nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒10‒14
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Innovation and competitive pressure By Vives, Xavier
  2. Competitive Nonlinear Pricing and Bundling By Mark Armstrong; John Vickers
  3. Competition and Disclosure By Oliver Board
  4. Valuing New Goods in a Model with Complementarities: Online Newspapers By Matthew Gentzkow
  5. Payment industry dynamics: a two-sided market approach By James McAndrews; Zhu Wang
  6. Dynamic Spatial Competition Between Multi-Store Firms By Victor Aguirregabiria; Gustavo Vicentini
  7. Misspecifiation of the Panzar-Rosse Model: Assessing Competition in the Banking Industry By Jacob Bikker; Laura Spierdijk; Paul Finnie
  8. Pure Numbers Effects and Market Power: New Results from Near Continuous Posted-Offer Markets By Douglas D. Davis
  9. Entry, Exit and Patenting in the Software Industry By Iain M. Cockburn; Megan J. MacGarvie
  10. Access pricing, bypass and universal service in post By Armstrong, Mark
  11. Computing abuse related damages in the case of new entry: the.... By Maite Martínez-Granado; Georges Siotis
  12. Competition Policy in Turkey By Kulaksizoglu, Tamer
  13. The impact of competition on productive efficiency in European railways By Gertjan Driessen; Mark Lijesen; Machiel Mulder
  14. Competition vs. Cooperation: Analyzing Strategy Dilemma in Business Growth under Changing Social Paradigms By Rajagopal
  15. Credit in a Tiered Payments System By Alexandra Lai; Nikil Chande; Sean O'Connor
  16. Markets with Search and Switching Costs By Wilson, Chris
  17. Markets with Bilateral Bargaining and Incomplete Information By Chatterjee, Kalyan; Dutta, Bhaskar
  18. Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions By Holger Breinlich
  19. Bank efficiency, ownership, and market structure : why are interest spreads so high in Uganda ? By Beck, Thorsten; Hesse, Heiko

  1. By: Vives, Xavier (IESE Business School)
    Abstract: The effects of competition on process and product innovation are analyzed, obtaining robust results that hold for a range of market structures. It is found that increasing the number of firms tends to reduce R&D effort, whereas increasing the degree of product substitutability, with or without free entry, increases R&D effort -provided that the total market for product varieties does not shrink. Increasing the total market size increases R&D effort and has ambiguous effects on the number of varieties offered, while decreasing the cost of entry increases the number of entrants and varieties but reduces R&D effort per variety. The framework and results shed light on empirical strategies to assess the impact of competition on innovation.
    Keywords: cost reduction; X-inefficiency; market concentration; market size; substitutability; product introduction; corporate governance; globalization;
    Date: 2006–06–10
  2. By: Mark Armstrong; John Vickers
    Abstract: We examine the impact of multiproduct nonlinear pricing on profit, consumer surplus and welfare in a duopoly. When consumers buy all their products from one firm (the one-stop shopping model), nonlinear pricing leads to higher profit and welfare, but often lower consumer surplus, than linear pricing. By contrast, in a unit-demand model where consumers may buy one product from one firm and another product from another firm, bundling generally acts to reduce profit and welfare and to boost consumer surplus. In a more general model where consumers may buy from more than one firm and where consumers have elastic demands for each product, nonlinear pricing has ambiguous effects. Compared with linear pricing, nonlinear pricing tends to raise profit but harm consumer surplus when: (i) demand is elastic, (ii) there is substantial product differentiation, (iii) there is substantial heterogeneity in consumer demand, (iv) consumers face substantial shopping costs when visiting more than one firm, and (v) a consumer`s brand preference for one product is strongly correlated with her brand preference for another product. Nonlinear pricing is more likely to lead to welfare gains when (i), (ii), (iv) and (v) hold, but (iii) does not.
