nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒07‒15
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Two-Sided Markets with Pecuniary and Participation Externalities By Richard Schmidtke
  2. How Effective is European Merger Control? By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
  3. The U-shaped relationship between vertical integration and competition: theory and evidence By Philippe Aghion; Rachel Griffith; Peter Howitt
  4. Persistence of Monopoly, Innovation, and R-and-D Spillovers: Static versus Dynamic Analysis By Kresimir Zigic
  5. Welfare Analysis Incorporating a Structural Entry-Exit Model: A Case Study of Medicare HMOs By Shiko Murayama
  6. Reforms, Entry and Productivity: Some Evidence from the Indian Manufacturing Sector By Sumon Kumar Bhaumik; Shubhashis Gangopadhyay; Shagun Krishnan
  7. Regulatory Barriers & Entry in Developing Economies By John Bennett; Saul Estrin;
  8. Entry of Foreign Banks and their Impact on Host Countries By Maria Lehner; Monika Schnitzer
  9. Technology Licensing to a Rival By Boivin, Caroline; Langinier, Corinne
  10. Voice over IP. Competition Policy and Regulation By christoph Engel
  11. Competition Policy and the Swedish Model By Lundqvist, Torbjörn
  12. Competition as a Socially Desirable Dilemma By Christoph Engel
  13. The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment By Salvatore Piccolo; David Martimort
  14. Private Provision of a Complementary Public Good By Richard Schmidtke
  15. E-consumers' search and emerging structure of B-to-C coalitions By Jacques Laye
  16. Enterprise Restructuring in Belarus By Marina Bakanova; Saul Estrin; Igor Pelipas; Sergei Pukovich
  17. Multiagent modelling for telecommunication market structure evolution By Bogumil Kaminski
  18. Modeling the strategic trading of electricity assets By Derek W. Bunn; Fernando S. Oliveira
  19. Umbrella Branding and the Provision of Quality By Hendrik Hakenes; Martin Peitz
  20. The Economics of College Sports: Cartel Behavior vs. Amateurism By Lawrence M. Kahn
  21. Mixed Bundling Auctions By Philippe Jehiel; Moritz Meyer-ter-Vehn; Benny Moldovanu

  1. By: Richard Schmidtke (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany, Tel.: +49-89-2180 3957, Fax.: +49-89-2180 2767,
    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: Tomaso Duso (Wissenschaftszentrum Berlin für Sozialforschung (WZB), Reichpietschufer 50, D10785 Berlin, Germany. Tel: +49 30 25491 403, Fax: +49 30 25491 444,; Klaus Gugler (University of Vienna,; Burcin Yurtoglu (University of Vienna,
    Abstract: This paper applies a novel methodology to a unique dataset of large concentrations during the period 1990-2002 to assess merger control’s effectiveness. By using data gathered from several sources and employing different evaluation techniques, we analyze the economic effects of the European Commission’s (EC) merger control decisions and distinguish between blockings, clearances with commitments (either behavioral or structural), and outright clearances. We run an event study on merging and rival firms’ stocks to quantify the profitability effects of mergers and merger control decisions. We back up our results and methodology by using alternative measures for the merger’s profitability effects based on balance sheet data and obtain consistent results. Our findings suggest that outright blockings solve the competitive problems generated by the merger. Remedies are not always effective in solving the market power concerns, at least not on average. Nevertheless, both structural (divestitures) and behavioral remedies do help restore effective competition when correctly applied to anticompetitive mergers during the first investigation phase. Yet, they are on the whole ineffective or even detrimental when applied after the second investigation phase. Finally, remedies - especially behavioral ones - seem to constitute a rent transfer from merging firms to rivals when mistakenly applied to pro-competitive mergers.
    Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Expost Evaluation
    JEL: L4 K21 G34 C2 L2
    Date: 2006–07
  3. By: Philippe Aghion (Institute for Fiscal Studies and Harvard University); Rachel Griffith (Institute for Fiscal Studies); Peter Howitt (Institute for Fiscal Studies and Brown University)
    Abstract: This paper considers how competition can affect aggregate innovative activity through its effects on firms’ decision whether or not to vertically integrate. A moderate increase in competition enhances innovation incentives, too much competition discourages innovative effort. These effects generates an inverted-U relationship between competition and innovation and between competition and the incentive to vertically integrate. Preliminary evidence finds that there is a non-linear relationship between competition and the propensity of firms to vertically integrate. These results seem to be more consistent with the Property Right Theory (PRT) of vertical integration than with the Transaction Cost Economics (TCE) approach.
