nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒07‒21
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Quality-improving alliances in differentiated oligopoly By Frédéric Deroian; Frédéric Gannon
  2. Firm Regulation and Profit-Sharing: A Real Option Approach By Michele Moretto; Paola Valbonese
  3. Auctions with Endogenous Supply and the Walrasian Outcome By Damian S. Damianov
  4. Intellectual Property Rights and Entry into a Foreign Market: FDI vs. Joint Ventures By Alireza Naghavi; Dermot Leahy
  5. Innovation and the Determinants of Firm Survival By Hielke Buddelmeyer, Paul H. Jensen and Elizabeth Webster; Paul H. Jensen; Elizabeth Webster
  6. Cross-Border Acquisitons and Target Firms' Performance: Evidence from Japanese Firm-Level Data By Kyoji Fukao; Keikok Ito; Hyeg Ug Kwon; Miho Takizawa
  7. Pseudo-Generic Products and Mergers in Pharmaceutical Markets By Granier, L.; Trinquard, S.
  8. Innovation and market dynamics in the EPO market By Sorisio, Enrico; Strøm, Steinar
  9. Pricing strategies by European traditional and low cost airlines. Or, when is it the best time to book on line? By Claudio A. Piga; Enrico Bachis
  10. Air Travel Choices in Multi-Airport Markets By Jun Ishii; Sunyoung Jun; Kurt Van Dender
  11. Efficiency and Foreign Ownership in Banking: An International Comparison By Adnan Kasman; Saadet Kirbas Kasman; Oscar Carvallo
  12. Integración vertical en el sistema de salud colombiano: Aproximaciones empíricas y análisis de doble marginalización By Jairo Humberto Restrepo; Sandra Rodríguez; John Fernando Lopera

  1. By: Frédéric Deroian (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - [Université de la Méditerranée - Aix-Marseille II][Université de droit, d'économie et des sciences - Aix-Marseille III] - [Ecole des Hautes Etudes en Sciences Sociales]); Frédéric Gannon (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: Abstract: We study rival firms' incentives in quality-improving Research and Development (R&D) networks. The analysis stresses the role of free riding associated to collaboration and three major consequences emerge: R&D efforts decrease with the number of partners, networks of alliances are over-connected as compared to the social optimum and the profitmaximizing number of alliances is possibly non monotonic (decreasing then increasing) with respect to inverse measure of product differentiation.
    Keywords: and horizontally Differentiated Oligopoly, Product Innovation, R&D, Alliance
    Date: 2006–07–10
  2. By: Michele Moretto (University of Brescia); Paola Valbonese (University of Padova)
    Abstract: To avoid high profit levels often experienced in countries where monopolies in public utility sectors are regulated through price-cap mechanisms, several regulatory agencies have recently introduced profit-sharing (PS) clauses aimed at obtaining price reductions to the benefit of consumers. However, the implementation of these PS clauses has often turned out to be severely con- trained by the incompleteness of the price-cap itself and the non-verifiability of firms’profits. This paper studies the properties of a second-best optimal PS mechanism designed by the regulator to induce the regulated monopolist to divert part of its profits to custormers. In a dynamic model where a reg- ulated monopolist manages a long-term franchise contract and the regulator has the option to revoke the contract if there are serious welfare losses, we first derive the welfare maximising PS mechanism under verifiability of prof- its. Subsequently, we explore the sustainability of the PS mechanism under non-verifiability of profits. In a infinite-horizon game, it is showed that the dynamic sustainability of the PS clause crucially depends upon the magni- tude of the regulator’s revocation cost: the higher this cost, the lower the profit shared and the less frequent the regulator’s PS introduction. Finally, we present the endogenous and dynamic price adjustment which follows the adoption of the investigated PS mechanism in a price-cap regulation setting.
    Keywords: Price-cap regulation, Profit-sharing, Real options
    JEL: C73 L33 L5
    Date: 2006–01
  3. By: Damian S. Damianov (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: In this paper we study a special class of mechanisms for price formation on mo-nopolistic markets: multiunit auctions with endogenous supply. We formally define these trade mechanisms as dynamic market games and characterize their subgame perfect equilibria. Conditions on the pricing rule are provided, which guarantee that the strategic equilibria of these market forms are competitive. The discriminatory auction is found to have Walrasian equilibria only, whereas the uniform price auction has additional non-Walrasian equilibria. The presented models provide a strategic foundation of the competitive equilibrium paradigm. We discuss some parallels of our results to Pigou's (1920) discussion on monopoly pricing.