    Keywords: Nonlinear Pricing, Bundling, Discounts
    JEL: D43 L13
    Date: 2006
  3. By: Oliver Board
    Date: 2006–01
  4. By: Matthew Gentzkow
    Abstract: Many important economic questions hinge on the extent to which new goods either crowd out or complement consumption of existing products. Recent methods for studying new goods are based on demand models that rule out complementarity by assumption, so their applicability to these questions has been limited. I develop a new model that relaxes this restriction, and use it to study the specific case of competition between print and online newspapers. Using new micro data from the Washington DC market, I show that the major print and online papers appear to be strong complements in the raw data, but that this is an artifact of unobserved consumer heterogeneity. I estimate that the online paper reduced print readership by 27,000 per day, at a cost of $5.5 million per year in lost print profits. I find that online news has provided substantial welfare benefits to consumers and that charging positive online prices is unlikely to substantially increase firm profits.
    JEL: C25 L82
    Date: 2006–10
  5. By: James McAndrews; Zhu Wang
    Abstract: This paper provides a theory of payment industry dynamics, in which we focus on the monetary nature of payment devices and consider an alternative microfoundation for the two-sided market approach. In a competitive economy, the adoption of an emerging payment method is determined by the distribution of consumer incomes and firm sizes, and the change of consumer income, adoption cost, and card-industry market structure each have important influence on payment pricing and usage dynamics. Our findings suggest that both the increasing concentration of payment card network and the growth of consumer income relative to card service costs may help explain the puzzles surrounding payment card interchange fees.
    Date: 2006
  6. By: Victor Aguirregabiria; Gustavo Vicentini
    Abstract: We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store firms. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We provide an algorithm to compute Markov Perfect Equilibria (MPE) in our model. We conduct several numerical experiments to study how the propensity of multi-store retailers to spatial preemptive behavior depends on the magnitude of entry costs, exit value and transportation costs.
    Keywords: Spatial competition; Market dynamics; Sunk costs; Spatial preemptive behavior.
    JEL: C73 L13 L81 R10 R30
    Date: 2006–08–29
  7. By: Jacob Bikker; Laura Spierdijk; Paul Finnie
    Abstract: This paper demonstrates that the level of competition in the existing Panzar Rosse (P-R) literature is systematically overestimated and that the tests on both monopoly and perfect competition are distorted. This is due to the use of bank revenues divided by total assets as dependent variable in the P-R model instead of unscaled bank revenues. We provide both theoretical and empirical evidence to illustrate the impact of the misspecification on the estimation of competition and the statistical tests on the market structure. Inclusion of scale variables as explanatory variables, which is commonpractice in the current literature, has a similar distorting effect. Our overview of the extensive P-R literature reveals that all 28 studies considered suffer from these types of misspecification. The empirical evidence provided in this paper is based on a large sample of more than 18,000 banks in 101 countries over 16 years. We find that monopoly cannot be rejected in 28% of the countries (against 0% under misspecification) and that perfect competition cannot be rejected in 38% of the cases (against 20-30% under misspecification).
    Keywords: competition; banking industry; Panzar-Rosse model; misspecification; market structure
    JEL: C52 G21 L11 L13
    Date: 2006–09
  8. By: Douglas D. Davis (Department of Economics, VCU School of Business)
    Abstract: This paper reports an experiment conducted with extensively repeated posted-offer markets to examine interrelationships between seller concentration, static market power and pricing. Although contexts exist where both increased concentration and static market power raise prices, repeated-game effects also importantly affect outcomes. When sellers have static market power, dynamic effects cause prices to increase by more than the changes in static equilibrium predictions. Moreover, in a design where sellers have no static market power, but where the market structure facilitates dynamic price signaling activity, higher prices arise in three and four seller markets than in duopolies.
    Keywords: experiments, market concentration, antitrust policy
    JEL: C9 D4 L4
    Date: 2006–09
  9. By: Iain M. Cockburn; Megan J. MacGarvie
    Abstract: We examine the effects of software patents on entry and exit in 27 narrowly-defined classes of software products, using a dataset with comprehensive coverage of both mature public firms and small privately held firms between 1994 and 2004. Reflecting the complex economics underlying the relationship between patent protection, entry costs and industry structure, we find that patents have a mixture of effects on entry and exit. Controlling for firm and market characteristics, firms are less likely to enter product classes in which there are more software patents. However, all else equal, firms that hold software patents are more likely to enter these markets. The net effect on entry of increasing the number of software patents is difficult to measure precisely: estimates of the effect of an across-the-board 10% increase in patent holdings on the number of entrants into the average market in this sample range from -5% to +3.5%, with quite large standard errors. Evidence on exit and survival is consistent with these findings - holding patents appears to enhance the survival prospects of firms after entering a market.
