nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒06‒17
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Access to Commitment Devices Reduces Investment Incentives in Oligopoly By Veronika Grimm; Gregor Zoettl
  2. Spatial agglomeration and product market competition By Christoph Alsleben
  3. Closure Options in Duopoly: The Case of Second-Mover Advantages By Thomas Sparla
  4. Non-price advertising and price competition: a theory, and evidence from the Brazilian beer market By Renato D.B. Gomes; João Manoel Pinho de Mello
  5. STRATEGIC EFFECTS OF AIRLINE ALLIANCES By Rafael Moner Colonques; Ricardo Flores Fillol
  6. The Austrian Insurance Industry: A Structure, Conduct and Performance Analysis By Jedlicka, Lorenz; Jumah, Adusei
  7. Regulatory Barriers and Entry in Developing Economies By John Bennett; Saul Estrin
  8. “Ineffective” competition: a puzzle? By Andrej V. Ivanov; Florian Mueller
  9. Performance Measurement in the Australian Water Supply Industry By Tim Coelli; Shannon Walding
  10. Imperfect Competition and Corporate Governance By Frank Milne; David Kelsey
  11. Exchange rates and transition economies` export prices: is there evidence for pricing-to-market behaviour? By Emilia Penkova
  13. Fragmented property rights and R&D competition By Derek J. Clark; Kai A. Konrad
  14. Price Dispersion with Directed Search. By Camera, Gabriele; Selcuk, Cemil
  15. Effects of Foreign Presence in a Transition Economy : Regional and Industry-Wide Investments and Firm-Level Exports in Ukrainian Manufacturing By Stefan Lutz; Oleksandr Talavera; Sang-Min Park
  16. The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter? By Vojislav Maksimovic; Gordon Phillips
  17. Multi-Product Firms and Product Switching By Andrew B. Bernard; Stephen J. Redding; Peter K. Schott
  18. Investment Incentives in Auctions: An Experiment By Veronika Grimm; Friederike Mengel; Giovanni Ponti; Lari Arthur Viianto
  19. Regional patterns and determinants of new firm formation and survival in western Germany By Brixy, Udo; Grotz, Reinhold
  20. Choosing intellectual protection : imitation, patent strength and licensing. By David Encaoua; Yassine Lefouili

  1. By: Veronika Grimm; Gregor Zoettl
    Abstract: In this paper we analyze incentives to invest in capacity prior to a sequence of Cournot spot markets with varying demand. We compare equilibrium investment in the absence and in presence of the possibility to trade on forward markets. We find that the access to strategic devices (such as forward contracts as analyzed by Allaz and Vila (1993), or, equivalently strategic delegation as analyzed by Fershtman and Judd (1987) or Vickers (1985)) prior to spot market competition reduces equilibrium investments.
    Keywords: Investment incentives, commitment devices, oligopoly, demand fluctuations, forward markets
    JEL: D43 L13
    Date: 2006–06–06
  2. By: Christoph Alsleben
    Abstract: This paper tests the hypothesis that product market competition has a negative impact on spatial agglomeration. This hypothesis emerges as an interpetation of the models by Combes and Duranton (2001) and Alsleben (2005) which are about firms' location choice in the presence of knowledge spillovers. Using data for German manufacturing industries, the result is that, while controlling for other agglomeration forces, higher industrial concentration, measured by the Herfindahl index of concentration of sales, implies stronger spatial agglomeration, as measured by Ellison and Glaeser's (1997) index of concentration.
  3. By: Thomas Sparla
    Abstract: This paper examines exercise policies for capacity reduction options in a duopolistic market that is subject to aggregate shocks. Firms face an inverse demand that exhibits second-mover advantages rather than the complementary property of first-mover advantages commonly assumed in the literature on games of investment timing. We identify a joint-reduction scenario to be the unique equilibrium outcome of the disinvestment timing game with identical firms. With heterogeneous firms one out of three scenarios occurs. Depending on the degree of heterogeneity either firms disinvest jointly or the high-cost firm moves first or a multiplicity of equilibria arises. All optimal exercise policies turn out to be different from the closure rules suggested by the standard real options theory: Identical as well as heterogeneous firms in duopoly should disinvest earlier than price-taking firms but later than a monopolist. A discussion of welfare and policy issues suggests a restrictive approach to the assessment of mergers in declining industries.
