nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒09‒11
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices By Ali Hortacsu; Chad Syverson
  2. Trust and Recidivism; the Partial Success of Corporate Leniency Program in the Laboratory By Jeroen Hinloopen; Adriaan Soetevent
  3. Efficient collusion in optimal auctions By Dequiedt, V.
  4. Mean Variance Optimization of Non-Linear Systems and Worst-case Analysis By Elena Carletti; Philipp Hartmann; Giancarlo Spagnolo
  5. Single or Multiple Pricing in Electricity Pools? By Ahmed Anwar
  6. The Production Decisions of Large Competitors: Detecting Cost Advantages and Strategic Behavior in Restaurants By Clarissa Yeap
  7. Leveraging Offshore IT Outsourcing by SMEs through Online Marketplaces By Radkevitch, U.L.; Heck, E. van; Koppius, O.
  8. Buyer Commitment and Opportunism in the Online Market for IT Services By Radkevitch, U.L.; Heck, E. van; Koppius, O.
  9. When Should Nintendo Launch its Wii? Insights From a Bivariate Successive Generation Model By Franses, Ph.H.B.F.; Hernández-Mireles, C.
  10. Modeling Brand Extension as a Real Option: How Expectation, Competition and Financial Constraints Drive the Timing of Extensions By Pattikawa, L.H.
  11. The regulation of entry and aggregate productivity By Markus Poschke
  12. Competition:an inspirational marketing tool By Waarts, E.

  1. By: Ali Hortacsu; Chad Syverson
    Abstract: This paper looks at the reasons for and results of vertical integration, with specific regard to its possible effects on market power as proposed in the theoretical literature on foreclosure. It uses a rich data set on producers in the cement and ready-mixed concrete industries over a 34- year period to perform a detailed case study. There is little evidence that foreclosure effects are quantitatively important in these industries. Instead, prices fall, quantities rise, and entry rates remain unchanged when markets become more integrated. We suggest an alternative mechanism that is consistent with these patterns and provide additional evidence in support of it: namely, that higher productivity producers are more likely to vertically integrate, and as has been documented elsewhere, are also larger, more likely to grow and survive, and charge lower prices. We explore possible sources of vertically integrated producers’ productivity advantage and find that the advantage is tied to firm size, possibly in part through improved logistics coordination, but not to several other possible explanations.
    Date: 2006–07
  2. By: Jeroen Hinloopen (Faculty of Economics and Econometrics, Universiteit van Amsterdam); Adriaan Soetevent (Faculty of Economics and Econometrics, Universiteit van Amsterdam)
    Abstract: An experiment is conducted were subjects interact repeatedly to examine the effect of a particular leniency program on cartel formation, cartel stability and cartel recidivism. The program leads to lower prices for three reasons. First, non-cooperators are more persistent in their behavior which effectively blocks cartel formation in their respective groups. Second, members of groups that do form a cartel defect more often thus reducing the average cartel lifetime. Third, the difference between the agreed-upon price and the undercutting price is larger. The leniency program does not however affect the probability that a dismantled cartel is re-established.
    Keywords: cartels; corporate leniency programs; Bertrand competition; experiment
    JEL: C92 D43 L41
    Date: 2006–08–01
  3. By: Dequiedt, V.
    Abstract: We study collusion in an IPV auction with binary type spaces. Collusion is organized by a third-party than can manipulate participation decisions. We characterize the optimal response of the seller to different threats of collusion among the bidders. We show that, contrary to the prevailing view that assymmetric information imposes transaction costs in side-contracting, collusion in the optimal auction is efficient when the third-party can implement monetary transfers as well as when it can implement monetary transfers and reallocations of the good. The threat of non-participation in the auction by a subset of bidders is crucial in constraining the seller's profit.
    JEL: D82
    Date: 2006
  4. By: Elena Carletti (Center for Financial Studies, Frankfurt, and Wharton Financial Institution Center); Philipp Hartmann (European Central Bank, Frankfurt); Giancarlo Spagnolo (Stockholm School of Economics, Consip Research Unit, and CEPR)
    Abstract: We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition, which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank.