    JEL: L1 L6 O34
    Date: 2006–10
  10. By: Armstrong, Mark
    Abstract: An incumbent postal service provider faces two issues which make the design of efficient access pricing especially difficult. First, universal service obligations, together with the presence of significant fixed costs, require retail prices to be out of line with underlying marginal costs. Second, competing firms may be able to bypass the incumbent's delivery network. Within a simple framework, this note analyses how access charges should best be set in the light of these twin constraints.
    Keywords: Access pricing; post; regulation; liberalisation
    JEL: L87 L51
    Date: 2006–05
  11. By: Maite Martínez-Granado (Universidad del País Vasco / The University of the Basque Country); Georges Siotis (Universidad Carlos III de Madrid)
    Abstract: A number of European countries, among which the UK and Spain, have opened up their Directory Enquiry Services (DQs, or 118AB) market to competition. We analyse the Spanish case, where both local and foreign firms challenged the incumbent as of April 2003. We argue that the incumbent had the ability to abuse its dominant position, and that it was a perfectly rational strategy. In short,the incumbent raised its rivals' costs directly by providing an inferior quality version of the (essential) input, namely the incumbent's subscribers' database. We illustrate how it is possible to quantify the effect of abuse in situation were the entrant has no previous history in the market. To do this, we use the UK experience to construct the relevant counterfactual, that is the "but for abuse" scenario. After controlling for relative prices and advertising intensity, we find that one of the foreign entrants achieved a Spanish market share of only half of what it would have been in the absence of abuse.
    Keywords: Competition policy; abuse of dominance; telecommunications.
    JEL: L41 C22 L96
    Date: 2006–10–05
  12. By: Kulaksizoglu, Tamer
    Abstract: This paper evaluates the current competition policy framework in Turkey. A brief history of competition policy is presented. An account of the Law on the Protection of Competition, the main law on competition in Turkey, is given. The structure of the Competition Authority, the body responsi- ble for applying the Law, and the way the enforcement system works are explained. Detailed statistics are given about all the cases submitted to the Competition Authority by 2002. Accounts of some selected cases are reported and a general assessment of the implementation of competition policy is offered. The main finding of the paper is that, although there is a movement in the right direction, competition policy implementation in Turkey still needs to be developed and strengthened.
    Keywords: Competition policy; Competition law
    JEL: L40
    Date: 2004–11–26
  13. By: Gertjan Driessen; Mark Lijesen; Machiel Mulder
    Abstract: This paper empirically explores the relationship between competition design and productive efficiency in the railway industry. We use Data Envelopment Analysis (DEA) to construct efficiency scores, and explain these scores, using variables reflecting institutional factors and competition design. Our results suggest that competitive tendering improves productive efficiency, which is in line with economic intuition as well as with expectations on the design of competition. We also find that free entry lowers productive efficiency. A possible explanation for this result is that free entry may disable railway operators to reap economies of density. Our final result is that more autonomy of management lowers productive efficiency. Most of the incumbent railway companies are state owned and do not face any competitive pressure. As a consequence, increased independence without sufficient competition and adequate regulation may deteriorate incentives for productive efficiency.
    Keywords: Rail transport; Efficiency; competition design
    JEL: D24 H42 L22 L25 L33 L92
    Date: 2006–09
  14. By: Rajagopal (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: There are many factors that determine the structure of competition in the environment of growing globalization. Of these, the factors which predominates the nature of competition include not only rivals, but also the economics of particular industries, new entrants, the bargaining power of customers and suppliers, and the threat of substitute services or products. Hence, competition seems to be inevitable. However, collaboration in the business strategy may be considered analogous with the cooperation in the reference to prevailing concerns of the globalization. This paper delineates the driving factors after the ideologies of the strategy formulation through competition and cooperation. The arguments in the paper are woven around sociological, economical and human behavioral paradigms and analytically discuss the strategic fit of competition and cooperation maxims intended towards the growth of business in a firm. The motivation on these juxtaposed issues of competition and cooperation has been derived by reviewing the ideologies debated over the recent past.
