nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒10‒07
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Two-Sided Markets with Pecuniary and Participation Externalities By Richard Schmidtke
  2. Do Slotting Allowances Harm Retail Competition? By Oystein Foros; Hans Jarle Kind
  3. On R&D Information Sharing and Merger By Uday Bhanu Sinha
  4. Equilibrium Mode of Competition in Unionized Oligopolies: Do Unions Act as Commitment Devices to Cournot Outcomes? By Constantine Manasakis; Minas Vlassis
  5. Entry of Foreign Banks and their Impact on Host Countries By Lehner, Maria; Schnitzer, Monika
  6. NETWORK SIZE AND NETWORK CAPTURE By Gerard Llobet; Michael Manove
  7. Crítica à avaliação quantitativa do efeito unilateral de um ato de concentração By Marina Moreira da Gama; Marco Antônio Ribas Cavalieri
  8. Shareholder wealth effects from mergers and acquisitions in the Greek banking industry By Constantine Manasakis
  9. "Innocuous" Minimum Quality Standards By Paolo Garella
  10. Entry and Exit in International Markets: Evidence from Chilean Data By Roberto Alvarez; Ricardo Lopez
  11. Regulation, Market Structure and Service Trade Liberalization By Denise Eby Konan; Ari Van Assche
  12. How Reasonable is the ‘Reasonable’ Royalty Rate? Damage Rules and Probabilistic Intellectual Property Rights By Jay Pil Choi
  13. Disclosing vs. Withholding Technology Knowledge in a Duopoly By Emanuele Bacchiega; Paolo Garella
  14. The Growth Opportunities for SMEs? By Bentzen, Jan; Madsen, Erik Strøjer; Smith, Valdemar
  15. Procurement with Costly Bidding, Optimal Shortlisting, and Rebates By Cuihong Fan; Elmar Wolfstetter

  1. By: Richard Schmidtke
    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
  2. By: Oystein Foros; Hans Jarle Kind
    Abstract: Slotting allowances are fees paid by manufacturers to get access to retailers’ shelf space. Both in the USA and Europe, the use of slotting allowances has attracted attention in the general press as well as among policy makers and economists. One school of thought claims that slotting allowances are efficiency enhancing, while another school of thought maintains that slotting allowances are used in an anti-competitive manner. In this paper, we argue that this controversy is partially caused by inadequate assumptions of how the retail market is structured and organized. Using a formal model, we show that there are good reasons to expect anti-competitive effects of slotting allowances. We further point out that competition authorities tend to use an unsatisfactory basis for comparison when analyzing welfare consequences of slotting allowances.
    Keywords: slotting allowances, retail competition, anti-trust policy
    JEL: L13 L42 L81
    Date: 2006
  3. By: Uday Bhanu Sinha (Delhi School of Economics)
    Abstract: The paper deals with the issue of information sharing in a Cournot duopoly by an innovating firm in the face of a merger with its rival. The innovating firm would share information about the cost realization with its rival provided the market size is relatively small or, the R&D technology is relatively more efficient in a medium market size. However, in a large market, or in a medium market size with less efficient R&D technology, the innovating firm does not share information with its rival. We also show that the social welfare may be higher under incomplete information regime.
    Keywords: Information sharing, market size, R&D, merger and welfare.
    JEL: L13 O32
    Date: 2006–08
  4. By: Constantine Manasakis (Department of Economics, University of Crete); Minas Vlassis (Department of Economics, University of Crete)
    Abstract: In contrast with previous studies, we postulate that there is no ex-ante commitment over the type of contract (i.e., price or quantity) which a firm offers consumers. In the context of a unionized symmetric duopoly we instead argue that the mode of competition which in equilibrium emerges is the one that entails the most beneficial outcome for both the firm and its labour union, in each firm/union pair, given the choice of the rival pair. Our findings suggest that monopoly unions with risk-averse/neutral members may effectively act as commitment devices driving firms to the symmetric Cournot mode of competition.
