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on Industrial Competition |
| By: | Norbäck, Pehr-Johan (Research Institute of Industrial Economics); Persson, Lars (Research Institute of Industrial Economics); Vlachos, Jonas (Research Institute of Industrial Economics) |
| Abstract: | We show that, in the case when innovations are for sale, increased product market competition, captured by reduced product market profits, can increase the incentives for innovations. The reason is that the incentive to innovate depends on the acquisition price which, in turn, might increase despite firms in the market making lower profits. We also show that stricter, but not too strict, merger and cartel policies tend to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation and by increasing the relative profitability of being the most efficient firm in the industry. Moreover, it is shown that increased intensity of competition can increase the relative profitability of innovation for sale, relative to innovation for entry. |
| Keywords: | Acquisitions; Entrepreneurship; Innovation; Competition |
| JEL: | G34 L13 L22 M13 O31 |
| Date: | 2006–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0670&r=com |
| By: | Lommerud, Kjell Erik (Department of Economics, University of Bergen); Olsen, Trond E. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Straume, Odd Rune (Department of Economics, University of Bergen) |
| Abstract: | The international integration of regulated markets poses new challenges for regulatory policy. One question is the implications that the overall international regulatory regime will have for cross-border and/or domestic merger activity. In particular, do non-coordinated policies stimulate cross-border mergers that are overall inefficient, and is this then an argument for international coordination of such policies? The paper addresses this issue in a setting where firms must have access to a transportation network which is controlled by national regulators. The analysis reveals that while non-coordinated regulatory policies may induce cross-border mergers (by allowing the firms in question to play national regulators out against each other), this can nevertheless be overall welfare enhancing compared to market outcomes under coordinated regulation. |
| Keywords: | Access regulation; Endogenous merger; Policy coordination |
| JEL: | L13 L41 L50 |
| Date: | 2005–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2005_008&r=com |
| By: | Norbäck, Pehr-Johan (Research Institute of Industrial Economics); Persson, Lars (Research Institute of Industrial Economics) |
| Abstract: | Investment liberalizing countries are often concerned that cross-border mergers & acquisitions, in contrast to greenfield investments, might have an adverse effect on domestic firms and consumers. However, given that domestic assets are sufficiently scarce, we identify a preemption effect and an asset complementarity effect, which imply that the acquisition price is significantly higher than the domestic seller's profits. Moreover, we show that for the acquisition to take place, the MNE must be sufficiently efficient when using the domestic assets, otherwise rivals will expand their business, thereby making the acquisition unprofitable. Consequently, restricting cross-border M&As may also hurt consumers. |
| Keywords: | Investment Liberalization; Mergers & Acquisitions; Development; Ownership |
| JEL: | F23 K21 L13 O12 |
| Date: | 2006–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0666&r=com |
| By: | Deodhar Satish Y.; Pandey Vivek |
| Abstract: | The new competition policy of the Government of India seeks to promote competition to protect consumer interests and increase market efficiency. In fact, the degree of price transmission between farmers and final consumers also depends on the degree of competition in the processing sector. Moreover, policy of trade liberalization too is expected to have impact on domestic markets. It becomes imperative, therefore, that one knows the degree of competition in various domestic industries. Instant coffee market in India is a duopoly of Nestlé and Hindustan Lever for decades. They also differentiate their products through branding. At the same time, however, incumbents might have perceived potential competition from another firm, Tata Coffee. In fact, instant coffee can be considered as a part of a larger beverage market with numerous competing products. With trade liberalization, imports have also started trickling in. Thus, circumstantial evidence regarding degree of competition or the market power in the instant coffee market is rather mixed one. By econometrically estimating the perceived first-order supply relation and the demand function, we calculate the market power parameter. Results indicate that the market is not characterized by collusive behaviour. It is quite close to perfectly competitive behaviour although we cannot reject the Cournot-Nash behaviour as well. The econometric study may be complemented by in-depth case study on coffee procurement, processing, and pricing by leading producers. Similar estimations of market power and case studies may be undertaken for other industries as well. |