    Keywords: Competition, business growth, cooperation, human behavior, market leadership
    JEL: A13 D63 L22 M14 M20
    Date: 2006–08
  15. By: Alexandra Lai; Nikil Chande; Sean O'Connor
    Abstract: Payments systems are typically characterized by some degree of tiering, with upstream firms (clearing agents) providing settlement accounts to downstream institutions that wish to clear and settle payments indirectly in these systems (indirect clearers). Clearing agents provide their indirect clearers with an essential input (clearing and settlement services), while also competing directly with them in the retail market for payment services. The authors construct a model of a clearing agent with an indirect clearer to examine the clearing agent's incentives to lever off its upstream position to gain a competitive advantage in the retail payment services market. The model demonstrates that a clearing agent can attain this competitive advantage by raising the indirect clearer's costs, but that the incentive to raise these costs is mitigated by credit risk to the clearing agent from the provision of uncollateralized overdrafts to its indirect clearer. The results suggest that tiered payments systems, which require clearing agents to provide overdraft facilities to their indirect clearers, may result in a more competitive retail payment services market.
    Keywords: Financial institutions; Financial services; Market structure and pricing; Payment, clearing, and settlement systems
    JEL: G21 L12 L13 L22
    Date: 2006
  16. By: Wilson, Chris
    Abstract: By incorporating the additional existence of switching costs into an oligopoly search model by Stahl (1989), this paper dispels the misleading idea that search costs can simply be treated as a form of switching cost. Due to the assumption that search costs, unlike switching costs, are incurred unconditionally on the decision to switch suppliers it is shown that the anticompetitive effects of search costs are consistently larger than those from an equivalent level of switching costs. The finding suggests that obfuscation practices that aim to deter consumers from searching, such as competing on deliberately complex tariffs, may be particularly powerful relative to practices that increase the costs of substitution between firms, such as loyalty programs or termination fees.
    Keywords: Search costs; Switching costs; Obfuscation
    JEL: D83 D43 L13
    Date: 2006–05–06
  17. By: Chatterjee, Kalyan (Department of Economics, The Pennsylvania State University); Dutta, Bhaskar (Department of Economics, University of Warwick)
    Abstract: We study the relationship between bargaining and competition with incomplete information. We consider a model with two uninformed and identical buyers and two sellers. One of the sellers has a privately-known reservation price, which can either be Low or High. The other seller’s reservation price is commonly known to be in between the Low and High values of the privately-informed seller. Buyers move in sequence, and make offers with the second buyer observing the offer made by the first buyer. The sellers respond simultaneously. We show that there are two types of (perfect Bayes) equilibrium. In one equilibrium, the buyer who moves second does better. In the second equilibrium, buyers’ expected payoffs are equalised, and the price received by the seller with the known reservation value is determined entirely by the equuilibrium of the two-player game between a single buyer and an informed seller. We also discuss extensions of the model to multiple buyers and sellers, and to the case where both sellers are privately informed.
    Date: 2006
  18. By: Holger Breinlich
    Abstract: This paper analyzes mergers and acquisitions (M&A) as a previously neglected channel of industrial restructuring in the face of trade liberalization. Using the Canada-United States Free Trade Agreement of 1989 as a source of exogenous variation in trade barriers, I show that trade liberalization leads to a significant increase in M&A activity. I also provide evidence that resources are transferred from less to more productive firms in the process and that the magnitude of the overall transfer is quantitatively important. Taken together, these results suggest that M&As are an important alternative to the previously studied adjustment channels of firm and establishment closure and contraction. This has strong implications for the design of competition policy in the wake of trade liberalizations since M&As may offer a more efficient way of transferring resources than contraction and closure of low productivity firms combined with internal growth of more efficient firms.
    Date: 2006–10–09
  19. By: Beck, Thorsten; Hesse, Heiko
    Abstract: Using a unique bank-level data set on the Ugandan banking system during 1999-2005, the authors explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, they 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, the authors find tentative evidence that banks targeting the low end of the market incur higher costs and therefore higher margins.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Investment and Investment Climate,Financial Crisis Management & Restructuring,Financial Intermediation
    Date: 2006–10–01

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.