    Keywords: Oligopoly, Monopoly unions, Equilibrium mode of competition
    JEL: D43 J51 L13
    Date: 2006–03
  5. By: Lehner, Maria; Schnitzer, Monika
    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 ffects 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: 2006–09
  6. By: Gerard Llobet; Michael Manove (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Most types of networks, over time, spawn the creation of complementary stocks that enhance network value. Computer operating systems, for example, induce the development of the complementary stock of software applications that increase the value of the operating system. In this paper, we challenge the conventional wisdom that a large network, which induces the creation of large complementary stocks, serves as a barrier to entry that protects the incumbent from competition or network capture. We show that a larger network may either deter or attract entry depending on the relation between the network quality and the cost of an innovator's network product. The probability of entry also depends on the level of compatibility between the potential entrant's technology and existing complementary stocks, which in turn is influenced by the strength of the intellectual-property-rigths environment. Intellectual property rigths and the associated threat of entry may affect and incumbent's choice of network size in counterintuitive ways.
    JEL: L41 O34
    Date: 2006–04
  7. By: Marina Moreira da Gama (Cedeplar-UFMG); Marco Antônio Ribas Cavalieri (Cedeplar-UFMG)
    Abstract: The paper’s purpose is to investigate and to criticize the quantitative method used by antitrust authorities to analyze mergers unilateral effects. Until the nineties the method used by antitrust authorities was discretionary, based on a structural analysis of the market or the relevant market delimitation and the possibility of market power. Recently, the antitrust authorities have implemented a new method, called ‘merger simulation’ or the use of an oligopoly model with a demand system that predict the post merger prices and outputs. The problems with this new method are that two: these inherent implications, such that i) the dependence on the inherent curvature properties of the demand system; ii) the assumption that marginal cost does not vary in the relevant range; iii) the simplicity of the static oligopoly model; iv) the absence of market structural change as a consequence of the merger; and the relationship that this new method made with the variables structure and performance, like the questionable structuralism theory.
    Keywords: merger; unilateral effects; merger simulation
    JEL: L40 L44 K21
    Date: 2006–08
  8. By: Constantine Manasakis (Department of Economics, University of Crete)
    Abstract: This paper examines the shareholder wealth effects of mergers and acquisitions in the Greek banking industry from 1995 to 2001, using the “event study methodology”. The results suggest that targets’ shareholders earned significant abnormal returns upon the announcement of horizontal and diversifying deals. On the other hand, bidders’ shareholders had significant losses in cases of horizontal and zero effects in diversifying deals. Although mergers and acquisitions in the Greek banking industry are not found to be value-enhancing, they can be rationalized as an external growth strategy, whose goal was to strengthen the position of the participants in the domestic market and help them become more tenacious in a fiercely competitive international environment.
    Keywords: Mergers and Acquisitions; Banking; Valuation effects
    JEL: G34 G21 G14
    Date: 2006–05–31
  9. By: Paolo Garella (Dipartimento di Scienze Economiche, University of Bologna, Italy)
    Abstract: The present note shows that "innocuous" Minimum Quality Standards, namely below the lowest quality in a market, may have effects on equilibrium outcomes. Such a MQS reduces the incentive to invest in R&D by the quality-leading firm.
    Keywords: Regulation, Minimum Quality Standards, Oligopoly, R&D
    JEL: L0 L5
    Date: 2006–03–06
  10. By: Roberto Alvarez (Central Bank of Chile); Ricardo Lopez (Indiana University Bloomington)
    Abstract: Several studies examine the patterns and determinants of entry and exit in manufacturing industries. Not much work exists on entry and exit in international markets. This paper uses Chilean data to analyze the determinants of entry and exit in and out of export markets. We find that entry and exit rates differ across industries; vary over time; and are positively correlated. The econometric analysis shows that within-industry heterogeneity, measured by differences in productivity or other firm characteristics, has a significant effect on plant turnover in international markets. Our findings reveal that trade costs, factor intensities, and fluctuations in the real exchange rate play a minor role explaining entry and exit. This last result is consistent with hysteresis in international markets.
