nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒09‒23
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
  2. Information Exchange, Market Transparency and Dynamic Oligopoly By Overgaard, Per Baltzer; Møllgaard, Peter
  3. Competition, Hidden Information and Efficiency: An Experiment By Antonio Cabrales; Gary Charness; Marie-Claire Villeval
  5. Let's Talk about Bidding! - Coordination Mechanisms in Procurement Auctions By Werner Güth; Jeannette Brosig; Torsten Weiland
  6. Star Wars: Exclusive Superstars and Collusive Outcomes By Selvaggi, Marianao; Vasconcelos, Luis
  7. Sequential versus simultaneous market By Haldrup, Niels; Møllgaard, Peter; Nielsen, Claus Kastberg
  8. Competition Policy and Innovation By Møllgaard, Peter; Lorentzen, Jo
  9. Industry Competition and Total Factor Productivity Growth By Michael D. Giandrea
  10. Creative Destruction in Industries By Boyan Jovanovic; Chung-Yi Tse
  11. Banking and SME Financing in the United States By Charles Ou
  12. Bank Efficiency, Ownership and Market Structure By Heiko Hesse; Thorsten Beck
  13. A note on price-taking and price-making behaviours in general equilibrium oligopoly models By Ludovic Julien; Fabrice Tricou
  14. Public and Private Activity in Commercial TV Broadcasting By Hansen, Bodil O.; Keiding, Hans
  15. Do Acquirer Capabilities Affect Acquisition Performance? Examining Strategic and Effectiveness Capabilities in Acquirers By Mudde, Paul A.; Brush, Thomas
  16. Regulation of Television advertising By Simon P. Anderson
  17. The Organization of Supply: a Vertical Equilibrium Analysis By Nadav Levy

  1. By: Tomaso Duso (Humboldt University Berlin and WZB,; Klaus Gugler (University of Vienna,; Burcin Yurtoglu (University of Vienna,
    Abstract: Using a sample of 167 mergers during the period 1990-2002 involving 544 firms either as merging firms or competitors, we contrast a measure of the merger’s profitability based on event studies with one based on accounting data. We find positive and significant correlations between them when using a long window around the announcement date and, for rivals, in case of anticompetitive mergers.
    Keywords: Mergers, Merger Control, Event Studies, Ex-post Evaluation
    JEL: L4 K21 G34
    Date: 2006–09
  2. By: Overgaard, Per Baltzer (Department of Economics, Copenhagen Business School); Møllgaard, Peter (Department of Economics, Copenhagen Business School)
    Abstract: In the economics literature, various views on the likely (efficiency) effects of information exchange, communication between firms and market transparency present themselves. Often these views on information flows are highly conflicting. On the one hand, it is argued that increased information dissemination improves firm planning to the benefit of society (including customers) and/or allows potential customers to make the right decisions given their preferences. On the other hand, the literature also suggests that increased information dissemination can have significant coordinating or collusive potential to the benefit of firms but at the expense of society at large (mainly, potential customers). In this chapter, we try to make sense of these views, with the aim of presenting some simple lessons for antitrust practice. In addition, the chapter presents some cases, from both sides of the Atlantic, where informational issues have played a significant role.
    Keywords: None
    JEL: H00
    Date: 2006–09–13
  3. By: Antonio Cabrales (Universidad Carlos III de Madrid); Gary Charness (University of California, Santa Barbara); Marie-Claire Villeval (CNRS-GATE and IZA Bonn)
    Abstract: We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. Competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
    Keywords: experiment, hidden information, competition, efficiency
    JEL: A13 B49 C91 C92 D21 J41
    Date: 2006–09
  4. By: Jim Engle-Warnick; Bradley Ruffle
    Abstract: We experimentally examine the impact of buyer concentration on the pricing of a monopolist. In our experimental markets, a monopolist faces either two or four buyers. Markets with two buyers achieve significantly lower prices, sometimes below competitive levels, than those with four buyers. We design an additional pair of treatments to pinpoint the source of this difference. We attribute the lower pries in the two-buyer treatment to the monopolist pricing more cautiously when there are fewer buyers in order to avoid costly losses in sales. Buyer concentration may thus be an elective source of countervailing power.
    JEL: C91 D42
    Date: 2006–09
  5. By: Werner Güth; Jeannette Brosig; Torsten Weiland
    Abstract: Collusive agreements are often observed in procurement auctions. They are probably more easily achieved when competitors’ costs are easily estimated. If, however, the individual costs of bidders are private information, effective ring formation is difficult to realize. We compare experimentally different coordination mechanisms in a first-price procurement auction in how they promote the prospects of collusive arrangements. One mechanism allows bidders to coordinate by means of unrestricted pre-play communication. The second one enables bidders to restrict their bidding range and the last one gives them the opportunity to implement mutual shareholding. According to our results firstprice procurement is quite collusion-proof when allowing for the latter two coordination mechanisms whereas, on average, pre-play communication increases bidders’ profits.
