nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒05‒27
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Competition Policy with Optimally Differentiated Rules Instead of "Per se Rules vs. Rule of Reason" By Arndt Christiansen and Wolfgang Kerber
  2. Competing Ways Towards International Antitrust: the WTO versus the ICN By Mariana Bode; Oliver Budzinski
  3. Policy Formulation, Implementation and Feedback in EU Merger Control By Eric J. Shea,; Raj S. Chari
  4. An Economic Perspective on the Jurisdictional Reform of the European Merger Control System By Oliver Budzinski
  5. Sequential Entry in a Vertically Differentiated Duopoly By Luca Lambertini; Piero Tedeschi
  6. Would you like to enter first with a low-quality good? By Luca Lambertini; Piero Tedeschi
  7. Do Process Innovations Induce Product Ones? By Maria Rosa Battaggion; Piero Tedeschi
  8. On the Social Desirability of Patents for Sequential Innovations in a Vertically Differentiated Market By Luca Lambertini; Piero Tedeschi
  9. Durable Goods Monopoly and Product Quality By Jong-Hee Hahn
  10. The return of the guild? Network relations in historical pespective By Simon Deakin
  11. On the equivalence of selected supply chain contract mechanisms By Vijayender Reddy Nalla; Jack A.A. van der Veen; Venu Venugopal
  12. The Impact of E-Procurement on the Number of Suppliers : Where to Move to? By Daniel Nepelski
  13. Degree of innovativeness and market structure: A model By Daniela Grieco
  14. Modularity as an Entry Strategy: The invasion of new niches in the LAN equipment industry By Stefano Brusoni; Roberto Fontana
  15. Networks Performance and Contractual Design: Empirical Evidence from Franchising By Magali Chaudey; Muriel Fadairo
  16. The single European electricity market: A long road to convergence By François Coppens; David Vivet
  17. Restrictions verticales et externalité intra-marque en matière d'effort promotionnel Un test empirique sur données françaises By Magali Chaudey; Muriel Fadairo
  18. Preliminary Investigations of Hospital Geography and Patient Choice in Iowa By Imerman, Mark D.; Eathington, Liesl; Jintanakul, Kanlaya; Otto, Daniel

  1. By: Arndt Christiansen and Wolfgang Kerber (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: Abstract: Both in US antitrust and EU competition policy a development to a broader appli-cation of rule of reason instead of per se rules can be observed. In the European discussion the attempt to base competition policy on a "more economic approach" is mainly viewed as im-proving the economic analysis in the assessment of specific cases. In this paper it is shown from a general law and economics perspective that the application of rules instead of focus-sing on case-by-case analyses can have many advantages (less regulation costs, rent seeking and knowledge problems), although an additional differentiation of rules through a deeper assessment can also have advantages in regard to the reduction of decision errors of type I and II. After introducing the notion of a continuum of more or less differentiated rules, we show - based upon law and economics literature upon the optimal complexity of rules - in a simple model that a competition rule is optimally differentiated, if the marginal reduction of the sum of error costs (as the marginal benefit of differentiation) equals the marginal costs of differen-tiation. This model also allows for a more detailed analysis of the most important determi-nants of the optimal degree of rule-differentia¬tion. From this law and economics perspective, competition policy should consist mainly of (more or less differentiated) rules and should only rarely rely on case-by-case analysis. Therefore the main task of a "more economic ap-proach" is to use economics for the formulation of appropriate competition rules.