    Keywords: Monopoly, Endogenous supply auctions, Competitive equilibrium, Subgame perfect equilibrium, Strategic market games.
    JEL: D44 D41 D42
    Date: 2006–06
  4. By: Alireza Naghavi (Università di Modena e Reggio Emilia); Dermot Leahy (University College Dublin)
    Abstract: We study the effect of the intellectual property rights (IPR) regime of a host country (South) on a multinational's decision between serving a market via greenfield foreign direct investment to avoid the exposure of its technology or entering a joint venture (JV) with a local firm, which allows R&D spillovers under imperfect IPRs. JV is the equilibrium market structure when R&D intensity is moderate and IPRs strong. The South can gain from increased IPR protection by encouraging a JV, whereas policies to limit foreign ownership in a JV gain importance in technology intensive industries as complementary policies to strong IPRs.
    Keywords: Joint Ventures, Intellectual Property Rights, Technology Transfer, R&D Spillovers, FDI Policy
    JEL: O34 F23 O32 F13 L24 O24
    Date: 2006–06
  5. By: Hielke Buddelmeyer, Paul H. Jensen and Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research and Centre for Microeconometrics, The University of Melbourne and IZA Bonn); Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne and Intellectual Property Research Institute of Australia, The University of Melbourne); Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne and Intellectual Property Research Institute of Australia, The University of Melbourne)
    Abstract: While many firms compete through the development of new technologies and products, it is well known that new-to-the-world innovation is inherently risky and therefore may increase the probability of firm death. However, many existing studies consistently find a negative association between innovative activity and firm death. We argue that this may occur because authors fail to distinguish between innovation investments and innovation capital. Using an unbalanced panel of over 290,000 Australian companies, we estimate a piecewise-constant exponential hazard rate model to examine the relationship between innovation and survival and find that current innovation investments increase the probability of death while innovation capital lowers it.
    Date: 2006–07
  6. By: Kyoji Fukao; Keikok Ito; Hyeg Ug Kwon; Miho Takizawa
    Abstract: Using Japanese firm-level data for the period from 1994-2002, this paper examines whether a firm is chosen as an acquisition target based on its productivity level, profitability and other characteristics and whether the performance of Japanese firms that were acquired by foreign firms improves after the acquisition. In our previous study for the Japanese manufacturing sector, we found that M&As by foreigners brought a larger and quicker improvement in total factor productivity (TFP) and profit rates than M&As by domestic firms. However, it may argued that firms acquired by foreign firms showed better performance simply because foreign investors acquired more promising Japanese firms than Japanese investors did. In order to address this potential problem of selection bias problem, in this study we combine a difference-in-differences approach with propensity score matching. The basic idea of matching is that we look for firms that were not acquired by foreign firms but had similar characteristics to firms that were acquired by foreigners. Using these firms as control subjects and comparing the acquired firms and the control subjects, we examine whether firms acquired by foreigners show a greater improvement in performance than firms not acquired by foreigners. Both results from unmatched samples and matched samples show that foreign acquisitions improved target firms' productivity and profitability significantly more and quicker than acquisitions by domestic firms. Moreover, we find that there is no positive impact on target firms' profitability in the case of both within-group in-in acquisitions and in-in acquisitions by domestic outsiders. In fact, in the manufacturing sector, the return on assets even deteriorated one year and two years after within-group in-in acquisition, while the TFP growth rate was higher after within-group in-in acquisitions than after in-in acquisitions by outsiders. Our results imply that in the case of within-group in-in acquisitions, parent firms may be trying to quickly restructure acquired firms even at the cost of deteriorating profitability.
    Keywords: FDI, TFP, Acquisition, Selection bias, Propensity score matching, Average treatment effect
    JEL: C14 D24 F21 F23
    Date: 2006–07
  7. By: Granier, L.; Trinquard, S.
    Abstract: This paper fills the gap in the theoretical literature concerning mergers between brand-name and generic laboratories in pharmaceutical markets. To prevent generic firms from increasing their market share, some brand-name furms produce generics themselves, called pseudo-generics, enabling them to set up barriers to entry. We develop this topic by considering the pseudo-generics production as a mergers.catalyst. We show, in a duopoly model with substitutable goods, in which a brand-name firm and a generic firm compete à la Cournot, that a brand-name company always has an incentive to purchase its competitor. The key insight of this paper is that the brand-name laboratory can increase its merger gain by producing pseudo-generics beforehand. In some cases, pseudo-generics would not otherwise be produced.
    Keywords: Mergers, Pharmaceutical Market, Pseudo-Generics.