    Keywords: competition, collusion, auction, bidding, public procurement
    JEL: C72 H57 K42
    Date: 2006–09
  6. By: Selvaggi, Marianao; Vasconcelos, Luis
    Abstract: We examine the impact of agreements that prohibit "superstars" from switching their services to rivals on firms' ability to collude. Exclusivity (or non-compete) clauses are not uncommon in the sports,entertainment and professional services industries, but courts often refrain from enforcing them owing to inequity and/or restraint of trade considerations. We argue this attitude may be misguided. While in the collusive path exclusion may be inconsequential because firms agree not to hire each other's star, its enforcement level aspects the severity of future punishments. For exclusive talent may not be poached by rivals. The ability to sustain tacit collusion may thus be impaired, which in plausible constellations leads to efficiency improvements and more equitable distribution of rents.
    Date: 2006
  7. By: Haldrup, Niels (Department of Economics, Copenhagen Business School); Møllgaard, Peter (Department of Economics, Copenhagen Business School); Nielsen, Claus Kastberg (Department of Economics, Copenhagen Business School)
    Abstract: Delineation of the relevant market forms a pivotal part of most antitrust cases. The standard approach is sequential. First the product market is delineated, then the geographical market is defined. Demand and supply substitution in both the product dimension and the geographical dimension will normally be stronger than substitution in either dimension. By ignoring this one might decide first to define products narrowly and then to define the geographical extent narrowly ignoring the possibility of a diagonal substitution. These reflections are important in the empirical delineation of product and geographical markets. Using a unique data set for prices of Norwegian and Scottish salmon, we propose a methodology for simultaneous market delineation and we demonstrate that compared to a sequential approach conclusions will be reversed.
    Keywords: Relevant market; econometric delineation; salmon
    JEL: C30 K21 L41 Q22
    Date: 2005–03–15
  8. By: Møllgaard, Peter (Department of Economics, Copenhagen Business School); Lorentzen, Jo (Department of Economics, Copenhagen Business School)
    Abstract: We briefly review the rationale behind technological alliances and provide a snapshot of their role in global competition, especially insofar as it is based around intellectual capital. They nicely illustrate the increased importance of horizontal agreements and thus establish the relevance of the topic. We move on to discuss the organisation of industries in a dynamic context and draw out consequences for competition policy. We conclude with an outlook on the underlying tensions between technology alliances, competition policy, and industrial policy.
    Keywords: Competition policy; innovation; alliances; industrial policy
    JEL: L40 L50 O31
    Date: 2006–09–13
  9. By: Michael D. Giandrea (U.S. Bureau of Labor Statistics)
    Abstract: This paper analyzes the impact of changes in the competitive market structure on an industry's total factor productivity (TFP) growth. The impact of horizontal mergers on TFP growth is of particular interest. The number of proposed horizontal mergers among U.S. firms totaled 28,818 from 1996 to 2005, while the number of U.S. Department of Justice investigations of proposed mergers totaled 1,303 during the same time period. The impact of mergers upon total factor productivity growth is rightly a topic for consideration. Merger participants routinely claim that mergers will result in welfare improving efficiency gains. If true, these gains should translate into increased TFP growth. This paper estimates this effect and others after presenting a model of TFP growth as a function of changes in the competitive market structure of an industry, changes in production diversification measured at the establishment level, and changes in output per establishment and the number of establishments. Mergers are found to have a positive impact upon TFP growth, accounting for 0.36 percentage points of total factor productivity growth between census years.
    Keywords: Productivity Growth, Mergers, Competition
    JEL: D2 L1 L4
    Date: 2006–09
  10. By: Boyan Jovanovic; Chung-Yi Tse
    Abstract: Most industries go through a "shakeout" phase during which the number of producers in the industry declines. Industry output generally continues to rise, however, which implies a reallocation of capacity from exiting firms to incumbents and new entrants. Thus shakeouts seem to be classic creative destruction episodes. Shakeouts of firms tend to occur sooner in industries where technological progress is rapid. Existing models do not explain this. Yet the relation emerges naturally in a vintage-capital model in which shakeouts of firms accompany the replacement of capital, and in which a shakeout is the first replacement echo of the capital created when the industry is born. We fit the model to the Gort-Klepper data and to Agarwal's update of those data.
    JEL: L11
    Date: 2006–09
  11. By: Charles Ou
    Abstract: Loan markets for most small business borrowers in the United States have become more competitive over the past decade, evidenced by the emergence of a nationwide market for credit lines and credit cards and the entry of large regional banks in local markets. However, the impact of increased competition on the cost of funds to small firms, as indicated by the rate spreads between small business rates and the rates paid by the banks’ best prime customers, is more difficult to assess because of data limitations.
    Date: 2006
  12. By: Heiko Hesse; Thorsten Beck
    Abstract: Using a unique bank-level dataset on the Ugandan banking system over the period 1999 to 2005, we explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, we do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio, explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank-variation in spreads and margins. Further, we find tentative evidence that banks targeting the low-end of the market incur higher costs and therefore higher margins.