    Keywords: Competition Policy, European Competition Law, Rule of Reason
    JEL: K K L
    Date: 2006
  2. By: Mariana Bode; Oliver Budzinski (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: In times of globalization, trade liberalization and deregulation of specific industries, competition authorities face new challenges in order to protect national as well as international competition. With companies operating in various countries, fading market frontiers and increasing crossborder trade, new strategies must be developed in order to overcome threats to domestic markets resulting of anticompetitive behavior abroad. Even though solutions such as the “Effects Doctrine” or bilateral agreements allow – albeit imperfectly – countries to protect their domestic market, there are no laws safeguarding the global economy and international competition. Thus, the request arises to establish an international competition policy regime in order to harmonize countries’ competition laws, to reduce conflicts due to cross-border anti-competitive behavior and to support developing countries in reaching Western standards. Among several approaches, two are of significant interest: On the one hand, the World Trade Organization (WTO) could be enhanced by a board of supervision for international competition issues including a harmonized competition code for all, while on the other hand the International Competition Network (ICN) has been established to take care of global competition concerns through policy coordination [Graham 2003; Janow 2003; Budzinski 2004b]. This paper discusses whether the institutional WTO or the voluntary ICN approach represents the better path to an international competition policy regime to control private anticompetitive activities. The second part will explain the importance of an international competition policy. Subsequently, unilateral, bilateral and multilateral approaches to the prevention and solution of problems in global competition are introduced. Section 3.1 gives a short overview of the WTO’s characteristics, its structural organization and its plans to integrate an international competition policy. The organization and the framework of the ICN as well as its attempts to prevent international anticompetitive behavior is explored in section 3.2. Based on the statements made in section 2 and the facts presented in section 3, the fourth section compares the WTO approach with the ICN qualities. The discussion will be divided into the following six criteria: (i) feasibility, (ii) acceptability, (iii) efficiency, (iv) negotiation and implementation of international competition rules, (v) conflict resolution and (vi) adaptability. Conclusions follow in section 5.
    Date: 2005
  3. By: Eric J. Shea,; Raj S. Chari
    Abstract: This paper analyses the formulation of the EU Merger Control Regulation (MCR) and its implementation via the 1992 Nestlé/Perrier merger. It offers two arguments. First, these phases of policy development occurred in ‘macro’ and ‘micro’ policy communities found at the supranational level of governance. The first community consists of larger Commission and business interests that formulated the MCR and the second of specific actors within the ‘macro’ community - the Merger Task Force and the firms – that implemented the rules. Secondly, the development of these communities can be explained by private interest theory. The conclusions highlight two main lessons for students of comparative European politics. First, the concept of ‘macro’ and ‘micro’ communities existing at both the formulation and implementation phases of policy offers a framework for comparativists to better analyse which types of actors will interact during different stages of the policy-making process. It is argued that while the (larger) ‘macro’ community helps define the nature of the regulations, a related, but not necessarily equally composed, ‘micro’ community eventually implements the rules, potentially changing the nature of the policy itself via a ‘feedback’ mechanism. Secondly, this study suggests that comparativists must pay more attention to the private interests of policy-makers and how these are intertwined with their ‘private fears.’ Such interests and fears guide policy-makers while simultaneously constrain them from acting alone.
    Date: 2006–05–25
  4. By: Oliver Budzinski (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: The jurisdictional elements of the comprehensive 2004 reform of EU merger control are worth being analysed against the background of economic theory. Competence allocation and delimitation represent important factors for the workability of multilevel merger control regimes. The economics of federalism offer an analytical framework that can be adopted in a modified version in order to assess competence allocation regimes in competition policy. According to these theoretical insights, a given competence allocation and delimitation regime can be evaluated in regard to four criteria: internalisation of externalities, cost efficiency (the one-stop-shop principle), preference orientation, and adaptability. The ‘old’ competence allocation and delimitation regime of EU merger control consisted of two elements: turnover thresholds and post-notification referrals. Analysis along the lines of the economics of federalism reveals considerable deficiencies of the ‘old’ regime. Thus, the results of the theoretical analysis are compatible to the dissatisfying empirical experience, which represented a major motivation for launching the reform process. However, the actual reform eventually left the turnover thresholds untouched. The main element of the jurisdictional reform was the introduction of pre-notification referrals and the addition of institutionalised network cooperation.
    Keywords: competence allocation, economics of federalism, jurisdictional reform.
