nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒05‒20
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Prices, Spatial Competition, and Heterogenous Producers: An Empirical Test By Chad Syverson
  2. Tacit Collusion and Capacity Withholding in Repeated Uniform Price Auctions. By Dechenaux, Emmanuel; Kovenock, Dan
  3. On Nash equilibrium in prices in an oligopolistic market with demand characterized by a nested multinomial logit model and multiproduct firm as nest By Gang Liu
  4. Un modelo de entrada y competencia en telecomunicaciones By Xavier Mancero; Eduardo Saavedra
  5. On the effective design of the efficiency defence. By Andreea Cosnita; Jean-Philippe Tropeano
  6. The Welfare Consequences of Hospital Mergers By Robert Town; Douglas Wholey; Roger Feldman; Lawton R. Burns
  7. Internet Retail Demand: Taxes, Geography, and Online-Offline Competition By Glenn Ellison; Sara Fisher Ellison
  8. Should You Allow Your Agent to Become Your Competitor? -- On Non-Compete Agreements in Employment Contracts By Matthias Kräkel; Dirk Sliwka
  9. The Competitive Market Paradox. By Gjerstad, S.
  10. Regulation in telecommunications : a cross approach between law and economics By Thierry Pénard (CREM-CNRS); Nicolas Thirion (University of Liege)
  11. Persistence of innovation, technological change and quality-adjusted patents in the US pharmaceutical industry. By Gautier Duflos
  12. The patterns and determinants of price setting in the Belgian industry By David Cornille; Maarten Dossche
  13. A Percolation-Based Model Explaining Delayed Take-Off in New-Product Diffusion By Martin Hohnisch; Sabine Pittnauer; Dietrich Stauffer
  14. Distributional constraints and efficiency in a tradable permit market By Hagem, Cathrine; Westskog, Hege
  15. Syndication and Robust Collusion in Financial Markets By Vinicius Carrasco; Gustavo Manso
  16. Product Quality in Scientific Competition By Max Albert
  17. Accounting and Economic Rates of Return: a Dynamic Econometric Investigation By Rodrigo M. Zeidan; Marcelo Resende

  1. By: Chad Syverson
    Abstract: In markets where spatial competition is important, many models predict that average prices are lower in denser markets (i.e., those with more producers per unit area). Homogeneous-producer models attribute this effect solely to lower optimal markups. However, when producers instead differ in their production costs, a second mechanism also acts to lower equilibrium prices: competition-driven selection on costs. Consumers’ greater substitution possibilities in denser markets make it more difficult for high-cost firms to profitably operate, truncating the equilibrium cost (and price) distributions from above. This selection process can be empirically distinguished from the homogenous-producer case because it implies that not only do average prices fall as density rises, but that upper-bound prices and price dispersion should also decline as well. I find empirical support for this process using a rich set of price data from U.S. readymixed concrete plants. Features of the industry offer an arguably exogenous source of producer density variation with which to identify these effects. I also show that the findings do not simply result from lower factor prices in dense markets, but rather because dense-market producers have low costs because they are more efficient.
    JEL: L0 L1 D4 L6
    Date: 2006–05
  2. By: Dechenaux, Emmanuel; Kovenock, Dan
    Abstract: This paper contributes to the study of tacit collusion by analyzing infinitely reaped multiunit uniform price auctions in a symmetric oligopoly with capacity constrained firms. Under both the Market Clearing and Maximum Accepted Price rules of determining the uniform price, we show that when each firm sets a price-quantity pair specifying the firm’s minimum acceptable price and the maximum quantity the firm is willing to sell at this price, there exists a range of discount factors for which the monopoly outcome with equal sharing is sustainable in the uniform price auction, but not in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this outcome. We extend these results to the case where firms may set bids that are arbitrary step functions of price-quantity pairs with any finite number of price steps. Surprisingly, under the Maximum Accepted Price rule, firms need employ no more than two price steps to minimize the value of the discount factor above which the perfectly collusive outcome with equal sharing is sustainable on a stationary path. Under the Market Clearing Price rule, only one step is required. That is, within the class of step bidding functions with a finite number of steps, maximal collusion is attained with simple price-quantity strategies exhibiting capacity withholding.