  4. By: Renato D.B. Gomes (Ph.D. Student, Department of Economics - Northwestern University.); João Manoel Pinho de Mello (Department of Economics PUC-Rio.)
    Abstract: By engendering horizontal differentiation, non-price advertising increases the incentives to accommodate on the price dimension. However, advertising also increases the size of the market and, consequently, the payoffs to price undercutting, which induces more aggressive price competition. We propose a theory in which advertising has a different effect on price competition according to the level of market maturity. In mature markets - where potential growth in low - only the price accommodation effect is present. In immature markets, both effects are present. Therefore, advertising is more procompetitive (less anti-competitive) in immature markets. Evidence from several Brazilian beer markets corroborates the theory.
    Date: 2006–05
  5. By: Rafael Moner Colonques (Universitat de València); Ricardo Flores Fillol (Universidad Autónoma de Barcelona)
    Abstract: This paper looks at the endogenous formation of airline alliances bymeans of a two-stage game where first airlines decide whether to form analliance and then fares are determined. We analyze the profitability and thestrategic effects of airline alliances when two complementary alliances,following different paths, may be formed to serve a certain city-pair market.The formation of a complementary alliance is shown to hurt outsiders and thatfares decrease in the interline market. Contrary to what might be expected, wefind that complementary alliances are not always profitable, even in thepresence of economies of traffic density. The interplay between market size, thedegree of product differentiation and the intensity of economies of trafficdensity determines whether the market equilibrium entails no alliances, a singlealliance or a double alliance.
    Keywords: complementary airline alliances, economies of traffic density, product differentiation
    JEL: L13 L2 L93
    Date: 2006–06
  6. By: Jedlicka, Lorenz (Department of Economics, BWZ, University of Vienna); Jumah, Adusei (Department of Economics, BWZ, University of Vienna and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: There exist a vast number of studies on the banking industry. However, the insurance industry remains relatively unexplored. Increasingly, Austrian insurance institutions are becoming important as financial intermediaries in the domestic market, and – based on proximity advantage – also in the Central and Eastern European markets. This paper applies the structure, conduct and performance (SCP) approach to a sample of 52 Austrian insurance firms. The main finding is that the standard SCP hypothesis of highly concentrated markets, which create incentives to engage in collusive behaviour and which in turn leads to higher industry profit rates, cannot be supported by the Austrian insurance industry leads to higher industry profit rates, cannot be supported by the Austrian insurance industry.
    Keywords: Insurance industry, Market structure, Conduct and performance, Industrial organisation
    JEL: G22 L1
    Date: 2006–05
  7. By: John Bennett (Brunel University); Saul Estrin (London Business School and IZA Bonn)
    Abstract: We model entry by entrepreneurs into new markets in developing economies with regulatory barriers in the form of licence fees and bureaucratic delay. Because laissez faire leads to ‘excessive’ entry, a licence fee can increase welfare by discouraging entry. However, in the presence of a licence fee, bureaucratic delay creates a strategic opportunity, which can result in both greater entry by first movers and a higher steady-state number of firms. Delay also leads to speculation, with entrepreneurs taking out licences to obtain the option of immediate entry if they later observe the industry to be profitable enough.
    Keywords: entry, entry barriers, developing economy
    JEL: L50 O14
    Date: 2006–05
  8. By: Andrej V. Ivanov (Chair for Applied Microeconomics, Department of Economics, Mannheim University, D-68131 Mannheim, Germany,; Florian Mueller (Chair for Applied Microeconomics, Department of Economics, Mannheim University, D-68131 Mannheim, Germany,
    Abstract: Conventionally, we think of an increase in competition as weakly decreasing prices, increasing the number of consumers served, thus increasing consumer surplus, decreasing firms profits, etc. Here, we demonstrate that, under some tame circumstances, an increase in competition may lead to a price increase in a horizontally differentiated market. We show this relationship for the petrol market in German cities.