    JEL: I11 L12
    Date: 2006
  8. By: Sorisio, Enrico (Neuroscienze PharmaNess scarl); Strøm, Steinar (Dept. of Economics, University of Oslo)
    Abstract: We have estimated the demand of erythropoietin (EPO) on market data from the Nordic countries. Assuming that prices are set in a Nash-Bertrand game we determine the degree of competition in this Nordic market. We also report the impact of product innovation on welfare, e.g on consumer and producer surplus. The product innovation is the entry of Aranesp in the Nordic market. We find a positive effect related to the introduction of Aranesp in the EPO market. The high increase in consumer surplus however seems not to be accompanied by a great increase in producer surplus, whose growth is slight. Some time after the introduction of the innovation, the surplus growth does not seem to increase, it remains more or less the same (or decreases a bit). An important conclusion in our paper is that although there are few firms competing in the Nordic market for EPO, the estimated long run market power is low.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; EPO
    JEL: C35 D43 I18 L11
    Date: 2006–06–09
  9. By: Claudio A. Piga (Dept of Economics, Loughborough University); Enrico Bachis (Business School, Nottingham University)
    Abstract: It is often assumed that the airlines’ fares increase monotonically over time, peaking a few days before the departure. Using fares for about 650 thousand flights operated by both Low-Cost and Full Service Carriers, we show several instances in which the monotonic property does not hold. We also show that the volatility of fares increase in the last four weeks before departure, which is the period when the airlines can formulate a better prediction for a flight’s load factor. Finally, especially within the last two weeks, Full Service Carriers may offer lower fares than those posted by Low Cost Carriers.
    Keywords: on-line pricing; price discrimination; dispersion; yield management.
    JEL: L11 L13 L93
    Date: 2006–07
  10. By: Jun Ishii (Department of Economics, University of California-Irvine); Sunyoung Jun (Department of Economics, University of California-Irvine); Kurt Van Dender (Department of Economics, University of California-Irvine)
    Abstract: We estimate a conditional logit model to measure the impact of airport and airline supply characteristics on the air travel choices of passengers departing from one of three San Francisco Bay area airports and arriving at one of four airports in greater Los Angeles in October 1995. Non-price characteristics like airport access time, airport delay, flight frequency, the availability of particular airport-airline combinations, and early arrival times are found to strongly affect choice probabilities. Marginal effects and counterfactual scenarios suggest that changes access in times affect travel choices more than changes in travel delays, and that the preferred airport differs by passenger type. In order to examine the robustness of the conditional logit model, we estimate a mixed logit model, and find that the results are similar. We attribute the similarity to our strictly defined travel market and to our distinction between leisure and business travelers, thus controlling for two important sources of consumer heterogeneity.
    Keywords: Airports; Airlines; Air travel demand; Discrete choice
    JEL: L11 L15 L93 R41
    Date: 2006–02
  11. By: Adnan Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Saadet Kirbas Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Oscar Carvallo (Venezuelan Banking Association)
    Abstract: This paper estimates cost and profit efficiency for Latin American and the Caribbean banking sectors. This study also conducts a comparative analysis of the performance of foreign and domestic banks operating in these counties. Using a model proposed by Battese and Coelli (1995), a common cost and profit frontiers with country-specific environmental variables have been estimated for a panel of 427 banking firms from sixteen countries. The empirical analysis reveals the importance of the environmental variables in explaining the efficiency differences among countries. The results show that profit efficiency levels are well below those corresponding to cost efficiency, implying that the most important inefficiency is on the revenue side. The results further indicate that on average foreign banks are more efficient than domestic banks.
    Keywords: Banking, efficiency, foreign ownership
    JEL: G21 G28
    Date: 2005–11–23
  12. By: Jairo Humberto Restrepo; Sandra Rodríguez; John Fernando Lopera
    Abstract: La integración vertical en el sector salud se refiere a la estructura de gobierno diseñada para coordinar y controlar los servicios de atención en diferentes estados de la cadena de valor, así como para facilitar la colaboración y comunicación entre los oferentes de servicios. Para el caso colombiano, la integración vertical supone que los seguradores (EPS) presten los servicios de salud de forma directa, a través de sus propios centros de atención o redes de servicios (IPS), y es así como se ha dado la creación de IPS por parte de EPS, compras y otras modalidades de integración o control vertical. Se plantea un modelo de doble marginalización (Spengler, 1950), para el caso en el que solo participan una EPS y una IPS y se concluye que cuando hay integración o control vertical de la aseguradora hacia el prestador, los beneficios son mayores que un esquema de firmas independientes; además, el precio final del esquema integrado es menor.
    Date: 2006–05–15

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