    Keywords: Auction ; Capacity ; Collusion ; Electricity Market ; Supply Function
    JEL: D43 D44 L13 L41 L94
    Date: 2005–03
  3. By: Gang Liu (Statistics Norway)
    Abstract: This note provides a proof on existence and uniqueness of Nash equilibrium in prices in a market where the demand side is characterized by a nested multinomial logit model with multiproduct firm as nest and the supply side consists of oligopolistic price-setting multiproduct firms with each producing various differentiated variants.
    Keywords: oligopolistic market; multiproduct firm; nested multinomial logit model; Nash equilibrium
    JEL: C25 C62 C72 D43 L13
    Date: 2006–04
  4. By: Xavier Mancero (CEPAL, Chile.); Eduardo Saavedra (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Keywords: Subasta, Energía, Abastecimiento incierto, Racionamiento Eléctrico
    JEL: D43 L11 L13
    Date: 2006–04
  5. By: Andreea Cosnita (Centre d'Economie de la Sorbonne); Jean-Philippe Tropeano (Centre d'Economie de la Sorbonne)
    Abstract: The efficiency defence was long delayed in the European merger control due to costly implementation issues. In this paper we argue that the upstream consequences of the efficiency defence should equally be considered, namely the improvement of the distribution of notified mergers through the incentives it provides towards more efficient mergers. First of all, we show that even if the Competition Authority may not tell apart the mergers that rightfully invoke the efficiency defence from those that do not, allowing such a procedure can lead to a lower post-merger price. Secondly, we study the impact of merger remedies on the incentives conveyed by the efficiency defence, and conclude on the optimal design of the efficiency defence procedure.
    Keywords: Merger control, efficiency defence, merger remedies.
    JEL: L41 K21 D82
    Date: 2006–04
  6. By: Robert Town; Douglas Wholey; Roger Feldman; Lawton R. Burns
    Abstract: In the 1990s the US hospital industry consolidated. This paper estimates the impact of the wave of hospital mergers on welfare focusing on the impact on consumer surplus for the under-65 population. For the purposes of quantifying the price impact of consolidations, hospitals are modeled as an input to the production of health insurance for the under-65 population. The estimates indicate that the aggregate magnitude of the impact of hospital mergers is modest but not trivial. In 2001, average HMO premiums are estimated to be 3.2% higher than they would have been absent any hospital merger activity during the 1990s. In 2003, we estimate that because of hospital mergers private insurance rolls declined by approximately .3 percentage points or approximately 695,000 lives with the vast majority of those who lost private insurance joining the ranks of the uninsured. Our estimates imply that hospital mergers resulted in a cumulative consumer surplus loss of over $42.2 billion between 1990 and 2001. It is estimated that all but a modest $95.4 million of the loss in consumer surplus is transferred from consumers to providers.
    JEL: I11 L11 L41
    Date: 2006–05
  7. By: Glenn Ellison; Sara Fisher Ellison
    Abstract: Data on sales of memory modules are used to explore several aspects of e-retail demand. There is a strong relationship between e-retail sales to a given state and sales tax rates that apply to purchases from online retailers. This suggests that there is substantial substitution between online and online retail, and tax avoidance may be an important contributor to e-retail activity. Geography matters in two ways: we find some evidence that consumers prefer purchasing from firms in nearby states to benefit from faster shipping times as well as evidence of a separate preference for buying from in-state firms. Consumers appear fairly rational in some ways, but boundedly rational in others.
    JEL: L8 D1 H2
    Date: 2006–05
  8. By: Matthias Kräkel; Dirk Sliwka
    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 if the agent faces limited liability and there is an incentive problem the principal prefers not to impose such a clause if and only if the principal's profits from entering the market are sufficiently large relative to the agent's outside option. If the principal can impose a fine on the agent for leaving the firm, she will never prefer a non-compete agreement.