| Date: | 2006–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:2006-10-02&r=com |
| By: | Nicolas Gruyer (LEEA (air transport economics laboratory), ENAC) |
| Abstract: | This note extends Kreps and Scheinkman's result -showing that a production capacity choice stage followed by price competition yields the same outcome as a Cournot game- to a setting where capacity costs are asymmetric. |
| Keywords: | capacity, Bertrand competition, Kreps-Scheinkman, asymmetric costs. |
| JEL: | D43 L13 |
| Date: | 2006–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:enc:abcdef:ks4&r=com |
| By: | Darius Lakdawalla; Tomas Philipson; Y. Richard Wang |
| Abstract: | Patent protection spurs innovation by raising the rewards for research, but it usually results in less desirable allocations after the innovation has been discovered. In effect, patents reward inventors with inefficient monopoly power. However, previous analysis of intellectual property has focused only on the costs patents impose by restricting price-competition. We analyze the potentially important but overlooked role played by competition on dimensions other than price. Compared to a patent monopoly, competitive firms may engage in inefficient levels of non-price competition—such as marketing—when these activities confer benefits on competitors. Patent monopolies may thus price less efficiently, but market more efficiently than competitive firms. We measure the empirical importance of this issue, using patent-expiration data for the US pharmaceutical industry from 1990 to 2003. Contrary to what is predicted by price competition alone, we find that patent expirations actually have a negative effect on output for the first year after expiration. This results from the reduction in marketing effort, which offsets the reduction in price. The short-run decline in output costs consumers at least $400,000 per month, for each drug. In the long-run, however, expirations do raise output, but the value of expiration to consumers is about 15% lower than would be predicted by a model that considers price-competition alone, without marketing effort. The non-standard effects introduced by non-price competition alter the analysis of patents’ welfare effects. |
| JEL: | I11 L12 O34 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12577&r=com |
| By: | Milne , Alistair (Cass Business School, London, UK and Bank of Finland) |
| Abstract: | This paper examines the impact of messaging and technical standards on competition in the supply of se-curities transaction management services. Two simple switching cost models are used to clarify the im-pact of standards on barriers to entry and on the incentives to adopt harmonised and simplified securities processing standards. Policy implications are discussed briefly. |
| Keywords: | securities settlement; standards; inter-operability; switching costs |
| JEL: | L15 L86 |
| Date: | 2005–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2005_023&r=com |
| By: | Felix Hoeffler (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | The standard model by Laffont, Rey and Tirole (1998) treats termination fees as an instrument to increase market power in a one-shot game of horizontal product differentiation. We offer an alternative view in an infinitely repeated Bertrand competition. We focus on symmetrical call-ing patterns and investigate simple two-part tariffs for two types, as well as general non-linear tariffs for two types and for a continuum of types. In this framework, termination fees make deviations from the collusive outcome less attractive. The optimum deviation strategy is usually to try to attract the high valuation customers since they exhibit the highest profits. Thus, a deviator will have a pool of high users which will have more outgoing than incoming calls, implying net termination payments. A cooperatively chosen termination rate can increase the deviator’s cost and thereby always stabilizes collusion. |
| Keywords: | Two way access, mobile telecommunications, non-linear tariffs |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2006_16&r=com |
| By: | Nguyen, Thang |
| Abstract: | How does market organization affect quality innovation efforts and social welfare? Three stochastic dynamic market structures considered are monopoly, duopoly, and social planning. Products can be either linearly or nonlinearly substitutable. The introduction of a step function allows richer innovation strategies. First, given nonlinear substitution, a duopoly may follow an unbalanced evolution path and have a technology frontier not dominated by that in social planning. This result does not hold for the linear substitution case. Second, ex ante and long-run welfare values are always the highest in social planning and the lowest in monopoly. Thus, policies should encourage static and dynamic competition. |