    Date: 2006–05
  9. By: Tim Coelli; Shannon Walding (CEPA - School of Economics, The University of Queensland)
    Abstract: Various government-owned businesses provide water supply services to Australian residents. With the advent of recent competition and regulatory reforms in infrastructure industries in Australia, more and more of these businesses are now facing new types of incentive-based regulatory regimes. This has led to a desire for more information on the performance of these businesses, both relative to each other and over time. In this study we use panel data on the 18 largest Australian water services businesses, observed over an eight-year period from 1995/6 to 2002/3, to measure the relative efficiency and productivity growth of these businesses. Data envelopment analysis (DEA) methods are used to obtain estimates of the multi-input, multi-output production technology. The potential use of these performance measures in price-cap regulation is discussed, where the effects of variable selection and data quality upon empirical results is emphasised.
    Date: 2005–06
  10. By: Frank Milne (Queen's University); David Kelsey (University of Exeter)
    Abstract: This paper studies corporate governance when a firm operates in imperfect markets. We derive firms’ decisions from utility maximisation by individuals. If those involved in decisions are also consumers, the usual monopoly distortion is reduced. Corporate governance can effect the equilibrium in the product (or input) markets. This enables us to endogenise the objective function of the firm. If the firm cannot commit not to change its constitution, we find a Coase-like result where all market power is lost in the limit. We present a more abstract model of governance in the presence of market distortions.
    Keywords: corporate governance, stakeholder, oligopoly, strategic delegation
    JEL: D70 L13 L20
    Date: 2006–04
  11. By: Emilia Penkova
    Abstract: The paper tests for potential pricing-to-market for a wide range of export industries in selected transition economies, namely Poland, Hungary and Bulgaria, at the four-digit level over the period 1990-1998. Panel estimation is undertaken and a fixed-effects linear model is estimated. The empirical evidence reported here offers new evidence for transition economies that have not been investigated before. Given the industries sampled, more price discrimination across destination is observed in Bulgaria than in Poland and Hungary. There is no evidence showing pricing-to-market in relation to common industries across source countries.
  12. By: Francisco J. Mas (Universidad de Alicante); Antonio Ladrón de Guevara Martínez (Universitat Pompeu Fabra); Felipe Ruiz Moreno (Universidad de Alicante)
    Abstract: The main objective of this work is to propose an oligopolistic competition model thatincorporates product differentiation through quality of service in the Spanish bank loansmarket. This model allows us to detect the competitive behavior patterns in terms of the outputof all the financial entities with respect to three strategic groups defined in terms of size. Thismodel of competitive interactions is tested with a sample of 100 firms in the Spanish bank loanmarket between 1992 and 1994. This period of time is characterized by both, the end of a longprocess of deregulation and the integration of the Spanish Banking System in the EuropeanBanking System. The findings evidence a stronger aggressiveness from the larger-size groupwhen the medium and smaller-size groups increase their output. Besides, the results detect anaggressive conduct between the entities within the larger-size group. El objetivo de este trabajo consiste en proponer un modelo de competencia oligopolísticacon diferenciación de producto vía calidad de servicio en el mercado de créditos bancarios, elcual permite detectar el patrón de conducta competitiva del output (variaciones conjeturales anivel de cantidades de créditos vendidos) para todas y cada una de las entidades financierasrespecto de cada uno de los grupos estratégicos definidos por tamaño. Este modelo deinteracciones competitivas es contrastado con 100 entidades del mercado español de créditosbancarios entre 1992 y 1994, período temporal que marca la culminación de un proceso dedesregulación e integración europea del sistema bancario español y que incide directamente enla competencia en términos de cantidades de créditos vendidos. Los resultados obtenidosevidencian que el grupo de entidades de mayor tamaño tiene una actitud agresiva ante unaumento del output de los grupos de entidades pequeñas y medianas. Además, se detecta unaconducta agresiva entre las entidades del grupo de mayor tamaño.
