nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒07‒02
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Two-Sided Markets with Pecuniary and Participation Externalities By Schmidtke, Richard
  2. Firms merge in response to constraints By Boone,Jan
  3. The evolution of competition in banking in a transition economy: an application of the Panzar-Rosse model to Armenia By Armenuhi Mkrtchyan
  4. Networks and Firm Location By José Pedro Pontes
  5. Imports as Product and Labor Market Discipline By Hervé Boulhol; Sabien Dobbelaere; Sara Maioli
  6. Telecommunications policies: Measurement and determinants By Gual, Jordi; Trillas, Francesc
  7. Business Groups in Emerging Markets - Financial Control and Sequential Investment By Christa Hainz
  8. How do mergers and acquisitions affect bondholders in Europe? : evidence on the impact and spillover of governance and legal standards By Renneboog,Luc; Szilagyi,Peter G.
  9. The economics of IPR protection policies By Gil, Ricard
  10. Pseudo-Generic Products and Mergers in Pharmaceutical Markets By Martimort, D.; Poudou, J.-C.; Sand-Zantman, W.
  11. Package Auctions and Package Exchanges: the 2004 Fisher-Schultz Lecture By Paul Milgrom
  12. Cooperation in experimental games of strategic complements and substitutes By Potters,Jan; Suetens,Sigrid
  13. Empirical Determinants of Bargaining Power By Hirofumi Uchida

  1. By: Schmidtke, Richard
    Abstract: The existing literature on "two-sided markets" addresses participation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup differentiated platforms compete in advertising and offer consumers a service free of charge (such as a TV program) that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms benefit from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.
    Keywords: two-sided markets; broadcasting; advertising; market entry; digital television
    JEL: D43 L13 L82
    Date: 2006–06
  2. By: Boone,Jan (Tilburg University, Center for Economic Research)
    Abstract: Theoretical IO models of horizontal mergers and acquisitions make the critical assumption of efficiency gains. Without efficiency gains, these models predict either that mergers are not profitable or that mergers are welfare reducing. A problem here is the empirical observation that on average mergers do not create efficiency gains. We analyze mergers in a model where firms cannot equalize marginal costs and marginal revenues over all dimensions in their action space due to constraints. In this type of model mergers can still be profitable and welfare enhancing while they create a loss in efficiency. The merger allows a firm to relax constraints. Further, this set up is consistent with the following stylized facts on mergers and acquisitions: M&A's happen when new opportunities have opened up or industries have become more competitive (due to liberalization), they happen in waves, shareholders of the acquired firms gain while shareholders of the acquiring firms lose from the acquisition. Standard IO merger models do not explain these empirical observations.
    Keywords: Pro/anti-competitive mergers;efficiency defence;constraints;merger waves; deregulation
    JEL: G34 K21 L40
    Date: 2006
  3. By: Armenuhi Mkrtchyan
    Abstract: The structure of the banking industry typically undergoes fundamental changes during the transition to a market economy. This research employs the method suggested by Panzar and Rosse (1987) to evaluate the empirical evidence on the evolution of competitive structure in the Armenian banking industry during its recent transition and on the possible forces-market power or efficiency/contestability-that underlie that evolution. The results point to monopolistic competition.The reduction of bank numbers and the simultaneous increase in concentration is accompanied by a decline in competition intensity, which supports the market-power hypothesis
    JEL: L1 L8
    Date: 2005–06–01
  4. By: José Pedro Pontes
    Abstract: This paper models the decision of vertically-linked firms to build either partitioned or connected networks of supply of an intermediate good. In each case, the locations of upstream and downstream firms are correlated. Input specificity is related both to variable costs (transport costs of the input) and fixed costs (learning costs of the use of the input). When both are low, a connected network emerges and a partitioned pattern arises in the opposite case. In the boundary region, there are multiple equilibria, either asymmetric (mixed network) or symmetric.
    Keywords: Vertically-linked industries; Intermediate goods; Networks; Input flexibility.
    JEL: R30 L13
  5. By: Hervé Boulhol (IXIS-CIB and CES, University Paris I Panthéon-Sorbonne); Sabien Dobbelaere (Ghent University, LICOS K.U. Leuven and IZA Bonn); Sara Maioli (GEP, University of Nottingham)
    Abstract: This paper tests the pro-competitive effect of trade in the product and labor markets of UK manufacturing sectors between 1988 and 2003 using a two-stage estimation procedure. In the first stage, we use data on 9820 firms from twenty manufacturing sectors to simultaneously estimate mark-up and workers’ bargaining power parameters according to sector, firm size and period. We find a significant drop in both the mark-up and the workers’ bargaining power in the mid-nineties. In the second stage, we relate our parameters of interest to trade variables. Our results show that imports from developed countries have significantly contributed to the decrease in both mark-ups and workers’ bargaining power.
    Keywords: workers’ bargaining power, mark-ups, pro-competitive effect
    JEL: C23 F16 J51 L13
    Date: 2006–06
  6. By: Gual, Jordi (IESE Business School); Trillas, Francesc (Universitat Autonoma de Barcelona)
    Abstract: This paper presents new data on telecommunications reform for a cross section of countries. We measure telecommunications reform along two dimensions: entry barriers and regulatory independence. This data set is combined with a comprehensive set of performance, institutional and political data to analyze the determinants of telecommunications policies. We find that entry barriers are positively associated with the degree to which countries have an interventionist legal tradition, but they are unrelated to the partisan ideology of reforming governments. We also find that countries with weak protection of investors' quasi-rents by other means, and countries with a larger incumbent are more prone to create independent regulatory agencies, although this last result is statistically weaker.