    Keywords: Credit Market Competition, Bank Reserves, Internal Money Market, Banking System Liquidity, Monetary Operations
    JEL: D43 G21 G28 L13
    Date: 2006–03–06
  5. By: Ahmed Anwar
    Abstract: We present a 2 bidder multi-unit, common cost auction model with uncertain demand and capacity constraints which ensure that the participants sometimes face a residual market share. The model is motivated by electricity pools. We show that a single-price auction where the bidders can submit only one bid for all units weakly dominates an auction where the bidders can make multiple-price bids in terms of average prices. In the case of uniform price auctions we give an example where the dominance is strict.
    Keywords: Electricity Pool, Multi-Unit Auction, Revenue Ranking
    JEL: D44 L13 L94
  6. By: Clarissa Yeap
    Abstract: This paper evaluates firm profitability in the highly competitive restaurant industry by comparing variation in firm size and production decisions with variation in market size. In the Census microdata, I find that multi-unit firms operate a greater number of restaurants and larger individual restaurants in larger MSAs. They also increase production intensity by increasing production during operating hours, extending operating hours, increasing the volume of meals and non-meals output. These results are generally consistent with full capacity exploitation in efficient firms, rather than underutilization by firms seeking to limit rivalry through excess capacity or product proliferation.
    Date: 2006–07
  7. By: Radkevitch, U.L.; Heck, E. van; Koppius, O. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Following their larger counterparts, an increasing number of small firms outsource their IT tasks to lower cost offshore destinations. For small firms, however, offshore outsourcing is a difficult undertaking as it involves high transaction costs. Online marketplaces for IT services, which have recently become available to small firms, make offshore IT outsourcing more accessible and manageable, although differences in the marketplace design result in varying outcomes across the marketplaces. This has consequences for SME’s decision as to which online marketplace to use, because different markets may have different types of benefits and costs. This paper sets to analyze some of the similarities and differences between online marketplaces for IT services and their effects for small firms. First, we analyze if and how online marketplaces reduce small firms’ transaction costs in offshore IT outsourcing. Second, we examine the effects of market entry barriers on outcomes of online marketplaces and their implications for small firms. The results indicate that online marketplaces for IT services do reduce transaction costs for small firms in offshore outsourcing across ten specific market processes. More surprising, however, is the finding that the lower market entry barriers for suppliers result in lower prices for buyers without compromising other aspects of market performance.
    Keywords: Offshore IT Outsourcing;Online Market;Reverse Auction;Process-Stakeholder Analysis;
    Date: 2006–08–22
  8. By: Radkevitch, U.L.; Heck, E. van; Koppius, O. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Companies increasingly outsource IT-related tasks using reverse auction mechanisms embedded into online marketplaces. However, a considerable proportion of auctions at these marketplaces do not result in a contract between buyer and supplier. Extant literature mostly refers to costly bidding and bid evaluation to explain this phenomenon. Another possible explanation is that because of the low entry barriers, buyers with a low commitment to exchange can use the marketplace solely for information gath-ering purposes such as price benchmarking and obtaining free consultations, having little or no intention to contract a supplier. We test this explanation by looking at how different types of costs incurred by the buyer during the sourcing process, are related to the outcome of reverse auctions in terms of contract award. We argue that higher levels of search, preparation and negotiation costs are associated with higher commitment to exchange and find that opportunistic behaviour does indeed play a part in the non-contracted projects, while committed buyers are more likely to enter into a contract with a supplier. The hypotheses are tested on a sample of 2,574 reverse auctions at a leading online marketplace for IT services and further verified across projects of different value and different levels of buyer experience. On the practical side, we recommend setting up entry barriers for buyers with a low level of commitment.
