nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒09‒16
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Collusion and Durability By Dan Sasaki; Roland Strausz
  2. Collusion when the Number of Firms is Large By Luca Colombo; Michele Grillo
  3. Currents and Sub-currents in the River of Innovations - Explaining Innovativeness using New-Product Announcements By Dolfsma, W.; Panne, G. van der
  4. Investment in oligopoly under uncertainty : the accordion effect By Bouis,Romain; Huisman,Kuno J.M.; Kort,Peter M.
  5. Quantifying the Scope for Efficiency Defense in Merger Control: The Werden-Froeb-Index By Marie Goppelsroeder; Maarten Pieter Schinkel; Jan Tuinstra
  6. The impact of competition on bank orientation By Degryse,Hans; Ongena,Steven
  7. The Cost of Banking Regulation By Luigi Guiso; Paola Sapienza; Luigi Zingales
  8. Are Rural Credit Markets Competitive? Is There Room for Competition in Rural Credit Markets? By Kilkenny, Maureen; Jolly, Robert W.
  9. Asset Restructuring Strategies in Bank Acquisitions: Evidence from the Italian Banking Industry By Pietro ALESSANDRINI; Alberto ZAZZARO; Giorgio CALCAGNINI
  10. The impact of organizational structure and lending technology on banking competition By Degryse,Hans; Laeven,Luc; Ongena,Steven
  11. Banks, Distances and Financing Constraints for Firms By Pietro ALESSANDRINI; Alberto ZAZZARO; Andrea PRESBITERO
  12. Going where the Ad leads you: On High Advertised Prices and Search where to buy By Maarten C.W. Janssen; Marielle C. Non
  13. Mergers and CEO power By Felipe Balmaceda
  14. Synergies are a reason to prefer first-price auctions! By Leufkens Kasper; Peeters Ronald
  15. Exclusive vs Overlapping Viewers in Media Markets By Ambrus, Attila; Reisinger, Markus

  1. By: Dan Sasaki (University of Tokyo, Institute of Social Science); Roland Strausz (Free University of Berlin, Department of Economics)
    Abstract: We make the observation that cartels which produce goods with lower durability are easier to sustain implicitly. This observation generates the following results: 1) implicit cartels have an incentive to produce goods with an inefficiently low level of durability; 2) a monopoly or explicit cartel is welfare superior to an implicit cartel; 3) welfare is non--monotonic in the number of firms; 4) a regulator may demand inefficiently high levels of durability to prevent collusion.
  2. By: Luca Colombo; Michele Grillo
    Abstract: In antitrust analysis it is generally agreed that a small number of firms operating in the industry is an essential precondition for collusive behavior to be sustainable. However, the Italian Competition Authority (AGCM) challenged this view in the recent case RCA (2000), when an information exchange among forty-four firms in the car insurance market was assessed as having an anticompetitive object. The AGCM’s basic argument was that an information exchange facilitates collusion because it changes the market environment in such a way as to relax the incentive compatibility constraint for collusion, thus circumventing the decrease in the critical discount factor when the number of firms in the industry increases. In this paper we model collusive behavior in a “dispersed” oligopoly. We prove that, when the technology exhibits decreasing returns to scale, collusion can always be sustained, regardless of the number of firms, provided the marginal cost function is sufficiently steep. Moreover, we show how an information exchange can sustain collusive behavior when the number of firms is “large” independently of the assumptions on technology.
    Keywords: Collusion, Industry structure, Facilitating practices
    JEL: L41 L13 L11 K21
    Date: 2006–03
  3. By: Dolfsma, W.; Panne, G. van der (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: In their seminal paper, Acs and Audretsch (1988) analyze innovation patterns across industries and identify several determinants of innovativeness, both positive and negative. Their work is seminal if only because of the unique data they use to measure innovativeness: new-product announcements. They show that industry concentration, degree of unionization would hamper innovation; industries characterized by increased shares of skilled labor and large firms provide favorable conditions for innovation. By analyzing a new and more consciously compiled database, we re-examine their original claims. Our results largely support the findings of Acs & Audretsch, but diverge from them in one important way. We suggest that the large firms do not contribute more to a industry?s innovativeness than small firms ? a vindication of the Schumpeter Mark I perspective. In addition, we analyze micro-level data of individual firms. Firms within different sub-groups respond differently to their competitive environment. We show that less dedicated innovators prove more susceptible to environmental factors than more committed innovators. In addition, an unfavorable competitive environment decreases the likelihood that less successful innovators will announce new products.