    Keywords: Telecommunications policies; Liberalization; Regulation;
    JEL: F21 L32 L96
    Date: 2006–05–24
  7. By: Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Tel.: +49 89 2180 3232, Fax.: +49 89 2180 2767, christa.hainz at
    Abstract: Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.
    Keywords: Business groups, self-enforcing contract, institutions, internal capital market
    JEL: G31 G32 G34 K49 L22
    Date: 2006–06
  8. By: Renneboog,Luc; Szilagyi,Peter G. (Tilburg University, Center for Economic Research)
    Abstract: This paper contributes to the comparative corporate governance literature by showing how cross-country differences in governance and legal standards affect the bondholder wealth effects of European merger and acquisitions (M&As). Using investment-grade Eurobonds, we find some remarkable results. Firstly, M&As involving European firms are considerably more bondholderfriendly than are US domestic deals. Bidding firm bondholders earn economically significant positive returns, while target bondholders incur positive but insignificant returns. Overall, acquisitions do generate value to European bidding firms, but most of the wealth effect is captured by the bondholders. Secondly, bondholder gains in both bidding and target firms are systematically higher in M&As that involve Continental European firms. Thirdly, bidder abnormal bond returns are lower in cross-border deals. However, this is counterbalanced if creditor rights and the efficiency of credit contract enforcement are stronger in the target country. There is also strong evidence that, consistent with crossborder spillovers, improved creditor protection redistributes wealth from shareholders to bondholders. Finally, we document that bondholder wealth changes are subject to changes in asset risk and to a negative listing effect similar to that previously reported for changes in shareholder wealth.
    Keywords: bondholder returns;Eurobonds;mergers and acquisitions;creditor rights; takeover;corporate governance;shareholders abnormal returns;M&A;insolvency
    JEL: G34 G32 G12 G14
    Date: 2006
  9. By: Gil, Ricard (University of California, Santa Cruz)
    Abstract: In this paper, we model competition between legal and pirate products. In our framework, the government affects this competition through police spending and taxes on legal products. Therefore, the government can choose the combination of spending and taxes that best fits its goals. We find that governments that focus entirely on eradicating piracy use lower levels of taxes and police spending than governments that focus on maximizing consumption, consumer surplus, welfare or government size. This result highlights the importance of demand side policies in the fight against piracy and posts a challenge to the traditional solo approach of supply side policies.
    Keywords: piracy; pirate products; intellectual property rights; illegal copying; demand side policies;
    Date: 2006–03–03
  10. By: Martimort, D.; Poudou, J.-C.; Sand-Zantman, W.
    Abstract: This article analyzes the optimal contract design between an inventor and a developer. The inventor is privately informed on the value of his idea. The developer must exert some non-verifiable effort to improve the probability of success of this innovation but may also choose to opt out of the relationship upon learning the quality of the idea. While first-best efficiency requires that all marginal returns on innovation be left to the developer, second-best efficiency taking into account this bilateral asymmetric information leads to distort downwards the developer’s incentives to prevent innovators from overstating the value of their ideas. There exists a trade-off between inviting inventor to reveal their ideas and inducing both effort and participation from the developer. The extent of this trade-off depends on the regime of property rights on ideas, i.e., on how easy to steal ideas. Since decreasing the marginal share of developers makes it more difficult to have them participating to the contract, countervailing incentives might sometimes appear. Taking into account those various effects leads to reduce the responsiveness of the contract to the exact value of the idea and might force to give up additional rents to the developer. Some extensions of our framework, including the cases of limited commitment, partial disclosure and double moral hazard, are studied to show the robustness and limits of our previous findings.
    Keywords: Contracts, Innovation, Ideas Stealing, Bilateral Asymmetric Information
    JEL: D82 D86 L24 O31
    Date: 2006
  11. By: Paul Milgrom
    Date: 2006–06–21
  12. By: Potters,Jan; Suetens,Sigrid (Tilburg University, Center for Economic Research)
    Abstract: Results are reported of a laboratory experiment aimed at examining whether strategic substitutability and strategic complementarity have an impact on the tendency to cooperate in two-player dominancesolvable games with a Pareto-inefficient Nash equilibrium. We find that there is significantly more cooperation when actions exhibit strategic complementarities than in case of strategic substitutes.
    Keywords: experiments;cooperation;strategic substitutes and complements;externalities
    JEL: C7 C9 L1
    Date: 2006
  13. By: Hirofumi Uchida
    Abstract: This paper empirically investigates what determine bargaining power between a lender and a borrower who have continuing transactional relationships. Bargaining power is proxied by which side of the transaction, i.e. the lender or the borrower, usually incurs a shoe-leather cost when they have contact. The proxy is regressed on three types of variables that can potentially determine distribution: (i) lender's competition, (ii) the degree of informational asymmetry between the two parties, and (iii) borrower performance. Consistent with theoretical predictions, we find that intensive lender competition and borrowers' good performance increase the likelihood of the lender incurring the cost, or the borrower's power. We also obtain evidence suggesting that some lenders enjoy a status of informational monopoly and capture borrowers.
    Date: 2006–06

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