    Date: 2006
  5. By: Luca Lambertini; Piero Tedeschi
    Abstract: We analyse a model of vertical differentiation focusing on the trade-off between entering early and exploiting monopoly power with a low quality, versus waiting and enjoying a dominant market position with a superior product. We show that, in a relevant parameter region, there exists a unique equilibrium where the leader enters with a lower quality than the follower. This happens when the time span spent by the leader as a monopolist matters the most, i.e., in correspondence of sufficiently low discount rate values, low costs of quality improvement and high consumers' willingness to pay for quality.
    Keywords: vertical differentiation, product innovation, monopoly rent
    JEL: L13 O31
    Date: 2006–05
  6. By: Luca Lambertini; Piero Tedeschi
    Abstract: Using a two-period duopoly model with vertical differentiation, we show that there exists a unique subgame perfect equilibrium where the first entrant supplies a lower quality and gains higher profits than the second entrant. We also prove that this entry sequence is socially efficient.
    Keywords: entry, vertical differentiation
    JEL: C73 D43 L13
    Date: 2006–05
  7. By: Maria Rosa Battaggion; Piero Tedeschi
    Abstract: We study the relationship between process and product innovations in vertically differentiated duopolies. A process innovation can lead two competing firms to improve the quality of their goods introducing a product innovation. In fact, a cost reducing innovation has two effects: it spurs production and it enhances price competition. The former effect induces both firms to increase quality. The latter encourages differentiation, inducing low quality firm to decrease it. Therefore, high quality firm always improves its quality, while the other may or may not. The prevailing effect depends on the nature of quality costs (fixed or variable).
    Keywords: Process Innovation, Product Innovation
    JEL: D43 O33
  8. By: Luca Lambertini; Piero Tedeschi
    Abstract: We consider a market for vertically differentiated goods where firms enter over time, after having developed innovations characterised by different quality levels. We show that patent height and length interact to determine the ultimate emergence of duopoly. In general, imposing quality improvements on later entrants entails the persistence of monopoly, while a duopoly equilibrium emerges when the second innovator is allowed to produce a sufficiently inferior quality and the patent protection granted to the first innovator is not too long-lasting.
    Keywords: innovation, patent height, product quality
    JEL: L12 L13 O31
  9. By: Jong-Hee Hahn (Keele University, Department of Economics)
    Abstract: This paper examines how a durable-goods monopolist’s choice of product quality interacts with time inconsistency problems in an environment, where the firm faces an irreversible decision on quality and unit production costs increase in quality. The monopolist may have incentives to choose a high quality in order to mitigate the time-inconsistency problem, which counters the standard quality underprovision incentive due to the lack of commitment. Depending on the relative strength of the two opposing forces, the monopolist may increase or decrease quality relative to the optimal commitment or rental level. Its welfare implications are also discussed, and it is shown that the lack of commitment power may be socially harmful in contrast to the prediction in the traditional theory of durable-goods monopoly pricing.
    Keywords: Durable-goods monopoly, Product quality, Time consistency, Commitment.
    JEL: D42 L12
    Date: 2005–08
  10. By: Simon Deakin
    Abstract: Prior to the industrial revolution, the predominant form of economic organization in western Europe and north America was the guild. Guilds were network forms, loose associations of independent producers, with strong local and regional identities, in which cooperation and competition were combined. The decline of the guild was brought about in large part by legal changes which privileged the emerging conjunction of the vertically integrated enterprise and mass consumer market. If present- day network forms are not be consigned to the margins of capitalism as their predecessors were, we need a set of legal concepts and techniques which can underpin and protect network relations, most importantly in the context of competition law.
    Keywords: networks, guilds, vertical integration, industrialisation, competition law.
    JEL: K21 L14 L22
    Date: 2006–03
  11. By: Vijayender Reddy Nalla; Jack A.A. van der Veen; Venu Venugopal (Nyenrode Business Universiteit)
    Abstract: This paper models a situation where a Supplier sells a fashion product to a Buyer who in turn sells the product to the consumers. Both the Supplier and the Buyer set their own selling price. For the above setting this paper designs different contract mechanisms such as Revenue sharing, Profit sharing, Quantity discounts, License fee and Mail-in-rebate contract mechanisms. The paper shows that the designed contract mechanism can provide both coordination and win-win. The paper also establishes the equivalence between the designed contract mechanisms and argues that industries can use one mechanism over the other in case of implementation problem.