    Date: 2006–06
  4. By: Kresimir Zigic (CERGE-EI)
    Keywords: dynamic duopoly, R&D spillovers, persistence of monopoly, strategic predation, accommodation
    JEL: L12 L13 L41
    Date: 2006–07–04
  5. By: Shiko Murayama
    Abstract: Should the government subsidize entry to promote competition? In theory, free entry does not guarantee the socially optimum number of entrants. In differentiated product markets, free entry can result either in excessive or insufficient entry. In this paper I propose an empirical framework to address this issue with a case study of the Medicare HMO market for 2003 and 2004. I perform counterfactual welfare simulations with different entry conditions and with different government payment rates to HMOs. The results indicate that uniformly raising the payment rate lowers national welfare, which supports the government's efforts to contain the payment rate in my sample years. A comparison of the cases with and without entry and/or market power indicates that this welfare loss does not come from additional entry, but instead the oligopolistic market structure and market distortion from the payment rate subsidy. The number of entrants is likely to be insufficient.
    Date: 2006–06
  6. By: Sumon Kumar Bhaumik; Shubhashis Gangopadhyay; Shagun Krishnan
    Abstract: It is now stylized that, while the impact of ownership on firm productivity is unclear, product market competition can be expected to have a positive impact on productivity, thereby making entry (or contestability of markets) desirable. Traditional research in the context of entry has explored the strategic reactions of incumbent firms when threatened by the possibility of entry. However, following De Soto (1989), there has been increasing emphasis on regulatory and institutional factors governing entry rates, especially in the context of developing countries. Using 3-digit industry level data from India, for the 1984-97 period, we examine the phenomenon of entry in the Indian context. Our empirical results suggest that during the 1980s industry level factors largely explained variations in entry rates, but that, following the economic federalism brought about by the post-1991 reforms, variations entry rates during the 1990s were explained largely by state level institutional and legacy factors. We also find evidence to suggest that, in India, entry rates were positively associated with growth in total factor productivity.
    Keywords: Entry, Productivity, Institutions, Regulations, India, Reforms
    JEL: L11 L52 L64 L67 O14 O17
    Date: 2006–03–01
  7. By: John Bennett; Saul Estrin;
    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: L15 O14
    Date: 2006–03–01
  8. By: Maria Lehner (University of Munich, Akademiestr. 1/III, 80799 Munich, Germany. Tel: +49 89 2180 2766; Monika Schnitzer (University of Munich, Akademiestr. 1/III, 80799 Munich, Germany and CEPR. Tel: +49 89 2180 2217
    Abstract: Foreign bank entry is frequently associated with spillover effects for local banks and increasing competition in the local banking market. We study the impact of these effects on host countries. In particular, we ask how these effects interact and how they depend on the competitive environment of the host banking market. An increasing number of banks is more likely to have positive welfare effects the more competitive the market environment, whereas spillovers are less likely to have positive welfare effects the stronger competition. Hence, competitive effects seem to reinforce each other, while spillovers and competition tend to weaken each other.
    Keywords: foreign bank entry, multinational bank, competition in banking, spillover effects
    JEL: F37 G21 L13 O16
    Date: 2006–06
  9. By: Boivin, Caroline; Langinier, Corinne
    Abstract: Licensing a new technology implies introducing competition into the market. This has a negative effect on the profit of the incumbent if the demand remains unchanged. However, because of the novel content of an innovation, consumers may have different perceptions of the value of a good depending on the market structure. Thus, the introduction of a competitor into the market may enhance demand, and consequently have a positive effect on the profit of the incumbent. In a simple setting, we show that the incumbent may decide to license her technology even in the absence of a royalty when the positive effect outweighs the negative one.