| Keywords: | R&D; quality innovation; product supremacy |
| JEL: | L13 D43 L15 D92 O31 D21 |
| Date: | 2004–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:235&r=com |
| By: | Tomaso Duso; Klaus Gugler; Burcin Yurtoglu |
| Abstract: | We use 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. <br> <br> <i>ZUSAMMENFASSUNG - (Ist die "event study" Methodologie nützlich für die Analyse von Fusionen? Ein Vergleich von Aktienmärkte und Bilanzdaten) <br> Wir analysieren eine Stichprobe von 167 Fusionen, die zwischen 1990 und 2002 stattgefunden haben und welche 544 Unternehmen -entweder als fusionierende Parteien oder als Wettbewerber- involviert haben. Wir vergleichen eine auf "event studies" basierende Rentabilitätsmaß der Fusion zu einer alternativen Maß, die durch Bilanzdaten konstruiert wurde. Wir finden, dass diese zwei maße positiv und signifikant korrelieren besonders wenn wir ein langes Fenster um die Fusionsankündigung in dem "event study" benutzen.</i> |
| Keywords: | Mergers, Merger Control, Event Studies, Ex-post Evaluation |
| JEL: | L4 K21 G34 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:wzb:wzebiv:spii2006-19&r=com |
| By: | Vesala , Timo (RUESG, University of Helsinki) |
| Abstract: | This paper studies relationship lending in a framework where the cost of switching banks measures the degree of banking competition. The relationship lender’s (insider bank’s) informational advantage creates a lock-in effect, which is at its height when the switching cost is infinitesimal. This is because a low switching cost gives rise to a potential adverse selection problem, and outsider banks are thus reluctant to make overly aggressive bids. This effect gradually fades as the magnitude of the switching cost increases, which de facto reduces the insider bank’s profits. However, after a certain threshold in the switching cost, the insider bank’s ‘mark-up’ begins to increase again. Hence, relationship benefits are a non-monotonous (V-shaped) function of the switching cost. The ‘dynamic implication’ of this pattern is that relationship formation should be more common under extreme market structures ie when the cost of switching banks is either very low or sufficiently high. Recent empirical evidence lends support to this prediction. |
| Keywords: | relationship lending; switching cost; banking competition |
| JEL: | D43 D82 G21 G24 |
| Date: | 2005–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2005_003&r=com |
| By: | Kemppainen , Kari (Bank of Finland Research) |
| Abstract: | This paper considers effects of price regulation in retail payment systems by applying the model of tele-communications competition by Laffont-Rey-Tirole (1998). In our two-country model world there is one retail payment network located in each country and markets are segmented à la Hotelling. We show that the optimal price under price regulation is the weighted average of pre-regulation domestic and cross-border prices where the degree of home-bias in making payments serves as the weight. Furthermore, we find that the general welfare effects of price regulation are ambiguous: gross social welfare is higher un-der price discrimination than under price regulation in the special case where costs of access to banking services (transportation costs) are high. However, there also exist cases where prohibitively high transac-tion costs make price discrimination to reduce total welfare. Finally, if transportation costs are reduced sufficiently, segmentation of payment markets is eliminated. Markets then become fully-served as in the original Laffont-Rey-Tirole model, suggesting that price discrimination would be beneficial for welfare. |
| Keywords: | payment systems; price regulation; retail payments |
| JEL: | D49 G28 L59 |
| Date: | 2005–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2005_019&r=com |
| By: | Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | The paper studies the assessment of private damages that the cartelization of a market imposes on buyers in that market and, possibly, on the buyers’ own customers in further market downstream. Abstracting from procedural problems and focussing on conceptual issues, the paper argues that damages comprise not just the overcharge on the actual quantity purchased, but also foregone profits on the units that are not purchased because the cartel price is higher than the competitive price. The paper also argues that the passing-on defense against claims by direct buyers is flawed because it neglects the business loss effect that is associated with a direct buyer’s raising his own price to pass the higher cartel price on to his own customers. If direct buyers are not in competition with each other, a revealed-preference argument shows that the business loss effect on the direct buyer’s profits is necessarily greater than the effect of the increase in revenues per unit that is sold. The overcharge on the actual quantity purchased again is a lower bound for actual damages. The assessment of damages suffered by