    Keywords: Coordination, Win-Win, Supply Chain Contracts, Mail-in-rebates
    Date: 2005
  12. By: Daniel Nepelski
    Abstract: This paper examines how electronic procurement influences the organization of economic transactions. It seeks evidence for ICT-induced changes in how companies organize their activities and whether ICT lead to more competitive and transparent markets. Testing the relationship between the effect of electronic procurement on procurement cost and sourcing strategy, I provide new evidence that electronic procurement leads to more market transactions. This leads to the conclusion that electronic procurement increases market transparency, lowers search and supplier switching costs and improves the management of supply chain and contradicts the predictions that ICT will lead to a dominance of network-like organizational form and an increasing reliance on hybrid forms of organizing economic transactions. Two implications emerge from these results. The first one is relevant for companies engaging in ICT projects. ICT combined with changes in business strategy leads to a reduction of market transaction costs and, as a result, opens up new possibilities in terms of how business activities can be organized and/or how to structure competition in upstream markets. This effect of new technologies is of clear benefit to companies successfully implementing and using new technologies. The second implication is of great importance for companies whose customers implement ICT to intensify competition among suppliers. Changing environment forces them to adapt to new market conditions and look for new ways of maintaining profitability.
    Keywords: information technology and firm boundaries, markets vs. hierarchies, sourcing strategy, electronic procurement
    JEL: L22
    Date: 2006
  13. By: Daniela Grieco (CESPRI, Bocconi University, Milano,Italy.)
    Abstract: A limited number of business firms engage in disruptive innovative activity. When firms decide among alternative innovative patterns, inertial forces may bias their choices in favour of incremental innovations. This paper proposes a model that compares firms’ value when firms can invest in strategies implying different degrees of innovativeness. The model shows that incremental strategies emerge as a dominant strategy for oligopolists when imitation of incremental innovation is sufficiently slow and firms are not too asymmetric in their access to knowledge. If these conditions are not respected, the model exhibits an additional symmetric Nash equilibrium where firms select radical innovations.
    Keywords: Radical innovation, Incremental Innovation, Imperfect competition, Patent race.
    JEL: D21 D81 L20 O33
    Date: 2006–04
  14. By: Stefano Brusoni (CESPRI and CRORA, Università Bocconi, Milano and Silvio Tronchetti- Provera Foundation, Italy); Roberto Fontana (CESPRI, Università Bocconi, Milano and Department of Economics, University of Pavia, Italy)
    Abstract: This paper focuses on niche entry patterns in the LAN equipment industry in the 1990s. We analyze an original data-set of LAN equipment consisting of more than 1,000 hubs and switches marketed between 1990 and 1999. Modularity emerged as a design strategy that supported incumbent firms’ efforts to enter new product niches in the hub segment. However, after the emergence of switches as an alternative to hubs, coupled with the introduction of a new standard, incumbents relying on a modular hub strategy were overtaken by a new comer (Cisco). Moreover, the fastest followers were incumbents that had not previously relied on modular hub architectures. Our interpretation is as follows: modularity offers advantages of speed when changes occur within established boundaries. However, it also generates a ‘tunnel effect’ that prevents firms from developing products based on different problem-solving strategies. Such changes are more easily introduced by firms that do not rely on tightly-defined modular design rules.