    JEL: L1
    Date: 2005–09–19
  10. By: christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Traditionally, there have been two separate telecommunications networks, one based on switches, the other based on routers. The switched network basically carried voice. The packet switched network basically carried data. Now voice is about to go packet switched too. Ultimately, both networks might merge. If that were to happen, the governance structure of either of these networks would have to change fundamentally. Currently, a large amount of packet switched traffic goes over the public Internet. The Internet is organised as a club good. There is an access fee, but no further fee for its actual use. Volume metering is technically feasible, but typically only bandwidth is controlled. In the switched network, a split price is standard. There is an access fee, plus a separate fee for each call. In a club good, by definition each side pays for part of the traffic. On the Internet, the receiver pays principle is thus applied. In most countries, the switched network is governed by the caller pays principle. Under that principle, there are termination charges. Each operator has a local monopoly over its customers. There is thus the possibility that telephony will in the future be controlled by the same principles. Actually, in that case the only remaining property right would be access to the network. In the opposite case, data traffic might be contaminated by the principles currently governing switched telephony. This would presuppose that operators succeed in introducing artificial property rights for the relationship with their customers, maybe even for the individual instance of communication. Technically, there are two main opportunities for this. In switched telephony, for technical reasons it is natural to give out telephone numbers to operators, not to clients. Through these numbers, they control their customers. Voice over IP operators try to implement the same scheme for packet switched voice traffic, although here the domain name system would be natural. Domains are accorded to end users, not to operators. A second conduit for artificially introducing property rights is technical standards. They are needed for defining addressees, for the management of real-time interaction, and for the digital coding of voice signals. By way of proprietary standards, the operator gains full control. Competition policy should not only see at the establishment of these fundamental governance structures. It should also check the potential for distorting systems competition between switched and packet switched telephony. Incumbents are having a host of potential strategies for creating new barriers to entry, and for distorting actual competition. Most critical are bundling strategies. Diagonally integrated incumbents might offer their clients to carry their traffic over IP where possible, and through their traditional network otherwise. That way they could turn their customer base in the traditional networks into a barrier to entry. Currently, this strategy can fully work for mobile telephony. In fixed telephony it is more difficult to implement as long as IP addressees are not earmarked.
    Keywords: property right, club good, network externality, monopolistic competition, systems competition, packet switched telephony, network access, E. 164 numbers vs. IP addresses, caller pays principle vs. receiver pays principle, sip, codecs
    JEL: D D43 H41 K21 K23 L13 L15 L43 L86
    Date: 2005–12
  11. By: Lundqvist, Torbjörn (Institute for Futures Studies)
    Abstract: The aim of this paper is to present some findings from a study on the development of competition policy in Sweden since 1945. The comprehensive questions are about the view on knowledge in competition policy, the trust to the Swedish model, the change of the model and what has replaced it, and the attitudes to competition and co-operation in politics, authorities and interest groups. The study is basically built on government bills and directives to committees, committee reports, and comments on the later from authorities and interest groups.<p> Typical signs of the Swedish model were a consensus and co-operative attitude towards interest conflict, with institutional arrangements aimed for negotiations and pragmatism. This was also typical for competition policy. During the 1990s we find a change to an EU-model. It meant a transition to a more legalistic and theoretic view on competition.<p> When it comes to attitudes they changed successively in the direction of favouring competition before co-operation. The change was however radical when it comes to politicians and competition authorities. Not least the later came to argue for an “antitrust” view on competition. However, business interests were sceptical to the new competition law copying the EU-model.
    Keywords: competition policy; Swedish model
    JEL: N00
    Date: 2006–05
  12. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: A cartel is socially not desirable. But is it a normative problem? And has merger control reason to be concerned about tacit collusion? Neither is evident once one has seen that the members of a cartel face a problem of strategic interaction. It is routinely analysed in terms of game theory. Much less frequently, however, an obvious parallel is drawn. For cartel members, the formation of the cartel and cartel discipline are a public good. Making the parallel explicit is elucidating both at the theoretical and at the experimental levels. The paper contrasts oligopoly theory with public goods theory, and oligopoly experiments with public goods experiments.
    Keywords: Oligopoly, Public Good, Experiment
    JEL: C D D H K L L
    Date: 2006–05
  13. By: Salvatore Piccolo (University of Salerno and CSEF); David Martimort (University of Toulouse I, IDEI)
    Abstract: We provide a rationale for contractual incompleteness in a setting with manufacturer-retailer hier- archies. In a class of simple manufacturers-retailers economies, characterized by adverse selection and moral hazard, we show that principals dealing with (exclusive) agents who compete on a downstream market, may prefer to leave contracts silent on some (potentially) performance measures whenever certain other aspects of agents.activity remain noncontractible. Two e¤ects are at play once one moves from a complete to an incomplete contracting. First, reducing the number of screening instruments has a detrimental e¤ect on principals. pro.ts as it makes information revelation more costly and drives up the information rents associated to informational asymmetry. Second, it may provide principals with strategic power in that it allows to force competing hierarchies to behave in a more friendly manner on the downstream market. In contrast with previous literature, conjecturing a positive relationship between transaction costs and contracting incompleteness, it is demonstrated that equilibrium contracts display forms of incompleteness whenever agency costs are small enough. Implications on the use of vertical arrangements based on resale price maintenance in imperfectly competitive industries are also discussed.
    Date: 2006–07–01
  14. By: Richard Schmidtke (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany, Tel.: +49-89-2180 3957, Fax.: +49-89-2180 2767,
    Abstract: For several years, an increasing number of firms are investing in Open Source Software (OSS). While improvements in such a non-excludable public good cannot be appropriated, companies can benefit indirectly in a complementary proprietary segment. We study this incentive for investment in OSS. In particular we ask how (1) market entry and (2) public investments in the public good affects the firms' production and profits. Surprisingly, we find that there exist cases where incumbents benefit from market entry. Moreover, we show the counter-intuitive result that public spending does not necessarily lead to a decreasing voluntary private contribution.