indirect buyers is independent of this refutation of the passing-on defense. If direct buyers are in competition with each other, there is an additional business gain effect because the cartelization upstream raises rivals’ costs and thereby affects the competition between the direct buyers. In this case, the assessment of damages depends on the treatment of causation i.e., to what extent a direct buyer’s competitors’ price increases are ascribed to the cartelization upstream. Consistency requires that, for claims raised at the level of direct and indirect buyers alike, the same treatment of causation should be used. Either the cartel members should be held responsible for the entire shift in the equilibrium of the strategic game between direct buyers in suits involving indirect buyers, as well as direct buyers, or a ceteris paribus assumption should be applied to the actions of a direct buyer’s competitors, which eliminates the business gain effect resulting from their price increases. In the latter treatment, which seems conceptually and procedurally the simplest, the overcharge on the actual quantity purchased is again a lower bound for actual damages. |
| Keywords: | Horizontal Price Fixing, Passing-On Defense, Private Damage Claims |
| JEL: | K L |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2006_22&r=com |
| By: | Kauko, Karlo (Bank of Finland Research) |
| Abstract: | This paper presents a model depicting cross-border payment systems as a mixed oligopoly. A private net settlement system that maximises profit competes with the central banks’ gross settlement system that maximises welfare. It may be optimal for the central bank system to encourage increased use of the private system by charging fees that exceed the marginal cost. The central bank system is not only a competitor but also an essential service provider, because central bank money is needed for net settlement of payments in the private system. In some cases the central bank system can paradoxically induce the private system to charge lower fees by making it expensive to use central bank money for settlement purposes. |
| Keywords: | payment systems; network economics; mixed oligopolies |
| JEL: | F36 G29 L13 L44 |
| Date: | 2005–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2005_011&r=com |
| By: | Hylke Vandenbussche; Ziga Zarnic |
| Abstract: | This paper empirically investigates the effects of US safeguard protection on steel imports in 2002 on the mark-ups of EU steel producers. We identify a large panel of European steel producers between 1995 and 2004 affected by the safeguards. Using the Roeger method, our results show that US safeguards significantly reduced EU firms’ mark-ups. Single-product EU steel firms suffered relatively more from the protection than multi-product firms. Controlling for firm heterogeneity, these results are robust to alternative specifications. Our evidence further suggests that US protection resulted in some rerouting of European steel especially towards China, aggravating the situation on the Chinese steel market and ultimately resulting in Chinese trade protection of steel imports. |
| Keywords: | Firm data; Markups; Safeguards; Steel industry; Trade deflection |
| JEL: | F13 L13 L61 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lic:licosd:17606&r=com |
| By: | Natalie Chen (Warwick, ECARES; CEPR); Jean Imbs (HEC Lausanne, Swiss Finance Institute; CEPR); Andrew Scott (London Business School; CEPR) |
| Abstract: | We present, extend and estimate a model of international trade with firm heterogeneity in the tradition of Melitz (2003) and Melitz and Ottaviano (2005). The model is constructed to yield testable implications for the dynamics of international prices, productivity levels and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. Consistent with theory however, these effects diminish and may even revert in the longer term as less competitive economies become attractive havens from which to export from. We provide evidence that this entry into less open economies induces pro-competitive effects overseas in response to domestic trade liberalization. |
| Keywords: | Competition, Globalization, Markups, Openness, Prices, Productivity, Trade |
| JEL: | E31 F12 F15 L16 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200610-3&r=com |
| By: | Filip Abraham (Faculty of Economics and Applied Economics, Katholieke Universiteit Leuven); Jozef Konings (Faculty of Economics and Applied Economics, Katholieke Universiteit Leuven; LICOS, Centre for Transition Economics; Katholieke Universiteit Leuven; CEPR, London); Stijn Vanormelingen (Faculty of Economics and Applied Economics, Katholieke Universiteit Leuven) |
