ask how scarcity of assets, skills or liquidity in the market translates into ownership and control allocations within organizations. Firms will be more integrated when the terms of trade are more favorable to the short side of the market, when liquidity is unequally distributed among existing firms and when there is a positive uniform shock to productivity. The model identifies a price-like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring.
  12. By: G. Rossini
  13. By: Marco Hoeberichts (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Ad Stokman (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.)
    Abstract: This paper presents the results of a survey among Dutch firms on price setting behaviour in the Netherlands. It aims to identify how sticky prices are, which prices are sticky and why they are sticky. It is part of the Eurosystem Inflation Persistence Network (IPN). The most distinctive feature of the Dutch survey is its broad coverage of the business community (seven sectors and seven size classes). Our primary finding is that price setting behaviour depends critically on both a firm’s size and the competitive environment it faces. Small firms in particular adopt more rigid pricing policies, and the weaker the competition a firm faces, the stickier a company’s price will be. Furthermore, we find that wholesale and retail prices are more flexible than those for business-to-business services. The survey suggests that explicit and informal contracting are the most important sources of price stickiness. Menu costs and psychological pricing – two prominent explanations of price stickiness in the literature – are of minor importance. Finally, there is clear evidence of asymmetries in shocks driving price increases and decreases.
    Keywords: Price setting, nominal rigidity, survey data.
    JEL: E30 D40
    Date: 2006–04
  14. By: Patrick Lünnemann; Thomas Mathä
    Abstract: This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forward-looking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs.
    Date: 2006–05

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