    Keywords: Innovation;New-Product Announcements;Innovation Sub-Currents;Schumpeter Mark I;
    Date: 2006–09–06
  4. By: Bouis,Romain; Huisman,Kuno J.M.; Kort,Peter M. (Tilburg University, Center for Economic Research)
    Abstract: In the strategic investment under uncertainty literature the trade off between the value of waiting known from single decision maker models and the incentive to preempt competitors is mainly studied in duopoly models. This paper aims at studying competitive investments in new markets where more than two (potential) competitors are present. In case of three firms an accordion effect in terms of investment thresholds is detected in the sense that an exogenous demand shock results in a change of the wedge between the investment thresholds of the first and second investors that is qualitatively different from the change of the wedge between the second and third investment threshold. This result extends to the n firm case. We show that a direct implication of the accordion effect is that there are two types of equilibria in the three firm case. In the first type all firms invest sequentially and in the second type the first two investors invest simultaneously and the third investor invests at a later moment. If we consider sequential equilibria and compare entry times of the first investors for different potential market sizes, it turns out that in the two firm case the first investor invests earlier than in the monopoly case, in the three firm case the investment timing lies in between the one and the two firm case, the four firm case lies in between the two and the three firm case, and so on and so forth. Hence, a policy maker interested in an early start up should hope for an even number of competitors, although for n large the investment times of the first investors are almost equal.
    Keywords: investment;real options;oligopoly
    JEL: C73 D92 L13
    Date: 2006
  5. By: Marie Goppelsroeder (Graduate Institute of International Studies, Geneva, Switzerland); Maarten Pieter Schinkel (Faculty of Economics and Business, Universiteit van Amsterdam); Jan Tuinstra (Faculty of Economics and Business, Universiteit van Amsterdam)
    Abstract: In both US and EU merger control, merger-specific efficiencies are recognized as a possible defense for horizontal mergers that raise competition concerns. We introduce the Werden-Froeb-index (WFI) to assist in evaluating these efficiencies. The index measures the average reduction in marginal costs required to restore pre-merger equilibrium prices and quantities after the merger is consummated. It has low information requirements and can deal with any number of firms in price- or quantity-competition merging fully or partially, and a large class of demand and cost functions. We show how the WFI complements Phase I merger inquiries as a screening mechanism.
    Keywords: Merger control; efficiency defense; index; HHI
    JEL: L10 L40 C43
    Date: 2006–08–25
  6. By: Degryse,Hans; Ongena,Steven (Tilburg University, Center for Economic Research)
    Abstract: How do banks react to increased competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking. We empirically investigate the impact of interbank competition on bank branch orientation. We employ a unique data set containing detailed information on bank-firm relationships. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending. Our results illustrate that competition and relationships are not necessarily inimical.
    Keywords: bank orientation;bank industry specialization;competition;lending relationships
    JEL: G21 L11 L14
    Date: 2006
  7. By: Luigi Guiso; Paola Sapienza; Luigi Zingales
    Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations- access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rates spreads and an increased access to credit at a cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalizations.
    JEL: E0 G0
    Date: 2006–08
  8. By: Kilkenny, Maureen; Jolly, Robert W.
    Abstract: Not available.
    Date: 2006–05–31
  9. By: Pietro ALESSANDRINI (Universita' Politecnica delle Marche, Dipartimento di Economia); Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); Giorgio CALCAGNINI (Universit… di Urbino "Carlo Bo", Facolt… di Economia)
    Abstract: One of the most lively debated effects of banking acquisitions is the change in lending and asset allocation of the target bank in favour of transactional activities, at the expense of small and informational opaque borrowers. These changes may be the result of two distinct restructuring strategies of the asset portfolio of the bidder bank. An asset cleaning strategy (ACS), in which the acquiring bank makes a clean sweep of all the negative net present value activities in the portfolio of the acquired bank, and an asset portfolio strategy (APS), in which the acquiring bank permanently changes the portfolio allocation of the acquired bank. In this paper we focus on Italian bank acquisitions and test which asset restructuring strategy was predominantly pursued over the period 1997-2003. Moreover, we estimate both a model for the whole Italian banking industry and a model for the acquired banks located in economic backward Southern regions. At the national level we find evidence of a primacy of ACSs over APSs. When we concentrate on bank acquisitions that occurred in the Mezzogiorno (Italy’s Southern regions), evidence seems to reverse, i.e. APSs dominate over ACSs.
    Keywords: asset restructuring strategies, bank acquisitions, small business lending
    JEL: G21 L22
    Date: 2006–06
  10. By: Degryse,Hans; Laeven,Luc; Ongena,Steven (Tilburg University, Center for Economic Research)
    Abstract: Recent theoretical models argue that a bank's organizational structure reflects its lending technology. A hierarchically organized bank will employ mainly hard information, whereas a decentralized bank will rely more on soft information. We investigate theoretically and empirically how bank organization shapes banking competition. Our theoretical model illustrates how a bank's geographical reach and loan pricing strategy is determined not only by its own organizational structure but also by organizational choices made by its rivals. We take our model to the data by estimating the impact of the rival banks' organization on the geographical reach and loan pricing of a singular, large bank in Belgium. We employ detailed contract information from more than 15,000 bank loans granted to small firms, comprising the entire loan portfolio of this large bank, and information on the organizational structure of all rival banks located in the vicinity of the borrower. We find that the organizational structure of the close rival banks matters for both branch reach and loan pricing. The geographical footprint of the lending bank is smaller when the close rival banks are large, hierarchically organized, and technologically advanced. Such rival banks may rely more on hard information. Large rival banks in the vicinity also lower the degree of spatial pricing. We also find that the effects on spatial pricing are more pronounced for firms that generate less hard information, such as small firms. In short, size and hierarchy of rival banks in the vicinity influences both branch reach and loan pricing of the lender.