    Keywords: Treatment Entry, Exit, International Markets, Chile
    JEL: F14 D21 O54
    Date: 2006–09
  11. By: Denise Eby Konan; Ari Van Assche
    Abstract: In this paper, we develop a method to quantify the importance of regulation and market structure on the success of trade liberalization. For this purpose, we incorporate a single imperfectly competitive service sector that can take on various market structures into a standard computational general equilibrium model. We apply our framework to analyze the impact of allowing a single foreign telecom provider to enter Tunisia. If the regulation environment guarantees competition, Tunisia’s welfare can improve up to 0.65 percent. If a cartel is formed between the domestic incumbent and foreign entrant, however, Tunisia’s welfare can drop up to 0.25 percent. Our results thus call for Tunisia among other developing countries to step up its procompetitive regulatory reforms while liberalizing its telecom sector. <P>Dans ce papier, nous développons une méthode permettant de quantifier l’importance de la réglementation et de la structure des marchés sur la libéralisation du commerce et sur son succès. À ces fins, nous incorporons un secteur unique et imparfaitement compétitif pouvant intégrer différentes structures de marché dans un modèle standard de calcul d’équilibre général. Nous appliquons notre cadre d’analyse afin d’étudier l’impact de l’entrée d’un seul fournisseur étranger en Tunisie. Nous trouvons que si la réglementation du marché y garantit la compétition, le bien-être de la Tunisie peut augmenter de 0,65 %. Cependant, s’il y a formation d’un cartel entre le réseau domestique et l’entrant étranger, le bien-être de la Tunisie peut baisser de 0,25 %. Nos résultats démontrent que tout en libéralisant son secteur des télécommunications, la Tunisie bénéficierait de réformes visant des régulations pro-compétitives.
    Keywords: service trade liberalization, regulation, market structure, imperfect competition, CGE (Computable General Equilibrium), CGE (équilibre général calculable), compétition imparfaite, libéralisation du commerce, réglementation, structure de marché
    JEL: F12 F13 F23
    Date: 2006–09–01
  12. By: Jay Pil Choi
    Abstract: This paper investigates how different damage rules in patent infringement cases shape competition when intellectual property rights are probabilistic. I develop a simple model of oligopolistic competition to compare two main liability doctrines that have been used in the US to assess infringement damages – the unjust enrichment rule and the lost profit rule. It also points out the logical inconsistency in the concept of the “reasonable royalty rates” when intellectual property rights are not ironclad.
    Keywords: probabilistic intellectual property rights, damage rules, reasonable royalty rates
    JEL: D80 K40 L10 L40 O30
    Date: 2006
  13. By: Emanuele Bacchiega; Paolo Garella (Dipartimento di Scienze Economiche, University of Bologna, Italy)
    Keywords: Oligopoly, Information disclosure, R&D Joint Ventures, R&D Consortia, Returns to scale
    JEL: L13 O30
    Date: 2006–05–02
  14. By: Bentzen, Jan (Department of Economics, Aarhus School of Business); Madsen, Erik Strøjer (Department of Economics, Aarhus School of Business); Smith, Valdemar (Department of Economics, Aarhus School of Business)
    Abstract: The extensive empirical literature on the validity of Gibrat’s law does not in general verify the law as it finds that firms’ growth rates are negatively correlated with both firm size and age. However, some studies find that Gibrat’s law holds for sub-samples of firms such as large firms or firms belonging to special industries. It has been pointed out that these results are due to the fact that the likelihood of firm survival for natural reasons is positively related to firm size and age. This study uses a relatively large and representative sample of Danish firms to evaluate the validity of Gibrat’s law for different kinds of firms over the period 1990 - 2003. In contrast to the majority of earlier studies our analysis corrects for the bias in the estimations by using variables related to the survival of small firms.
    Keywords: Market Structure; Firm Strategy; Market Performance;
    JEL: L10
    Date: 2006–09–27
  15. By: Cuihong Fan (Shanghai University of Finance and Economics, School of Economics, Guoding Road 777 200433 Shanghai, China.; Elmar Wolfstetter (Dept. of Economics, Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str. 1, 10099 Berlin,Germany.
    Abstract: We consider the procurement of a complex, indivisible good when bid preparation is costly, assuming a population of heterogeneous contractors. Shortlisting is introduced to implement the optimal number of bidders, and we explore whether the procurer should reimburse the nonrecoverable cost of preparing a bid in whole or in part. We find that a reimbursement policy is profitable for the procurer only if performance and bidding costs are negatively correlated. Moreover, negative rebates (entry fees) always dominate positive rebates.
    Keywords: Procurement, Auctions, Entry
    JEL: D44 D45
    Date: 2006–09

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