    Keywords: Entry; Modularity; LAN Equipment
    JEL: O33 L63 D83
    Date: 2005–07
  15. By: Magali Chaudey (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne]); Muriel Fadairo (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne])
    Abstract: This article deals with the links between networks performance and the design of vertical contracts. It provides evidence broadly consistent with the hypothesis that within franchising systems, constraining contracts for the retailers favor a better performance at the network level
    Keywords: vertical relationships; contractual constraints; contracts econometrics
    Date: 2006–05–22
  16. By: François Coppens (National Bank of Belgium, Microeconomic information Department); David Vivet (National Bank of Belgium, Microeconomic information Department)
    Abstract: In the context of a first Working Paper the authors argued that electricity has a number of characteristics that set it apart from other commodities. It was demonstrated that some of these characteristics might complicate the deregulation process. This paper analyses the ongoing deregulation process in the European electricity sector and attempts to establish whether these difficulties can more readily be solved at European level. It would appear that some problems, e.g. economies of scale in electricity generation, have less of an impact at European level than within smaller national markets. However, a number of difficulties have to be overcome before a unified European electricity market can become a reality. These include the limited interconnection capacities between Member States. The European Commission has taken steps to improve the situation, for example by offering financial support for investments and promoting the development of regional markets as an interim measure ultimately leading to a fully integrated market. Apart from the difficulties related to electricity generation and transmission there are also exogenous factors that influence the ongoing deregulation process, e.g. the implementation of the Kyoto protocol and the dramatic increases in primary fuel prices. This paper argues that a consistent, stable and uniform European regulatory framework must be put in place if the impact of these difficulties is to be minimised.
    Keywords: Electricity deregulation
    JEL: L94
    Date: 2006–05
  17. By: Magali Chaudey (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne]); Muriel Fadairo (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne])
    Abstract: Les restrictions verticales se définissent comme des clauses contractuelles imposées par un producteur, qui limitent la liberté d'action d'un ou plusieurs distributeurs. L'économétrie des contrats représente une voie de recherche intéressante pour analyser ces accords, en particulier pour mettre en évidence ce qui les motive. Elle permet de repérer les situations dans lesquelles les contraintes sont mises en place dans le but de neutraliser les externalités relatives aux relations fournisseurs-distributeurs, conformément aux enseignements de la théorie des incitations et du paradigme principal-agent. Cet article reprend les principales justifications théoriques concernant l'utilisation de restrictions verticales, puis développe un test économétrique sur un échantillon de 439 réseaux français. Les résultats sont en partie compatibles avec l'argument théorique.
    Keywords: Restrictions verticales; économétrie des contrats; externalité de publicité; probit ordonné;Vertical restraints; contract econometrics; advertising externality; ordered probit.
    Date: 2006–05–22
  18. By: Imerman, Mark D.; Eathington, Liesl; Jintanakul, Kanlaya; Otto, Daniel
    Abstract: This report provides a spatial representation of hospital geography in Iowa and of the decisions of patients to patronize hospitals. It begins with a brief analysis of hospital proximity and hospital proximity’s relationship to population distributions and existing hospital capacity. This is followed with a discussion of hospital capacity as a proxy for the supply of hospital services and the construction of hospital service area gravity models based upon capacity. Patient patronage of hospitals is then presented as a proxy of demand for hospital services, and gravity models are estimated on the basis of patronage. Having defined proxies for both the supply of and demand for hospital services and estimated patronage areas with respect to both, the analysis then turns to an investigation of where patients actually go for health care services. A simple visual analysis is done by mapping patients’ locations of residence and coding residence points to identify hospitals actually visited. The next step is to informally evaluate the expectation that patients will patronize their local (within an estimated service area) or nearest (if they reside outside of any service area) hospital. This is done with respect to type of patient (inpatient or outpatient) and by type of diagnosis. This investigation is based on hospital proximity, size, and patronage rather than qualitative evaluations of healthcare adequacy. Evaluation of health care quality is beyond the expertise of the authors. The analysis is based on visual interpretations and simple groupings of mapped data rather than on geostatistical analysis. The results provide a preliminary evaluation of data sources that have not previously been examined in detail. These preliminary results may identify areas of interest for further study. Data was obtained through the 2002 Iowa Hospital Association Inpatient and Outpatient Databases, which provide information on actual patient patronage of Iowa hospitals. Patient patronage reveals individual decisions made in the context of current health care pricing, quality, and availability.
    Keywords: Healthcare, Hospital
    JEL: I0 I1 L8
    Date: 2006–05–22

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