    Keywords: banking sector;bank size;competition;mode of organization
    JEL: G21 L11 L14
    Date: 2006
  11. By: Pietro ALESSANDRINI (Universita' Politecnica delle Marche, Dipartimento di Economia); Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); Andrea PRESBITERO ([n.a.])
    Abstract: The wave of bank mergers and acquisitions experienced in European and U.S. credit markets during the Nineties has deeply changed the geography of banking industry. While the number of bank branches has increased in almost every country, reducing the operational distance between banks and borrowers, bank decisional centres and strategic functions have been concentrated in only a few places within each nation, increasing the functional distance between banks and local communities. In this paper, we carry out a multivariate analysis to assess the correlation of functional and operational distances with local borrowers' financing constraints. We apply our analysis on Italian data at the local market level defined as provinces. Our findings consistently show that increased functional distance makes financing constraints more binding, it being positively associated with the probability of firms being rationed, investment-cash flow sensitivity, and the ratio of credit lines utilized by borrowers to credit lines make available by banks. These adverse effects are particularly evident for small firms and for firms located in southern Italian provinces. Furthermore, our findings suggest that the negative impact on financing constraints following the actual increased functional distance over the period 1996-2003 has substantially offset (and sometimes exceeded) the beneficial effects of the increased diffusion of bank branches occurring during the same period.
    Keywords: financing constraints, funtional distance, local banking system, operational proximity
    JEL: G21 G34 R51
    Date: 2006–09
  12. By: Maarten C.W. Janssen (Faculty of Economics, Erasmus Universiteit Rotterdam); Marielle C. Non (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: The search literature assumes that consumers know which firms sell products they are looking for, but are unaware of the particular variety and the prices at which each firm sells. In this paper, we consider the situation where consumers are uncertain whether a firm carries the product at all by proposing a model where in the first stage firms decide on whether or not to carry the product. Firms may advertise, informing consumers not only of the price they charge, but also of the basic fact that they sell the product. In this way, advertising lowers the expected search cost. We show that this role of advertising can lead to a situation where advertised prices are higher than non—advertised prices in equilibrium.
    Keywords: consumer search; informative advertising
    JEL: D83 L11 L13 M37
    Date: 2006–08–25
  13. By: Felipe Balmaceda
    Abstract: In this paper a simple model of mergers in which synergies, private benefits and CEO power play a crucial role is proposed. A merger is modeled as a bargaining process between the acquiring and target board with the gains from a merger divided according to Rubinstein’s alternating-offer game with inside options. Boards consider both firm value and CEOs’ payoff. when deciding whether or not to merge. The more powerful CEOs are, the more board members consider the consequences of a merger on CEOs’ payoffs. The model determines the optimal firm scope and yields predictions that are consistent with several empirical regularities about mergers such as: (i) inefficient mergers take place when acquiring CEOs are powerful and units are not related; (ii) target shareholders are better-o. after a merger, acquiring shareholders are sometimes worse-off., and combined value is positive; and (iii) in the presence of credit constraints, acquiring firms are more likely to merge with low-productivity firms and with firms in which CEOs are less powerful.
    Date: 2006
  14. By: Leufkens Kasper; Peeters Ronald (METEOR)
    Abstract: In this paper we show that in a private value setting first-price auctions can be preferred to second-price auctions. We consider a sequential auction of two objects with positive synergies and compare both auction formats. Although the second-price auction performs better in terms of efficiency and revenue, the first-price auction performs much better on a so far neglected dimension. Namely, the probability that the winner of the first object goes bankrupt is almost always higher when using the second-price rule. Our findings therefore support the common use of first-price auctions, most notably for procurement.
    Keywords: industrial organization ;
    Date: 2006
  15. By: Ambrus, Attila; Reisinger, Markus
    Abstract: This paper investigates competition for advertisers in media markets when viewers can subscribe to multiple channels. A central feature of the model is that channels are monopolists in selling advertising opportunities toward their exclusive viewers, but they can only obtain a competitive price for advertising opportunities to multi-homing viewers. Strategic incentives of firms in this setting are different than those in former models of media markets. If viewers can only watch one channel, then firms compete for marginal consumers by reducing the amount of advertising on their channels. In our model, channels have an incentive to increase levels of advertising, in order to reduce the overlap in viewership. We take an account of the differences between the predictions of the two types of models and find that our model is more consistent with recent developments in broadcasting markets. We also show that if channels can charge subscription fees on viewers, then symmetric firms can end up in an asymmetric equilibrium in which one collects all or most of its revenues from advertisers, while the other channel collects most of its revenues via viewer fees.
    Keywords: Media; Multihoming; Platform Competition; Two-Sided Markets
    JEL: D43 L13
    Date: 2006–09

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.