    Keywords: Reverse Auctions;Online Markets;IT Outsourcing;Opportunism;Transaction Costs;
    Date: 2006–08–22
  9. By: Franses, Ph.H.B.F.; Hernández-Mireles, C. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: November 2006 most likely marks the launch of Sony’s PS3, the successor to PS2. Later, Nintendo is expected to launch the Wii, the successor to the GameCube. We answer the question in the title by analyzing the diffusion of the earlier generations of these consoles, and by using a new model that extends the successive-generations model of Norton and Bass (1987) by introducing two market players. Based on interviews with consumers and with retailers, we calibrate part of this model. The main outcome is that an optimal launch time is around June 2007, as then total sales of Nintendo’s GameCube and Wii would get maximized.
    Keywords: Successive Generations;New Products;Video Consoles;Competition;
    Date: 2006–07–04
  10. By: Pattikawa, L.H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Despite their strategic importance firm’s motivations to extend brands have received only modest attentions by marketing scholars. We use multiple events duration models to examine the timing of launching brand extensions. We provide a theoretical framework of brand extensions based on the real option framework. Using a real option framework allows us to make a parallel comparison between firms launching brand extensions with an agent exercising a call option in a financial market. Specifically, we consider the timing of extensions as an opportunistic behaviour to cope with uncertainty, competition, and lack of financial resources. By using 428 pharmaceutical brands that were extended in the period 1973-2005, we demonstrate the use of several different variant of Cox models to deal with multiple extensions within the same brand (Andersen-Gill model, Marginal model, and two Conditional models). Our results show that firms launch brand extensions in response to increase in competition pressure, uncertainty concerning their expectation on firms’ stock prices, and lack of financial resources.
    Keywords: Brand Extension;Real Options;Hazard Models;
    Date: 2006–06–30
  11. By: Markus Poschke
    Abstract: The aim of this paper is to contribute to explaining differences in aggregate productivity between similar, industrialized countries such as the US and European Union (EU) member states. By introducing shifts in administrative entry cost and a firm technology adoption decision in a model of heterogeneous firms close to Hopenhayn (1992), it matches the following facts: higher entry cost is associated with (1) both lower labor and total factor productivity, (2) more capital-intensive production, and (3) lower firm turnover. Compared to previous studies of reallocation intensity and aggregate productivity, endogenizing capital intensity through technology choice leads to stronger results; higher equilibrium capital intensity acts as an entry barrier to new firms, and protects low-productivity incumbents. Notably, the very small differences in the administrative cost of entry as documented by Djankov, La Porta, Lopez-de-Silanes and Shleifer (2002) suffice to explain 10 to 20% of differences in TFP and the capital-output ratio between Europe and the US. To obtain this, both heterogeneity of firms and allowing for technology choice are crucial.
    Keywords: growth theory, aggregate productivity, technology adoption, firm dynamics, entry and exit, reallocation, selection, regulation of entry
    JEL: E22 G38 L11 L16 O33 O40
    Date: 2006
  12. By: Waarts, E. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Competition is the engine behind innovation and dynamics in the marketplace. Sectors like public transport,water,energy and telecom are liberalized and deregulated by nationalandinternationalgovernmentsinordertoincreasecompetitionamongcompanies. The ultimate goals are to create transparent markets with ample opportunities for new firms to enter, fair prices and a varied, innovative range of consumer products and services. Competition may indeed stimulate firms to run faster, and to create better products and services by using effectivemarketing practices.This can,for example,readily be observed in the high technology sector. In that sense, competition can be an inspirational and stimulating marketing tool. At the same time, competition can have destructive effectsaswell,whenfirms’primarygoalsbecometobeat orharmtheircompetitors.Thiswas, for example, recently the case in a taxi war in Amsterdam. Constructive and destructive behaviours are partly determined by both the characteristics and rules of the market, the manager and his company. Research is required to fully understand the effects of the various factors on competitive behaviour and subsequently on the performance of the market. This is essential, both for theory development, and for governments, companies and consumers as well.
    Keywords: marketing research;marketing strategy;competition;innovation;competitive interaction;industry;drivers;company performance;
    Date: 2004–08–26

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