    Keywords: fine, incentives, incomplete contracts, non-compete agreements
    JEL: D21 J3 K1 M5
    Date: 2006–03
  9. By: Gjerstad, S.
    Abstract: The competitive market model is a paradoxical. In perfect competition, agents cannot influence price: they only select an output quantity. Such passive behavior doesn’t conform to the intuitive notion of competition. This paper describes an experiment which demonstrates that near or even at a competitive equilibrium price, competition is undiminished. A substantial difference between the performance of sellers and buyers frequently results from this vigorous competition, even with low price variability and approximate efficiency. In double auction experiment sessions conducted with both automated and human agents, exogenous variation of the pace of asks and bids of automated agents demonstrates that the performance difference between sellers and buyers results primarily from a difference between the pace of asks and bids. If the buyers’ pace is slower than sellers’ pace, buyers make price concessions less frequently than sellers so that prices move below the equilibrium price. Then more buyers become active and fewer sellers remain active. Prices stabilize when changes to the numbers of active buyers and sellers offset the superior bargaining capability of one side or the other. In competitive equilibrium, to a first approximation agents are price takers, but that doesn’t preclude vigorous competition: competitive behavior moves to the dimension of bargaining pace.
    Keywords: Bargaining ; bounded rationality ; competitive equilibrium ; double auction ; experimental economics
    JEL: C78 C92 D41 D44
    Date: 2006–02
  10. By: Thierry Pénard (CREM-CNRS); Nicolas Thirion (University of Liege)
    Abstract: Regulation in telecommunication industry is one of the most sophisticated sectorial regulation. Two main goals are targeted by public authorities. In one hand, the regulator is trying to build a competitive market to replace the historic monopolistic situation. Now the emphasis is less on the monopolization of the market by the former public operator and more on the risk of collective dominance by a dew dominant operators. In the second hand, the regulator is trying to promote other objectives such as protection of consumers, the territory balance, the defence of national champions. All these objectives can sometimes be in conflict. This paper analyses regulatory objectives and instruments, focusing on the economic and lax aspects.
    Keywords: Internet, Regulation, Law
    Date: 2006
  11. By: Gautier Duflos (Centre d'Economie de la Sorbonne et CREST-LEI)
    Abstract: This paper analyzes American pharmaceutical firms' persistence in innovating just before the wave of mergers and acquisitions that accompanied the "Biotech revolution". We evaluate the impact of past innovative activity on firms' innovation propensities using a non-linear GMM estimator for exponential models that allows for predetermined regressors and linear feedback. We find that innovative activity at the firm level depends strongly on the scope of past innovations. Breakthroughs in particular depend largely on past quality innovation made by firms, and this effect may likely deter further pioneering discoveries rather than strengthen incentives to invest on non cumulative R&D. The results also shed light on the importance of small firms in the dynamics of innovation in pharmaceutical industry, and suggest that large firms persist in using patents strategically to remain dominant.
    Keywords: Patent citations, pharmaceutical industry, persistence in innovation.
    JEL: O31 L12 C23
    Date: 2006–01
  12. By: David Cornille (National Bank of Belgium, Research Department); Maarten Dossche (National Bank of Belgium, Research Department; Ghent University, Study Hive for Economic Research and Public Policy Analysis (SHERPPA))
    Abstract: This paper documents the patterns and determinants of price setting in the Belgian industry. We analyse the micro data underlying the Producer Price Index (PPI) over the period from February 2001 to January 2005. On average only one out of four prices changes in a typical month, whereas the absolute size of a price change amounts to 6 p.c. The frequencies of price adjustment are particularly heterogeneous across sectors, which is determined by heterogeneity in the market and cost structure. We find no signs of downward nominal rigidity. A joint analysis of sizes and frequencies of price adjustment across time shows that price setting is characterised by both time and state-dependent pricing. About 38 p.c. of the exported goods are affected by pricing-to-market.