    Keywords: Foreign Bank Entry, Financial Sector Reform, Bank Efficiency, Financial Intermediation, Uganda
    JEL: G21 G30 O16
    Date: 2006
  13. By: Ludovic Julien (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Fabrice Tricou (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: This paper explores the rationale of price-taking and price-making behaviours in the context of Walrasian and Cournotian pure exchange economies. Beside the influence of the number of agents, we underline the role of the structure of preferences. Through three equilibrium variations of the same basic economy, we obtain several results about price manipulation, about asymptotic identifications for large economies and for degenerate preferences, and about welfare comparisons. Perfect competition does not only correspond to the case of large economies, but may also concern economies where market powers are more or less equivalent.
    Keywords: Cournot-Walras equilibria, market power, perfect competition
    Date: 2006–09–08
  14. By: Hansen, Bodil O. (Department of Economics, Copenhagen Business School); Keiding, Hans (Department of Economics, Copenhagen Business School)
    Abstract: We consider a model of commercial television market, where private broadcasters coexist with a public television broadcaster. Assuming that the public TV station follows a policy of Ramsey pricing whereas the private stations are profit maximizers, we consider the equilibria in this market and compare with a situation where the public station is privatized and acts as another private TV broadcaster. A closer scrutiny of the market for commercial television leads to a distinction between target rating points, which are the prime unit of account in TV advertising, and net coverage, which is the final goal of advertisers. Working with net coverage as the fundamental concept, we exploit the models of competition between public and private price and quantity in order to show that privatization of the public TV station entails a welfare loss and results in TV advertising becoming more expensive.
    Keywords: TV broadcasting; imperfect competition; Ramsey pricing; welfare comparison
    JEL: L11 L33 L82
    Date: 2006–09–14
  15. By: Mudde, Paul A.; Brush, Thomas
    Abstract: This paper examines acquisition performance from the perspective of acquirer capabilities. It argues that the strategic capabilities underpinning a firm’s competitive strategy can be utilized to create economic value in acquisitions. Acquirers with strong cost leadership capabilities are expected to leverage these capabilities to reduce post-acquisition costs as they integrate acquisition targets. Acquirers with strong differentiation capabilities are expected to utilize their strategic capabilities to increase post-acquisition revenues by improving branding, product design, sales, and services in their targets. We also explore the affect of an acquirer’s effectiveness capabilities on acquisition performance. Lastly, we examine how acquirer’s organize these capabilities, either at the business unit or corporate-level, in order to maximize their affect on acquisition performance. Based on a sample of 204 horizontal acquisitions occurring in the banking industry, we find support for the link between acquirer cost leadership capabilities and post-acquisition cost reduction. Acquirer effectiveness capabilities are associated with improvements in post-acquisition revenues and profitability. We conclude that a better understanding of the competitive capabilities of acquirers is important to understanding acquisition performance. This contributes directly to horizontal acquisition research, but can be extended to several areas of strategy research on M&As including: diversifying acquisitions, acquirer experience, and how acquirers can avoid “synergy traps”.
    Keywords: Acquisitions ; Acquirer Capabilities ; Strategic Capabilities ; Effectiveness Capabilities ; Acquisition Performance
    Date: 2006–08
  16. By: Simon P. Anderson
    Abstract: Regulation of television advertising typically covers both the time devoted to commercials and restrictions on the commodities or services that can be publicized to various audiences (stricter laws often apply to children’s programming). Time restrictions (advertising caps) may improve welfare when advertising is overprovided in the market system. Even then, such caps may reduce the diversity of programming by curtailing revenues from programs. They may also decrease program net quality (including the direct benefit to viewers). Restricting advertising of particular products (such as cigarettes) likely reflects paternalistic altruism, but restrictions may be less efficient than appropriate taxes.
    Keywords: television, advertising, regulation, length caps, advertising content
    JEL: D42 L15 M37
    Date: 2005–08
  17. By: Nadav Levy
    Abstract: In this paper I study how the make-or-buy decision of a firm depends on the organization of its peers. I consider a multi-firm framework in which firms choose whether to integrate into the supply of an intermediate input or to outsource its production, and choose the size of their supplier network if outsourcing. Firms find it optimal to share the same set of suppliers, as there are economies of scope in investment to suppliers taking multiple designs. These economies are due to spillovers of technical or operational know-how between projects and to savings in the setup costs on physical capital. The model admits multiple vertical equilibria that are Pareto-ranked, the one with the highest level of outsourcing being most efficient. Outsourcing is more likely in larger markets and when the economies of scope are stronger. The size of the optimal supplier network however typically decreases when the spillovers are stronger. These findings provide insight into the patterns of reorganization of vertical supply relations observed over the last two decades.
    Keywords: Outsourcing, Vertical Integration, Spillovers, Supply relations creation-date: 2004
    JEL: L22 D23

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