| Abstract: | Europe has witnessed the last decade an accelerated process of economic integration. Trade barriers were removed, the euro was introduced and ten new member states entered the European Union. Economic integration is likely to have an impact on both labor and product markets. Unlike most other papers, that focus on product and labor markets separately, we look at the link between globalization and product and labor market imperfections simultaneously. To this end, we rely on a rich panel of manufacturing firms in Belgium, a small open economy. We find that union bargaining power is higher in sectors characterized by high price cost margins. Moreover, ignoring imperfections on the labor market, leads to an underestimation of product market power. Concerning the influence of globalization, our main findings are that both price cost margins and union bargaining power are typically lower in sectors that are subject higher international competition. This result is especially true for competition from low wage countries |
| Keywords: | Mark-ups, Trade Unions, International Trade |
| JEL: | F16 J50 L13 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200610-5&r=com |
| By: | Kilponen, Juha (Bank of Finland Research); Ripatti , Antti (Bank of Finland Research) |
| Abstract: | Using the DGE model of the Finnish Economy (the ‘Aino’ model), we study the response of the economy to reforms in both labour and product markets. The reforms are two-fold. We assume that the wage mark-up, ie the monopoly power of wage-setters is gradually reduced by 5 percentage points. At the same time, the degree of competition is increased, ie price margins are exogenously reduced by 2 percentage points. These reforms imply a very favourable outcome of the economy. Both consumption and employment in-creases permanently and the reforms are welfare enhancing. Public balances improve giving room for 1.5 percentage point cut in income taxes. Our simulation exercises clearly demonstrate that such reforms may help in financing the future fiscal burden of an ageing population. |
| Keywords: | competition; dynamic general equilibrium; public finance |
| JEL: | C68 E60 |
| Date: | 2006–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2006_005&r=com |
| By: | Michal Grajek; Tobias Kretschmer |
| Abstract: | In this paper, we study the dynamics of usage intensity of second-generation cellular telephony over the diffusion curve. We address two specific questions: First, does information about usage intensity over time allow us to draw conclusions about the underlying drivers of technology diffusion? Seconds, what effect does the existence and penetration of previous generations and other networks in the same generation on network usage intensity? Using an operator-level panel covering 41 countries with quarterly data over 6 years, we find that heterogeneity among adopters dominates network effects and that different technological generations are complements in terms of usage, but substitutes in terms of subscription. <br> <br> <i>ZUSAMMENFASSUNG - (Gebrauch und Infusion von Mobilfunktelefonie, 1998-2004) <br> In diesem Beitrag untersuchen wir die Dynamik der Gebrauchsintensität von Mobilfunktelekommunikation zweiter Generation (D-Netzwerk in Deutschland) in verschiedenen Phasen ihrer Marktdiffusion. Wir stellen zwei spezifische Fragen: Erstens, kann man an Hand der Informationen über die Gebrauchsintensität die zugrundeliegenden Treiber der Technologiediffusion identifizieren? Zweitens, welche Auswirkung haben die Existenz und die Marktdurchdringung der vorherigen Generationen und andere Netzwerke derselben Generation auf die Gebrauchsintensität eines Mobilfunknetzwerks? Mittels der Paneldaten auf Netzwerkbetreiberebene, die 41 Nationen vierteljährlich über 6 Jahre umspannen, finden wir, dass die Abonnentenheterogenität die Netzwerkeffekte dominiert. Außerdem stellt sich heraus, dass die unterschiedlichen Technologiegenerationen bezüglich der Gebrauchsintensität komplementär zueinander sind, jedoch bezüglich ihrer Subskription Substituten darstellen.</i> |
| Keywords: | Cellular telephony, diffusion, network effects, consumer heterogeneity, fixed-mobile substitutability |
| JEL: | L1 L52 O38 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:wzb:wzebiv:spii2006-20&r=com |
| By: | Vivien Lewis (Center for Economic Studies, Catholic University Leuven) |
| Abstract: | This paper studies the behaviour of firm entry and exit in response to macroeconomic shocks. We formulate a dynamic stochastic general equilibrium model with an endogenous number of producers. From the calibrated model, we derive a minimum set of robust sign restrictions to identify four kinds of macroeconomic shocks in a vector autoregression, namely supply, demand, monetary and entry cost shocks. The variables entering the VAR are output, inflation, the nominal interest rate, profits and firm entry. The response of firm entry to the various shocks is freely estimated. Our main finding is that entry responds significantly to all types of shocks. The results also show a crowding-in of firm entry following an exogenous rise in demand, consistent with the effect of a consumption preference shock predicted by the model |
| Keywords: | firm entry, VAR, business cycles |
| JEL: | E30 E32 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200610-13&r=com |