    Keywords: Variación Conjetural, Comportamiento Competitivo, Grupos Estratégicos, Banking; Competition; Strategic Groups.
    Date: 2006–06
  13. By: Derek J. Clark (Department of Economics and Management, University of Tromsø, N-9037 Tromsø, Norway.; Kai A. Konrad (WZB, Reichpietschufer 50, D-10785 Berlin, Germany, and Free University of Berlin.
    Abstract: Where product innovation requires several complementary patents, fragmented property rights can be a factor that limits firms’ willingness to invest in the development and commercialization of new products. This paper studies multiple simultaneous R&D contests for complementary patents and how they interact with patent portfolios that firms may have acquired already. We also consider how this interaction and the intensity of the contests depends on the type of patent trade regimes and the product market equilibria that result from these regimes. We solve for the contest equilibria and show that the multiple patent product involves an important hold-up problem that considerably reduces the overall contest effort.
    Keywords: fragmented property rights, patents, contests, hold-up, R&D, patent pools, licensing
    JEL: D44
    Date: 2006–06
  14. By: Camera, Gabriele; Selcuk, Cemil
    Abstract: We study a market where identical capacity-constrained sellers compete to attract identical buyers, via price advertisements. Once buyers reach a store, prices might be renegotiable in a manner that is responsive to excess demand. We focus strongly symmetric equilibria, proving their existence and providing explicit solutions for the distributions of advertised and sale prices as functions of market characteristics. Since variations in the posted price can affect the store’s attractiveness and the incidence of haggling, the model endogenizes the ‘pricing convention’ prevailing in the market and generates several empirically testable predictions on market behavior.
    Keywords: Directed Search ; Endogenous Trading Mechanisms ; Market Frictions ; Price Dispersion
    JEL: C78 D39 D49 E39
    Date: 2004–12
  15. By: Stefan Lutz; Oleksandr Talavera; Sang-Min Park
    Abstract: We investigate the effects of regional and industry-wide foreign presence and foreign direct investment (FDI) on export volumes of Ukrainian manufacturing firms using unpublished panel data from 1996-2000. Foreign presence through FDI may have negative competition effects on domestic firms' performance while, at the same time, domestic firms' productivity may be increased by technology transfer or through training and demonstration effects. From a Cournot competition model including negative competition and positive technology-spillover effects, we derive the hypotheses that foreign presence and foreign investment might positively affect domestic firms' output and exports. Our estimation results support these hy-potheses and suggest in particular that large firms and durable-goods producers benefit most from foreign presence and investments.
    Keywords: transition, foreign direct investment, spillovers, firm performance.
    JEL: F14 F23 L60
    Date: 2006
  16. By: Vojislav Maksimovic; Gordon Phillips
    Abstract: We examine the effect of financial dependence on acquisition and investment within existing industries by single-segment and conglomerate firms for industries undergoing different long run changes in industry conditions. Conglomerates and single-segment firms differ more in rates of within-industry acquisitions than in capital expenditure rates, which are similar across organizational type. In particular, 36 percent of within-industry growth by conglomerate firms in growth industries is from intra-industry acquisitions, compared to nine percent for single segment firms. Financial dependence, a deficit in a segment’s internal financing, decreases the likelihood of within-industry acquisitions and opening new plants, especially for single-segment firms. These effects are mitigated for conglomerates in growth industries. The findings persist after controlling for firm size and segment productivity. Acquisitions lead to increased efficiency as plants acquired by conglomerate firms in growth industries increase in productivity post acquisition. The results are consistent with the comparative advantages of different firm organizations differing across long-run industry conditions.