    Keywords: Open Source Software, Private Provision of Public Goods, Cournot-Nash Equilibrium, Complements, Market Entry
    JEL: C72 L13 L86
    Date: 2006–06
  15. By: Jacques Laye (LEF Umr Inra-Engref, Nancy INRA)
    Keywords: B-to-C, coalition formation, multi-agent
    JEL: L11 C63 D83
    Date: 2006–07–04
  16. By: Marina Bakanova (World Bank, Minsk); Saul Estrin (London Business School and IZA Bonn); Igor Pelipas (Institute of Privatisation and Management, Minsk); Sergei Pukovich (Institute of Privatisation and Management, Minsk)
    Abstract: We explore the impact of privatization and the entry of new firms on enterprise performance in Belarus, a transition economy in which reform and market-orientated institutional development has been limited. We hypothesize that private ownership will enhance company performance, measured in a variety of ways including profitability and capacity to export to the West, and that newly created firms will perform better than state-owned ones. Our work is based on a large enterprise level survey which includes state-owned firms, privatized companies and newly created enterprises. The data refute both hypotheses. We conclude that this is probably because the institutional environment has not evolved sufficiently from the socialist era to permit free competition and effective governance by new owners.
    Keywords: enterprise restructuring, privatization, transition, Belarus
    JEL: P2 P31 L1
    Date: 2006–05
  17. By: Bogumil Kaminski (Warsaw School of Economics)
    Date: 2006–07–04
  18. By: Derek W. Bunn (London Business School); Fernando S. Oliveira (Operational Research and Systems Warwick Business School)
    Keywords: Competitive advantage, computational learning, auctions, asset trading, simulation, electricity markets
    JEL: L14 C72 C73 L94
    Date: 2006–07–04
  19. By: Hendrik Hakenes (MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany,; Martin Peitz (International University in Germany, 76646 Bruchsal, Germany,
    Abstract: Consider a two-product firm that decides on the quality of each product. Product quality is unknown to consumers. If the firm sells both products under the same brand name, consumers adjust their beliefs about quality subject to the performance of both products. We show that if the probability that low quality will be detected is in an intermediate range, the firm produces high quality under umbrella branding whereas it would sell low quality in the absence of umbrella branding. Hence, umbrella branding mitigates the moral hazard problem. We also find that umbrella branding survives in asymmetric markets and that even unprofitable products may be used to stabilize the umbrella brand. However, umbrella branding does not necessarily imply high quality; the firm may choose low-quality products with positive probability.
    Keywords: Umbrella branding, reputation transfer, signaling, experience goods.
    JEL: L14 L15 M37 D82
    Date: 2006–06
  20. By: Lawrence M. Kahn (Cornell University, CESifo and IZA Bonn)
    Abstract: This paper studies intercollegiate athletics in the context of the theory of cartels. Some point to explicit attempts by the National Collegiate Athletic Association (NCAA) to restrict output and payments for factors of production as evidence of cartel behavior. Others argue that such limits enhance product quality by preserving amateurism. I find that the NCAA’s compensation limits on athletes lead to high levels of rents from the entertainment revenues produced by the athletes. The athletes producing these rents are disproportionately African- American, while the beneficiaries are primarily white. The rents are typically spent on coaches’ salaries, facilities, and nonrevenue sports. Although athletic departments considered as businesses lose money on average, there is some evidence, although not unanimous, that they generate alumni contributions, state appropriations, and additional student applications.
    Keywords: cartel, monopsony, college athletics
    JEL: L12 L44 I21
    Date: 2006–06
  21. By: Philippe Jehiel (Paris-Jourdan Sciences Economiques, and University College, London,; Moritz Meyer-ter-Vehn (; Benny Moldovanu (Department of Economics, University of Bonn, Lennestr. 37, 53113 Bonn, Germany;
    Abstract: We study multi-object auctions where agents have private and additive valuations for heterogeneous objects. We focus on the revenue properties of a class of dominant strategy mechanisms where a weight is assigned to each partition of objects. The weights influence the probability with which partitions are chosen in the mechanism. This class contains efficient auctions, pure bundling auctions, mixed bundling auctions, auctions with reserve prices and auctions with pre-packaged bundles. For any number of objects and bidders, both the pure bundling auction and separate, efficient auctions for the single objects are revenue-inferior to an auction that involves mixed bundling.
    Date: 2006–02

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