    Keywords: producer price setting, nominal price rigidity, pricing-to-market, time-dependent pricing, state-dependent pricing, staggering
    JEL: D40 E31
    Date: 2006–05
  13. By: Martin Hohnisch; Sabine Pittnauer; Dietrich Stauffer
    Abstract: A model of new-product diffusion is proposed in which a site-percolation dynamics represents socially-driven diffusion of knowledge about the product's characteristics in a population of potential buyers. A consumer buys the new product if her valuation of it is not below the price of the product announced by the firm in a given period. Our model attributes the empirical finding of a delayed ``take-off'' of a new product to a drift of the percolation dynamics from a non-percolating regime to a percolating regime. This drift is caused by learning-effects lowering the price of the product, or by network-effects increasing its valuation by consumers, with an increasing number of buyers.
    Keywords: new-product diffusion, innovation adoption, spatial stochastic processes, percolation
    JEL: C15 L15
    Date: 2006–04
  14. By: Hagem, Cathrine (Dept. of Economics, University of Oslo); Westskog, Hege (CICERO, Center for International Climate and Environmental Research)
    Abstract: It is a well known result that taking distributional constraints into account when allocating tradable permits to different agents can lead to an imperfectly competitive permit market. Hence, the emission target is no longer met at least cost. In this paper we suggest an allocation rule for permits which can handle this problem. If the permits are allocated twice during the same period, and the allocation in the second round is dependent on the market price for permits, this allocation rule can achieve both cost effectiveness and meet specific requirements for cost distribution across agents.
    Keywords: Climate Change; Emission Permits; Allocation; Cost Effectiveness; Distributional Constraints
    JEL: Q52 Q54
    Date: 2006–05–08
  15. By: Vinicius Carrasco (Department of Economics PUC-Rio.); Gustavo Manso (Graduate School of Business, Stanford University.)
    Abstract: This paper investigates the extent to which syndication in financial markets is related to collusive behavior. A group of financiers who have private information regarding their capability of monitoring an entrepreneur must decide whether to provide a loan individually in a competitive fashion, or provide it collectively. When deciding whether to provide the loan collectively, the lenders bargain over their participation, on who will be monitoring the lender (the leader), and on pricing. It is shown that if the bargaining stage is robust to timing of communication of their private information (Ex-Post Incentive Compatibility), and if the lenders believe it is better to agree on a collective deal than competing, positive participation in the loan is given to all lenders even when side payments are allowed. Hence, we show that syndication is the optimal response of colluding lenders to the communication costs resulting from the negotiations between them for a given loan. Syndication improves on pricing but introduces a distortion by leaving the most effective monitor with less than full participation in the loan. Necessary conditions for syndication prevailing over competition are provided.
    Date: 2006–05
  16. By: Max Albert
    Abstract: The paper presents a linear model of product quality in scientific competition. The only outputs of research are published papers; the only inputs are labor and papers by other researchers, which are cited when used. Researchers compete for status, measured as their rank in a citations count. If quality is hereditary in the production process, competition and self-fulfilling expectations can establish a quality scale.
    Keywords: citations, competition, norms, quality, science
    JEL: L3 O3
    Date: 2006–05
  17. By: Rodrigo M. Zeidan; Marcelo Resende
    Abstract: Many studies have questioned empirical utilization of accounting data as internal rates of return would be more consistent with the relevant economic concept. The paper investigates the dynamic relationships between different measures of accounting rates of return (ARRs) and different approximations for the internal rates of returns (IRRs). In contrast with the prevailing case-study investigations, one considers a panel for quoted Brazilian firms in the manufacturing industry along the 1988-3/2003-2 period. Granger causality tests are considered and even though the results are not completely clear cut, some discernible uni-directional patterns emerge. In particular, there seems to be informational content between economic and accounting rates of return, between ROA (Net Profits/Total Assets) and PM (Gross Profits/ Operational Income), and internal rates of return. This seems to indicate that there is some validity in using accounting rates of return in certain economic studies.
    JEL: M21 M41
    Date: 2006

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