    JEL: G0 G2 G3
    Date: 2006–06
  17. By: Andrew B. Bernard; Stephen J. Redding; Peter K. Schott
    Abstract: This paper examines the frequency, pervasiveness and determinants of product switching among U.S. manufacturing firms. We find that two-thirds of firms alter their mix of five-digit SIC products every five years, that one-third of the increase in real U.S. manufacturing shipments between 1972 and 1997 is due to the net adding and dropping of products by survivors, and that firms are more likely to drop products which are younger and have smaller production volumes relative to other firms producing the same product. The product-switching behavior we observe is consistent with an extended model of industry dynamics emphasizing firm heterogeneity and self-selection into individual product markets. Our findings suggest that product switching contributes towards a reallocation of economic activity within firms towards more productive uses.
    JEL: D21 E23 L11 L60
    Date: 2006–06
  18. By: Veronika Grimm; Friederike Mengel; Giovanni Ponti; Lari Arthur Viianto
    Abstract: We experimentally analyze first and second price auctions where one bidder can achieve a comparative advantage by investment prior to the auction. We find that, as predicted by theory, bidders invest more often prior to second price auctions than prior to first price auctions. In both auction formats bidding is more aggressive than the equilibrium prediction. However, bidding is closer to equilibrium than in control treatments where the comparative advantage is exogenous.
    Keywords: Auctions, Investment Incentives, Asymmetric Auctions, Experimental Economics
    JEL: D44 C91
    Date: 2006–06–06
  19. By: Brixy, Udo (Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]); Grotz, Reinhold
    Abstract: "There is a large body of literature on the determinants of regional variation in new firm formation. In contrast there are few articles on the spatial differences in new firm survival. Using panel data we analyse both items for 74 western German regions over a ten-year period. The positive relationship between entry and exit which is often stated suggests a negative correlation between entry and survival. On the other hand, however, it seems convincing that regions with high birth rates should also have high survival rates, because a favourable environment for the founding of new firms should also be encouraging for the development of these firms. However, an analysis of both rates for 74 western German regions over a ten-year period reveals the existence of a negative relationship in general. This means that the survival rates are below average in regions with high birth rates. Despite this overall correlation, however, it is shown that the spatial pattern of a combination of both rates is complex, and all types of possible relationships exist. With a multivariate panel analysis we study the factors that influence regional birth and survival rates using the same set of independent variables. It is shown that in the service sector most variables literally work in opposite directions in the birth and survival rates models. But this does not hold for the manufacturing sector. This can be rated as evidence for the 'supportive environment thesis'. The reason for this is a completely different outcome of the estimated birth rates models for both industry sectors, whereas there are only minor differences in the estimated survival rate models. We can therefore deduce firstly that the two industries have different requirements for their 'seed bed' but not for their further successful development; and secondly, that the spatial structures which increase the number of newly founded businesses in the service sector are detrimental to the survival rates of newly founded firms." (author's abstract, IAB-Doku) ((en))
    Keywords: Unternehmensgründung, regionale Disparität, Unternehmenserfolg, Wirtschaftszweige, Westdeutschland, Bundesrepublik Deutschland
    JEL: R11 J23 L25 M13
    Date: 2006–04–27
  20. By: David Encaoua (Centre d'Economie de la Sorbonne); Yassine Lefouili (Centre d'Economie de la Sorbonne)
    Abstract: This paper investigates the choice of an intellectual protection regime for a process innovation. We set up a multi-stage model in which choosing between patent and trade secrecy is affected by three parameters : the patent strength defined as the probability that the right is upheld by the court, the cost of imitating a patented innovation relative to the cost of imitating a secret innovation, and the innovation size defined as the extent of the cost reduction. The choice of the protection regime is the result of two effects : the damage effect evaluated under the unjust enrichment doctrine and the effect of market competition that occurs under the shadow of infringement. We find that large innovations are likely to be kept secret whereas small innovations are always patented. Furthermore, medium innovations are patented only when patent strength is sufficiently high. Finally, we investigate a class of licensing agreements used to settle patent disputes between patent holders and their competitors.
    Keywords: Patent, trade secrecy, imitation, licensing.
    JEL: D45 L10 O32 O34
    Date: 2005–12

This nep-com issue is ©2006 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.